#  

**UNITED STATESSECURITIES AND EXCHANGE COMMISSION********Washington, DC  20549**

 

# FORM 10-Q/A

 

**(AmendmentNo. 1)**

 
| **ý**                                                                                                       | ** ** | **QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE  SECURITIES EXCHANGE ACT OF 1934**  |
|------------------------------------------------------------------------------------------------------------------|------------|-----------------------------------------------------------------------------------------------|
|                                                                                                             |       |                                                                                          |
| For The  Quarterly Period Ended March 31, 2003                                                                   |
|                                                                                                             |       |                                                                                          |
| **o**                                                                                                            | ** ** | **TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF  THE SECURITIES EXCHANGE ACT OF 1934** |
|                                                                                                             |       |                                                                                          |
| **For  The Transition Period From               To** |
|                                                                                                             |       |                                                                                          |
| **Commission  File No. 000-30981**                                                                               |

 

**GENAISSANCE PHARMACEUTICALS, INC.**(Exact Name of Registrant as Specified in its Charter)

 

| Delaware                                                         |   | 06-1338846                             |
|------------------------------------------------------------------|--------|----------------------------------------|
| (State  or other jurisdiction of  incorporation or organization) |   | (I.R.S.  Employer  Identification No.) |
|                                                             |   |                                   |
| **Five  Science Park, New Haven, Connecticut   06511**      |
| (Address  of principal executive office and zip code)            |
|                                                             |   |                                   |
| **(203)  773-1450**                                              |
| (Registrant’s  telephone number, including area code)       |

 

Indicate by check mark whetherthe registrant:  (1) has filed allreports required to be filed by Section 13 or 15(d) of the Securities ExchangeAct of 1934 during the preceding 12 months (or for such shorter period that theregistrant was required to file such reports), and (2) has been subject to suchfiling requirements for the past 90 days:

 

| Yes  ý | No  o |
|-------------|-------|

 

Indicate by check mark whether the registrant is anaccelerated filer (as defined in rule 12b-2 of the Exchange Act):

 

| Yes  o | No  ý |
|--------|------------|

 

The number of shares of the registrant’s outstanding commonstock as of May 9, 2003 was 23,049,397 shares.

 

 

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**EXPLANATORY NOTE**

 

                The purpose of this Form 10-Q/Ais to amend and restate in its entirety Item 2 of our Quarterly Report on Form10-Q for the quarter ended March 31, 2003 entitled “Management’s Discussion andAnalysis of Financial Condition and Results of Operations” in response tocomments received by the Securities and Exchange Commission (the “SEC”) to ourRegistration Statement on Form S-3 as filed with the SEC on November 14, 2003,as amended.  This Amendment No. 1 to Form10-Q does not reflect events occurring after the filing of the original Form10-Q or modify or update those disclosures affected by subsequent events.  No other modifications or changes have beenmade to the Form 10-Q as originally filed or the exhibits filed therewith,except for changes to the certifications required by (i) Rules 13a-14(a)/15d-14(a)promulgated under the Securities Exchange Act of 1934, as amended,and (ii) 18 U.S.C. Section 1350.

 

 

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**Item 2 — Management’sDiscussion and Analysis of Financial Condition and Results of Operations**

 

*The following discussion and analysis ofour financial condition and the results of operations should be read inconjunction with the financial statements and related notes appearing elsewherein this quarterly report on Form 10-Q. This report on Form 10-Q containsforward-looking statements within the meaning of Section 21E of the SecuritiesExchange Act of 1934, as amended, that involve risks and uncertainties,including, but not limited to, statements about management’s expectations as tocosts and our liquidity position. These expectations are based on certainassumptions regarding our research and development activities, projectedexpenditures, the ability of our technologies to improve the drug developmentprocess, success of our commercialization efforts and significant growth in ourrevenues and other factors relating to our business.  These expectations may not materialize ifdevelopment efforts are delayed or suspended or if other assumptions proveincorrect.  These factors are more fullydiscussed below under the heading “Factors Affecting Future Operating Results”and in our other filings with the Securities and Exchange Commission. Readersare cautioned not to place undue reliance on these or other forward-lookingstatements, which reflect management’s analysis, judgment, belief orexpectation only as of the date on which they are made.  While we may elect to update forward-lookingstatements at some time in the future, we specifically disclaim any obligationto do so, even if our estimates change.*

 

**Overview**

 

Since ourinception, we have incurred significant operating losses, and, as of March 31,2003, we had an accumulated deficit of $198.3 million.  The majority of our operating losses haveresulted from costs we incurred in developing our *HAP*TM Technology, including in our clinical trials andadministrative costs associated with operations.  As part of our *HAP*TMTechnology platform, we continue to populate our database with *HAP*TMMarker information for pharmaceutically relevant genes.  As of March 31, 2003 we had a total of 6,716genes in our database with 528 of these genes added during the three monthsended March 31 2003.  There is notnecessarily any correlation between the costs incurred in any period and thenumber of genes added to the database in that period.  This is due to the fact that the size of thegene and, therefore, the amount of work involved varies from gene to gene.  In addition, after a gene is sequenced itmust be analyzed and go through an internal quality assurance check before itis added to the database.  This processmay cause a gene sequenced in one period to be added to the database in adifferent period.  Furthermore, sinceadditional information about genes continues to be discovered, we mayresequence genes previously included in the database and do further qualityassurance analysis.  We expect todedicate a significant portion of our resources for the foreseeable future toservice our *HAP*TMPartnership program partners, our pharmacogenomic support service customers, our CARING program and to maintain our HAPTMTechnology.  To date, our revenue hasbeen primarily from licensing and service fees from our agreements withAstraZeneca UK Limited (AstraZeneca), Biogen, Inc. (Biogen), Gene Logic, Inc.(GLI), Johnson & Johnson Pharmaceutical Research & Development, adivision of Janssen Pharmaceuticals, N.V., (J&J PRD), MillenniumPharmaceuticals, Inc. (Millennium), Pfizer, Inc. and Pharmacia & UpjohnCompany (Pharmacia), as well as a sublicensing agreement with Visible Genetics,Inc. and government grants.

 

During the second quarter of 2002, we recorded a $6.0million charge for the impairment of fixed assets.  This charge is related to sequencingequipment, computer hardware and software and leasehold improvements in our DNAsequencing facility that we determined needed to be reviewed for potentialimpairment.  As a result of our review,we determined that the carrying value of the assets was in excess of discountedfuture cash flows to be generated by the asset group and we recorded a writedown of $6.0 million.

 

In August 2002, we announced a restructuring and costreduction program to revise our business focus and to better align ouroperating cost structure with our current and projected partner needs andprojected 

 

 

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revenues from our current andprojected partners. The cost reduction program included a realignment ofmanagement responsibilities, a reduction in our workforce and a decision toseek partners for all internal product development programs. The workforce wasreduced by 20 percent to 110 employees in the third fiscal quarter, with themajority of the workforce reductions occurring in the DNA sequencing facilityand related informatics support.  Weincurred a charge for severance and related costs of approximately $200,000,which was recorded in operating results in the third fiscal quarter of2002.  All severance obligationsassociated with this workforce reduction had been paid by December 31, 2002.

