SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
(Mark One)
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the quarterly period ended June 30, 2002
[_] 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: 000-30267
ORCHID BIOSCIENCES, INC.
(Exact name of registrant as specified in its charter)
DELAWARE 22-3392819
(State or other jurisdiction of (I.R.S. Employer Identification No.)
incorporation or organization)
4390 US ROUTE ONE, PRINCETON, NJ 08540
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code: (609) 750-2200
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days. Yes [X] No [_]
The number of shares outstanding of the registrant's Common Stock, $.001 par
value, as of August 1, 2002, was 55,233,793.
ORCHID BIOSCIENCES, INC. AND SUBSIDIARIES
INDEX TO FORM 10-Q
Page
PART I FINANCIAL INFORMATION ............................................................ 3
Item 1. Financial Statements ............................................................ 3
Condensed Consolidated Balance Sheets as of June 30, 2002
(unaudited) and December 31, 2001. ...................................................... 3
Condensed Consolidated Statements Of Operations for the three and six
months ended June 30, 2002 and 2001 (unaudited). ........................................ 4
Condensed Consolidated Statements Of Cash Flows for the six months ended
June 30, 2002 and 2001 (unaudited) ...................................................... 5
Notes To Condensed Consolidated Financial Statements (unaudited) ........................ 6
Item 2. Management's Discussion And Analysis Of Financial Condition
And Results Of Operations. .............................................................. 14
Item 3. Quantitative And Qualitative Disclosures About Market Risk ...................... 25
PART II OTHER INFORMATION. .............................................................. 26
Item 1. Legal Proceedings. .............................................................. 26
Item 2. Changes In Securities And Use Of Proceeds. ...................................... 26
Item 3. Defaults Upon Senior Securities. ................................................ 26
Item 4. Submission Of Matters To A Vote Of Security Holders. ............................ 26
Item 5. Other Information ............................................................... 27
Item 6. Exhibits And Reports On Form 8-K ................................................ 28
PART I FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
ORCHID BIOSCIENCES, INC.
AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
(In thousands except share and per share data)
June 30, December 31,
Assets 2002 2001
--------------- -------------
(unaudited)
Current assets:
Cash and cash equivalents $ 15,885 $ 10,746
Short-term investments 4,903 17,196
Restricted cash 1,084 --
Accounts receivable, net 15,467 12,330
Inventory 6,533 5,354
Other current assets 2,076 1,855
-------------- --------------
Total current assets 45,948 47,481
Equipment and leasehold improvements, net 29,188 29,615
Goodwill, net 3,479 3,265
Other intangibles, net 34,999 36,772
Restricted cash 2,301 --
Other assets 2,968 3,783
-------------- --------------
Total assets $ 118,883 $ 120,916
============== ==============
Liabilities and Stockholders' Equity
Current liabilities:
Current portion of long-term debt $ 3,529 $ 3,397
Accounts payable 5,384 6,161
Accrued expenses 9,803 9,180
Deferred revenue 1,976 1,221
-------------- --------------
Total current liabilities 20,692 19,959
Long-term debt, less current portion 4,516 6,327
Other liabilities 992 1,392
Commitments and contingencies
Stockholders' equity:
Preferred stock, $.001 par value, authorized 5,000,000 shares, no
shares issued or outstanding -- --
Series A junior participating stock, $.001 par value,
1,000,000 shares designated; no shares issued or outstanding -- --
Common stock, $.001 par value, authorized 150,000,000 shares,
issued and outstanding 55,233,731 and 46,180,450 at June 30,
2002 and December 31, 2001, respectively 55 46
Additional paid-in capital 304,435 283,857
Deferred compensation (5,819) (7,543)
Accumulated other comprehensive income 52 181
Accumulated deficit (206,040) (183,303)
-------------- --------------
Total stockholders' equity 92,683 93,238
-------------- --------------
Total liabilities and stockholders' equity $ 118,883 $ 120,916
============== ==============
See accompanying notes to condensed consolidated financial statements.
3
ORCHID BIOSCIENCES, INC.
AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(In thousands except share and per share data)
(unaudited)
Three months ended Six months ended
June 30, June 30,
------------------------------- ------------------------------
2002 2001 2002 2001
------------- -------------- -------------- -------------
Revenues:
Products revenues $ 2,285 $ 1,211 $ 5,331 $ 2,219
Services revenues 13,521 4,424 25,116 8,321
Collaboration, license and other revenues 624 1,083 1,813 1,813
------------- -------------- -------------- -------------
Total revenues 16,430 6,718 32,260 12,353
Operating expenses:
Cost of products revenues 1,036 867 2,488 1,685
Cost of services revenues 7,791 2,859 15,399 5,731
Selling, general and administrative 11,689 8,930 23,526 16,122
Research and development 6,220 9,192 12,489 16,146
Restructuring 1,930 -- 1,930 --
------------- -------------- -------------- -------------
Total operating expenses 28,666 21,848 55,832 39,684
------------- -------------- -------------- -------------
Operating loss (12,236) (15,130) (23,572) (27,331)
Other income (expense):
Interest income 192 1,026 472 1,900
Interest expense (243) (203) (458) (367)
Other expense 67 -- (73) --
------------- -------------- -------------- -------------
Total other income (expense) 16 823 (59) 1,533
------------- -------------- -------------- -------------
Loss before income taxes (12,220) (14,307) (23,631) (25,798)
Income tax benefit -- -- 894 --
------------- -------------- -------------- -------------
Net loss allocable to common
stockholders $ (12,220) $ (14,307) $ (22,737) $ (25,798)
============= ============== ============== =============
Basic and diluted net loss per share
allocable to common stockholders
$ (0.22) $ (0.41) $ (0.43) $ 0.76)
============= ============== ============== =============
Shares used in computing basic and
diluted net loss per share allocable
to common stockholders 55,229,738 34,633,400 52,340,131 33,985,809
============= ============== ============== =============
See accompanying notes to condensed consolidated financial statements.
4
ORCHID BIOSCIENCES, INC.
AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(In thousands)
(unaudited)
Six months ended
June 30,
-----------------------------------
2002 2001
---------------- ---------------
Cash flows from operating activities:
Net loss $ (22,737) $ (25,798)
Adjustments to reconcile net loss to net cash used in operating activities:
Noncash compensation expense 1,107 1,630
Depreciation and amortization 5,359 3,548
Impairment of fixed assets from restructuring 205 --
Changes in assets and liabilities:
Accounts receivable (3,137) 1,086
Inventory (1,179) 745
Other current assets (221) 772
Other assets 583 (645)
Accounts payable (777) (2,732)
Accrued expenses 623 (57)
Deferred revenue 755 (497)
Other liabilities (112) --
---------------- ---------------
Net cash used in operating activities (19,531) (21,948)
---------------- ---------------
Cash flows from investing activities:
Cash paid to acquire Cellmark, including acquisition costs -- (2,909)
Capital expenditures (3,176) (4,122)
Increase in restricted cash (3,385) --
Cash paid for intangible assets (150) --
Maturities of short-term investments 22,201 67,291
Purchases of short-term investments (9,992) (65,765)
---------------- ---------------
Net cash provided by (used in) investing activities 5,498 (5,505)
---------------- ---------------
Cash flows from financing activities:
Proceeds from issuance of debt from line of credit -- 862
Repayment of debt on lines of credit (1,679) (1,088)
Net proceeds from issuance of common stock 21,204 33,372
Payments of patent obligation (288) --
---------------- ---------------
Net cash provided by financing activities 19,237 33,146
---------------- ---------------
Effect of foreign currency translation on cash and cash equivalents (65) (104)
---------------- ---------------
Net increase in cash and cash equivalents 5,139 5,589
Cash and cash equivalents at beginning of period 10,746 14,558
---------------- ---------------
Cash and cash equivalents at end of period $ 15,885 $ 20,147
================ ===============
Supplemental disclosure of noncash financing and investing activities:
Changes in deferred compensation from grant, forfeiture and
remeasurement of common stock options $ 617 $ 1,637
Issuance of common stock in connection with the acquisition of Cellmark -- 2,019
Issuance of common stock for services -- 229
Supplemental disclosure of cash flow information:
Cash paid during the period for interest 451 363
See accompanying notes to condensed consolidated financial statements.
5
ORCHID BIOSCIENCES, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
June 30, 2002 and 2001
(Dollars in thousands except per share data)
(Unaudited)
(1) Basis of Presentation
The accompanying unaudited condensed consolidated financial statements of
Orchid BioSciences, Inc. and its subsidiaries (the "Company") have been
prepared in accordance with accounting principles generally accepted in
the United States of America ("US") for interim financial information and
with the instructions to Form 10-Q and Article 10 of Regulation S-X.
Accordingly, they do not include all of the information and footnotes
required by accounting principles generally accepted in the US for
complete annual financial statements. In the opinion of management, all
adjustments, consisting of normal recurring adjustments, considered
necessary for a fair presentation have been included. Interim results are
not necessarily indicative of results that may be expected for a full
year.
The accompanying unaudited condensed consolidated financial statements
include the results of the Company and its wholly owned subsidiaries. All
intercompany accounts and transactions have been eliminated. The
accompanying unaudited condensed consolidated financial statements should
be read in conjunction with the audited consolidated financial statements
and footnotes thereto included in the Company's Annual Report on Form 10-K
for the year ended December 31, 2001, as filed with the Securities and
Exchange Commission.
The Company has not yet achieved profitable operations or positive cash
flow from operations. There is no assurance that profitable operations, if
ever achieved, could be sustained on a continuing basis. In addition,
development and commercialization activities will require significant
additional financing. The Company's accumulated deficit aggregated
$206,040 through June 30, 2002 and it expects to incur additional losses
over at least the next year.
Certain reclassifications were made to prior year amounts to conform to
the current year presentation.
