<PAGE>
AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON OCTOBER 21, 1997
REGISTRATION NO. 333-37317
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
------------------------
AMENDMENT NO. 1
TO
FORM S-1
REGISTRATION STATEMENT
UNDER
THE SECURITIES ACT OF 1933
------------------------
GENE LOGIC INC.
(Exact name of registrant as specified in its charter)
<TABLE>
<S> <C> <C>
DELAWARE 8731 06-1411336
(State or jurisdiction of (Primary Standard Industrial I.R.S. Employer
incorporation or organization) Classification Code Number) Identification
Number
</TABLE>
10150 OLD COLUMBIA ROAD
COLUMBIA, MARYLAND 21046
(410) 309-3100
(Address, including zip code, and telephone number,
including area code, of registrant's principal executive offices)
------------------------
MICHAEL J. BRENNAN, M.D., PH.D.
PRESIDENT AND CHIEF EXECUTIVE OFFICER
GENE LOGIC INC.
10150 OLD COLUMBIA ROAD
COLUMBIA, MARYLAND 21046
(410) 309-3100
(Name, address, including zip code, and telephone number, including area code,
of agent for service)
------------------------
COPIES TO:
FREDERICK T. MUTO, ESQ. LESLIE E. DAVIS, ESQ.
L. KAY CHANDLER, ESQ. LAWRENCE A. GOLD, ESQ.
NANCY E. DENYES, ESQ. TESTA, HURWITZ & THIBEAULT, LLP
COOLEY GODWARD LLP HIGH STREET TOWER
4365 EXECUTIVE DRIVE, SUITE 1100 125 HIGH STREET
SAN DIEGO, CA 92121 BOSTON, MA 02110
(619) 550-6000 (617) 248-7000
------------------------
APPROXIMATE DATE OF COMMENCEMENT OF PROPOSED SALE TO THE PUBLIC:
AS SOON AS PRACTICABLE AFTER THE REGISTRATION STATEMENT BECOMES EFFECTIVE.
------------------------
If any of the securities being registered on this Form are to be offered on
a delayed or continuous basis pursuant to Rule 415 under the Securities Act of
1933, check the following box: / /
If this Form is filed to register additional securities for an offering
pursuant to Rule 462(b) under the Securities Act, please check the following box
and list the Securities Act registration statement number of the earlier
effective registration statement for the same
offering. / /________________________
If this Form is a post-effective amendment filed pursuant to Rule 462(c)
under the Securities Act of 1933, check the following box and list the
Securities Act registration statement number of the earlier effective
registration statement for the same offering. / /________________________
If delivery of the prospectus is expected to be made pursuant to Rule 434,
please check the following box. / /
------------------------
THE REGISTRANT HEREBY AMENDS THIS REGISTRATION STATEMENT ON SUCH DATE OR
DATES AS MAY BE NECESSARY TO DELAY ITS EFFECTIVE DATE UNTIL THE REGISTRANT SHALL
FILE A FURTHER AMENDMENT THAT SPECIFICALLY STATES THAT THIS REGISTRATION
STATEMENT SHALL THEREAFTER BECOME EFFECTIVE IN ACCORDANCE WITH SECTION 8(A) OF
THE SECURITIES ACT OF 1933, AS AMENDED, OR UNTIL THE REGISTRATION STATEMENT
SHALL BECOME EFFECTIVE ON SUCH DATE AS THE COMMISSION, ACTING PURSUANT TO SAID
SECTION 8(A), MAY DETERMINE.
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
<PAGE>
SUBJECT TO COMPLETION, DATED OCTOBER 21, 1997
INFORMATION CONTAINED HEREIN IS SUBJECT TO COMPLETION OR AMENDMENT. A
REGISTRATION STATEMENT RELATING TO THESE SECURITIES HAS BEEN FILED WITH THE
SECURITIES AND EXCHANGE COMMISSION. THESE SECURITIES MAY NOT BE SOLD NOR MAY
OFFERS TO BUY BE ACCEPTED PRIOR TO THE TIME THE REGISTRATION STATEMENT BECOMES
EFFECTIVE. THIS PROSPECTUS SHALL NOT CONSTITUTE AN OFFER TO SELL OR THE
SOLICITATION OF AN OFFER TO BUY NOR SHALL THERE BE ANY SALE OF THESE SECURITIES
IN ANY STATE IN WHICH SUCH OFFER, SOLICITATION OR SALE WOULD BE UNLAWFUL PRIOR
TO REGISTRATION OR QUALIFICATION UNDER THE SECURITIES LAWS OF ANY SUCH STATE.
<PAGE>
[LOGO]
3,000,000 SHARES
COMMON STOCK
All of the 3,000,000 shares of Common Stock offered hereby are being sold by
GENE LOGIC INC. ("Gene Logic" or the "Company"). Prior to this offering, there
has been no public market for the Common Stock of the Company. It is currently
estimated that the initial public offering price of the Common Stock will be
between $10.00 and $12.00 per share. See "Underwriting" for information relating
to the method of determining the initial public offering price.
Japan Tobacco Inc. ("Japan Tobacco") is a party to a strategic alliance with
the Company. As part of the strategic alliance, Japan Tobacco has agreed to
purchase $3,000,000 of the Company's Common Stock in a private transaction
concurrent with this offering at a price per share equal to the price per share
at which Common Stock is sold in this offering. See "Business--Strategic
Alliances--Japan Tobacco Inc."
----------------
THE COMMON STOCK OFFERED HEREBY INVOLVES A HIGH DEGREE OF RISK.
SEE "RISK FACTORS" BEGINNING ON PAGE 7.
----------------
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES
AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION NOR HAS
THE COMMISSION OR ANY STATE SECURITIES COMMISSION PASSED UPON
THE ACCURACY OR ADEQUACY OF THIS PROSPECTUS. ANY
REPRESENTATION TO THE CONTRARY IS A CRIMINAL
OFFENSE.
<TABLE>
<CAPTION>
UNDERWRITING
PRICE TO DISCOUNTS AND PROCEEDS TO
PUBLIC COMMISSIONS COMPANY (1)
<S> <C> <C> <C>
Per Share.................................. $ $ $
Total (2).................................. $ $ $
</TABLE>
(1) Before deducting expenses payable by the Company estimated at $600,000.
(2) The Company has granted the Underwriters a 30-day option to purchase up to
an additional 450,000 shares of Common Stock solely to cover
over-allotments, if any. See "Underwriting." If such option is exercised in
full, the total Price to Public, Underwriting Discounts and Commissions and
Proceeds to Company will be $ , $ and $ , respectively.
----------------
The Common Stock is offered by the Underwriters as stated herein, subject to
receipt and acceptance by them and subject to their right to reject any order in
whole or in part. It is expected that delivery of such shares will be made
through the offices of BancAmerica Robertson Stephens, San Francisco,
California, on or about , 1997.
BANCAMERICA ROBERTSON STEPHENS
HAMBRECHT & QUIST
UBS SECURITIES
The date of this Prospectus is , 1997
<PAGE>
GENE LOGIC INC.
MOLECULAR TOPOGRAPHY-TM- OF GENE EXPRESSION
[GRAPHICAL DEPICTION OF MOLECULAR TOPOGRAPHY]
Above is a Molecular Topographic representing a quantitative snapshot of the
expression of essentially all of the genes in a human cell sample. The data were
generated using, Gene Logic's proprietary READS technology and are represented
using Gene Logic's Molecular Topography software tool. Gene Logic intends to use
these technologies to discover drug targets and drug leads and to develop
database products.
IN CONNECTION WITH THIS OFFERING, THE UNDERWRITERS MAY OVER-ALLOT OR EFFECT
TRANSACTIONS WHICH STABILIZE OR MAINTAIN THE MARKET PRICE OF THE COMMON STOCK OF
THE COMPANY AT A LEVEL ABOVE THAT WHICH MIGHT OTHERWISE PREVAIL IN THE OPEN
MARKET. SUCH TRANSACTIONS MAY BE EFFECTED ON THE NASDAQ NATIONAL MARKET, OR
OTHERWISE. SUCH STABILIZING, IF COMMENCED, MAY BE DISCONTINUED AT ANY TIME.
<PAGE>
NO DEALER, SALES REPRESENTATIVE OR ANY OTHER PERSON HAS BEEN AUTHORIZED TO
GIVE ANY INFORMATION OR TO MAKE ANY REPRESENTATIONS IN CONNECTION WITH THIS
OFFERING OTHER THAN THOSE CONTAINED IN THIS PROSPECTUS, AND, IF GIVEN OR MADE,
SUCH INFORMATION OR REPRESENTATIONS MUST NOT BE RELIED UPON AS HAVING BEEN
AUTHORIZED BY THE COMPANY OR ANY UNDERWRITER. THIS PROSPECTUS DOES NOT
CONSTITUTE AN OFFER TO SELL, OR A SOLICITATION OF AN OFFER TO BUY, ANY
SECURITIES OTHER THAN THE REGISTERED SECURITIES TO WHICH IT RELATES OR AN OFFER
TO, OR A SOLICITATION OF, ANY PERSON IN ANY JURISDICTION IN WHICH SUCH AN OFFER
OR SOLICITATION WOULD BE UNLAWFUL. NEITHER THE DELIVERY OF THIS PROSPECTUS NOR
ANY SALE MADE HEREUNDER SHALL, UNDER ANY CIRCUMSTANCES, CREATE ANY IMPLICATION
THAT THERE HAS BEEN NO CHANGE IN THE AFFAIRS OF THE COMPANY SINCE THE DATE
HEREOF OR THAT THE INFORMATION CONTAINED HEREIN IS CORRECT AS OF ANY TIME
SUBSEQUENT TO THE DATE HEREOF.
UNTIL , 1997 (25 DAYS AFTER THE DATE OF THIS PROSPECTUS), ALL DEALERS
EFFECTING TRANSACTIONS IN THE REGISTERED SECURITIES, WHETHER OR NOT
PARTICIPATING IN THIS DISTRIBUTION, MAY BE REQUIRED TO DELIVER A PROSPECTUS.
THIS DELIVERY REQUIREMENT IS IN ADDITION TO THE OBLIGATION OF DEALERS TO DELIVER
A PROSPECTUS WHEN ACTING AS UNDERWRITERS AND WITH RESPECT TO THEIR UNSOLD
ALLOTMENTS OR SUBSCRIPTIONS.
------------------------
TABLE OF CONTENTS
<TABLE>
<CAPTION>
PAGE
-----
<S> <C>
Summary........................................................................................ 4
Risk Factors................................................................................... 7
Use of Proceeds................................................................................ 20
Dividend Policy................................................................................ 20
Capitalization................................................................................. 21
Dilution....................................................................................... 22
Selected Financial Data........................................................................ 23
Management's Discussion and Analysis of Financial Condition and Results of Operations.......... 24
Business....................................................................................... 28
Management..................................................................................... 48
Certain Transactions........................................................................... 56
Principal Stockholders......................................................................... 57
Description of Capital Stock................................................................... 59
Shares Eligible For Future Sale................................................................ 61
Underwriting................................................................................... 63
Legal Matters.................................................................................. 64
Experts........................................................................................ 64
Additional Information......................................................................... 65
Index to Financial Statements.................................................................. F-1
</TABLE>
------------------------
READS-TM-, MuST-TM-, Flow-thru Chip-TM-, Molecular Topography-TM-, GENE
EXPRESS-TM-, ACCELERATED DRUG DISCOVERY-TM-, Pharmacology EXPRESS-TM-,
Toxicology EXPRESS-TM-, rEST-TM-, TAG-TM- and quEST-TM- are trademarks of the
Company. Tradenames and trademarks of other companies appearing in this
Prospectus are the property of their respective holders.
The Company was incorporated in Delaware in 1994. The Company's executive
offices are located at 10150 Old Columbia Road, Columbia, Maryland 21046, and
its telephone number is (410) 309-3100.
3
<PAGE>
SUMMARY
THE FOLLOWING SUMMARY IS QUALIFIED IN ITS ENTIRETY BY THE MORE DETAILED
INFORMATION AND FINANCIAL STATEMENTS AND NOTES THERETO APPEARING ELSEWHERE IN
THIS PROSPECTUS. THIS PROSPECTUS CONTAINS CERTAIN FORWARD-LOOKING STATEMENTS
WHICH INVOLVE RISKS AND UNCERTAINTIES. THE COMPANY'S ACTUAL RESULTS COULD DIFFER
MATERIALLY FROM THOSE ANTICIPATED IN THESE FORWARD-LOOKING STATEMENTS AS A
RESULT OF CERTAIN FACTORS, INCLUDING THOSE SET FORTH UNDER "RISK FACTORS" AND
ELSEWHERE IN THIS PROSPECTUS.
THE COMPANY
GENE LOGIC INC. ("Gene Logic" or the "Company") uses a proprietary system,
based on analysis of gene expression and gene regulation, designed to accelerate
the discovery of drug targets and drug leads. The Company's objective is to
provide its pharmaceutical company partners with novel drug targets, drug leads
and a suite of genomic database products to reduce the time, cost and risk
associated with drug discovery. The Company believes that by building its
portfolio of partnerships it will generate current revenues and establish a
long-term economic interest in the product pipelines of multiple partners
through milestone and royalty payments. Gene Logic has established major
strategic alliances with Procter & Gamble Pharmaceuticals, Inc. ("Procter &
Gamble") and Japan Tobacco Inc. ("Japan Tobacco").
The core of Gene Logic's ACCELERATED DRUG DISCOVERY system is its
proprietary READS (Restriction Enzyme Analysis of Differentially-expressed
Sequences) technology for analyzing patterns of gene expression. Gene Logic uses
READS in its drug target and drug lead discovery programs and to generate
genomic data for its database products.
DRUG TARGET DISCOVERY. Gene Logic identifies and analyzes
disease-associated genes and their functional pathways to determine which
genes might encode useful drug targets and prioritizes targets for drug
screening. Using READS, Gene Logic generates a gene expression profile, or
Molecular Topography, representing a quantitative snapshot of the levels of
expression of essentially all the genes expressed in a tissue sample. The
Company compares normal and diseased tissues through a series of Molecular
Topography snapshots, a "molecular movie," to identify the changes in gene
expression that occur as the disease develops and progresses and to
determine which genes are associated with the disease. In addition, using
its MuST (Multiplex Selection of Transcription Factors) technology, Gene
Logic characterizes the regions of the genes that regulate their expression.
This allows the Company to identify genes which share common regulatory
mechanisms with disease-associated genes and are therefore in the same
functional pathways. Gene Logic has received notices of allowance for patent
applications covering the key aspects of the READS and MuST technologies
from the United States Patent and Trademark Office.
DRUG LEAD DISCOVERY. Gene Logic is developing a proprietary, reusable
Flow-thru Chip for high-throughput analysis of changes in the expression of
known genes. The Company believes the Flow-thru Chip will enable the
development of high-throughput screening assays to evaluate the effects of
compounds on the expression of disease-associated genes identified by READS.
For a given disease, the Company will design a customized Flow-thru Chip
incorporating probes specific for these genes and use the chip to test the
effects of compounds on cells. Compounds that have the desired effect on
expression of the relevant genes may be evaluated as drug leads. Gene Logic
believes this technology represents a new approach to drug discovery and has
the potential to accelerate substantially the identification of drug leads.
GENOMIC DATABASES. Gene Logic is developing a suite of genomic database
products to accelerate the process of target identification and
prioritization, the discovery of lead compounds and the preclinical and
clinical development of drugs. The Company plans to market its genomic
database products, either in a single package or as separate modules, to
multiple pharmaceutical company customers. The Company's database products
are: (i) the GENE EXPRESS NORMAL database, a reference set of gene
expression profiles in a wide variety of normal tissues; (ii) the rare EST
(rEST) database containing sequences for rarely-expressed genes that are not
available through public sources; (iii) The Annotated Genome (TAG) database
which assigns human genes to functional pathways based on their patterns of
expression and regulation; (iv) the Pharmacology EXPRESS database to predict
efficacy of lead compounds at the preclinical drug development stage; and
(v) the Toxicology EXPRESS database for screening of lead compounds for
common classes of toxicological effects.
4
<PAGE>
The Company has designed and is continuing to develop a bioinformatics
system to manage and analyze the information it generates. The system integrates
Gene Logic's genomic data content with other proprietary or public genomic
databases, protein databases and the chemical, screening and assay databases
used by the Company's strategic partners.
Gene Logic's business strategy is to (i) establish strategic alliances with
pharmaceutical companies for drug target and drug lead discovery programs in
specific disease areas, (ii) establish independent discovery programs and
license resulting drug targets and drug leads to pharmaceutical companies for
further development and commercialization, (iii) market its suite of genomic
database products under non-exclusive license to multiple pharmaceutical company
customers, and (iv) retain significant rights to new product opportunities,
including diagnostic products, therapeutic proteins, gene therapy products and
products in the fields of differential diagnosis, molecular staging of disease
and pharmacogenomic profiling. The Company expects to receive a diversified
stream of technology license fees, research funding, milestone payments and
royalty or profit-sharing income from its strategic alliance partners and
licensees.
Gene Logic has established discovery programs in the fields of heart
failure, renal disease, certain diseases of the central nervous system,
osteoporosis and prostate cancer. The Company has collaborations with academic
institutions and commercial organizations for access to relevant normal and
diseased human tissues and cell types and animal disease models in these areas.
To date, Gene Logic has partnered two of its discovery programs with
pharmaceutical companies. In May 1997, the Company entered into a 4 1/2-year
strategic alliance with Procter & Gamble for drug target discovery in heart
failure. In September 1997, the Company and Japan Tobacco entered into a
five-year strategic alliance for drug target and drug lead discovery in renal
disease. Through both alliances, Gene Logic will receive committed technology
access fees and research funding. In each case, the Company's partner has the
right to expand the alliance to include discovery programs in two additional
disease indications upon terms, including committed payments, identical to those
covering the initial program. Gene Logic will also be entitled to receive
additional payments for the achievement of specified target discovery, product
development and associated regulatory milestones and royalties on worldwide net
sales of all products that may result from each alliance. As part of its
alliance, Japan Tobacco has agreed to purchase $3.0 million of Common Stock in
the Company in a private placement concurrent with this offering at a price per
share equal to the price per share at which Common Stock is sold in this
offering. The Company also granted Japan Tobacco a non-exclusive license to the
GENE EXPRESS NORMAL database, and Gene Logic intends to use its Flow-thru Chip
technology for drug screening. Japan Tobacco is obligated to pay Gene Logic chip
design fees and screening fees for use of the Flow-thru Chip and an accelerated
schedule of milestone and royalty payments on any resulting products. The
Company has retained certain rights to diagnostic products and certain classes
of therapeutics under these alliances.
THE OFFERING
<TABLE>
<S> <C>
Common Stock Offered by the Company............ 3,000,000 shares
Common Stock Outstanding after the Offering.... 13,382,377 shares (1)
Use of Proceeds................................ For research and development, capital
expenditures, working capital and general
corporate purposes, including possible
acquisitions of complementary
technologies, products or businesses. See
"Use of Proceeds."
Proposed Nasdaq National Market Symbol......... GLGC
</TABLE>
5
<PAGE>
SUMMARY FINANCIAL DATA
(in thousands, except per share data)
<TABLE>
<CAPTION>
YEAR ENDED NINE MONTHS ENDED
DECEMBER 31, SEPTEMBER 30,
-------------------- ----------------------
1995 1996 1996 1997
--------- --------- ----------- ---------
<S> <C> <C> <C> <C>
(UNAUDITED)
STATEMENT OF OPERATIONS DATA:
Revenues......................................................... $ -- $ -- $ -- $ 774
Operating expenses:
Research and development...................................... 486 1,741 982 3,338
General and administrative.................................... 258 1,345 791 2,381
--------- --------- ----------- ---------
Total operating expenses........................................ 744 3,086 1,773 5,719
Interest income, net............................................ -- 221 111 355
Income tax expense.............................................. -- -- -- 100
--------- --------- ----------- ---------
Net loss........................................................ $ (744) $ (2,865) $ (1,662) $ (4,690)
--------- --------- ----------- ---------
--------- --------- ----------- ---------
Pro forma net loss per share (2)................................ $ (0.31) $ (0.46)
--------- ---------
--------- ---------
Shares used in computing pro forma
net loss per share (2)........................................ 9,198 10,269
</TABLE>
- ------------------------
(1) Based on shares outstanding as of September 30, 1997. Includes (i) the sale
of 272,727 shares of Common Stock to Japan Tobacco at a price equal to the
assumed initial public offering price of $11.00 per share and (ii) 9,281,185
shares of Preferred Stock which will convert to Common Stock concurrent with
the initial public offering. Excludes (i) 2,424,381 shares of Common Stock
issuable upon exercise of outstanding stock options as of September 30, 1997
at a weighted average exercise price of $1.05 per share, and (ii) 162,576
shares of Common Stock issuable upon exercise of outstanding warrants at a
weighted average exercise price of $3.10 per share. Also excludes 56,000
shares of Common Stock issuable upon exercise of stock options granted after
September 30, 1997 with an exercise price of $3.50 per share. See
"Business--Strategic Alliances," "Management--Equity Incentive Plans" and
"Description of Capital Stock--Warrants."
(2) See Note 1 of Notes to Financial Statements for a description of the
computation of pro forma net loss per share.
<TABLE>
<CAPTION>
SEPTEMBER 30, 1997
--------------------------
ACTUAL AS ADJUSTED (1)
--------- ---------------
<S> <C> <C>
BALANCE SHEET DATA:
Cash and marketable securities............................................. $ 22,143 $ 55,233
Working capital........................................................... 18,776 51,866
Total assets.............................................................. 27,621 60,711
Total mandatorily redeemable convertible preferred stock.................. 30,508 --
Total stockholders' equity................................................ (9,614) 53,984
</TABLE>
- ----------------
(1) As adjusted to give effect to the conversion of all outstanding shares of
Preferred Stock into 9,281,185 shares of Common Stock upon the closing of
this offering and the sale by the Company of 3,000,000 shares of Common
Stock offered hereby at an assumed initial public offering of $11.00 per
share and 272,727 shares of Common Stock to Japan Tobacco at a price equal
to the assumed initial public offering price per share and the application
of the estimated net proceeds therefrom. See "Use of Proceeds" and
"Business--Strategic Alliances."
----------------
EXCEPT AS OTHERWISE INDICATED, ALL INFORMATION IN THIS PROSPECTUS (I) HAS BEEN
ADJUSTED TO GIVE EFFECT TO THE CONVERSION OF ALL OUTSTANDING SHARES OF PREFERRED
STOCK INTO COMMON STOCK UPON THE COMPLETION OF THIS OFFERING AND (II) ASSUMES NO
EXERCISE OF THE UNDERWRITERS' OVER-ALLOTMENT OPTION. SEE "CAPITALIZATION" AND
"UNDERWRITING."
6
<PAGE>
RISK FACTORS
In addition to the other information in this Prospectus, the following risk
factors should be considered carefully in evaluating the Company and its
business before purchasing shares of Common Stock offered hereby. This
Prospectus contains forward-looking statements which involve risks and
uncertainties. The Company's actual results could differ materially from those
anticipated in these forward-looking statements as a result of certain factors,
including the matters set forth in the following risk factors and elsewhere in
this Prospectus.
TECHNOLOGICAL UNCERTAINTY AND PRODUCT DEVELOPMENT RISK
The Company has developed and intends to continue to develop its ACCELERATED
DRUG DISCOVERY system, including its proprietary READS and MuST technologies,
bioinformatics system and Flow-thru Chip, for the identification of genes, drug
targets and drug leads useful for the discovery and development of therapeutic
and diagnostic products. These technologies are new and unproven approaches and
are based on the assumption that information about gene expression and gene
sequences may enable scientists better to understand complex disease processes.
Generally, there is limited understanding of the roles of genes in these
diseases, and relatively few therapeutic products based on gene discoveries have
been developed and commercialized. There can be no assurance that the Company's
technologies will enable it or its strategic partners to identify genes, drug
targets and drug leads useful for the discovery and development of therapeutic
and diagnostic products. Even if the Company is successful in identifying genes
and drug targets associated with specific diseases, there can be no assurance
that the Company or its strategic partners will be able to discover drug leads
or develop products based on such discoveries. To date, no drug targets or drug
leads have been identified based on the Company's technologies, and the Company
has not commercialized any therapeutic or diagnostic products either alone or in
conjunction with its strategic partners. Failure to identify genes, drug targets
and drug leads useful for the discovery and development of therapeutic and
diagnostic products will have a material adverse effect on the Company's
business, financial condition and results of operations.
The development of therapeutic and diagnostic products based on the
Company's discoveries will also be subject to other risks of failure inherent in
pharmaceutical development. These risks include, among others, the possibilities
that any such products will be found to be ineffective or toxic, or otherwise
fail to receive necessary regulatory approvals; that any of the products, if
safe and effective, will prove difficult or impossible to manufacture on a large
scale or will be uneconomical to market; that the proprietary rights of third
parties will preclude the Company or its strategic partners from marketing any
products developed; and that third parties will market equivalent or superior
products. As a result, there can be no assurance that the activities of the
Company or its strategic partners will result in any commercially viable
products.
The Company has created a prototype of the Flow-thru Chip and plans to
commence in-house testing during 1998 but has not yet produced the Flow-thru
Chip on a commercial scale. The Company is in the process of developing its
suite of genomic database products, but, to date, only the GENE EXPRESS NORMAL
database is commercially available. Other than the option to require the Company
to develop Flow-thru Chip assays and the non-exclusive license to the GENE
EXPRESS NORMAL database granted to Japan Tobacco, the Company has not sold or
licensed rights to its Flow-thru Chip or any of its genomic database products.
There can be no assurance that the development or commercial scale-up of the
Flow-thru Chip or the genomic database products will be successful or that the
Company will be successful in marketing such products.
The success of the Company's genomic database products will depend on the
Company's ability to generate genomic data content and analyze such data using
software tools. Gene Logic's database products are complex and sophisticated and
could contain design defects or software errors that could be difficult to
detect and correct. There can be no assurance that, despite testing by the
Company and its strategic partners and customers, errors, bugs and viruses will
not be found in current and future products, if any.
7
<PAGE>
Failure to maintain and further develop the necessary bioinformatics platform to
support the drug discovery efforts of the Company and its partners could result
in the loss of or delay in revenues and market acceptance, which could have a
material adverse effect on the Company's business, financial condition and
results of operations. Because the Company's genomic database products contain
genomic information generated by the Company's technologies, the development and
commercialization of the Company's genomic database products will be materially
adversely affected in the event that its technologies fail to generate such
information. See "Business--Gene Logic's ACCELERATED DRUG DISCOVERY System" and
"--Gene Logic Programs and Products."
RELIANCE ON STRATEGIC PARTNERS
The Company's strategy for development and commercialization of therapeutic
and diagnostic products based on its discoveries depends, in large part, upon
the formation of multiple strategic alliances and licensing arrangements to
pursue drug targets and drug leads in different disease areas. The Company has
established strategic alliances with Procter & Gamble and Japan Tobacco in
certain disease fields. These strategic alliances have only been formed in
recent months. No drug targets have been identified pursuant to such alliances,
and there can be no assurance that the alliances will be successful. There can
also be no assurance that the Company will establish additional strategic
alliances or licensing arrangements that it deems necessary to develop and
commercialize products based upon its discovery programs, that any such
agreements will be made under terms acceptable to the Company or that any future
strategic alliances or licensing arrangements will ultimately be successful. The
Company has received a substantial portion of its revenues since inception from
alliances with its strategic partners and expects to continue to do so in the
near term. Failure of the Company to enter into additional strategic alliances
could have a material adverse effect on the Company's business, financial
condition and results of operations.
The Company's strategy includes entering into multiple, concurrent strategic
alliances. There can be no assurance that the Company will successfully manage
simultaneous collaborative programs. Failure by the Company to manage existing
and future strategic alliances, maintain confidentiality among strategic
partners or prevent the occurrence of conflicts among strategic partners could
lead to disputes that result in, among other things, a significant strain on
management resources, legal claims involving significant time, expense and loss
of reputation, loss of capital or a loss of revenues, any of which could have a
material adverse effect on the Company's business, financial condition and
results of operations.
The Company intends to rely on strategic partners for preclinical studies,
clinical development, regulatory approval, manufacturing and marketing of
therapeutic and diagnostic products, if any, resulting from its discovery
programs. Agreements with strategic partners typically will allow such partners
significant discretion in electing whether to pursue any of these activities.
The Company cannot control the amount and timing of resources its strategic
partners may devote to the Company's programs or potential products, and there
can be no assurance that such partners will perform their obligations as
expected. A strategic partner's performance under its alliance agreement with
the Company could be materially adversely affected if such partner were involved
in certain third party transactions such as a business combination or in the
event that the partner had a significant strategic shift in its business focus.
If any strategic partner were to breach its agreement with the Company, or
otherwise fail to conduct its collaborative activities in a timely manner, such
conduct could have a material adverse effect on the Company's business,
financial condition and results of operations. Each of the Company's current
strategic alliances provides the strategic partner with certain rights to
terminate the alliance agreement without cause by giving Gene Logic six months
notice at any time after 12 months from the date of commencement of the research
program under such agreement. The early termination of any strategic alliance
could have a material adverse effect on the Company's business, financial
condition and results of operations. The Company intends to continue to rely on
its strategic partners for significant funding in support of its research
operations. The Company would be required to devote additional internal
resources to such
8
<PAGE>
programs, or to scale back or terminate certain programs, if such funding were
not available or were reduced in amount.
Under its current strategic alliances, the Company has agreed not to conduct
certain research, independently or with other commercial third parties, that is
in the same field as the research conducted under the alliance agreement.
Consequently, such arrangements could have the effect of limiting the areas of
research the Company may pursue, either alone or with others. Should a strategic
partner fail to develop or commercialize a product to which it has rights, the
Company's business may be materially adversely affected. There can be no
assurance that a strategic partner will not develop, either alone or with
others, alternative technologies or products which are competitive with any that
might result from the Company's research program with the strategic partner.
Possible disagreements between the Company and its partners could lead to delays
in collaborative research, development or commercialization of certain products
or could require or result in litigation or arbitration, which would be time
consuming and expensive, and could have a material adverse effect on the
Company's business, financial condition and results of operations. See
"Business--Gene Logic's Strategy" and "--Strategic Alliances."
EARLY STAGE OF DEVELOPMENT; LIMITED OPERATING HISTORY; PROFITABILITY UNCERTAIN
The Company is at an early stage of development. There is limited historical
information available upon which an investor can base an evaluation of an
investment in the Company. The Company was founded in September 1994, but did
not scale up operations until May 1996 following its first major financing.
Substantially all of the Company's resources have been, and for the foreseeable
future will continue to be, dedicated to the development of the Company's
ACCELERATED DRUG DISCOVERY system and its application to the identification of
genes, drug targets and drug leads with therapeutic and diagnostic potential.
All of the Company's programs and strategic alliances are at an early stage. The
development of the Company's technologies and their application to the discovery
of genes, drug targets and drug leads will require significant additional
research and development and investment, including testing to further validate
performance and demonstrate cost effectiveness. There can be no assurance that
the Company's technologies will continue to be successfully developed, or that
any therapeutic or diagnostic products discovered or developed through their
utilization will prove to be commercially useful, meet applicable regulatory
standards in a timely manner or at all, compete with other technologies and
products, avoid infringing the proprietary rights of others, be manufactured in
sufficient quantities or at reasonable costs or be marketed successfully. The
Company expects that it will be a number of years, if ever, before the Company
will recognize revenue from therapeutic or diagnostic product sales or
royalties.
The Company has incurred operating losses in each year since its inception,
including net losses of approximately $2.9 million and $4.7 million during the
year ended December 31, 1996 and the nine months ended September 30, 1997,
respectively, and as of September 30, 1997, had an accumulated deficit of $9.8
million. The Company expects to incur additional losses for at least the next
several years and that such losses will increase as the Company expands its
research and development activities. The Company's losses to date have resulted
principally from costs incurred in research and development and from general and
administrative costs associated with the Company's operations. To date,
substantially all of the Company's revenues have been derived from payments from
strategic alliances and licensing arrangements, and the Company expects that
substantially all of its revenues for the foreseeable future will result from
payments from strategic alliances and licensing arrangements and interest
income. There can be no assurance that the Company will receive additional
revenues under existing strategic alliances or that the Company will be
successful in entering into any new strategic alliance that results in revenues.
The Company's ability to generate revenues and achieve profitability is
dependent in large part on the Company's ability to enter into additional
strategic alliances, and on the ability of the Company and its strategic
partners to discover genes and drug targets associated with particular diseases
and, thereafter, utilize such discoveries to identify drug leads, develop
therapeutic and diagnostic products, conduct preclinical studies and clinical
trials, obtain required regulatory approvals and successfully manufacture,
introduce and market such
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products. In addition, to the extent that the Company relies upon others for
these research, development and commercialization activities, the Company's
ability to achieve profitability will be dependent in part upon the success of
such outside parties. The time required to reach profitability is highly
uncertain and there can be no assurance that the Company will be able to achieve
profitability on a sustained basis, if at all. Failure to achieve significant
revenues or profitability would have a material adverse effect on the Company's
business, financial condition and results of operations. See "Management's
Discussion and Analysis of Financial Condition and Results of Operations."
DEPENDENCE UPON ACCESS TO CERTAIN MATERIALS AND INFORMATION AND LICENSED
TECHNOLOGIES
The Company obtains relevant normal and diseased human tissue samples,
related clinical and other biological information and animal disease models
through collaborations with academic institutions and commercial organizations.
Use of the Company's technologies to discover disease-related genes and drug
targets requires access to such materials and information and there is
substantial competition for such materials and information. There can be no
assurance that the Company will continue to be able to obtain access to such
materials and information upon terms acceptable to the Company, if at all, and
any material lack of availability of such materials and information would have a
material adverse effect on the Company's business, financial condition and
results of operations. See "Business--Gene Logic Programs and Products."
Certain of the components of the ACCELERATED DRUG DISCOVERY system, such as
the technologies underlying READS, MuST and the Flow-thru Chip, have been
acquired or licensed from third parties. Changes in certain third party license
agreements and relationships, or termination thereof, could materially adversely
affect the Company's research and development activities. There can be no
assurance that the Company will be able to acquire from third parties or develop
new technologies, alone or with others. Failure to license necessary
technologies would have a material adverse effect on the Company's business,
financial condition and results of operations. There also can be no assurance
that there will not be disruptions in the Company's relationships with third
parties from whom the Company derives technology, or that any disruptions that
do arise will be resolved in a timely and cost-effective manner, if at all. Any
such disruptions could have a material adverse effect on the Company's business,
financial condition and results of operations.
FLUCTUATIONS IN OPERATING RESULTS
The Company's operating results may fluctuate significantly from quarter to
quarter as a result of a variety of factors, including changes in the demand for
the Company's technologies and products, variations in payments under strategic
alliances, including milestone payments, royalties, license fees and other
contract revenues, the timing of new product introductions, if any, by the
Company, changes in the research and development budgets of the Company's
strategic partners and any potential partners, the introduction of new products
by the Company's competitors and other competitive factors, regulatory actions,
adoption of new technologies, manufacturing results, and the cost, quality and
availability of cell and tissue samples, reagents and related components. If
revenue in a particular period does not meet expectations, the Company may not
be able to adjust significantly its level of expenditures in such period, which
would have an adverse effect on the Company's operating results. The Company
believes that quarterly comparisons of its financial results will not
necessarily be a meaningful indication of future performance. Due to the
foregoing and other unforeseen factors, in some future quarter or quarters the
Company's operating results may be below the expectations of public market
analysts and investors. In such event, the price of the Company's Common Stock
could be materially and adversely affected. See "Management's Discussion and
Analysis of Financial Condition and Results of Operations."
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PATENTS AND PROPRIETARY RIGHTS; THIRD PARTY RIGHTS
Gene Logic seeks United States and international patent protection for major
components of its technology platform, including elements of its READS, MuST,
Flow-thru Chip and bioinformatics technologies; it relies upon trade secret
protection for certain of its confidential and proprietary information; and it
uses license agreements both to access external technologies and assets and to
transfer certain intellectual property rights to others. The Company's
commercial success will be dependent in part upon its ability to obtain
commercially valuable patent claims and to protect its intellectual property
portfolio.
As of October 20, 1997, the Company had exclusive rights to nine United
States patent applications, as well as corresponding international and foreign
patent applications, relating to its technologies. The Company has received
notices of allowance for two United States patent applications covering the key
aspects of the READS technology, and notice of allowance for one United States
patent application covering the key aspects of MuST technology. However, no
patents have issued to date.
The patent positions of pharmaceutical, biopharmaceutical and biotechnology
companies, including Gene Logic, are generally uncertain and involve complex
legal and factual questions. There can be no assurance that any of the pending
patent applications to which the Company has exclusive rights will result in
issued patents, that the claims of any patents which are issued will provide
meaningful protection, that the Company will develop additional proprietary
technologies that are patentable, that any patents licensed or issued to the
Company or its strategic partners will provide a basis for commercially viable
products or will provide the Company with any competitive advantages or will not
be challenged by third parties, or that the patents of others will not have an
adverse effect on the ability of the Company to do business. In addition, patent
law relating to the scope of claims in the technology field in which the Company
operates is still evolving. The degree of future protection for the Company's
proprietary rights, therefore, is uncertain. Furthermore, there can be no
assurance that others will not independently develop similar or alternative
technologies, duplicate any of the Company's technologies, or, if patents are
licensed or issued to the Company, design around the patented technologies
licensed to or developed by the Company. In addition, the Company could incur
substantial costs in litigation if it is required to defend itself in patent
suits brought by third parties or if it initiates such suits.
The Company is aware of a number of United States patents and patent
applications and corresponding foreign patents and patent applications owned by
third parties relating to the analysis of gene expression or the manufacture and
use of DNA chips. There can be no assurance that these or other technologies
will not provide third parties with competitive advantages over the Company and
will not have a material adverse effect on the Company's business, financial
condition and results of operations. In addition, certain third party patent
applications contain broad claims, and it is not possible to determine whether
or not such claims will be narrowed during prosecution and/or will be allowed
and issued as patents, even if such claims appear to cover the prior art or have
other defects. There can be no assurance that an owner or licensee of a patent
in the field will not threaten or file an infringement action or that the
Company would prevail in any such action. There can be no assurance that the
cost of defending an infringement action would not be substantial and would not
have a material adverse effect on the Company's business, financial condition
and results of operations. Furthermore, there can be no assurance that any
required licenses would be made available on commercially viable terms, if at
all. Failure to obtain any required license could prevent the Company from
utilizing or commercializing one or more of its technologies and could have a
material adverse effect on the Company's business, financial condition and
results of operations.
In general, the Company intends to continue to apply for patent protection
for methods relating to gene expression and to apply for patent protection for
the individual disease genes and drug targets it discovers. Such patents may
include claims relating to novel genes and gene fragments and to novel uses for
known genes or gene fragments identified through its discovery programs. There
can be no assurance that the Company will be able to obtain meaningful patent
protection for its discoveries; even if patents are
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issued, the scope of the coverage or protection afforded thereby is uncertain.
Failure to secure such meaningful patent protection could have a material
adverse effect on the Company's business, financial condition and results of
operations.
Several groups are attempting to identify and patent gene fragments and
full-length genes, the functions of which have not been characterized, as well
as fully characterized genes. There is substantial uncertainty regarding the
possible patent protection for gene fragments or genes without known function or
correlation with specific diseases. To the extent any patents issue to other
parties on such partial or full-length genes, the risk increases that the
potential products and processes of the Company or its strategic partners may
give rise to claims of patent infringement. The public availability of partial
or full sequence information or the existence of patent applications related
thereto, even if not accompanied by relevant function or disease association,
prior to the time the Company applies for patent protection on a corresponding
gene could adversely affect the Company's ability to obtain patent protection
with respect to such gene or related expression patterns. Furthermore, others
may have filed, and in the future are likely to file, patent applications
covering genes or gene products that are similar or identical to any for which
the Company may seek patent protection. No assurance can be given that any such
patent application will not have priority over patent applications filed by the
Company. Any legal action against the Company or its strategic partners claiming
damages and seeking to enjoin commercial activities relating to the affected
products and processes could, in addition to subjecting the Company to potential
liability for damages, require the Company or its strategic partners to obtain a
license in order to continue to manufacture or market the affected products and
processes. There can be no assurance that the Company or its strategic partners
would prevail in any such action or that any license required under any such
patent would be made available on commercially acceptable terms, if at all. The
Company believes that there is likely to be significant litigation in the
industry regarding patent and other intellectual property rights. If the Company
becomes involved in such litigation, it could consume a substantial portion of
the Company's managerial and financial resources and have a material adverse
effect on the Company's business, financial condition and results of operations.
Enactment of legislation implementing the General Agreement on Tariffs and
Trade has resulted in certain changes to United States patent laws that became
effective on June 8, 1995. Most notably, the term of patent protection for
patent applications filed on or after June 8, 1995 is no longer a period of 17
years from the date of grant. The new term of United States patents will
commence on the date of issuance and terminate 20 years from the earliest
effective filing date of the application. Because the time from filing to
issuance of biotechnology patent applications is often more than three years, a
20-year term from the effective date of filing may result in a substantially
shortened period of patent protection which may adversely affect the Company's
patent position. If this change results in a shorter period of patent coverage,
the Company's business could be adversely affected to the extent that the
duration and level of the royalties it is entitled to receive from its strategic
partners are based on the existence of a valid patent covering the product
subject to the royalty obligation.
With respect to proprietary know-how that is not patentable and for
processes for which patents are difficult to enforce, the Company has chosen to
rely on trade secret protection and confidentiality agreements to protect its
interests. The Company believes that several elements of its ACCELERATED DRUG
DISCOVERY system involve proprietary know-how, technology or data which are not
covered by patents or patent applications. In addition, the Company has
developed a proprietary index of gene and gene fragment sequences which it
updates on an ongoing basis. Some of these data will be the subject of patent
applications whereas other data will be maintained as proprietary trade secret
information. The Company has taken security measures to protect its proprietary
know-how and technologies and confidential data and continues to explore further
methods of protection. While Gene Logic requires all employees, consultants and
collaborators to enter into confidentiality agreements, there can be no
assurance that proprietary information will not be disclosed, that others will
not independently develop substantially equivalent proprietary information and
techniques or otherwise gain access to the Company's trade
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secrets, or that the Company can meaningfully protect its trade secrets. In the
case of a strategic partnership or other collaborative arrangement which
requires the sharing of data, the Company's policy is to make available to its
partner only such data as are relevant to the partnership or arrangement, under
controlled circumstances, and only during the contractual term of the strategic
partnership or collaborative arrangement, and subject to a duty of
confidentiality on the part of its partner or collaborator. There can be no
assurance, however, that such measures will adequately protect the Company's
data. Any material leak of confidential data into the public domain or to third
parties may have a material adverse effect on the Company's business, financial
condition and results of operations.
The Company is a party to various license agreements which give it rights to
use certain technologies and biological materials in its research and
development processes. There can be no assurance that the Company will be able
to maintain such rights on commercially reasonable terms, if at all. Failure by
the Company to maintain such rights could have a material adverse effect on the
Company's business, financial condition and results of operations. See
"Business--Intellectual Property."
INTENSE COMPETITION; RAPID TECHNOLOGICAL CHANGE
Competition among entities attempting to identify genes associated with
specific diseases and to develop products based on such discoveries is intense.
Gene Logic faces, and will continue to face, competition from pharmaceutical,
biotechnology and diagnostic companies, academic and research institutions and
government agencies, both in the United States and abroad. Several entities are
attempting to identify and patent randomly sequenced genes and gene fragments,
while others are pursuing a gene identification, characterization and product
development strategy based on positional cloning. The Company is aware that
certain entities are utilizing a variety of different gene expression analysis
methodologies, including the use of chip-based systems, to attempt to identify
disease-related genes. In addition, numerous pharmaceutical companies are
developing genomic research programs, either alone or in partnership with the
Company's competitors. Competition among such entities is intense and is
expected to increase. In order to compete against existing and future
technologies, the Company will need to demonstrate to potential customers that
its technologies and capabilities are superior to competing technologies.
Many of the Company's competitors have substantially greater capital
resources, research and development staffs, facilities, manufacturing and
marketing experience, distribution channels and human resources than the
Company. These competitors may discover, characterize or develop important
genes, drug targets or drug leads, drug discovery technologies or drugs in
advance of Gene Logic or which are more effective than those developed by Gene
Logic or its strategic partners, or may obtain regulatory approvals of their
drugs more rapidly than the Company and its strategic partners, any of which
could have a material adverse effect on any similar Gene Logic program.
Moreover, there can be no assurance that the Company's competitors will not
obtain patent protection or other intellectual property rights that would limit
the Company's or its strategic partners' ability to use the Company's drug
discovery technologies or commercialize therapeutic or diagnostic products,
which could have a material adverse effect on the Company's business, financial
condition and results of operations. The Company also faces competition from
these and other entities in gaining access to relevant samples used in its
discovery programs.
The Company will rely on its strategic partners for support of certain of
its discovery programs and intends to rely on its strategic partners for
preclinical and clinical development of related potential products and the
manufacturing and marketing of such products. Each of the Company's strategic
partners is conducting multiple product development efforts within each area
which is the subject of its strategic alliance with Gene Logic. Generally, the
Company's strategic alliance agreements do not preclude the strategic partner
from pursuing development efforts utilizing approaches distinct from that which
is the subject of the alliance. Any product candidate of the Company, therefore,
may be subject to competition with a potential product under development by a
strategic partner. See "--Reliance on Strategic Partners."
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Future competition will come from existing competitors as well as other
companies seeking to develop new technologies for drug discovery based on gene
sequencing, gene expression analysis, bioinformatics and related technologies.
In addition, certain pharmaceutical and biotechnology companies have significant
needs for genomic information and may choose to develop or acquire competing
technologies to meet such needs. Genomic technologies have undergone and are
expected to continue to undergo rapid and significant change. The Company's
future success will depend in large part on its maintaining a competitive
position in the genomics field. Rapid technological development by the Company
or others may result in products or technologies becoming obsolete before the
Company recovers the expenses it incurs in connection with their development.
Products offered by the Company could be made obsolete by less expensive or more
effective drug target and drug lead technologies, including technologies which
may be unrelated to genomics. There can be no assurance that the Company will be
able to make the enhancements to its technology necessary to compete
successfully with newly emerging technologies. See "Business--Competition."
FUTURE CAPITAL REQUIREMENTS; UNCERTAINTY OF ACCESS TO ADDITIONAL FUNDING
The Company has invested significant capital in its infrastructure and in
its scientific and business development activities and expects capital and
operating expenditures to increase over the next several years as it expands its
operations. The Company believes that the net proceeds from this offering and
the sale of shares to Japan Tobacco, existing cash and marketable securities and
anticipated cash flow from strategic alliances will be sufficient to support the
Company's operations for at least the next 24 months. However, this expectation
is based on the Company's current operating plan, which could change as a result
of many factors, and the Company could require additional funding sooner than
expected. In addition, the Company may choose to raise additional capital due to
market conditions or strategic considerations even if it has sufficient funds
for its operating plan. The Company's actual future capital requirements and the
adequacy of its available funds will depend on many factors, including progress
of its discovery programs, the number and breadth of these programs, the ability
of the Company to establish and maintain strategic alliance and licensing
arrangements and the progress of the development and commercialization efforts
of the Company's strategic partners. These factors also include the level of the
Company's activities relating to its independent discovery programs and to the
development and commercialization rights it retains in its strategic alliance
arrangements, competing technological and market developments, the costs
associated with obtaining access to tissue samples and related information and
the costs involved in preparing, filing, prosecuting, maintaining and enforcing
patent claims and other intellectual property rights.
The Company expects that it will require significant additional funding in
the future, which it may seek through public or private equity offerings, debt
financings or additional strategic alliance and licensing arrangements. No
assurance can be given that additional financing or strategic alliance and
licensing arrangements will be available when needed, or that, if available,
such financing will be obtained on terms favorable to the Company or its
stockholders. To the extent the Company raises additional capital by issuing
equity or convertible debt securities, ownership dilution to stockholders will
result. If adequate funds are not available when needed, the Company may be
required to curtail operations significantly or to obtain funds by entering into
strategic alliances and licensing arrangements, in which case the Company may be
required to relinquish rights to certain of its technologies, discoveries or
potential products, or to grant licenses on terms that are not favorable to the
Company, any of which could have a material adverse effect on the Company's
business, financial condition and results of operations. In the event that
adequate funds are not available, the Company's business would be adversely
affected. See "Management's Discussion and Analysis of Financial Condition and
Results of Operations."