 

In December 2002, we announced that we received a noticefrom General Electric Capital Corporation (GE) claiming that an event ofdefault had occurred under the lease agreement as a result of an allegedmaterial adverse change in our business. Because of the alleged default, GE declared that all principal andfuture interest obligations were due and payable immediately.  GE also filed a complaint in the SuperiorCourt of the State of Connecticut, demanding payment of all amounts due underthe lease agreements.  In March 2003, weand GE agreed to an amendment to their existing lease agreement.  In connection with this amendment, GE hasrescinded and withdrawn its default claim and both parties have withdrawn fromany legal action.  The GE lease amendmentrequires compliance with certain additional covenants as well as a $2.0 millionletter of credit, which is collateralized by cash.  We also received a notice from Finova CapitalCorporation (Finova), stating that as a result of the alleged default claim byGE, there was a cross-default under our agreement with Finova.  In connection with a cross-default, Finovadeclared that all principal and future interest obligations were due andpayable immediately.  Because of theoutstanding claim of default by Finova, we recorded an additional charge tointerest expense during the fourth quarter of 2002.  This charge represents all future interestpayments due under the terms of the agreement with Finova.  As of December 31, 2002, and March 31, 2003,we have classified as current the GE and Finova lease obligations.  However, we anticipate paying the obligationsunder the terms of the original maturity schedules, through February 2005.

 

We continually evaluate opportunities that may provide uswith, among other things, intellectual property, key personnel, capabilitiesthat could augment our recurring revenues or technologies that will enhance andcomplement our *HAP*TM Technology.  From time to time, we intend to pursueacquisitions, which we believe will meet these goals.  For example, on May 7, 2003, the United StatesBankruptcy court approved our purchase of substantially all of the assets ofDNA Sciences, Inc. (DNA) pursuant to an Asset Purchase Agreement by and betweenthe Company and DNA Sciences, Inc. dated as of March 28, 2003, as amended.  In addition, we expect to enter into amodification to a license agreement related to certain purchased assets thatwill result in a net cost of the purchase of  approximately $1.0 million includingthe legal and advisory costs.  We expectto close on the transaction during the second quarter of 2003.

 

**Critical Accounting Policies**

 

The preparation of financial statements in conformity withgenerally accepted accounting principals requires management to make certainestimates and assumptions that affect the reported amounts of assets andliabilities, the disclosure of contingent liabilities at the date of thefinancial statements and the reported amounts of revenues and expenses duringthe reporting period.

 

Our critical accounting policies are as follows:

•                    Revenue recognition

•                    Valuation of long-lived assets

•                    Research and development expenses

 

Revenuerecognition.  We earn our revenues primarily through thelicensing of our *HAP*TM Technology and by providing HAPTMTyping services. We have also entered into agreements which 

 

 

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provide for future milestonesand royalty payments.  We recognizerevenue in accordance with Staff Accounting Bulletin No. 101, *RevenueRecognition in Financial Statements* (SAB 101), and in accordance withStatement of Position 97-2, *Software Revenue Recognition* (SOP 97-2), asamended by Statement of Position 98-9 (SOP 98-9).  In accordance therewith, we recognize annuallicense and subscription fees over the term of the agreement and service feesas the services are performed.  Futuremilestones and royalty payments, if any, will be recognized when receivedprovided that the milestone is substantive and a culmination of the earningsprocess has occurred.  Revenues derivedfrom the achievement of milestones or recognition of related work whenperformed under the terms of a contract, as well as the access period of thelicense agreement, may cause our operating results to vary considerably fromperiod to period.  Deferred revenueresults from cash received or amounts receivable in advance of revenuerecognition.

 

Valuation of long-livedassets.We assess the impairment of long-lived assets whenever events or changes incircumstances indicate that the carrying value may not be recoverable. Factorswe consider important, which could trigger an impairment review, include, amongothers, the following:

 

•                  a significant adversechange in the extent or manner in which a long-lived asset is being used;

 

•                  a significant adversechange in the business climate that could affect the value of a long-livedasset; and

 

•                  a significant decrease inthe market value of assets.

 

If we determine that the carrying value oflong-lived assets may not be recoverable, based upon the existence of one ormore of the above indicators of impairment, we compare the carrying value ofthe asset group to the undiscounted cash flows expected to be generated by thegroup.  If the carrying value exceeds theundiscounted cash flows, an impairment charge may be needed.  To determine the amount of the impairmentcharge, we compare the carrying value of the applicable fixed asset group toits fair value.  We determine the fairvalue of the fixed asset group by discounting expected future cash flow using adiscount rate determined by our management to be commensurate with the riskinherent in our current business.  If thefair value is less than the carrying value, such amount is recognized as animpairment charge.

 

Research and developmentexpenses.We record research and development expenses when they are incurred or, in thecase of clinical trial expenses, based upon information we receive from thirdparty Clinical Research Organizations. Research and development expenses include the following major types ofcosts: salaries and benefits, material and reagent costs, research licensefees, clinical trial expenses, depreciation and amortization of lab equipmentand leasehold improvements and building and utility costs related to researchspace.  Vendor contractual costs consistprimarily of consulting arrangements and certain clinical trial expenses.  We expense clinical trial costs as incurredbased on information we receive from third parties and estimates that wemake.  Our estimates may change asadditional information becomes available which could cause results to vary fromperiod to period.

 

**Results of Operations**

 

**Three Months EndedMarch 31, 2003 and 2002**

 

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License and service revenue consists primarily of proceedsreceived in connection with the licensing of our *HAP*TM Technology. Revenue increased to approximately $2.1 million inthe three months ended March 31, 2003 from $1.9 million in the three monthsended March 31, 2002. The increase in license revenue is primarily attributableto the commercialization of our *HAP*TM Technology Partnershipprogram and our *HAP*TM Drug-Specific Partnership program,including agreements entered into with Millennium in 2003, and Pfizer in2002.  Revenue also includes theamortization, over the remaining life of the sublicensed patent, of upfrontpayments received in connection with the sublicensing of a patent.

 

Research and development expenses consists primarily ofpayroll and benefits for research and development personnel, material andreagent costs, costs incurred in connection with clinical trials, depreciationand maintenance costs for equipment used for *HAP*TM Marker discovery and *HAP*TM Typing, and facility-related costs. We expense ourresearch and development costs as incurred. Research and development expensesdecreased to approximately $4.7 million in the three months ended March 31,2003 from approximately $8.3 million in the three months ended March 31, 2002.Except for clinical trial expenses, substantially all of our research anddevelopment expenditures are incurred in processing and analyzing geneinformation added to the HAP database. The following is a breakdown of research and development expense (inthousands):

 
| ** **                     | ** ** | **Three months ended March  31, 2003** | ** ** | **Three months ended March  31, 2002** | ** ** |
|--------------------------------|------------|----------------------------------------|------------|----------------------------------------|------------|
| Payroll and  related expenses  |       | $                                      | 1,800      |                                   | $          | 2,280 |   |
| Depreciation  and amortization |       | 1,590                                  |       | 2,100                                  |       |
| Consumables                    |       | 530                                    |       | 1,030                                  |       |
| Technology  license fees       |       | 90                                     |       | 890                                    |       |
| Clinical  trial expenses       |       | —                                 |       | 520                                    |       |
| Other                          |       | 690                                    |       | 1,480                                  |       |
| Total                          |       | $                                      | 4,700      |                                   | $          | 8,300 |   |