(2) Acquisition of Cellmark Diagnostics
On February 12, 2001, the Company completed its acquisition of certain
assets of AstraZeneca's business division, Cellmark Diagnostics
("Cellmark"), a leading provider of genetic diversity testing services in
the UK which also sells kits for and conducts tests for genetic diseases,
including cystic fibrosis. The acquisition has been accounted for under
the purchase method of accounting and accordingly, the assets and
liabilities acquired have been recorded at their fair values. The results
of operations of Cellmark have been included in the Company's consolidated
results of operations since the date of acquisition by the Company on
February 12, 2001. The pro forma results of operations of Cellmark have
not been presented because they are immaterial to the Company's results of
operations for 2001.
(3) Acquisition of Lifecodes Corporation
On December 5, 2001, the Company acquired all of the outstanding equity
securities of Lifecodes Corporation ("Lifecodes"). The acquisition has
been accounted for under the purchase method of accounting and
accordingly, the assets and liabilities acquired have been recorded at
their fair values. The results of operations of Lifecodes have been
included in the consolidated results of operations since the date of
acquisition by the Company on December 5, 2001. The following unaudited
pro forma financial information presents the combined results of
operations of the Company and Lifecodes as if the acquisition had occurred
as of January 1, 2001, after giving effect to certain pro forma
adjustments, including amortization of other intangibles and elimination
of transaction related costs incurred by Lifecodes prior to the
acquisition. The pro forma financial information does not necessarily
reflect the results of operations that would have occurred had the
6
Company and Lifecodes constituted a single entity during this period or
the results of operations which may occur in the future.
Three months Six months
ended June 30, ended June 30,
2001 2001
------------------ ------------------
(unaudited) (unaudited)
Revenues $ 14,499 $ 28,554
Net loss allocable to common stockholders (14,636) (26,119)
Basic and diluted net loss per share allocable
to common stockholders $ (0.35) $ (0.64)
(4) Inventory
Inventory is comprised of the following at June 30, 2002 and December 31,
2001, respectively:
December 31,
June 30, 2002 2001
--------------- ---------------
Raw materials $ 2,854 $ 3,087
Work in progress 2,413 1,208
Finished goods 1,266 1,059
---------------- --------------
$ 6,533 $ 5,354
================= ==============
Raw materials consist mainly of reagents, enzymes, chemicals and plates
used in SNP scoring, genotyping and to manufacture SNPware consumables.
Work in progress consists mainly of case work not yet completed and kits
that are in the production process. Finished goods consist mainly of kits
that have been produced, but have not been shipped.
(5) Segment Information
The Company has historically operated in two segments, the Products
segment and the Services segment, each of which was considered a strategic
business that was historically managed separately because each business
develops, manufactures and sells distinct products and services. The
Products segment marketed and sold equipment and consumables for SNP
scoring and other genetic analyses, whereas, the Service segment included
the Company's business which performed genotyping services including DNA
laboratory analysis for paternity, forensic and transplantation testing
and SNP scoring services. The Company continues to market and sell these
products and provide these services to its customers, however, during the
second quarter of 2002, the Company completed an internal process of
realigning its business into four business units. These business units
consist of Orchid Life Sciences, Orchid Identity Genomics, Orchid
Diagnostics and Orchid GeneShield. A brief description of all of the
business units which have been determined to be reportable segments is as
follows:
. Orchid Life Sciences develops and markets products, services and
technologies for SNP genotyping, or scoring, and genetic diversity
analyses to life sciences and biomedical researchers as well as
pharmaceutical, agricultural, diagnostic and biotechnology
companies;
. Orchid Identity Genomics provides DNA testing for paternity and
forensics determinations to state and local governmental
authorities as well as to individuals and organizations, through
Orchid GeneScreen and Orchid Cellmark;
. Orchid Diagnostics provides products and services for genetic
testing, including HLA genotyping, disease susceptibility testing
and immunogenetics, or the study of the relationship between an
individual's immune response and their genetic makeup, to
individuals; and
. Orchid GeneShield is developing programs designed to accelerate
the adoption and use of personalized medicine by patients and
physicians.
The Chief Operating Decision Maker of the Company measures segment
profit/(loss) using operating income/(loss), which excludes other income
(expense) and allocation of corporate expenditures. These corporate costs,
which include treasury, human resources, finance, restructuring costs and
certain other corporate functions, are included in corporate and all
other. The accounting policies of the segments are the same as those
described in the summary of significant accounting policies, as discussed
in Note 1 to the consolidated financial statements included in the
Company's Annual Report on Form 10-K filed for the year ended December 31,
2001.
Goodwill has been allocated to each reportable segment as shown below.
Prior period information presented below has been restated to the current
segment presentation.
7
Corporate- Total
Life Sciences Identify Genomics Diagnostics and all other
------------- ----------------- ----------- ------------- --------
Three months ended June 30, 2002:
Revenues 2,325 10,058 4,047 - 16,430
Segment operating income/(loss) (3,557) 891 603 (10,173) (12,236)
As of and for the six months ended June 30, 2002:
Revenues 4,842 19,243 8,175 - 32,260
Segment operating income/(loss) (7,758) 675 1,427 (17,916) (23,572)
Goodwill - 2,091 1,388 - 3,479
Total assets 17,567 44,185 14,863 42,268 118,883
Three months ended June 30, 2001:
Revenues 1,959 4,759 - - 6,718
Segment operating income/(loss) (8,293) (1,603) - (5,234) (15,130)
As of and for the six months ended June 30, 2001:
Revenues 3,638 8,715 - - 12,353
Segment operating income/(loss) (14,188) (4,010) - (9,133) (27,331)
Total assets 16,603 53,533 79,321 149,457
(6) Issuance of Common Stock
On March 5, 2002, the Company completed an offering through which an
aggregate of 9.0 million shares were sold, including an overallotment, to
a group of new and existing shareholders. The shares of common stock were
offered through a prospectus supplement pursuant to the Company's
effective shelf registration statement. The Company generated net proceeds
as a result of this offering of approximately $21,200.
(7) Restructuring
During the second quarter of 2002, the Company formalized and announced a
plan to restructure certain operations of the Company in order to cut
costs. As a result, over 80 positions which cover all areas of the
Company's operations were eliminated. Most of these terminations were from
the Company's Princeton, New Jersey facility. As a result of this plan,
the Company recorded approximately $1,930 as a restructuring charge which
consisted of employee related charges such as severance, benefits and
outplacement services of approximately $1,030, facility charges related to
lease exit costs of approximately $695 and leasehold improvements
impairment charges of approximately $205. As of June 30, 2002, the
remaining accrual as it relates to this restructuring is approximately
$1,232. The Company expects to fully pay the existing liability as it
relates to severance during the fourth quarter of 2002.
8
(8) Contingencies
Effective January 2000, the Company entered into three-year employment
agreements with two executives of the Company. In certain cases, the
Company may be obligated to pay the executives' salary and benefits for up
to eighteen months after leaving the Company.
On or about November 21, 2001, the Company was made aware of a complaint
filed in the United States District Court for the Southern District of New
York naming the Company as defendants, along with certain of its officers
and underwriters. An amended complaint was filed on April 19, 2002. The
complaint, as amended, purportedly is filed on behalf of persons
purchasing the Company's stock between May 4, 2000 and December 6, 2000,
and alleges violations of Sections 11 and 15 of the Securities Act of
1933, as amended, and Sections 10(b) and 20(a) of the Securities Exchange
Act of 1934, as amended, and Rule 10b-5 promulgated thereunder. The
amended complaint alleges that, in connection with the Company's May 5,
2000 initial public offering, the defendants failed to disclose additional
and excessive commissions purportedly solicited by and paid to the
underwriter defendants in exchange for allocating shares of the Company's
stock to preferred customers and alleged agreements among the underwriter
defendants and preferred customers tying the allocation of IPO shares to
agreements to make additional aftermarket purchases at pre-determined
prices. Plaintiffs claim that the failure to disclose these alleged
arrangements made the Company's registration statement on Form S-1 filed
with the SEC in May 2000 and the prospectus, a part of the registration
statement, materially false and misleading. Plaintiffs seek unspecified
damages. The Company has not reserved any amount related to this case as
the Company believes that the allegations are without merit and intends to
vigorously defend against the plaintiffs' claims. In this regard, on or
about July 15, 2002, the Company filed a motion to dismiss all of the
claims against it and its officers.
The Company had been in a litigation with St. Louis University of St.
Louis, Missouri regarding its belief that the Company's SNP scoring
technology infringes certain claims under U.S. patent 5,846,710, which was
controlled by the University. On August 7, 2002, the parties dismissed the
litigation and the Company acquired the subject patent. St. Louis
University has assigned both the patent and all license agreements related
thereto to the Company.
Additionally, the Company has other certain claims against it arising from
the normal course of its business. The ultimate resolution of such
matters, in the opinion of management, will not have a material effect on
the Company's financial position or results of operations.
In connection with the Company's acquisition of certain patents in 2001,
the Company assumed an obligation to pay future amounts over the next
three years. The obligation has been recorded in the accompanying
condensed consolidated balance sheet as of June 30, 2002, at the net
present value of the future obligations. The payments which are to be made
to the original patent holder are as follows:
2002 $ 1,204
2003 1,178
2004 310
----------
Total 2,692
Less amount that represents interest (255)
-----------
Net present value of future obligations $ 2,437
==========
The Company is also obligated to pay minimum royalties related to these
patents of $1.2 million in 2005, $1.6 million in 2006, and $1.9 million in
2007 and each year thereafter until the expiration of the agreement.