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ATTRACTION AND RETENTION OF KEY EMPLOYEES
The Company is highly dependent on the principal members of its management
and scientific staff. The loss of the services of any of these persons could
significantly impede the accomplishment of the Company's scientific and business
objectives. The Company's success is also dependent upon its ability to attract
and retain additional qualified scientific, technical and managerial personnel.
There is substantial competition among biotechnology, pharmaceutical and health
care companies, universities, government entities and non-profit organizations
for such personnel, and there can be no assurance that the Company will retain
its key scientific, technical and managerial employees or that it will be able
to attract, assimilate and retain such other highly qualified scientific,
technical and managerial personnel as may be required in the future. The
inability of the Company to retain its current scientific, technical and
managerial personnel and to attract and retain additional key employees could
have a material adverse effect on the Company's business, financial condition
and results of operations. See "Business--Competition," "--Scientific Advisers"
and "--Employees."
GOVERNMENT REGULATION; NO ASSURANCE OF REGULATORY APPROVAL; HAZARDOUS MATERIALS
The Company does not plan to conduct clinical trials in humans or
commercialize therapeutic products discovered as a result of its genes, drug
target and drug lead discovery programs but intends to rely on its strategic
partners to conduct such activities. Prior to marketing, any new drug developed
by the Company's strategic partners must undergo an extensive regulatory
approval process in the United States and other countries. This regulatory
process, which includes preclinical studies and clinical trials, and may include
post-marketing surveillance of each compound to establish its safety and
efficacy, can take many years and require the expenditure of substantial
resources. Data obtained from preclinical studies and clinical trials are
subject to varying interpretations that could delay, limit or prevent regulatory
approval. Delays or rejections may also be encountered based upon changes in
United States Food and Drug Administration ("FDA") policies for drug approval
during the period of product development and FDA regulatory review of each
submitted new drug application ("NDA") in the case of new pharmaceutical agents,
or product license application ("PLA") or biologics license application ("BLA")
in the case of biological therapeutics. Similar delays may also be encountered
in the regulatory approval of any diagnostic product, where such approval is
required, and in obtaining regulatory approval in foreign countries. Delays in
obtaining regulatory approvals could adversely affect the marketing of any drugs
developed by the Company or its strategic partners, impose costly procedures
upon the Company's or its partners' activities, diminish any competitive
advantages that the Company or its partners may attain and adversely affect the
Company's receipt of royalties. There can be no assurance that regulatory
approval will be obtained for any drugs or diagnostic products developed by the
Company or its strategic partners. Furthermore, regulatory approval may entail
limitations on the indicated uses of a drug. Because certain of the products
likely to result from the Company's drug target and lead discovery programs
involve the application of new technologies and may be based upon a new
therapeutic approach, such products may be subject to substantial additional
review by various government regulatory authorities and, as a result, regulatory
approvals may be obtained more slowly than for products based upon more
conventional technologies.
Even if regulatory approval is obtained, a marketed product and its
manufacturer are subject to continuing review. Discovery of previously unknown
problems with a product may result in withdrawal of the product from the market,
and could have adverse effects on the Company's business, financial conditions
and results of operations. Violations of regulatory requirements at any stage
during the regulatory process, including preclinical studies and clinical
trials, the approval process, post-approval or in good manufacturing practices
manufacturing requirements, may result in various adverse consequences to the
Company, including the FDA's delay in approval or refusal to approve a product,
withdrawal of an approved product from the market or the imposition of criminal
penalties against the manufacturer and NDA, PLA or BLA holder. No
investigational new drug application ("IND") has been submitted for any
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product candidate resulting from the Company's discovery programs, and no
product candidate has been approved for commercialization in the United States
or elsewhere. The Company intends to rely on its strategic partners to file INDs
and generally direct the regulatory approval process. There can be no assurance
that the Company's strategic partners will be able to conduct clinical testing
or obtain necessary approvals from the FDA or other regulatory authorities for
any products. Failure to obtain required governmental approvals will delay or
preclude the Company's strategic partners from marketing drugs or diagnostic
products developed through the Company's research or limit the commercial use of
such products and could have a material adverse effect on the Company's
business, financial condition and results of operations.
The Company's research and development activities involve the controlled use
of certain biological and other hazardous materials, chemicals and various
radioactive materials. The Company is subject to federal, state and local laws
and regulations governing the use, storage, handling and disposal of such
materials and certain waste products. Although the Company believes that its
safety procedures for handling and disposing of such materials comply with the
standards prescribed by federal, state and local laws and regulations, the risk
of accidental contamination or injury from these materials cannot be completely
eliminated. In the event of such an accident, the Company could be held liable
for any damages that result, and any liability could exceed the resources of the
Company. Other than such laws and regulations governing the generation, use and
disposal of hazardous materials and wastes, and limiting workplace exposures to
such materials, the Company does not believe its current and proposed activities
are subject to any specific government regulation other than regulations
affecting the operations of companies generally. See "Business--Government
Regulation."
ETHICAL, LEGAL AND SOCIAL IMPLICATIONS OF GENE-BASED DIAGNOSTICS
The Company and its partners may seek to develop diagnostic products based
on genes it discovers. The prospect of broadly available gene-based diagnostic
tests raises issues regarding their appropriate utilization and the
confidentiality of the information provided by such testing. It is possible that
discrimination by third party payors, based on the results of such testing,
could lead to the increase of premiums by such payors to prohibitive levels,
outright cancellation of insurance or unwillingness to provide coverage to
individuals showing unfavorable gene expression profiles. Similarly, employers
could discriminate against employees with gene expression profiles indicative of
the potential for high disease-related costs and lost employment time. Finally,
government authorities could, for social or other purposes, limit or prohibit
the use of such tests under certain circumstances. There can be no assurance
that such ethical and social factors or concerns about genetic testing and
target identification will not have a material adverse effect on market
acceptance of the Company's technologies and products.
REIMBURSEMENT RISK
The levels of revenues and profitability of pharmaceutical companies may be
affected by the continuing efforts of governments and third party payors to
contain or reduce the costs of health care through various means including by
limiting prices paid for pharmaceuticals. In both the United States and
elsewhere, sale of prescription pharmaceuticals are dependent in part on the
availability of reimbursement to the consumer from third party payors, such as
government insurance programs (Medicare and Medicaid) and private and corporate
health insurance plans. Third party payors are increasingly challenging the
prices charged for pharmaceuticals and, in some cases, refusing payment for
off-label use and other uses of pharmaceuticals they deem inappropriate.
EXPANSION OF OPERATIONS; MANAGEMENT OF GROWTH
The Company has recently experienced, and expects to continue to experience,
significant growth in the number of its employees and the scope of its
operations. The Company has significantly increased the scale of its operations
and number of employees to support its partnered and independent discovery
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programs and to manage its strategic alliances. The number of employees of the
Company increased from three on January 1, 1996 to 57 on September 30, 1997.
This growth has placed, and may continue to place, a significant strain on the
Company's management, operations and systems. The Company's ability to manage
such growth effectively will depend upon its broadening its management team and
attracting, hiring and retaining skilled employees. In addition, in order to
increase capacity to remain competitive and satisfy the needs of current and
future strategic partners, the Company will be required to acquire additional
capital equipment and resources. There can be no assurance that the Company will
be able to manage its growth, and the Company's inability to manage growth
effectively could have a material adverse effect on the Company's business,
financial condition and results of operations. See "Business--Employees" and
"--Facilities."
LIMITED CLINICAL DEVELOPMENT, MANUFACTURING, MARKETING AND SALES EXPERIENCE
The Company has made no investment in therapeutic or diagnostic
manufacturing, marketing or product sales resources and does not generally
expect to engage directly in the manufacturing, marketing or sale of therapeutic
or diagnostic products. Instead, the Company currently intends to contract with
others to pursue the commercialization of therapeutic or diagnostic products
based upon or discovered using its technologies. There can be no assurance that
the Company will be able to enter into such arrangements on acceptable terms, if
at all. The Company will be dependent to a significant extent on partners,
licensees or other entities for development, manufacturing and commercialization
of such products. The Company's dependence upon third parties for the
manufacture, marketing and sales of therapeutic or diagnostic products may
materially adversely affect the Company's ability to develop and deliver such
products on a timely and competitive basis, if at all. To the extent the Company
directly engages in development, manufacturing and marketing of certain
therapeutic or diagnostic products, it will require substantial additional
funds, personnel and production facilities. See "--Reliance on Strategic
Partners."
PRODUCT LIABILITY EXPOSURE
Clinical trials, manufacturing, marketing and sale of any of the Company's
or its partners' potential therapeutic or diagnostic products may expose the
Company to liability claims from the use of such products. The Company currently
does not carry product liability insurance. There can be no assurance that the
Company or its partners will be able to obtain such insurance or, if obtained,
that sufficient coverage can be acquired at a reasonable cost. The inability to
obtain sufficient insurance coverage at an acceptable cost or to otherwise
protect against potential product liability claims could prevent or inhibit the
commercialization of pharmaceutical products developed by the Company or its
partners. A product liability claim or recall would have a material adverse
effect on the Company's business, financial condition and results of operations.
CONTROL BY MANAGEMENT AND EXISTING STOCKHOLDERS
Upon completion of this offering, the Company's executive officers,
directors and affiliated individuals and entities together will beneficially own
approximately 35.3% of the outstanding shares of Common Stock (34.2% if the
Underwriters' over-allotment option is exercised in full). As a result, these
stockholders, acting together, will be able to influence significantly and
possibly control most matters requiring approval by the stockholders of the
Company, including approvals of amendments to the Company's Certificate of
Incorporation, mergers, a sale of all or substantially all of the assets of the
Company, going private transactions and other fundamental transactions. In
addition, the Company's Certificate of Incorporation, as it is proposed to be
amended and restated concurrently with the closing of this offering (the
"Restated Certificate"), does not provide for cumulative voting with respect to
the election of directors. Consequently, the present executive officers,
directors and affiliated individuals and entities will be able to control the
election of the members of the Board of Directors of the Company. Such a
17
<PAGE>
concentration of ownership could affect the liquidity of the Company's Common
Stock and have an adverse effect on the price of the Common Stock, and may have
the effect of delaying or preventing a change in control of the Company,
including transactions in which stockholders might otherwise receive a premium
for their shares over then current market prices. See "Principal Stockholders"
and "Description of Capital Stock."
NO PRIOR PUBLIC MARKET FOR COMMON STOCK; POSSIBLE VOLATILITY OF STOCK PRICE
Prior to this offering, there has been no public market for the Common
Stock, and there can be no assurance that an active public market for the Common
Stock will develop or be sustained after this offering or that the market price
of the Common Stock will not decline below the initial public offering price.
The initial public offering price will be determined by negotiations between the
Company and the Underwriters and is not necessarily indicative of the market
price at which the Common Stock of the Company will trade after this offering.
See "Underwriting" for a discussion of the factors considered in determining the
initial public offering price. The market prices for securities of biotechnology
and pharmaceutical companies have been highly volatile, and the market has
experienced significant price and volume fluctuations that are often unrelated
to the operating performance of particular companies. Announcements of
technological innovations or new commercial products by the Company or its
competitors, disputes or other developments concerning proprietary rights,
including patents and litigation matters, developments concerning strategic
alliance agreements, publicity regarding actual or potential results with
respect to products or technology under development by the Company, its
strategic partners or its competitors, regulatory developments in both the
United States and foreign countries, public concern as to the efficacy of new
technologies, quarterly fluctuations in the Company's operating results, future
sales of substantial amounts of Common Stock by existing stockholders and
comments by securities analysts, as well as general market conditions and other
factors, may have a significant impact on the market price of the Common Stock.
In particular, the realization of any of the risks described in these "Risk
Factors" could have a material adverse impact on such market price.
ANTI-TAKEOVER PROVISIONS
The Restated Certificate provides for staggered terms for the members of the
Board of Directors. In addition, the Restated Certificate authorizes the Board
of Directors of the Company, without stockholder approval, to issue additional
shares of Common Stock and to fix the rights, preferences and privileges of and
issue additional shares of Preferred Stock with voting, conversion, dividend and
other rights and preferences that could adversely affect the voting power or
other rights of the holders of Common Stock. The issuance of Preferred Stock,
rights to purchase Preferred Stock or additional shares of Common Stock may have
the effect of delaying or preventing a change in control of the Company. In
addition, the possible issuance of Preferred Stock or additional shares of
Common Stock could discourage a proxy contest, make more difficult the
acquisition of a substantial block of the Company's Common Stock or limit the
price that investors might be willing to pay for shares of the Company's Common
Stock. Further, the Restated Certificate provides that any action required or
permitted to be taken by stockholders of the Company must be effected at a duly
called annual or special meeting of stockholders and may not be effected by
written consent. Special meetings of the stockholders of the Company may be
called only by the Chairman of the Board of Directors, the President of the
Company or by the Board of Directors pursuant to a resolution adopted by a
majority of the total number of authorized directors. These and other provisions
contained in the Restated Certificate and the Company's By-laws, as well as
certain provisions of Delaware law, could delay or make more difficult certain
types of transactions involving an actual or potential change in control of the
Company or its management (including transactions in which stockholders might
otherwise receive a premium for their shares over then current market prices)
and may limit the ability of stockholders to remove current management of the
Company or approve transactions that stockholders may deem to be in their best
interests and, therefore, could adversely affect the price of the Company's
Common Stock. See "Description of Capital Stock."
18
<PAGE>
SHARES ELIGIBLE FOR FUTURE SALE AND POTENTIAL ADVERSE EFFECT ON MARKET PRICE
Future sales of Common Stock in the public market following this offering
could adversely affect the market price of the Common Stock. Upon completion of
this offering, the Company will have 13,382,377 shares of Common Stock
outstanding, assuming no exercise of currently outstanding options or warrants.
Of these shares, the 3,000,000 shares sold in this offering (plus any additional
shares sold upon exercise of the Underwriters' over-allotment option) will be
freely transferable without restriction under the Securities Act of 1933, as
amended (the "Securities Act"), unless they are held by "affiliates" of the
Company as that term is used under the Securities Act and the regulations
promulgated thereunder. The remaining 10,382,377 shares of Common Stock held by
existing stockholders are "restricted securities" as that term is defined in
Rule 144 of the Securities Act (the "Restricted Shares"). Restricted Shares may
be sold in the public market only if registered or if they qualify for an
exemption from registration under Rule 144 or Rule 701 under the Securities Act.
As a result of contractual restrictions and the provisions of Rules 144 and 701,
additional shares will be available for sale in the public market as follows:
(i) no Restricted Shares will be eligible for immediate sale on the date of this
Prospectus; (ii) approximately 5,732 Restricted Shares will be eligible for sale
90 days after the date of this Prospectus; (iii) approximately 5,609,475
Restricted Shares will be eligible for sale 180 days after the effective date of
this offering upon expiration of lock-up agreements and upon expiration of their
respective holding periods under Rule 144; and (iv) the remainder of the
Restricted Shares will be eligible for sale from time to time thereafter upon
expiration of their respective holding periods under Rule 144. In addition,
1,192,918 shares issuable upon exercise of vested stock options will become
eligible for sale 180 days after the date of this Prospectus upon expiration of
lock-up agreements. The holders of 9,281,185 shares of Common Stock and the
holders of warrants to purchase 30,051 shares of Common Stock have the right in
certain circumstances to require the Company to register their shares under the
Securities Act for resale to the public beginning three months after the
effective date of this offering. If such holders, by exercising their demand
registration rights, cause a large number of shares to be registered and sold in
the public market, such sales could have an adverse effect on the market price
for the Company's Common Stock. If the Company were required to include in a
Company-initiated registration shares held by such holders pursuant to the
exercise of their piggyback registration rights, such sales may have an adverse
effect on the Company's ability to raise needed capital. In addition, the
Company expects to file a registration statement on Form S-8 registering a total
of approximately 6,134,268 shares of Common Stock subject to outstanding stock
options or reserved for issuance under the Company's equity incentive plans.
Such registration statement is expected to be filed and to become effective 180
days after the effective date of this offering. Shares registered under such
registration statement will, subject to Rule 144 volume limitations applicable
to affiliates, be available for sale in the open market, unless such shares are
subject to vesting restrictions with the Company or the lock-up agreements
described above. See "Management--Equity Incentive Plans," "Description of
Capital Stock--Registration Rights," "Shares Eligible for Future Sale" and
"Underwriting."
DILUTION; ABSENCE OF CASH DIVIDENDS
Purchasers of the shares of Common Stock offered hereby will experience
immediate and substantial dilution in the net tangible book value of their
investment from the initial public offering price. Additional dilution will
occur upon exercise of outstanding options and warrants. See "Dilution" and
"Shares Eligible for Future Sale." The Company has never paid any dividends and
does not anticipate paying dividends in the foreseeable future. See "Dividend
Policy."
19
<PAGE>
USE OF PROCEEDS
The net proceeds to the Company from the sale of the 3,000,000 shares of
Common Stock offered by the Company hereby and the sale of 272,727 shares of
Common Stock to Japan Tobacco are estimated to be approximately $33,090,000
($37,693,500 if the Underwriters' over-allotment option is exercised in full),
assuming an initial public offering price of $11.00 per share, after deducting
the underwriting discounts and commissions and estimated offering expenses
payable by the Company.
The Company intends to use the net proceeds from this offering and the sale
of shares to Japan Tobacco to fund its research and development activities and
capital expenditures, including scale-up of its laboratory, database and
business development operations and tenant improvements, and for working capital
and general corporate purposes. The amount and timing of these expenditures will
vary significantly depending on a number of factors, including the progress of
the Company's programs, future revenue growth, if any, and the amount of cash,
if any, generated by the Company's operations. The Company's management will
retain broad discretion in the allocation of such net proceeds. The Company may
also use a portion of the net proceeds to fund acquisitions of complementary
technologies, products or businesses, although the Company has no current
agreements or commitments for any such acquisitions. Pending such uses, the
Company intends to invest the net proceeds of this offering and the sale of
shares to Japan Tobacco in short-term, interest bearing, investment-grade
securities.
The Company believes that its existing capital resources, together with the
net proceeds from this offering and the sale of shares to Japan Tobacco,
interest income and future payments due under its existing strategic alliances,
will be sufficient to satisfy its current and projected funding requirements for
at least the next 24 months. See "Management's Discussion and Analysis of
Financial Condition and Results of Operations--Liquidity and Capital Resources."
DIVIDEND POLICY
The Company has never declared or paid dividends on its Common Stock and
does not anticipate paying any dividends on its Common Stock in the forseeable
future. The Company currently intends to retain any future earnings to fund the
development of its business.
20
<PAGE>
CAPITALIZATION
The following table sets forth the capitalization of the Company as of
September 30, 1997, and as adjusted to reflect the conversion of all outstanding
shares of Preferred Stock into 9,281,185 shares of Common Stock upon the closing
of this offering and the sale of 3,000,000 shares of Common Stock offered hereby
at an assumed initial public offering price of $11.00 per share and the sale of
272,727 shares of Common Stock to Japan Tobacco at a price equal to the assumed
initial public offering price per share and the application of the estimated net
proceeds therefrom:
<TABLE>
<CAPTION>
SEPTEMBER 30, 1997
------------------------------
<S> <C> <C>
ACTUAL (1) AS ADJUSTED (2)
----------- -----------------
<CAPTION>
(in thousands)
<S> <C> <C>
Current portion of long-term debt and capital lease obligations........ $ 358 $ 358
----------- -------
----------- -------
Noncurrent portion of long-term debt and capital lease obligations..... $ 998 $ 998
Series A, A-1, B and C convertible preferred stock, $0.01 par value;
9,550,000 shares authorized; 9,281,185 shares issued and outstanding,
actual; no shares issued and outstanding, as adjusted (2)............ 30,508 --
Stockholders' equity:
Preferred Stock, $.01 par value; no shares authorized, actual;
10,000,000 shares authorized, as adjusted; no shares issued or
outstanding, actual and as adjusted................................ -- --
----------- -------
Common Stock, $.01 par value; 17,000,000 shares authorized, actual;
60,000,000 shares authorized, as adjusted; 828,465 shares issued
and outstanding, actual; 13,382,377 shares issued and outstanding,
as adjusted........................................................ 8 134
Additional paid-in capital........................................... 4,001 67,473
Deferred compensation, net........................................... (3,829) (3,829)
Unrealized loss on marketable securities............................. (1) (1)
Accumulated deficit.................................................. (9,793) (9,793)
----------- -------
Total stockholders' equity......................................... (9,614) 53,984
----------- -------
Total capitalization............................................. $ 21,892 $ 54,982
----------- -------
----------- -------
</TABLE>
- ------------------------
(1) Excludes: (i) 2,424,381 shares of Common Stock issuable upon exercise of
outstanding stock options as of September 30, 1997 at a weighted average
exercise price of $1.05 per share; and (ii) 162,576 shares of Common Stock
issuable upon exercise of outstanding warrants at a weighted average
exercise price of $3.10 per share. Also excludes 56,000 shares of Common
Stock issuable upon exercise of stock options granted after September 30,
1997 with an exercise price of $3.50 per share. See "Management--Equity
Incentive Plans," "Description of Capital Stock--Warrants" and Note 13 of
Notes to Financial Statements.
(2) See the Financial Statements and Note 9 of Notes to the Financial Statements
for descriptions of the authorized, issued and outstanding shares,
liquidation preferences and conversion features of the individual Series of
Preferred Stock.
21
<PAGE>
DILUTION
The pro forma net tangible book value of the Company as of September 30,
1997 was $20,489,747 or $2.03 per share of Common Stock. Pro forma net tangible
book value per share represents the amount of the Company's total tangible
assets less total liabilities, divided by the number of shares of Common Stock
outstanding after giving effect to the conversion of all outstanding shares of
Preferred Stock into Common Stock.
Pro forma net tangible book value dilution per share represents the
difference between the amount per share paid by purchasers of shares of Common
Stock in this offering and the net tangible book value per share of the Common
Stock immediately after completion of this offering. After giving effect to the
sale by the Company of 3,000,000 shares of Common Stock offered hereby at an
assumed initial public offering price of $11.00 per share and after deducting
the underwriting discounts and commissions and estimated offering expenses
payable by the Company, and the sale of 272,727 shares of Common Stock to Japan
Tobacco at a price equal to the assumed initial public offering price per share
and assuming no other changes in the net tangible book value after September 30,
1997, the Company's pro forma net tangible book value as of September 30, 1997
would have been $53,579,747 or $4.00 per share. This represents an immediate
increase in pro forma net tangible book value of $1.97 per share to existing
stockholders and an immediate dilution in pro forma net tangible book value of
$7.00 per share to new purchasers of Common Stock in this offering and in the
sale of shares of Common Stock to Japan Tobacco, as illustrated by the following
table:
<TABLE>
<S> <C> <C>
Assumed initial public offering price per share............ $ 11.00
Pro forma net tangible book value per share as of
September 30, 1997..................................... $ 2.03
Increase attributable to new investors................... 1.97
---------
Pro forma net tangible book value per share after the
offering................................................. 4.00
---------
Dilution to new investors.................................. $ 7.00
---------
---------
</TABLE>
The following table sets forth on a pro forma basis, as of September 30,
1997, the difference between the number of shares of Common Stock purchased from
the Company, the total consideration paid and the average price per share paid
by the existing holders of Common Stock and by the new investors, before
deducting the underwriting discounts and commissions and estimated offering
expenses payable by the Company:
<TABLE>
<CAPTION>
SHARES PURCHASED TOTAL CONSIDERATION
------------------------- -------------------------- AVERAGE PRICE
NUMBER PERCENT AMOUNT PERCENT PER SHARE
------------ ----------- ------------- ----------- -------------
<S> <C> <C> <C> <C> <C>
Existing stockholders (1).......................... 10,109,650 75.5% $ 30,199,910 45.6% $ 2.99
New investors...................................... 3,272,727 24.5 36,000,000 54.4 11.00
------------ ----- ------------- -----
Total............................................ 13,382,377 100.0% $ 66,199,910 100.0%
------------ ----- ------------- -----
------------ ----- ------------- -----
</TABLE>
- ------------------------
(1) Gives effect to the conversion of all outstanding shares of Preferred Stock
into 9,281,185 shares of Common Stock upon the closing of this offering.
The calculation of net tangible book value and the other computations above
assume no exercise of outstanding options and warrants. As of September 30,
1997, 2,586,957 shares of Common Stock were subject to outstanding options and
warrants at a weighted average exercise price of $1.18 per share. To the extent
additional shares are purchased pursuant to the exercise of outstanding options
and warrants, there will be further dilution to new investors. See
"Management--Equity Incentive Plans," "Description of Capital Stock-- Warrants"
and Note 13 of Notes to Financial Statements.
22
<PAGE>
SELECTED FINANCIAL DATA
The selected financial data presented below for the period from September
22, 1994 (inception) through December 31, 1994, the years ended December 31,
1995 and 1996 and the nine months ended September 30, 1997 and at December 31,
1994, 1995 and 1996 and September 30, 1997 are derived from the Company's
financial statements audited by Arthur Andersen LLP, independent auditors, which
are included elsewhere in this Prospectus. The statement of operations data for
the nine months ended September 30, 1996 and the balance sheet data at September
30, 1996 have been derived from unaudited financial statements; however,
management believes such financial statements include all adjustments,
consisting only of normal recurring adjustments, that the Company considers
necessary for a fair presentation of the financial position and results of
operations for these periods. Operating results for the nine months ended
September 30, 1997 are not necessarily indicative of the results that may be
expected for the entire year ended December 31, 1997. The data set forth below
should be read in conjunction with "Management's Discussion and Analysis of
Financial Condition and Results of Operations" and the financial statements and
related notes thereto appearing elsewhere in this Prospectus.
<TABLE>
<CAPTION>
PERIOD FROM
SEPTEMBER 22, 1994 YEAR ENDED NINE MONTHS ENDED
(INCEPTION) DECEMBER 31, SEPTEMBER 30,
THROUGH -------------------- ----------------------
DECEMBER 31, 1994 1995 1996 1996 1997
--------------------- --------- --------- ----------- ---------
<S> <C> <C> <C> <C> <C>
(UNAUDITED)
<CAPTION>
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<S> <C> <C> <C> <C> <C>
STATEMENT OF OPERATIONS DATA:
Revenues......................................... $ -- $ -- $ -- $ -- $ 774
Operating expenses:
Research and development..................... 44 486 1,741 982 3,338
General and administrative................... 46 258 1,345 791 2,381
--- --------- --------- ----------- ---------
Total operating expenses......................... 90 744 3,086 1,773 5,719
Interest income, net............................. -- -- 221 111 355
Income tax expense............................... -- -- -- -- 100
--- --------- --------- ----------- ---------
Net loss......................................... $ (90) $ (744) $ (2,865) $ (1,662) $ (4,690)
--- --------- --------- ----------- ---------
--- --------- --------- ----------- ---------
Pro forma net loss per share (1)................. $ (0.31) $ (0.46)
--------- ---------
--------- ---------
Shares used in computing pro forma net loss per
share (1)...................................... 9,198 10,269
</TABLE>
<TABLE>
<CAPTION>
DECEMBER 31, SEPTEMBER 30,
------------------------------- ----------------------
<S> <C> <C> <C> <C> <C>
1994 1995 1996 1996 1997
--------- --------- --------- ----------- ---------
<CAPTION>
(UNAUDITED)
(IN THOUSANDS)
<S> <C> <C> <C> <C> <C>
BALANCE SHEET DATA:
Cash and marketable securities............................. $ 298 $ 348 $ 5,671 $ 5,930 $ 22,143
Working capital............................................ 311 246 4,581 5,832 18,776
Total assets............................................... 311 424 7,819 7,126 27,621
Total long-term debt and capital lease obligations......... -- -- 446 471 1,356
Total mandatorily redeemable convertible
preferred stock.......................................... 400 1,153 10,471 9,301 30,508
Total stockholders' equity................................. (89) (833) (4,187) (2,810) (9,614)
</TABLE>
- ------------------------
(1) See Note 1 of Notes to Financial Statements for a description of the
computation of the pro forma net loss per share.
23
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
The following Management's Discussion and Analysis of Financial Condition
and Results of Operations contains certain forward-looking statements which
involve risk and uncertainties. Actual events and results may differ materially
from those anticipated in these forward-looking statements as a result of
various factors, including the matters set forth under the caption "Risk
Factors" and elsewhere in this Prospectus.
OVERVIEW
The Company was incorporated in September 1994, and has devoted
substantially all of its resources to the development of its genomics
technologies, bioinformatics systems and database products used to identify the
expression of genes, drug targets and drug leads. The Company has incurred
losses since inception and, as of September 30, 1997, had an accumulated deficit
of $9.8 million.
The Company entered into a strategic alliance with Procter & Gamble in the
field of heart failure in May 1997 and with Japan Tobacco in the field of renal
disease in September 1997. These agreements provide the Company with various
combinations of technology and database access fees and research funding and may
provide certain additional payments upon the attainment of research and
regulatory milestones and royalty payments based on sales of any products
resulting from the collaborations. Revenue recognized under the alliances with
Procter & Gamble and Japan Tobacco through September 30, 1997 totalled
approximately $774,000. Each strategic partner has the option to expand the
collaboration to cover two additional disease indications. In addition, Japan
Tobacco is also obligated to purchase $3.0 million of the Company's Common Stock
in a private placement to close simultaneously with this offering.
The Company's future profitability will depend in part on the successful
development and marketing of the ACCELERATED DRUG DISCOVERY system, the genomic
database products and the Flow-thru Chip and the establishment of strategic
alliances. Payments from strategic alliance partners and interest income are
expected to be the only sources of revenue for the foreseeable future. These
payments will include committed technology access fees and milestone payments
for the discovery of drug targets and leads. Such revenue is dependent in large
part on the discovery of genes, drug targets and drug leads using the Company's
technologies. Royalties or other revenue from commercial sales of products
developed from any therapeutic or diagnostic product identified using the
Company's technologies are not expected for at least several years, if at all.
Payments under strategic alliances will be subject to significant fluctuation in
both timing and amount, and, therefore, the Company's results of operations for
any period may not be comparable to the results of operations for any other
period. Furthermore, the generation of significant revenues and profitability
will depend upon the Company entering into additional alliances. There can be no
assurance that the Company will enter into additional alliances on acceptable
terms, if at all, or that such current or future alliances will be successful.
The Company has incurred operating losses in each year since its inception,
including net losses of approximately $2.9 million and $4.7 million for the year
ended December 31, 1996 and the nine months ended September 30, 1997,
respectively, and at September 30, 1997, the Company had an accumulated deficit
of approximately $9.8 million. The Company's losses have resulted principally
from costs incurred in research and development and from general and
administrative costs associated with the Company's operations. These costs have
exceeded the Company's interest income and revenues which to date have been
generated principally from strategic alliances. The Company expects to incur
substantial additional operating losses over the next few years as a result of
increases in its expenses for research and development capabilities.
The Company's quarterly operating results may fluctuate significantly as a
result of a variety of factors, including changes in the demand for the
Company's technologies and products, variations in payments under strategic
alliances, including milestone payments, royalties, license fees and other
contract
24
<PAGE>
revenues, and the timing of new product introductions, if any, by the Company.
The Company's quarterly operating results may also fluctuate significantly
depending on changes in the research and development budgets of the Company's
strategic partners and any potential partners, the introduction of new products
by the Company's competitors and other competitive factors, regulatory actions,
adoption of new technologies, manufacturing results, and the cost, quality and
availability of cell and tissue samples, reagents and related components.
RESULTS OF OPERATIONS
NINE MONTHS ENDED SEPTEMBER 30, 1997 AND SEPTEMBER 30, 1996
Revenue under strategic alliance agreements was $774,000 for the nine months
ended September 30, 1997. There was no revenue for the nine months ended
September 30, 1996. The 1997 revenue resulted from the Company's strategic
alliance agreements with Procter & Gamble and Japan Tobacco.
Research and development expenses increased to $3,338,000 for the nine
months ended September 30, 1997 from $982,000 for the comparable period in 1996.
This increase was primarily attributable to increased payroll and personnel
expenses as the Company hired additional research and development personnel,
increased purchases of laboratory supplies and increased equipment depreciation
as a result of capital expenditures. The Company expects research and
development expenses to continue to increase as personnel and research and
development facilities are expanded to accommodate new and existing strategic
alliances.
General and administrative expenses increased to $2,381,000 for the nine
months ended September 30, 1997 from $791,000 for the comparable period in 1996.
This increase was primarily attributable to increased payroll and personnel
expenses as the Company hired additional management and administrative personnel
and professional fees in connection with the overall scale-up of the Company's
operations and business development efforts. The Company expects that general
and administrative expenses will continue to increase as the Company continues
to expand its operations.
Net interest income increased to $355,000 for the nine months ended
September 30, 1997 from $111,000 for the comparable period in 1996. This
increase was primarily due to larger cash and investment balances on hand during
1997 as a result of private placements of equity securities.
As of September 30, 1997, the Company had accumulated losses of $9.8 million
since inception and, therefore, has not paid any federal income taxes.
Realization of deferred tax assets is dependent on future earnings, if any, the
timing and amount of which are uncertain. Accordingly, valuation allowances in
amounts equal to the deferred tax assets have been established to reflect these
uncertainties. See Note 7 of Notes to Financial Statements.
YEARS ENDED DECEMBER 31, 1996 AND DECEMBER 31, 1995
Research and development expenses increased to $1,741,000 in 1996 from
$486,000 in 1995. This increase was primarily attributable to increased payroll
and personnel expenses as the Company hired additional research and development
personnel, increased purchases of laboratory supplies and increased contracted
services.
General and administrative expenses increased to $1,345,000 in 1996 from
$258,000 in 1995. This increase was primarily attributable to increased payroll
and personnel expenses as the Company hired additional management and
administrative personnel and professional fees in connection with the expansion
of the Company's operations and business development efforts.
The Company had net interest income of $221,000 in 1996 resulting from
interest earned on cash and marketable securities derived from private
placements of equity securities. The Company did not earn interest income in
1995.
25
<PAGE>
YEAR ENDED DECEMBER 31, 1995 AND PERIOD FROM SEPTEMBER 22, 1994 (INCEPTION)
THROUGH
DECEMBER 31, 1994
Research and development expenses increased to $486,000 in 1995 from $44,000
in the 1994 period. This increase was primarily due to the inclusion of a full
year of operations in 1995 and expenditures for certain contracted research
activities.
General and administrative expenses increased to $258,000 in 1995 from
$46,000 in the 1994 period. This increase was primarily due to the inclusion of
a full year of operations in 1995 as well as increased contracted services.
LIQUIDITY AND CAPITAL RESOURCES
From inception through September 30, 1997, the Company financed its
operations through private placements of equity securities, payment from a
strategic alliance partner, a capital lease and an equipment loan. The private
placement of equity securities has provided the Company with aggregate gross
proceeds of approximately $30,160,000 as of September 30, 1997. The Company also
has obtained $3,000,000 under its strategic alliance with Procter & Gamble, as
of September 30, 1997, comprised of an initial research and technology access
payment of $1,000,000 and a $2,000,000 note which will be forgiven over the
initial 18 months of the agreement upon the Company's performance of research
obligations. The Company has also obtained $471,000 of capital lease financing
and $1,084,000 under an equipment loan. As of September 30, 1997, the Company
had approximately $22,143,000 in cash and marketable securities.
Amounts financed for equipment under a capital lease for the year ended
December 31, 1996 were approximately $471,000. The Company also had purchases of
equipment of approximately $12,000, $1,339,000 and $1,785,000 during the years
ended December 31, 1995 and 1996 and the nine months ended September 30, 1997,
respectively. Although the Company had no material commitments for capital
expenditures as of September 30, 1997, the Company expects capital expenditures
to increase over the next several years as it expands its facilities and
acquires scientific and computer equipment to support the planned expansion of
its research and development efforts.
As of September 30, 1997, the Company had net operating loss carryforwards
of approximately $7,726,000 to offset federal and state income taxes. The
Company's research and development tax credit carryforwards were estimated to be
approximately $56,000 as of December 31, 1996 for federal income tax purposes.
If not utilized, the federal and state net operating loss carryforwards will
expire through 2011. See Note 7 to Notes to Financial Statements.
To date, all revenue received by the Company has been from its strategic
alliances. The Company expects that substantially all revenue for the
foreseeable future will come from strategic alliance partners and interest
income. Furthermore, the Company's ability to achieve profitability will be
dependent upon the ability of the Company to enter into additional strategic
alliances. There can be no assurance that the Company will be able to negotiate
additional strategic alliances in the future on acceptable terms, if at all, or
that current or future strategic alliances will be successful and provide the
Company with expected benefits.
The Company believes that the net proceeds from this offering and the sale
of shares to Japan Tobacco, existing cash and marketable securities and
anticipated cash flow from its current strategic alliances will be sufficient to
support the Company's operations for at least the next 24 months. The Company's
actual future capital requirements and the adequacy of its available funds,
however, will depend on many factors, including progress of its discovery
programs, the number and breadth of these programs, the ability of the Company
to establish and maintain additional strategic alliance and licensing
arrangements and the progress of the development and commercialization efforts
of the Company's strategic partners. These factors also include the level of the
Company's activities relating to its independent discovery programs and to the
development and commercialization rights it retains in its strategic
26
<PAGE>
alliance arrangements, competing technological and market developments, the
costs associated with obtaining access to tissue samples and related information
and the costs involved in preparing, filing, prosecuting, maintaining and
enforcing patent claims and other intellectual property rights. The Company
expects that it will require significant additional financings in the future,
which it may seek to raise through public or private equity offerings, debt
financing or additional strategic alliance and licensing arrangements. No
assurance can be given that additional financing or strategic alliance and
licensing arrangements will be available when needed, if at all, or that, if
available, such financing will be obtained on terms favorable to the Company or
its stockholders. To the extent the Company raises additional capital by issuing
equity or convertible debt securities, ownership dilution to stockholders will
result. If adequate financing is not available when needed, the Company may be
required to curtail significantly one or more of its research and development
programs or to obtain funds through arrangements with strategic partners or
others that may require the Company to relinquish rights to certain of its
technologies, discoveries or potential products, or to grant licenses on terms
that are not favorable to the Company, any of which could have a material
adverse effect on the Company's business, financial condition and results of
operations. In the event that adequate funds are not available, the Company's
business would be adversely affected.
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BUSINESS
The following Business section contains forward-looking statements which
involve risks and uncertainties. The Company's actual results could differ
materially from those anticipated in these forward-looking statements as a
result of certain factors, including those set forth under "Risk Factors" and
elsewhere in this Prospectus.
OVERVIEW
GENE LOGIC INC. ("Gene Logic" or the "Company") uses a proprietary system,
based on analysis of gene expression and gene regulation, to discover drug
targets and drug leads. Gene Logic uses READS in its drug target and drug lead
discovery programs and to generate genomic data for its database products. The
Company's objective is to provide its pharmaceutical company partners with novel
drug targets, drug leads and a suite of genomic database products to reduce the
time, cost and risk associated with drug discovery. The Company believes that by
building its portfolio of partnerships it will generate current revenues and
establish a long-term economic interest in the product pipelines of multiple
partners through milestone and royalty payments. Gene Logic has established
major strategic alliances with Procter & Gamble and Japan Tobacco.
INDUSTRY BACKGROUND
DRUG DISCOVERY AND DEVELOPMENT
Diseases are the result of disturbances of, or abnormalities in, the
physiological pathways that regulate the functioning of cells in the human body.
The main components of these pathways are proteins, such as enzymes, receptors
or ion channels, encoded by genes expressed within the cells affected by the
disease. Drugs generally exert their therapeutic effects by interacting with
certain of these proteins, referred to as drug targets, in such a way as to
restore the normal functioning of the disease-affected pathways or otherwise to
compensate for the abnormalities. The process of drug discovery involves the
screening of collections of compounds against a drug target to identify those
compounds which interact with the target to produce the desired effect.
In response to increasing competitive pressures to discover and develop new
drugs in a more rapid and cost-effective manner, pharmaceutical and
biotechnology companies have recently made significant advances in combinatorial
chemistry and high-throughput screening technologies which enable the rapid
generation and screening of large and diverse compound libraries against many
potential targets. However, the current drug discovery process remains
time-consuming and costly, in part because of the difficulty and complexity of
identifying novel drug targets using traditional methodologies. In general,
pharmaceutical companies rely upon their own basic research and academic
discoveries to identify drug targets. The Company believes this approach
provides an insufficient number of targets to fill the industry's increasing
annual screening objectives. Recent developments in genomics have permitted the
partial sequencing of tens of thousands of new genes and the identification of
the classes of proteins they encode. These developments have not enabled the
rapid identification of drug targets, because the gene sequence data by itself
provides limited information, if any, about a gene's relationship to a specific
disease. There remains a significant need for a rapid and cost-effective method
to correlate genes with specific diseases to discover drug targets.
GENES, GENE EXPRESSION AND DISEASE
The genetic content of humans, the human genome, is maintained in
chromosomes, which contain deoxyribonucleic acid ("DNA"). DNA is composed of two
strands of four constituent molecules known as bases or nucleotides: adenine
(A), thymine (T), guanine (G) and cytosine (C). The specific order, or sequence,
of these bases encodes genetic information within units defined as genes, which
are the
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hereditary units that control the structure, health and function of all
organisms. The beginning sequence of any gene is called 5 prime (5') and its end
is called 3 prime (3'). The human genome is estimated to comprise approximately
three billion base pairs encoding 100,000 to 150,000 genes. While all of these
genes are present in every human cell, certain of these genes are switched "on"
only in specific tissues or only at certain developmental stages and are
otherwise inactive. On average, in any single cell type, 10,000 to 20,000
different genes are expressed out of the possible 100,000 to 150,000. The cell's
pattern of gene expression defines the function of that cell.
Genes consist of coding and non-coding regions which ultimately direct and
regulate the production of the various proteins that maintain normal cellular
function. The coding regions, which account for less than five percent of the
human genome, direct the production of proteins, and the order of the bases in
these regions determine the order of amino acids in a given protein. An enzyme
reads these genes and makes a strand of RNA (a molecule similar to DNA) that
consists of a string of bases complementary to that of the DNA of the gene. This
process is known as transcription and results in the production of messenger RNA
("mRNA"). Messenger RNA directs the assembly of amino acids in a sequence that
corresponds to the order of the bases of the mRNA defining the sequence of a
protein. The amount of mRNA in a cell provides a direct indication of the level
of activity of the corresponding gene.
Some of the non-coding DNA sequences, referred to as promoter regions,
regulate genes in the different tissues. A series of regulatory proteins, called
transcription factors, bind to specific promoter regions, either singularly or
in unique, multi-component complexes, and act as switches controlling the
activity of the genes. The synthesis of regulatory proteins is, in turn,
directed by genes coding for transcription factors and their accessory proteins.
Together these control elements regulate the pattern of gene expression in
specific cells.
When a mutation occurs in a gene, the resulting protein may be abnormal in
function, resulting in disease. A number of relatively rare diseases, such as
cystic fibrosis and sickle cell anemia, result from such single gene mutations,
and the genes responsible for many of these monogenic diseases have been
identified over the last decade. Detailed knowledge of gene sequences that
encode defective proteins may facilitate development of novel therapeutic
products and diagnostic tests for these conditions. However, almost all major
common diseases, including heart failure, renal disease, diseases of the central
nervous system, osteoporosis and cancer, are believed to involve multiple genes
and, often, complex interactions of genetic and environmental factors. These
conditions evolve over time as a result of successive changes in the patterns of
gene expression in the cells involved in the disease.
THE NEED FOR NOVEL DRUG TARGETS
A critical step for drug development is the identification of suitable drug
targets for screening. The major pharmaceutical companies are facing increasing
pressures to introduce new drugs more rapidly than in the past. Because most
drug candidates fail during the development process, these companies need to
identify a large number of potential drug candidates by screening compound
libraries against large numbers of targets to improve their chances of
identifying commercially viable drugs. Recent estimates suggest that major
pharmaceutical companies may have to screen hundreds of new targets each year in
order to meet their drug discovery objectives. This figure compares with a
published 1995 industry source estimate that approximately 300 targets in total
were then in active screening by the pharmaceutical industry.
The majority of drug targets are proteins that are encoded by genes
expressed within tissues affected by a disease. The importance of certain
protein classes, such as enzymes, receptors or ion channels, as targets is
illustrated by the world's top selling prescription drugs. Of the 100 most
prescribed drugs, approximately 80% interact with one of four classes of
proteins: 33 drugs inhibit 13 different enzymes; 22 bind to ten different
G-protein-coupled receptors; 13 interact with six different ion channels; and 15
bind to four different nuclear hormone receptors. It is estimated that there are
approximately 10,000 different
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enzymes, 1,000 different G-protein-coupled receptors, 200 different ion channels
and 100 different nuclear hormone receptors encoded in the human genome. These
proteins are key components of the pathways involved in disease and, therefore,
are likely to be a rich source of new drug targets.
Proven drug targets share certain other characteristics which can only be
identified by understanding their expression levels in cells and cannot be
determined by their gene sequence alone. Drug targets are (i) often expressed
primarily in specific tissues, allowing for selectivity of pharmacological
action and reducing the potential for adverse side effects and (ii) generally
expressed at low abundance in the cells of the relevant organ. An effective
target discovery system would therefore enable the detection of genes that
encode for proteins expressed in specific tissues at low abundance, thereby
permitting the rapid identification of proteins which are likely to be targets
for therapeutic and diagnostic development.
LIMITATIONS OF TRADITIONAL GENOMICS TECHNOLOGIES
Although traditional genomics technologies have yielded sequence information
for many genes and have succeeded in identifying genes that predispose
individuals to certain diseases, the rate at which novel drug targets can be
identified from this information is limited. Traditional genomics efforts are
generally classified in two categories: gene sequencing and positional cloning.
Most gene sequencing approaches use high-throughput methods to capture
partial sequences (known as expressed sequence tags or "ESTs") for many genes on
an essentially random basis. These ESTs are stored in public and proprietary
databases which, to date, contain an estimated three million ESTs, representing
partial and fragmentary sequence data for 50 to 60 percent of human genes.
Despite the widespread availability of a significant amount of sequence data,
these data have limited use in identifying targets for therapeutic or diagnostic
product development. This is because the gene sequence data by itself provides
limited information, if any, about a gene's relationship to a specific disease.
Also, the EST sequencing approach tends to capture multiple times those genes
which are abundantly expressed, while missing the low-abundance, tissue-specific
genes which may code for useful drug targets.
Positional cloning is a method of identifying individual genes that, when
defective, cause or predispose individuals to particular diseases. The process
consists of genetic mapping, physical mapping and sequencing, and typically
requires an extensive collection of DNA samples from families affected by the
disease. Scientists test the DNA of both affected and non-affected members of
these families and, through statistical analysis, attempt to identify the region
or regions of the genome likely to contain a gene related to the disease.
Positional cloning requires large numbers of samples from the affected families
to demonstrate statistical significance and becomes much more complicated when
multiple genes are involved in the disease. The accumulation of such samples is
costly and time consuming. Although researchers are attempting to use other
methodologies, including animal models of disease, to speed the process of gene
discovery, the overall process may take several years.
THE GENE LOGIC SOLUTION
Gene Logic believes that its proprietary technologies for analysis of the
overall patterns of gene expression and regulation in specific diseases will
enable the Company to identify multiple, novel drug targets more rapidly than
competing technologies. Gene Logic's ACCELERATED DRUG DISCOVERY system allows
the Company to display the changes in gene expression patterns as a disease
develops and progresses. The Company uses this information, in conjunction with
its proprietary suite of genomics databases and bioinformatics tools, to
identify genes and their associated pathways implicated in disease and to
discover and prioritize individual drug targets. Pursuant to strategic alliances
with corporate partners and in independent programs, the Company is using its
system to identify drug targets for major common diseases, including heart
failure, renal disease, diseases of the central nervous system, osteoporosis and
prostate cancer. In addition, Gene Logic is developing a proprietary, reusable
Flow-thru Chip for high-throughput analysis of changes in the expression of
known genes. The Company believes the Flow-thru
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Chip will enable the development of high-throughput screening assays to evaluate
the effects of compounds on the expression of disease-associated genes
identified by READS. This technology represents a new approach to drug discovery
and has the potential to accelerate substantially the identification of drug
leads. By utilizing and further developing the portfolio of technologies,
genomics databases and bioinformatics tools in its ACCELERATED DRUG DISCOVERY
system, Gene Logic believes it can significantly enhance many critical steps in
the drug development process and accelerate the development of novel
pharmaceuticals for the Company and its partners.