 

The decrease in expenses is primarily attributable to adecrease of $800,000 in technology license fees, a decrease of approximately$1.0 million in material and reagent costs and depreciation expense and adecrease of approximately $500,000 in payroll and related costs.  The decrease in technology license fees isprimarily due to a license agreement that expired in the fourth quarter of2002.  The decrease in clinical trialsexpense is primarily due to STRENGTH Trials which were substantially completedin the first quarter of 2002.  Thedecrease in material and reagent costs and depreciation expense is primarilydue to reduced DNA sequencing volumes consistent with the removal of themajority of our DNA analyzers from production and the asset impairment chargerecorded in the quarter ended June 30, 2002. The decrease in payroll andrelated costs is primarily due to our work force reduction in connection withour restructuring program that was initiated in the third quarter of 2002.  We expect depreciation and amortizationexpense to decrease in the second half of 2004, as a significant portion of ourassets will be fully depreciated at June 30, 2004.  We do not necessarily expect a decrease intotal research and development expense for 2004.

 

General and administrative expenses consisted primarily ofpayroll and benefits for executive, business development, financeand other administrative personnel, as well as facility-related costs andoutside professional fees incurred in connection with corporate development andgeneral legal and financial matters. General and administrative expensesdecreased to approximately $2.0 million in the three months ended March 31,2003 from approximately $2.5 million in the three months ended March 31,2002.  The decrease is primarilyattributable to a decrease in payroll and related costs in connection with our

 

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workforce reduction and a generalreduction in expenses as part of our cost reduction program initiated duringthe quarter ended September 30, 2002.

 

Interest income decreased to approximately $134,000 in thethree months ended March 31, 2003 from $354,000 in for the same period in2002.  The decrease is the result ofhigher cash, cash equivalent and short-term investment balances in 2002 andlower interest rates on investments during 2003.

 

Interest expense decreased to an expense of approximately$201,000 in the three months ended March 31, 2003 from expense of approximately$526,000 in the three months ended March 31, 2002. The decrease is primarilythe result of the recording of all future interest associated with the Finovacapital leases in the quarter ended December 31, 2002.  If, in the future, we enter into a settlementor amend our agreement with Finova it may result in the reversal, in the periodof amendment or settlement, of the remaining interest expense recognized in thefourth quarter of 2002.

 

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**Liquidity and CapitalResources**

 

We have financed our operations primarily through the saleof common and preferred stock, government research grants, payments underlicensing agreements, loans and capital leases. From inception through March31, 2003, we have received aggregate gross proceeds of approximately $163.1million from issuance of common and preferred stock. In addition, through March31, 2003, we have received $4.5 million of government research grants and $19.9million from license and service fees, royalties and research contracts. Wehave also received $26.2 million****fromcapital lease financing arrangements and $8.2 million from other loans. We haveacquired, through March 31, 2003, $42.2 million of property and equipment.  The majority of these assets were financedthrough capital lease financing arrangements and other loans.

 

We expect to continue to finance our operations in theshort-term from cash we received in 2000 from the sale of our common andpreferred stock and revenue from our *HAP*TM Technology Partnership program and our pharmacogenomicsupport service customers.  Our businessstrategy depends on, among other things, entering into partnership agreementswith pharmaceutical and biotechnology companies.  If we are unsuccessful in entering into ourpartnership programs, we may not generate sufficient revenues to sustain ouroperations at planned levels.

 

Cash used in operations for the three months ended March 31,2003 was $2.0 million compared with $7.7 million for the same period in 2002.The cash used in operations for the three months ended March 31, 2003 resultedprimarily from a net loss of $4.7 million, partially offset by $1.8 million ofnon-cash charges for depreciation and amortization expense and stock-basedcompensation.  Cash used in operationsfor the three months ended March 31, 2002 resulted primarily from a net loss of$9.1 million and a $1.8 million decrease in accounts payable and accruedliabilities, partially offset by $2.4 million of non-cash charges fordepreciation and amortization expense and stock- based compensation.

 

Cash provided by investing activities for the three monthsended March 31, 2003 was $2.2 million compared with $4.3 million for the sameperiod in 2002.  Net proceeds from thesale of marketable securities totaled $2.7 million for the three months endedMarch 31, 2003 compared to $4.4 million for the same period in 2002.  During the three months ended March 31, 2003,we used $410,000 of cash for the purchase of property and equipment compared to$40,000 for the same period in 2002.

 

Cash used for financing activities for the three monthsended March 31, 2003 was $1.7 million compared with $1.8 million for the sameperiod in 2002.  The primary use of cashfrom financing activities for the three months ended March 31, 2003 and 2002was the repayment of long-term debt and capital lease obligations.

 

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Our contractualcash obligations as of March 31, 2003, are as follows:

 
| **Contractual********Obligations**                 | ** **                          | **Payments Due by Period (2)********(in  thousands)** | ** **      |
|----------------------------------------------------|-------------------------------------|-------------------------------------------------------|-----------------|
| ** **                                         | **Total  Amounts********Committed** | ** **                                            | **Fiscal 2003** | ** ** | **Fiscal Years  2004 and 2005** | ** ** | **Fiscal Years  2006 and 2007** | ** ** | **Fiscal Year  2008 and later** | ** ** |
| Long-Term Debt, including interest                 |                                | $                                                     | 6,355           |   | $ | 587 |   | $ | 1,408 |   | $ | 1,408 |   | $ | 2,952 |   |
| Capital Lease Obligations, including  interest (1) |                                | 9,809                                                 |            | 9,809 |   | — |   | — |   | — |   |
| Operating Leases                                   |                                | 8,944                                                 |            | 892 |   | 2,235 |   | 2,025 |   | 3,792 |   |
| Minimum License Obligations                        |                                | 500                                                   |            | 88 |   | 206 |   | 206 |   | — |   |
| Total Contractual Cash Obligations                 |                                | $                                                     | 25,608          |   | $ | 11,376 |   | $ | 3,849 |   | $ | 3,639 |   | $ | 6,744 |   |

 

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(1)          Reflectsall lease obligations as being current, however, as a result of the amendmentto our lease agreement with GE that we entered into in March 2003, weanticipate paying the outstanding GE lease obligations under the originalmaturity schedule through February, 2005. Obligations due under the original maturity schedules total $5,638 forfiscal 2003 and $4,171 for fiscal 2004 and 2005.  See Management’s Discussion and Analysis –Overview and Note 6 for additional information regarding the classification ofcertain amounts as current obligations.

 

(2)          Payment ofour long-term debt and capital lease obligations could be accelerated and hasbeen accelerated in the past, if we fail to maintain compliance with certainnon-financial covenants, including absence of material adverse change and othercovenants.