9
(9) Comprehensive Loss
SFAS No. 130, "Reporting Comprehensive Income" ("SFAS 130") requires
reporting and displaying comprehensive income (loss) and its components
which, for the Company, includes net loss and unrealized gains and losses
on available-for-sale securities and foreign currency translation gains
and losses. In accordance with SFAS 130, the accumulated balance of other
comprehensive income (loss) is displayed as a separate component of
stockholders' equity. The following table reconciles net loss to
comprehensive loss for the three and six months ended June 30, 2002 and
2001:
Three months ended June 30, Six months ended June 30,
------------------------------ ------------------------------
2002 2001 2002 2001
------------ ------------ ------------ -------------
Net loss $ (12,220) $ (14,307) $ (22,737) $ (25,798)
Other comprehensive income (loss):
Unrealized holding gain (loss)
arising during the period -- (481) (253) (376)
Less reclassification adjustment for
gains included in net loss 90 -- 195 --
------------ ------------ ------------ -------------
Unrealized holding gain (loss) on
available-for-sale securities (90) (481) (448) (376)
Foreign currency translation
adjustments 571 (51) 319 (160)
------------ ------------ ------------ -------------
Other comprehensive income/(loss) 481 (532) (129) (536)
------------ ------------ ------------ -------------
Comprehensive loss $ (11,739) $ (14,839) $ (22,866) $ (26,334)
============ ============ ============ =============
(10) Debt Covenants
Pursuant to the Company's line of credit which was amended in December
2000, the Company is required to provide a cash security deposit or letter
of credit equal to an amount defined in the agreement, if the Company does
not maintain minimum unrestricted cash, as defined in the agreement, equal
to the greater of $35,000 or twelve month's cash needs (calculated by
taking the trailing three months' net cash used in operations multiplied
by four) not to exceed 50% of outstanding amounts on draws made on or
subsequent to December 30, 2000. As of December 31, 2001 and just prior to
the follow-on offering (See Note 6), the Company did not maintain the
minimum unrestricted cash defined in the agreement. The Company received a
waiver from its lender regarding its non-compliance with this covenant for
this period. Subsequent to March 31, 2002, the Company was not in
compliance with this financial covenant. On June 19, 2002, the Company
obtained a letter of credit in the amount of approximately $2,682 as
required by the amended line of credit, which was supported by a cash
restriction on certain securities held by the Company. As such, this cash
restriction, in addition to cash restricted under two of the Company's
operating leases is reflected as restricted cash in the condensed
consolidated balance sheet as of June 30, 2002 of $3,385, of which $2,301
is classified as a long term asset. The Company has also received written
notice from the lender stating that the lender waived the financial
covenant violation as a result of not maintaining a pledge of cash
security deposit or letter of credit under this agreement for the period
of non-compliance through June 19, 2002.
(11) Recent Accounting Pronouncements
In July 2001, the Financial Accounting Standards Board ("FASB") issued
SFAS No. 141, "Business Combinations" ("SFAS 141"), and SFAS No. 142,
"Goodwill and Other Intangible Assets" ("SFAS 142"). SFAS 141 requires
that the purchase method of accounting be used for all business
combinations initiated after June 30, 2001 as well as all purchase method
business combinations completed after June 30, 2001.
10
SFAS 141 also specifies criteria intangible assets acquired in a purchase
method business combination must meet to be recognized and reported apart
from goodwill, noting that any purchase price allocable to an assembled
workforce may not be accounted for separately. SFAS 142 requires that
goodwill and intangible assets with indefinite useful lives no longer be
amortized, but instead be tested for impairment at least annually in
accordance with the provisions of SFAS 142. SFAS 142 also requires that
intangible assets with estimable useful lives be amortized over their
respective estimated useful lives to their estimated residual values, and
reviewed for impairment in accordance with SFAS No. 121.
The Company adopted certain provisions of SFAS 141 during 2001 for the
Lifecodes acquisition and fully adopted SFAS 141 on January 1, 2002. The
Company has adopted SFAS 142 effective January 1, 2002 as well. As such,
goodwill acquired in a purchase business combination completed after June
30, 2001, but before SFAS 142 was adopted in full was not amortized, but
continued to be evaluated for impairment in accordance with the
appropriate pre-SFAS 142 accounting literature. Goodwill and intangible
assets acquired in business combinations completed before July 1, 2001,
continued to be amortized and tested for impairment in accordance with the
appropriate pre-SFAS 142 accounting requirements prior to the adoption of
SFAS 142.
SFAS 141 requires, upon adoption of SFAS 142, that the Company evaluate
its existing intangible assets and goodwill that were acquired in a prior
purchase business combination, and to make any necessary reclassifications
in order to conform with the new criteria in SFAS 141 for recognition
apart from goodwill. In connection with its evaluation of intangible
assets arising from business combinations prior to the adoption of SFAS
141, the Company has reclassified its workforce intangible asset with a
net book value as of December 31, 2001 of approximately $1,073 to
goodwill. Upon adoption of SFAS 142, the Company was required to reassess
the useful lives and residual values of all intangible assets acquired,
and make any necessary amortization period adjustments by the end of the
first interim period after adoption. In addition, to the extent an
intangible asset is identified as having an indefinite useful life, the
Company was required to test the intangible asset for impairment in
accordance with the provisions of SFAS 142. Any impairment loss would be
measured as of the date of adoption and recognized as the cumulative
effect of a change in accounting principle in the first interim period.
The Company has reassessed the useful lives and residual values of all of
its intangible assets in accordance with its adoption of SFAS 142 and
determined that the existing useful lives for its intangible assets are
appropriate. No identifiable intangible assets, were determined to have
indefinite lives.
In connection with SFAS 142's transitional goodwill impairment evaluation,
the statement required the Company to perform an assessment of whether
there is an indication that goodwill is impaired as of the date of
adoption. To accomplish this, the Company had to identify its reporting
units and determine the carrying value of each reporting unit by assigning
the assets and liabilities, including the existing goodwill and intangible
assets, to those reporting units as of the date of adoption. The Company
then had to determine the fair value of each reporting unit and compare it
to the reporting unit's carrying amount. Upon the completion of this step,
to the extent a reporting unit's carrying amount exceeds its fair value,
an indication exists that the reporting unit's goodwill may be impaired,
then the Company would have to perform the second step of the transitional
impairment test, in which the Company must compare the implied fair value
of the reporting unit's goodwill, determined by allocating the reporting
unit's fair value to all of its assets (recognized and unrecognized) and
liabilities in a manner similar to a purchase price allocation in
accordance with SFAS 141, to its carrying amount, both of which would be
measured as of the date of adoption. This second step is required to be
completed as soon as possible, but no later than the end of the year of
adoption. Any transitional impairment loss would be recognized as the
cumulative effect of a change in accounting principle in the Company's
statement of operations. During the second quarter of 2002, the Company
identified its reporting units and performed the transitional impairment
test. Based on a discounted cash flow model to determine reporting unit
fair value, the Company determined that the fair values of its reporting
units exceeded the respective carrying values and therefore goodwill was
in fact not impaired and performance of the second step noted above is not
required. The Company has unamortized goodwill as of June 30, 2002 of
$3,479, which is allocated to its reportable segments (see Note 5).
11
SFAS 142 requires disclosure of what reported net loss and net loss per
share allocable to common stockholders would have been in all periods
presented exclusive of amortization expense recognized in those periods
related to goodwill and intangible assets that will no longer be amortized
and changes in amortization periods for intangible assets that will
continue to be amortized. This disclosure is reflected in the table below.
For the three months ended For the six months ended
June 30, June 30,
------------------------------ -------------------------------
2002 2001 2002 2001
------------ ------------ ------------- -------------
Net loss:
Net loss as reported $ (12,220) $ (14,307) $ (22,737) $ (25,798)
Add back: Goodwill amortization -- 578 -- 1,096
------------ ------------ ------------- -------------
Net loss, as adjusted (12,220) (13,729) (22,737) (24,702)
============ ============ ============= =============
Basic and diluted net loss per share
allocable to common stockholders
as reported: $ (0.22) $ (0.41) $ (0.43) $ (0.76)
Add back: Goodwill amortization per share -- 0.01 -- 0.03
------------ ------------ ------------- -------------
Net loss per share, as adjusted $ (0.22) $ (0.40) $ (0.43) $ (0.73)
============ ============ ============= =============
Goodwill amortization in the table above includes amortization of the
workforce intangible asset which was reclassified to goodwill upon the
adoption of SFAS 142.
(12) Goodwill and Other Intangible Assets
The following table sets forth the Company's other intangible assets at
June 30, 2002:
Base technology $ 9,615
Customer list 5,040
Trademark/tradename 3,998
Patents and know-how 16,793
Developed technology 4,080
Other 1,254
------------
Total 40,780
Less accumulated amortization (5,781)
-------------
Other intangible assets, net $ 34,999
=============
Aggregate amortization expense:
For the three months ended June 30, 2002 $ 1,018
For the six months ended June 30, 2002 $ 1,961
Estimated amortization expense:
For the six months ending December 31, 2002 $ 2,166
For the year ending December 31, 2003 4,332
For the year ending December 31, 2004 4,285
For the year ending December 31, 2005 4,244
For the year ending December 31, 2006 4,044
As of June 30, 2002, the Company does not have any intangible assets other
than goodwill which are not subject to amortization. In addition, the
change in goodwill from $3,265 as of December 31, 2001 to
12
$3,479 as of June 30, 2002 was primarily the result of foreign currency
translation adjustments during the quarter ended June 30, 2002.
(13) Increase in Authorized Shares of Common Stock
In March 2002, the Board of Directors of the Company approved, subject to
stockholder approval, an increase of the Company's authorized shares of
common stock to 150,000,000 shares. The stockholders approved this
increase in authorized shares at its annual meeting in June of 2002, and
the Company filed an Amendment to its Certificate of Incorporation on June
17, 2002 effectuating the increase in authorized shares.
(14) Income Tax Benefit
The Company participates in the State of New Jersey's corporation business
tax benefit certificate transfer program (the "Program"), which allows
certain high technology and biotechnology companies to sell unused net
operating loss carryovers to other New Jersey corporation business
taxpayers. During 2000, the Company submitted an application to the New
Jersey Economic Development Authority (the "EDA") to participate in the
Program, and the application was approved. The EDA then issued a
certificate certifying the Company's ability to participate in the Program
and the amount of New Jersey net operating loss carryovers the Company has
available to transfer. Since New Jersey law provides that net operating
losses can be carried over for up to seven years, the Company may be able
to transfer its New Jersey net operating losses from the last seven years.