GENE LOGIC'S STRATEGY
Gene Logic's objective is to provide to its pharmaceutical company partners
novel drug targets, drug leads and a suite of genomic database products in order
to reduce the time, cost and risk associated with drug discovery. The Company
believes that by building its portfolio of partnerships it will generate current
revenues and establish a long-term economic interest in the product pipelines of
multiple partners through milestone and royalty payments. The Company believes
that this portfolio approach will maximize the likelihood of drugs being
discovered and developed using its system. The Company's strategy for building
commercial value is to:
- PROVIDE AN INTEGRATED DRUG DISCOVERY PLATFORM. The Company has established
and intends to continue to build a broad technology platform, the
ACCELERATED DRUG DISCOVERY system, based on the analysis of gene
expression and gene regulation for the rapid discovery of multiple,
screenable drug targets and drug leads. The ACCELERATED DRUG DISCOVERY
system is designed to be integrated easily into the current drug discovery
processes of multiple partners.
- ESTABLISH DISEASE-SPECIFIC DRUG TARGET AND LEAD DISCOVERY ALLIANCES. Gene
Logic intends to continue to establish strategic alliances in specific
disease areas with pharmaceutical companies for drug target and drug lead
discovery programs. Such strategic alliances would generally provide the
Company technology license fees, research funding, milestone payments and
royalty or profit-sharing income from commercialization of products
resulting from the alliances. To date, Gene Logic has entered into a
target discovery alliance with Procter & Gamble in the field of heart
failure and a target and lead discovery alliance with Japan Tobacco in the
field of renal disease.
- ESTABLISH INDEPENDENT DRUG TARGET AND LEAD DISCOVERY PROGRAMS. Gene Logic
has established and intends to expand independent drug discovery programs
based on its proprietary technologies, including the Flow-thru Chip. The
Company plans to license drug leads discovered through its independent
programs to pharmaceutical companies for clinical development and
commercialization and expects to receive license fees, development
milestone payments and royalty or profit-sharing income from such
licensees.
- MARKET GENOMIC DATABASE PRODUCTS UNDER NON-EXCLUSIVE LICENSE. The Company
plans to market its suite of genomic database products, including its GENE
EXPRESS NORMAL and rare EST (rEST) databases, either in a single package
or as separate modules, to multiple pharmaceutical company partners. The
Company intends to grant non-exclusive licenses independent of, or in
conjunction with, strategic alliances. Such licenses would generally
provide the Company annual subscription fees, milestone payments and
royalties. To date, Gene Logic has granted Japan Tobacco a non-exclusive
license to its GENE EXPRESS NORMAL database.
- RETAIN SIGNIFICANT RIGHTS TO NEW PRODUCT OPPORTUNITIES. Under its
strategic alliances, Gene Logic retains certain rights to diagnostic,
therapeutic protein and gene therapy applications. In addition, the
Company intends to use its databases and technological capabilities to
develop products for the evolving fields of differential diagnosis,
molecular staging of disease and pharmacogenomic profiling. The Company
may pursue these applications independently or in alliances with
additional partners.
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GENE LOGIC'S ACCELERATED DRUG DISCOVERY SYSTEM
Gene Logic is employing its proprietary technologies and bioinformatics
system for the discovery of drug targets and drug leads and to accelerate the
development of drugs. The elements of Gene Logic's ACCELERATED DRUG DISCOVERY
system include:
ANALYSIS OF GENE EXPRESSION AND REGULATION
READS TECHNOLOGY
The Company has developed a proprietary, automated technology, known as
READS (Restriction Enzyme Analysis of Differentially-expressed Sequences), for
capturing and analyzing the overall gene expression profile of a given cell or
tissue type to identify drug targets. The Company has an exclusive license from
Yale University to patent applications covering the READS technology. The
Company has received notices of allowance for two patent applications, covering
the key aspects of the READS technology, from the United States Patent and
Trademark Office (the "USPTO"). Using READS, Gene Logic rapidly generates a gene
expression profile, or Molecular Topography, representing a quantitative
snapshot of the levels of expression of essentially all the genes in a tissue
sample. The Company compares normal and diseased tissues through a series of
Molecular Topography snapshots, a "molecular movie," to identify the changes in
gene expression patterns that occur as the disease develops and progresses and
to determine which genes are associated with the disease. The READS technology
is accurate and highly sensitive, capable of detecting essentially all mRNA
transcripts including rarely expressed genes, at the level of approximately one
mRNA copy per cell. By employing its READS technology in conjunction with its
proprietary bioinformatics system, the Company can then prioritize the proteins
encoded by these disease-associated genes as potential drug targets.
The READS process begins with the procurement of a relevant cell or tissue
sample, extraction of its total RNA content and preparation of complementary DNA
("cDNA") using standard techniques. By applying proprietary tagging and enzyme
cleavage procedures to the cDNA pool, the Company generates a unique set of
identifiable signature fragments (3' ESTs) for each mRNA species present in the
cell. The fragments are separated by size using gel-based, automated separation
techniques and quantified using proprietary image analysis software. The
quantity of each signature fragment correlates directly with the expression
levels of the corresponding gene. The Company uses its bioinformatics system to
compile these data into a Molecular Topography snapshot which represents the
levels of expression of genes active in the sample. This process typically takes
two days and is tracked by the Company's laboratory information management
system, which captures both process and quality control data.
The READS technology has been highly automated through the use of
commercially available robotic liquid handling stations, thermocyclers and
fragment separation instruments. A single production unit may be utilized for
two shifts per day and is capable of generating approximately 1,000 Molecular
Topography snapshots per year. Gene Logic has installed its first production
unit and has scaled up operations to two shifts per day. The Company expects to
install a second production unit during 1998. There can be no assurance,
however, that the Company will be able to increase its capacity as expected or
to realize the cost efficiencies of scale it anticipates.
MUST TECHNOLOGY
Gene Logic's proprietary MuST (Multiplex Selection of Transcription Factors)
technology enables the Company to identify the nucleotide sequences of the
transcription factor binding sites through which the expression of genes is
regulated. The Company believes that the information generated by MuST, in
combination with the information on gene expression levels generated by its
READS technology, will enable the Company to assign genes to functional pathways
based on the observation that genes in such pathways share common regulatory
mechanisms and are coordinately expressed. The Company has an exclusive license
from Yale University to patent applications covering the MuST technology and has
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received a notice of allowance for the original patent application, covering the
key aspects of the MuST technology, from the USPTO.
The MuST process starts with the extraction of nuclear proteins in the cell
or tissue sample. Proteins within this extract which exhibit sequence-specific
DNA binding properties are bound to a set of DNA probes and separated from all
unbound probes using electrophoretic separation techniques. After purification
and amplification, the binding sites are sequenced and entered into a database.
The result is a library of sequences which represent the binding sites for the
gene regulatory proteins contained in the original nuclear extract. The entire
process is tracked by the Company's laboratory information management system,
which captures both process and quality control data.
The Company has established the technical resources to construct a library
of transcription factor binding sequences for any given cell type in a period of
four weeks and has begun to process samples in order to expand the database.
Over 50% of the transcription factor binding sequences Gene Logic has identified
to date in a variety of different human cell types are not included in public
domain databases.
GENE LOGIC'S BIOINFORMATICS SYSTEM
The Company has designed and is continuing to develop a bioinformatics
system to manage and analyze the information it generates and to interface with
its databases, its partners' databases and databases in the public domain. This
system enables the functional integration of Gene Logic's genomic data content
with other proprietary or public genomic databases, protein databases and
strategic partners' chemical, screening and assay databases. Gene Logic's
bioinformatics system provides the analytical tools necessary to enable the
Company to discover and prioritize targets for drug discovery. Moreover, the
provision of Gene Logic's proprietary genomic data in conjunction with its
integrated bioinformatics system may enable the Company to introduce that system
into strategic partners' drug discovery process in a customized, expandable
format that is compatible with partners' current database architectures.
DATABASE INTEGRATION TOOLS
The Company's bioinformatics system was developed using scientific data
management tools based on the Object Protocol Model ("OPM"). These tools provide
support for the rapid development of relational databases, the integration of
relational and flat file databases and for cross-database queries. The Company's
bioinformatics system works through customized and configurable Web interfaces,
regardless of the structure of the underlying databases and without having to
redevelop each database. The Company's bioinformatics system enables the
integration of Gene Logic's information content into the data management systems
of its strategic partners, and the Company believes that the system will also
enhance the value of such partners' existing databases by establishing
interconnectivity of heterogeneous data sources.
GENOMIC DATA ANALYTICAL TOOLS
The Company's bioinformatics system includes tools for the analysis of data
generated by READS and MuST for both normal and diseased cell and tissue types.
Gene expression data are analyzed using the Company's proprietary Molecular
Topography data tool. The tool allows intuitive "point and click" navigation
among the expressed genes and is also an analytical tool. The system can
identify genes as known (represented in the Company's databases of indexed 3'
ESTs and full-length sequences) or unknown, and provides a wide variety of
statistical analyses of expression levels and correlations both within and
across cell, tissue and disease types.
Underlying the Molecular Topography tool is the quEST software developed by
the Company. quEST includes a reference set of indexed, human 3' ESTs,
representing the Company's universe of known genes. The Company processes these
ESTs to eliminate artifacts and redundancies which are commonly found in the
public data. The quEST tool also includes a searching and matching algorithm
which allows 3' EST
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signature fragments from READS to be correlated with known genes. The Company
routinely sequences signature fragments which are not in its databases as they
are identified by READS and is capable of sequencing over 1,000 such fragments
per week. Once the sequence of a gene is captured in the Company's database, a
fragment derived from that gene can thereafter be identified in a Molecular
Topography without the need for further sequencing.
Gene Logic has also developed proprietary methods to prioritize the
disease-associated genes it discovers as potential drug targets. This
prioritization depends upon a number of factors including: (i) a gene's temporal
association with the disease process; (ii) the tissue distribution of its
expression; (iii) any homology it may have with known target classes, such as
membrane receptors, enzymes or signaling proteins; (iv) its involvement in known
metabolic or signal transduction pathways; and (v) the feasibility of developing
a screening assay.
THE FLOW-THRU CHIP
Gene Logic is developing its proprietary, reusable Flow-thru Chip for
high-throughput analysis of changes in the expression of known genes. The
Company believes that the Flow-thru Chip will enable the development of
high-throughput screening assays to evaluate the effects of compounds on the
expression of disease associated genes identified by READS. This technology
represents a new approach to drug discovery and has the potential to accelerate
substantially the identification of drug leads. The Company has exclusive
licenses to the technology underlying the Flow-thru Chip from the United States
Department of Energy and the inventor of the technology.
In its drug discovery process, Gene Logic will use its READS technology to
identify which genes are associated with the disease. Once these genes are
known, the Company will design a customized Flow-thru Chip incorporating probes
specific to these genes and use the chip to test the effects of compounds in
cellular assays. Compounds that have the desired effect on expression of the
relevant genes, such as restoring the expression pattern to normal or mimicking
the effect of a known therapeutic, may be evaluated as drug leads.
The substrate of the Flow-thru Chip is a silicon or glass wafer traversed by
a grid of micro-channels. The current version of the chip is laid out in a
format which is compatible with current high-throughput cellular assay systems.
Each well is configured to contain an array of approximately 400 genes
identified using the Company's READS technology; the number of genes included in
each well is expected to be increased to approximately 1,000 in the second
version of the Flow-thru Chip. The Company expects to commence in-house testing
during 1998.
Based on disease-associated genes identified by READS, Gene Logic designs
and synthesizes custom oligonucleotide probes and binds them, using a
proprietary covalent attachment chemistry, within the micro-channels covering a
specific area of the chip. The function of each probe is to bind to its
complementary DNA or RNA in the sample being analyzed. The nucleic acid is
isolated from such a sample and fluorescently labeled by one of several standard
biochemical methods. The test sample is then flowed through the substrate of the
Flow-thru Chip where each attached probe captures, or hybridizes to, any labeled
nucleic acid present in the sample which is complementary to that probe. When
imaged using the Company's signal detection system, the hybridized test sample
generates a fluorescent signal which can be correlated with the expression in
the original sample of the gene captured by the probe because the sequence and
position of each complementary DNA probe on the Flow-thru Chip is known. The
level of signal is readily quantifiable and reflects the degree to which the
gene is expressed in the sample.
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FLOW-THRU CHIP-TM-
[graphical depiction of cross-sections of Flow-thru Chip]
Cut-away of a micro-channel containing covalently-linked oligonucleotide
probes.
Area of chip containing probes for a single gene.
Portion of one cm2 chip with 400 sites each containing probes for individual
genes.
Each high-throughput screening assay comprises 96 wells, each containing the
full 400 gene set.
The Company believes that several features make the Flow-thru Chip well
suited for monitoring the expression of known genes in high-throughput cellular
assays:
- SENSITIVITY. Because of the greater surface area available for attachment
of the oligonucleotide probes, the Company believes the Flow-thru Chip
will be sensitive enough to monitor changes in expression of low-abundance
transcripts.
- SPEED. The existence of the micro-channels accelerates the hybridization
reaction, reducing the time required for each assay. In addition, because
the walls of the micro-channels focus the fluorescent signal, the Company
is able to use a commercially available digital signal detection system
which provides an immediate read-out.
- COST. As a result of the proprietary covalent chemistry through which the
oligonucleotide probes are attached within the micro-channels, each
Flow-thru Chip can be used multiple times. Following each assay the chip
is washed to remove the hybridized material and is then ready for reuse.
The Company believes the reusability of the Flow-thru Chip will make it
suitable for use in high- throughput screening applications.
In addition to its use as part of the Company's drug lead discovery
programs, the Flow-thru Chip will also serve as a platform for the screening of
lead compounds against the data in the Toxicology EXPRESS and Pharmacology
EXPRESS databases being developed by the Company. Gene Logic will design
Flow-thru Chips using oligonucleotide probes representative of the genes that
comprise patterns of gene expression which typify known classes of toxic or
pharmacological effects identified using READS. The Company may sell Flow-thru
Chips to its strategic partners in conjunction with subscriptions to the
Toxicology EXPRESS or Pharmacology EXPRESS databases or provide screening
services in conjunction with an alliance.
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The Company has established relationships with several third parties for
manufacture of the chip substrates and oligonucleotide probes which constitute
its Flow-thru Chip arrays and for the robotic and signal detection systems
associated with running high-throughput screening assays using the chips. There
can be no assurance, however, that the Company will be able to maintain such
relationships on terms acceptable to the Company.
There can be no assurance that further development and scale-up of the
Flow-thru Chip will be successful or that the Company will be successful in
marketing the Flow-thru Chip to strategic partners or others.
GENE LOGIC PROGRAMS AND PRODUCTS
DRUG TARGET AND LEAD DISCOVERY PROGRAMS
The ACCELERATED DRUG DISCOVERY system is applicable to a broad range of
diseases. As part of its business strategy, Gene Logic focuses on large medical
markets that are poorly served by current drug treatments and intends to
establish strategic alliances in specific disease areas with pharmaceutical
companies for drug target and drug lead discovery programs. To date, the Company
has established two strategic alliances in the fields of heart failure and renal
disease. Gene Logic has established independent discovery programs to identify
drug targets for certain diseases of the central nervous system, osteoporosis
and prostate cancer. Gene Logic also intends to obtain access to compound
libraries from combinatorial chemistry and pharmaceutical companies for
screening using its Flow-thru Chip.
Gene Logic has collaborations with academic institutions and commercial
organizations for access to relevant normal and diseased human tissues and cell
types and animal disease models. The Company uses these tissues for analysis of
gene expression and gene regulation and to build its genomic databases. Under
the terms of these agreements, the Company generally retains all commercial
rights to gene discoveries made through the use of cells and tissues provided by
its collaborators.
HEART FAILURE
An estimated 4.8 million Americans suffer from heart failure. Heart failure
refers to a progressive reduction in the ability of the ventricles of the heart
to pump an adequate volume of blood. Although many causes for heart failure have
been identified, common to all is loss of the normal ability of the cells
comprising heart muscle to respond to stress. Normally, muscle becomes stronger
with exercise; in heart failure, increasing load on the heart muscle weakens
rather than strengthens the muscle. Better knowledge of altered patterns of gene
expression in the heart muscle cells as the disease progresses may offer insight
into the disease mechanism.
In May 1997, Gene Logic entered into a 4 1/2-year strategic alliance with
Procter & Gamble for the discovery of drug targets for heart failure. In
connection with this alliance, the Company has obtained access to muscle tissue
from normal and failing human hearts through several heart transplant programs.
Pursuant to the alliance research program, Gene Logic is using READS to identify
changes in the expression of genes which underlie the pathological process to
prioritize targets for the development of innovative drugs and prognostic
indicators. The Company has processed samples and generated Molecular Topography
snapshots for samples received to date from Procter & Gamble and is providing
Procter & Gamble with on-line access to such results. See "--Strategic
Alliances--Procter & Gamble Pharmaceuticals, Inc."
RENAL DISEASE
Approximately 200,000 Americans suffer from end-stage renal disease. The
management of chronic renal failure consumes a significant portion of the health
care budget in the United States. The major causes of renal failure are
glomerulonephritis, diabetes mellitus and hypertension.
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In September 1997, the Company entered into a five-year strategic alliance
with Japan Tobacco for the discovery of drug targets and drug leads for renal
disease. As part of the alliance, the Company granted Japan Tobacco a
non-exclusive license to the GENE EXPRESS NORMAL database and Gene Logic may
also use its Flow-thru Chip technology for screening for drug leads in renal
disease. Pursuant to the alliance, Gene Logic is establishing collaborations for
access to a broad range of human tissues and animal disease models relevant to
renal disease. The Company is using its ACCELERATED DRUG DISCOVERY system to
identify drug targets and leads for the development of novel therapeutics and
diagnostic and molecular staging products for renal disease. See "--Strategic
Alliances--Japan Tobacco Inc."
DISEASES OF THE CENTRAL NERVOUS SYSTEM
Gene Logic is employing its ACCELERATED DRUG DISCOVERY system to identify
drug targets for schizophrenia, affective disorders and Alzheimer's disease.
SCHIZOPHRENIA. Schizophrenia is a severe mental disorder affecting
approximately one percent of the worldwide population. Current treatments for
schizophrenia are inadequate because a significant percentage of schizophrenics
are resistant to all treatments and others respond only partially to drug
therapy and remain too affected to work or lead normal lives. The underlying
chemical alterations in the brain which cause schizophrenia are not well
understood.
Gene Logic is analyzing the patterns of gene expression in brain cells from
schizophrenics and animal treatment models to identify novel drug targets. Gene
Logic has entered into a collaboration with Johns Hopkins University School of
Medicine for access to POST MORTEM tissue samples from brains of schizophrenics.
These samples were obtained from both drug-treated and untreated individuals
shortly after death. The Company has also begun evaluating the effects of
established and experimental anti-
psychotic drugs on gene expression in the brain in animal models.
AFFECTIVE DISORDERS. There are two broad categories of affective disorders:
unipolar affective disorder, or depression, which affects an estimated 15
million Americans, and bipolar affective disorder, also known as
manic-depression, which affects an estimated two million people in the United
States. Although drug therapies exist for these disorders, pharmaceutical
companies are attempting to develop new products having a more rapid onset of
action and efficacy in a higher percentage of patients.
The Company is using READS to discover new antidepressant drug targets based
on changes in the patterns of gene expression in brain cells from patients with
affective disorders. The Company has entered into a collaboration with Johns
Hopkins University School of Medicine for access to POST MORTEM samples from
specific regions of the brains of both drug-treated and untreated
manic-depressives.
ALZHEIMER'S DISEASE. Between three and four million Americans suffer from
disabling age-related dementia, or Alzheimer's disease. The primary therapeutic
goal is postponement of the onset of disease in predisposed individuals and
slowing of disease progression.
Gene Logic has entered into a collaboration with Molecular Geriatrics
Corporation for access to micro-dissected samples of relevant regions of human
brain from patients with Alzheimer's disease ranging from early stage through
advanced degeneration. The samples have been characterized using proprietary
monoclonal antibodies to reveal cells affected at the onset of the disease. The
Company has exclusive rights to any genes useful in the development of
therapeutic products which are identified through the collaboration. The Company
may pursue such rights independently or in alliance with a strategic partner.
Molecular Geriatrics Corporation retains rights to develop diagnostic products.
OSTEOPOROSIS
Osteoporosis is a condition characterised by low bone mass and
susceptibility to fracture. Osteoporosis affects over 20 million American women,
a number which continues to grow as the average age of the population increases.
Loss of bone mass in postmenopausal women can be substantially retarded or
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prevented by hormone replacement therapy. However, there is no available
treatment that significantly restores bone mass that has already been lost.
Because effective prevention requires early diagnosis, there is also a large and
immediate market for more sensitive diagnostics.
Gene Logic has commenced its discovery program in osteoporosis with the
Center for Clinical and Basic Research and Johns Hopkins University School of
Medicine providing normal and osteoporotic bone samples. The Company intends to
develop drug targets identified through these programs independently or in
alliance with a strategic partner.
PROSTATE CANCER
Prostate cancer is the most commonly diagnosed cancer in American men with
317,000 new cases reported in 1996 and is the second leading cause of all male
cancer deaths in the United States.
Gene Logic has established a collaboration for access to staged and
characterized prostate cancer tissue samples, together with related clinical
treatment and outcomes data, with Baylor College of Medicine. In this program,
the Company is focusing on the identification of targets for the development of
novel therapeutics and diagnostic products. Gene Logic may develop these
independently or in alliance with strategic partners.
GENOMIC DATABASE PRODUCTS
Complementary to its disease-specific target discovery programs, the Company
is developing a suite of genomic database products designed to accelerate the
process of target identification and prioritization, the discovery of lead
compounds and the preclinical and clinical development of drugs. Gene Logic
intends to market its suite of genomic database products, in a single package or
as separate modules, to multiple partners on a non-exclusive basis both
independent of and in conjunction with drug target and drug lead discovery
alliances. The Company expects to receive annual database access subscription
fees, milestone payments based on utilization of the data in licensees' drug and
diagnostic discovery programs and royalties on net sales of resulting products.
GENE EXPRESS NORMAL DATABASE
The GENE EXPRESS NORMAL database is a reference set of gene expression
profiles for a wide variety of normal human tissues, which enables the Company
and its partners to determine rapidly the expression level of genes in normal
tissues. The database will also contain gene expression profiles for normal
tissues in rat and mouse, the experimental animals most commonly used by the
pharmaceutical industry. This information facilitates the prioritization of drug
targets. The database uses the Company's bioinformatics system to correlate
specific gene sequences to their expression levels and to interface with other
public or private sequence databases to which the licensee may have access. The
Company has granted the first non-exclusive license to the GENE EXPRESS NORMAL
database to Japan Tobacco.
RARE EST (REST) DATABASE
Approximately 80% of all human genes are rarely expressed (at the level of
fewer than five mRNA copies per cell), and fewer than an estimated 50% of such
genes are available in existing human EST databases. However, these
low-abundance, tissue-specific gene transcripts are those that the Company
believes will be most promising as drug targets. Gene Logic uses its READS
technology on tissue samples to identify rarely expressed genes. Unlike
traditional EST sequencing methods, Gene Logic's process is directed
(non-random) and has a low level of redundancy. The Company is developing a
database of rare ESTs, with the potential to provide promising drug targets not
available through other sources of sequence data. The Company anticipates that
the rEST database will be commercially available in 1998, but there can be no
assurance that it will be available by such date, or at all.
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THE ANNOTATED GENOME (TAG) DATABASE
The Human Genome Project is forecast to complete the sequencing of the
entire genome by the year 2005. Using expression data derived from the GENE
EXPRESS NORMAL database and the transcription factor binding site sequence
information generated by the Company's MuST technology, Gene Logic intends to
create a database, the TAG database, of human genomic sequence information
derived from the Human Genome Project annotated with expression levels, tissue
distribution of expression and gene regulatory mechanisms. The Company believes
the analysis of this database will enable genes to be placed in their functional
pathways based upon coordinate expression and shared transcriptional control
elements, thereby allowing the selection and prioritization of appropriate drug
targets at multiple points along disease-associated pathways. The development of
the TAG database is at an early stage and Gene Logic expects that it will
accelerate as more human genomic sequence data becomes available.
PHARMACOLOGY EXPRESS DATABASE
The Company is using its READS technology to build a database of profiles of
gene expression that characterize the pharmacological effects in relevant target
organs of compounds of known therapeutic benefit. These patterns can be used as
references for the screening of new lead compounds in order to predict
therapeutic efficacy at the preclinical development stage. The Company believes
that this technology may substantially reduce the risks associated with clinical
development of new drugs and provide a rapid filter for the selection and
prioritization of lead compounds. In conjunction with its Pharmacology EXPRESS
database, Gene Logic plans to use its Flow-thru Chip for the screening of lead
compounds against the database. The construction of the Pharmacology EXPRESS
database is at an early stage. The Company anticipates that such database will
be commercially available in 1998, but there can be no assurance that it will be
available by such date, or at all.
TOXICOLOGY EXPRESS DATABASE
Gene Logic intends to use its READS technology to build a database of the
changes in gene expression that typify known toxicological effects of compounds
in the target organs subject to such effects. Patterns may be identified by
comparing gene expression in normal tissues to gene expression in similar
tissues exposed to known toxic substances. These patterns can be used as
references for the screening of new lead compounds for common classes of
toxicological effects in order to minimize the use of traditional animal
toxicology screening, which is both time-consuming and expensive. In conjunction
with the Toxicology EXPRESS database, Gene Logic plans to use its Flow-thru Chip
for the screening of lead compounds against the database. The Company believes
that screening against the Toxicology EXPRESS database will provide a filter for
the prioritization of lead compounds and will accelerate the selection of those
to be taken forward through full toxicological studies in animals and those to
be abandoned. The construction of the Toxicology EXPRESS database is at an early
stage. The Company anticipates that such database will be commercially available
in 1998, but there can be no assurance that it will be available by such date,
or at all.
The statements made in this Prospectus regarding anticipated dates for
commercial availability of certain of its products are forward-looking
statements, and the actual dates of commercialization could differ materially
from those projected as a result of a variety of factors, including progress of
the Company's technologies, changes in the Company's business priorities and
other factors discussed in "Risk Factors." There can be no assurance that the
Company will not experience difficulties that could delay or prevent the
successful development and commercialization of products or that the Company's
products will address the requirements of the market or achieve market
acceptance.
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NEW PRODUCT OPPORTUNITIES
Gene Logic intends to pursue commercial opportunities for diagnostic
applications of its discoveries, including molecular staging of disease,
differential diagnosis and pharmacogenomic profiling. The Company believes that
management of common diseases in the future will include gene expression-based
diagnostics to monitor the molecular evolution of the disease. Gene expression
analysis may enable differentiation among diseases which share clinical symptoms
but which differ at the level of molecular mechanism. Gene Logic believes that
pharmacogenomic profiling, using gene expression-based assays to predict an
individual's response to specific drugs, may be especially valuable in new drug
development and in modifying drug therapies of known efficacy but which have
toxic side effects in certain groups of patients.
STRATEGIC ALLIANCES
As part of its business strategy, Gene Logic intends to continue to
establish strategic alliances for drug target and lead discovery programs in
specific disease areas with pharmaceutical companies. Gene Logic may also enter
into strategic alliances or joint ventures with additional partners to develop
certain diagnostics, therapeutic proteins and gene therapy products for which it
has retained rights. The Company's strategic alliances would generally provide
for the Company to receive technology license fees, research funding, milestone
payments and royalty or profit-sharing income. To date, Gene Logic has entered
into a target discovery alliance with Procter & Gamble in the field of heart
failure and a target and lead discovery alliance with Japan Tobacco in the field
of renal disease.
Gene Logic's objective is to structure its alliances in a flexible manner.
Subject to a commitment by a strategic partner, the Company is able to allocate
a variable portion of its production capacity to any individual program. An
alliance might embrace a field as restricted as one specific project within a
single disease indication or as broad as an entire category of disease involving
several indications.
PROCTER & GAMBLE PHARMACEUTICALS, INC.
In May 1997, the Company and Procter & Gamble entered into a 4 1/2-year
strategic alliance for drug target discovery in heart failure. Payments by
Procter & Gamble to the Company in the form of committed technology access fees
and research funding will total a minimum of $10.1 million if the research
program continues for its full term and the Company performs its research
obligations under the agreement. The parties may agree to extend the research
program for additional one-year periods. At any time during the first 18 months
of the alliance, Procter & Gamble has the right to expand the alliance to
include drug target discovery programs in two additional disease indications
upon terms, including committed research funding, identical to those covering
the initial program in heart failure. Procter & Gamble will be obligated to make
additional payments to the Company for the achievement of specified target
discovery, product development and associated regulatory milestones. Procter &
Gamble will also pay the Company royalties on worldwide net sales of all
products that may result from the alliance.
The agreement provides Procter & Gamble with exclusive, worldwide,
royalty-bearing rights to develop and commercialize small molecule therapeutics,
therapeutic proteins and diagnostics based on the Company's discoveries in the
field of heart failure. Gene Logic has retained all rights to develop and
commercialize products discovered pursuant to the alliance outside of the
alliance field. Procter & Gamble has agreed to assign to Gene Logic any and all
interest it may have in inventions related to the Company's core technologies
and to products developed pursuant to the alliance to the extent necessary for
Gene Logic to exercise its retained commercial rights.
Procter & Gamble has the right to terminate the research program with
respect to heart failure by giving Gene Logic six months notice at any time
after 12 months from the date of commencement of the research program under the
agreement and has comparable rights to terminate the research program in the
options fields. Accordingly, the minimum duration of any research program is 18
months. If Procter & Gamble terminates the agreement, it may elect to recommence
the research program for up to two
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additional years. Each party also has the right to terminate the agreement upon
certain change of control events with respect to the other party. Unless earlier
terminated in accordance with its terms, the agreement will remain in effect
until the expiration of the last-to-expire obligations of Procter & Gamble to
pay royalties under the agreement.
There can be no assurance that the Company's research pursuant to the
agreement will be successful in discovering drug targets related to heart
failure or to either of the two option disease fields or that Procter & Gamble
will be successful in developing or commercializing any products based upon such
discoveries made by the Company. As a result, there can be no assurance that
Gene Logic will receive any milestone payments, royalties or other payments
contemplated by the agreement.
JAPAN TOBACCO INC.
In September 1997, the Company and Japan Tobacco entered into a five-year
strategic alliance for drug target and drug lead discovery in renal disease.
Payments by Japan Tobacco to the Company in the form of committed technology
access fees and research funding total a minimum of $15.0 million if the
research program continues for its full term and the Company performs its
research obligations under the Agreement. Japan Tobacco may extend the research
program for one additional year. At any time during the first two years of the
alliance, Japan Tobacco has the right to expand the alliance to include drug
target and drug lead discovery programs in two additional disease indications
upon terms, including committed research funding, identical to those covering
the initial program in renal disease. Japan Tobacco will be obligated to make
additional payments to the Company for the achievement of specified target
discovery and related product development and associated regulatory milestones.
Pursuant to the terms of the agreement, Japan Tobacco would pay a minimum of
$12.5 million for each therapeutic product if all milestones are achieved. Japan
Tobacco will also pay the Company royalties on worldwide net sales of all
products that may result from targets discovered pursuant to the alliance.
As part of the alliance and during the research term of the alliance
agreement, the Company granted Japan Tobacco a non-exclusive license to the GENE
EXPRESS NORMAL database, and Gene Logic intends to use its Flow-thru Chip
technology for screening for drug leads in renal disease or, if Japan Tobacco
has exercised its options to additional disease indications, such other disease
indications. In consideration for such license and access, Japan Tobacco has
agreed to purchase $3.0 million of Common Stock in a private transaction
concurrent with this offering at a price per share equal to the price per share
at which Common Stock is sold in this offering. Under the terms of the option,
Japan Tobacco will pay Gene Logic chip design fees, screening fees and a minimum
of $17.5 million for each therapeutic product based on a lead compound
identified through such assays if all milestones are achieved. The agreement
also entitles the Company to royalties on net sales of therapeutic products
based on lead compounds identified through such assays.
The agreement provides Japan Tobacco with exclusive, worldwide,
royalty-bearing rights to develop and commercialize small molecule therapeutics
and therapeutic antibodies and proteins based on the Company's discoveries in
the course of the alliance. Gene Logic has retained all rights to develop and
commercialize gene therapy and antisense drugs and diagnostic products
discovered pursuant to the alliance. Japan Tobacco has agreed to assign to Gene
Logic any and all interest it may have in inventions related to the Company's
core technologies and to products developed pursuant to the alliance to the
extent necessary for Gene Logic to exercise its retained commercial rights.
Japan Tobacco has the right to terminate the research program with respect
to renal disease by giving Gene Logic six months notice at any time after 12
months from the date of commencement of the research program under the agreement
and has comparable rights to terminate the research program in the option
fields. Accordingly, the minimum duration of any research program is 18 months.
Unless earlier terminated in accordance with its terms, the agreement will
remain in effect until the expiration of the last-to-expire obligations of Japan
Tobacco to pay royalties under the agreement.
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There can be no assurance that the Company's research pursuant to the
agreement will be successful in discovering drug targets or drug leads related
to renal disease or to either of the two option disease fields or that Japan
Tobacco will be successful in developing or commercializing any products based
upon such discoveries made by the Company. As a result, there can be no
assurance that Gene Logic will receive any milestone payments, royalties or
other payments contemplated by the agreement.
INTELLECTUAL PROPERTY
Gene Logic seeks United States and international patent protection for major
components of its technology platform, including elements of its READS, MuST,
Flow-thru Chip and bioinformatics technologies; it relies upon trade secret
protection for certain of its confidential and proprietary information; and it
uses license agreements both to access external technologies and assets and to
convey certain intellectual property rights to others. The Company's commercial
success will be dependent in part upon its ability to obtain commercially
valuable patent claims and to protect its intellectual property portfolio.
As of October 20, 1997, the Company had exclusive rights to nine United
States patent applications, as well as corresponding international and foreign
patent applications, relating to its technologies. The Company has received
notices of allowance for two United States patent applications covering the key
aspects of the READS technology, and notice of allowance for one United States
patent application covering the key aspects of the MuST technology. However, no
patents have issued to date.
The patent positions of pharmaceutical, biopharmaceutical and biotechnology
companies, including Gene Logic, are generally uncertain and involve complex
legal and factual questions. There can be no assurance that any of the pending
patent applications to which the Company has exclusive rights will result in
issued patents, that the claims of any patents which are issued will provide
meaningful protection, that the Company will develop additional proprietary
technologies that are patentable, that any patents licensed or issued to the
Company or its strategic partners will provide a basis for commercially viable
products or will provide the Company with any competitive advantages or will not
be challenged by third parties, or that the patents of others will not have an
adverse effect on the ability of the Company to do business. In addition, patent
law relating to the scope of claims in the technology field in which the Company
operates is still evolving. The degree of future protection for the Company's
proprietary rights, therefore, is uncertain. Furthermore, there can be no
assurance that others will not independently develop similar or alternative
technologies, duplicate any of the Company's technologies, or, if patents are
licensed or issued to the Company, design around the patented technologies
licensed to or developed by the Company. In addition, the Company could incur
substantial costs in litigation if it is required to defend itself in patent
suits brought by third parties or if it initiates such suits.
The Company is aware of a number of United States patents and patent
applications and corresponding foreign patents and patent applications owned by
third parties relating to the analysis of gene expression or the manufacture and
use of DNA chips. There can be no assurance that these or other technologies
will not provide third parties with competitive advantages over the Company and
will not have a material adverse effect on the Company's business, financial
condition and results of operations. In addition, certain third party patent
applications contain broad claims, and it is not possible to determine whether
or not such claims will be narrowed during prosecution and/or will be allowed
and issued as patents, even if such claims appear to cover the prior art or have
other defects. There can be no assurance that an owner or licensee of a patent
in the field will not threaten or file an infringement action or that the
Company would prevail in any such action. There can be no assurance that the
cost of defending an infringement action would not be substantial and would not
have a material adverse effect on the Company's business, financial condition
and results of operations. Furthermore, there can be no assurance that any
required licenses would be made available on commercially viable terms, if at
all. Failure to obtain any required license could prevent the Company from
utilizing or commercializing one or more of its technologies and could have a
material adverse effect on the Company's business, financial condition and
results of operations.
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In general, the Company intends to apply for patent protection for methods
relating to gene expression and to apply for patent protection for the
individual disease genes and targets it discovers. Such patents may include
claims relating to novel genes and gene fragments and to novel uses for known
genes or gene fragments identified through its discovery programs. There can be
no assurance that the Company will be able to obtain meaningful patent
protection for its discoveries; even if patents are issued, the scope of the
coverage or protection afforded thereby is uncertain. Failure to secure such
meaningful patent protection could have a material adverse effect on the
Company's business, financial condition and results of operations.
Several groups are attempting to identify and patent gene fragments and
full-length genes, the functions of which have not been characterized, as well
as fully characterized genes. There is substantial uncertainty regarding the
possible patent protection for gene fragments or genes without known function or
correlation with specific diseases. To the extent any patents issue to other
parties on such partial or full-length genes, the risk increases that the
potential products and processes of the Company or its strategic partners may
give rise to claims of patent infringement. The public availability of partial
or full sequence information or the existence of patent applications related
thereto, even if not accompanied by relevant function or disease association,
prior to the time the Company applies for patent protection on a corresponding
gene could adversely affect the Company's ability to obtain patent protection
with respect to such gene or to the related expression patterns. Furthermore,
others may have filed, and in the future are likely to file, patent applications
covering genes or gene products that are similar, or identical to, any for which
the Company may seek patent protection. No assurance can be given that any such
patent application will not have priority over patent applications filed by the
Company. Any legal action against the Company or its strategic partners claiming
damages and seeking to enjoin commercial activities relating to the affected
products and processes could, in addition to subjecting the Company to potential
liability for damages, require the Company or its strategic partners to obtain a
license in order to continue to manufacture or market the affected products and
processes. There can be no assurance that the Company or its strategic partners
would prevail in any such action or that any license required under any such
patent would be made available on commercially acceptable terms, if at all. The
Company believes that there is likely to be significant litigation in the
industry regarding patent and other intellectual property rights. If the Company
becomes involved in such litigation, it could consume a substantial portion of
the Company's managerial and financial resources and have a material adverse
effect on the Company's business, financial condition and results of operations.
Enactment of legislation implementing the General Agreement on Tariffs and
Trade has resulted in certain changes to United States patent laws that became
effective on June 8, 1995. Most notably, the term of patent protection for
patent applications filed on or after June 8, 1995 is no longer a period of 17
years from the date of grant. The new term of United States patents will
commence on the date of issuance and terminate 20 years from the earliest
effective filing date of the application. Because the time from filing to
issuance of biotechnology patent applications is often more than three years, a
20-year term from the effective date of filing may result in a substantially
shortened period of patent protection which may adversely affect the Company's
patent position. If this change results in a shorter period of patent coverage,
the Company's business could be adversely affected to the extent that the
duration and level of the royalties it is entitled to receive from its strategic
partners are based on the existence of a valid patent covering the product
subject to the royalty obligation.
With respect to proprietary know-how that is not patentable and for
processes for which patents are difficult to enforce, the Company has chosen to
rely on trade secret protection and confidentiality agreements to protect its
interests. The Company believes that several elements of its ACCELERATED DRUG
DISCOVERY system involve proprietary know-how, technology or data which are not
covered by patents or patent applications. In addition, the Company has
developed a proprietary index of gene and gene fragment sequences which it
updates on an ongoing basis. Some of these data will be the subject of patent
applications whereas other data will be maintained as proprietary trade secret
information. The Company
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has taken security measures to protect its proprietary know-how and technologies
and confidential data and continues to explore further methods of protection.
While Gene Logic requires all employees, consultants and collaborators to enter
into confidentiality agreements, there can be no assurance that proprietary
information will not be disclosed, that others will not independently develop
substantially equivalent proprietary information and techniques or otherwise
gain access to the Company's trade secrets, or that the Company can meaningfully
protect its trade secrets. In the case of a strategic partnership or other
collaborative arrangement which requires the sharing of data, the Company's
policy is to make available to its partner only such data as are relevant to the
partnership or arrangement, under controlled circumstances, and only during the
contractual term of the strategic partnership or collaborative arrangement, and
subject to a duty of confidentiality on the part of its partner or collaborator.
There can be no assurance, however, that such measures will adequately protect
the Company's data. Any material leak of confidential data into the public
domain or to third parties may have a material adverse effect on the Company's
business, financial condition and results of operations.
The Company is a party to various license agreements which give it rights to
use certain technologies and biological materials in its research and
development processes. There can be no assurance that the Company will be able
to maintain such rights on commercially reasonable terms, if at all. Failure by
the Company to maintain such rights could have a material adverse effect on the
Company's business, financial condition and results of operations.
COMPETITION
Competition among entities attempting to identify the genes associated with
specific diseases and to develop products based on such discoveries is intense.
Gene Logic faces, and will continue to face, competition from pharmaceutical,
biotechnology and diagnostic companies, academic and research institutions and
government agencies, both in the United States and abroad. Several entities are
attempting to identify and patent randomly sequenced genes and gene fragments,
while others are pursuing a gene identification, characterization and product
development strategy based on positional cloning. The Company is aware that
certain entities are utilizing a variety of different gene expression analysis
methodologies, including the use of chip-based systems, to attempt to identify
disease-related genes. In addition, numerous pharmaceutical companies are
developing genomic research programs, either alone or in partnership with the
Company's competitors. Competition among such entities is intense and is
expected to increase. In order to compete against existing and future
technologies, the Company will need to demonstrate to potential customers that
its technologies and capabilities are superior to competing technologies.
Many of the Company's competitors have substantially greater capital
resources, research and development staffs, facilities, manufacturing and
marketing experience, distribution channels and human resources than the
Company. These competitors may discover, characterize or develop important
genes, drug targets or drug leads, drug discovery technologies or drugs in
advance of Gene Logic or which are more effective than those developed by Gene
Logic or its strategic partners, or may obtain regulatory approvals of their
drugs more rapidly than the Company and its strategic partners, any of which
could have a material adverse affect on any similar Gene Logic program.
Moreover, there can be no assurance that the Company's competitors will not
obtain patent protection or other intellectual property rights that would limit
the Company's or its strategic partners' ability to use the Company's drug
discovery technologies or commercialize therapeutic or diagnostic products,
which could have a material adverse effect on the Company's business, financial
condition and results of operations. The Company also faces competition from
these and other entities in gaining access to cells, tissues and nucleic acid
samples used in its discovery programs.
The Company will rely on its strategic partners for support of certain of
its discovery programs and intends to rely on its strategic partners for
preclinical and clinical development of related potential products and the
manufacturing and marketing of such products. Each of the Company's strategic
partners
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is conducting multiple product development efforts within each disease area
which is the subject of its strategic alliance with Gene Logic. Generally, the
Company's strategic alliance agreements do not preclude the strategic partner
from pursuing development efforts utilizing approaches distinct from that which
is the subject of the alliance. Any product candidate of the Company, therefore,
may be subject to competition with a potential product under development by a
strategic partner.
Future competition will come from existing competitors as well as other
companies seeking to develop new technologies for drug discovery based on gene
sequencing, target gene identification, bioinformatics and related technologies.
In addition, certain pharmaceutical and biotechnology companies have significant
needs for genomic information and may choose to develop or acquire competing
technologies to meet such needs. Genomic technologies have undergone and are
expected to continue to undergo rapid and significant change. The Company's
future success will depend in large part on its maintaining a competitive
position in the genomics field. Rapid technological development by the Company
or others may result in products or technologies becoming obsolete before the
Company recovers the expenses it incurs in connection with their development.
Products offered by the Company could be made obsolete by less expensive or more
effective drug target and drug lead technologies, including technologies which
may be unrelated to genomics. There can be no assurance that the Company will be
able to make the enhancements to its technology necessary to compete
successfully with newly emerging technologies.
GOVERNMENT REGULATION
The Company does not plan to conduct clinical trials in humans or
commercialize therapeutic products discovered as a result of its genes, drug
target and drug lead discovery programs but intends to rely on its strategic
partners to conduct such activities. Prior to marketing, any new drug developed
by the Company's strategic partners must undergo an extensive regulatory
approval process in the United States and other countries. This regulatory
process, which includes preclinical studies and clinical trials, and may include
post-marketing surveillance of each compound to establish its safety and
efficacy, can take many years and require the expenditure of substantial
resources. Data obtained from preclinical studies and clinical trials are
subject to varying interpretations that could delay, limit or prevent regulatory
approval. Delays or rejections may also be encountered based upon changes in FDA
policies for drug approval during the period of product development and FDA
regulatory review of each submitted NDA in the case of new pharmaceutical
agents, or PLA or BLA in the case of biological therapeutics. Similar delays may
also be encountered in the regulatory approval of any diagnostic product, where
such approval is required, and in obtaining regulatory approval in foreign
countries. Delays in obtaining regulatory approvals could adversely affect the
marketing of any drugs developed by the Company or its strategic partners,
impose costly procedures upon the Company's and its partners' activities,
diminish any competitive advantages that the Company or its partners may attain
and adversely affect the Company's receipt of royalties. There can be no
assurance that regulatory approval will be obtained for any drugs or diagnostic
products developed by the Company or its strategic partners. Furthermore,
regulatory approval may entail limitations on the indicated uses of a drug.
Because certain of the products likely to result from the Company's disease
research programs involve the application of new technologies and may be based
upon a new therapeutic approach, such products may be subject to substantial
additional review by various government regulatory authorities and, as a result,
regulatory approvals may be obtained more slowly than for products based upon
more conventional technologies.
Even if regulatory approval is obtained, a marketed product and its
manufacturer are subject to continuing review. Discovery of previously unknown
problems with a product may result in withdrawal of the product from the market,
and could have adverse effects on the Company's business, financial conditions
and results of operations. Violations of regulatory requirements at any stage
during the regulatory process, including preclinical studies and clinical
trials, the approval process, post-approval or in good manufacturing practices
manufacturing requirements, may result in various adverse consequences to the
Company, including the FDA's delay in approval or refusal to approve a product,
withdrawal of an
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approved product from the market or the imposition of criminal penalties against
the manufacturer and NDA, PLA or BLA holder. No IND has been submitted for any
product candidate resulting from the Company's discovery programs, and no
product candidate has been approved for commercialization in the United States
or elsewhere. The Company intends to rely on its strategic partners to file INDs
and generally direct the regulatory approval process. There can be no assurance
that the Company's strategic partners will be able to conduct clinical testing
or obtain necessary approvals from the FDA or other regulatory authorities for
any products. Failure to obtain required governmental approvals will delay or
preclude the Company's strategic partners from marketing drugs or diagnostic
products developed through the Company's research or limit the commercial use of
such products and could have a material adverse effect on the Company's
business, financial condition and results of operations.
The Company's research and development activities involve the controlled use
of certain biological and other hazardous materials, chemicals and various
radioactive materials. The Company is subject to federal, state and local laws
and regulations governing the use, storage, handling and disposal of such
materials and certain waste products. Although the Company believes that its
safety procedures for handling and disposing of such materials comply with the
standards prescribed by federal, state and local laws and regulations, the risk
of accidental contamination or injury from these materials cannot be eliminated.
In the event of such an accident, the Company could be held liable for any
damages that result, and any liability could exceed the resources of the
Company. Other than such laws and regulations governing the generation, use and
disposal of hazardous materials and wastes, and limiting workplace exposures to
such materials, the Company does not believe its current and proposed activities
are subject to any specific government regulation other than regulations
affecting the operations of companies generally.
SCIENTIFIC ADVISERS
The Company has established a select group of scientists and physicians to
advise it on scientific and technical matters in areas of the Company's
business. The scientific advisers are compensated by retainer and on a time and
expenses basis, and certain of them have received shares of Common Stock of the
Company. The Company has entered into consulting agreements with a number of the
scientific advisers.