 

Long-term debtconsists of three financing agreements with Connecticut Innovations Inc. (CII),a stockholder, used to finance certain leasehold improvements and other costsassociated with our facility expansion. Each agreement provided for interest only with principal payments, basedon a 120-month amortization, beginning April 2001 through October 2002, withfinal balloon payments due in March 2009 through June 2011.  Borrowings under the agreements bear interestat 6.5% and are collateralized by the related leasehold improvements.  We are in compliance with all debt covenantsas of March 31, 2003 and no cross default provisions exist in the agreements.

 

Capital leaseobligations, related to equipment, consist principally of arrangements withfour equipment leasing companies.  Theleases have terms ranging from two to four years with installments originallyscheduled to end between August 2003 and February 2005, and which bear interestat rates ranging from 8.15% to 12.46%. Borrowings under these agreements are secured by the underlying leasedequipment.  The majority of the capitallease arrangements allow for the purchase of the related equipment at thecompletion of the lease term, as defined in the agreements, and certain of theagreements require the purchase of the equipment at the completion of the leaseterm. Two of our equipment lessors, GE and Finova, alleged that we were indefault of our agreements with them.  Fora further discussion, see Management’s Discussion and Analysis of FinancialConditions – Overview and Note 6 of the notes to unaudited financialstatements.

 

We lease our operating facilities located in New Haven,Connecticut.  The lease agreementscurrently require annual lease payments of approximately $1.1 million per yearover the original term, which expires in 2006. We have two five-year renewal options to extend the lease agreementsbeyond the initial term.  We arerecording the expense associated with the leases on a straight-line basis overthe expected term of the leases through September 2011.  In addition to the operating lease agreementsfor our current facility, we also have operating leases for certain of ouroffice equipment.

 

In addition, weperiodically enter into agreements with third parties to obtain exclusive ornon-exclusive licenses for certain technologies.  The terms of certain of these agreementsrequire us to make future royalty payments and certain milestone payments basedon product sales or sublicense income generated from applicable technologies, ifany and include provisions requiring future minimum lease payments, whether ornot the technology is commercialized. The amount of such payments will depend upon successfulcommercialization of applicable technologies, if any.  The future minimum payments (assumingnon-termination of these agreements) are included in the minimum licenseobligations above.

 

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Based on ourcurrent business plans, capital expenditures are not expected to exceed$500,000 to $1 million for each of fiscal 2003 and 2004.

 

Our cash requirements will vary depending upon a number offactors, many of which are beyond our control, including:

 

•                  the demand for our *HAP*TM Technology;

•                  the efforts and success of our *HAP* TM Partnership program;

•                  the commercialization of intellectual property derived fromour associations;

•                  the level of competition we face;

•                  our ability to maintain our *HAP* TMTechnology; and

•                  our ability to effectively manage our operating expenses.

 

On March 31, 2003, cash, cash equivalents and short-term investmentstotaled $30.0 million compared to approximately $34.2 million at December 31,2002.  Our cash reserves are held ininterest-bearing high-grade corporate bonds and money market accounts.  We believe that our existing cash reserveswill be sufficient to support our expected net losses, debt obligations andcapital expenditures for at least 12 months. To execute our long-term business plan, we will need to grow ourrevenues significantly each year and we may need to seek additional fundingthrough public or private equity offerings, debt financings or commercialpartners.  We cannot assure you that wewill obtain additional partners or capital funding on acceptable terms, if atall.

 

**FactorsAffecting Future Operating Results**

 

*This Quarterly Report on Form 10-Q contains “forward-looking statements”within the meaning of Section 21E of the Securities Exchange Act of 1934, asamended.  These statements are subject torisks and uncertainties and are based on the beliefs and assumptions of ourmanagement based on information currently available to our management.  Use of words, such as**“believes,” “expects,” “anticipates,”“intends,” “plans,” “estimates,” “should,” “likely” or similar expressions, indicate a forward-looking statement.  Forward-looking statements involve risks,uncertainties and assumptions.  Certainof the information contained in this Quarterly Report on Form 10-Q consists offorward-looking statements.  Importantfactors that could cause actual results to differ materially from the forward-lookingstatements include the following:*

 

**We are an earlystage company with a history of losses and we expect to incur net losses forthe foreseeable future such that we may never be profitable**.

 

We have incurred substantial operating losses since our inception.  As of March 31, 2003, we have generated onlyminimal revenue from our *HAP*TM Partnership program and ourpharmacogenomics support services, and we do not expect to generate significantrevenues for several years.  Frominception through March 31, 2003, we had an accumulated deficit ofapproximately $198.3 million.  Our lossesto date have resulted principally from costs we incurred in the development ofour *HAP*TM Technology, in our clinical trials and from generaland administrative costs associated with operations.  We expect to devote substantially all of ourresources to service our *HAP*TM Partnership program andSTRENGTH program partners, our pharmacogenomics support services customers, ourCARING program and to maintain our *HAP*TM Technology.

 

We expect to incur additional losses this year and in future years, andwe may never achieve profitability.  Inaddition, pharmaceutical and biotechnology companies are only now beginning touse products such as ours in their drug and diagnostic development or marketingefforts and, accordingly, they may not choose to use our *HAP*TMTechnology.  We do not expect our lossesto be substantially mitigated by revenues from our *HAP*TMPartnership and STRENGTH programs and our CARING program, if any, or from our pharmacogenomicssupport services for a number of years.

 

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**We currentlyrely on a limited number of licensing and service arrangements forsubstantially all of our revenues.  As aresult, the loss of one major customer or our inability to secure additionalsignificant customers during a given period would have an adverse affect on ourbusiness and operating results.**

 

We are dependent upon a limited number of licensing and servicearrangements that represent substantially all of our revenues.  In the quarter ended March 31, 2003, two ofour customers accounted for 59% of our total revenues.  The agreements with the two customers terminatein the fourth quarter of 2003 and the third quarter of 2004.  If we are unable to replace, uponsubstantially similar terms, the agreement that expired in 2002 or if we loseany of the remaining significant customers, it would have a material adverseaffect on our revenues and on our business in general and could cause volatilityor a decline in our stock price.

 

**To generatesignificant revenues, we must obtain additional customers for our *HAP*TMPartnership program and our STRENGTH and CARING programs.**

 

Our strategy depends on entering into agreements with pharmaceutical andbiotechnology companies for our *HAP*TM Partnership program andour STRENGTH and CARING programs.  We currently have a *HAP*TM Partnership programwith five pharmaceutical and biotechnology companies as well as anagreement with a major diagnostic company to commercialize exclusively thediagnostic product rights and non-exclusively the therapeutic productdevelopment rights from our STRENGTH program. Wemay not obtain additional partners for our *HAP*TM Partnershipprogram and our STRENGTH program or obtain any partners for our CARINGprogram.  If we are unsuccessful infinding additional partners for our *HAP*TM Partnership programand our STRENGTH program or in finding any partners for our CARING program, wemay never generate sufficient revenues to sustain our operations.  In addition, we expect that some of ourfuture *HAP*TM Partnership program collaborations, like some ofour current *HAP*TM Partnership program collaborations, will belimited to specific, limited-term projects or that some of these collaborationsmay not be renewed.  Accordingly, we mustcontinually obtain new customers to be successful.  To date, the integration of pharmacogenomicsinto drug development and marketing has not achieved widespread marketacceptance.