The Program requires that the purchaser pay at least 75% of the amount of
the surrendered tax benefit.
During January 2002, the Company completed the sale of approximately
$11,000 of its New Jersey tax loss carryforwards and received $894, which
was recorded as an income tax benefit.
13
ORCHID BIOSCIENCES, INC.
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
This Management's Discussion and Analysis of Financial Condition as of June 30,
2002 and the Results of Operations for the three and six months ended June 30,
2002 and 2001 should be read in conjunction with our Consolidated Financial
Statements and related Notes to Condensed Consolidated Financial Statements
included elsewhere in this Quarterly Report on Form 10-Q. This Quarterly Report
on Form 10-Q contains forward-looking statements within the meaning of Section
21E of the Securities Exchange Act of 1934, as amended, and Section 27A of the
Securities Act of 1933, as amended. For a more detailed discussion of such
forward-looking statements and the potential risks and uncertainties that may
impact upon the accuracy of such statements in this section, see the
"Forward-Looking Statements" section of this Quarterly Report on Form 10-Q and
also the potential risks and uncertainties set forth in the "Overview" section
hereof and in the "Risk Factors" section of our Annual Report on Form 10-K filed
with the Securities and Exchange Commission for the year ended December 31,
2001. Except as required by law, we undertake no obligation to update any
forward-looking statements. You should also carefully consider the factors set
forth in other reports or documents that we file from time to time with the
Securities and Exchange Commission.
OVERVIEW
We are engaged in the development and commercialization of genetic diversity
technologies, products and services. Since we began operations in March 1995, we
have devoted substantially all of our resources to the development and
application of a portfolio of products and services using our proprietary
biochemistry for scoring single nucleotide polymorphisms, or SNPs, as well as
microfluidics technologies for applications, principally in the field of high
volume SNP scoring and pharmacogenetics analysis.
In 2001, our business focused on our SNP scoring products and services that
apply our proprietary SNP-IT primer extension technology, and on our identity
genomics services in paternity and forensics. During 2001, we entered into
various agreements. These agreements had varying terms and included but were not
limited to: (i) services agreements whereby we agreed to provide genetic
analysis services; (ii) services agreements under which we would provide SNP
genotyping services; (iii) license agreements pursuant to which we granted third
parties royalty bearing, non-exclusive and exclusive licenses to use our SNP-IT
single base primer extension technology to produce and sell reagent kits and
software incorporating our technology; and (iv) agreements under which we agreed
to provide SNPstream instruments, SNPware and ELUCIGENE consumables. Since late
1999, following our acquisition of GeneScreen, Inc. ("GeneScreen") and, our
subsequent acquisitions of Cellmark and Lifecodes, both in 2001, we also have
been a leading provider of DNA testing services in the paternity, forensics and
human leukocyte antigen, or HLA, transplantation typing fields.
Our ability to achieve profitability will depend, in part, on our ability
to continue to develop and commercialize our proprietary SNP scoring
technologies in the form of products and services for pharmaceutical,
biotechnology and diagnostic companies and research institutions, as well as our
ability to competitively bid on, and receive contracts, for identity genomics
testing services. We introduced our SNPstream 25K SNP scoring system, SNPware
consumables and related services in late 1999. In September 2001, we introduced
the SNPstream MT solution with medium throughput capabilities and based on the
Luminex xMap platform. In April 2002 we launched our ultra high-throughput
SNPstream UHT System, capable of genotyping from 5,000 to over 800,000 SNPs in a
24-hour period. Because our proprietary SNP-IT primer extension technology is
very adaptable to other hardware platforms, we intend to expand our offerings of
SNPware consumables for use on instruments made or sold by other companies and
to obtain license fees and royalties by licensing our SNP-IT technology for
incorporation in the consumable kits of others. Our
14
collaborations with Affymetrix, Amersham Biosciences, Applied Biosystems and
PerkinElmer are examples of this Platform Propagation strategy. We also provide
SNP-IT-based high quality SNP scoring to a variety of customers on a
fee-for-service basis. Our MegaSNPatron facilities currently offer high
throughput SNP genotyping services to such customers as AstraZeneca, Ellipsis
Biotherapeutics, GlaxoSmithKline, Lilly, and Sygen. And, in April of this year,
we added our SNPstream UHT system to our MegaSNPatron facilities, giving us the
broadest range of SNP scoring options available to service customers in the
industry. We believe fee-for-service SNP scoring will be an attractive option
for many customers.
Acquisitions
On December 30, 1999, we acquired GeneScreen, Inc. as a wholly owned subsidiary,
which operates genetic diversity testing laboratories in Dallas, Texas and
Dayton, Ohio. GeneScreen performs DNA laboratory analyses for paternity,
transplantation and forensic testing. GeneScreen's primary source of revenue is
paternity testing under contracts with various state and county government
agencies.
On February 12, 2001, we acquired Cellmark Diagnostics, a division of
AstraZeneca, in an asset acquisition, for a combination of cash and 222,980
shares of our common stock. Cellmark is a leading provider of genetic testing
services in the UK and sells kits and conducts testing for genetic diseases,
including cystic fibrosis.
On December 5, 2001, we acquired all of the outstanding equity securities of
Lifecodes Corporation, in a tax-free transaction. Lifecodes, now a wholly owned
subsidiary of Orchid, is a leading provider of genomics testing for forensics
and paternity in the US. We acquired Lifecodes in order to strengthen our
position in the clinical testing market. Lifecodes also maintains a
diagnostic kit business which adds to our current products. We view this
acquisition, in addition to the two previous acquisitions of GeneScreen and
Cellmark, as a significant step in providing a cost efficient, high throughput
clinical testing business. In exchange for Lifecodes shares we agreed to issue
6,622,951 shares of our common stock to former stockholders of Lifecodes, of
which 1,414,754 shares were deposited in an escrow account and may be used to
compensate us in the event that we are entitled to indemnification under the
Amended and Restated Agreement and Plan of Merger. We also issued 313,978 and
472,313 fully vested options and warrants, respectively, which are exercisable
for our common stock in exchange for existing Lifecodes options and warrants.
The acquisition has been accounted for by the purchase method, and accordingly,
the assets and liabilities acquired have been recorded at their fair values. The
total consideration as a result of this acquisition is approximately $23.7
million.
GeneScreen's, Cellmark's, and Lifecodes' businesses in paternity and forensics
testing support our goal of extending our business in genetic diversity. We
intend to apply our ultra-high throughput SNP scoring technology to the
paternity and forensics businesses of GeneScreen, Cellmark, and Lifecodes in
order to significantly reduce the cost of providing these identity genomics
services. We also plan to use the accredited laboratories at GeneScreen,
Cellmark, and Lifecodes to offer clinical quality pharmacogenetic SNP scoring of
patient samples for clinical association studies and pharmaceutical clinical
trials. We also plan to use these laboratories to conduct pharmacogenetic SNP
scoring services that we plan to offer to physicians and patients in the future
through a number of distribution channels. Our DNA testing business is dependent
upon our ability to successfully and competitively bid and qualify for contracts
with various governmental entities to provide paternity and forensics testing
services. We expect revenues from the respective forensics businesses of
GeneScreen, Cellmark, and Lifecodes to increase as DNA analyses are increasingly
being used by the authorities within the criminal justice system to identify
perpetrators and exonerate the innocent.
15
Our GeneShield business, established in 2001, is working to implement a strategy
based on the creation of proprietary rights covering the identification of SNPs
and their associations to medically important attributes of patients. GeneShield
is also developing a number of innovative programs designed to accelerate the
adoption of pharmacogenetics into routine health care. These programs are
focused on health outcomes and may include a number of health system
participants, including providers, patients and payers. Orchid GeneShield
expects to announce its first beta test program in the last quarter of 2002. We
intend to develop intellectual property rights to medical and diagnostic uses of
SNPs through our collaborations with pharmaceutical and biotechnology companies.
We expect Orchid GeneShield to commence generating revenues in 2003.
Compensation Charges
In prior years, we recorded deferred compensation resulting from the granting of
stock options to employees, directors or consultants with exercise prices below
the fair market value of the underlying common stock at the date of their grant.
During 2001 and through June 30, 2002, all stock options were granted with grant
prices equal to the fair value of our common stock at the grant date. Net of
prior amortization, and remeasurement related to options previously granted to
consultants, deferred compensation of approximately $5.8 million at June 30,
2002 will be amortized over the vesting periods of the respective options,
typically four years.
We anticipate recording total compensation charges resulting from the
amortization in future periods of the deferred compensation as of June 30, 2002
as follows (in millions):
Six months ended Year ended
December 31, December 31,
------------------------------------
2002 2003
---------------- ----------------
$ 1.9 $ 3.9
The portion of these amounts which results from grants to consultants is subject
to remeasurement at the end of each reporting period based upon the changes in
the fair value of our common stock until the consultant completes performance
under his or her respective option agreement. A reduction of deferred
compensation of approximately $0.6 million was recorded for the six months ended
June 30, 2002 related to such remeasurements. Also, certain grants of
performance-based options have been made for which no deferred compensation
expense has been recorded and for which compensation expense will be measured at
the time the performance criteria is met as the difference between the fair
value of the common stock and the exercise price and will be immediately
recorded as compensation expense.
We have incurred losses since inception, and, as of June 30, 2002, we had total
stockholders' equity of approximately $92.7 million, including an accumulated
deficit of approximately $206.0 million. We anticipate incurring additional
losses over at least the next year. We expect these losses to continue in the
near future as we expand the commercialization of our products and services and
we fully implement our proprietary Orchid GeneShield business. We expect this
expansion to result in some increases in research and development, marketing and
sales, and general and administrative expenses. However, we expect that these
anticipated increases will be offset by our restructuring efforts. Payments
under strategic alliances, collaborations and licensing arrangements will be
subject to significant fluctuation in both timing and amount and therefore our
results of operations for any period may not be comparable to the results of
operations for any other period.