None of the scientific advisers is employed by the Company, and they may
have other commitments to or consulting or advisory contracts with their
employers or other entities that may conflict or compete with their obligations
to the Company. Accordingly, such persons are expected to devote only a limited
portion of their time to the Company. The Company's scientific advisers include:
KENNETH L. BEATTIE, PH.D., Senior Research Staff Member, Oak Ridge National
Laboratory. Dr. Beattie, the inventor of the Flow-thru Chip, is an exclusive
consultant to the Company in its program for the development of analytical
microsystems for gene expression profiling. He is an inventor of several key
patents in the area of DNA probe and sequencing technologies and genome mapping.
Dr. Beattie holds a Ph.D. from the University of Tennessee.
RONALD FALK, M.D., Professor of Medicine and Chief, Division of Nephrology,
University of North Carolina. Dr. Falk consults with the Company in the field of
kidney disease. He is co-director of the Glomerular Disease Collaboration
Network. Dr. Falk holds a M.D. from the University of North Carolina.
J. CHARLES JENNETTE, M.D., Professor of Medicine, Pathology and Laboratory
Medicine, University of North Carolina. Dr. Jennette consults with the Company
in the field of kidney disease. He is Director of the Nephropathology Laboratory
at the University of North Carolina, Jennette holds a M.D. from the University
of North Carolina.
AARON KLUG, PH.D., Director, MRC Laboratory of Molecular Biology, University
of Cambridge, England and Fellow of Peterhouse College. Professor Klug, a
scientific founder of the Company, has been widely recognized for his
contributions to modern molecular biology. He was elected a fellow of the Royal
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<PAGE>
Society in 1969, received the Nobel Prize for Chemistry in 1982 and the Copley
Medal of the Royal Society in 1985 and was knighted in 1988.
RONALD A. MORTON, JR., M.D., Assistant Professor in Urology, Baylor College
of Medicine. Dr. Morton is Director of Laboratories at the Baylor Prostate
Center, one of three National Cancer Institute prostate cancer SPORE
(Specialized Programs of Research Excellence) centers, and is responsible for
developing and expanding its extensive library of normal and malignant human
prostate tissues. He is an exclusive consultant to Gene Logic in the field of
gene discovery in prostate cancer. Dr. Morton holds a M.D. from Johns Hopkins
University School of Medicine. He is an American Foundation for Urologic Disease
Research Scholar.
JAY R. SHAPIRO, M.D., Professor, Division of Geriatric Medicine, Johns
Hopkins University School of Medicine. Dr. Shapiro is an expert in human bone
diseases and an exclusive consultant to the Company in the field of
osteoporosis. He holds a M.D. from Boston University School of Medicine.
SHERMAN M. WEISSMAN, M.D., Sterling Professor of Genetics and Medicine, Yale
University School of Medicine. Dr. Weissman, the inventor of the READS and MuST
technologies, is a scientific founder of and a key adviser to the Company. Dr.
Weissman graduated with advanced degrees in mathematics from the University of
Chicago and a M.D. from Harvard Medical School. He is a member of the National
Academy of Sciences, a fellow of the American Association for the Advancement of
Science and sits on the editorial board of the PROCEEDINGS OF THE NATIONAL
ACADEMY OF SCIENCES and other eminent journals.
ROBERT H. YOLKEN, M.D., Professor of Pediatrics and Director, The Stanley
Laboratory for the Study of Schizophrenia and Bipolar Disorder, Johns Hopkins
University School of Medicine. Dr. Yolken consults with the Company in the
fields of gene target discovery in schizophrenia and affective disorders. Dr.
Yolken holds a M.D. from Harvard University.
EMPLOYEES
As of September 30, 1997, the Company had a total of 57 employees, 18 of
whom hold M.D., Ph.D or D.Sc. degrees and ten of whom hold other advanced
degrees, and one part-time employee. Of these, 46 were engaged in research and
development and 11 were engaged in business development, finance and general
administration. The Company's future success depends in significant part upon
the continued service of its key scientific, technical and senior management
personnel and its continuing ability to attract and retain highly qualified
technical and managerial personnel. None of the Company's employees is
represented by a labor union or covered by a collective bargaining agreement.
The Company has not experienced any work stoppages and considers its relations
with its employees to be good.
FACILITIES
The Company's facilities are located in Columbia, Maryland. The Company
leases approximately 21,000 square feet of laboratory and office space. These
facilities are leased through February 28, 1998. The Company recently entered
into a ten-year lease for approximately 50,000 square feet of laboratory and
office space in Gaithersburg, Maryland and plans to relocate its operations to
such facility in January 1998. The Company believes that, upon such relocation,
the Company's facilities will be adequate for its current and projected needs
and that additional space will be available as needed. The Company has leased
approximately 5,000 square feet of office space in Berkeley, California.
LEGAL PROCEEDINGS
Gene Logic is not a party to any material legal proceedings.
47
<PAGE>
MANAGEMENT
DIRECTORS, EXECUTIVE OFFICERS AND KEY EMPLOYEES
The following table sets forth certain information regarding the Company's
directors, executive officers and key employees as of September 30, 1997:
<TABLE>
<CAPTION>
NAME AGE POSITION
- ----------------------------------------------------- --- -----------------------------------------------------
<S> <C> <C>
Alan G. Walton, Ph.D., D.Sc. (1)..................... 61 Chairman of the Board of Directors
Michael J. Brennan, M.D., Ph.D. ..................... 40 President, Chief Executive Officer and Director
Keith O. Elliston, Ph.D. ............................ 36 Senior Vice President and Chief Scientific Officer
Mark D. Gessler...................................... 36 Senior Vice President, Corporate Development and
Chief Financial Officer
Eric M. Eastman, Ph.D. .............................. 45 Vice President, Technology Management
Gregory G. Lennon, Ph.D. ............................ 40 Vice President, Genomics Research
Victor M. Markowitz, D.Sc. .......................... 44 Vice President, Bioinformatics Systems
Daniel R. Passeri, J.D. ............................. 36 Vice President, Business Development and Intellectual
Property
Jules Blake, Ph.D. (1)(2)............................ 73 Director
Charles L. Dimmler III (1)(2)........................ 55 Director
G. Anthony Gorry, Ph.D. ............................. 56 Director
Jeffrey D. Sollender................................. 37 Director
</TABLE>
- ------------------------
(1) Member of the Compensation Committee
(2) Member of the Audit Committee
ALAN G. WALTON, PH.D., D.SC. has served as Chairman of the Board of
Directors of the Company since its inception in September 1994. He has been a
General Partner of Oxford Bioscience Partners, a private equity investment firm,
since 1991 and a member of the Board of Directors of Collaborative Clinical
Research since 1994. In 1981, Dr. Walton co-founded University Genetics Co., a
public corporation specializing in technology transfer from academic
institutions to industry and in the seed financing of high-technology start-ups,
and served as President and Chief Executive Officer until 1987. He has lectured
extensively at various universities, including Harvard Medical School, Indiana
University and Case Western Reserve University where he was Professor of
Macromolecular Science and Director of the Laboratory for Biological
Macromolecules. Dr. Walton received a Ph.D. in chemistry and a D.Sc. in
biological chemistry from Nottingham University, England.
MICHAEL J. BRENNAN, M.D., PH.D. has served as President, Chief Executive
Officer and a director of the Company since December 1995. From October 1993 to
November 1995, he was Vice President, Business Development for Corange
International Limited's worldwide therapeutics business, Boehringer Mannheim
Therapeutics. From June 1990 to October 1993, Dr. Brennan was a director and the
general manager of Boehringer Mannheim South Africa. Dr. Brennan received a
Ph.D. in neurobiology and a M.D. from the University of the Witwatersrand,
Johannesburg, South Africa. In 1985, he completed his residency in neurology at
Boston City Hospital.
KEITH O. ELLISTON, PH.D. has served as Senior Vice President and Chief
Scientific Officer of the Company since February 1997. From July 1996 to
February 1997, Dr. Elliston was Head of Genome Sciences at Bayer Corporation, a
pharmaceutical company, and also responsible for establishing and
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<PAGE>
directing its bioinformatics effort worldwide. From 1986 to July 1996, Dr.
Elliston was involved in a wide range of genomics and drug discovery programs at
Merck & Co., Inc. ("Merck"), a pharmaceutical company. In 1993, he founded the
Department of Bioinformatics at Merck. He also co-founded and was the scientific
director of the Merck Gene Index project, involving the coordinated efforts of
Merck, Washington University, Lawrence Livermore National Laboratory, the
University of Pennsylvania and the National Center for Biotechnology
Information. Dr. Elliston received his M.S. degree in genetics from the
University of Minnesota and a Ph.D. in molecular genetics from Rutgers
University. He is an advisory board member of the National Center for
Biotechnology Information, National Institutes of Health, and the National
Center for Genome Resources, and an Adjunct Professor at Rutgers University.
MARK D. GESSLER has served as Senior Vice President, Corporate Development
and Chief Financial Officer of the Company since June 1996. From February 1993
to June 1996, Mr. Gessler was with GeneMedicine, Inc., a gene therapy company,
most recently as Vice President, Corporate Development. From 1988 until January
1993, he was Director of Business Development at BCM Technologies, Inc., the
venture and technology subsidiary of Baylor College of Medicine. While in that
position, Mr. Gessler co-founded three biotechnology companies and a software
company. Mr. Gessler holds a MBA from the University of Tennessee and was an
Adjunct Professor of Business Administration at Rice University from 1991 to
1996.
ERIC M. EASTMAN, PH.D. has served as Vice President, Technology Management
of the Company since August 1997. He served as Vice President, Scientific
Operations of the Company from September 1996 to August 1997. From June 1993 to
September 1996, Dr. Eastman was Director of Gene Expression and Process Research
& Development at GeneMedicine, Inc. He was a founder and served as Vice
President and Chief Scientific Officer of Lark Sequencing Technologies, Inc., a
molecular biology services company, from 1989 to June 1993. Dr. Eastman holds a
M.S. from the University of Connecticut and received a M.Phil. degree and a
Ph.D. in human genetics and development from Columbia University College of
Physicians and Surgeons.
GREGORY G. LENNON, PH.D. has served as Vice President, Genomics Research
since September 1997. Prior to joining Gene Logic, Dr. Lennon was a senior
scientist of the Human Genome Center at Lawrence Livermore National Laboratory
and manager of the functional genomics research portfolio for the Department of
Energy's Joint Genome Institute from October 1991 to August 1997. Dr. Lennon is
a founder and the director of the I.M.A.G.E. (Integrated Molecular Analysis of
Gene Expression) Consortium funded by the Department of Energy. He was a
participant in both the Merck Gene Index project and the National Cancer
Institute's Cancer Genome Anatomy Project. Dr. Lennon holds a Ph.D. in genetics
from the University of Pennsylvania. He is an adviser to the National Cancer
Institute of the National Institutes of Health.
VICTOR M. MARKOWITZ, D.SC. has served as Vice President, Bioinformatics
Systems since September 1997. Prior to joining Gene Logic, Dr. Markowitz was a
staff scientist at Lawrence Berkeley National Laboratory from 1987 to August
1997, serving most recently as project leader in the Data Management Research
and Development Group. He is the principal architect of the Object Protocol
Model (OPM) software. Dr. Markowitz received his M.Sc. and D.Sc. in computer
science from Technion, the Israel Institute of Technology.
DANIEL R. PASSERI, J.D. has served as Vice President, Business Development
and Intellectual Property of the Company since March 1997. From March 1995 to
March 1997, he was Director of Technology Management for the Boehringer Mannheim
Group, responsible for the assessment and acquisition or licensing of new
biomedical technologies. From January 1992 to February 1995 he was Acting Chief,
Cellular Growth and Regulation Branch of the Office of Technology Transfer of
the National Institutes of Health and its Senior Licensing Specialist. He served
as a Patent Examiner in the biotechnology section of the USPTO. Mr. Passeri
holds a M.Sc. in biotechnology from the Imperial College of Science, Technology
and Medicine, University of London. He holds a J.D. from George Washington
University. He is registered
49
<PAGE>
to practice before the USPTO and in the State of Maryland and has been an
adjunct professor at George Washington University since 1995.
JULES BLAKE, PH.D. has served as a director of the Company since its
inception. From 1973 until his retirement in 1989, Dr. Blake served as Vice
President of Research and Development and Vice President, Corporate Scientific
Affairs, for Colgate-Palmolive, Inc., a consumer products company. Dr. Blake was
appointed as an Industrial Research Institute Fellow at the United States Office
of Science and Technology Policy, Executive Office of the President, where he
served until 1991. Dr. Blake serves on the boards of directors of the public
companies Martek Biosciences Corporation and ProCyte Corporation. Dr. Blake
holds a Ph.D in organic chemistry from the University of Pennsylvania.
CHARLES L. DIMMLER III has served as a director of the Company since May
1996. Since 1988, Mr. Dimmler has been a General Partner of Hambro International
Equity Partners, an equity investment firm, and is currently also the principal
investment officer of Cross Atlantic Partners Funds, an equity investment firm,
and an operating officer of Hambro Health International, Inc., an affiliate of
Hambros Bank Limited, a global merchant bank based in London. Mr. Dimmler serves
as a director of SunPharm, Inc., a public company, and various private
companies. He holds an honors degree from the University of California at Davis.
G. ANTHONY GORRY, PH.D. has served as a director of the Company since
January 1997. Since April 1992, Dr. Gorry has been Vice President for
Information Technology and Professor of Computer Science at Rice University. He
is the Chairman and a founder of The Forefront Group, Inc., a public information
technology company. From 1975 to April 1992, he served as Vice President for
Information Technology and Professor of Medical Informatics and Neuroscience at
Baylor College of Medicine, as well as Director of the W. M. Keck Center for
Computational Biology and Adjunct Professor of Computer Science at Rice
University. Dr. Gorry holds a M.S. in chemical engineering from the University
of California at Berkeley and a Ph.D. in computer science from Massachusetts
Institute of Technology. He is a fellow of the American College of Medical
Informatics and a member of the Institute of Medicine and of the National
Academy of Sciences.
JEFFREY D. SOLLENDER has served as a director of the Company since July
1997. Mr. Sollender is a founder of and adviser to Biotechvest L.P., a venture
capital investment firm formed in 1993. From 1994 through December 1995, Mr.
Sollender served as an adviser to Forward Ventures, a venture capital investment
firm. Mr. Sollender became a venture partner of Forward Ventures in 1996 and a
general partner in September 1997. Mr. Sollender co-founded Triangle
Pharmaceuticals, Inc., a biopharmaceutical company, in 1995, CombiChem Inc., a
combinatorial chemistry company, in 1994 and GenQuest, Inc., a functional
genomics company, in 1995. He served as Vice President of Operations and
Business Development for CombiChem Inc. and GenQuest, Inc. until January 1995
and February 1996, respectively. Mr. Sollender co-founded AriZeke
Pharmaceuticals, an oral drug delivery company, in 1997 and continues to serve
as Chairman and Chief Executive Officer of the company. Mr. Sollender received
his MBA from the University of Chicago Graduate School of Business.
COMMITTEES OF THE BOARD OF DIRECTORS
The Compensation Committee consists of Dr. Walton, Dr. Blake and Mr.
Dimmler. The Compensation Committee makes recommendations regarding the
Company's 1997 Equity Incentive Plan, Non-Employee Directors' Stock Option Plan
and Employee Stock Purchase Plan and determines salaries for the executive
officers and incentive compensation for employees and consultants of the
Company.
The Audit Committee consists of Dr. Blake and Mr. Dimmler. The Audit
Committee makes recommendations to the Board of Directors regarding the
selection of independent auditors, reviews the results and scope of the audit
and other services provided by the Company's independent auditors and reviews
and evaluates the Company's audit and control functions.
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<PAGE>
DIRECTOR COMPENSATION
The Company's non-employee directors who are not affiliated with
stockholders of the Company currently receive $6,000 per year for their
attendance at Board meetings and all directors are reimbursed for certain
expenses in connection with attendance at Board and committee meetings.
Non-employee directors receive automatic grants of options under the Company's
Non-employee Directors' Stock Option Plan as described below. See "--Equity
Incentive Plans."
COMPENSATION COMMITTEE INTERLOCKS AND INSIDER PARTICIPATION
No executive officer of the Company serves as a member of the board of
directors or compensation committee of any entity that has one or more executive
officers serving as a member of the Company's Board of Directors or Compensation
Committee. See "Certain Transactions" for a description of transactions between
the Company and entities affiliated with members of the Compensation Committee.
EXECUTIVE COMPENSATION
The following table sets forth summary information concerning compensation
paid by, or accrued for services rendered to, the Company during the fiscal year
ended December 31, 1996 to the Company's Chief Executive Officer and the two
other most highly compensated executive officers who earned in excess of
$100,000 in salary and bonus during the fiscal year ended December 31, 1996 (the
"Named Executive Officers").
SUMMARY COMPENSATION TABLE
<TABLE>
<CAPTION>
LONG-TERM
COMPENSATION
AWARDS
ANNUAL COMPENSATION -------------
------------------------------------ SECURITIES ALL OTHER
SALARY UNDERLYING COMPENSATION
NAME AND PRINCIPAL POSITION YEAR ($)(1) BONUS ($) OPTIONS(#) ($)
- -------------------------------------------------- --------- ------------ ----------- ------------- -------------
<S> <C> <C> <C> <C> <C>
Michael J. Brennan, M.D. Ph.D. ................... 1996 $ 200,000 $ 30,000(2) 245,000 --
President, Chief Executive Officer and
Director
Mark D. Gessler................................... 1996 95,363 40,000 25,000 --
Senior Vice President, Corporate
Development and Chief Financial
Officer
Richard E. Kouri, Ph.D. (3)....................... 1996 106,875 30,000 -- 90,000(4)
Senior Vice President and Chief
Technical Officer
</TABLE>
- ------------------------
(1) In accordance with the rules of the Securities and Exchange Commission (the
"Commission"), the compensation described in this table does not include
medical, group life insurance or other benefits received by the Named
Executive Officers which are available generally to all salaried employees
of the Company, and certain perquisites and other personal benefits received
by the Named Executive Officers which do not exceed the lesser of $50,000 or
10% of any such officer's salary and bonus disclosed in this table.
(2) Includes an amount that was assigned to a corporation of which Dr. Brennan
is the sole stockholder.
(3) Dr. Kouri resigned from the Company effective on October 15, 1996.
(4) Represents a $90,000 severance payment to Dr. Kouri in connection with his
resignation from the Company.
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<PAGE>
STOCK OPTION GRANTS
OPTION GRANTS IN LAST FISCAL YEAR
The following table sets forth, for the fiscal year ended December 31, 1996,
certain information regarding options granted to each of the Named Executive
Officers:
<TABLE>
<CAPTION>
INDIVIDUAL GRANTS
---------------------------------------------------------- POTENTIAL REALIZABLE
PERCENTAGE VALUE AT ASSUMED
NUMBER OF OF TOTAL ANNUAL RATES
SECURITIES OPTIONS OF STOCK PRICE
UNDERLYING GRANTED TO APPRECIATION
OPTIONS EMPLOYEES IN EXERCISE PRICE FOR OPTION TERM ($)(3)
GRANTED FISCAL PER SHARE EXPIRATION --------------------------
NAME (#) YEAR (%)(1) ($)(2) DATE 5% 10%
- ------------------------------------- ----------- --------------- --------------- ----------- ------------ ------------
<S> <C> <C> <C> <C> <C> <C>
Michael J. Brennan, M.D., Ph.D....... 100,000 20.5% $ 0.01 2/28/06 $ 1,790,784 $ 2,852,117
145,000 29.8 0.15 12/19/06 2,576,337 4,115,269
Mark D. Gessler...................... 25,000 5.1 0.15 12/19/06 444,196 709,529
Richard E. Kouri, Ph.D............... -- -- -- -- -- --
</TABLE>
- ------------------------
(1) Based on options to purchase 487,000 shares granted to employees in fiscal
1996, including the Named Executive Officers. The options were granted under
the Company's 1997 Equity Incentive Plan. Options granted under such plan
generally vest monthly over four years. The foregoing options accelerate
upon achievement of certain performance-based goals, including vesting of
80% of such options upon completion of this offering and the remaining 20%
180 days thereafter.
(2) Represents the fair market value of the underlying Common Stock as
determined by the Board of Directors on the date of grant.
(3) The potential realizable value is calculated based on the term of the option
at its time of grant (10 years) and the assumed initial public offering
price of $11.00. It is calculated assuming that the stock price on the date
of grant appreciates at the indicated annual rate, compounded annually for
the entire term of the option and that the option is exercised and sold on
the last day of its term for the appreciated stock price. These amounts
represent certain assumed rates of appreciation only, in accordance with the
rules of the Commission, and do not reflect the Company's estimate or
projection of future stock price performance. Actual gains, if any, are
dependent on the actual future performance of the Company's Common Stock.
AGGREGATED OPTION EXERCISES IN LAST FISCAL YEAR AND FISCAL YEAR-END VALUES
The following table sets forth, with respect to each of the Named Executive
Officers, information regarding the number and value of securities underlying
unexercised options held by the Named Executive Officers as of December 31,
1996.
<TABLE>
<CAPTION>
NUMBER OF SECURITIES
UNDERLYING UNEXERCISED VALUE OF UNEXERCISED IN-
OPTIONS AT THE MONEY OPTIONS AT
FISCAL YEAR-END (#) FISCAL YEAR-END ($)(1)
SHARES ACQUIRED VALUE ---------------------------- --------------------------
NAME ON EXERCISE(#) REALIZED($) EXERCISABLE UNEXERCISABLE EXERCISABLE UNEXERCISABLE
- ------------------------------------- --------------- ----------- ------------- ------------- ----------- -------------
<S> <C> <C> <C> <C> <C> <C>
Michael J. Brennan, M.D., Ph.D....... 100,000 $ 14,000 3,021 141,979 $ 32,778 $ 1,540,472
Mark D. Gessler...................... -- -- 521 24,479 5,653 265,597
Richard E. Kouri, Ph.D............... -- -- -- -- -- --
</TABLE>
- ------------------------
(1) Based on the assumed initial public offering price of $11.00 per share, less
the exercise price.
EMPLOYMENT AGREEMENTS
On December 1, 1995, Michael J. Brennan, the President, Chief Executive
Officer and a director and stockholder of the Company, entered into an
employment agreement with the Company. Dr. Brennan will be paid $200,000 in
salary for 1997 under such agreement. The employment agreement has a five-year
term and provides, among other things, for the payment to Dr. Brennan of annual
bonuses and the acceleration of certain unvested options upon achievement of
certain performance-based goals, including vesting of 80% of such options upon
completion of this offering and the remaining 20% 180 days thereafter. Of Dr.
Brennan's total outstanding options to purchase 538,962 shares, options to
purchase
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<PAGE>
131,000 shares will be exercisable upon completion of this offering. The
employment agreement also provides that Dr. Brennan will be offered the
opportunity to participate in any future equity financings on a pro rata basis,
provided that such right terminates upon the closing of this offering. Dr.
Brennan and the Company have also entered into an Equity Adjustment Agreement
whereby the Company agreed to pay Dr. Brennan a cash bonus upon the occurrence
of a change in control of the Company. The Equity Adjustment Agreement
terminates upon the closing of this offering.
On May 16, 1996, Mark D. Gessler, the Senior Vice President, Corporate
Development and Chief Financial Officer of the Company and a stockholder of the
Company, entered into an employment agreement with the Company. The employment
agreement has a four-year term and provides, among other things, for the payment
to Mr. Gessler of annual bonuses and the acceleration of certain unvested
options upon achievement of certain performance-based goals, including vesting
of 80% of such options upon completion of this offering and the remaining 20%
180 days thereafter. Of Mr. Gessler's total outstanding options to purchase
346,981 shares, options to purchase 140,000 shares will be exercisable upon
completion of this offering. Mr. Gessler will be paid $185,000 in salary for
1997 under such agreement.
EQUITY INCENTIVE PLANS
1997 EQUITY INCENTIVE PLAN
The Company adopted its 1996 Stock Plan in January 1996 and amended and
restated the 1996 Stock Plan in September 1997 as the 1997 Equity Incentive Plan
(the "Stock Plan"). An aggregate of 6,100,000 shares of the Company's Common
Stock have been reserved for issuance pursuant to the exercise of stock awards
granted to employees, directors and consultants under the Stock Plan. The Stock
Plan will terminate in September 2007, unless sooner terminated by the Board.
The Stock Plan permits the granting of options intended to qualify as
incentive stock options ("Incentive Stock Options") within the meaning of
Section 422 of the Internal Revenue Code of 1986, as amended (the "Code"), to
employees (including officers and employee directors), and options that do not
so qualify ("Nonstatutory Stock Options," and, together with Incentive Stock
Options, the "Options") to employees (including officers and employee directors)
and consultants (including non- employee directors). In addition, the Stock Plan
permits the granting of stock appreciation rights (SARs) appurtenant to or
independently of Options, as well as stock bonuses and rights to purchase
restricted stock (Options, SARs, stock bonuses and rights to purchase restricted
stock are hereinafter referred to as "Stock Awards"). No person is eligible to
be granted Options and SARs covering more than 700,000 shares of the Company's
Common Stock in any 12-month period.
The Stock Plan is administered by the Board or a committee appointed by the
Board. Subject to the limitations set forth in the Stock Plan, the Board has the
authority to select the persons to whom grants are to be made, to designate the
number of shares to be covered by each Stock Award, to determine whether an
Option is to be an Incentive Stock Option or a Nonstatutory Stock Option, to
establish vesting schedules, to specify the Option exercise price and the type
of consideration to be paid to the Company upon exercise and, subject to certain
restrictions, to specify other terms of Stock Awards.
The maximum term of Options granted under the Stock Plan is ten years. The
aggregate fair market value, determined at the time of grant, of the shares of
Common Stock with respect to which Incentive Stock Options are exercisable for
the first time by an optionee during any calendar year (under all such plans of
the Company and its affiliates) may not exceed $100,000. Options granted under
the Stock Plan generally are non-transferable and expire three months after the
termination of an optionee's service to the Company. In general, if an optionee
is permanently disabled or dies during his or her service to the Company, such
person's Option may be exercised up to 12 months following such disability and
up to 18 months following such death.
The exercise price of Options granted under the Stock Plan is determined by
the Board of Directors in accordance with the guidelines set forth in the Stock
Plan. The exercise price of an Incentive Stock Option cannot be less than 100%
of the fair market value of the Common Stock on the date of the grant. The
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<PAGE>
exercise price of a Nonstatutory Stock Option cannot be less than 85% of the
fair market value of the Common Stock on the date of grant. Options granted
under the Stock Plan vest at the rate specified in the option agreement. The
exercise price of Incentive Stock Options granted to any person who at the time
of grant owns stock representing more than 10% of the total combined voting
power of all classes of the Company's capital stock must be at least 110% of the
fair market value of such stock on the date of grant and the term of such
Incentive Stock Options cannot exceed five years.
Any stock bonuses or restricted stock purchase awards granted under the
Stock Plan will be in such form and will contain terms and conditions as the
Board deems appropriate. The purchase price under any restricted stock purchase
agreement will not be less than 85% of the fair market value of the Company's
Common Stock on the date of grant. Stock bonuses and restricted stock purchase
agreements awarded under the Stock Plan are generally non-transferable.
Pursuant to the Stock Plan, shares subject to Stock Awards that have expired
or otherwise terminated without having been exercised in full again become
available for the grant, but shares subject to exercised stock appreciation
rights will not again become available for the grant. The Board of Directors has
the authority to reprice outstanding Options and SARs and to offer optionees and
holders of SARs the opportunity to replace outstanding options and SARs with new
options or SARs for the same or a different number of shares.
Upon certain changes in control of the Company, all outstanding Stock Awards
under the Stock Plan must either be assumed or substituted by the surviving
entity. In the event the surviving entity determines not to assume or substitute
such Stock Awards, with respect to persons then performing services as
employees, directors or consultants, the time during which such Stock Awards may
be exercised will be accelerated and such Stock Awards terminated if not
exercised prior to such change in control. In the event that any person who was
providing services as an employee, director or consultant immediately prior to
the consummation of a change of control is terminated other than for cause
within 12 months following such change of control, any stock awards held by such
persons shall immediately become vested and exercisable or free from repurchase
rights.
As of September 30, 1997, the Company had issued 100,000 shares of Common
Stock pursuant to the exercise of purchase rights granted under the Stock Plan,
and had granted Incentive and Nonstatutory Stock Options to purchase an
aggregate of 2,716,881 shares of Common Stock. As of September 30, 1997,
3,334,887 shares of Common Stock remained available for future grants under the
Stock Plan.
NON-EMPLOYEE DIRECTORS' STOCK OPTION PLAN
In September 1997, the Company adopted a Non-employee Directors' Stock
Option Plan (the "Directors' Plan") to provide for the automatic grant of
options to purchase shares of Common Stock to non-employee directors of the
Company. The Directors' Plan is administered by the Board, unless the Board
delegates administration to a committee of disinterested directors.
The maximum number of shares of Common Stock that may be issued pursuant to
options granted under the Directors' Plan is 125,000. Pursuant to the terms of
the Directors' Plan: (i) each person who after the effective date of this
offering for the first time becomes a Non-employee Director automatically will
be granted, upon the date of his or her initial appointment or election to be a
Non-employee Director, a one-time option to purchase 30,000 shares of Common
Stock (the "Initial Options"); and (ii) on the date of each annual meeting of
the stockholders of the Company after the effective date of this offering (other
than any such annual meeting held in 1997), each person who is a Non-employee
Director following such annual meeting (other than a person who receives a grant
in accordance with (i) above on or during the three-month period preceding such
date) automatically will be granted an option to purchase 7,500 shares of Common
Stock (the "Annual Options").
No options granted under the Directors' Plan may be exercised after the
expiration of ten years from the date it was granted. The Initial Options
granted under the Directors' Plan vest on an annual basis over four years. The
Annual Options vest on the anniversary of the date of grant. The exercise price
of options under the Directors' Plan will equal 100% of the fair market value of
the Common Stock on the date of
54
<PAGE>
grant. Options granted under the Directors' Plan are generally non-transferable.
Unless otherwise terminated by the Board of Directors, the Directors' Plan
automatically terminates in September 2007. As of September 30, 1997, no options
to purchase shares of Common Stock had been granted under the Directors' Plan.
EMPLOYEE STOCK PURCHASE PLAN
In September 1997, the Company adopted an Employee Stock Purchase Plan (the
"Purchase Plan") covering an aggregate of 250,000 shares of Common Stock. The
Purchase Plan is intended to qualify as an employee stock purchase plan within
the meaning of Section 423 of the Code. Under the Purchase Plan, the Board may
authorize participation by eligible employees, including officers, in periodic
offerings following the commencement of the Purchase Plan. The initial offering
under the Purchase Plan will commence on the date of this Prospectus and
terminate on January 31, 2000.
Unless otherwise determined by the Board, employees are eligible to
participate in the Purchase Plan only if they are employed by the Company or a
subsidiary of the Company designated by the Board for at least 20 hours per week
and are customarily employed by the Company or a subsidiary of the Company
designated by the Board for at least five months per calendar year. Employees
who participate in an offering may have up to 15% of their earnings withheld
pursuant to the Purchase Plan. The amount withheld is then used to purchase
shares of the Common Stock on specified dates determined by the Board. The price
of Common Stock purchased under the Purchase Plan will be equal to 85% of the
lower of the fair market value of the Common Stock at the commencement date of
each offering period or the relevant purchase date. Employees may end their
participation in this offering at any time during this offering period, and
participation ends automatically on termination of employment with the Company.
In the event of a merger, reorganization, consolidation or liquidation
involving the Company, the Board has discretion to provide that each right to
purchase Common Stock will be assumed or an equivalent right substituted by the
successor corporation, or the Board may shorten this offering period and provide
for all sums collected by payroll deductions to be applied to purchase stock
immediately prior to such merger or other transaction. The Board has the
authority to amend or terminate the Purchase Plan, provided, however, that no
such action may adversely affect any outstanding rights to purchase Common
Stock.
401(K) PLAN
The Company has established a tax-qualified employee savings and retirement
plan (the "401(k) Plan"). The 401(k) Plan provides that each participant may
contribute between 2% and 15% of his or her pre-tax gross compensation (up to a
statutorily prescribed annual limit of $9,500 in 1997). Employees must be
twenty-one years old to participate and are eligible on the first day of the
quarter following six months as an employee of the Company. All amounts
contributed by employee participants and earnings on these contributions are
fully vested at all times. Employee participants may elect to invest their
contributions in various established funds.
LIMITATIONS OF DIRECTORS' AND EXECUTIVE OFFICERS' LIABILITY AND INDEMNIFICATION
The Company's Restated Certificate of Incorporation provides that directors
of the Company will not be personally liable to the Company or its stockholders
for monetary damages for any breach of fiduciary duty as a director, except to
the extent that such exemption from liability or limitation thereof is not
permitted by the Delaware General Corporation Law as currently in effect or as
the same is subsequently amended. Such limitation of liability does not apply to
liabilities arising under the federal securities laws and does not affect the
availability of equitable remedies such as injunctive relief or rescission.
The Company's Amended and Restated By-laws provide that the Company will
indemnify its directors and executive officers and may indemnify its other
officers, employees and agents to the fullest extent permitted by Delaware law.
The Company is also empowered under its Amended and Restated By-laws to enter
into indemnification contracts with its directors and officers and to purchase
insurance on behalf of any person it is required or permitted to indemnify.
Pursuant to this provision, the Company has entered into indemnification
agreements with each of its directors and executive officers.
55
<PAGE>
CERTAIN TRANSACTIONS
Between November 1994 and July 1997, the Company completed several equity
financings. The purchasers of the Company's stock included, among others, the
following affiliates of the Company's Directors.
<TABLE>
<CAPTION>
NUMBER OF SHARES OF
PURCHASER COMMON STOCK
- ------------------------------------------------------------------------- -------------------
<S> <C>
Biotechvest L.P. (1)..................................................... 333,334
Fruit of the Loom Senior Executive Officer Deferred
Compensation Trust (1)................................................. 333,333
Cross Atlantic Partners K/S (2).......................................... 880,233
Cross Atlantic Partners II K/S (2)....................................... 498,832
Cross Atlantic Partners III K/S (2)...................................... 173,334
Oxford Bioscience Partners (Adjunct) L.P. (3)............................ 138,952
Oxford Bioscience Partners (Bermuda) Limited Partnership (3)............. 276,119
Oxford Bioscience Partners L.P. (3)...................................... 995,282
Oxford Bioscience Management Partners (3)................................ 100,000
</TABLE>
- ------------------------
(1) Affiliated with Jeffrey D. Sollender, a Director.
(2) Affiliated with Charles L. Dimmler III, a Director.
(3) Affiliated with Alan G. Walton, a Director.
In February 1996, Dr. Kouri, formerly the Senior Vice President and Chief
Technical Officer of the Company, received 55,000 shares of Common Stock (the
"Shares") pursuant to his Employment Agreement. Pursuant to the terms of a Stock
Pledge Agreement, Dr. Kouri pledged the Shares as security for the Promissory
Note. Following Dr. Kouri's resignation from the Company on October 15, 1996,
the Promissory Note was canceled and the Company canceled the Shares effective
January 1, 1997.
To assist Mr. Gessler, the Company's Senior Vice President, Corporate
Development and Chief Financial Officer, with his relocation, the Company loaned
Mr. Gessler $50,000 in July 1996 pursuant to a Promissory Note. Pursuant to the
terms of a Stock Pledge Agreement, the Promissory Note is secured by certain
shares of Common Stock of the Company owned by Mr. Gessler. The Promissory Note
provides that the loan balance will be forgiven upon the completion of this
offering.
In March 1997, the Company loaned Dr. Eastman, the Company's Vice President,
Technology Management, $20,000, of which $11,000 remains outstanding. Such loan
is non-interest bearing and becomes due at the end of 1997.
The Company has entered employment agreements with each of its executive
officers. See "Management--Employment Agreements" for a description of the
employment agreements with Dr. Brennan and Mr. Gessler. The agreements with Dr.
Brennan, Mr. Gessler, Dr. Elliston, Dr. Eastman and Mr. Passeri provide, among
other things, for the acceleration of certain unvested options upon achievement
of certain performance-based goals (including 80% vesting upon completion of
this offering and the remaining 20% 180 days thereafter).
The Company has granted options to certain of its directors and executive
officers. The Company has also entered into an Indemnification Agreement with
each of its directors and executive officers.
The Company believes that all of the transactions set forth above were made
on terms no less favorable to the Company than could have been obtained from
unaffiliated third parties. All future transactions between the Company and its
officers, directors, principal stockholders and their affiliates will be
approved by a majority of the Board of Directors, including a majority of the
disinterested directors, and will continue to be on terms no less favorable to
the Company than could be obtained from unaffiliated third parties.
56
<PAGE>
PRINCIPAL STOCKHOLDERS
The following table sets forth certain information with respect to the
beneficial ownership of the Company's Common Stock as of September 30, 1997, and
as adjusted to reflect the sale of the shares of Common Stock offered hereby and
the sale of 272,727 shares of Common Stock to Japan Tobacco, by (i) each of the
Company's Named Executive Officers, (ii) each of the Company's directors, (iii)
each holder of more than 5% of the Company's Common Stock and (iv) all current
directors and executive officers as a group.
<TABLE>
<CAPTION>
PERCENTAGE OF SHARES
BENEFICIALLY OWNED (1)
SHARES ----------------------------
5% STOCKHOLDERS, DIRECTORS BENEFICIALLY BEFORE AFTER
AND NAMED EXECUTIVE OFFICERS OWNED (1) OFFERING OFFERING
- ----------------------------------------------------------------------------- ----------- ------------- -------------
<S> <C> <C> <C>
Alan G. Walton, Ph.D., D.Sc. (2)............................................. 1,565,353 15.4% 11.6%
Oxford Bioscience Partners
315 Post Road West
Westport, CT 06880
Oxford Bioscience Partners (3)............................................... 1,560,353 15.4 11.6
c/o Alan G. Walton, Ph.D., D.Sc.
315 Post Road West
Westport, CT 06880
Charles L. Dimmler III (4)................................................... 1,557,399 15.4 11.6
Hambro Health International, Inc.
650 Madison Avenue, 21st Floor
New York, NY 10022
Cross Atlantic Partners K/S (5).............................................. 1,552,399 15.4 11.6
c/o Charles L. Dimmler III
Hambro Health International, Inc.
650 Madison Avenue, 21st Floor
New York, NY 10022
New York Life Insurance Company.............................................. 676,767 6.7 5.1
c/o Mr. Dominique O. Semon
51 Madison Avenue
New York, NY 10010
Altamira Management Ltd. (6)................................................. 652,020 6.4 4.9
c/o Mr. Ian Ainsworth
250 Bloor Street West
Suite 300
Toronto M4W1E6
Canada
GIMV Investment Corporation.................................................. 526,465 5.2 3.9
Karel Oomsstraat 37, 2018
Antwerpen
Belgium
</TABLE>
57
<PAGE>
<TABLE>
<CAPTION>
PERCENTAGE OF SHARES
BENEFICIALLY OWNED (1)
SHARES ----------------------------
5% STOCKHOLDERS, DIRECTORS BENEFICIALLY BEFORE AFTER
AND NAMED EXECUTIVE OFFICERS OWNED (1) OFFERING OFFERING
- ----------------------------------------------------------------------------- ----------- ------------- -------------
<S> <C> <C> <C>
Michael J. Brennan, M.D., Ph.D. (7).......................................... 486,000 4.7 3.6
Gene Logic Inc.
10150 Columbia Road
Columbia, MD 21046
Mark D. Gessler (8).......................................................... 240,000 2.3 1.8
Jules Blake, Ph.D. (9)....................................................... 14,500 * *
G. Anthony Gorry, Ph.D. (10)................................................. 5,000 * *
Jeffrey D. Sollender (11).................................................... 2,500 * *
All directors and executive officers as a group (12 persons) (12)............ 4,979,221 46.0 35.3
</TABLE>
- ------------------------
* Represents beneficial ownership of less than 1%.
(1) Beneficial ownership is determined in accordance with the rules of the
Commission and generally includes voting or investment power with respect to
securities. Except as indicated by footnote, and subject to community
property laws where applicable, the persons named in the table above have
sole voting and investment power with respect to all shares of Common Stock
shown as beneficially owned by them. Percentage of beneficial ownership is
based on 10,109,650 shares of Common Stock outstanding as of September 30,
1997 and 13,382,377 shares of Common Stock outstanding after completion of
this offering.
(2) Includes an aggregate of 1,510,353 shares and warrants to purchase up to
50,000 shares held of record by Oxford Bioscience Partners, of which Dr.
Walton is a general partner, and by entities related thereto. Also includes
5,000 shares subject to options held by Dr. Walton exercisable within 60
days of September 30, 1997.
(3) Includes 100,000 shares held of record by Oxford Bioscience Management
Partners, 276,119 shares and warrants to purchase 10,859 shares held of
record by Oxford Bioscience Partners (Bermuda) Limited Partnership, 138,952
shares held of record by Oxford Bioscience Partners (Adjunct) L.P. and
warrants to purchase 39,141 shares held of record by Oxford Bioscience
Partners, L.P..
(4) Includes 880,233 shares held of record by Cross Atlantic Partners K/S,
498,832 shares held of record by Cross Atlantic Partners II K/S and 173,334
shares held of record by Cross Atlantic Partners III K/S. Also includes
5,000 shares subject to options held by Mr. Dimmler exercisable within 60
days of September 30, 1997. Mr. Dimmler is the Chief Investment Officer of
Cross Atlantic Partners.
(5) Includes 498,832 shares held of record by Cross Atlantic Partners II K/S and
173,334 shares held of record by Cross Atlantic Partners III K/S.
(6) Includes 90,909 shares held of record by Altamira Science & Technology Fund,
136,364 shares held of record by Altamira Pooled U.S. Equity Fund and
113,636 shares held of record by Altamira Special Growth Fund.
(7) Includes 100,000 shares held of record by the Brennan Family Limited
Partnership and 131,000 shares subject to options exercisable upon
completion of this offering.
(8) Includes 30,000 shares held of record by the Gessler Family Limited
Partnership and 140,000 shares subject to options exercisable upon
completion of this offering.
(9) Includes 14,500 shares subject to options exercisable within 60 days of
September 30, 1997.
(10) Includes 5,000 shares subject to options exercisable within 60 days of
September 30, 1997.
(11) Includes 2,500 shares subject to options held by Mr. Sollender exercisable
within 60 days of September 30, 1997.
(12) See footnotes (2), (4) and (7) through (11) above.
58
<PAGE>
DESCRIPTION OF CAPITAL STOCK
The authorized capital stock of the Company consists of 60,000,000 shares of
Common Stock, $.01 par value, and 10,000,000 shares of Preferred Stock, $.01 par
value.
COMMON STOCK
As of September 30, 1997, there were 10,109,650 shares of Common Stock
outstanding, after giving effect to the conversion of all outstanding shares of
Preferred Stock into 9,281,185 shares of Common Stock.
The holders of Common Stock are entitled to one vote per share on all
matters to be voted on by the stockholders. Subject to preferences that may be
applicable to any outstanding shares of Preferred Stock, holders of Common Stock
are entitled to receive ratably such dividends as may be declared by the Board
of Directors out of funds legally available therefor. In the event of a
liquidation, dissolution or winding up of the Company, holders of Common Stock
are entitled to share ratably in all assets remaining after payment of
liabilities and the liquidation preferences of any outstanding shares of
Preferred Stock. Holders of Common Stock have no preemptive, conversion,
subscription or other rights. There are no redemption or sinking fund provisions
applicable to the Common Stock. All outstanding shares of Common Stock are, and
all shares of Common Stock to be outstanding upon completion of this offering
will be, fully paid and nonassessable.
PREFERRED STOCK
Upon the closing of this offering, all outstanding shares of Preferred Stock
will be converted into 9,281,185 shares of Common Stock. See Note 9 of Notes to
Financial Statements for a description of the currently outstanding Preferred
Stock. Following the conversion, the Company's Restated Certificate of
Incorporation will be amended and restated to delete all references to such
shares of Preferred Stock. Under the Certificate of Incorporation, as amended
and restated upon the closing of this offering (the "Restated Certificate"), the
Board has the authority, without further action by stockholders, to issue up to
10,000,000 shares of Preferred Stock in one or more series and to fix the
rights, preferences, privileges, qualifications and restrictions granted to or
imposed upon such Preferred Stock, including dividend rights, conversion rights,
voting rights, rights and terms of redemption, liquidation preference and
sinking fund terms, any or all of which may be greater than the rights of the
Common Stock. The issuance of Preferred Stock could adversely affect the voting
power of holders of Common Stock and reduce the likelihood that such holders
will receive dividend payments and payments upon liquidation. Such issuance
could have the effect of decreasing the market price of the Common Stock. The
issuance of Preferred Stock could have the effect of delaying, deterring or
preventing a change in control of the Company. The Company has no present plans
to issue any additional shares of Preferred Stock.
WARRANTS
As of September 30, 1997, there were warrants outstanding to purchase an
aggregate of 162,576 shares of the Company's Common Stock at a weighted average
exercise price of $3.10 per share. In August 1995, the Company issued warrants
to purchase an aggregate of 50,000 shares of Common Stock in connection with an
equity financing. Such warrants are exercisable for $1.60 per share and expire
August 31, 2005. In March 1997, the Company issued a warrant to purchase 25,758
shares of Common Stock at an exercise price of $2.20 per share with an
expiration date of December 31, 2002 in connection with an equipment loan
agreement. Such loan agreement provides for the grant of additional warrants in
the event the Company draws down on the loan. Pursuant to such provision, in
September 1997 the Company issued an additional warrant to purchase 4,293 shares
of Common Stock at an exercise price of $2.20 per share with an expiration date
of December 31, 2002. In April 1997, in connection with the establishment of
capital lease facilities, the Company issued a warrant to purchase 13,636 shares
of Common Stock at an
59
<PAGE>
exercise price of $2.20 per share. Such warrant expires November 2002. In August
1997, in connection with Company's facilities lease, the Company issued a
warrant to purchase 20,000 shares of Common Stock at an exercise price of $5.40.
Such warrant will expire upon the completion of this offering. The Company
issued a warrant to purchase 48,889 shares of its Common Stock at an exercise
price of $4.50 per share to Hambrecht & Quist LLC for services related to the
Company's most recent preferred stock financing which closed on July 15, 1997.
Such warrant expires upon completion of this offering.
REGISTRATION RIGHTS
After this offering, the holders of 9,281,185 shares of Common Stock and the
holders of warrants to purchase 30,051 shares of Common Stock will be entitled
to certain rights with respect to the registration of such shares under the
Securities Act, pursuant to an Amended and Restated Investor Rights Agreement
dated July 15, 1997 (the "Investor Rights Agreement"). Under the terms of the
Investor Rights Agreement, if the Company proposes to register any of its
securities under the Securities Act, either for its own account or for the
account of other security holders exercising registration rights, such holders
are entitled to notice of such registration and are entitled, subject to certain
limitations, to include shares therein. Commencing with the date that is three
months after this offering, the holders may also require the Company to file a
registration statement under the Securities Act with respect to their shares on
two occasions, and the Company is required to use its best efforts to effect
such registration. Furthermore, the holders may require the Company to register
their shares on Form S-3 when such form becomes available to the Company.
Generally, the Company is required to bear all registration expenses incurred in
connection with any such registrations, but not including any underwriting
discounts and selling commissions. These rights are subject to certain
conditions and limitations, among them the right of the underwriters of an
offering to limit the number of shares included in such registration.
DELAWARE ANTI-TAKEOVER LAW AND CERTAIN CHARTER PROVISIONS
The Company is governed by the provisions of Section 203 of the Delaware
Law. In general, Section 203 prohibits a public Delaware corporation from
engaging in a "business combination" with an "interested stockholder" for a
period of three years after the date of the transaction in which the person
became an interested stockholder, unless the business combination is approved in
a prescribed manner. A "business combination" includes mergers, asset sales or
other transactions resulting in a financial benefit to the stockholder. An
"interested stockholder" is a person who, together with affiliates and
associates, owns (or within three years, did own) 15% or more of the
corporation's voting stock. The existence of this provision would be expected to
have anti-takeover effects with respect to transactions not approved in advance
by the Board of Directors, such as discouraging takeover attempts that might
result in a premium over the market price of the Common Stock.