 

**If the estimateswe make, and the assumptions on which we rely, in preparing our financialstatements prove inaccurate, our actual results may vary from those reflectedin our projections and accruals.**

 

Our financial statements have been prepared in accordance withaccounting principles generally accepted in the United States of America.  The preparation of these financial statementsrequires us to make estimates and judgments that affect the reported amounts ofour assets, liabilities, revenues and expenses, the amounts of charges accruedby us and related disclosure of contingent assets and liabilities.  We base our estimates on historicalexperience and on various other assumptions that we believe to be reasonableunder the circumstances.  There can be noassurance, however, that our estimates or the assumptions underlying ourestimates will be correct.

 

**We may requireadditional funding to fund operations and repay debt and we may not be able toobtain any.**

 

We have used substantial amounts of cash to fund our research anddevelopment activities.  We will continueto spend funds to service our *HAP*TM Partnership program andSTRENGTH program partners, our pharmacogenomics support services customers, ourCARING program and to maintain our *HAP*TM Technology.  We plan to pay for these activities withfunds from:

 

•                  our existing cash and investment securities; and

 

•                  income that we may receive from our *HAP*TM Partnershipprogram and STRENGTH program partners and pharmacogenomics support servicescustomers.

 

We intend to rely on our current *HAP*TM Partnershipprogram and STRENGTH program partners and future partners, if any, and ourcurrent pharmacogenomics support services customers and future customers, ifany, for significant funding in the future to support our development efforts.  To execute our business plans, we will needto grow our revenues significantly each year. We cannot be certain when we will begin to receive additional income, ifat all, from our *HAP*TM Partnershipand STRENGTH programs and our pharmacogenomics support services and income, ifany, from our CARING program.  If we donot receive this income or do not receive it as rapidly as we expect, we wouldspend our existing cash and investment securities more rapidly than wecurrently plan.

 

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We believe that our existing cash reserves will be sufficient to supportour expected net losses, debt obligations and capital expenditures for at least12 months.  We cannot assure you that wewill be able to obtain new partners or to generate the increased revenuesrequired to meet our business plan objectives. In addition, to execute our business plans, we may need to seekadditional funding through public or private equity offerings, debt financings orcommercial partners.  We cannot assureyou that we will obtain additional partners or capital funding on acceptableterms, if at all.  If we are unable togenerate sufficient revenues or access capital on acceptable terms, we may berequired to (a) obtain funds on unfavorable terms that may require us torelinquish rights to certain of our technologies or that would significantlydilute our stockholders and/or (b) significantly scale back currentoperations.  Either of these twopossibilities would have a material adverse effect on our business.

 

**Our *HAP*TMTechnology may not allow our partners to develop commercial products or toincrease sales of their marketed products.**

 

We developed our *HAP*TM Technology on the assumptionthat information about gene variation and gene variation associated with drugresponse may help drug development professionals better understand the drugresponse of particular populations and complex disease processes.  Although the pharmaceutical and biotechnologyindustries are increasing their use of genomics in analyzing drug response anddiseases, we are unaware of any successful drug development program applyingpopulation genomics.

 

We discover *HAP*TM Markers for pharmaceuticallyrelevant genes.  If we are unable to find*HAP*TM Markers for pharmaceutically relevant genes in a timelymanner, our potential partners may lose confidence in our *HAP*TMTechnology and our Company, and this loss in confidence could decrease ourability to generate revenues.  Even if weare able to discover the *HAP*TM Markers for pharmaceuticallyrelevant genes, this information may not prove to be superior to genomicvariation information discovered by our competitors.  Furthermore, pharmaceutical and biotechnologycompanies may not choose our *HAP*TM Technology over competingtechnologies.

 

Our *DecoGen*® Informatics System may also be lesseffective than we expect or may not allow our partners or us to determine acorrelation between drug response and genomic variation.  Furthermore, even if our partners or we are successfulin identifying a specific correlation between drug response and genomicvariation based on our *HAP*TM Technology, our partners may notbe able to develop or sell commercially viable products nor may our partners be able to increase the sales of their marketed productsusing this correlation.  Accordingly, our*HAP*TM Markers and *HAP*TM Technology may notimprove the development, marketing and prescribing of drugs or the developmentand marketing of diagnostics developed by our *HAP*TMPartnership program and STRENGTH program partners.

 

**If we are unableto obtain intellectual property protection for our *HAP*TMTechnology, trade secrets or know how, we may not be able to operate ourbusiness profitably.**

 

Our success depends, in part, on our ability to protect our *HAP*TMTechnology, any associations that we find between clinical outcomes and geneticvariation and any other proprietary software, methods and technologies that wedevelop, either as a trade secret or under the patent and other intellectualproperty laws of the United States and other countries, so that we can preventunauthorized entities from using our inventions and proprietaryinformation.  Because patent applicationsthat were filed prior to November 29, 2000 in the United States are confidentialuntil patents issue, third parties may have filed patent applications fortechnology covered by our pending patent applications without our being awareof those applications, and our patent applications may not have priority overany patent applications of others.  Weare aware that there are other firms or individuals who have discovered, or arecurrently discovering, information similar to the information we arediscovering, who may have filed, and in the future are likely to file, patentapplications that are similar or identical to our *HAP*TMTechnology patent applications.

 

Our pending patent applications may not result in issued patents.  The patent positions of pharmaceutical andbiotechnology companies, including ours, are generally uncertain as a result ofthe uncertain state of the patent law in the biotechnology field.  There is no uniform, worldwide policyregarding the subject matter and scope of claims granted or allowable inbiotechnology patents, particularly those involving genomics.  In addition, some interest groups are lobbyingfor restrictions on patenting of genetic tests.

 

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**We may be unableto develop or commercialize our *HAP*TM Technology if we cannotestablish additional collaborative relationships, and we will depend on ourpartners to develop or to co-develop products.**

 

We currently have a *HAP*TM Partnership program with five pharmaceuticaland biotechnology companies aswell as an agreement with a major diagnostic company to commercializeexclusively the diagnostic product rights and non-exclusively the therapeuticproduct development rights from our STRENGTH program.  We do not currently have any partners for ourCARING program.  Under our currentstrategy, and for the foreseeable future, we do not expect to develop or marketpharmaceutical or diagnostic products on our own.  As a result, our current and future revenues,in part, will depend on payments from our current *HAP*TMPartnership program and STRENGTH program partners and our future *HAP*TMPartnership, STRENGTH and CARING program partners, if any, for either the newproducts they may develop, or for increased sales of their existing products,made possible through the use of our *HAP*TM Technology.  If we are unable to attract new *HAP*TMPartnership program and STRENGTH program partners or any partners for ourCARING program, we may never generate sufficient revenues to sustain ouroperations.

 

Our partners for our *HAP*TM Partnership program andSTRENGTH program and our partners, if any, for our CARING program, will be responsiblefor pre-clinical study and clinical development of therapeutic and diagnosticproducts and for regulatory approval, manufacturing and marketing of anyproducts or enhanced marketing claims that result from the application of our *HAP*TMTechnology.  Our current agreements, andwe anticipate that our future agreements, with partners for any of our  programs willallow them significant discretion in pursuing these activities.  We cannot control the amount and timing ofresources that any such current or potential partners will devote to ourprograms or potential products.  Ourprogram arrangements may also have the effect of limiting the areas of researchthat we may pursue either alone or with others. Because part of our revenues will be dependent on the successfulcommercialization or development of our partners’ products, if, for any reason,a partner delays or abandons its development or commercialization of a productdeveloped using our *HAP*TM Technology, we may receive reducedroyalty or other payments or no royalty or other payments at all.