Critical Accounting Policies
Our critical accounting policies are as follows:
. revenue recognition
. valuation of long-lived and intangible assets and goodwill.
16
Revenue Recognition. We have had, and expect in the future to have, several
sources of revenues. Prior to our acquisitions of GeneScreen, Cellmark, and
Lifecodes, we derived substantially all of our revenues from research and
development collaborations, technology grants and awards from several
governmental agencies. In 2001, we derived our first revenues from the sale of
testing kits and laboratory DNA testing services from our Cellmark division in
the UK. In 2000, we derived our first revenues from the performance of
laboratory DNA testing services by GeneScreen, our wholly owned subsidiary in
the US. In 1999, we derived our first revenues from the placement of our first
commercial SNPstream hardware system, and throughout 2000, 2001 and through
June 30, 2002, we derived increased amounts of revenues from the sale of
SNP-IT-based consumables. We also derived significant license revenues beginning
in 2000.
In connection with the research and development collaborations that provided the
majority of our revenues in the early years of our corporate history, we
recognize revenues when related research expenses are incurred and when we
satisfy specific performance obligations under the terms of the respective
research contracts. We defer up-front licensing fees obtained in connection with
such agreements and amortize them over the estimated performance period of the
respective research contract. We recognize milestone payments as revenues upon
the completion of the milestone event or requirement, if it represents the
achievement of a significant step in research and development or performance
process.
We recognize DNA laboratory and SNP scoring services revenues on a completed
contract basis at the time test results are completed and reported. Deferred
revenues represent the unearned portion of payments received in advance of tests
being completed and reported.
To date, we have offered our SNPstream system hardware in two basic types of
transactions, either a purchase and sale transaction or an arrangement in which
the customer takes possession of the system and pays an access fee for its use.
We record revenues on the sale of the hardware upon transfer of title and after
we have met all of our significant performance obligations. We defer access fee
payments that we receive when a system is initially placed with a customer, and
recognize revenues on a straight-line basis over the term of the agreement.
Revenues from the sale of consumables are recognized upon the transfer of title,
generally when our products are shipped to our customers from our facilities.
Revenues from license arrangements, including license fees creditable against
potential future royalty obligations of the licensee, are recognized when an
arrangement is entered into if we have no significant continuing involvement
under the terms of the arrangement. If we have significant continuing
involvement under such an arrangement, license fees are deferred and recognized
over the estimated performance period. Management has made estimates and
assumptions relating to the performance period which are subject to change.
Changes in these estimates and assumptions could affect the amount of revenues
from licenses reported in any given period.
Valuation of long-lived and intangible assets and goodwill. We assess the
impairment of amortizable identifiable intangibles and long-lived assets
whenever events or changes in circumstances indicate that the carrying value may
not be recoverable. Factors we consider important which could trigger an
impairment review include the following:
. significant underperformance relative to expected historical or projected
future operating results;
. significant changes in the manner of our use of the acquired assets or
the strategy for our overall business;
. significant negative industry or economic trends; and
. significant decrease in market value of assets.
17
When we determine that the carrying value of amortizable intangibles and other
long-lived assets may not be recoverable based upon the existence of one or more
of the above indicators of impairment, we measure any impairment based on a
projected discounted cash flow method using a discount rate determined by our
management to be commensurate with the risk inherent in our current business.
Net amortizable intangible assets and long-lived assets, excluding goodwill,
amounted to $64.2 million as of June 30, 2002.
On January 1, 2002, Statement of Financial Accounting Standards No. 142,
"Goodwill and Other Intangible Assets, became effective and, as a result, we
ceased to amortize approximately $3.3 million of net goodwill recorded as of
December 31, 2001. We had recorded approximately $1.9 million of amortization
during 2001. In connection with our adoption of SFAS 141 which became effective
on January 1, 2002, and our evaluation of intangible assets arising from
business combinations prior to the adoption of SFAS 141, we have reclassified
our work force intangible asset with a net book value as of December 31, 2001 of
approximately $1.1 million to goodwill. In connection with SFAS 142's
transitional goodwill impairment evaluation, the statement required us to
perform an assessment of whether there is an indication that goodwill is
impaired as of the date of adoption. To accomplish this, we had to identify our
reporting units and determine the carrying value of each reporting unit by
assigning the assets and liabilities, including the existing goodwill and
intangible assets, to those reporting units as of the date of adoption. We then
had up to six months from the date of adoption to determine the fair value of
each reporting unit and compare it to the reporting unit's carrying amount. Upon
the completion of this step, to the extent a reporting unit's carrying amount
exceeds its fair value, an indication exists that the reporting unit's goodwill
may be impaired, then we would have to perform the second step of the
transitional impairment test. In the second step, we must compare the implied
fair value of the reporting unit's goodwill, determined by allocating the
reporting unit's fair value to all of its assets (recognized and unrecognized)
and liabilities in a manner similar to a purchase price allocation in accordance
with SFAS 141, to its carrying amount, both of which would measured as of the
date of adoption. This second step is required to be completed as soon as
possible, but no later than the end of the year of adoption. Any transitional
impairment loss would be recognized as the cumulative effect of a change in
accounting principle in our statement of operations. During the second quarter
of 2002, we identified our reporting units and performed the transitional
impairment test. Based on a discounted model to determine reporting unit fair
value, we determined that the fair values of our reporting units exceed the
respective carrying value. Therefore, goodwill was in fact not impaired and
performance of the second step above is not required.
Certain events or market and business conditions in the future could cause us to
revise our estimates and judgments, and could result in a material impairment of
equipment, leasehold improvements and other intangible assets.
RESULTS OF OPERATIONS
Three Months Ended June 30, 2002 and 2001
Revenues. Revenues for the three months ended June 30, 2002 of approximately
$16.4 million represents an increase of approximately $9.7 million as compared
to revenues of approximately $6.7 million for the corresponding period of 2001.
This increase is primarily attributable to an increase of approximately $9.1
million in services revenues, which primarily relates to our two acquisitions in
2001, Cellmark and Lifecodes. Lifecodes, which we acquired in December of 2001,
had services revenues during the three months ended June 30, 2002 of
approximately $6.4 million. The increase was also attributable to an increase in
SNP genotyping services performed in the second quarter of 2002 under genotyping
service arrangements. Products revenues also increased by approximately $1.1
million, which relates primarily to our two acquisitions in 2001, Cellmark and
Lifecodes, as well as an increase in SNPstream consumable sales. We also
recognized approximately $0.6 million in license, grant, and collaboration
revenues during the three months ended June 30, 2002.
Cost of products revenues. Cost of products revenues for the three months ended
June 30, 2002 was approximately $1.0 million, or 45% of products revenues,
compared to approximately $0.9 million, or 72% of products revenues for the
corresponding period of 2001. The decrease in cost of products revenues as a
percent
18
of products revenues is attributable to an increased number of SNPstream
consumables which had a higher gross margin than SNPstream systems for the three
months ended June 30, 2002 versus the corresponding period in 2001. In addition,
during the second quarter of 2002 we incurred costs of products revenues for our
Lifecodes business which has gross margins that are consistent with the overall
historical gross margins of our consumables products business. The increase in
the amount of cost of products revenues was attributable to the costs associated
with the various consumables sold in the three months ended June 30, 2002
compared to the corresponding period of 2001 which included the cost of
SNPStream placements. Included in the total costs of products revenues for the
three months ended June 30, 2002 is approximately $0.8 million related to
Lifecodes which was not included in our results of operations in the
corresponding period of 2001.
Cost of services revenues. Cost of services revenues was approximately $7.8
million, or 58% of services revenues for the three months ended June 30, 2002
compared to approximately $2.9 million, or 65% of services revenues in the
corresponding period of 2001. The increase in costs of services revenues was
primarily attributable to increased costs associated with Lifecodes of
approximately $3.7 million, which we acquired in December 2001. The decrease in
cost of services revenues as a percent of services revenues is attributed to the
inclusion of both our Cellmark and Lifecodes businesses in the quarterly results
for a full three month period, which generates a higher gross margin on services
revenues than the previous services business. Even though our Cellmark business
was included in our results of operations during the previous year's quarterly
results, there was an increase in the gross margins for that business as
compared to the previous year because Cellmark has experienced significant
growth in higher margin services.
Selling, general and administrative expenses. Selling, general and
administrative expenses consist primarily of salaries and related expenses for
executive, finance and other administrative personnel, professional fees, legal
expenses resulting from intellectual property prosecution and protection, and
other corporate expenses including business development and general legal
activities. Selling, general and administrative expenses for the three months
ended June 30, 2002 were approximately $11.7 million, an increase of
approximately $2.8 million, as compared to approximately $8.9 million for the
corresponding period of 2001. We attribute this increase in overall selling,
general and administrative expenses to Lifecodes which was not included in the
previous years quarterly results of operations. Without giving effect to the
total selling, general and administrative expenses of Lifecodes of approximately
$2.7 million, the selling, general and administrative expenses for three months
ended June 30, 2002 would be relatively consistent with the three months ended
June 30, 2001. Our Cellmark business had selling, general and administrative
expenses of approximately $1.3 million during the three months ended June 30,
2002 as compared to approximately $1.0 million during the corresponding period
of 2001 which was caused by the growth of that business. This increase was
offset by lower corporate selling, general and administrative expenses as a
result of our restructuring efforts.
Research and development expenses. Research and development expenses consist
primarily of salaries and related personnel costs, fees paid to consultants and
outside service providers for development, laboratory supplies for prototypes
and test units, and other expenses related to the design, development, testing
and enhancement of our products. Research and development expenses for the three
months ended June 30, 2002 were approximately $6.2 million, a decrease of
approximately $3 million, as compared to approximately $9.2 million for the
corresponding period of 2001. Without giving effect to the research and
development expenses attributed to Lifecodes of approximately $0.6 million, the
decrease in research and development expenses would have been approximately $3.6
million. The decrease in research and development expense was primarily
attributable to a decrease in purchases of laboratory supplies of approximately
$2.6 million. There was also a reduction in research and development personnel
which contributed to this overall decrease during the three months ended June
30, 2002, as compared to the prior period. During the three months ended June
30, 2001, we incurred a significant amount of research and development costs in
connection with the expansion of our internal and collaborative efforts,
including our collaboration with the SNP Consortium. We expect future research
and development expenses to decrease as our products shift from the research and
development stage to commercialization as evidenced by our commercialization of
several products during the first six months of 2002.