The Company's Restated Certificate provides for a Board of Directors that is
divided into three Classes. The Directors in Class I hold office until the first
annual meeting of stockholders following this offering, the Directors in Class
II hold office until the second annual meeting of stockholders following this
offering and the Directors in Class III hold office until the third annual
meeting of stockholders following this offering, (or, in each case, until their
successors are duly elected and qualified or until their earlier resignation,
removal from office or death), and, after each such election, the Directors in
each such class will then serve in succeeding terms of three years and until
their successors are duly elected and qualified. The classification system of
electing Directors may tend to discourage a third party from making a tender
offer or otherwise attempting to obtain control of the Company and may maintain
the incumbency of the Board of Directors, as the classification of the Board of
Directors generally increases the difficulty of replacing a majority of the
directors.
The Company's Restated Certificate provides further that any action required
or permitted to be taken by stockholders of the Company must be effected at a
duly called annual or special meeting of stockholders and may not be effected by
any consent in writing. The Company's Restated Certificate also
60
<PAGE>
specifies that the authorized number of directors may be changed only by
resolution of the Board of Directors. In addition, the Company's Amended and
Restated By-laws provide that special meetings of the stockholders of the
Company may be called only by the Chairman of the Board, the President of the
Company or by the Board of Directors pursuant to a resolution adopted by a
majority of the total number of authorized directors. These and other provisions
contained in the Restated Certificate and the Company's Amended and Restated
By-laws could delay or make more difficult certain types of transactions
involving an actual or potential change in control of the Company or its
management (including transactions in which stockholders might otherwise receive
a premium for their shares over then current prices) and may limit the ability
of stockholders to remove current management of the Company or approve
transactions that stockholders may deem to be in their best interests and,
therefore, could adversely affect the price of the Company's Common Stock.
TRANSFER AGENT AND REGISTRAR
The transfer agent and registrar for the Company's Common Stock is Chase
Mellon Shareholder Services.
SHARES ELIGIBLE FOR FUTURE SALE
Prior to this offering, there has been no public market for the Common Stock
of the Company. Future sales of substantial amounts of Common Stock in the
public market could adversely affect prevailing market prices. Furthermore,
since only a limited number of shares will be available for sale shortly after
the offering because of certain contractual and legal restrictions on resale
described below, sales of substantial amounts of Common Stock of the Company in
the public market after the restrictions lapse could adversely affect the
prevailing market price and the ability of the Company to raise equity capital
in the future.
Upon completion of the offering, the Company will have 13,382,377 shares of
Common Stock outstanding, assuming no exercise of currently outstanding options.
Of these shares, the 3,000,000 shares sold in this offering (plus any additional
shares sold upon exercise of the Underwriters' over-allotment option) will be
freely transferable without restriction under the Securities Act, unless they
are held by "affiliates" of the Company as that term is used under the
Securities Act and the regulations promulgated thereunder ("Affiliates"). The
remaining 10,382,377 shares of Common Stock held by existing stockholders are
"restricted securities" as that term is defined in Rule 144 of the Securities
Act (the "Restricted Shares"). Restricted Shares may be sold in the public
market only if registered or if they qualify for an exemption from registration
under Rule 144 or Rule 701 under the Securities Act. As a result of contractual
restrictions and the provisions of Rules 144 and 701, additional shares will be
available for sale in the public market as follows: (i) no Restricted Shares
will be eligible for immediate sale on the date of this Prospectus; (ii)
approximately 5,732 Restricted Shares will be eligible for sale 90 days after
the date of this Prospectus; (iii) approximately 5,609,475 Restricted Shares
will be eligible for sale 180 days after the effective date of this offering
upon expiration of lock-up agreements and upon expiration of their respective
holding periods under Rule 144; and (iv) the remainder of the Restricted Shares
will be eligible for sale from time to time thereafter upon expiration of their
respective holding periods under Rule 144. In addition, 1,192,918 shares
issuable upon exercise of vested stock options will become eligible for sale 180
days after the effective date of this offering upon expiration of lock-up
agreements. The holders of 9,281,185 shares of Common Stock and the holders of
warrants to purchase 30,051 shares of Common Stock have the right in certain
circumstances to require the Company to register their shares under the
Securities Act for resale to the public beginning three months after the
effective date of this offering. If such holders, by exercising their demand
registration rights, cause a large number of shares to be registered and sold in
the public market, such sales could have an adverse effect on the market price
for the Company's Common Stock. If the Company were required to include in a
Company-initiated registration shares held by such holders pursuant to the
exercise of their piggyback registration rights, such sales may
61
<PAGE>
have an adverse effect on the Company's ability to raise needed capital. In
addition, the Company expects to file a registration statement on Form S-8
registering a total of approximately 6,134,268 shares of Common Stock subject to
outstanding stock options or reserved for issuance under the Company's equity
incentive plans. Such registration statement is expected to be filed and to
become effective 180 days following the effective date of this offering. Shares
registered under such registration statement will, subject to Rule 144 volume
limitations applicable to Affiliates, be available for sale in the open market,
unless such shares are subject to vesting restrictions with the Company or the
lock-up agreements described above.
In general, under Rule 144 as currently in effect, beginning 90 days after
the effective date of the offering, an Affiliate of the Company, or person (or
persons whose shares are aggregated) who has beneficially owned restricted
shares (as defined under Rule 144) for at least one year is entitled to sell
within any three-month period a number of shares that does not exceed the
greater of (i) one percent of the then outstanding shares of the Company's
Common Stock or (ii) the average weekly trading volume of the Company's Common
Stock in the Nasdaq National Market during the four calendar weeks immediately
preceding the date on which notice of the sale is filed with the Commission.
Sales pursuant to Rule 144 are subject to certain requirements relating to the
manner of sale, notice, and the availability of current public information about
the Company. A person (or persons whose shares are aggregated) who was not an
Affiliate of the Company at any time during the 90 days immediately preceding
the sale and who has beneficially owned restricted shares for at least two years
is entitled to sell such shares under Rule 144(k) without regard to the
limitations described above.
An employee, officer or director of or consultant to the Company who
purchased or was awarded shares or options to purchase shares pursuant to a
written compensatory plan or contract is entitled to rely on the resale
provisions of Rule 701 under the Securities Act, which permits Affiliates and
non-Affiliates to sell their Rule 701 shares without having to comply with Rule
144's holding period restrictions, in each case commencing 90 days after the
date of this Prospectus. In addition, non-Affiliates may sell Rule 701 shares
without complying with the public information, volume and notice provisions of
Rule 144.
62
<PAGE>
UNDERWRITING
The Underwriters named below (the "Underwriters"), acting through their
representatives,
BancAmerica Robertson Stephens, Hambrecht & Quist LLC and UBS Securities LLC
(the "Representatives"), have severally agreed with the Company, subject to the
terms and conditions of the Underwriting Agreement, to purchase from the Company
the number of shares of Common Stock set forth opposite their respective names
below. The Underwriters are committed to purchase and pay for all such shares if
any are purchased.
<TABLE>
<CAPTION>
NUMBER OF
UNDERWRITER SHARES
- -------------------------------------------------------------------------------- ------------
<S> <C>
BancAmerica Robertson Stephens..................................................
Hambrecht & Quist LLC...........................................................
UBS Securities LLC..............................................................
------------
Total....................................................................... 3,000,000
------------
------------
</TABLE>
The Company has been advised by the Representatives that the Underwriters
propose to offer the shares of Common Stock to the public at the initial public
offering price set forth on the cover page of this Prospectus and to certain
dealers at such price, less a concession not in excess of $ per share,
of which $ may be reallowed to other dealers. After the initial public
offering, the public offering price, concession and reallowance to dealers may
be reduced by the Representatives. No such reduction shall change the amount of
proceeds to be received by the Company as set forth on the cover page of this
Prospectus.
The Company has granted to the Underwriters an option, exercisable during
the 30-day period after the date of this Prospectus, to purchase up to 450,000
additional shares of Common Stock at the same price per share as the Company
will receive for the 3,000,000 shares that the Underwriters have agreed to
purchase. To the extent that the Underwriters exercise such option, each of the
Underwriters will have a firm commitment to purchase approximately the same
percentage of such additional shares that the number of shares of Common Stock
to be purchased by it shown in the above table represents as a percentage of the
3,000,000 shares offered hereby. If purchased, such additional shares will be
sold by the Underwriters on the same terms as those on which the 3,000,000
shares are being sold. The Company will be obligated, pursuant to the option, to
sell shares to the extent the option is exercised. The Underwriters may exercise
such option only to cover over-allotments made in connection with the sale of
shares of Common Stock offered hereby.
The Underwriting Agreement contains covenants of indemnity between the
Underwriters and the Company against certain civil liabilities, including
liabilities under the Securities Act and liabilities arising from breaches of
representations and warranties contained in the Underwriting Agreement.
Each officer and director of the Company and certain stockholders together
holding approximately 10,326,645 shares of Common Stock (including Japan
Tobacco) have agreed in writing with the Representatives (the "Lock-Up
Agreements") that, until 180 days after the Registration Statement is declared
effective by the Commission, subject to certain limited exceptions, they will
not, directly or indirectly, sell, offer, contract to sell, pledge, grant any
option to purchase or otherwise dispose of any shares of Common Stock, any
options or warrants to purchase any shares of Common Stock, or any securities
convertible into or exchangeable for, or any other rights to purchase or
acquire, Common Stock owned directly by them or acquired by them after the date
of the Lock-Up Agreements, or which may be deemed to be beneficially owned by
them, without the prior written consent of BancAmerica Robertson Stephens.
Approximately 5,609,475 of such shares will be eligible for immediate public
sale following expiration of the lock-up period pursuant to Rule 144.
BancAmerica Robertson Stephens may, in its sole discretion and at any time
without notice, release all or any portion of the securities subject to the
Lock-Up Agreements. In addition, the Company has agreed that, until 180 days
after the Registration Statement is declared effective by the
63
<PAGE>
Commission, the Company will not, without the prior written consent of
BancAmerica Robertson Stephens, subject to certain limited exceptions, sell,
offer, contract to sell, pledge, grant any option to purchase or otherwise
dispose of any shares of Common Stock, any options or warrants to purchase any
shares of Common Stock, or any securities convertible into or exchangeable for,
or any other rights to purchase or acquire, shares of Common Stock, other than
the Company's sale of shares in this offering and the sale of shares to Japan
Tobacco, the issuance of Common Stock upon the exercise of the outstanding
warrants or options, or the Company's grant of options and issuance of stock
under existing employee stock option or stock purchase plans. See "Shares
Eligible for Future Sale."
The Underwriters do not intend to confirm sales to any account over which
they exercise discretionary authority.
Prior to this offering, there has been no public market for the Common Stock
of the Company. Consequently, the initial public offering price for the Common
Stock offered hereby will be determined through negotiations among the Company
and the Representatives. Among the factors to be considered in such negotiations
include prevailing market conditions, certain financial information of the
Company, market valuations of other companies that the Company and the
Representatives believe to be comparable to the Company, estimates of the
business potential of the Company, the present stage of the Company's
development and other factors deemed relevant.
The Representatives have advised the Company that, pursuant to Regulation M
under the Securities Act, certain persons participating in the offering may
engage in transactions, including stabilizing bids, syndicate covering
transactions or the imposition of penalty bids which may have the effect of
stabilizing or maintaining the market price of the Common Stock at a level above
that which might otherwise prevail in the open market. A "stabilizing bid" is a
bid for or the purchase of the Common Stock. A "syndicate covering transaction"
is the bid for or the purchase of the Common Stock on behalf of the Underwriters
to reduce a short position incurred by the Underwriters in connection with the
offering. A "penalty bid" is an arrangement permitting the Representatives to
reclaim the selling concession otherwise accruing to an Underwriter or syndicate
member in connection with the offering if the Common Stock originally sold by
such Underwriter or syndicate member is purchased by the Representatives in a
syndicate covering transaction and has therefore not been effectively placed by
such Underwriter or syndicate member. The Representatives have advised the
Company that such transactions may be effected on the Nasdaq National Market or
otherwise and, if commenced, may be discontinued at any time.
H&Q Gene Logic Investors, LP, a California limited partnership and a related
party to Hambrecht & Quist LLC, one of the Representatives, owns 111,111 shares
of the Company's Series C Preferred Stock, $.01 par value per share, which will
automatically convert into 111,111 shares of the Company's Common Stock upon the
closing of this offering. In addition, Hambrecht & Quist LLC owns a warrant
which is exercisable for the purchase of 48,889 shares of the Company's Series C
Preferred Stock at an exercise price of $4.50 per share. Hambrecht & Quist LLC
received the warrant from the Company, in addition to a cash payment, as
compensation for Hambrecht & Quist LLC's services as placement agent in
connection with the Company's Series C Preferred Stock financing, which closed
on July 15, 1997. The warrant will expire upon the closing of this offering.
LEGAL MATTERS
The validity of the shares of Common Stock offered hereby will be passed
upon for the Company by Cooley Godward LLP, San Diego, California. Certain legal
matters will be passed upon for the Underwriters by Testa, Hurwitz & Thibeault,
LLP, Boston, Massachusetts.
EXPERTS
The financial statements of the Company as of December 31, 1995 and 1996 and
September 30, 1997 and for the period from September 22, 1994 (inception)
through December 31, 1994, the years ended
64
<PAGE>
December 31, 1995 and 1996 and the nine months ended September 30, 1997 included
in this Prospectus and elsewhere in the Registration Statement have been audited
by Arthur Andersen LLP, independent public accountants, as indicated in their
reports with respect thereto, and are included in reliance upon the authority of
said firm as experts in giving said reports.
ADDITIONAL INFORMATION
The Company has filed with the Commission a Registration Statement on Form
S-1 under the Securities Act, with respect to the Common Stock offered hereby.
As permitted by the rules and regulations of the Commission, this Prospectus,
which is a part of the Registration Statement, omits certain information,
exhibits, schedules and undertakings set forth in the Registration Statement.
For further information pertaining to the Company and the Common Stock offered
hereby, reference is made to such Registration Statement and the exhibits and
schedules thereto. Statements contained in this Prospectus as to the contents or
provisions of any contract or other document referred to herein are not
necessarily complete, and in each instance reference is made to the copy of such
contract or other document filed as an exhibit to the Registration Statement,
each such statement being qualified in all respects by such reference. A copy of
the Registration Statement may be inspected without charge at the office of the
Commission at 450 Fifth Street, N.W., Washington, D.C. 20549, and at the
Commission's regional offices located at the Northwestern Atrium Center, 500
West Madison Street, Suite 1400, Chicago, Illinois 60661 and Seven World Trade
Center, 13th Floor, New York, New York 10048. Copies of all or any part of the
Registration Statement may be obtained from such offices upon the payment of the
fees prescribed by the Commission. In addition, registration statements and
certain other filings made with the Commission through its Electronic Data
Gathering, Analysis and Retrieval ("EDGAR") system are publicly available
through the Commission's web site on the Internet's World Wide Web, located at
http://www.sec.gov. The Registration Statement, including all exhibits thereto
and amendments thereof, has been filed with the Commission through EDGAR.
65
<PAGE>
GENE LOGIC INC.
INDEX TO FINANCIAL STATEMENTS
<TABLE>
<CAPTION>
PAGE
-----
<S> <C>
Report of Independent Public Accountants................................................................... F-2
Balance Sheets as of December 31, 1995 and 1996 and September 30, 1997..................................... F-3
Statements of Operations for the period from September 22, 1994 (inception) through December 31, 1994, the
years ended December 31, 1995 and 1996 and the nine months ended September 30, 1996 (unaudited) and
1997..................................................................................................... F-4
Statements of Stockholders' Equity for the period from September 22, 1994 (inception) through December 31,
1994, the years ended December 31, 1995 and 1996 and the nine months ended September 30, 1997............ F-5
Statements of Cash Flows for the period from September 22, 1994 (inception) through December 31, 1994, the
years ended December 31, 1995 and 1996 and the nine months ended September 30, 1996 (unaudited) and
1997..................................................................................................... F-6
Notes to Financial Statements.............................................................................. F-7
</TABLE>
F-1
<PAGE>
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
To the Board of Directors of
Gene Logic Inc.:
We have audited the accompanying balance sheets of Gene Logic Inc. (a
Delaware corporation) as of December 31, 1995 and 1996 and September 30, 1997,
and the related statements of operations, stockholders' equity and cash flows
for the period from September 22, 1994 (inception) through December 31, 1994,
the years ended December 31, 1995 and 1996 and the nine months ended September
30, 1997. These financial statements are the responsibility of the Company's
management. Our responsibility is to express an opinion on these financial
statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly,
in all material respects, the financial position of Gene Logic Inc. as of
December 31, 1995 and 1996 and September 30, 1997, and the results of its
operations and its cash flows for the period from September 22, 1994 (inception)
through December 31, 1994, the years ended December 31, 1995 and 1996 and the
nine months ended September 30, 1997, in conformity with generally accepted
accounting principles.
/s/ Arthur Andersen LLP
Baltimore, Maryland
October 17, 1997
F-2
<PAGE>
GENE LOGIC INC.
BALANCE SHEETS
<TABLE>
<CAPTION>
PRO FORMA
STOCKHOLDERS'
DECEMBER 31, EQUITY AS OF
---------------------------- SEPTEMBER 30, SEPTEMBER 30,
1995 1996 1997 1997
------------- ------------- ------------- -------------
<S> <C> <C> <C> <C>
(UNAUDITED)
ASSETS
Current Assets:
Cash and cash equivalents.......................... $ 348,478 $ 1,137,130 $21,993,266
Marketable securities available for sale........... -- 4,534,353 149,582
Due from strategic partner......................... -- -- 945,833
Prepaid expenses................................... -- 37,424 590,265
Other current assets............................... 1,100 67,078 299,702
------------- ------------- -------------
Total Current Assets............................. 349,578 5,775,985 23,978,648
Property and Equipment, net.......................... 11,666 1,757,240 3,161,690
Notes Receivable from Employees...................... -- 102,896 65,215
Intangibles and Other Assets, net.................... 62,444 182,931 415,333
------------- ------------- -------------
Total Assets..................................... $ 423,688 $ 7,819,052 $27,620,886
------------- ------------- -------------
------------- ------------- -------------
LIABILITIES AND STOCKHOLDERS' EQUITY
Current Liabilities:
Accounts payable................................... $ 17,294 $ 91,074 $ 395,200
Accrued expenses................................... 86,249 997,710 1,510,757
Current portion of capital lease obligation........ -- 106,195 112,736
Current portion of long-term debt.................. -- -- 244,764
Deferred revenue................................... -- -- 2,938,889
------------- ------------- -------------
Total Current Liabilities........................ 103,543 1,194,979 5,202,346
Deferred Revenue..................................... -- -- 333,332
Capital Lease Obligation............................. -- 339,699 254,310
Long-Term Debt....................................... -- -- 743,917
Other Noncurrent Liabilities......................... -- -- 193,326
------------- ------------- -------------
Total Liabilities................................ 103,543 1,534,678 6,727,231
------------- ------------- -------------
Commitments and Contingencies
Series A Convertible Preferred Stock, $.01 par value;
333,333 shares authorized; 333,333 shares issued
and outstanding as of December 31, 1995 and 1996
and September 30, 1997, liquidation preference of
$1.50 per share.................................... 500,000 500,000 500,000 --
Series A-1 Convertible Preferred Stock, $.01 par
value; 462,500 shares authorized; 412,500 shares
issued and outstanding as of December 31, 1995 and
1996 and September 30, 1997, liquidation preference
of $1.60 per share................................. 652,825 653,722 654,395 --
Series B Convertible Preferred Stock, $.01 par value;
4,154,167 shares authorized; 4,090,909 shares
issued and outstanding as of December 31, 1996 and
September 30, 1997, liquidation preference of $2.20
per share.......................................... -- 9,317,611 9,872,539 --
Series C Convertible Preferred Stock, $.01 par value;
4,600,000 shares authorized, 4,444,443 shares
issued and outstanding as of September 30, 1997,
liquidation preference of $4.50 per share.......... -- -- 19,480,942 --
Stockholders' Equity:
Common stock, $.01 par value; 17,000,000 shares
authorized; 280,000, 692,733 and 828,465 shares
issued and outstanding as of December 31, 1995
and 1996 and September 30, 1997, respectively.... 2,800 6,927 8,284 101,096
Additional paid-in capital......................... -- 13,450 4,001,158 34,416,222
Deferred compensation on stock options, net........ -- -- (3,828,963) (3,828,963)
Unrealized losses on marketable securities......... -- (13,215) (1,303) (1,303)
Accumulated deficit................................ (835,480) (4,194,121) (9,793,397) (9,793,397)
------------- ------------- ------------- -------------
Total Stockholders' Equity....................... (832,680) (4,186,959) (9,614,221) 20,893,655
------------- ------------- ------------- -------------
Total Liabilities and Stockholders' Equity....... $ 423,688 $ 7,819,052 $27,620,886
------------- ------------- -------------
------------- ------------- -------------
</TABLE>
The accompanying notes are an integral part of these balance sheets.
F-3
<PAGE>
GENE LOGIC INC.
STATEMENTS OF OPERATIONS
<TABLE>
<CAPTION>
PERIOD FROM
SEPTEMBER 22, 1994
(INCEPTION) THROUGH YEAR ENDED NINE MONTHS ENDED
DECEMBER 31, DECEMBER 31, SEPTEMBER 30,
--------------------- ------------------------ --------------------------
1994 1995 1996 1996 1997
--------------------- ---------- ------------ ------------ ------------
<S> <C> <C> <C> <C> <C>
(UNAUDITED)
Revenues............................. $ -- $ -- $ -- $ -- $ 773,612
-------- ---------- ------------ ------------ ------------
Expenses:
Research and development........... 44,438 485,688 1,741,469 981,842 3,338,143
General and administrative......... 45,966 258,491 1,344,961 791,249 2,380,310
-------- ---------- ------------ ------------ ------------
Total expenses................. 90,404 744,179 3,086,430 1,773,091 5,718,453
-------- ---------- ------------ ------------ ------------
Loss from operations........... (90,404) (744,179) (3,086,430) (1,773,091) (4,944,841)
Interest Income, net................. -- -- 221,302 110,848 354,960
-------- ---------- ------------ ------------ ------------
Loss before income tax
expense...................... (90,404) (744,179) (2,865,128) (1,662,243) (4,589,881)
Income Tax Expense................... -- -- -- -- 100,000
-------- ---------- ------------ ------------ ------------
Net loss....................... (90,404) (744,179) (2,865,128) (1,662,243) (4,689,881)
Accretion of Mandatory Redemption
Value of Preferred Stock........... -- 897 493,513 324,313 909,395
-------- ---------- ------------ ------------ ------------
Net loss attributable to common
shareholders..................... $ (90,404) $ (745,076) $ (3,358,641) $ (1,986,556) $ (5,599,276)
-------- ---------- ------------ ------------ ------------
-------- ---------- ------------ ------------ ------------
Pro Forma Net Loss Per Common
Share.............................. $ (0.31) $ (0.46)
------------ ------------
------------ ------------
Shares Used in Computing Pro Forma
Net Loss Per Common Share.......... 9,197,660 10,268,598
------------ ------------
------------ ------------
</TABLE>
The accompanying notes are an integral part of these statements.
F-4
<PAGE>
GENE LOGIC INC.
STATEMENTS OF STOCKHOLDERS' EQUITY
<TABLE>
<CAPTION>
STOCKHOLDERS' EQUITY
---------------------------------------------------------------
PREFERRED COMMON
STOCK STOCK UNREALIZED
----------------------- -------------------- ADDITIONAL LOSSES ON
NUMBER NUMBER PAR PAID-IN DEFERRED MARKETABLE
OF SHARES AMOUNT OF SHARES VALUE CAPITAL COMPENSATION SECURITIES
---------- ----------- --------- --------- ---------- ------------- --------------
<S> <C> <C> <C> <C> <C> <C> <C>
Inception (September 22,
1994)....................... -- $ -- -- $ -- $ -- $ -- $ --
Issuance of common stock.... -- -- 100,000 1,000 -- -- --
Issuance of Series A
Convertible Preferred
Stock..................... 266,666 400,000 -- -- -- -- --
Net Loss.................... -- -- -- -- -- -- --
---------- ----------- --------- --------- ---------- ------------- --------------
Balance at December 31,
1994........................ 266,666 400,000 100,000 1,000 -- -- --
Issuance of common stock.... -- -- 180,000 1,800 -- -- --
Issuance of Series A
Convertible Preferred
Stock..................... 66,667 100,000 -- -- -- -- --
Issuance of Series A-1
Convertible Preferred
Stock, net of issuance
costs..................... 412,500 651,928 -- -- -- -- --
Accretion of mandatory
redemption value of
preferred stock........... -- 897 -- -- -- -- --
Net Loss.................... -- -- -- -- -- -- --
---------- ----------- --------- --------- ---------- ------------- --------------
Balance at December 31,
1995........................ 745,833 1,152,825 280,000 2,800 -- -- --
Issuance of common stock.... -- -- 412,733 4,127 13,450 -- --
Issuance of Series B
Convertible Preferred
Stock, net of issuance
costs..................... 4,090,909 8,824,995 -- -- -- -- --
Accretion of mandatory
redemption value of
preferred stock........... -- 493,513 -- -- -- -- --
Net change in unrealized
losses from marketable
securities................ -- -- -- -- -- -- (13,215)
Net Loss.................... -- -- -- -- -- -- --
---------- ----------- --------- --------- ---------- ------------- --------------
Balance at December 31,
1996........................ 4,836,742 10,471,333 692,733 6,927 13,450 -- (13,215)
Issuance of Series C
Convertible Preferred
Stock, net of issuance
costs..................... 4,444,443 19,127,148 -- -- -- -- --
Cancellation of common
stock..................... -- -- (55,000) (550) (7,700) -- --
Stock issued in connection
with exercise of stock
options................... -- -- 140,732 1,407 19,695 -- --
Issuance of common stock.... -- -- 50,000 500 7,000 -- --
Issuance of warrants........ -- -- -- -- 42,563 -- --
Accretion of mandatory
redemption value of
preferred stock........... -- 909,395 -- -- -- -- --
Net change in unrealized
losses from marketable
securities................ -- -- -- -- -- -- 11,912
Deferred compensation from
stock options............. -- -- -- -- 3,926,150 (3,926,150) --
Amortization of deferred
compensation.............. -- -- -- -- -- 97,187 --
Net Loss.................... -- -- -- -- -- -- --
---------- ----------- --------- --------- ---------- ------------- --------------
Balance at September 30,
1997........................ 9,281,185 30,507,876 828,465 8,284 4,001,158 (3,828,963) (1,303)
Pro forma conversion of
Preferred Stock to Common
Stock (unaudited)........... (9,281,185) (30,507,876) 9,281,185 92,812 30,415,064 -- --
---------- ----------- --------- --------- ---------- ------------- --------------
Pro forma balance at
September 30, 1997
(unaudited)................. -- $ -- 10,109,650 $ 101,096 $34,416,222 $(3,828,963) $ (1,303)
---------- ----------- --------- --------- ---------- ------------- --------------
---------- ----------- --------- --------- ---------- ------------- --------------
<CAPTION>
ACCUMULATED
DEFICIT
------------
<S> <C>
Inception (September 22,
1994)....................... $ --
Issuance of common stock.... --
Issuance of Series A
Convertible Preferred
Stock..................... --
Net Loss.................... (90,404)
------------
Balance at December 31,
1994........................ (90,404)
Issuance of common stock.... --
Issuance of Series A
Convertible Preferred
Stock..................... --
Issuance of Series A-1
Convertible Preferred
Stock, net of issuance
costs..................... --
Accretion of mandatory
redemption value of
preferred stock........... (897)
Net Loss.................... (744,179)
------------
Balance at December 31,
1995........................ (835,480)
Issuance of common stock.... --
Issuance of Series B
Convertible Preferred
Stock, net of issuance
costs..................... --
Accretion of mandatory
redemption value of
preferred stock........... (493,513)
Net change in unrealized
losses from marketable
securities................ --
Net Loss.................... (2,865,128)
------------
Balance at December 31,
1996........................ (4,194,121)
Issuance of Series C
Convertible Preferred
Stock, net of issuance
costs..................... --
Cancellation of common
stock..................... --
Stock issued in connection
with exercise of stock
options................... --
Issuance of common stock.... --
Issuance of warrants........ --
Accretion of mandatory
redemption value of
preferred stock........... (909,395)
Net change in unrealized
losses from marketable
securities................ --
Deferred compensation from
stock options............. --
Amortization of deferred
compensation.............. --
Net Loss.................... (4,689,881)
------------
Balance at September 30,
1997........................ (9,793,397)
Pro forma conversion of
Preferred Stock to Common
Stock (unaudited)........... --
------------
Pro forma balance at
September 30, 1997
(unaudited)................. $(9,793,397)
------------
------------
</TABLE>
The accompanying notes are an integral part of these statements.
F-5
<PAGE>
GENE LOGIC INC.
STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
PERIOD FROM
SEPTEMBER 22, 1994
(INCEPTION)
THROUGH YEAR ENDED NINE MONTHS ENDED
DECEMBER 31, DECEMBER 31, SEPTEMBER 30,
------------------ --------------------- ------------------------
1994 1995 1996 1996 1997
------------------ --------- ---------- ----------- -----------
<S> <C> <C> <C> <C> <C>
(UNAUDITED)
Cash Flows From Operating Activities:
Net loss................................. $ (90,404) $(744,179) $(2,865,128) ($1,662,243) $(4,689,881)
Adjustments to reconcile net loss to net
cash flows from operating activities:
Depreciation and amortization.......... -- 1,395 67,602 14,133 383,433
Write off of deferred financing fee.... -- -- 2,500 -- --
Cancellation of note receiveable....... -- -- -- -- 43,258
Amount due under research agreement.... -- -- -- -- 47,500
Amortization of deferred
compensation......................... -- -- -- -- 97,187
Changes in operating assets and
liabilities:
Due from strategic partner............. -- -- -- -- (945,833)
Prepaid expenses....................... (11,445) 11,445 (37,424) (132,944) (552,841)
Other current assets................... (1,000) (100) (65,978) (38,655) (232,624)
Intangibles and other assets........... -- (63,139) (125,810) (61,999) (275,437)
Accounts payable....................... -- 17,294 73,780 147,005 304,126
Accrued expenses....................... -- 86,249 911,461 (85,960) 516,594
Deferred revenue....................... -- -- -- -- 3,272,221
Other noncurrent liabilities........... -- -- -- -- 232,342
---------- --------- ---------- ----------- -----------
Net Cash Flows From Operating
Activities......................... (102,849) (691,035) (2,038,997) (1,820,663) (1,799,955)
---------- --------- ---------- ----------- -----------
Cash Flows From Investing Activities:
Purchases of property and equipment...... -- (12,366) (1,339,207) (324,560) (1,784,856)
Increase in notes receivable from
employees.............................. -- -- (102,896) (106,111) (13,827)
Purchase of marketable securities
available for sale..................... -- -- (4,547,568) (4,518,611) --
Proceeds from sale and maturity of
marketable securities available for
sale................................... -- -- -- -- 4,396,683
---------- --------- ---------- ----------- -----------
Net Cash Flows From Investing
Activities......................... -- (12,366) (5,989,671) (4,949,282) 2,598,000
---------- --------- ---------- ----------- -----------
Cash Flows From Financing Activities:
Proceeds from issuance of common stock... 1,000 1,800 17,577 14,827 21,110
Proceeds from issuance of preferred
stock.................................. 400,000 760,000 9,000,000 8,000,000 20,000,000
Payments for stock issuance costs........ -- (8,072) (175,005) (163,974) (872,852)
Proceeds from equipment loan............. -- -- -- -- 1,084,362
Repayments of capital lease obligation
and equipment loan..................... -- -- (25,252) -- (174,529)
---------- --------- ---------- ----------- -----------
Net Cash Flows From Financing
Activities......................... 401,000 753,728 8,817,320 7,850,853 20,058,091
---------- --------- ---------- ----------- -----------
Net Increase in Cash and Cash
Equivalents.............................. 298,151 50,327 788,652 1,080,908 20,856,136
Cash and Cash Equivalents, beginning of
period................................... -- 298,151 348,478 348,478 1,137,130
---------- --------- ---------- ----------- -----------
Cash and Cash Equivalents, end of period... $ 298,151 $ 348,478 $1,137,130 $1,429,386 $21,993,266
---------- --------- ---------- ----------- -----------
---------- --------- ---------- ----------- -----------
Supplemental Disclosure:
Interest expense paid.................... $ -- $ -- $ 9,024 $ -- $ 64,191
---------- --------- ---------- ----------- -----------
---------- --------- ---------- ----------- -----------
Non-Cash Transactions:
Equipment acquired under capital
leases................................. $ -- $ -- $ 471,146 $ 471,146 $ --
---------- --------- ---------- ----------- -----------
---------- --------- ---------- ----------- -----------
Issuance of warrants to lessor........... $ -- $ -- $ -- $ -- $ 42,563
---------- --------- ---------- ----------- -----------
---------- --------- ---------- ----------- -----------
</TABLE>
The accompanying notes are an integral part of these statements.
F-6
<PAGE>
GENE LOGIC INC.
NOTES TO FINANCIAL STATEMENTS
DECEMBER 31, 1995 AND 1996
AND SEPTEMBER 30, 1996 AND 1997
NOTE 1. ORGANIZATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES:
ORGANIZATION AND BUSINESS
Gene Logic Inc. (the "Company"), formerly Senatics Corporation, was
incorporated on September 22, 1994, to commercialize technologies for the
discovery of disease-associated genes for the development of therapeutic and
diagnostic products. The Company was previously in the development stage and has
yet to generate any significant revenues.
UNAUDITED INTERIM FINANCIAL INFORMATION
The interim financial statements of the Company for the nine months ended
September 30, 1996, included herein have been prepared by the Company, without
audit, pursuant to the rules and regulations of the Securities and Exchange
Commission. Certain information and footnote disclosures normally included in
financial statements prepared in accordance with generally accepted accounting
principles have been condensed or omitted pursuant to such rules and
regulations. In the opinion of management, the accompanying unaudited interim
financial statements reflect all adjustments, consisting only of normal
recurring adjustments, necessary to present fairly the financial position of the
Company at September 30, 1996, and the results of its operations and cash flows
for the nine months ended September 30, 1996.
USE OF ESTIMATES
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets, liabilities, revenues
and expenses in the financial statements and in the disclosures of contingent
assets and liabilities. While actual results could differ from those estimates,
management believes that actual results will not be materially different from
amounts provided in the accompanying financial statements.
NEW PRONOUNCEMENTS
In March 1997, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards No. 128, "Earnings Per Share" ("SFAS No. 128").
SFAS No. 128 simplifies the standards for computing earnings per share
previously found in Accounting Principles Board Opinion No. 15, "Earnings Per
Share" ("APB Opinion No. 15"). It replaces the presentation of primary EPS with
a presentation of basic EPS and requires a reconciliation of the numerator and
denominator of the basic EPS calculation to the numerator and denominator of the
diluted EPS calculation. Basic EPS excludes dilution and is computed by dividing
income available to common stockholders by the weighted average number of common
shares outstanding for the period. Diluted EPS is computed similarly to primary
EPS pursuant to APB Opinion No. 15.
SFAS No. 128 is effective for interim periods and fiscal years ending after
December 15, 1997, and early adoption is not permitted. When adopted, it will
require restatement of prior years' EPS. The adoption of SFAS No. 128 will have
no impact on the Company.
In June 1997, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards No. 130, "Reporting Comprehensive Income" ("SFAS
No. 130"). SFAS No. 130 sets standards for reporting and presentation of
comprehensive income and its components in financial statements. SFAS No. 130 is
effective for fiscal years beginning after December 15, 1997, and early adoption
is permitted. When adopted,
F-7
<PAGE>
GENE LOGIC INC.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
NOTE 1. ORGANIZATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED):
it will require reclassification adjustments and changes in presentation for all
prior periods shown. The impact of the adoption of SFAS No. 130 on the Company
has not been determined.
CASH AND CASH EQUIVALENTS
Cash and cash equivalents are defined as liquid investments with original
maturities of 90 days or less that are readily convertible into cash. All other
investments are reported as marketable securities available for sale. Cash and
cash equivalents as of December 31, 1995 and 1996 and September 30, 1997, are
comprised of:
<TABLE>
<CAPTION>
DECEMBER 31,
------------------------ SEPTEMBER 30,
1995 1996 1997
---------- ------------ -------------
<S> <C> <C> <C>
Cash..................................................................... $ 348,478 $ 117,407 $ 13,425
Money market mutual fund................................................. -- 1,019,723 21,979,841
---------- ------------ -------------
$ 348,478 $ 1,137,130 $21,993,266
---------- ------------ -------------
---------- ------------ -------------
</TABLE>
MARKETABLE SECURITIES AVAILABLE FOR SALE
All marketable securities are classified as available for sale. Available
for sale securities are carried at fair value, with unrealized gains and losses
reported as a separate component of stockholders' equity. Realized gains and
losses and declines in value judged to be other than temporary for available for
sale securities are included in other income.
PROPERTY AND EQUIPMENT
Property and equipment is carried at cost, less accumulated depreciation.
Depreciation is computed using the straight-line method over the estimated
useful lives of the assets as follows:
<TABLE>
<S> <C>
Furniture and fixtures............................................ 10 years
Computers and office equipment.................................... 5 years
Lab equipment..................................................... 5 years
</TABLE>
Equipment under capital leases and leasehold improvements are depreciated
and amortized over their useful lives, or the term of the lease, whichever is
shorter.
INTANGIBLES AND OTHER ASSETS
Other assets consists primarily of organization costs, patent costs,
trademarks and licenses. These amounts are being amortized over periods of five
to seventeen years. Accumulated amortization relating to other assets was $695,
$3,518 and $6,545 as of December 31, 1995 and 1996, and September 30, 1997,
respectively. The Company's success is heavily dependent upon its proprietary
technologies. The Company depends upon a combination of patents, trade secrets,
copyright and trademark laws, license agreements, nondisclosure and other
contractual provisions and various other security measures to protect its
technology rights.
RESEARCH AND DEVELOPMENT
Research and development costs are charged to operations when incurred.
F-8
<PAGE>
GENE LOGIC INC.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
NOTE 1. ORGANIZATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED):
REVENUE RECOGNITION
The Company recognizes revenue from research and development support and
technology and database access fees as they are earned under the terms of the
agreement. Revenue is deferred for fees received before they are earned.
Revenues related to the achievement of certain milestones are recognized when
earned.
INCOME TAXES
The Company accounts for income taxes under the provisions of Statement of
Financial Accounting Standards No. 109, "Accounting for Income Taxes" ("SFAS No.
109"). Under the asset and liability method of SFAS No. 109, deferred tax assets
and liabilities are recognized for the future tax consequences attributable to
differences between the financial statement carrying amounts of existing assets
and liabilities and their respective tax bases and net operating loss and tax
credit carryforwards. Deferred tax assets and liabilities are measured using
enacted tax rates expected to apply to taxable income in the years in which
those temporary differences are expected to be recovered or settled. Under SFAS
No. 109, the effect on deferred tax assets and liabilities of a change in tax
rates is recognized in operations in the period that includes the enactment
date.
STOCK OPTION PLANS
Prior to January 1, 1996, the Company's policy was to account for its stock
options plans in accordance with the provisions of Accounting Principles Board
Opinion No. 25, "Accounting for Stock Issued to Employees" ("APB Opinion No.
25"), and related interpretations. As such, compensation expense is recorded on
the date of grant only if the current fair value of the underlying stock exceeds
the exercise price. On January 1, 1996, the Company adopted Statement of
Financial Accounting Standards No. 123, "Accounting for Stock-Based
Compensation" ("SFAS No. 123"), which permits entities to recognize as expense
over the vesting period the fair value of all stock-based awards on the date of
grant. Alternatively, SFAS No. 123 also allows entities to continue to apply the
provisions of APB Opinion No. 25 and provide pro forma net earnings and pro
forma earnings per share disclosures for employee stock option grants made in
1995 and future years as if the fair-value based method defined in SFAS No. 123
had been applied. The Company elected to continue to apply the provisions of APB
Opinion No. 25 and provide the pro forma disclosure provisions of SFAS No. 123.
The Company uses the Black-Scholes option pricing model to estimate the fair
value of options and warrants granted.
PRO FORMA NET LOSS PER COMMON SHARE
Pro forma net loss per common share is computed using the weighted average
number of shares of common stock outstanding giving effect to the conversion of
convertible preferred shares that will automatically convert upon completion of
the Company's initial public offering (using the if-converted method) from the
original date of issuance. Common equivalent shares from stock options and
warrants are excluded from the computation for all periods as their effect is
antidulutive, except that, pursuant to the Securities and Exchange Commission
Staff Accounting Bulletins, common and common equivalent shares issued during
the 12-month period prior to the initial filing of the proposed offering at
prices below the assumed public offering price have been included in the
calculation as if they were outstanding for all periods presented.
The conversion of preferred stock will significantly reduce the net loss per
common share, decreasing the relevance of historical net loss per common share
information. As a result, historical net loss per common share is not shown.
F-9
<PAGE>
GENE LOGIC INC.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
NOTE 2. MARKETABLE SECURITIES:
The following is a summary of the Company's investment portfolio as of
December 31, 1995 and 1996 and September 30, 1997:
<TABLE>
<CAPTION>
GROSS
AMORTIZED UNREALIZED
COST LOSSES FAIR VALUE
------------ ----------- ------------
<S> <C> <C> <C>
December 31, 1995
Unit Investment Trust................................................... $ -- $ -- $ --
Government Securities................................................... -- -- --
------------ ----------- ------------
Total................................................................. $ -- $ -- $ --
------------ ----------- ------------
------------ ----------- ------------
December 31, 1996
Unit Investment Trust................................................... $ 2,483,352 $ (13,215) $ 2,470,137
Government Securities................................................... 2,064,216 -- 2,064,216
------------ ----------- ------------
Total................................................................. $ 4,547,568 $ (13,215) $ 4,534,353
------------ ----------- ------------
------------ ----------- ------------
September 30, 1997
Unit Investment Trust................................................... $ 150,885 $ (1,303) $ 149,582
Government Securities................................................... -- -- --
------------ ----------- ------------
Total................................................................. $ 150,885 $ (1,303) $ 149,582
------------ ----------- ------------
------------ ----------- ------------
</TABLE>
All marketable securities mature within one year or have no stated maturity.
As of December 31, 1995 and 1996 and September 30, 1997, all of the Company's
investments were classified as current as the Company may not hold its
investments until maturity in order to take advantage of market conditions.
During the nine months ended September 30, 1997, a portion of the Unit
Investment Trust was sold for total proceeds of $2,357,044, resulting in
realized losses of $11,912.
NOTE 3. PROPERTY AND EQUIPMENT:
Property and equipment includes the following as of December 31, 1995 and
1996 and September 30, 1997:
<TABLE>
<CAPTION>
DECEMBER 31,
----------------------- SEPTEMBER 30,
1995 1996 1997
--------- ------------ -------------
<S> <C> <C> <C>
Furniture and fixtures............................... $ -- $ 105,061 $ 145,130
Computers and office equipment....................... -- 276,912 1,634,372
Lab equipment........................................ 12,366 932,479 1,315,446
Lab equipment under capital lease.................... -- 471,146 471,146
Leasehold improvements............................... -- 37,121 41,481
--------- ------------ -------------
12,366 1,822,719 3,607,575
Less--Accumulated depreciation....................... (700) (65,479) (445,885)
--------- ------------ -------------
Property and Equipment, net.......................... $ 11,666 $ 1,757,240 $ 3,161,690
--------- ------------ -------------
--------- ------------ -------------
</TABLE>
Depreciation expense was $0, $700, $64,779, $10,805, and $380,406 for the
period from September 22, 1994 (inception) through December 31, 1994, and the
years ended December 31, 1995 and 1996, and for the nine months ended September
30, 1996 and 1997, respectively.
F-10
<PAGE>
GENE LOGIC INC.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
NOTE 4. ACCRUED EXPENSES:
Accrued expenses consists of the following as of December 31, 1995 and 1996,
and September 30, 1997:
<TABLE>
<CAPTION>
DECEMBER 31,
------------------------ SEPTEMBER 30,
1995 1996 1997
--------- ------------- -------------
<S> <C> <C> <C>
Consulting........................................... $ 68,155 $ -- $ 72,681
Property additions................................... -- 877,962 751,446
Professional fees.................................... 18,094 56,039 350,673
Payroll taxes and benefits........................... -- 63,709 173,546
Other................................................ -- -- 162,411
--------- ------------- -------------
Total............................................ $ 86,249 $ 997,710 $ 1,510,757
--------- ------------- -------------
--------- ------------- -------------
</TABLE>
NOTE 5. LICENSE ARRANGEMENTS:
The proprietary rights and technical information covered by various patent
applications have been licensed by the Company from third parties. These
licenses will continue for the life of the respective patent or until terminated
by either party. The license costs are being amortized over the useful life of
the related patents. The agreements call for the payment of royalties over the
life of the patents or a shorter life if no patents are issued.
NOTE 6. STRATEGIC ALLIANCES:
During May 1997, the Company entered into a strategic alliance with Procter
& Gamble Pharmaceuticals Inc., a division of Procter & Gamble Company ("Procter
& Gamble") for the discovery of drug targets in the field of heart failure. In
connection with the agreement, the Company received technology access fees and
research and development support of $3 million. Revenue from this initial
payment is being recognized ratably over the 18 month initial phase of the
agreement of which approximately $667,000 has been recognized as revenue during
the nine months ended September 30, 1997. Payments by Procter & Gamble to the
Company in the form of committed technology access fees and research funding
will total a minimum of $10.1 million if the research program continues for its
4 1/2 year term and the Company performs its research obligations under the
agreement. Procter & Gamble will be obligated to make additional payments to the
Company for the achievement of specified target discovery and related product
development and associated regulatory milestones. Procter & Gamble will also pay
the Company royalties on worldwide net sales of all products that may result
from the alliance. Procter & Gamble also has the option to expand the alliance
to include two additional fields upon terms, including committed research
funding, identical to those covering the initial program in heart failure.
During September 1997, the Company entered into a strategic alliance with
Japan Tobacco Inc. ("Japan Tobacco") for discovery of drug targets and drug
leads in the field of renal disease. Payments by Japan Tobacco to the Company in
the form of committed technology access fees and research funding will total a
minimum of $15.0 million if the research program continues for its five year
term and the Company performs its research obligations under the agreement.
During the nine months ended September 30, 1997, the Company has recognized
approximately $107,000 of revenue under the alliance. In addition, Japan Tobacco
will also make a $3 million investment in common stock of the Company at the
time of an initial public offering by the Company, provided that an offering
closes within two years of the agreement date. Japan Tobacco will be obligated
to make additional payments to the Company for the achievement of specified
target discovery and related product development and associated regulatory
milestones. Japan Tobacco will also pay the Company royalties on worldwide net
sales of all products that may result from targets discovered pursuant to the
alliance. Japan Tobacco also has the option to expand the alliance to include
two other fields upon terms, including committed research funding, identical to
those covering the initial program in renal disease.
F-11
<PAGE>
GENE LOGIC INC.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
NOTE 6. STRATEGIC ALLIANCES (CONTINUED):
The Company's strategy for developing and commercializing pharmaceutical
products based on its target discoveries depends on the formation of strategic
alliances with pharmaceutical companies. The Company has established two such
alliances, both in 1997. There can be no assurance that the Company will be able
to establish additional strategic alliances or that any alliances established
will be successful.