 

Although we intend to retain the rights to all *HAP*TMMarkers, which we discover as well as to *HAP*TM Markersdiscovered jointly with our *HAP*TM Partnership and STRENGTHprogram partners and with our CARING program partners, if any, we may notalways be able to negotiate the retention of these rights.  Furthermore, disputes may arise in the futureover the ownership of rights to *HAP*TM Markers as well as anyother technology we develop with any of our program partners.  These and other possible disagreements between  a programpartner and us or between our CARING program partners, if any, and us couldlead to delays in the research, development or commercialization of theirproducts.  These disagreements could alsoresult in litigation or require arbitration to resolve.  Any of these events could prevent us fromeffectively marketing our *HAP*TM Technology.

 

**We investconsiderable amounts of time, effort, and money to license our *HAP*TMTechnology; and if we are unable to license our technology, we may not generatesufficient revenue to sustain our operations**.

 

Our ability to obtain partners for our *HAP*TMPartnership program and our STRENGTH and CARING programs will depend insignificant part upon the pharmaceutical and biotechnology industries’acceptance that our *HAP*TM Technology can help accelerate orimprove their drug and diagnostic development and marketing efforts.  To achieve market acceptance, we mustcontinue to educate the pharmaceutical and biotechnology industries and thepublic in general as to the potential benefits of our *HAP*TMPartnership, STRENGTH and CARING programs. Most importantly, we must convince the research and development,clinical and marketing departments of pharmaceutical and biotechnology companiesthat our *HAP*TM Technology can accelerate and improve theprocesses for developing, marketing and prescribing drugs and for developingand marketing diagnostics and that our *HAP*TM Partnership,STRENGTH and CARING programs will be commercially viable.  If we fail to gain this acceptance, we maynever generate sufficient revenues to sustain our operations.  We may expend substantial funds andmanagement effort to market our *HAP*TM Partnership, STRENGTHand CARING programs, without any resulting revenues.

 

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**Our ability tomake any acquisitions is dependent on the availability of adequate cash and theattractiveness of our stock price.**

 

We anticipate that any future acquisitions of businesses or technologieswill be financed through cash from operations, the issuance of shares of ourcommon stock and/or seller financing.  Wecannot assure you that we will have sufficient existing capital resources orthat we will be able to raise sufficient additional capital resources on termssatisfactory to us, if at all, in order to meet our capital requirements forsuch acquisitions.

 

We also believe that a significant factor in our ability to closeacquisitions will be the attractiveness of our common stock for potentialacquisition candidates.  Thisattractiveness may, in large part, be dependent upon the relative market priceand capital appreciation prospects of our common stock compared to the equitysecurities of our competitors.  Thetrading price of common stock on the Nasdaq National Market could in the futurematerially adversely affect our acquisition program.

 

**Integration oracquisitions or strategic investments could interrupt our business and ourfinancial condition could be harmed.**

 

From time to time, we may acquire or make strategic investments in otherbusinesses or technologies.  For example,on May 7, 2003, the United States Bankruptcy Court approved our  purchase of substantially all of theassets of DNA Sciences, Inc. (DNA) pursuant to an Asset Purchase Agreement byand between the Company and DNA.  Inaddition, we expect to sign a modification to a license agreement related tocertain purchased assets.  We expect toclose the acquisition and license modification in the second quarter of2003.  The DNA acquisition and any otheracquisitions or strategic investments we may make in the future may entailnumerous risks that include the following:

 

•                  difficulties integrating acquired operations, personnel,technologies or products, if any;

•                  diversion of management’s focus from our corebusiness concerns;

•                  entering markets in which we have no or limited prior experience orknowledge;

•                  exposure to litigation from stockholders orcreditors of, or other parties affiliated with, the target company or companies;

•                  dilution to existing stockholders and earnings pershare; and

•                  incurrence of substantial debt.

 

Any such difficulties encountered as a result of merger, acquisitions orstrategic investments could adversely affect our business, operating resultsand financial condition.

 

**If we are unableto prevent others from unauthorized use of, or are unable to defend our use of,our *HAP*TM Technology, trade secrets or know how, we may notbe able to operate our business profitably.**

 

Despite our efforts to protect ourproprietary rights, unauthorized parties may be able to obtain and useinformation that we regard as proprietary. The issuance of a patent does not guarantee that it is valid orenforceable; thus, even if we obtain patents, they may not be valid or enforceableagainst third parties.

 

We also rely upon unpatented trade secrets and improvements, unpatentedknow-how and continuing technological innovation to develop and maintain ourcompetitive position.  We generallyprotect this information with reasonable security measures, includingconfidentiality agreements signed by our employees, academic collaborators andconsultants that provide that all confidential information developed or madeknown to others during the course of the employment, consulting or businessrelationship will be kept confidential except in specified circumstances.  Agreements with employees, consultants andcollaborators generally provide that all inventions conceived by the individualwhile employed by us are our exclusive property.  If employees, consultants or collaborators donot honor these agreements, we may not have adequate remedies for breach.  Furthermore, our trade secrets may otherwisebecome known or be independently discovered by competitors.

 

Further, a patent does not provide the patent holder with freedom tooperate in a way that infringes the patent rights of others.  A third party may sue us for infringing onits patent rights.  Likewise, we may needto resort to litigation to enforce a patent issued to us or to determine thescope and validity of third party proprietary rights.  The cost to us of any litigation or otherproceeding relating to intellectual property rights, even if resolved in ourfavor,

 

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could be substantial, and the litigation woulddivert our management’s efforts.  Some ofour competitors may be able to sustain the costs of complex patent litigationmore effectively than we can because they have substantially greaterresources.  Uncertainties resulting fromthe initiation and continuation of any litigation could limit our ability tocontinue our operations.

 

If any party should successfully claim that the creation or use of our *HAP*TMTechnology or *HAP*TM Marker association data infringe upontheir intellectual property rights, in addition to any damages we might have topay, a court could require us to stop the infringing activity or obtain alicense on unfavorable terms.  Moreover,any legal action against us or any of our program partners claiming damages orseeking to enjoin commercial activities relating to the affected products andprocesses could, in addition to subjecting us to potential liability fordamages, require us or of our program partners to obtain a license in order tocontinue to manufacture or market the affected products and processes.  Any license required under any patent may notbe made available on commercially acceptable terms, if at all.  In addition, some licenses may benon-exclusive, and, therefore, our competitors may have access to the sametechnology licensed to us.  If we fail toobtain a required license or are unable to design around a patent, we may beunable to market effectively some of our *HAP*TM Technology,which could limit our profitability and possibly prevent us from generatingrevenue sufficient to sustain our operations.