19
Restructuring. During the second quarter of 2002, we formalized and announced a
plan to restructure certain operations in order to cut costs. As a result, over
80 positions which cover all areas of our operations were eliminated. Most of
these terminations were from our Princeton, New Jersey facility. As a result of
this plan, we recorded approximately $1.9 million as a restructuring charge
which consisted of employee related charges such as severance, benefits and
outplacement services of approximately $1.0 million, facility charges related to
lease exit costs of approximately $0.7 million and leasehold improvements
impairment charges of approximately $0.2 million. We expect to fully pay the
existing liability as it relates to severance during the fourth quarter of 2002.
We also expect to incur additional restructuring charges in 2002 as we make a
concerted effort to cut costs and achieve profitability.
Interest income. Interest income for the three months ended June 30, 2002 was
approximately $0.2 million, compared to approximately $1.0 million for the
corresponding period of 2001. This decrease was primarily due to interest
received on larger cash, cash equivalent and short-term investment balances
which we held during 2001. This decrease is also attributable to lower interest
rates during 2002 compared to 2001.
Interest expense. Interest expense for the three months ended June 30, 2002 was
approximately $0.2 million, which was comparable to the approximately $0.2
million in the corresponding period in 2001. Interest expense during these
periods was consistent because of the comparable levels of long term debt.
Net loss allocable to common stockholders. Due to the factors discussed above,
for the three months ended June 30, 2002, we reported a net loss allocable to
common stockholders of approximately $12.2 million as compared to approximately
$14.3 million in the corresponding period in 2001.
Six Months Ended June 30, 2002 and 2001
Revenues. Revenues for the six months ended June 30, 2002 of approximately $32.3
million represents an increase of approximately $19.9 million as compared to
revenues of approximately $12.4 million for the corresponding period of 2001.
This increase is primarily attributable to an increase of approximately $16.8
million in services revenues, which primarily relates to our two acquisitions in
2001, Cellmark and Lifecodes. Lifecodes, which we acquired in December 2001, had
services revenues during the six months ended June 30, 2002 of approximately
$12.0 million. The increase was also attributable to an increase in SNP
genotyping services performed in 2002 under genotyping service arrangements.
Products revenues also increased by approximately $3.1 million, which relates
primarily to our two acquisitions in 2001 of Cellmark and Lifecodes. We also
recognized approximately $1.8 million in license, grant and collaboration
revenues during the six months ended June 30, 2002 which is consistent with the
comparable period of 2001.
Cost of products revenues. Cost of products revenues for the six months ended
June 30, 2002 was approximately $2.5 million, or 47% of products revenues,
compared to approximately $1.7 million, or 76% of products revenues for the
corresponding period of 2001. The decrease in cost of products revenues as a
percent of products revenues is attributable to an increased proportion of total
products revenues from SNPstream consumables, which had a higher gross margin,
than SNPstream systems for the period ended June 30, 2002 versus the
corresponding period in 2001. In addition, during the six months ended June 30,
2002 we incurred costs of products revenues for our Lifecodes business which has
gross margins consistent which are consistent with the overall historical gross
margins of our consumables products business. The increase in the amount of cost
of products revenues was attributable to the costs associated with the
consumables sold in the six months ended June 30, 2002 compared to the
corresponding period of 2001 which included the cost of SNPstream placements.
Included in the total costs of products revenues for the six months ended June
30, 2002 is approximately $1.7 million related to Lifecodes which was not
included in our results of operations in the corresponding period of 2001.
Cost of services revenues. Cost of services revenues was approximately $15.4
million, or 61% of services revenues for the six months ended June 30, 2002
compared to approximately $5.7 million, or 69% of services revenues in the
corresponding period of 2001. The increase in cost of services revenues was
primarily attributable to increased costs associated with Lifecodes of
approximately $7.3 million, which we acquired in December 2001. The decrease in
cost of services revenues as a percent of services revenues is attributed to the
20
inclusion of both our Cellmark and Lifecodes businesses in the results of
operations for a full six-month period, which generates a higher gross margin on
services revenues than the previous services business. Even though our Cellmark
business was included in our results of operations during most of the six months
ended June 30, 2001, there was an increase in the gross margins and in total
cost of services revenues for that business in 2002 as compared to the previous
year because Cellmark has experienced significant growth in higher margin
services.
Selling, general and administrative expenses. Selling, general and
administrative expenses consist primarily of salaries and related expenses for
executive, finance and other administrative personnel, professional fees, legal
expenses resulting from intellectual property prosecution and protection, and
other corporate expenses including business development and general legal
activities. Selling, general and administrative expenses for the six months
ended June 30, 2002 were approximately $23.5 million, an increase of
approximately $7.4 million, as compared to approximately $16.1 million for the
corresponding period of 2001. We attribute this increase in overall selling,
general and administrative expenses to Lifecodes which was not included in the
previous periods results of operations. Without giving effect to the total
selling, general and administrative expenses of Lifecodes of approximately $5.5
million for the six months ended June 30, 2002, the selling general and
administrative expenses for the six months ended June 30, 2002 would have
increased by only approximately $1.9 million as compared with the six months
ended June 30, 2001. Our Cellmark business had selling, general and
administrative expenses of approximately $2.5 million during the six months
ended June 30, 2002 as compared to approximately $1.3 million during the
corresponding period of 2001 which was caused by the growth of that business and
the inclusion of the results of operations for a full six-month period. This
accounts for the most significant reason for the increase in selling, general
and administrative expenses as compared to the prior year, without given giving
effect to the results of operations of Lifecodes.
Research and development expenses. Research and development expenses consist
primarily of salaries and related personnel costs, fees paid to consultants and
outside service providers for development, laboratory supplies for prototypes
and test units, and other expenses related to the design, development, testing
and enhancement of our products. Research and development expenses for the six
months ended June 30, 2002 were approximately $12.5 million, a decrease of
approximately $3.6 million, as compared to approximately $16.1 million for the
corresponding period of 2001. Without giving effect to the research and
development expenses attributed to Lifecodes of approximately $1.0 million, the
decrease in research and development expenses would have been approximately $4.6
million. The decrease in research and development expense for the six months
ended June 30, 2002 as compared to the comparable previous period was primarily
attributable to a decrease in purchases of laboratory supplies of approximately
$2.1 million. There was also a reduction in research and development personnel
which contributed to the overall decrease during the six months ended June 30,
2002 as compared to the prior period. During the six months ended June 30, 2001,
we incurred a significant amount of research and development costs in connection
with the expansion of our internal and collaborative efforts, including our
collaboration with the SNP Consortium. We expect future research and development
expenses to decrease as our products shift from the research and development
stage to commercialization as evidenced by our commercialization of several
products during the first six months of 2002.
Restructuring. During the six months ended June 30, 2002, we formalized and
announced a plan to restructure certain operations in order to cut costs. As a
result, over 80 positions which cover all areas of our operations were
eliminated. Most of these terminations were from our Princeton, New Jersey
facility. As a result of this plan, we recorded approximately $1.9 million as a
restructuring charge which consisted of employee related charges such as
severance, benefits and outplacement services of approximately $1.0 million,
facility charges related to lease exit costs of approximately $0.7 million and
leasehold improvements impairment charges of approximately $0.2 million. We
expect to fully pay the existing liability as it relates to severance during the
fourth quarter of 2002. We also expect to incur additional restructuring charges
in 2002 as we make a concerted effort to cut costs and achieve profitability.
Interest income. Interest income for the six months ended June 30, 2002 was
approximately $0.5 million, compared to approximately $1.9 for the corresponding
period of 2001. This decrease was primarily due to interest received on larger
cash, cash equivalent and short-term investment balances which we held during
2001. This decrease is also attributable to lower interest rates during 2002
compared to 2001.
21
Interest expense. Interest expense for the six months ended June 30, 2002 was
approximately $0.5 million compared to approximately $0.4 million in the
corresponding period in 2001. Interest expense during these periods was
comparable because of the comparable level of long term debt.
Income tax benefit. During the six months ended June 30, 2002, we recorded an
income tax benefit of approximately $0.9 million. This was related to the sale
of some of our state net operating loss carryforwards to another company, which
is authorized by the New Jersey Economic Development Authority.
Net loss allocable to common stockholders. Due to the factors discussed above,
for the six months ended June 30, 2002, we reported a net loss allocable to
common stockholders of approximately $22.7 million as compared to approximately
$25.8 million in the corresponding period in 2001.
LIQUIDITY AND CAPITAL RESOURCES
Since our inception, we have financed our operations primarily through research
and development funding from collaborative partners, from our two private
placements of equity securities with aggregate net proceeds of approximately
$102.0 million that closed in March 1998 and in December 1999 and January 2000,
approximately $48.4 million from our initial public offering which closed in May
2000, approximately $33.2 million from our follow-on offering of common stock in
June 2001, and approximately $21.2 million from our follow-on offering of common
stock in February and March 2002. Our sale of series E mandatorily redeemable
convertible preferred stock in December 1999 resulted in an approximate $44.6
million beneficial conversion feature which was included in net loss allocable
to common stockholders in 1999. The closing of our sale of series E mandatorily
redeemable convertible preferred stock in January 2000 resulted in an
approximate additional $29.6 million beneficial conversion feature which was
included in net loss allocable to common stockholders in 2000. In December 1998,
we obtained a secured $6.0 million equipment loan line, for the purchase of
leasehold improvements and equipment at our corporate headquarters and research
and development laboratories whose availability expired in 1999. In December
2000, this agreement was amended to establish a new borrowing base of an
additional $8.0 million. At June 30, 2002, we had borrowings of approximately
$7.5 million outstanding, and approximately $0.9 million available to be
borrowed under this facility through 2002. We lease our corporate and primary
research facility under operating leases, which expire in 2006 and 2008,
respectively. If we do not maintain minimum unrestricted cash, as defined in the
agreement, equal to the greater of $35 million or twelve months' cash needs
(calculated by taking the trailing three months net cash used in operations
multiplied by four), we are required to provide a cash security deposit or
letter of credit equal to an amount defined in the agreement, not to exceed 50%
of outstanding amounts on draws made in or subsequent to December 2000. As of
December 31, 2001, and just prior to the follow-on offering (See Note 6 to the
condensed consolidated financial statements), we did not maintain the minimum
unrestricted cash defined in the agreement. We have received a waiver from our
lender regarding our non-compliance with this covenant for this period.