NOTE 7. INCOME TAXES:
The actual income tax expense for the period from September 22, 1994
(inception) to December 31, 1994, and the years ended December 31, 1995 and 1996
and the nine months ended September 30, 1996 and 1997, is different from the
amount computed by applying the statutory federal income tax rates to losses
before income tax expense. The reconciliation of these differences is as
follows:
<TABLE>
<CAPTION>
PERIOD FROM
SEPTEMBER 22, 1994 YEAR ENDED NINE MONTHS ENDED
(INCEPTION) DECEMBER 31, SEPTEMBER 30,
THROUGH ---------------------- ----------------------
DECEMBER 31, 1994 1995 1996 1996 1997
------------------ --------- ----------- --------- -----------
<S> <C> <C> <C> <C> <C>
(UNAUDITED)
Tax benefit at statutory
rate................... $ (30,737) $(253,021) $ (977,518) $(626,507) $(1,540,264)
State income taxes, net
of federal income tax
effect................. (4,177) (34,381) (132,827) (85,131) (209,285)
Other.................... (4,420) 9,799 (49,813) -- (14,646)
Increase in valuation
allowance.............. 39,334 277,603 1,160,158 711,638 1,864,195
-------- --------- ----------- --------- -----------
Income tax expense....... $ -- $ -- $ -- $ -- $ 100,000
-------- --------- ----------- --------- -----------
-------- --------- ----------- --------- -----------
</TABLE>
The tax effect of cumulative temporary differences at December 31, 1995 and
1996 and September 30, 1997, follow:
<TABLE>
<CAPTION>
DECEMBER 31,
------------------------- SEPTEMBER 30,
1995 1996 1997
---------- ------------- -------------
<S> <C> <C> <C>
Deferred Tax Assets:
Japanese withholding............................. $ -- $ -- $ 100,000
Tax carryforwards................................ -- 1,128,927 3,039,250
Start-up costs................................... 316,937 403,889 335,304
Accrued vacation................................. -- 7,457 32,437
---------- ------------- -------------
316,937 1,540,273 3,506,991
Less: Valuation allowance........................ (316,937) (1,477,095) (3,341,290)
---------- ------------- -------------
Net deferred tax asset......................... $ -- $ 63,178 $ 165,701
---------- ------------- -------------
---------- ------------- -------------
Deferred Tax Liabilities:
Depreciation..................................... $ -- $ 51,380 $ 112,532
Prepaid expenses................................. -- 2,046 13,169
Capital leases................................... -- 9,752 40,000
---------- ------------- -------------
Net deferred tax liabilities................... $ -- $ 63,178 $ 165,701
---------- ------------- -------------
---------- ------------- -------------
</TABLE>
F-12
<PAGE>
GENE LOGIC INC.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
NOTE 7. INCOME TAXES (CONTINUED):
Net operating loss carryforwards for income tax purposes are approximately
$7,726,000, as of September 30, 1997. The Company also has research and
development tax credit carryforwards of approximately $56,000 as of December 31,
1996. The carryforwards, if not utilized, will expire in increments through
2011. Utilization of the net operating losses and credits may be subject to an
annual limitation, due to the ownership change limitations provided by the
Internal Revenue Code of 1986.
NOTE 8. LONG-TERM DEBT:
Long-term debt at September 30, 1997, consists of the following:
<TABLE>
<S> <C>
Equipment loan.................................................. $ 988,681
Less--Current portion........................................... (244,764)
---------
Total long-term debt............................................ $ 743,917
---------
---------
</TABLE>
As of September 30, 1997, principal payments on long-term debt for the next
five years are as follows:
<TABLE>
<S> <C>
Three months ending December 31,
1997.............................. $ 59,149
Year ending December 31, 1998....... 250,312
Year ending December 31, 1999....... 273,795
Year ending December 31, 2000....... 299,480
Year ending December 31, 2001....... 105,945
---------
$ 988,681
---------
---------
</TABLE>
In March 1997, the Company entered into a loan agreement for the purchase of
laboratory and computer equipment. The Company may borrow up to $1.5 million,
bearing interest at 9.0%. In April 1997, the Company borrowed $1,084,362 under
this agreement. The loan will be repaid in 48 equal monthly installments. The
Company has granted the lender a security interest, collateralized by all of the
equipment and fixtures acquired under the loan. In conjunction with the
agreement, the Company granted warrants to the lender to purchase 30,051 shares
of the Company's Series B Convertible Preferred stock at an exercise price of
$2.20 per share.
NOTE 9. CONVERTIBLE PREFERRED STOCK:
Four series of mandatory redeemable preferred stock have been issued--Series
A Convertible Preferred stock ("Series A"), Series A-1 Convertible Preferred
stock ("Series A-1"), Series B Convertible Preferred stock ("Series B") and
Series C Convertible Preferred stock ("Series C"). Each holder of common and
preferred stock is entitled to one vote for each share held.
During 1994, the Company sold 266,666 shares of Series A stock for $400,000.
During 1995, the Company sold 66,667 shares of Series A stock for $100,000
and 412,500 shares of Series A-1 stock for $660,000. Warrants to purchase an
additional 50,000 shares of Series A-1 stock at an exercise price of $1.60 per
share were issued and expires August 2005.
During 1996, the Company sold 4,090,909 shares of Series B stock for
$9,000,000.
During July 1997, the Company sold 4,444,443 shares of Series C Convertible
Preferred Stock for net proceeds of approximately $19.1 million. The Company
also agreed to issue warrants for an additional 48,889
F-13
<PAGE>
GENE LOGIC INC.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
NOTE 9. CONVERTIBLE PREFERRED STOCK (CONTINUED):
shares of Series C stock at an exercise price of $4.50. The fair value of these
warants, approximately $118,000, has been recorded as Series C stock in the
accompanying balance sheet.
The preferred stock is convertible into an equal number of shares of common
stock at the option of the holder, with certain additional antidilutive
protection provided to the holder. Conversion is mandatory upon the closing of
an underwritten public offering that meets certain minimum conditions as to
offering price and net proceeds under the Securities Act of 1933. At the option
of a majority of the holders of outstanding preferred stock, the Company shall
redeem all preferred stock on March 31, 2002, 2003 and 2004, at a rate of
33-1/3%, 50% and 100%, respectively, and at a price of $1.50 per share of Series
A, $1.60 per share of Series A-1, $2.20 per share of Series B and $4.50 per
share of Series C, plus any declared, accrued or unpaid dividends of Series A
and Series A-1 and any accrued or unpaid dividends of Series B and Series C
whether declared or undeclared. If funds are insufficient to redeem all
outstanding shares, the Company will redeem as many shares as funds are legally
available to redeem on a pro-rata basis among all preferred stockholders. The
difference between the redemption value of the preferred stock and its carrying
value is being accreted through a charge to retained earnings over the period
until redemption.
With the approval of the holders of 66 2/3% of the outstanding shares of
preferred stock, the Company can declare or pay dividends in the amount of
$0.120, $0.128, $0.176 and $0.360 per share of Series A, Series A-1, Series B
and Series C preferred stock outstanding, respectively. Upon liquidation, Series
A, Series A-1, Series B and Series C stockholders will receive $1.50, $1.60,
$2.20 and $4.50 per share plus any accrued or unpaid dividends, whether or not
declared, respectively, prior to any other distributions.
NOTE 10. STOCKHOLDERS' EQUITY:
The Company is authorized to issue 17,000,000 shares of common stock and
9,550,000 shares of preferred stock as of September 30, 1997.
In October 1996, an officer of the Company resigned. In January 1997, in
connection with the resignation, the 55,000 shares of the Company's common stock
held by the officer were canceled in satisfaction of the $50,000 note receivable
and accrued interest obligation from the officer to the Company (see Note 14).
NOTE 11. COMMITMENTS AND CONTINGENCIES:
OPERATING LEASE
During October 1997, the Company renegotiated its current lease of
laboratory and office space under an agreement which expires February 28, 1998,
with an option to continue on a month-to-month basis with 60 days written notice
to terminate. The Company intends to renew on a month-to-month basis until the
relocation to the new facility is complete. In addition, the Company entered
into an operating sublease for office space in Berkeley, California. The lease
term is for 22 months with monthly rent payments of $9,158.
During August 1997, the Company entered into an operating lease for new
laboratory and office space. The Company is responsible for the design and
renovation of an existing facility owned by the lessor. These costs will be
funded by the lessor while the responsibility for performance and liability
during construction remains with the Company. The lease term is ten years with
monthly payments of $89,211 plus 3% annual inflation; however, monthly payments
could increase if construction costs exceed a certain amount. The lease also
requires the Company to pay for building operating costs. In addition to future
minimum lease payments, the Company has issued a warrant to purchase 20,000
shares of common stock at an exercise price of $5.40 per share in connection
with the lease. The fair value of the warrants is being recorded as rent expense
over the term of the lease. Such warrant will expire upon the completion of the
Company's initial public offering (see Note 15).
F-14
<PAGE>
GENE LOGIC INC.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
NOTE 11. COMMITMENTS AND CONTINGENCIES (CONTINUED):
Future minimum lease payments on these operating leases areas follows:
<TABLE>
<S> <C>
Three months ending December 31, 1997.......................... $ 237,929
Year ending December 31, 1998.................................. 1,278,919
Year ending December 31, 1999.................................. 1,169,516
Year ending December 31, 2000.................................. 1,138,572
Year ending December 31, 2001.................................. 1,172,729
Year ending December 31, 2002 and thereafter................... 7,693,371
----------
$12,691,036
----------
----------
</TABLE>
Rent expense for the period from September 22, 1994 (inception) through
December 31, 1994, the years ended December 31, 1995 and 1996, and the nine
months ended September 30, 1996 and 1997, were $0, $0, $238,930, $168,619 and
$218,758, respectively.
CAPITAL LEASE
During 1996, the Company entered into a capital lease to purchase equipment
for $471,146. Accumulated amortization for this equipment was $29,447 and
$88,343 at December 31, 1996 and September 30, 1997, respectively. Payments
during the year ended December 31, 1996 and the nine months ended September 30,
1997, totaled $25,252 and $102,825, respectively. Future minimum lease payments
are as follows:
<TABLE>
<S> <C>
Three months ending December 31, 1997................ $ 34,275
Year ending December 31, 1998........................ 137,104
Year ending December 31, 1999........................ 137,104
Year ending December 31, 2000........................ 102,827
---------
Total minimum lease payments..................... 411,310
Less: Amounts representing imputed interest.......... (44,264)
---------
Present value of net minimum payments............ 367,046
Less: Current portion................................ (112,736)
---------
Noncurrent portion of capital lease obligation... $ 254,310
---------
---------
</TABLE>
In conjunction with this lease agreement, the Company granted a warrant to
the lessor to purchase 13,636 shares of the Company's Series B Convertible
Preferred stock at an exercise price of $2.20 per share. Such warrant expires
five years from the completion of an initial public offering (see Note 15).
Clinical trials, manufacturing, marketing and sale of any of the Company's
partners' potential therapeutic or diagnostic products may expose the Company to
liability claims from the use of such pharmaceutical products. The Company
currently does not carry product liability insurance.
NOTE 12. 401(K) RETIREMENT PLAN:
During 1996, the Company established the Gene Logic Inc. 401(k) Retirement
Plan (the "401(k) Plan") for its employees under Section 401(k) of the Internal
Revenue Service code. Under this plan, all employees over 21 years of age and
with at least six months of service with the Company are eligible to contribute
from 2% to 15% of their salary. Employee contributions are 100% vested. The
Company is not required to make any contributions to the 401(k) Plan and has not
made any contributions through September 30, 1997.
F-15
<PAGE>
GENE LOGIC INC.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
NOTE 13. STOCK BASED COMPENSATION:
During 1996, the Company instituted a stock plan (the "Plan") whereby the
Company's compensation committee (the "Committee"), at its discretion, can grant
options, award stock or provide opportunities to make direct purchases of stock
to employees, officers, directors and consultants of the company and related
corporations. The Plan is authorized to grant options of up to 6,100,000 shares
of common stock. Options are to be granted at the fair market value of the
common stock at the grant date. The options, awards and opportunities to
purchase stock expire at the earlier of termination or the date specified by the
Committee at the date of grant, but not more than ten years.
The following is a rollforward of option activity for the year ended
December 31, 1996 and the nine months ended September 30, 1997:
<TABLE>
<CAPTION>
YEAR ENDED NINE MONTHS ENDED
DECEMBER 31, 1996 SEPTEMBER 30, 1997
---------------------- -----------------------
WEIGHTED WEIGHTED
AVERAGE AVERAGE
EXERCISE EXERCISE
SHARES PRICE SHARES PRICE
--------- ----------- ---------- -----------
<S> <C> <C> <C> <C>
Outstanding, beginning of period.................................... -- $ -- 424,000 $ 0.15
Granted........................................................... 524,000 0.12 2,192,881 1.15
Exercised......................................................... (100,000) 0.01 (140,732) 0.15
Cancelled......................................................... -- -- (51,768) 0.15
--------- ----------
Outstanding, end of period.......................................... 424,000 0.15 2,424,381 1.05
--------- ----------
Exercisable, end of period.......................................... 77,710 0.15 367,272 0.22
--------- ----------
--------- ----------
Weighted average fair value of options granted...................... $ 0.05 $ 2.04
--------- ----------
--------- ----------
Weighted average remaining contractual life (in years).............. 9.86 9.59
--------- ----------
--------- ----------
</TABLE>
During the nine months ended September 30, 1997, the Company granted options
with exercise prices below fair value. The Company has recorded deferred
compensation of $3,926,150 at September 30, 1997, and compensation expense of
$97,187 for the nine months then ended for these options.
Also, subsequent to September 30, 1997, the Company granted additional
options with exercise prices below fair value. In connection with these grants
the Company will record additional deferred compensation of $84,000 during the
three months ended December 31, 1997 which will be recognized as compensation
expense over the four year vesting period of the option.
During 1996, an officer of the Company purchased 100,000 shares of common
stock for $0.15 per share under the Plan, subject to a declining buy-back right
of the Company.
F-16
<PAGE>
GENE LOGIC INC.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
NOTE 13. STOCK BASED COMPENSATION (CONTINUED):
Had compensation cost for the Company's stock-based compensation plans been
determined based on the fair value at the grant dates for awards under the Plan,
consistent with the method of SFAS No. 123, the Company's net loss and loss per
share would have been changed to the pro forma amounts indicated below:
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31,
------------------------
<S> <C> <C> <C>
NINE MONTHS ENDED
SEPTEMBER 30,
1995 1996 1997
---------- ------------ ------------------
Net loss:
As reported..................................................... $ (744,179) $ (2,865,128) $ (4,689,881)
Pro forma....................................................... (744,179) (2,873,805) (4,708,951)
Net loss:
As reported..................................................... $ (0.13) $ (0.31) $ (0.46)
Pro forma....................................................... (0.13) (0.31) (0.46)
</TABLE>
The fair value of each option grant is estimated on the date of grant using
the Black-Scholes option pricing model, with the following assumptions:
<TABLE>
<S> <C>
Expected volatility......................................................... 60.0%
Risk-free interest rates.................................................... 5.72% to 5.85%
Expected lives.............................................................. 1-3 years
Dividend rate............................................................... 0%
</TABLE>
NOTE 14. RELATED PARTY TRANSACTIONS:
During 1996, the Company made loans to two officers of the Company of
$50,000 each to offset relocation costs. These notes receivable were secured by
common stock previously issued to the officers. In January 1997, one of these
notes was cancelled (see Note 10). The remaining note is due in 2002 and bears
interest (see Note 15).
NOTE 15. CONTEMPLATED INITIAL PUBLIC OFFERING:
On October 7, 1997, the Company filed a registration statement with the
Securities and Exchange Commission for an initial public offering ("IPO") of
3,000,000 shares of common stock at an anticipated initial offering price of $11
per share. Net proceeds of the offering (not including the concurrent Japan
Tobacco investment previously described), after underwriting commissions and
expenses are expected to be approximately $30,090,000 ($37,693,500 if the
underwriters' over-allotment option is exercised in full). Concurrent with the
IPO, a note receivable of $50,000 plus interest, from an officer of the Company
will be forgiven, the vesting of certain options will be accelerated and the
authorized capital stock of the Company will be increased to 60,000,000 shares
of common stock and 10,000,000 shares of preferred stock. The Company intends to
use the proceeds for working capital to support research and development,
capital expenditures and general corporate purposes.
F-17
<PAGE>
DRUG TARGET DISCOVERY
"MOLECULAR MOVIE"
[graphical depiction of series of Molecular Topography snapshots] 10,000 GENES
DIFFERENTIALLY EXPRESSED, DISEASE-ASSOCIATED GENES
[graphical depiction of differential expression of disease-associated
genes] 50-500 GENES
PRIORITIZATION OF POTENTIAL DRUG TARGETS
[numbers and letters representing gene sequences] 5-50 GENES
The core of Gene Logic's Accelerated Drug Discovery system is its proprietary
READS-TM- (Restriction Analysis of Differentially-expressed Sequences)
technology for analyzing patterns of gene expression. Using READS-TM-. Gene
Logic rapidly generates a gene expression profile, or Molecular Topography-TM-,
representing a quantitative snapshot of the levels of expression of essentially
all the genes expressed in a tissue sample.
The drug target discovery process comprises the following steps:
1. The Company compares normal and diseased tissues through a series of
Molecular Topography snapshots, a "molecular movie," to identify the changes
in gene expression that occur as the disease develops and progresses.
2. Using its bioinformatics tools, Gene Logic analyzes these changes to
identify which expressed genes are associated with the disease.
3. Gene Logic prioritizes disease-associated genes as drug targets using its
bioinformatics system. This prioritization depends upon a number of factors
including: (i) a gene's temporal association with the disease process; (ii)
the tissue distribution of its expression; (iii) any homology it may have
with known target classes, such as membrane receptors, enzymes or ion
channels; (iv) its involvement in known metabolic or signal transduction
pathways; and (v) the feasibility of developing a screening assay.
<PAGE>
[LOGO]
<PAGE>
PART II
INFORMATION NOT REQUIRED IN PROSPECTUS
ITEM 13. OTHER EXPENSES OF ISSUANCE AND DISTRIBUTION.
The following table sets forth all expenses payable by the Registrant in
connection with the sale of the Common Stock being registered. All the amounts
shown are estimates except for the SEC registration fee and the NASD filing fee.
<TABLE>
<S> <C>
Registration fee.................................................................. $ 12,546
NASD filing fee................................................................... 4,640
Nasdaq Stock Market Listing Application fee....................................... 50,000
Blue sky qualification fees and expenses.......................................... 1,000
Printing and engraving expenses................................................... 120,000
Legal fees and expenses........................................................... 275,000
Accounting fees and expenses...................................................... 125,000
Transfer agent and registrar fees................................................. 10,000
Miscellaneous..................................................................... 1,814
---------
Total......................................................................... $ 600,000
---------
---------
</TABLE>
ITEM 14. INDEMNIFICATION OF DIRECTORS AND OFFICERS.
Under Section 145 of the Delaware General Corporation Law, the Registrant
has broad powers to indemnify its Directors and officers against liabilities
they may incur in such capacities, including liabilities under the Securities
Act.
The Registrant's Restated Certificate of Incorporation and Amended and
Restated By-laws include provisions to (i) eliminate the personal liability of
its directors for monetary damages resulting from breaches of their fiduciary
duty to the extent permitted by Section 102(b)(7) of the General Corporation Law
of Delaware (the "Delaware Law") and (ii) require the Registrant to indemnify
its Directors and officers to the fullest extent permitted by Section 145 of the
Delaware Law, including circumstances in which indemnification is otherwise
discretionary. Pursuant to Section 145 of the Delaware Law, a corporation
generally has the power to indemnify its present and former directors, officers,
employees and agents against expenses incurred by them in connection with any
suit to which they are or are threatened to be made a party by reason of their
serving in such positions so long as they acted in good faith and in a manner
they reasonably believed to be in or not opposed to, the best interests of the
corporation and with respect to any criminal action, they had no reasonable
cause to believe their conduct was unlawful. The Registrant believes that these
provisions are necessary to attract and retain qualified persons as Directors
and officers. These provisions do not eliminate the Directors' duty of care,
and, in appropriate circumstances, equitable remedies such as injunctive or
other forms of non-monetary relief will remain available under Delaware Law. In
addition, each Director will continue to be subject to liability for breach of
the Director's duty of loyalty to the Registrant, for acts or omissions not in
good faith or involving intentional misconduct, for knowing violations of law,
for acts or omissions that the Director believes to be contrary to the best
interests of the Registrant or its stockholders, for any transaction from which
the Director derived an improper personal benefit, for acts or omissions
involving a reckless disregard for the Director's duty to the Registrant or its
stockholders when the Director was aware or should have been aware of a risk of
serious injury to the Registrant or its stockholders, for acts or omissions that
constitute an unexcused pattern of inattention that amounts to an abdication of
the Director's duty to the Registrant or its stockholders, for improper
transactions between the Director and the Registrant and for improper
II-1
<PAGE>
distributions to stockholders and loans to Directors and officers. The provision
also does not affect a Director's responsibilities under any other law, such as
the federal securities law or state or federal environmental laws.
The Registrant has entered into indemnity agreements with each of its
Directors and executive officers that require the Registrant to indemnify such
persons against expenses, judgments, fines, settlements and other amounts
incurred (including expenses of a derivative action) in connection with any
proceeding, whether actual or threatened, to which any such person may be made a
party by reason of the fact that such person is or was a Director or an
executive officer of the Registrant or any of its affiliated enterprises,
provided that such person acted in good faith and in a manner such person
reasonably believed to be in or not opposed to the best interests of the
Registrant and, with respect to any criminal proceeding, had no reasonable cause
to believe his conduct was unlawful. The indemnification agreements also set
forth certain procedures that will apply in the event of a claim for
indemnification thereunder.
At present, there is no pending litigation or proceeding involving a
Director, officer or key employee of the Registrant as to which indemnification
is being sought nor is the Registrant aware of any threatened litigation that
may result in claims for indemnification by any officer or Director.
The Registrant has an insurance policy covering the officers and Directors
of the Registrant with respect to certain liabilities, including liabilities
arising under the Securities Act or otherwise.
ITEM 15. RECENT SALES OF UNREGISTERED SECURITIES.
Since September 22, 1994 (inception), the Registrant has sold and issued the
following unregistered securities:
1. During the period, the Registrant granted incentive stock options to
employees, officers and directors of the Registrant under its 1996 Stock
Plan (the "Stock Plan") covering an aggregate of 2,533,654 shares of the
Registrant's Common Stock. Certain of these options vest over a period of
time following their respective date of grant.
2. During the period, the Registrant granted non-statutory stock
options to employees, officers and directors of the Registrant under the
Stock Plan covering an aggregate of 239,227 shares of the Registrant's
Common Stock. Certain of these options vest over a period of time following
their respective date of grant.
3. During the period, the Registrant issued 642,733 shares of its
Common Stock to employees and consultants for $17,800 in cash and $2,127 in
services. An additional 240,732 shares were issued pursuant to the exercise
of incentive stock options granted under the Stock Plan.
4. In November 1994 and May 1995, pursuant to the terms of an equity
financing of the Registrant, the Registrant issued 333,333 shares of Series
A Preferred Stock for $500,000 to certain investors.
5. In September 1995, pursuant to the terms of an equity financing of
the Registrant, the Registrant issued 412,500 shares of Series A-1 Preferred
Stock for $660,000 to certain investors. In connection with such financing,
the Registrant issued warrants to purchase 50,000 shares of Series A-1
Preferred Stock at an exercise price of $1.60 per share to certain of such
investors.
6. In April through October 1996, pursuant to the terms of an equity
financing of the Registrant, the Registrant issued 4,090,909 shares of
Series B Preferred Stock for $9,000,000 to certain investors.
7. In April 1997, the Registrant issued a warrant to purchase 25,758
shares of Series B Preferred Stock at an exercise price of $2.20 per share
in connection with an equipment loan agreement.
II-2
<PAGE>
8. In April 1997, the Registrant issued a warrant to purchase 13,636
shares of Series B Preferred Stock at an exercise price of $2.20 per share
in connection with the establishment of a capital lease facility.
9. In July 1997, pursuant to the terms of an equity financing of the
Registrant, the Registrant issued 4,444,443 shares of Series C Preferred
Stock for $19,999,993.50 to certain investors.
10. In August 1997, in connection with the Registrant's facilities
lease, the Registrant issued a warrant to purchase 20,000 shares of the
Registrant's Common Stock at an exercise price of $5.40 per share.
11. In September 1997, the Registrant issued 50,000 shares of its Common
Stock to Genaissance Pharmaceuticals, Inc. in connection with a negotiated
settlement.
12. The Registrant issued a warrant to purchase 48,889 shares of its
Common Stock at an exercise price of $4.50 per share to Hambrecht & Quist
LLC for services as placement agent for Registrant's Series C Preferred
Stock financing, which closed on July 15, 1997.
13. In September 1997, the Registrant issued a warrant to purchase 4,293
shares of Series B Preferred Stock at an exercise price of $2.20 per share
in connection with an equipment loan agreement.
The sales and issuances of securities in the transactions described in
paragraphs (1), (2) and (3) above were deemed to be exempt from registration
under the Securities Act by virtue of Rule 701 promulgated thereunder in that
they were offered and sold either pursuant to written compensatory benefit plans
or pursuant to a written contract relating to compensation, as provided by Rule
701.
With respect to the grant of stock options described in paragraphs (1) and
(2) above exemption from registration under the Securities Act was unnecessary
in that none of such transactions involved a "sale" of securities as such term
is used in Section 2(3) of the Securities Act.
The sales and issuances of securities in the transactions described in
paragraphs (4) through (13) above were deemed to be exempt from registration
under the Securities Act by virtue of Section 4(2) and/ or Regulation D
promulgated thereunder.
The recipients represented their intention to acquire the securities for
investment purposes only and not with a view to the distribution thereof.
Appropriate legends are affixed to the stock certificates issued in such
transactions. Similar legends were imposed in connection with any subsequent
sales of any such securities. All recipients either received adequate
information about the Registrant of had access, though employment or other
relationships, to such information.
ITEM 16. EXHIBITS AND FINANCIAL STATEMENT SCHEDULES.
(A) EXHIBITS.
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION OF DOCUMENT
- ---------- --------------------------------------------------------------------------------------------------------
<C> <S>
1.1** Form of Underwriting Agreement.
3.1** Restated Certificate of Incorporation.
3.2** Amended and Restated Certificate of Incorporation, to be filed and become effective immediately
following this offering.
3.3 By-laws, as amended.
3.4** By-laws, as amended and restated, to become effective immediately following this offering.
4.1** References made to Exhibits 3.1, 3.2 and 3.3.
</TABLE>
II-3
<PAGE>
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION OF DOCUMENT
- ---------- --------------------------------------------------------------------------------------------------------
<C> <S>
4.2* Specimen Stock Certificate.
5.1 Opinion of Cooley Godward LLP.
10.1** Form of Indemnity Agreement entered into between Registrant and its directors and executive officers.
10.2** Registrant's 1997 Equity Incentive Plan (the "Stock Plan").
10.3** Form of Stock Option Agreement under the Stock Plan.
10.4** Form of Stock Option Grant Notice.
10.5** Registrant's Employee Stock Purchase Plan and related offering document.
10.6** Registrant's Non-Employee Directors' Stock Option Plan.
10.7** Form of Nonstatutory Stock Option under the Non-Employee Directors' Stock Option Plan.
10.8** Stock Restriction Agreement, dated July 31, 1996, between the Registrant and Mark D. Gessler.
10.9** Stock Restriction Agreement, dated December 20, 1996, between the Registrant and Mark D. Gessler.
10.10** Stock Restriction Agreement, dated February 29, 1996, between the Registrant and Michael J. Brennan.
10.11** Amended and Restated Investor Rights Agreement, dated July 15, 1997, between the Registrant and certain
investors.
10.12** Employment Agreement, dated October 31, 1995, between the Registrant and Michael J. Brennan.
10.13** Amendment to Employment Agreement, dated July 9, 1997, between the Registrant and Michael J. Brennan.
10.14** Employment Agreement, dated May 16, 1996, between the Registrant and Mark D. Gessler.
10.15** Amendment to Employment Agreement, dated July 9, 1997, between the Registrant and Mark D. Gessler.
10.16** Series A-1 Convertible Preferred Stock Purchase Warrant, dated August 1, 1995, issued to Oxford
Bioscience Partners L.P.
10.17** Series A-1 Convertible Preferred Stock Purchase Warrant, dated August 1, 1995, issued to Oxford
Bioscience Partners (Bermuda) Limited Partnership.
10.18** Warrant for the purchase of shares of Common Stock, dated August 29, 1997, between Registrant and
ARE-708 Quince Orchard, LLC.
10.19** Warrant, dated April 24, 1997, issued to Venture Lending & Leasing, Inc.
10.20** Warrant issued to Hambrecht & Quist LLC.
10.21 Lease Agreement, dated May 7, 1997, between Registrant and M.O.R. XVIII Associates Limited Partnership.
10.22** Lease Agreement, dated August 22, 1997, between Registrant and ARE-708 Quince Orchard, LLC, as amended.
10.23 Warrant, dated April 15, 1997, between Registrant and Comdisco, Inc.
</TABLE>
II-4
<PAGE>
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION OF DOCUMENT
- ---------- --------------------------------------------------------------------------------------------------------
<C> <S>
10.24**+ Target Discovery Collaboration and License Agreement, dated May 27, 1997, between Registrant and Procter
& Gamble Pharmaceuticals, Inc. ("Procter & Gamble").
10.25**+ Promissory Note, dated May 27, 1997, between Registrant and Procter & Gamble.
10.26**+ Drug Target and Drug Lead Discovery Collaboration Agreement, dated September 9, 1997, between Registrant
and Japan Tobacco Inc.
10.27** Share Purchase Agreement, dated September 9, 1997, between Registrant and Japan Tobacco Inc.
10.28**+ License Agreement, dated May 22, 1996, between Registrant and Yale University.
10.29**+ Amendment, dated October 1, 1997, to the License Agreement between Registrant and Yale University.
10.30**+ Sole Commercial Patent License Agreement, dated June 15, 1997, between Registrant and Lockheed Martin
Energy Research Company.
10.31**+ License Agreement, dated May 30, 1997, between Registrant and Dr. Kenneth L. Beattie.
11.1** Statement Regarding Computation of Per Share Earnings.
23.1 Consent of Arthur Andersen LLP.
23.2 Consent of Cooley Godward LLP. Reference is made to Exhibit 5.1.
24.1** Power of Attorney. Reference is made to page II-7.
27.1** Financial Data Schedule
</TABLE>
- ------------------------
* To be filed by amendment.
** Previously filed.
+ Confidential Treatment has been requested with respect to certain portions
of this exhibit. Omitted portions will be filed separately with the
Securities and Exchange Commission.
(B) SCHEDULES
All schedules are omitted because they are not required, are not applicable
or the information is included in the financial statements or notes thereto.
ITEM 17. UNDERTAKINGS.
Insofar as indemnification for liabilities arising under the Act may be
permitted to directors, officers and controlling persons of the registrant
pursuant to provisions described in Item 15 or otherwise, the registrant has
been advised that in the opinion of the Commission such indemnification is
against public policy as expressed in the Act and is, therefore, unenforceable.
In the event that a claim for indemnification against such liabilities (other
than the payment by the registrant of expenses incurred or paid by a director,
officer or controlling person of the registrant in the successful defense of any
action, suit or proceeding) is asserted by such director, officer or controlling
person in connection with the securities being registered, the registrant will,
unless in the opinion of its counsel the matter has been settled by controlling
precedent, submit to a court of appropriate jurisdiction the question whether
such indemnification by it is against public policy as expressed in the Act and
will be governed by the final adjudication of such issue.
II-5
<PAGE>
The undersigned Registrant hereby undertakes:
(1) That, for purposes of determining any liability under the Act, each
filing of the registrant's annual report pursuant to Section 13(a) or 15(d)
of the Exchange Act (and, where applicable, each filing of an employee
benefit plan's annual report pursuant to Section 15(d) of the Exchange Act)
that is incorporated by reference in the registration statement shall be
deemed to be a new registration statement relating to the securities offered
therein and the offering of such securities at that time shall be deemed to
be the initial bona fide offering thereof.
(2) That, for purposes of determining any liability under the Act, the
information omitted from the form of prospectus filed as part of this
Registration Statement in reliance upon Rule 430A and contained in a form of
prospectus filed by the registrant pursuant to Rule 424(b)(1) or (4) or
497(h) under the Act shall be deemed to be part of this Registration
Statement as of the time it was declared effective.
(3) For the purpose of determining any liability under the Act, each
post-effective amendment that contains a form of prospectus shall be deemed
to be a new registration statement relating to the securities offered
therein, and the offering of such securities at that time shall be deemed to
be the initial bona fide offering thereof.
II-6
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933, the Registrant
certifies that it has reasonable grounds to believe that it meets all of the
requirements for filing on Form S-1 and has duly caused this Amendment No. 1 to
the Registration Statement to be signed on its behalf by the undersigned,
thereunto duly authorized, in the City of Columbia, County of Columbia, State of
Maryland, on the 20th day of October, 1997.
<TABLE>
<S> <C> <C>
By: /s/ MARK D. GESSLER
------------------------------------------
Mark D. Gessler
SENIOR VICE PRESIDENT, CORPORATE
DEVELOPMENT AND CHIEF FINANCIAL OFFICER
</TABLE>
Pursuant to the requirements of the Securities Act of 1933, this Amendment
No. 1 to the Registration Statement has been signed by the following persons in
the capacities and on the dates indicated.
<TABLE>
<CAPTION>
SIGNATURE TITLE DATE
- ------------------------------------------------------ --------------------------------- ----------------------
<C> <S> <C>
* President, Chief Executive October 20, 1997
------------------------------------------- Officer and Director (PRINCIPAL
Michael J. Brennan, M.D., Ph.D. EXECUTIVE OFFICER)
/s/ MARK D. GESSLER Senior Vice President, Corporate October 20, 1997
------------------------------------------- Development and Chief Financial
Mark D. Gessler Officer (PRINCIPAL FINANCIAL
AND ACCOUNTING OFFICER)
* Chairman of the Board of October 20, 1997
------------------------------------------- Directors
Alan G. Walton, Ph.D., D.Sc.
* Director October 20, 1997
-------------------------------------------
Jules Blake, Ph.D.
* Director October 20, 1997
-------------------------------------------
Charles L. Dimmler III
* Director October 20, 1997
-------------------------------------------
G. Anthony Gorry, Ph.D.
* Director October 20, 1997
-------------------------------------------
Jeffrey D. Sollender
</TABLE>
<TABLE>
<S> <C>
*By: /s/ MARK D. GESSLER
-----------------------------------------
Mark D. Gessler
</TABLE>
II-7
<PAGE>
Exhibit 3.3
BY-LAWS
OF
GENE LOGIC INC.
(FORMERLY, SENATICS CORPORATION)
Amended through October 21, 1996
<PAGE>
BY-LAWS
OF
GENE LOGIC INC.
ARTICLE 1
STOCKHOLDERS
1.1 PLACE OF MEETINGS. All meetings of stockholders shall be held at such
place within or without the State of Delaware as may be designated from time
to time by the Board of Directors or the President or, if not so designated,
at the registered office of the corporation.
1.2 ANNUAL MEETING. The annual meeting of stockholders for the election
of directors and for the transaction of such other business as may properly
be brought before the meeting shall be held on the third Thursday of June in
each year, at a time fixed by the Board of Directors or the President. If
this date shall fall upon a legal holiday at the place of the meeting, then
such meeting shall be held on the next succeeding business day at the same
hour. If no annual meeting is held in accordance with the foregoing
provisions, the Board of Directors shall cause the meeting to be held as soon
thereafter as convenient. If no annual meeting is held in accordance with the
foregoing provisions, a special meeting may be held in lieu of the annual
meeting, and any action taken at that special meeting shall have the same
effect as if it had been taken at the annual meeting, and in such case all
references in these By-Laws to the annual meeting of the stockholders shall
be deemed to refer to such special meeting.
1.3 SPECIAL MEETINGS. Special meetings of stockholders may be called at
any time by the President or by the Board of Directors or by the holders of
shares of the capital stock of the corporation representing in the aggregate,
10% or greater of the voting power of the capital stock of the corporation
issued and outstanding and entitled to vote at a meeting of stockholders.
Business transacted at any special meeting of stockholders shall be limited
to matters relating to the purpose or purposes stated in the notice of
meeting.
1.4 NOTICE OF MEETINGS. Except as otherwise provided by law, written
notice of each meeting of stockholders, whether annual or special, shall be
given not less than 10 nor more than 60 days before the date of the meeting
to each stockholder entitled to vote at such meeting. The notices of all
meetings shall state the place, date and hour of the meeting. The notice of a
special meeting shall state, in addition, the purpose or purposes for which
the meeting is called. If mailed, notice is given when deposited in the
United States mail, postage prepaid, directed to the stockholder at his
address as it appears on the records of the corporation.
<PAGE>
1.5 VOTING LIST. The officer who has charge of the stock ledger of the
corporation shall prepare, at least 10 days before every meeting of
stockholders, a complete list of the stockholders entitled to vote at the
meeting, arranged in alphabetical order, and showing the address of each
stockholder and the number of shares registered in the name of each
stockholder. Such list shall be open to the examination of any stockholder,
for any purpose germane to the meeting, during ordinary business hours, for a
period of at least 10 days prior to the meeting, at a place within the city
where the meeting is to be held. The list shall also be produced and kept at
the time and place of the meeting during the whole time of the meeting, and
may be inspected by any stockholder who is present.
1.6 QUORUM. Except as otherwise provided by law, the Certificate of
Incorporation or these By-Laws, the holders of a majority of the shares of
the capital stock of the corporation issued and outstanding and entitled to
vote at the meeting, present in person or represented by proxy, shall
constitute a quorum for the transaction of business.
1.7 ADJOURNMENTS. Any meeting of stockholders may be adjourned to any
other time and to any other place at which a meeting of stockholders may be
held under these By-Laws by the stockholders present or represented at the
meeting and entitled to vote, although less than a quorum, or, if no
stockholder is present, any officer entitled to preside at or to act as
Secretary of such meeting. It shall not be necessary to notify any
stockholder of any adjournment of less than 30 days if the time and Place of
the adjournment meeting are announced at the meeting at which adjournment is
taken, unless after the adjournment a new record date is fixed for the
adjourned meeting. At the adjourned meeting, the corporation may transact any
business which might have been transacted at the original meeting.
1.8 VOTING AND PROXIES. Each stockholder shall have one vote for each
share of stock entitled to vote held of record by such stockholder and a
proportionate vote for each fractional share so held, unless otherwise
provided in the Certificate of Incorporation. Each stockholder of record
entitled to vote at a meeting of stockholders, or to express consent or
dissent to corporate action in writing without a meeting, may vote or express
such consent or dissent in person or may authorize another person or persons
to vote or act for him by written proxy executed by the stockholder or his
authorized agent and delivered to the Secretary of the corporation. No such
proxy shall be voted or acted upon after three years from the date of its
execution unless the proxy expressly provides for a longer period.
1.9 ACTION AT MEETING. When a quorum is present at any meeting, the
holders of a majority of the stock present or represented and voting on a
matter (or if there are two or more classes of stock entitled to vote as
separate classes, then in the case of each such class, the holders of a
majority of the stock of that class present or represented and voting on a
matter) shall decide any matter to be voted upon by the stockholders at such
meeting except when a different vote is required by express provision of law,
the Certificate of Incorporation or these By-Laws. Any election by
stockholders shall be determined by a plurality of the votes cast by the
stockholders entitled to vote at the election.
2
<PAGE>
1.10 ACTION WITHOUT MEETING. Any action required or permitted to be taken
at any annual or special meeting of stockholders of the corporation may be
taken without a meeting, without prior notice and without a vote, if a
consent in writing, setting forth the action so taken, is signed by the
holders of outstanding stock having not less than the minimum number of votes
that would be necessary to authorize or take such action at a meeting at
which all shares entitled to vote on such action were present and voted.
Prompt notice of the taking of corporate action without a meeting by less
than unanimous written consent shall be given to those stockholders who have
not consented in writing and to the corporation.
ARTICLE 2
DIRECTORS
2.1 GENERAL POWERS. The business and affairs of the corporation shall be
managed by or under the direction of a Board of Directors, who may exercise
all of the powers of the corporation except as otherwise provided by law, the
Certificate of Incorporation or these By-Laws. In the event of a vacancy in
the Board of Directors, the remaining directors, except as otherwise provided
by law, may exercise the powers of the full Board until the vacancy is filled.
2.2 BOARD OF DIRECTORS.
(a) SIZE AND ELECTION OF THE BOARD OF DIRECTORS. The number of directors
constituting the Board of Directors of the Corporation shall at all times be
set at seven (7). The members of the Board of Directors shall be elected in
accordance with this Section 2.2.
(b) SERIES A AND SERIES A-1 DIRECTOR ELECTION RIGHT.
(i) The holders of at least a majority of the outstanding shares of
Series A Preferred Stock and Series A-1 Preferred Stock, voting together as a
single class, shall be entitled to elect one (1) director of the Corporation
(the "Series A Director"). At any annual or special meeting of the
Corporation (or in a written consent in lieu thereof) held for the purpose of
electing directors, the presence in person or by proxy (or by written
consent) of the holders of at least a majority of the outstanding shares of
Series A Preferred Stock and Series A-1 Preferred Stock shall constitute a
quorum for the election of the Series A Director.
(ii) Any Series A Director may be removed during his or her term of
office, without cause, by or only by, the affirmative vote or written consent
of the holders of at least a majority of the outstanding shares of the Series
A Preferred Stock and Series A-1 Preferred Stock, voting together as a single
class. A vacancy in the seat held by the Series A Director shall be filled by
vote or written consent of the holders of at least a majority of the
outstanding shares of Series A Preferred Stock and Series A-1 Preferred
Stock, voting together as a single class.
3
<PAGE>
(c) SERIES B DIRECTOR ELECTION RIGHT.
(i) The holders of least a majority of the outstanding shares of
Series B Preferred Stock voting together as a separate class, shall be
entitled to elect two (2) directors of the Corporation (the "Series B
Directors"); the Series A Director and the Series B Director may be referred
to herein as (the "Preferred Stock Directors"). At any annual or special
meeting of the Corporation (or in a written consent in lieu thereof) held for
the purpose of electing directors, the presence in person or by proxy (or by
written consent) of the holders of at least a majority of the outstanding
shares of Series B Preferred Stock shall constitute a quorum for the election
of the Series B Directors.
(ii) Any Series B Stock Director may be removed during his or her term
of office, without cause, by and only by, the affirmative vote or written
consent of the holders of at least a majority of the outstanding shares of
the Series B Preferred Stock, voting together as a separate class. A vacancy
in the seat held by any Series B Director shall be filled by vote or written
consent of the holders of at least a majority of the outstanding shares of
Series B Preferred Stock, voting together as a separate class.
(d) COMMON STOCK DIRECTOR ELECTION RIGHT.
(i) The holders of at least a majority of the outstanding shares of
Common Stock, voting together as a separate class, shall be entitled to elect
two (2) directors of the Corporation (the "Common Stock Directors"). At any
annual or special meeting of the Corporation (or in a written consent of lieu
thereof) held for the propose of electing directors, the presence in person
or by proxy (or by written consent) of the holders of a majority of the
outstanding shares of Common Stock shall constitute a quorum for the election
of the Common Stock Directors.
(ii) Any Common Stock Director may be removed during his or her term
of office, without cause, by and only by, the affirmative vote or written
consent of the holders of a majority of the outstanding shares of the Common
Stock. A vacancy in the seat held by any Common Stock Director shall be
filled by vote or written consent of the holders of at least a majority of
the outstanding shares of Common Stock, voting together as a separate class.
(e) REMAINING DIRECTORS.
(i) The holders of at least a majority of the outstanding shares of
Common Stock and Preferred Stock, voting together as a single class, shall be
entitled to elect two (2) directors of the Corporation (the "Remaining
Directors"). At any annual or special meeting of the Corporation (or in a
written consent in lieu thereof) held for the purpose of electing directors,
the presence in person or by proxy (or by written consent) of the holders of
a majority of the outstanding shares of Common Stock and Preferred Stock
shall constitute a quorum for the election of the Remaining Directors.
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(ii) Any Remaining Director may be removed during his or her term of
office, without cause, by and only by, the affirmative vote or written
consent of the holders of at least a majority of the outstanding shares of
the Common Stock and Preferred Stock, voting together as a single class. A
vacancy in the seat held by any Remaining Director shall be filled by vote or
written consent of the holders of at least a majority of the outstanding
shares of Common Stock and Preferred Stock, voting together as a single class.
2.3 RESIGNATION. Any director may resign by delivering his written
resignation to the corporation at its principal office or to the President or
Secretary. Such resignation shall be effective upon receipt unless it is
specified to be effective at some other time or upon the happening of some
other event.
2.4 REGULAR MEETINGS. Regular meetings of the Board of Directors may be
held without notice at such time and place, either within or without the
State of Delaware, as shall be determined from time to time by the Board of
Directors; provided that any director who is absent when such a determination
is made shall be given notice of the determination. A regular meeting of the
Board of Directors may be held without notice immediately after and at the
same place as the annual meeting of stockholders.
2.5 SPECIAL MEETINGS. Special meetings of the Board of Directors may be
held at any time and place, within or without the State of Delaware,
designated in a call by the Chairman of the Board, by the President, or by
any one or more directors.
2.6 NOTICE OF SPECIAL MEETINGS. Notice of any special meeting of
directors shall be given to each director by the Secretary or by the officer
or one of the directors calling the meeting. Notice shall be duly given to
each director (i) by giving notice to such director in person or by telephone
at least 48 hours in advance of the meeting, (ii) by sending a telegram or
telex, or delivering written notice by hand, to his last known business or
home address at least 48 hours in advance of the meeting, or (iii) by mailing
written notice to his last known business or home address at least 72 hours
in advance of the meeting. A notice or waiver of notice of a meeting of the
Board of Directors need not specify the purposes of the meeting.
2.7 MEETINGS BY TELEPHONE CONFERENCE CALLS. Directors or any members of
any committee designated by the directors may participate in meetings of the
Board of Directors or such committee by means of conference telephone or
similar communications equipment by means of which all persons participating
in the meeting can hear each other, and participation by such means shall
constitute presence in person at such meeting.
2.8 QUORUM. A majority of the total number of the whole Board of
Directors shall constitute a quorum at all meetings of the Board of
Directors. In the event one or more of the directors shall be disqualified to
vote at any meeting, then the required quorum shall be reduced by one for
each such director so disqualified; provided, however, that in no case shall
less than one-third (1/3) of the number so fixed constitute a quorum. In the
absence of a
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quorum at any such meeting, a majority of the directors present may adjourn
the meeting from time to time without further notice other than announcement
at the meeting, until a quorum shall be present.
2.9 ACTION AT MEETING. At any meeting of the Board of Directors at which
a quorum is present, the vote of a majority of those present shall be
sufficient to take any action, unless a different vote is specified by law,
the Certificate of Incorporation or these By-Laws.
2.10 ACTION BY CONSENT. Any action required or permitted to be taken at
any meeting of the Board of Directors or of any committee of the Board of
Directors may be taken without a meeting, if all members of the Board or
committee, as the case may be, consent to the action in writing, and the
written consents are filed with the minutes of proceedings of the Board or
committee.
2.11 REMOVAL. Any one or more or all of the directors may be removed,
with or without cause, by the holders of a majority of the shares then
entitled to vote at an election of directors, except that the directors
elected by the holders of a particular class or series of stock may be
removed without cause only by vote of the holders of a majority of the
outstanding shares of such class or series and that the directors elected by
the holders of more than one class or series of stock, voting together, may
be removed, without cause, only by vote of the holders of a majority of the
outstanding shares of such classes and series, voting together.
2.12 COMMITTEES. The Board of Directors may, by resolution passed by a
majority of the whole Board, designate one or more committees, each committee
to consist of one or more of the directors of the corporation. The Board may
designate one or more directors as alternate members of any committee, who
may replace any absent or disqualified member at any meeting of the
committee. In the absence or disqualification of a member of a committee, the
member or members of the committee present at any meeting and not
disqualified from voting, whether or not he or they constitute a quorum, may
unanimously appoint another member of the Board of Directors to act at the
meeting in the place of any such absent or disqualified member. Any such
committee, to the extent provided in the resolution of the Board of Directors
and subject to the provisions of the General Corporation Law of the State of
Delaware, shall have and may exercise all the powers and authority of the
Board of Directors in the management of the business and affairs of the
corporation and may authorize the seal of the corporation to be affixed to
all papers which may require it. Each such committee shall keep minutes and
make such reports as the Board of Directors may from time to time request.
Except as the Board of Directors may otherwise determine, any committee may
make rules for the conduct of its business, but unless otherwise provided by
the directors or in such rules, its business shall be conducted as nearly as
possible in the same manner as is provided in thee By-Laws for the Board of
Directors.
2.13 COMPENSATION OF DIRECTORS. Directors may be paid such compensation
for their services and such reimbursement for expenses of attendance at
meetings as the Board of
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Directors may from time to time determine. No such payment shall preclude any
director from serving the corporation or any of its parent or subsidiary
corporations in any other capacity and receiving compensation for such
service.