 

**Regulatoryoversight of our *HAP*TM Technology and public opinionregarding ethical issues surrounding the use of genetic information mayadversely affect our ability to market our *HAP*TM Technology.**

 

Currently, there is limited Food and Drug Administration (FDA)regulation of genetic tests.  TheSecretary’s Advisory Committee on Genetic Testing, an advisory panel to theSecretary of the U.S. Department of Health and Human Services, has recommendedthat the FDA expand its regulation of genetic testing to require FDA approvalfor all new genetic tests and labeling of genetic tests.  If the FDA adopts this recommendation, it mayrequire that we, or our partners, apply for FDA approval as a prerequisite tomarketing genetic tests that incorporate our *HAP*TMTechnology.  If the FDA were to deny anyapplication of this kind, it could adversely affect our business and we may beunable to generate sufficient revenues to sustain our operations.

 

To date, the FDA has not required, in connection with approving anydrug, that a physician must have genomic variation information determined abouta patient before the doctor prescribes a drug. However, the FDA, in one instance, has required that a physician musthave gene expression information about a patient before the doctor prescribesthe drug.  On January 31, 2003, the FDAannounced an initiative to help make innovative medical technology availablesooner, including the use of pharmacogenomics during drug development.  The FDA indicated that within six months theagency would issue guidance on when and how to submit pharmacogenomicinformation to the FDA during the drug development process.  The FDA said that this guidance wouldfacilitate the exploratory use of pharmacogenomic screening during drugdevelopment and would clarify when such information would be considered part ofthe evaluation of drug safety.  Inaddition, the FDA stated that the agency would hold a workshop in 2003 onissues that are involved in the co-development of a pharmacogenomic test and adrug and that within 18 months the agency would issue guidance on theregulatory pathway for such combinations through the agency’s Center for DrugEvaluation and Research and the Center for Devices and RadiologicalHealth.  Our success will depend in parton what guidance the FDA issues with regard to the use of genomic variationanalysis as part of the drug approval process and, accordingly, the validity ofour *HAP*TM Technology as a basis for identifying genomicvariation and for correlating drug response with genomic variation.  Without this acceptance by the FDA and thepharmaceutical and biotechnology industry, we may be unable to marketeffectively our *HAP*TM Technology and we may not generatesufficient revenues to sustain our operations.

 

Within the field of personalized health and medicine, governmental andother entities may enact patient privacy and healthcare laws and regulationsthat may limit the use of genomic variation data.  To the extent that these laws and regulationslimit the use of our *HAP*TM Technology or impose additionalcosts on our partners, we may be unable to market effectively our *HAP*TMPartnership, STRENGTH and CARING programs and we may not generate sufficientrevenues to sustain our operations.

 

Additionally, public opinion on ethical issues related to theconfidentiality and appropriate use of genetic testing results may influencegovernmental authorities to call for limits on, or regulation of the use of,genetic testing.

 

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In addition,governmental authorities or other entities may call for limits on, orregulation of the use of, genetic testing or prohibit testing for geneticpredisposition to certain conditions, particularly for those that have no knowncure.  The occurrence of any of theseevents could reduce the potential markets for our *HAP*TMTechnology, which could prevent us from generating sufficient revenues tosustain our operations.

 

Furthermore, we may be directly subject to regulations as a provider ofdiagnostic information.  To the extentthat these regulations restrict the sale of our *HAP*TMTechnology or impose other costs, we may be unable to provide our *HAP*TMTechnology to our customers on terms sufficient to recover our expenses.

 

**If our partnersdo not seek, or do not receive, marketing approval for products developed, ifany, using our *HAP*TM Technology, we may receive delayedroyalty or other payments or no royalty or other payments at all.**

 

Any new drug, biologic, or new drug or biologic indication our partnersdevelop using our *HAP*TM Technology must undergo an extensiveregulatory review process in the United States and other countries before a newproduct or indication of this kind could be marketed.  This regulatory process can take many yearsand require substantial expense.  Changesin FDA policies and the policies of similar foreign regulatory bodies canprolong the regulatory review of each new drug or biologic license applicationor prevent approval of the application. We expect similar delays and risks in the regulatory review process forany diagnostic product developed by our partners, whenever this regulatoryreview is required.  Even if a productobtains marketing clearance, a marketed product and its manufacturer aresubject to continuing review.  Amanufacturer may be forced to withdraw a product from the market if apreviously unknown problem with a product becomes apparent.  Because our future revenues will be largelydependent on the successful commercialization or development of products usingour *HAP*TM Technology, any delay of our partners in obtaining,failing to obtain, or failing to maintain regulatory approval for a productdeveloped using our *HAP*TM Technology may delay our receipt ofroyalty or other payments or prevent us from receiving royalty or otherpayments sufficient to recover our expenses.

 

**If our partnersare unable to obtain FDA approval for therapeutic or diagnostic productsdeveloped using our *HAP*TM Technology, the lack of regulatoryapproval will diminish the value of our *HAP*TM Technology.**

 

To date, no one has developed or commercialized any therapeutic productor commercialized any diagnostic product using our *HAP*TMTechnology.  We expect to rely on ourprogram partners to file applications for regulatory approval and generallydirect the regulatory review process and obtain FDA acceptance of our *HAP*TMPartnership and STRENGTH programs and our CARING programs, if any.  Our program partners may not submit anapplication for regulatory review.  Evenif they do submit applications, they may not be able to obtain marketingclearance for any products on a timely basis, if at all.  If our partners fail to obtain requiredgovernmental clearances for therapeutic or diagnostic products, they will notbe able to market these products unless and until they obtain theseclearances.  As a result, we may notreceive royalty or other payments from our customers.  The occurrence of any of these events mayprevent us from generating revenues sufficient to sustain our operations.

 

**If we do notsuccessfully distinguish and commercialize our *HAP*TMTechnology, we may be unable to compete successfully with our competitors or togenerate revenue significant to sustain our operations**.

 

Numerous entities are attempting to identify genomic variationpredictive of specific diseases and drug response and to develop products andservices based on these discoveries.  Weface competition in these areas from pharmaceutical, biotechnology anddiagnostic companies, academic and research institutions and government andother publicly-funded agencies, both in the United States and abroad, most ofwhich have substantially greater capital resources, research and developmentstaffs, facilities, manufacturing and marketing experience, distributionchannels and human resources than we do.

 

These competitors may discover, characterize or develop importanttechnologies applying population genomics before us or our partners for our *HAP*TMPartnership and STRENGTH programs that are more effective than thosetechnologies which, we develop or which our partners for our *HAP*TMPartnership and STRENGTH programs develop, or these competitors may obtainregulatory approvals of their drugs and diagnostics more rapidly

 

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than our partnersfor our *HAP*TM Partnership and STRENGTH programs do, any ofwhich could limit our ability to market effectively our *HAP*TMTechnology.

 

Some companies and governments are marketing or developing a number ofdatabases and informatics tools to assist participants in the healthcareindustry and academic researchers in the management and analysis of genomicdata.  Entities such as PerlegenSciences, Celera Genomics Group and the International HapMap Project havedeveloped or plan to develop databases containing gene sequence, genomicvariation or other genomic information and are marketing or plan to markettheir data to pharmaceutical and biotechnology companies or plan to make freelyavailable their databases.  In addition,numerous pharmaceutical and biotechnology companies, such as GlaxoSmithKlineplc, either alone or in partnership with our competitors, are developinggenomic research programs that involve the use of information that can be foundin these databases.  Furthermore,companies, such as deCODE genetics, Inc., have technologies for using geneticvariation in diagnostics and in the drug development process and already havepartnerships with companies employing these technologies.