Subsequent to March 31, 2002, we did not maintain the minimum cash defined in
the agreement. On June 19, 2002, we obtained a letter of credit in the amount of
approximately $2.7 million as required by the amended line of credit, which was
supported by a cash restriction on certain securities held by us. As such, this
cash restriction, in addition to cash restricted under two of our operating
leases is reflected as restricted cash in the condensed consolidated balance
sheet as of June 30, 2002 of $3.4 million, of which approximately $2.3 million
is classified as a long term asset. We have also received written notice from
the lender stating that the lender waived the financial covenant violation as a
result of not maintaining a pledge of cash security deposit or letter or credit
under this agreement for the period of non-compliance though June 19, 2002.
On May 10, 2001, we filed a Registration Statement on Form S-3 with the
Securities and Exchange Commission. Subject to our ongoing obligations under the
Securities Act of 1933, as amended, and the Securities Exchange Act of 1934, as
amended, the Registration Statement permits us to offer and sell various types
of securities, up to
22
an aggregate value of approximately $75.0 million, of which approximately $16.8
million remains available for future use. The sale of common stock in June 2001
for gross proceeds of approximately $35.7 million was registered under this
Registration Statement. The subsequent sale of common stock in February and
March 2002 for gross proceeds of approximately $22.5 million was also registered
under a Prospectus Supplement to this Registration Statement.
As of June 30, 2002, we had approximately $20.8 million in cash and cash
equivalents and short-term investments, compared to approximately $27.9 million
as of December 31, 2001. This decrease is due to our follow-on offering of
common stock in February and March 2002 which generated net proceeds of
approximately $21.2 million offset by cash used to fund operations through June
30, 2002.
Net cash used in operations for the six months ended June 30, 2002 was
approximately $19.5 million compared with approximately $21.9 million for the
comparable period in 2001. Non-cash charges for the first six months of 2002
included compensation expense of approximately $1.1 million, depreciation and
amortization expense of approximately $5.4 million and impairment of certain
fixed assets from the restructuring of approximately $0.2 million. Investing
activities included capital expenditures of approximately $3.2 million, and
approximately $12.2 million of proceeds from maturities, net of purchases, of
short term investments. Financing activities primarily consisted of
approximately $21.2 million of net proceeds from our offering of common stock in
February and March 2002 and repayment of debt of $1.7 million.
Working capital decreased to approximately $25.3 million at June 30, 2002 from
approximately $27.5 million at December 31, 2001. The decrease in working
capital resulted from an increase as it related to our offering of common stock
in February and March 2002, offset by cash used in operations, cash paid to
acquire fixed assets and repay debt obligations during the six months
ended June 30, 2002 and the long term restriction on the use of our cash of
approximately $2.3 million.
We expect our restructuring efforts in the second quarter of 2002 and
anticipated incremental restructuring efforts during the third quarter to reduce
future spending. We believe that the result of these efforts, coupled with
expected increases in both revenues and gross margins in all of our business
units, will enable us to use our existing cash reserves to operate our ongoing
business activities over at least the next 12 months. However, we may need to
access the capital markets for additional funding for strategic business
activities currently under development.
We cannot assure you that our business or operations will not change in a manner
that would consume available resources more rapidly than anticipated. We also
cannot assure you that we will not require substantial additional funding before
we can achieve profitable operations. Our capital requirements depend on
numerous factors, including the following:
. our ability to enter into strategic alliances or make acquisitions;
. regulatory changes and competing technological and market developments;
. changes in our existing collaborative relationships;
. the cost of filing, prosecuting, defending and enforcing patent claims
and other intellectual property rights;
. the development of our SNPware consumables, SNPstream systems and
related software, and associated reagent consumables;
. the application of our SNP scoring technologies to our other business
areas, including paternity testing;
. our ability to successfully secure contracts for high volume genotyping
services from pharmaceutical, biotechnology and agricultural companies;
. the success rate of establishing new contracts, and renewal rate of
existing contracts, for identity
23
genomics services in the areas of paternity, forensics and
transplantation;
. the progress of our existing and future milestone and royalty producing
activities; and
. the availability of additional funding at favorable terms, if necessary.
As of December 31, 2001, our net operating loss carryforwards were approximately
$134.2 million and $123.5 million for Federal and state income tax purposes,
respectively, as adjusted for the sale of our state tax loss carryforwards in
January 2002. If not utilized, our Federal and state tax loss carryforwards will
begin to expire in 2003 and 2002, respectively. Utilization of our net operating
losses to offset future taxable income, if any, may be substantially limited due
to "change of ownership" provisions in the Internal Revenue Code of 1986. We
have not yet determined the extent to which limitations were triggered as a
result of past financings or may be triggered as a result of future financings.
This annual limitation is likely to result in the expiration of certain net
operating losses prior to their use.
Contractual Commitments. We maintain multiple contractual commitments as of June
30, 2002, which will support our future business operations. Such commitments
relate to non-cancelable operating lease arrangements, long term debt, minimum
supply purchases, and future patent and minimum royalty obligations. We have
identified and quantified the significant commitments in the following table.
Payments Due by Period
(in $000's)
Six months
ending Years ending December 31,
December 31, -------------------------
There-
Contractual Obligations 2002 2003 2004 2005 2006 after Total
- ----------------------- ---------- ---------- ---------- ---------- ---------- ---------- ---------
Noncancelable operating
lease arrangements (1) $ 1,492 $ 3,653 $ 3,272 $ 2,909 $ 2,264 $ 4,652 $ 18,242
Long-term debt (2) 1,718 3,498 2,170 659 -- -- 8,045
Future patent obligations (3) 1,204 1,178 310 -- -- -- 2,692
Minimum purchase
commitments (4) 700 990 1,320 -- -- -- 3,010
Future minimum
royalties (5) -- -- -- 1,240 1,550 -- 2,790
---------- ---------- ---------- ---------- ---------- ---------- ---------
Total contractual obligations $ 5,114 $ 9,319 $ 7,072 $ 4,808 $ 3,814 $ 4,652 $ 34,779
========== ========== ========== ========== ========== ========== =========
(1) Such amounts represent future minimum rental commitments for office space
leased under non-cancelable operating lease arrangements. We lease
approximately 208,000 square feet for operations in the US and
approximately 75,000 square feet in Abingdon, UK to support foreign
operations.
(2) Such amounts primarily consist of amounts payable pursuant to our equipment
loan line. Also included in such amounts are notes payable to former
employees (net of unamortized discount) and capital lease obligations for
certain machinery and equipment (including interest).
(3) Such amounts represent obligations to pay future amounts over the next
three years in conjunction with our acquisition of US Patent No. 5,856,092
and its foreign counterparts from Affymetrix in July 2001.
24
(4) Such amounts represent minimum purchase commitments of terminators from
PerkinElmer (formerly known as NEN Life Science Products, Inc.) pursuant to
the License and Supply Agreement for Terminators, effective February 21,
2000.
(5) In connection with our acquisition of US Patent No. 5,856,092, we are also
obligated to pay future minimum royalties commencing in 2005 which
increases up to $1.9 million in 2007 and continues through the expiration
of the agreement.
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
Our exposure to market risk is principally confined to our cash equivalents,
short-term investments, and restricted cash which are conservative in nature,
with a focus on preservation of capital and all of which have maturities of less
than one year which limit their exposure to market fluctuations. We maintain a
non-trading investment portfolio of investment grade, liquid debt securities
that limit the amount of credit exposure to any one issue, issuer or type of
instrument.
Market risk refers to the risk of loss arising from adverse changes in foreign
currency exchange rates. As a result of our acquisition of Cellmark in February
2001, the acquisition of Lifecodes in December 2001 and a limited number of
agreements with foreign companies we may be affected by fluctuations in currency
exchange rates.
We have a minimal amount of long-term debt recorded on our books. The interest
rates applicable to such debt are not variable with respect to market
conditions.
FORWARD-LOOKING STATEMENTS
This report may contain forward-looking statements. Such statements are based on
management's current expectations and are subject to a number of factors and
uncertainties that could cause actual results or outcomes to differ materially
from those described in such forward-looking statements. These statements
address or may address the following subjects: our expectation of incurring
additional losses in the next year; our expectation that losses will continue in
the near future as we expand the commercialization of our products and services
and we fully implement our proprietary Orchid GeneShield business; our
expectation that our continued expansion will result in some increases in
research and development, marketing and sales, and general and administrative
expenses; our expectation that these anticipated increased expenses will be
offset by our restructuring efforts; our intention of vigorously defending
lawsuits; our belief that fee-for-service SNP scoring will be an attractive
option for many customers; our intention to apply our ultra-high throughput SNP
scoring technology to the paternity and forensics business of GeneScreen,
Cellmark and Lifecodes in order to significantly reduce the cost of providing
these identity genomics services; our plan to use the accredited laboratories at
GeneScreen, Cellmark and Lifecodes to offer clinical quality pharmacogenetic SNP
scoring of patient samples for clinical association studies and pharmaceutical
clinical trials and to conduct pharmacogenetic SNP scoring services that we plan
to offer to physicians and patients in the future through a number of
distribution channels; our intention to expand our offerings of products for
instruments made or sold by others and to obtain license fees and royalties by
licensing our technology for incorporation in products of others; our
expectation that revenues from the respective forensics businesses of
GeneScreen, Cellmark and Lifecodes will increase as DNA analyses are
increasingly being used by authorities within the criminal justice system;
Orchid GeneShield's expectation of announcing its first beta test program in the
last quarter of 2002; our intention of developing intellectual property rights
to medical and diagnostic uses of SNPs through our collaborations with
pharmaceutical and biotechnology companies; our expectation that Orchid
GeneShield will commence generating revenues in 2003; our expectation of having
several sources of revenue in the future; our expectation that our restructuring
efforts in the second quarter of 2002 and anticipated incremental restructuring
efforts in the third quarter will reduce future spending; our belief that the
result of our restructuring efforts coupled with expected increases in both
revenues and gross margins in all our business units will enable us to use our
existing cash reserves to operate our ongoing business activities over at least
the next 12 months; and our belief we may need to access the capital markets for
additional funding for strategic business activities currently under
development. For further information, refer to the more specific factors and
uncertainties discussed throughout this report and in the "Risk Factors" section
of our Annual Report on Form 10-K for the year ended December 31, 2001.