ARTICLE 3
OFFICERS
3.1 ENUMERATION. The officers of the corporation shall consist of a
President, a Secretary, a Treasurer and such other officers with such other
titles as the Board of Directors shall determine, including a Chairman of the
Board, a Vice-Chairman of the Board, and one or more Vice Presidents,
Assistant Treasurers, and Assistant Secretaries. The Board of Directors may
appoint such other officers as it may deem appropriate.
3.2 ELECTION. The President, Treasurer and Secretary shall be elected
annually by the Board of Directors at its first meeting following the annual
meeting of stockholders. Other officers may be appointed by the Board of
Directors at such meeting or at any other meeting.
3.3 QUALIFICATION. No officer need be a stockholder. Any two or more
offices may be held by the same person.
3.4 TENURE. Except as otherwise provided by law, by the Certificate of
Incorporation or by these By-Laws, each officer shall hold office until his
successor is elected and qualified, unless a different term is specified in
the vote choosing or appointing him, or until his earlier death, resignation
or removal.
3.5 RESIGNATION AND REMOVAL. Any officer may resign by delivering his
written resignation to the corporation at its principal office or to the
President or Secretary. Such resignation shall be effective upon receipt
unless it is specified to be effective at some other time or upon the
happening of some other event.
Any officer may be removed at any time, with or without cause, by vote of
a majority of the entire number of directors then in office.
Except as the Board of Directors may otherwise determine, no officer who
resigns or is removed shall have any right to any compensation as an officer
for any period following his resignation or removal, or any right to damages
on account of such removal, whether his compensation be by the month or by
the year or otherwise, unless such compensation is expressly provided in a
duly authorized written agreement with the corporation.
3.6 VACANCIES. The Board of Directors may fill any vacancy occurring in
any office for any reason and may, in its discretion, leave unfilled for such
period as it may determine any offices other than those of President,
Treasurer and Secretary. Each such successor shall hold office for the
unexpired term of his predecessor and until his successor is elected and
qualified, or until his earlier death, resignation or removal.
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3.7 CHAIRMAN OF THE BOARD AND VICE-CHAIRMAN OF THE BOARD. The Board of
Directors may appoint a Chairman of the Board and may designate the Chairman
of the Board as Chief Executive Officer. If the Board of Directors appoints a
Chairman of the Board, he shall perform such duties and possess such powers
as are assigned to him by the Board of Directors. If the Board of Directors
appoints a Vice-Chairman of the Board, he shall, in the absence or disability
of the Chairman of the Board, perform the duties and exercise the powers of
the Chairman of the Board and shall perform such other duties and possess
such other powers as may from time to time be vested in him by the Board of
Directors.
3.8 PRESIDENT. The President shall, subject to the direction of the Board
of Directors, have general charge and supervision of the business of the
corporation. Unless otherwise provided by the Board of Directors, he shall
preside at all meetings of the stockholders, if he is a director, at all
meetings of the Board of Directors. Unless the Board of Directors has
designated the Chairman of the Board or another officer as Chief Executive
Officer, the President shall be the Chief Executive Officer of the
corporation. The President shall perform such other duties and shall have
such other powers as the Board of Directors may from time to time prescribe.
3.9 VICE PRESIDENTS. Any Vice President shall perform such duties and
possess such powers as the Board of Directors or the President may from time
to time prescribe. In the event of the absence, inability or refusal to act
of the President, the Vice President (or if there shall be more than one, the
Vice Presidents in the order determined by the Board of Directors) shall
perform the duties of the President and when so performing shall have all the
powers of and be subject to all the restrictions upon the President. The
Board of Directors may assign to any Vice President the title of Executive
Vice President, Senior Vice President or any other title selected by the
Board of Directors.
3.10 SECRETARY AND ASSISTANT SECRETARIES. The Secretary shall perform
such duties and shall have such powers as the Board of Directors or the
President may from time to time prescribe. In addition, the Secretary shall
perform such duties and have such powers as are incident to the office of the
secretary, including without limitation the duty and power to give notices of
all meetings of stockholders and special meetings of the Board of Directors,
to attend all meetings of stockholders and the Board of Directors and keep a
record of the proceedings, to maintain a stock ledger and prepare lists of
stockholders and their addresses as required, to be custodian of corporate
records and the corporate seal and to affix and attest to the same on
documents.
Any Assistant Secretary shall perform such duties and possess such powers
as the Board of Directors, the President or the Secretary may from time to
time prescribe. In the event of the absence, inability or refusal to act of
the Secretary, the Assistant Secretary, (or if there shall be more than one,
the Assistant Secretaries in the order determined by the Board of Directors)
shall perform the duties and exercise the powers of the Secretary.
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In the absence of the Secretary or any Assistant Secretary at any meeting
of stockholders or directors, the person presiding at the meeting shall
designate a temporary secretary to keep a record of the meeting.
3.11 TREASURER AND ASSISTANT TREASURERS. The Treasurer shall perform
such duties and shall have such powers as may from time to time be assigned
to him by the Board of Directors or the president. In addition, the Treasurer
shall perform such duties and have such powers as are incident to the office
of treasurer, including without limitation the duty and power to keep and be
responsible for all funds and securities of the corporation, to deposit funds
of the corporation in depositories selected in accordance with these By-Laws,
to disburse such funds as ordered by the Board of Directors, to make proper
accounts of such funds and to render as required by the Board of Directors
statements of all such transactions and of the financial condition of the
corporation.
The Assistant Treasurer shall perform such duties and possess such powers
as the Board of Directors, the President or the Treasurer may from time to
time prescribe. In the event of the absence, inability or refusal to act of
the Treasurer, the Assistant Treasurer, (or if there shall be more than one,
the Assistant Treasurers in the order determined by the Board of Directors)
shall perform the duties and exercise the powers of the Treasurer.
3.12 SALARIES. Officers of the corporation shall be entitled to such
salaries, compensation or reimbursement as shall be fixed or allowed from
time to time by the Board of Directors.
ARTICLE 4
CAPITAL STOCK
4.1 ISSUANCE OF STOCK. Unless otherwise voted by the stockholders and
subject to the provisions of the Certificate of Incorporation, the whole or
any part of any unissued balance of the authorized capital stock of the
corporation or the whole or any part of any unissued balance of the
authorized capital stock of the corporation held in its treasury may be
issued, sold, transferred or otherwise disposed of by vote of the Board of
Directors in such manner, for such consideration and on such terms as the
Board of Directors may determine.
4.2 CERTIFICATES OF STOCK. Every holder of stock of the corporation shall
be entitled to have a certificate, in such form as may be prescribed by law
and by the Board of Directors, certifying the number and class of shares
owned by him in the corporation. Each such certificate shall be signed by, or
in the name of the corporation by, the Chairman or Vice-Chairman, if any, of
the Board of Directors, or the President or a Vice President, and the
Treasurer or an Assistant Treasurer, or the Secretary or an Assistant
Secretary of the corporation. Any or all of the signatures on the certificate
may be a facsimile.
Each certificate for shares of stock which are subject to any restriction
on transfer pursuant to the Certificate of Incorporation, the By-Laws,
applicable securities laws or any agreement among any number of shareholders
or among such holders and the corporation
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shall have conspicuously noted on the face or back of the certificate either
the full text of the restriction or a statement of the existence of such
restriction.
4.3 TRANSFERS. Except as otherwise established by rules and regulations
adopted by the Board of Directors, and subject to applicable law, shares of
stock may be transferred on the books of the corporation by the surrender to
the corporation or its transfer agent of the certificate representing such
shares properly endorsed or accompanied by a written assignment or power of
attorney properly executed, and with such proof of authority or the
authenticity of signature as the corporation or its transfer agent may
reasonably require. Except as may be otherwise required by law, by the
Certificate of Incorporation or by these By-Laws, the corporation shall be
entitled to treat the record holder of stock as shown on its books as the
owner of such stock for all purposes, including the payment of dividends and
the right to vote with respect to such stock, regardless of any transfer,
pledge or other disposition of such stock until the shares have been
transferred on the books of the corporation in accordance with the
requirements of these By-Laws.
4.4 LOST, STOLEN OR DESTROYED CERTIFICATES. The corporation may issue a
new certificate of stock in place of any previously issued certificate
alleged to have been lost, stolen, or destroyed, upon such terms and
conditions as the Board of Directors may prescribe, including the
presentation of reasonable evidence of such loss, theft or destruction and
the giving of such indemnity as the Board of Directors may require for the
protection of the corporation, any transfer agent or registrar.
4.5 RECORD DATE. The Board of Directors may fix in advance a date as a
record date for the determination of the stockholders entitled to notice of
or to vote at any meeting of stockholders or to express consent (or dissent)
to corporate action in writing without a meeting, or entitled to receive
payment of any dividend or other distribution or allotment of any rights in
respect of any change, conversion or exchange of stock, or for the purpose of
any other lawful action. Such record date shall not be more than 60 nor less
than 10 days before the date of such meeting, nor more than 60 days prior to
any other action to which such record date relates.
If no record date is fixed, the record date for determining stockholders
entitled to notice of or to vote at a meeting of stockholders shall be at the
close of business on the day before the day on which notice is given, or, if
notice is waived, at the close of business on the day before the day on which
the meeting is held. The record date for determining stockholders entitled to
express consent to corporate action in writing without a meeting, when no
prior action by the Board of Directors is necessary, shall be the day on
which the first written consent is delivered to the corporation by delivery
to its registered office in the State of Delaware, its principal place of
business, or an officer or agent of the corporation having custody of the
book in which proceedings of meetings of stockholders are recorded. Delivery
made to a corporation's registered office shall be by hand or by certified or
registered mail, return receipt requested. The record date for determining
stockholders for
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any other purpose shall be at the close of business on the day on which the
Board of Directors adopts the resolution relating to such purpose.
A determination of stockholders of record entitled to notice of or to
vote at a meeting of stockholders shall apply to any adjournment of the
meeting; provided, however, that the Board of Directors may fix a new record
date for the adjourned meeting.
ARTICLE 5
GENERAL PROVISIONS
5.1 FISCAL YEAR. Except as from time to time otherwise designated by the
Board of Directors, the fiscal year of the corporation shall begin on the
first day of January in each year and end on the last day of December in each
year.
5.2 CORPORATE SEAL. The corporate seal shall be in such form as shall be
approved by the Board of Directors.
5.3 WAIVER OF NOTICE. Whenever any notice whatsoever is required to be
given by law, by the Certificate of Incorporation or by these By-Laws, a
waiver of such notice either in writing signed by the person entitled to such
notice or such person's duly authorized attorney, or by telegraph, cable or
any other available method, whether before, at or after the time stated in
such waiver, or the appearance of such person or persons at such meeting in
person or by proxy, shall be deemed equivalent to such notice.
5.4 VOTING OF SECURITIES. Except as the directors may otherwise
designate, the President or Treasurer may waive notice of, and act as, or
appoint any person or persons to act as, proxy or attorney-in-fact for this
corporation (with or without power of substitution) at, any meeting of
stockholders or shareholders of any other corporation or organization, the
securities of which may be held by this corporation.
5.5 EVIDENCE OF AUTHORITY. A certificate by the Secretary, or an
Assistant Secretary, or a temporary Secretary, as to any action taken by the
stockholders, director, a committee or any officer or representative of the
corporation shall as to all persons who rely on the certificate in good faith
be conclusive evidence of such action.
5.6 CERTIFICATE OF INCORPORATION. All references in these By-Laws to the
Certificate of Incorporation shall be deemed to refer to the Certificate of
Incorporation of the corporation, as amended and in effect from time to time.
5.7 TRANSACTIONS WITH INTERESTED PARTIES. No contract or transaction
between the corporation and one or more of the directors or officers, or
between the corporation and any other corporation, partnership, association,
or other organization in which one or more of the directors or officers, or
have a financial interest, shall be void or voidable solely for this reason,
or solely because the director or officer is present at or
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participates in the meeting of the Board of Directors or a committee of the
Board of Directors which authorizes the contract or transaction or solely
because his or their votes are counted for such purpose, if:
(a) The material facts as to his relationship or interest and as to
the contract or transaction are disclosed or are known to the Board of
Directors or the committee, and the Board or committee in good faith
authorizes the contract or transaction by the affirmative votes of a majority
of the disinterested directors, even though the disinterested directors be
less than a quorum; or
(b) The material facts as to his relationship or interest and as to
the contract or transaction are disclosed or are known to the stockholders
entitled to vote thereon, and the contract or transaction is specifically
approved in good faith by vote of the stockholders; or
(c) The contract or transaction is fair as to the corporation as of
the time it is authorized, approved or ratified, by the Board of Directors, a
committee of the Board of Directors, or the stockholders.
Common or interested directors may be counted in determining the presence
of a quorum at a meeting of the Board of Directors or of a committee which
authorizes the contact or transaction.
5.8 SEVERABILITY. Any determination that any provision of these By-Laws
is for any reason inapplicable, illegal or ineffective shall not affect or
invalidate any other provision of these By-Laws.
5.9 PRONOUNS. All pronouns used in these By-Laws shall be deemed to refer
to the masculine, feminine or neuter, singular or plural, as the identity of
the person or persons may require.
ARTICLE 6
INDEMNIFICATION
6.1 ACTIONS, SUITS AND PROCEEDINGS OTHER THAN BY OR IN THE RIGHT OF THE
CORPORATION. The corporation shall indemnify each person who was or is a
party or is threatened to be made a party to any threatened, pending or
completed action, suit or proceeding whether civil, criminal, administrative
or investigative (other than an action by or in the right of the
corporation), by reason of the fact that he is or was, or has agreed to
become, a director or officer of the corporation, or is or was serving, or
has agreed to serve, at the request of the corporation as a director, officer
or trustee of, or in a similar capacity with, another corporation,
partnership, joint venture, trust or other enterprise, including any employee
benefit plan (all such persons being referred to hereafter as an
"Indemnitee"), or by reason of any action alleged to have been taken or
omitted in such capacity, against all expenses
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(including attorneys' fees), judgments, fines and amounts paid in settlement
actually and reasonably incurred by him or on his behalf in connection with
such action, suit or proceeding and any appeal therefrom, if he acted in good
faith and in a manner he reasonably believed to be in, or not opposed to, the
best interests of the corporation, and, with respect to any criminal action
or proceeding, had no reasonable cause to believe his conduct was unlawful.
The termination of any action, suit or proceeding by judgment, order,
settlement, conviction or upon a plea of nolo contendere or its equivalent,
shall not, of itself, create a presumption that the person did not act in
good faith and in a manner which he reasonably believed to be in, or not
opposed to, the best interests of the corporation, and, with respect to any
criminal action or proceeding, had reasonable cause to believe that his
conduct was unlawful. Notwithstanding anything to the contrary in this
Article, except as set forth in Section 6.6 below, the corporation shall not
indemnify an Indemnitee seeking indemnification in connection with a
proceeding (or part thereof) initiated by the Indemnitee unless the
initiation thereof was approved by the Board of Directors of the corporation.
6.2 ACTIONS OR SUITS BY OR IN THE RIGHT OF THE CORPORATION. The
corporation shall indemnify any Indemnitee who was or is a party or is
threatened to be made a party to any threatened, pending or completed action
or suit by or in the right of the corporation to procure a judgment in its
favor by reason of the fact that he is or was, or has agreed to become, a
director or officer of the corporation, or is or was serving, or has agreed
to serve, at the request of the corporation, as a director, officer or
trustee of, or in a similar capacity with, another corporation, partnership,
joint venture, trust or other enterprise, including any employee benefit
plan, or by reason of any action alleged to have been taken or omitted in
such capacity, against all expenses (including attorneys' fees) and amounts
paid in settlement actually and reasonably incurred by him or on his behalf
in connection with such action, suit or proceeding and any appeal therefrom,
if he acted in good faith and in a manner he reasonably believed to be in, or
not opposed to, the best interests of the corporation, except that no
indemnification shall be made in respect of any claim, issue or matter as to
which such person shall have been adjudged to be liable to the corporation
unless and only to the extent that the Court of Chancery of Delaware or the
court in which such action or suit was brought shall determine upon
application that, despite the adjudication of such liability but in view of
all the circumstances of the case, such person is fairly and reasonably
entitled to indemnity for such expenses (including attorneys' fees) which the
Court of Chancery of Delaware or such other court shall deem proper.
6.3 INDEMNIFICATION FOR EXPENSES OF SUCCESSFUL PARTY. Notwithstanding
the other provisions of this Article, to the extent that an Indemnitee has
been successful, on the merits or otherwise, in defense of any action, suit
or proceeding referred to in Sections 6.1 and 6.2 of this Article, or in
defense of any claim, issue or matter therein, or on appeal from any such
action, suit or proceeding, he shall be indemnified against all expenses
(including attorneys' fees) actually and reasonably incurred by him or on his
behalf in connection therewith. Without limiting the foregoing, if any
action, suit or proceeding is disposed of, on the merits or otherwise
(including a disposition without prejudice), without (i) the disposition
being adverse to the Indemnitee, (ii) an adjudication that the Indemnitee was
liable to the
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corporation, (iii) a plea of guilty or nolo contendere by the Indemnitee,
(iv) an adjudication that the Indemnitee did not act in good faith and in a
manner he reasonably believed to be in or not opposed to the best interests
of the corporation, and (v) with respect to any criminal proceeding, an
adjudication that the Indemnitee had reasonable cause to believe his conduct
was unlawful, the Indemnitee shall be considered for the purposes hereof to
have been wholly successful with respect thereto.
6.4 NOTIFICATION AND DEFENSE OF CLAIM. As a condition precedent to his
right to be indemnified, the Indemnitee must notify the corporation in
writing as soon as practicable of any action, suit, proceeding or
investigation involving him for which indemnity will or could be sought. With
respect to any action, suit, proceeding or investigation of which the
corporation is so notified, the corporation will be entitled to participate
therein at its own expense and/or to assume the defense thereof at its own
expense, with legal counsel reasonably acceptable to such Indemnitee. After
notice from the corporation to the Indemnitee of its election so to assume
such defense, the corporation shall not be liable to the Indemnitee for any
legal or other expenses subsequently incurred by the Indemnitee in connection
with such claim, other than as provided below in this Section 6.4. The
Indemnitee shall have the right to employ his own counsel in connection with
such claim, but the fees and expenses of such counsel incurred after notice
from the corporation of its assumption of the defense thereof shall be at the
expense of the Indemnitee unless (i) the employment of counsel by the
Indemnitee has been authorized by the corporation, (ii) counsel to the
Indemnitee shall have reasonably concluded that there may be a conflict of
interest or position on any significant issue between the corporation and the
Indemnitee in the conduct of the defense of such action or (iii) the
corporation shall not in fact have employed counsel to assume the defense of
such action, in each of which cases the fees and expenses of counsel for the
Indemnitee shall be at the expense of the corporation, except as otherwise
expressly provided by this Article. The corporation shall not be entitled to
assume the defense of any claim brought by or in the right of the corporation
or as to which counsel for the Indemnitee shall have reasonably made the
conclusion provided for in clause (ii) above.
6.5 ADVANCE OF EXPENSES. Subject to the provisions of Section 6.6 below,
in the event that the corporation does not assume the defense pursuant to
Section 6.4 of this Article of any action, suit, proceeding or investigation
of which the corporation receives notice under this Article, any expenses
(including attorneys' fees) incurred by an Indemnitee in defending a civil or
criminal action, suit, proceeding or investigation or any appeal therefrom
shall be paid by the corporation in advance of the final disposition of such
matter, provided, however, that the payment of such expenses incurred by an
Indemnitee in advance of the final disposition of such matter shall be made
only upon receipt of an undertaking by or on behalf of the Indemnitee to
repay all amounts so advanced in the event that it shall ultimately be
determined that such Indemnitee is not entitled to be indemnified by the
corporation as authorized in this Article.
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6.6 PROCEDURE FOR INDEMNIFICATION. Any indemnification or advancement of
expenses pursuant to Section 6.1, 6.2, 6.3 or 6.5 of this Article shall be
made promptly, and in any event within 60 days after receipt by the
corporation of the written request of the Indemnitee, unless with respect to
requests under Section 6.1, 6.2 or 6.5 the corporation determines within such
60-day period that such Indemnitee did not meet the applicable standard of
conduct set forth in Section 6.1 or 6.2, as the case may be. Such
determination shall be made in each instance by (a) a majority vote of a
quorum of the directors of the corporation consisting of persons who are not
at that time parties to the action, suit or proceeding in question
("disinterested directors"), (b) if no such quorum is obtainable, a majority
vote of a committee of two or more disinterested directors, (c) a majority
vote of a quorum of the outstanding shares of stock of all classes entitled
to vote for directors, voting as a single class, which quorum shall consist
of stockholders who are not at that time parties to the action, suit or
proceeding in question, (d) independent legal counsel (who may be regular
legal counsel to the corporation) appointed for such purpose by vote of the
directors in the manner specified in clause (a) or (b) above, or (e) a court
of competent jurisdiction. The right to indemnification or advances as
granted by this Article shall be enforceable by the Indemnitee in any court
of competent jurisdiction if the corporation denies such request, in whole or
in part, or if no disposition thereof is made within the 60-day period
referred to above. Unless otherwise required by law, the burden of proving
that the Indemnitee is not entitled to indemnification or advancement of
expenses under this Article 6 shall be on the corporation. Neither the
failure of the corporation to have made a determination prior to the
commencement of such action that indemnification is proper in the
circumstances because the Indemnitee has met the applicable standard of
conduct, nor an actual determination by the corporation pursuant to this
Section 6.6 that the Indemnitee has not met such applicable standard of
conduct, shall be a defense to the action or create a presumption that the
Indemnitee has not met the applicable standard of conduct. Such Indemnitee's
expenses (including attorneys' fees) incurred in connection with successfully
establishing his right to indemnification, in whole or in part, in any such
proceeding shall also be indemnified by the corporation. Unless otherwise
provided by law, the burden of proving that the Indemnitee is not entitled to
indemnification or advancement of expenses under this Article shall be on the
corporation.
6.7 SUBSEQUENT AMENDMENT. No amendment, termination or repeal of this
Article or of the relevant provisions of the Delaware General Corporation Law
or any other applicable laws shall affect or diminish in any way the rights
of any Indemnitee to indemnification under the provisions hereof with respect
to any action, suit, proceeding or investigation arising out of or relating
to any actions, transactions or facts occurring prior to the final adoption
of such amendment, termination or repeal.
6.8 OTHER RIGHTS. The indemnification and advancement of expenses
provided by this Article shall not be deemed exclusive of any ocher rights to
which an Indemnitee seeking indemnification or advancement of expenses may be
entitled under any law (common or statutory), agreement or vote of
stockholders or disinterested directors or otherwise, both as to action in
his official capacity and as to action in any other capacity while holding
office for
15
<PAGE>
the corporation, and shall continue as to an Indemnitee who has ceased to be
a director or officer, and shall inure to the benefit of the estate, heirs,
executors and administrators of such Indemnitee. Nothing contained in this
Article shall be deemed to prohibit, and the corporation is specifically
authorized to enter into, agreements with officers and directors providing
indemnification rights and procedures different from those set forth in this
Article. In addition, the corporation may, to the extent authorized from
time to time by its Board of Directors, grant indemnification rights to other
employees or agents of the corporation or other persons serving the
corporation and such rights may be equivalent to, or greater or less than,
those set forth in this Article.
6.9 PARTIAL INDEMNIFICATION. If an Indemnitee is entitled under any
provision of this Article to indemnification by the corporation for some or a
portion of the expenses (including attorneys' fees), judgments, fines or
amounts paid in settlement actually and reasonably incurred by him or on his
behalf in connection with any action, suit, proceeding or investigation and
any appeal therefrom but not, however, for the total amount thereof, the
corporation shall nevertheless indemnify the Indemnitee for the portion of
such expenses (including attorneys' fees), judgments, fines or amounts paid
in settlement to which such Indemnitee is entitled.
6.10 INSURANCE. The corporation may purchase and maintain insurance, at
its expense, to protect itself and any director, officer, employee or agent
of the corporation or another corporation, partnership, joint venture, trust
or other enterprise, including any employee benefit plan, against any
expense, liability or loss incurred by him in any such capacity, or arising
out of his status as such, whether or not the corporation would have the
power to indemnify such person against such expense, liability or loss under
the Delaware General Corporation Law. The corporation's obligation to provide
indemnification under this Article shall be offset to the extent of any other
source of indemnification or any otherwise applicable insurance coverage
under a policy maintained by the corporation or any other person.
6.11 MERGER OR CONSOLIDATION. If the corporation is merged into or
consolidated with another corporation and the corporation is not the
surviving corporation, the surviving corporation shall assume the obligations
of the corporation under this Article with respect to any action, suit,
proceeding or investigation arising out of or relating to any actions,
transactions or facts occurring prior to the date of such merger or
consolidation.
6.l2 SAVINGS CLAUSE. If this Article or any portion hereof shall be
invalidated on any ground by any court of competent jurisdiction, then the
corporation shall nevertheless indemnify each Indemnitee as to any expenses
(including attorneys' fees), judgments, fines and amounts paid in settlement
in connection with any action, suit, proceeding or investigation, whether
civil, criminal or administrative, including an action by or in the right of
the corporation, to the fullest extent permitted by any applicable portion of
this Article that shall not have been invalidated and to the fullest extent
permitted by applicable law.
16
<PAGE>
6.13 DEFINITIONS. Terms used herein and defined in Section 145(h) and
Section 145(i) of the Delaware General Corporation Law shall have the
respective meanings assigned to such terms in such Section 145(h) and Section
145(i).
6.14 SUBSEQUENT LEGISLATION. If the Delaware General Corporation Law is
amended after adoption of this Article to expand further the indemnification
permitted to Indemnitees, then the corporation shall indemnify such persons
to the fullest extent permitted by the Delaware General Corporation Law, as
so amended.
ARTICLE 7
AMENDMENTS
7.1 BY THE BOARD OF DIRECTORS. These By-Laws may be altered, amended or
repealed or new by-laws may be adopted by the affirmative vote of a majority
of the directors present at any regular or special meeting of the Board of
Directors at which a quorum is present.
7.2 BY THE STOCKHOLDERS. These By-Laws may be altered, amended or
repealed or new by-laws may be adopted by the affirmative vote of the holders
of a majority of the shares of the capital stock of the corporation issued
and outstanding and entitled to vote at any regular meeting of stockholders,
or at any special meeting of stockholders, provided notice of such
alteration, amendment, repeal or adoption of new by-laws shall have been
stated in the notice of such special meeting.
17
<PAGE>
AMENDMENT OF THE BY-LAWS
OF
GENE LOGIC INC.
Upon approval of the Board of Directors and the stockholders of GENE
LOGIC INC. (the "Company") in accordance with Article 7 of the Company's
By-Laws, the Company's By-Laws are amended as follows:
I. SECTION 2.2 OF ARTICLE 2 IS AMENDED TO READ AS FOLLOWS
"2.2 BOARD OF DIRECTORS.
a. SIZE AND ELECTION OF THE BOARD OF DIRECTORS. The number of
directors constituting the Board of Directors of the Corporation shall at
all times be set at six (6). The members of the Board of Directors shall
be elected in accordance with this Section 2.2.
b. SERIES A AND SERIES A-1 DIRECTOR ELECTION RIGHT.
(i) The holders of at least a majority of the outstanding
shares of Series A Preferred Stock and Series A-1 Preferred Stock, voting
together as a single class, shall be entitled to elect one (1) director
of the Corporation (the "Series A Director"). At any annual or special
meeting of the Corporation (or in a written consent in lieu thereof) held
for the purpose of electing directors, the presence in person or by proxy
(or by written consent) of the holders of at least a majority of the
outstanding shares of Series A Preferred Stock and Series A-1 Preferred
Stock shall constitute a quorum for the election of the Series A Director.
(ii) Any Series A Director may be removed during his or her
term of office, without cause, by and only by, the affirmative vote or
written consent of the holders of at least a majority of the outstanding
shares of the Series A Preferred Stock and Series A-1 Preferred Stock,
voting together as a single class. A vacancy in the seat held by the
Series A Director shall be filled by vote or written consent of the
holders of at least a majority of the outstanding shares of Series A
Preferred Stock and Series A-1 Preferred Stock, voting together as a
single class.
c. SERIES B DIRECTOR ELECTION RIGHT.
(i) The holders of at least a majority of the outstanding
shares of Series B Preferred Stock, voting together as a separate class,
shall
1.
<PAGE>
be entitled to elect one (1) director of the Corporation (the "Series B
Director"). At any annual or special meeting of the Corporation (or in a
written consent in lieu thereof) held for the purpose of electing
directors, the presence in person or by proxy (or by written consent) of
the holders of at least a majority of the outstanding shares of Series B
Preferred Stock shall constitute a quorum for the election of the Series
B Director.
(ii) Any Series B Stock Director may be removed during his or
her term of office, without cause, by and only by, the affirmative vote
or written consent of the holders of at least a majority of the
outstanding shares of the Series B Preferred Stock, voting together as a
separate class. A vacancy in the seat held by any Series B Director shall
be filled by vote or written consent of the holders of at least a
majority of the outstanding shares of Series B Preferred Stock, voting
together as a separate class.
d. SERIES C DIRECTOR ELECTION RIGHT.
(i) The holders of at least a majority of the outstanding
shares of Series C Preferred Stock, voting together as a separate class,
shall be entitled to elect one (1) director of the Corporation (the
"Series C Director"). At any annual or special meeting of the Corporation
(or in a written consent in lieu thereof) held for the purpose of
electing directors, the presence in person or by proxy (or by written
consent) of the holders of at least a majority of the outstanding shares
of Series C Preferred Stock shall constitute a quorum for the election of
the Series C Director.
(ii) Any Series C Stock Director may be removed during his or
her term of office, without cause, by and only by, the affirmative vote
or written consent of the holders of at least a majority of the
outstanding shares of the Series C Preferred Stock, voting together as a
separate class. A vacancy in the seat held by any Series C Director shall
be filled by vote or written consent of the holders of at least a
majority of the outstanding shares of Series C Preferred Stock, voting
together as a separate class.
e. REMAINING DIRECTORS.
(i) The holders of at least a majority of the outstanding
shares of Common Stock and Preferred Stock, voting together as a single
class, shall be entitled to elect three (3) directors of the Corporation
(the "Remaining Directors"). At any annual or special meeting of the
Corporation (or in a written consent in lieu thereof) held for the
purpose of electing directors, the presence in person or by proxy (or by
written consent) of the holders of a majority of the outstanding shares
of Common Stock and Preferred Stock shall constitute a quorum for the
election of the Remaining Directors.
2.
<PAGE>
(ii) Any Remaining Director may be removed during his or her
term of office, without cause, by and only by, the affirmative vote or
written consent of the holders of at least a majority of the outstanding
shares of the Common Stock and Preferred Stock, voting together as a
single class. A vacancy in the seat held by any Remaining Director shall
be filled by vote or written consent of the holders of at least a
majority of the outstanding shares of Common Stock and Preferred Stock,
voting together as a single class."
CERTIFICATE OF ASSISTANT SECRETARY
I, the undersigned, certify that I am the presently elected and acting
Assistant Secretary of GENE LOGIC INC., a Delaware corporation, and the above
amendment to the corporation's By-Laws was duly adopted by the Board of
Directors and the stockholders.
/s/ FREDERICK T. MUTO
---------------------------------------
Frederick T. Muto , Assistant Secretary
3.
<PAGE>
Exhibit 5.1
[COOLEY GODWARD LLP LETTERHEAD]
October 16, 1997
Gene Logic inc.
10150 Old Columbia Road
Columbia, MD 21046
Ladies and Gentlemen:
You have requested our opinion with respect to certain matters in connection
with the filing by Gene Logic Inc. (the "Company") of a Registration
Statement on Form S-1 (the "Registration Statement"), with the Securities and
Exchange Commission (the "Commission"), including a related prospectus to be
filed with the Commission pursuant to Rule 424(b) of Regulation C (the
"Prospectus") promulgated under the Securities Act of 1933, as amended, and
the underwriten public offering of up to 3,450,000 shares of common stock,
including 450,000 shares of common stock for which the Underwriters have been
granted an over-allotment option (the "Common Stock").
In connection with this opinion, we have (i) examined and relied upon the
Registration Statement and related Prospectus, the Company's Amended and
Restated Certificate of Incorporation and By-laws and the originals or copies
certified to our satisfaction of such records, documents, certificates,
memoranda and other instruments as in our judgment are necessary or
appropriate to enable us to render the opinion expressed below and (ii)
assumed that the shares of the Common Stock will be sold by the Underwriters
at a price established by the Pricing Committee of the Company's Board of
Directors.
On the basis of the foregoing, and in reliance thereon, we are of the opinion
that the Common Stock, when sold and issued in accordance with the
Registration Statement and related Prospectus, will be validly issued, fully
paid and nonassessable.
We consent to the reference to our firm under the caption "Legal Matters" in
the Prospectus included in the Registration Statement and to the filing of
this opinion as an exhibit to the Registration Statement.
Very truly yours,
Cooley Godward LLP
By: /s/ L. Kay Chandler
----------------------------
L. Kay Chandler
<PAGE>
Exhibit 10.21
M.O.R. XVIII ASSOCIATES LIMITED PARTNERSHIP (Landlord)
TRIPLE NET LEASE AGREEMENT
FOR
GENE LOGIC, INC. (Tenant)
TABLE OF CONTENTS
Paragraph Page No.
1. Leased Premises....................................................... 1
2. Term.................................................................. 2
3. Security Deposit...................................................... 3
4. Rental Payments....................................................... 4
4.1. Definitions..................................................... 5
4.2. Utilities....................................................... 5
4.3. Escrow Agreement................................................ 7
5. Conditions of Tenant's Occupancy and Possession....................... 8
5.1. Use Restrictions and Rules...................................... 8
5.2. Improvements by Tenant.......................................... 9
5.3. Maintenance..................................................... 10
5.4. Conduct on Leased Premises...................................... 11
5.5. Insurance....................................................... 11
5.6. Liens........................................................... 12
5.7. Environmental Assurances........................................ 12
(a) Covenants................................................... 12
(b) Indemnification............................................. 14
(c) Definitions................................................. 14
6. Landlord's Rights and Responsibilities................................ 15
6.1. Access.......................................................... 15
6.2. Building Repairs................................................ 15
6.3. Performance of Tenant's Responsibilities by Landlord............ 16
6.4. Loss, Damage, Injury............................................ 16
6.5. Mutual Indemnity................................................ 16
<PAGE>
7. Damage and Destruction................................................ 17
8. Condemnation.......................................................... 18
9. Holding Over.......................................................... 18
10. Default.............................................................. 19
10.1.Events of Default............................................... 19
10.2.Effect of Default............................................... 20
10.3 Termination of Lease and Possession of Leased Premises.......... 21
<PAGE>
10.4 Damages......................................................... 21
10.5 Confession of Judgment.......................................... 21
11. Legal and General Provisions......................................... 22
11.1 Assignment/Subletting........................................... 22
11.2 Estoppel Certificates........................................... 23
11.3 Subordination................................................... 23
11.4 Attornment...................................................... 24
11.5 Landlord's Liability............................................ 24
11.6 Authority....................................................... 24
11.7 Notices......................................................... 24
11.8 Severability, Enforceability.................................... 25
11.9 Captions........................................................ 25
11.10.Recordation.................................................... 25
11.11 Successors and Assigns......................................... 26
11.12 Commissions.................................................... 26
11.13 Quiet Enjoyment................................................ 26
11.14 Force Majeure.................................................. 26
11.15 Waiver of Jury Trial........................................... 27
11.16 Miscellaneous.................................................. 27
12. Contingency.......................................................... 27
Exhibit A - The Land
Exhibit B - Leased Premises
Exhibit C - Tenant's Use
Exhibit D - List of Covenants Affecting Leased Premises
Schedule I - Items Belonging to Landlord to Remain in the Leased Premises as of
the Commencement Date
Schedule II - Items Purchased by Tenant to Remain Property of
Tenant after Lease Expiration
<PAGE>
LEASE AGREEMENT
THIS AGREEMENT OF LEASE is made this 7th day of May, 1997, by and
between M.O.R. XVIII ASSOCIATES LIMITED PARTNERSHIP, a limited partnership
formed under the laws of the State of Maryland (hereinafter referred to as
"Landlord"), and GENE LOGIC, INC., a Delaware corporation (hereinafter
referred to as "Tenant").
WITNESSETH, that the parties hereby covenant, promise and agree as follows:
1. Leased Premises
1.1. Landlord is the owner of a building containing approximately
75,500 square feet (the "Building") constructed on land leased by Landlord
and designated as Parcel M-2 (the "Land") on the Plat entitled, "Parcels M-2
and M-3, A Resubdivision of Parcel M-1, Plat No. 5194", which plat is
recorded among the Land Records of Howard County, Maryland as Plat No. 5693.
The Land contains approximately 11 acres, is located at 10150 Columbia Road
in the Rivers Corporate Park (the "Park") in Howard County, Maryland (the
"County"), and is more particularly shown on Exhibit A attached hereto
incorporated by reference herein and initialed by the parties. The Land, the
Building, the easements and rights appurtenant thereto (including those
established by certain declarations of covenants recorded prior hereto among
the Land Records of the County), and the sidewalks, areaways, parking areas,
driveways, loading areas, gardens and lawns surrounding the Building and
located on the Land are collectively hereinafter called the "Real Property".
Landlord does hereby lease unto Tenant, and Tenant does hereby rent from
Landlord, that portion of the Building containing approximately 12,500,
rentable square feet as more particularly described on Exhibit B attached
hereto incorporated by reference herein and initialed by the parties (the
"Leased Premises") for the "Lease Term" (as hereinafter defined).
Tenant shall be entitled to the use in common with other tenants of the
Building of the parking areas on the Real Property. Such use shall be
non-exclusive, at no additional cost, and on a first come-first serve basis,
subject to such reasonable rules and regulations as Landlord may from time to
time promulgate therefor.
The rentable square feet of the Leased Premises will be
<PAGE>
verified, and adjusted as necessary. The calculation of Basic Annual Rent will
also be appropriately adjusted if the measurement of the Leased Premises
reflects a measurement different from 12,500.
1.2. Tenant has been leasing a portion of the Leased Premises from
the former tenants of the Building (Crop Genetics International Corporation
["Crop Genetics"] or its parent (biosys, Inc.) (Crop Genetics and biosys,
Inc. are herein collectively "biosys") since May 2, 1996.
1.3. The Leased Premises shall be delivered to Tenant in "AS-IS"
condition except that Landlord shall (i) make reasonable repairs to the roof
over the Leased Premises provided the cost of repairs to the roof does not
exceed Five Thousand Dollars ($5,000.00); and (ii) make reasonable repairs as
requested by Tenant and agreed to by Landlord to the slab of the Leased
Premises, and the HVAC and other Building systems affecting the Leased Premises,
provided the aggregate cost of such repairs does not exceed Six Thousand Dollars
($6,000.00). Tenant acknowledges that Landlord has no responsibility whatsoever
with respect to any equipment, trade fixtures, laboratory area items or systems,
humidifiers, furniture or similar items now within the Leased Premises and same
are delivered without representation or warranty whatsoever for Tenant's use
during the Lease Term subject to Sections 5.2 and 5.3 hereof. Tenant further
understands and acknowledges that certain equipment and systems now in the
Leased Premises have been sold by biosys and may be removed by such buyer upon
reasonable prior notice to Tenant. Landlord and Tenant acknowledge that those
items listed on Schedule I attached hereto and incorporated by reference herein
are (among other items) the property of Landlord and will not be so removed.
Tenant understands that the buyer will commence its move on or about April 7,
1997 and anticipates that such move will take two or three weeks to complete.
2. Term. Provided Escrow Agent shall have received from Tenant
simultaneously with Tenant's execution of this Lease Twenty-five Thousand
Dollars ($25,000.00) (the "Term Fee") to be held by Escrow Agent (hereinafter
defined) and delivered to Landlord pursuant to Section 4.3 below, this Lease
shall be for an initial term commencing on the day after the contingency set
forth in Section 12 below has been satisfied, but shall be effective as of
April 1, 1997 (the "Commencement Date") and terminating at 11:59 p.m. on
September 30, 1997, unless thereafter
-2-
<PAGE>
continued on a month-to-month basis because neither Tenant nor Landlord has
elected to terminate this tenancy by giving the other at least sixty (60) days
prior written notice to so terminate. No such notice shall be effective to
terminate the Lease prior to September 30, 1997. Notwithstanding the foregoing,
this Lease may be terminated at any time pursuant to Section 10 hereof if Tenant
is in default of its obligations hereunder after the running of any applicable
notice and cure period pursuant to Section 10.1 hereof. Prior to the expiration
of said 60-day period or any applicable notice and cure period Tenant shall have
vacated the Leased Premises and removed all of its personalty therefrom leaving
same in clean order and condition in accordance with Section 5.2 and Section
5.3(e) below. Until the Commencement Date, Tenant may continue to occupy the
Leased Premises pursuant to Tenant's sublease agreement with biosys (the
"Sublease") and not pursuant to this Lease, provided, however, all terms of the
Sublease to be satisfied by Tenant are so satisfied except that in lieu of any
rental payments due thereunder after March 31, 1997, all Rent due under this
Lease is, subject to the written approval of biosys and the Bankruptcy Court,
paid directly to Landlord or the Escrow Agent as the case may be.
Tenant shall also be subject to compliance with the terms hereof from and
after April 1, 1997.
Each respective period of twelve (12) successive calendar months
during the Lease Term or any renewals thereof shall be hereinafter referred to
as a "lease year".
3. Security Deposit. Subject to adjustment if the measurement of the
Leased Premises reflects a measurement different from 12,500, Tenant shall
deposit with Escrow Agent simultaneously with its execution of this Lease a
"Security Deposit" of Thirteen Thousand Two Hundred Eighty-one Dollars and
Twenty-five Cents ($13,281.25) in the form of cash or a clean, non-contingent
irrevocable letter of credit from a financial institution and otherwise in
form and substance reasonably acceptable to Landlord. The Security Deposit
shall be held by Escrow Agent and delivered to Landlord or Tenant pursuant to
Section 4.3 below. Tenant may substitute one form of Security Deposit for the
other from time to time. The Security Deposit shall be paid by Tenant to
guarantee performance of its covenants in this Lease. To the extent the
Security Deposit has not been applied pursuant to the terms of this Lease, it
will be returned to Tenant within 30 days following the termination of this
Lease.
-3-
<PAGE>
In addition to any and all other remedies available to Landlord under this
Lease, the Security Deposit may be used at any time by Landlord to cure or
compensate Landlord for any breaches of the Lease by Tenant. To the extent
Landlord makes any such use of the Security Deposit, Tenant will immediately
replenish it to its original amount. Landlord is not required to put the
Security Deposit into escrow and neither Escrow Agent nor Landlord is required
to pay or accrue any interest on it. The Security Deposit may not be used or
applied by Tenant in lieu of Basic Annual Rent.
4. Rental Payments. Subject to adjustment if the measurement of the
Leased Premises reflects a measurement different from 12,500, Tenant agrees
to pay Landlord Basic Annual Rent of Two Hundred Twenty-one Thousand Eight
Hundred Seventy-five Dollars ($221,875.00) (i.e. $17.75 per square foot based
on 12,500 square feet) in equal monthly installments of Eighteen Thousand
Four Hundred Eighty-nine Dollars and Fifty-eight Cents ($18,489.58), except
that Thirty-six Thousand Nine Hundred Seventy-nine Dollars and Sixteen Cents
($36,979.16) (the "Advance Rent") (i.e. the first and last monthly
installment of Basic Annual Rent), shall be paid to Escrow Agent
simultaneously with Tenant's execution of this Lease in the form of cash.
Each monthly installment of Basic Annual Rent (other than the Advance Rent)
shall be paid to Landlord or Escrow Agent pursuant to Section 4.3 below in
advance on the first (1st) day of each and every month for which payment is
due. All payments of Basic Annual Rent, Additional Rent or other sums due
Landlord under this Lease will be paid by Tenant without any deductions or
set-offs and without demand, at the address designated in this Lease for such
payments or, pursuant to Section 4.3, to the Escrow Agent, or at any other
address that Landlord designates in writing to Tenant.
Unless specifically stated otherwise in this Lease, the term "Rent"
means Basic Annual Rent and Additional Rent. Because Landlord will incur
additional expenses if Tenant does not pay the Rent on the date due, Tenant will
pay a late charge of Twenty-five Dollars ($25.00) per day for each day such a
payment is more than three (3) business days late. The late charge will be
payable at the same time as the late payment, without demand. Time is of the
essence respecting all payments to be made by Tenant to Landlord under this
Lease.
The term "Additional Rent" includes all payments or installments due
under this Lease other than Basic Annual Rent
-4-
<PAGE>
(including reasonable attorneys' fees incurred by Landlord in connection with
Tenant's default). Unless a different period for payment is provided for
elsewhere in this Lease, any Additional Rent due will be paid by Tenant within
thirty (30) days after Landlord has notified Tenant of the amount due. Tenant's
obligation for Additional Rent and any unpaid Basic Annual Rent will remain in
effect after the termination or expiration of this Lease.
4.1. Definitions. For purposes of this Lease, the following meanings
or definitions shall apply:
(a) Intentionally Deleted.
(b) Intentionally Deleted.
(c) "Real Property" shall have the meaning set forth in Section
1.1 above.
(d) Intentionally Deleted.
(e) "Term" or "Lease Term" shall mean the initial six month
lease term and any subsequent month-to-month tenancy pursuant to Section 2
hereof.
(f) "Deed of Trust" shall mean the deed of trust or mortgage
securing Landlord's original, interim, and/or permanent financing for the Real
Property and the beneficiary thereof is herein the "Lender".
(g) Intentionally Deleted.
(h) Intentionally Deleted.
4.2. Utilities. (a) Tenant agrees to pay promptly to the
appropriate supplier all charges for telephone and all other communication
services used and/or supplied in connection with Tenant's use of the Leased
Premises.
(b) Except as set forth below, Landlord will furnish the
following services (the "Full Services") to the Leased Premises: heat during
winter, air conditioning during summer, and an amount of electric current
sufficient to operate Tenant's business as now being conducted.
-5-
<PAGE>
Landlord reserves the right to stop supplying the Full Services
when necessary, by reason of accident, or emergency, or for repairs,
alterations, replacement or improvements, which in the judgment of Landlord are
desirable or necessary to be made, until such repairs, alterations, replacements
or improvements are completed; provided, however, Landlord shall use reasonable
efforts to minimize any interruption of such Full Services and to complete any
such repairs, alterations, replacements or improvements as quickly as possible.
Except in the event of an emergency, Landlord shall provide reasonable advance
notice to Tenant's representative at the Leased Premises (which may be verbal)
of Landlord's intention to interrupt the Full Services. In an emergency
situation, no such notice is required. Landlord is not responsible and will not
be liable for failure to supply the Full Services during such period or when
prevented from doing so by any cause beyond Landlord's reasonable control.
Tenant agrees that stoppage of any of the Full Services under the foregoing
circumstances will not be a constructive eviction of Tenant, nor will Tenant be
permitted to stop paying Rent or performing any other of Tenant's obligations
under this Lease as a result of such stoppage. Anything to the contrary
contained herein notwithstanding, in the event that Full Services are
interrupted for five (5) consecutive business days, or that same are interrupted
for more than five (5) out of eight (8) consecutive business days, and further
in the event that as a result of such interruption Tenant determines to cease,
curtail or otherwise substantially modify its operations in any affected area
(e.g., during the summer by modifying work hours to avoid excessive heat), then,
as Tenant's sole remedy for such interruption all Rent shall thereafter abate
with respect to such affected areas until such interruption ceases and Tenant is
once again able to operate on a continuous, regular uninterrupted basis in such
affected areas. In the event that such interruption continues for more than
thirty (30) consecutive days, then Tenant shall have the right to terminate this
Lease provided it gives thirty (30) days prior written notice to Landlord, and
such interruption has not been corrected during such time. The time periods
provided for in this paragraph shall not be extended by reason of Paragraph
11.14.
Notwithstanding anything in this Lease to the contrary, any
maintenance or repair to the HVAC, plumbing, electrical or other systems which
are required, directly or indirectly, because of any negligent acts or use of
such systems
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by Tenant or its agents, representatives, employees or visitors, will be made by
Landlord at Tenant's sole cost and expense.