 

Genomic technologies have undergone, and are expected to continue toundergo, rapid and significant change. Our future success will depend in large part on maintaining acompetitive position in the genomics field. Others may rapidly develop new technologies that may result in ourproducts or technologies becoming obsolete before we recover the expenses thatwe incur in connection with the development of these products.  Our *HAP*TM Technology couldbecome obsolete if our competitors offer less expensive or more effective drugdiscovery and development technologies, including technologies that may beunrelated to genomics.

 

**If we fail tomaintain our computer hardware, software and related infrastructure, we couldexperience loss of, or delay in, revenues and market acceptance.**

 

Because our business requires manipulating and analyzing large amountsof data, we depend on the continuous, effective, reliable and secure operationof our computer hardware, software and related infrastructure.  To the extent that our hardware or softwaremalfunctions, we will experience reduced productivity.  We protect our computer hardware throughphysical and software safeguards. However, our computer hardware is still vulnerable to fire, weather,earthquake, or other natural disaster and power loss, telecommunicationsfailures, physical or software break-ins and similar events.  In addition, the software and algorithmiccomponents of our *DecoGen*® Informatics System are complex andsophisticated, and as such, could contain data, design or software errors thatcould be difficult to detect and correct. Users of our system may find software defects in current or futureproducts.  If we fail to maintain thenecessary computer capacity and data to support our computational needs and ourcustomers’ drug and diagnostic discovery and development efforts, we couldexperience a loss in revenues, or a delay in receiving revenues and a delay inobtaining market acceptance for our technology.

 

**Our operatingresults may fluctuate significantly and any failure to meet financialexpectations may disappoint securities analysts or investors and result in adecline in our common stock price.**

 

Our operating results have fluctuated in the past and we expect theywill fluctuate in the future. These fluctuations could cause our common stockprice to decline.  Some of the factorsthat could cause our operating results to fluctuate include:

 

•                  recognition of non-recurring revenues due to receipt oflicense fees, achievement of milestones, completion of contracts or other revenues;

 

•                  demand for and market acceptance of our *HAP*TM Partnership,STRENGTH and CARING programs;

 

•                  timing of the execution of agreements on our *HAP*TMPartnership, STRENGTH and CARING programs and other material contracts;

 

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•                    our competitors’announcements or introduction of new products, services or technologicalinnovations;

 

•                    disputesregarding patents or other intellectual property rights;

 

•                    securities classactions or other litigation;

 

•                    adverse changesin the level of economic activity in the United States and other major regionsin which we do business; and

 

•                    general andindustry-specific economic conditions, which may affect our partners’ use ofour *HAP*TM Technology.

 

Due to volatile and unpredictable revenues and operating expenses, webelieve that period-to-period comparisons of our results of operations may notbe a good indication of our future performance. It is possible that our operating results may be below the expectationsof securities analysts or investors.  Inthis event, the market price of our common stock could fluctuate significantlyor decline.

 

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**Item 6 — Exhibits and Reports on Form 8-K.**

 

(a) Exhibits

 

See Index to Exhibits attached hereto.

 

(b) Reports on Form 8-K

 

No reports on Form 8-Khave been filed during the quarter for which this report is filed.

 

 

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**GENAISSANCE PHARMACEUTICALS, INC.**

 

**SIGNATURE**

 

Pursuant to the requirements ofthe Securities Exchange Act of 1934, as amended, the Registrant has duly causedthis Amendment No.1 to its Quarterly Report on Form 10-Q to be signed on itsbehalf by the undersigned thereunto duly authorized.

 

 
|                    | GENAISSANCE PHARMACEUTICALS,  INC.                 |
|-------------------------|----------------------------------------------------|
|                    |                                               |   |
|                    |                                               |   |
| Date: February 11, 2004 | By:                                                | /s/ Ben Kaplan |
|                    | Ben Kaplan                                         |
|                    | Senior Vice President and  Chief Financial Officer |
|                    | (Principal Financial and  Accounting Officer)      |

 

 

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**Index to Exhibits**

 
| **Exhibit  Number** | ** ** | **Description of Document**                                                                                                                                                                                                             |
|---------------------|------------|-----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
|                |       |                                                                                                                                                                                                                                    |
| 2.1#(1)             |       | Asset Purchase Agreement between Genaissance  Pharmaceuticals, Inc. and DNA Sciences, Inc., dated March 28, 2003.                                                                                                                       |
| 2.2#(1)             |       | Amendment No. 1, dated May 5, 2003, to Asset Purchase  Agreement between Genaissance Pharmaceuticals, Inc. and DNA Sciences, Inc.,  dated March 28, 2003.                                                                               |
| 10.1+(1)            |       | Technology and Database License Agreement between  Genaissance Pharmaceuticals, Inc. and Millennium Pharmaceuticals, Inc., dated  January 7, 2003.                                                                                      |
| 10.2+(1)            |       | Research Collaboration and License Agreement between  Genaissance Pharmaceuticals, Inc., Bayer AG and Bayer Healthcare LLC,  dated January 15, 2003.                                                                               |
| 10.3(1)             |       | Amendment, dated February 6, 2003, to Agreement with  Pfizer, Inc., dated August 29, 2001.                                                                                                                                              |
| 10.4+(1)            |       | Genotyping Services Agreement between Genaissance  Pharmaceuticals, Inc. and Wayne State University,  dated March 11, 2003.                                                                                                        |
| 10.5(1)             |       | Amendment, dated March 12, 2003, to Master Equipment Lease  Agreement between Genaissance Pharmaceuticals, Inc. and General Electric  Capital Corporation (successor-in-interest to Oxford Venture Finance, LLC),  dated June 10, 1999. |
| 10.6*(1)            |       | Management Incentive Program Summary.                                                                                                                                                                                                   |
| 31.1                |       | Certification pursuant to Rules 13a-14(a)/15d-14(a)  promulgated under the Securities Exchange Act of 1934, as amended.  Filed herewith.                                                                                           |
| 31.2                |       | Certification pursuant to Rules 13a-14(a)/15d-14(a)  promulgated under the Securities Exchange Act of 1934, as amended.  Filed herewith.                                                                                           |
| 32.1                |       | Statement pursuant to 18 U.S.C. Section 1350.  Filed herewith.                                                                                                                                                                     |
| 32.2                |       | Statement pursuant to 18 U.S.C. Section 1350.  Filed herewith.                                                                                                                                                                     |

 

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*        Indicates a management contract orcompensatory plan.

+                       Confidentialtreatment requested as to certain portions, which portions have been filedseparately with the Commission

#                       Certain schedules to this agreement were omitted by theRegistrant.  The Registrant agrees tofurnish any schedule to this agreement supplementally to the Securities andExchange Commission upon written request.

 

(1)                Filed as anExhibit to the Registrant’s Quarterly Report on Form 10-Q (File No. 000-30981)for the quarter ended March 31, 2003 and incorporated herein by reference.

 

 

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