25
PART II OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS.
On or about November 21, 2001, we were made aware of a complaint filed in the
United States District Court for the Southern District of New York naming us as
defendants, along with certain of our officers and underwriters. An amended
complaint was filed on April 19, 2002. The complaint, as amended, purportedly is
filed on behalf of persons purchasing our stock between May 4, 2000 and December
6, 2000, and alleges violations of Sections 11 and 15 of the Securities Act of
1933, as amended, and Sections 10(b) and 20(a) of the Securities Exchange Act of
1934, as amended, and Rule 10b-5 promulgated thereunder. The amended complaint
alleges that, in connection with our May 5, 2000 initial public offering, the
defendants failed to disclose additional and excessive commissions purportedly
solicited by and paid to the underwriter defendants in exchange for allocating
shares of our stock to preferred customers and alleged agreements among the
underwriter defendants and preferred customers tying the allocation of IPO
shares to agreements to make additional aftermarket purchases at pre-determined
prices. Plaintiffs claim that the failure to disclose these alleged arrangements
made our registration statement on Form S-1 filed with the SEC in May 2000 and
the prospectus, a part of the registration statement, materially false and
misleading. Plaintiffs seek unspecified damages. We have not reserved any amount
related to this case as we believe that the allegations are without merit and
intend to vigorously defend against the plaintiffs' claims. In this regard, on
or about July 15, 2002, we have filed a motion to dismiss all of the claims
against us and our officers.
We had been in a litigation with St. Louis University of St. Louis, Missouri
regarding its belief that our SNP scoring technology infringes certain claims
under U.S. patent 5,846,710, which was controlled by the University. On August
7, 2002, the parties dismissed the litigation and we acquired the subject
patent. St. Louis University has assigned both the patent and all license
agreements related thereto to us.
ITEM 2. CHANGES IN SECURITIES AND USE OF PROCEEDS.
Not applicable.
ITEM 3. DEFAULTS UPON SENIOR SECURITIES.
Not applicable.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS.
The following matters were put to a vote of security holders at our Annual
Meeting of Stockholders held on June 14, 2002: (i) the election of Kenneth D.
Noonan, PhD., as a Class I Director, to serve until 2004, and to elect Robert M.
Tien, MD, MPH, Jeremy M. Levin, D.Phil., MB, BChir, and Ernest Mario, PhD., as
Class II directors to serve until 2005; (ii) the amendment of our Restated
Certificate of Incorporation to increase the aggregate number of shares of
common stock authorized to be issued from 100,000,000 to 150,000,000 shares; and
(iii) the ratification of the appointment of KPMG LLP as our independent public
accounts for the current fiscal year.
The following tables set forth information regarding the number of votes cast
for, against or withheld, abstentions and broker non-votes, with respect to each
matter presented at the meeting. Under the rules of the Nasdaq Stock Market,
brokers who hold shares in street name for customers who are beneficial owners
of those shares may be prohibited from giving a proxy to vote shares held for
such customers on certain matters without specific instructions from such
customers (broker non-votes). Under Delaware law, abstentions and broker
non-votes are
26
counted as shares represented at the meeting for purposes of determining the
presence or absence of a quorum at a stockholders meeting. The election of
directors is decided by plurality of the votes cast; withholding authority to
vote for a nominee for director had no effect on the outcome of the vote. For
the proposal to ratify the appointment of KPMG LLP as our independent public
accountants for the fiscal year ending December 31, 2002, the affirmative vote
of a majority of shares of Common Stock voted affirmatively or negatively at the
Meeting on the matter was necessary for approval. Abstentions with respect to
each of these two proposals had no effect on the outcome of the vote. For the
proposal to amend our Restated Certificate of Incorporation to increase the
aggregate number of shares of common stock authorized for issuance from
100,000,000 shares to 150,000,000 shares, the affirmative vote of the holders of
at least the majority of the outstanding common stock entitled to vote on this
matter was required for approval under Delaware law. Because abstentions are
treated as shares present or represented and entitled to vote, abstentions with
respect to this proposal had the same effect as a vote against the proposal.
Against
Broker
Proposals: For or Withheld Abstentions Non-votes
--- ----------- ----------- ---------
(i) election of directors 36,924,437 870,064 -- --
(ii) proposal to amend our Restated
Certificate of Incorporation to
increase the aggregate number of shares
of common stock authorized to be issued
from 100,000,000 to 150,000,000 shares 36,166,733 1,534,811 92,957 --
(iii) proposal to ratify the appointment of
KPMG LLP as our independent public accounts
for the current fiscal year 36,987,985 756,087 50,429 --
At the meeting the following directors were approved by the shareholders to
serve on the board of directors: Kenneth D. Noonan, PhD., as a Class I director,
to serve until 2004, and Robert M. Tien, MD, MPH, Jeremy M. Levin, D.Phil., MB,
BChir, and Ernest Mario, PhD., as Class II directors to serve until 2005. In
addition to these directors, the following directors continue to serve on the
board of directors: Sidney M. Hecht, PhD, Samuel D. Isaly, and George Poste,
DVM, PhD.
ITEM 5. OTHER INFORMATION.
Not applicable.
27
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K.
(a) Exhibits
The following is a list of exhibits filed as part of this Quarterly Report on
Form 10-Q.
Exhibit
Number Description
3.1 Restated Certificate of Incorporation of the Registrant dated
May 10, 2000.
3.2 Certificate of Amendment to the Restated Certificate of
Incorporation of the Registrant, dated June 12, 2001
3.3 Certificate of Amendment to the Restated Certificate of
Incorporation of the Registrant, dated June 17, 2002
3.4 Certificate of Designation, Preferences, and Rights of Series A
Junior Participating Preferred Stock of the Registrant, dated
August 1, 2001
3.5 Second Amended and Restated Bylaws of the Registrant (filed as
Exhibit 3.4 to the Registrant's Annual Report on Form 10-K for
the year ended December 31, 2001 and incorporated herein by
reference)
4.1 Specimen certificate for shares of common stock (filed as
Exhibit 4.1 to the Registrant's Quarterly Report on Form 10-Q
for the quarter ended September 30, 2001 and incorporated
herein by reference)
4.2 Rights Agreement, dated as of July 27, 2001, by and between the
Registrant and American Stock Transfer & Trust Company, which
includes the form of Certificate of Designations setting forth
the terms of the Series A Junior Participating Preferred Stock,
$0.001 par value, as Exhibit A, the form of rights certificate
as Exhibit B and the summary of rights to purchase Series A
Junior Participating Preferred Stock as Exhibit C. Pursuant to
the Rights Agreement, printed rights certificates will not be
mailed until after the Distribution Date (as defined in the
Rights Agreement) (filed as Exhibit 4.1 to the Registrant's
Registration Statement on Form 8-A)
99.1 Certification Pursuant to Section 906 of the Sarbanes-Oxley Act
of 2002
(b) Reports on Form 8-K
None.
28
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.
ORCHID BIOSCIENCES, INC.
Date: August 14, 2002 By: /s/ Donald R. Marvin
DONALD R. MARVIN
Senior Vice President, Chief Operating
Officer, Chief Financial Officer
(principal financial and accounting officer)
29
Exhibit Index
Exhibit
Number Description
3.1 Restated Certificate of Incorporation of the Registrant dated
May 10, 2000
3.2 Certificate of Amendment to the Restated Certificate of
Incorporation of the Registrant, dated June 12, 2001
3.3 Certificate of Amendment to the Restated Certificate of
Incorporation of the Registrant dated June 17, 2002
3.4 Certificate of Designation, Preferences, and Rights of Series A
Junior Participating Preferred Stock of the Registrant, dated
August 1, 2001
3.5 Second Amended and Restated Bylaws of the Registrant (filed as
Exhibit 3.4 to the Registrant's Annual Report on Form 10-K for
the year ended December 31, 2001 and incorporated herein by
reference)
4.1 Specimen certificate for shares of common stock (filed as
Exhibit 4.1 to the Registrant's Quarterly Report on Form 10-Q
for the quarter ended September 30, 2001 and incorporated
herein by reference)
4.2 Rights Agreement, dated as of July 27, 2001, by and between the
Registrant and American Stock Transfer & Trust Company, which
includes the form of Certificate of Designations setting forth
the terms of the Series A Junior Participating Preferred Stock,
$0.001 par value, as Exhibit A, the form of rights certificate
as Exhibit B and the summary of rights to purchase Series A
Junior Participating Preferred Stock as Exhibit C. Pursuant to
the Rights Agreement, printed rights certificates will not be
mailed until after the Distribution Date (as defined in the
Rights Agreement) (filed as Exhibit 4.1 to the Registrant's
Registration Statement on Form 8-A)
99.1 Certification Pursuant to Section 906 of the Sarbanes-Oxley Act
of 2002