4.3. Escrow Agreement. Tenant shall deposit the Term Fee, the Security
Deposit, the Advance Rent and, if applicable, the monthly installment of Basic
Annual Rent due for May, 1997 (collectively, the "Escrow Money") with Shapiro
and Olander, P.A. ("Escrow Agent") at the time of its execution of this Lease.
The "Escrow Money" shall also include all other sums deposited hereafter with
Escrow Agent pursuant to this Lease. Landlord and Tenant acknowledge that until
satisfaction of the contingency set forth in Section 12 below, all sums due
under this Lease shall be deposited with Escrow Agent and payments made to
Escrow Agent shall be deemed in satisfaction of the corresponding payment
obligation under this Lease. The Escrow Money is not required to be held by
Escrow Agent in an interest bearing account. It is agreed that Escrow Agent
shall have no obligation or liability hereunder except as a depository to hold
the Escrow Money and to dispose of same as follows:
(i) In the event the contingency set forth in Section 12 hereof
is not satisfied on or before July 28, 1997 (the "Contingency Date"), (i) the
Term Fee shall be returned to Tenant within five (5) business days after such
date; (ii) all Rent paid to Escrow Agent (including the Advance Rent)
attributable to the period from and after April 1, 1997 and prior to the
Contingency Date shall be paid to Tenant (provided, however, that in the event
that the Bankruptcy Court shall order that funds be paid to biosys or Landlord
then Escrow Agent shall pay to biosys or Landlord the amount of such funds so
ordered to be paid); and (iii) the Security Deposit shall be returned to Tenant
by Escrow Agent within five (5) business days after Tenant has vacated the
Leased Premises following the termination of the Sublease, leaving the Leased
Premises clean and at least in the same good condition (reasonable wear and tear
excepted) as on April 1, 1997 or as may have been improved subsequent to April
1, 1997 pursuant to Section 1.3 hereof.
(ii) In the event the contingency set forth in Section 12 hereof
is satisfied on or before the Contingency Date, the Escrow Money shall be
delivered to Landlord by Escrow Agent to be held by Landlord in accordance with
the terms hereof. From and after the satisfaction of the contingency set forth
in Section 12 below and the distribution of the Escrow Money as set forth in
this Section 4.3, all future payments of Rent hereunder shall be
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made directly to Landlord.
Upon disposition by Escrow Agent, in accordance with
the terms hereof, of the Escrow Money, Escrow Agent shall be fully and finally
released and discharged from any and all duties, obligations and liabilities
arising in connection with this Lease.
Tenant acknowledges that Landlord's attorney is acting
as Escrow Agent as an accommodation to both parties and Tenant agrees that
Escrow Agent shall be entitled to represent Landlord in any dispute with Tenant
without a conflict of interest hereunder.
5. Conditions of Tenant's Occupancy and Possession
5.1. Use Restrictions and Rules. Tenant agrees to use the Leased
Premises only for the purposes set forth on Exhibit C attached hereto and
incorporated herein and for no other purpose. In addition, Tenant agrees to
be bound by all laws, requirements, rules, orders, ordinances, zoning and
restrictive covenants applicable to the Real Property, whether in force on or
after the Commencement Date, and by the Rules and Regulations as announced by
Landlord from time to time, including those set forth in Exhibit D
(collectively, the "Restrictions") provided that in no event shall the
foregoing require Tenant to make any alterations, additions or repairs to the
Leased Premises or any equipment or systems therein except if required of
Tenant by order of governmental authority as a result of Tenant's particular
use of the Leased Premises. In particular, the Restrictions include (but are
not limited to) certain covenants and restrictions, referred to as the
General Restrictions and the Special Restrictions, to which the Real Property
is subject and of which copies have been provided to Tenant by Landlord
(collectively, the "HRD Restrictions") as same may be modified from time to
time. Tenant acknowledges receipt of the HRD Restrictions and that it is
cognizant of the terms and provisions of the HRD Restrictions and agrees to
be bound by them. Landlord and Tenant agree that The Howard Research and
Development Corporation and its successors are third party beneficiaries to
this Section and may remedy any violation of the HRD Restrictions occasioned
by Tenant's use and occupancy of the Leased Premises, in the manner and to
the extent provided in the HRD Restrictions, including, but not limited to,
bringing suit, at law or in equity,
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directly against Tenant.
5.2. Improvements by Tenant. Tenant will not make any further
improvements, alterations, installations or additions to the Leased Premises
unless (1) it receives Landlord's prior written consent, which will not be
unreasonably withheld; (2) the work is performed only by licensed and bonded
contractors reasonably approved in advance by Landlord; (3) the work is
carried out pursuant to properly documented drawings reasonably approved in
advance by Landlord and pursuant to all necessary permits or governmental
and/or other approvals, the responsibility and cost of obtaining which will
be borne solely by Tenant; (4) Tenant pays all costs of such work; and (5)
the quiet enjoyment of other tenants in the Building is not disturbed. All
work with respect to which neither Landlord nor Manekin Corporation
("Manekin") is the general contractor shall be performed under the general
supervision of Landlord or Manekin for which Landlord or Manekin, as the case
may be, shall be paid a reasonable supervisory fee which, with respect to all
major improvements, shall be equal to $60.00 for each hour of supervision
performed by Landlord.
With the exception of Tenant's movable trade fixtures and
furniture, all alterations, additions and improvements made by Tenant or its
predecessors in occupancy of the Leased Premises are hereby deemed the property
of Landlord and will remain a part of the Leased Premises upon this Lease's
termination, unless otherwise agreed at the time approval for such Tenant work
is sought. Landlord, however, may at the time it gives consent to any
alterations by Tenant request in writing that Tenant remove any or all of them
no later than the termination date of this Lease. In response to Landlord's
request, Tenant promptly will perform such removal and restore the Leased
Premises to their original condition, all at Tenant's sole cost. Landlord
acknowledges that those items listed on Schedule II attached hereto and
incorporated by reference herein were purchased by Tenant and will remain the
property of Tenant after the expiration of this Lease. Further, in the event
Tenant shall purchase a generator, such generator shall remain the property of
Tenant after the expiration of this Lease. Landlord agrees that, without
limiting the foregoing, Tenant may remove the items listed on Schedule II as
well as any generator purchased by Tenant provided that Tenant repairs any
damage caused to the Leased Premises or the Building by such removal and Tenant
restores the Leased Premises to their condition prior to installation of such
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items, all at Tenant's sole cost and expense.
5.3. Maintenance.
(a) Tenant will, at its sole cost, keep the Leased Premises in
as good condition and repair as on the Commencement Date, normal wear and tear
excepted, and will permit no damage to the Leased Premises or the fixtures,
improvements, equipment and appurtenances in and to the Leased Premises.
Tenant's responsibility under this Section 5.3(a) will include, but will not be
limited to trash and Hazardous Substance removal, cleaning of the Leased
Premises (in each case by a qualified contractor reasonably acceptable to
Landlord), maintenance and repair of all interior windows and doors, hardware,
locks, light fixtures, pipes, interior plumbing, electrical and sewer
connections.
(b) Except for repairs to the roof of the Leased Premises and
the slab of the Leased Premises to be made by Landlord to the extent set forth
in Section 1.3 above, Landlord shall have no other maintenance, repair or
replacement obligations but shall, at Tenant's sole cost and expense, make such
repairs and perform such maintenance as may be requested by Tenant to the
Building and/or the Leased Premises.
(c) Tenant will not commit or suffer any waste of the Leased
Premises. Landlord or Landlord's representatives may enter the Leased Premises
at any reasonable time to verify Tenant's compliance with this Lease.
(d) At the expiration or termination of this Lease, (a) Tenant
will leave the Leased Premises clean and at least in the same good condition
(reasonable wear and tear excepted) as when the Lease Term began and (b) Tenant
will remove all of its property and possessions from the Leased Premises except
to the extent provided by Section 5.2 above, and repair any damage caused
thereby. Any items of Tenant's personalty remaining in the Leased Premises
after the termination of the Lease shall be deemed abandoned by Tenant and
become the sole property of Landlord. Notwithstanding the foregoing, any costs
incurred by Landlord in storing and/or disposing of such abandoned property
shall remain the sole obligation of Tenant, which obligation shall survive the
termination of this Lease.
(e) Anything to the contrary herein
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notwithstanding, because of the short duration of this Lease, Tenant shall not
be required to perform any maintenance or repair other than to correct damage
caused by the wrongful or negligent acts or omissions of Tenant or its
representatives, agents, employees or visitors.
5.4. Conduct on Leased Premises. Tenant will neither do, nor permit
anyone else to do, anything on the Leased Premises which might or would (1)
interfere with the good order of the Real Property; (2) interfere with the
rights of other tenants of the Real Property; (3) increase any insurance
rates charged Landlord with respect to the Real Property; or (4) conflict
with or invalidate any insurance policy maintained by Landlord for the Real
Property. If the insurance premiums of Landlord are increased due to
Tenant's use or occupancy of the Leased Premises, then the amount of such
increase will be paid by Tenant to Landlord as Additional Rent as it becomes
due, and Landlord will have the same right to collect such amount as Landlord
has under this Lease to collect Additional Rent.
5.5. Insurance. Tenant will purchase at its sole cost, from an
insurance company licensed to do business in the State of Maryland and
approved by Landlord, a policy of public liability insurance covering the
Leased Premises and the business conducted by Tenant there. The policy will
be kept in force during the entire Lease Term. The policy will have minimum
limits of liability of (1) $1,000,000 for injuries to or death of any one or
more persons with respect to any one occurrence and (2) $2,000,000 with
respect to the aggregate. The policy must name Landlord and Manekin
Corporation as additional insureds, and must contain an agreement by the
insurer not to cancel or change the insurance without first endeavoring to
give Landlord thirty (30) days' prior written notice. Tenant will furnish
Landlord with a certificate of insurance simultaneously with its execution of
this Lease and on the date of each policy renewal.
During the Lease Term, Landlord shall carry a policy of general
liability insurance covering occurrences at the Building and a policy of
all-risk insurance for the full insurable value of the Building in reasonable
amounts or in such other amounts as may be required by Landlord's Lender from
time to time.
Anything to the contrary contained herein
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notwithstanding, Landlord and Tenant hereby mutually waive all claims for
recovery from the other for any loss or damage to any of Landlord's or
Tenant's property insurable under policies required to be maintained by such
party hereunder valid and collectible insurance policies to the extent of any
recovery for loss insured under those policies. The parties agree that a
mutual subrogation clause will be included in each insurance policy setting
forth that the insurance will not be invalidated in the event that the
insured waives in writing, before any loss, any or all right of recovery
against the other party for any insured loss.
5.6. Liens. Tenant will not do anything, or permit anything to be
done, which subjects all or any part of the Leased Premises or Tenant's
interest in it to any lien or encumbrance. This includes, but is not limited
to, mechanics' or materialmen's liens. If any such lien is filed purporting
to be for work or material furnished to Tenant, then Tenant must have such
lien discharged or bonded within ten (10) days of its filing.
5.7. Environmental Assurances.
(a) Covenants. Tenant covenants with Landlord:
(i) that it shall not Generate Hazardous Substances at, to
or from the Leased Premises unless the same is specifically approved in advance
by Landlord in writing;
(ii) to comply with all obligations imposed by applicable
law, and regulations promulgated thereunder, and all other restrictions and
regulations upon the Generation by Tenant or other occupants of the Leased
Premises of Hazardous Substances (whether or not at, to or from the Leased
Premises);
(iii) to deliver promptly to Landlord true and complete
copies of all notices received by Tenant from any governmental authority with
respect to the Generation by Tenant of Hazardous Substances (whether or not at,
to or from the Leased Premises);
(iv) to complete fully, truthfully and promptly any
questionnaires sent by Landlord with respect to
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Tenant's use of the Leased Premises and Generation of Hazardous Substances;
(v) to permit entry onto the Leased Premises by Landlord or
Landlord's representatives at any reasonable time to verify and monitor Tenant's
compliance with its representations, warranties and covenants set forth in this
Section 5.7;
(vi) to pay to Landlord, as Additional Rent, the reasonable
costs incurred by Landlord hereunder, including the reasonable costs of such
monitoring and verification;
(vii) to furnish to Landlord, at the expiration of the
Term or at the sooner termination of the Term as herein provided, a
certification to Landlord, in form and content acceptable to Landlord, from an
environmental audit company acceptable to Landlord to the effect that, based
upon an inspection conducted by such environmental audit company not more than
thirty (30) days prior to the expiration or termination of the Term, the Leased
Premises are free from Hazardous Substances which were not present on the
commencement date of the Sublease (i.e. on May 2, 1996) (the burden to prove the
existence prior to such date shall be upon Tenant);
(viii) to obtain its own Hazardous Waste Generator Site
Number from the applicable Federal, State or Local authorities and will provide
Landlord with proof of such compliance as a pre-condition to its commencement of
occupancy hereunder;
(ix) to obtain its own Radioactive Use Permit from
applicable Federal, State and Local authorities, and will provide Landlord with
proof of such compliance as a pre-condition to its commencement of occupancy
hereunder;
(x) to store any Hazardous Substance, in Landlord
approved storage areas within the Leased Premises and in no other area.
Tenant shall be responsible for the removal of such materials in accordance
with applicable law. Tenant will be responsible for the costs of any tenant
improvements associated with the creation of such storage area within the
Leased Premises;
(xi) to contact the appropriate local
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government authority for any necessary sewer discharge permits and to provide
Landlord with proof of such compliance as a pre-condition to its commencement of
occupancy hereunder; and
(xii) to designate a company safety director/contact
prior to occupancy of the Leased Premises. Tenant's safety director will be the
primary contact for Landlord regarding compliance audits and evacuation drills.
(b) Indemnification. Tenant agrees to indemnify and defend
Landlord (with legal counsel reasonably acceptable to Landlord) from and against
any costs, fees or expenses (including, without limitation, environmental
assessment, investigation and environmental remediation expenses, third party
claims and environmental impairment expenses and reasonable attorneys' fees and
expenses) incurred by Landlord in connection with Tenant's Generation of
Hazardous Substances at, to or from the Leased Premises or in connection with
Tenant's failure to comply with its representations, warranties and covenants
set forth in this Paragraph. This indemnification by Tenant will remain in
effect for one year after the termination or expiration of this Lease.
(c) Definitions. The term "Hazardous Substance" means (i) any
"hazardous waste" as defined by the Resource Conservation and Recovery Act of
1976 (42 U.S.C. Section 6901 et seq.), as amended from time to time, and
regulations promulgated thereunder; (ii) any "hazardous substance" as defined
by the Comprehensive Environmental Response, Compensation and Liability Act
of 1980 (42 U.S.C. Section 9601 et seq.), as amended from time to time, and
regulations promulgated thereunder; (iii) any "oil," as defined by the
Maryland Environment Code Ann. Section 4-401(g), as amended from time to
time, and regulations promulgated thereunder; (iv) any "controlled hazardous
substance" or "hazardous substance" as defined by the Maryland Environment
Code Ann. Section 7-201, as amended from time to time, and regulations
promulgated thereunder; (v) any "infectious waste" as defined by the Maryland
Environment Code Ann. Section 9-227, as amended from time to time, and
regulations promulgated thereunder; (vi) any substance the presence of which
on the Real Property is prohibited, regulated or restricted by any law or
regulation similar to those set forth in this definition; and (vii) any other
substance which by law or regulation requires special handling in its
Generation. The term "To Generate" means
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to use, collect, generate, store, transport, treat or dispose of.
The foregoing notwithstanding, the term "Hazardous
Substance" shall not include normal materials and supplies customarily used in
Tenant's business so long as Tenant handles, stores and disposes of such
materials and supplies in accordance with all applicable legal requirements, the
Restrictions and this Lease and further in accordance with any manufacturer
labelling requirements, nor shall the foregoing be deemed to prohibit any
activity conducted in the ordinary course of Tenant's business (or similar in
nature to activities conducted by similar businesses) so long as such activity
is done in accordance with all applicable legal requirements, the Restrictions
and this Lease.
6. Landlord's Rights and Responsibilities
6.1. Access. Landlord or its authorized agent or representative
(e.g., a mortgagee, deed of trust holder, etc.) will have the right to enter
and examine the Leased Premises at any reasonable hour upon reasonable prior
notice which may be less than one business day or at any time (and without
notice) in the event of an emergency, including, but not limited to, showing
the Leased Premises to prospective tenants during the Lease Term.
6.2. Building Repairs. Landlord may, but will not be obligated to,
make such repairs, alterations or improvements as it or its authorized
representatives deem necessary for the safety or preservation of the Building
or for any other reasonable purpose. Except as otherwise provided in Section
4.2, the Rent will not abate while Landlord is exercising any of its rights
under this Section 6.2.
6.3. Performance of Tenant's Responsibilities by Landlord. If Tenant
fails to perform or otherwise comply with any covenant or term in this Lease
and such failure continues beyond applicable notice and cure periods, then
Landlord may perform the obligation for Tenant at any time thereafter. Any
performance by Landlord under this Section 6.3 will be solely at the option of
Landlord, and Landlord's cost will be charged to
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Tenant. Tenant will pay Landlord all costs (plus interest at a rate of two (2)
percentage points above the prime rate as announced by Citibank, N.A. from time
to time) incurred by Landlord in performing Tenant's obligations. Such payment
by Tenant will be made within ten (10) business days after Landlord's delivery
to Tenant of a statement for such costs. Landlord's rights provided in this
Section 6.3 are in addition to any other right Landlord has under this Lease.
6.4. Loss, Damage, Injury. Landlord will not be liable or
responsible to Tenant, or to any other person or entity, for any damage,
injury, destruction or death due to or arising out of any cause whatsoever
other than Landlord's willful misconduct or negligence. This limitation of
liability will remain in effect after the expiration or termination of this
Lease.
6.5. Mutual Indemnity. Landlord and Tenant agree that subject to
Section 5.5, each will indemnify and hold harmless the other for all losses,
damages, liabilities, costs, payments, expenses and fines incurred by one
party (the "Indemnitee") as a result of any claim or action (whether or not
such claim or action proceeds to final judgment) brought or threatened for
any of the following acts or omissions of the other party (the "Indemnitor"),
and/or of the Indemnitor's servants, employees, agents, licensees or
invitees: (1) any breach, violation and/or nonperformance of any covenant or
provision of this Lease applicable to the Indemnitor and/or (2) negligence or
any willful misconduct of the Indemnitor. This indemnification will remain in
effect after the termination or expiration of this Lease.
7. Damage and Destruction
If during the Lease Term, the Leased Premises or the Building becomes
damaged or destroyed in whole or in part by fire, other casualty or any other
cause (except condemnation), Tenant will immediately notify Landlord of such
event. This Lease will remain in full force and effect, except that the Rent
will be abated proportionately to the extent and for the period that all or a
portion of the Leased Premises are rendered untenantable.
If Landlord determines, in its sole discretion, that the damage or
destruction to the Leased Premises and/or to the Building is so extensive that
repair or restoration is un-
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economical, or if Landlord otherwise decides not to repair or restore the
Building, then this Lease will terminate on the first day after Landlord gives
Tenant written notice of such termination. The Rent then will be adjusted and
paid to the date of the damage or destruction. Tenant will as soon as reasonably
practicable vacate and surrender the Leased Premises upon such termination, but
shall during any continued occupancy pay unabated Rent for any areas of the
Leased Premises actually occupied by it. Tenant, however, will not be released
from liability for any damage caused by Tenant or its agents or employees except
as otherwise specifically set forth herein, or released from responsibility for
any of its obligations under this Lease for the period before such termination.
If Landlord decides to repair or restore the Leased Premises and/or
the Building, it will do so with reasonable speed, subject to reasonable delays
for: (a) adjusting losses under insurance policies; (b) labor troubles; or (c)
any other cause beyond Landlord's reasonable control.
8. Condemnation
This Lease will terminate immediately upon: (i) a taking or
condemnation of the entire Leased Premises for public purposes; (ii) a partial
taking which prevents the Tenant from being reasonably able to use the remainder
of the Leased Premises for the purposes intended by this Lease; or (iii) upon
Landlord's conveyance or lease of the Building to any condemning authority in
settlement of a threat of condemnation or taking. The Rent will be adjusted to
the date of termination due to such taking, leasing or conveyance.
In the event of a partial taking for which this Lease is not
terminated, the Rent will abate in an amount which, in Landlord's judgment, is
proportionate to the area of the Leased Premises so taken, leased or conveyed.
Tenant, however, will not have any claim against Landlord, nor any claim for any
award from the condemning authority arising out of any such taking, lease,
conveyance or condemnation action nor in any way arising out of its leasehold
interest in the Leased Premises, but will have the right to pursue a separate
claim against the condemning authority for its own loss of business and moving
expenses.
9. Holding Over
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This Lease is for a specific Lease Term. If Tenant, without
Landlord's specific written consent, continues its possession of the Leased
Premises sixty (60) days after notice from Landlord terminating this Lease
pursuant to Section 2 hereof, then all of the following conditions will apply:
(i) Tenant will occupy the Leased Premises as a month to month tenant on the
terms of this Lease, except that its occupancy will be at double the monthly
Rent (i.e. Thirty-six Thousand Nine Hundred Seventy-nine Dollars and Sixteen
Cents ($36,979.16), as same may be adjusted if the measurement of the Leased
Premises reflects a measurement different from 12,500) and will be subject to
termination on thirty (30) days' prior written notice from Landlord; (ii) Tenant
will be liable to Landlord for any damages suffered by Landlord due to such
holding over, including the loss of financial benefits from another potential
tenant occupying the Leased Premises; and (iii) Tenant will indemnify Landlord
for any losses or expenses (including reasonable attorneys' fees) incurred by
Landlord in connection with claims or litigation (e.g., due to a delayed
commencement date for a new tenant) arising because Tenant held over. Nothing
contained in this Lease shall be construed as a consent by Landlord to the
occupancy or possession of the Leased Premises by Tenant after termination of
this Lease. Tenant acknowledges that Tenant must vacate possession of the
Leased Premises within sixty (60) days after notice from Landlord terminating
this Lease pursuant to Section 2 hereof, and Landlord shall have the right to
repossess the Leased Premises immediately after such sixty (60) day period, and
Tenant hereby knowingly, intentionally and voluntarily waives any additional
notice from Landlord in order for Landlord to repossess the Leased Premises,
including, without limitation, waiver of any notice required under Section 8-402
of the Real Property Article, Maryland Annotated Code. Upon the termination of
this Lease, Landlord shall be immediately entitled to the benefit of all public
general or public local laws relating to the speedy recovery of the possession
of lands and tenements held over by tenants, that may now or hereafter be in
force.
10. Default
10.1. Events of Default. Each of the following constitutes a
material breach and a default by Tenant under this Lease, entitling Landlord
to all remedies set forth below or existing at law or in equity:
(a) Any of the following legal actions filed
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by or against Tenant and not bonded or discharged within thirty (30) days of the
date of filing: (a) a petition under the Federal Bankruptcy Code (as now or
later amended or supplemented) or for reorganization, arrangement or other
rehabilitation within the meaning of the Federal Bankruptcy Code; or (b) any
action or proceeding for the dissolution or liquidation of Tenant, or for the
appointment of a receiver or trustee of the property of Tenant.
(b) Tenant's suspension of business, or any action by Tenant
amounting to a business failure.
(c) Tenant's making an assignment for the benefit of creditors.
(d) The filing of a tax lien in excess of $50,000 against any
property of Tenant located within the Leased Premises after notice to Tenant and
a ten (10) day opportunity to cure;
(e) Tenant's causing or permitting the Leased Premises to be
vacant, the abandonment of the Leased Premises by Tenant and/or the cessation by
Tenant of active use of the Leased Premises for the purpose specified herein
after notice to Tenant and a ten (10) business day opportunity to cure;
(f) Failure of Tenant to make payment of the Basic Annual Rent
herein reserved, or any part thereof, or any other sum required by the terms of
this Lease (including late charges on the foregoing as provided herein) for a
period of five (5) days after service of notice by Landlord upon the Tenant that
such payment is due (provided, however, that Tenant shall be entitled to such
notice and opportunity to cure only one time in any six month period, and for
the remainder of such six month period, Tenant shall be in default for
non-payment of rent if any such payment is not made when due);
(g) A breach by Tenant in the performance of any other term,
covenant, agreement or condition of this Lease, on the part of Tenant to be
performed, for a period of fifteen (15) days after service of notice by the
Landlord upon the Tenant, unless cure of such default shall reasonably require a
longer period of time and Tenant shall have commenced such cure during such
fifteen (15) day period, and shall thereafter diligently prosecute such cure to
completion; and
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(h) Tenant's failure to vacate possession of the Leased Premises
(i) on or before the sixtieth (60) day after notice from Landlord terminating
this Lease pursuant to Section 2 hereof or, (ii) upon any other default of this
Lease unless cured within any applicable notice and cure period.
10.2. Effect of Default. Landlord's rights and remedies under this
Lease will be cumulative. None will exclude any other right or remedy
available at any time under this Lease or under any law.
Even if Landlord does not seek Tenant's strict performance of any
provision of this Lease, or does not exercise any right it has, Landlord will
not be construed as waiving its right to strictly enforce Tenant's performance
in the future. Similarly, if Landlord receives Rent with knowledge of Tenant's
breach of this Lease, then Landlord will not be construed as having waived such
breach.
There will be no waiver by Landlord of any Lease provision unless
expressed in writing and signed by Landlord.
10.3. Termination of Lease and Possession of Leased Premises. Upon
any default set forth in Section 10.1 above, Landlord may then, or at any
later time, without further notice to Tenant, terminate this Lease and
Tenant's right to possess the Leased Premises. Landlord may then (with or
without formal court action) take possession of the Leased Premises and
remove Tenant or any other occupant, and any property, without relinquishing
any other rights Landlord may have against Tenant.
10.4. Damages. In the event of any Tenant default set forth in
Section 10.1(a) above, Landlord will be entitled to receive from Tenant as
damages, upon demand, all expenses direct or indirect which Landlord incurs
as a result of such breach. These damages include, but are NOT limited to,
the lost Rent, together with court costs and actual attorneys' fees (and
their actual expenses) incurred at the standard hourly rates for such
attorneys.
An acceptance of surrender of the Leased Premises must be in
writing signed by Landlord. Tenant's liability under this Lease will not be
terminated by the execution
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of a lease with a new tenant for the Leased Premises. Landlord may bring
separate actions each month to recover damages then due without waiting until
the end of the Lease Term to compute the aggregate damages.
10.5. Confession of Judgment. IF TENANT SHALL BE IN DEFAULT UNDER
SECTION 10.1(h) ABOVE, TENANT DOES HEREBY AUTHORIZE AND EMPOWER THE CLERK OR
ANY ATTORNEY OF ANY COURT OF RECORD WITHIN THE STATE OF MARYLAND (INCLUDING
FEDERAL COURT, IF APPROPRIATE JURISDICTION EXISTS) TO APPEAR FOR TENANT
BEFORE ANY SUCH COURT HAVING JURISDICTION AND CONFESS JUDGMENT IN FAVOR OF
LANDLORD AGAINST TENANT FOR THE DAMAGES RESULTING FROM SUCH DEFAULT, TOGETHER
WITH ALL COSTS OF SUIT, INCLUDING ATTORNEYS' FEES ACTUALLY INCURRED AT
STANDARD HOURLY RATES FOR SUCH ATTORNEYS (BUT IN NO EVENT SHALL SUCH FEES BE
LESS THAN FIFTEEN PERCENT (15%) OF THE OUTSTANDING AMOUNTS DUE LANDLORD UNDER
THIS LEASE AS A RESULT OF TENANT'S DEFAULT). NOTWITHSTANDING THE FOREGOING,
LANDLORD AGREES NOT TO ENFORCE JUDGMENT FOR ATTORNEYS' FEES IN EXCESS OF
ACTUAL ATTORNEYS' FEES INCURRED AT STANDARD HOURLY RATES FOR SUCH ATTORNEYS.
11. Legal and General Provisions
11.1. Assignment/Subletting. Tenant is the only party that may use
or occupy the Leased Premises. No Assignment (defined below) of this Lease
is permitted without the prior written consent of Landlord. The granting or
withholding of such consent will be given solely within the discretion of
Landlord.
The foregoing restriction will include, but not be limited to,
the following (all of which will be deemed to be an "Assignment"): (1) any
assignment of this Lease or a subletting of the Leased Premises; (2) any
permission to a third party to use all or part of the Leased Premises; (3) any
mortgage or other encumbrance of this Lease or of the Leased Premises; (4) the
appointment of a receiver or trustee of any of the Tenant's property; (5) any
assignment or sale in bankruptcy or insolvency; and (6) so long as Tenant is a
privately-held entity, the transfer of majority control of Tenant by any means,
including operation of law, to parties other than those maintaining majority
control on the date on which the last party executes this Lease.
Even if Landlord consents to an Assignment,
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<PAGE>
Tenant will remain primarily liable under this Lease. Also, Tenant will bear
all reasonable legal costs incurred by Landlord in connection with Landlord's
review of documents concerning an Assignment, whether or not Landlord consents
to it. Landlord's consent to a specific Assignment does not waive Landlord's
right to withhold consent to any future or additional Assignment. Tenant will
give Landlord notice of its intention to make an Assignment at least forty-five
(45) days prior to such Assignment, which notice will contain such details as
Landlord may reasonably request.
If the amount of rent and other sums received by Tenant under any
Assignment of any portion of the Leased Premises is more than the Rent due from
Tenant under this Lease for the Leased Premises, then Tenant will pay all of the
excess to Landlord on a monthly basis and promptly upon Tenant's receipt of such
excess amounts.
If, without Landlord's consent, this Lease is Assigned, or if the
Leased Premises are occupied or used by any party other than Tenant, then all
resulting expenses (including reasonable attorneys' and brokerage fees) incurred
by Landlord will be immediately due and payable by Tenant upon receipt of an
invoice. If Tenant defaults, Landlord may collect rent from the assignee,
subtenant, occupant or user (the "Assignee") of the Leased Premises and apply it
towards the Rent due under this Lease. Such collection will not be deemed an
acceptance of the Assignee as tenant, will not waive or prejudice Landlord's
right to initiate legal action against Tenant to enforce Tenant's fulfillment of
its obligations under this Lease and will not release Tenant from such
obligations.
11.2. Estoppel Certificates. At any time during the Lease Term,
and after five (5) business days' prior written notice from the requesting
party, Landlord or Tenant will deliver to the other a properly executed and
acknowledged document, generally known as an estoppel certificate and
certifying among other matters, that: (1) this Lease is in full force and
effect and if modified, the extent to which it is modified; (2) the dates to
which the Rent and other payments have been made; (3) to the best of its
knowledge, either that the other party has not breached this Lease or, if
such party has breached this Lease, the nature of the breach; and (4) any
other factual matter reasonably requested. This estoppel certificate may be
relied upon by any third party.
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<PAGE>
11.3. Subordination. Tenant accepts this Lease, and the tenancy
it creates, subject and subordinate to any ground leases, security interests,
mortgages, deeds of trust or other financing arrangements, and/or any
extensions, modifications or amendments to them, which are or later will be a
lien, or affect or will affect all or any part of the Real Property. Tenant
agrees to execute, on request, any instruments which may be required to
subordinate Tenant's interest to such financing arrangement.
11.4. Attornment. Tenant agrees that upon any termination of
Landlord's interest in the Leased Premises, Tenant will, upon request, attorn
to the person or organization then holding title to the reversion of the
Leased Premises (the "Successor") and to all subsequent Successors, and shall
pay to the Successor all rents and other monies required to be paid by the
Tenant hereunder and perform all of the other terms, covenants, conditions
and obligations in this Lease contained; provided, however, that Tenant shall
not be so obligated to attorn unless, if Tenant shall so request in writing,
such Successor will execute and deliver to Tenant an instrument wherein such
Successor agrees that so long as Tenant performs all of the terms, covenants
and conditions of this Lease, on Tenant's part to be performed, Tenant's
possession under the provisions of this Lease shall not be disturbed by such
Successor.
11.5. Landlord's Liability. In the event of any transfer of title
to the Real Property or Building (or an assignment or sublease of either),
Landlord will be entirely relieved of all covenants and obligations which
arise after such transfer.
Landlord at the time of this Lease's execution is a Maryland
limited partnership. No partner of such limited partnership, as it may be
constituted now or in the future, will have any personal liability to Tenant
and/or to anyone claiming under, by or through Tenant, and as to Landlord,
recourse shall be had only to the extent of Landlord's interest in the Building.
11.6. Authority. Tenant warrants to Landlord that Tenant is a
corporation organized and validly existing in good standing under the laws of
the State of Delaware and registered to transact business in the State of
Maryland. In
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<PAGE>
addition, Tenant warrants to Landlord that this Lease has been properly
authorized and executed by Tenant and is binding upon Tenant in accordance with
its terms. Tenant's resident agent's name and address in the State of Maryland
are The Corporation Trust Incorporated, 32 South Street, Baltimore, Maryland
21202. Tenant agrees to notify Landlord in writing of any change with respect to
its resident agent.
11.7. Notices. Except as otherwise provided in this Lease, any
requirement for a notice, demand or request under this Lease will be
satisfied by a writing (a) hand-delivered with receipt; (b) mailed by United
States registered or certified mail or Express Mail, return receipt
requested, postage prepaid; or (c) sent by Federal Express or any other
nationally recognized overnight courier service, and addressed: (i) if to
Landlord, c/o Manekin Corporation, 7165 Columbia Gateway Drive, Columbia,
Maryland 21046, Attn: General Counsel with a copy to Ann Clary Gordon,
Esquire c/o Shapiro and Olander, 36 South Charles Street, Baltimore, Maryland
21201; and (ii) if to Tenant, at the Leased Premises. Attn: Chief Financial
Officer with a copy to Gary K. Bahena, Esq., 601 Thirteenth Street, N.W.,
Suite 320 North, Washington, D.C. 20005. All notices that are sent in
accordance with this Section 11.7 will be deemed received by the other party
on the earliest of the following applicable time periods: (a) the date of
refusal of delivery; (b) the date the return receipt is executed; or, (c) on
the date delivered as documented by the overnight courier service or the hand
delivery receipt. Except as otherwise set forth in Section 4.3 above, all
rental payments and other charges payable by Tenant under this Lease will be
delivered to Landlord at Landlord's address set forth above: Attn: Accounting
Department. Either party may designate a change of address by written notice
to the other party.
11.8. Severability, Enforceability. If any provision of this
Lease, or its application to any person, is found invalid or unenforceable,
the remainder of this Lease or its application will not be affected. Each
term and provision of this Lease will be valid and enforceable to the fullest
extent permitted by law. Notwithstanding any language in this Lease to the
contrary, if the Lease Term does not commence on or before January 1, 2010,
this Lease will automatically terminate, and neither party will have any
further liability to the other.
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<PAGE>
11.9. Captions. All headings contained in this Lease are for
convenience only. They are not to be treated as a summary construction of
the provisions to which they pertain.
11.10. Recordation. If at any time, any lienholder or other party
which has a right to require Landlord to do so, requires the recordation of
this Lease, Tenant will execute such acknowledgments as may be necessary to
effect such recordation. If Landlord requires, or is required, to record
this Lease, it will pay all recording fees, transfer taxes and/or documentary
stamp taxes payable in connection with the recordation. If Tenant records
this Lease, it will make all such payments. Tenant will not record this
Lease without Landlord's prior consent.
11.11. Successors and Assigns. This Lease and all of its
provisions, individually and collectively, will bind and inure to the benefit
of Landlord and Tenant, and their respective heirs, distributees, executors,
administrators, successors, personal and legal representatives and their
permitted assigns.
11.12. Commissions. Tenant represents that Tenant has dealt
directly with only MANEKIN CORPORATION as broker in connection with this
Lease and that, insofar as Tenant knows, no other broker negotiated this
Lease or is entitled to any commissions in connection with it. Tenant will
hold harmless and indemnify Landlord from any costs incurred by Landlord
arising out of any other broker's claim that such other broker has assisted
Tenant with respect to this Lease.
11.13. Quiet Enjoyment. Landlord covenants to Tenant that, so long
as Tenant pays the Rent and performs all other obligations imposed on Tenant
under this Lease, and subject to all matters of record and all mortgages and
other financing arrangements, Tenant will peaceably hold and enjoy the Leased
Premises throughout the Lease Term without hindrance or impairment from
Landlord or those claiming through Landlord.
11.14. Force Majeure. In the event that either party to this Lease
is delayed, hindered or prevented, by reason of strikes, lock-outs, labor
troubles, inability to produce materials, delays in transportation, failure of
power, restrictive governmental laws or regulations, riots, insurrection, war,
fire
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<PAGE>
or other casualties, acts of God, rain or other weather conditions or any other
reason (excluding lack of funds) not reasonably within the control of the party
so delayed, hindered or prevented, from performing work or doing any act
required under the terms of this Lease, then performance of such act will be
excused for the period of the delay, and the period of the performance of any
such act will be extended for a period equal to the period of such delay. The
occurrence of any event described in this Section 11.14 will not operate to
excuse Tenant from prompt payments of Rent, Additional Rent or any other
payments required by this Lease.
11.15. Waiver of Jury Trial. Landlord and Tenant desire a prompt
resolution of any litigation between them with respect to this Lease. To that
end, Landlord and Tenant waive trial by jury in any action, suit, proceeding
and/or counterclaim brought by either against the other on any matters
whatsoever arising out of or in any way connected with this Lease, the
relationship of Landlord and Tenant, Tenant's use or occupancy of the Leased
Premises, any claim of injury or damage and/or any statutory remedy. This
waiver is knowingly, intentionally and voluntarily made by Tenant. Tenant
acknowledges that neither Landlord nor any person acting on behalf of Landlord
has made any representations of fact to induce this waiver of trial by jury or
in any way to modify or nullify its effect. Tenant further acknowledges that it
has been represented (or has had the opportunity to be represented) in the
signing of this Lease and the making of this waiver by independent legal
counsel, selected of its own free will, and that it has had the opportunity to
discuss this waiver with counsel. Tenant further acknowledges that it has read
and understands the meaning and ramifications of this waiver of jury trial.
11.16. Miscellaneous
(a) As used in this Lease, and where the context requires:
(i) the masculine will be deemed to include the feminine and neuter and vice-
versa; and (ii) the singular will be deemed to include the plural and
vice-versa.
(b) This Lease is made in the State of Maryland and will be
governed in all respects by the laws of the State of Maryland.
(c) Except as otherwise specifically provided
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<PAGE>
in this Lease, no abatement, refund, offset, counter-claim, recoupment,
diminution or any reduction of Rent or any other payments will be claimed by or
allowed to Tenant, or any person claiming under Tenant (including inconvenience,
discomfort, interruption of business or otherwise), because of any present or
future governmental laws or ordinances, or because of any other cause or reason
whatsoever.
(d) All plats, exhibits, riders or other attachments to this
Lease are a part of this Lease and are incorporated by reference into this
Lease.
(e) THIS LEASE CONTAINS THE ENTIRE AGREEMENT BETWEEN LANDLORD
AND TENANT REGARDING THE SUBJECT MATTER OF THIS LEASE. THERE ARE NO PROMISES,
AGREEMENTS, CONDITIONS, UNDERTAKINGS, WARRANTIES OR REPRESENTATIONS, ORAL OR
WRITTEN, EXPRESS OR IMPLIED, BETWEEN THEM, RELATING TO THIS SUBJECT MATTER,
OTHER THAN AS SET FORTH IN THIS LEASE. THIS LEASE IS INTENDED BY LANDLORD AND
TENANT TO BE AN INTEGRATION OF ALL PRIOR OR CONTEMPORANEOUS PROMISES,
AGREEMENTS, CONDITIONS, NEGOTIATIONS AND UNDERTAKINGS BETWEEN THEM. THIS LEASE
MAY NOT BE MODIFIED ORALLY OR IN ANY MANNER OTHER THAN BY AN AGREEMENT IN
WRITING SIGNED BY LANDLORD AND TENANT OR THEIR RESPECTIVE SUCCESSORS IN
INTEREST. THIS LEASE MAY BE EXECUTED IN COUNTERPARTS, EACH OF WHICH WILL BE AN
ORIGINAL, BUT ALL OF WHICH WILL CONSTITUTE ONE AND THE SAME LEASE.
12. Contingency. Notwithstanding anything to the contrary herein,
this Lease and the obligations of the parties hereto (other than pursuant to
Section 4.3 above) are specifically contingent upon the occurrence on or
before the Contingency Date of the bankruptcy court's approval of biosys'
rejection of its lease with Landlord. In the event that the foregoing
contingency is not satisfied on or before the Contingency Date the offer
contained in this Lease shall be null and void and Landlord shall have no
obligations whatsoever to Tenant, including but not limited to allowing
Tenant's continued occupancy of the Leased Premises after the Contingency
Date, other than pursuant to Tenant's rights, if any, under the Sublease.
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<PAGE>
IN WITNESS WHEREOF, Landlord and Tenant have respectively signed this Lease
Agreement under seal as of the date first above written.
LANDLORD:
WITNESS: M.O.R. XVIII ASSOCIATES LIMITED
PARTNERSHIP
By: RA & DM, Inc., its general partner
__________________ By: /s/ R. Colfax Schnorf, Jr. (SEAL)
--------------------------------
Name: R. Colfax Schnorf, Jr.
---------------------------
Title: Vice President
--------------------------
TENANT:
WITNESS/ATTEST: GENE LOGIC, INC.
__________________ By: /s/ Michael Brennan (SEAL)
---------------------
Michael J. Brennan, M.D., Ph.D.
President and Chief Executive Officer
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<PAGE>
STATE OF MARYLAND )
) TO WIT:
COUNTY OF _________________________)
I HEREBY CERTIFY that on this _____ day of _____, 1997, before
me, the subscriber, a Notary Public of the State of Maryland, City/County of
_________________, personally appeared __________________, ______________ of RA
& DM, Inc., the general partner of M.O.R. XVIII ASSOCIATES LIMITED PARTNERSHIP,
Landlord, and she/he acknowledged the foregoing Lease Agreement to be the act
and deed of such limited partnership.
WITNESS my hand and Notarial Seal.
______________________________________
Notary Public
My Commission Expires: ____________________
STATE OF _________________________ )
) TO WIT:
COUNTY OF ________________________ )
I HEREBY CERTIFY that on this _____ day of _____, 1997, before
me, the subscriber, a Notary Public of the State of ________________________,
City/County of __________________, personally appeared Michael J. Brennan, the
President and Chief Executive Officer of GENE LOGIC, INC., Tenant, and he
acknowledged the foregoing Lease Agreement to be the act and deed of such
corporation.
WITNESS my hand and Notarial Seal.
_____________________________________
Notary Public
My Commission Expires: _________________
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<PAGE>
EXHIBIT A
Land
<PAGE>
EXHIBIT B
Leased Premises
<PAGE>
EXHIBIT C
Tenant's Use
Gene Logic - Lease Agreement
Permitted Uses of Leased Premises
Tenant shall not use or permit the use of any portion of the Leased
Premises for any purpose other than the following:
The Leased Premises shall be used for general office and corporate purposes, for
warehouse purposes, and for laboratory purposes, including but not limited to,
the conduct of biomedical research and for the provision of genomic information
and services to clients in the health care industry. Specifically, the Tenant
may use the Leased Premises for the following:
1. the culture of mammalian cells and other prokaryotic and eukaryotic
organisms;
2. extraction and manipulation of nucleic acids from such cells and
eukaryotic tissues;
3. general molecular biology activities, which includes the use of
low-level radioisotopes (under proper local, state and federal
licensing), and small amounts of organic chemical waste that will be
disposed of properly;
4. capture of information in computer databases; and,
5. to-and-fro transmission of data over T1 or ISDN lines.
Tenant may use the laboratory and warehouse space for other laboratory or
research purposes after reasonable prior notice to Landlord and in strict
compliance with applicable laws, regulations, private restrictions (including
the Restrictions) and the terms of this Lease.
<PAGE>
EXHIBIT D
Restrictions
1. Subject to the terms and provisions contained in an instrument entitled
"Deed, Agreement and Declaration" dated December 13, 1966 and recorded among the
Land Records of Howard County in Liber 463, folio 158, between The Columbia Park
and Recreation Association, Inc. and C. Aileen Ames.
2. Subject to the terms and provisions as contained in Corporate Park
Declaration of Covenants, Conditions and Restrictions recorded among the Land
Records of Howard County in Liber 1083, folio 392 by The Howard Research and
Development Corporation.
3. Subject to the terms and conditions of that certain Deed dated December
29, 1982 by and between The Howard Research and Development Corporation and
M.O.R. XVIII Associates Limited Partnership recorded among the Land Records of
Howard County, Maryland in Liber 1135, folio 573.
<PAGE>
SCHEDULE I
Items Belonging to Landlord to Remain in
the Leased Premises as of the Commencement Date
General Building Systems:
HVAC Units/Systems/Temperature Control System
Fire/Alarm System
Telephone Systems and handsets in the Leased Premises, if any
Security System
Equipment Procedure Manuals
Lab related Building Systems:
Deionized Water System
Vacuum System and Vacuum Pump
Humidifiers
Kitchen:
Plumbing/Kitchen Units
Lab #100
All casework/plumbing/gas/air/electric connections
Built-in Hood
Still
Lab #108
All casework/plumbing/gas/air/electric connections
Lab #109
All casework/plumbing/gas/air/electric connections
Lab #111
All casework/plumbing/gas/air/electric connections
Built-in Hood
Lab #142
All casework/plumbing/gas/air/electric connections
Built-in Hood
Lab #144
All casework/plumbing/gas/air/electric connections
Dark Room
Built-in Hood
<PAGE>
Furniture identified by Landlord
<PAGE>
SCHEDULE II
Items Purchased by Tenant to Remain
Property of Tenant after Lease Expiration
(1) Gintige Autoclave
(1) Glassware washer with booster boiler
(1) Glassdryer with air compressor
<PAGE>
FIRST AMENDMENT OF LEASE
THIS FIRST AMENDMENT OF LEASE (this "Amendment") made this 27th day of
June, 1997 but which shall be deemed effective as of May 7, 1997 (the
"Effective Date") by and between M.O.R. XVIII ASSOCIATES LIMITED PARTNERSHIP, a
Maryland limited partnership ("Landlord") and GENE LOGIC, INC., a Delaware
corporation ("Tenant").
Explanatory Statement
A. Landlord and Tenant entered into a Lease Agreement dated May 7, 1997
(the "Lease"), whereby Landlord leased to Tenant a portion of the Building
constructed on land leased by Landlord and designated as Parcel M-2 (the "Land")
containing approximately twelve thousand five hundred (12,500) rentable square
feet, subject to accurate measurement (the "Original Leased Premises").
B. Such accurate measurement having been determined, Landlord and Tenant
desire to correctly state the square footage of the Original Leased Premises and
to expand the Original Leased Premises, and to modify certain other provisions
of the Lease, all of which are more specifically set forth herein.
C. Unless the context requires otherwise, any capitalized term not
defined herein shall have the meaning given to it in the Lease.
NOW, THEREFORE, in consideration of the Explanatory Statement which is a
substantive part of this Amendment and of the mutual covenants and agreements
set forth herein and in the Lease, the receipt, adequacy, and sufficiency of
which the parties hereby acknowledge, the parties hereby covenant, promise,
agree, represent and warrant as follows:
1. Confirmation of Size of Original Leased Premises. Landlord and Tenant
hereby acknowledge that the Original Leased Premises, as described on Exhibit A
attached to the Lease, contain thirteen thousand three hundred sixteen (13,316)
square feet.
2. Expansion of Original Leased Premises. Landlord has agreed to lease
to Tenant and Tenant has agreed to lease from Landlord, in addition to the
Original Leased Premises the portion of the Building containing approximately
one thousand six hundred seventy-six (1,676) square feet and more particularly
described on Exhibit A, attached hereto and incorporated by reference herein
(the "Expansion Space"), for a term which commenced on June 1, 1997 and which
will continue until the expiration or sooner termination of the Lease.
3. "AS IS" Condition. Landlord has delivered and Tenant has accepted the
Expansion Space as of June 1, 1997 in "AS IS" condition.
4. Confirmation of Basic Annual Rent. Landlord and Tenant hereby
acknowledge that effective as of April 1, 1997, the Basic Annual Rent with
respect to the
<PAGE>
Original Leased Premises is Two Hundred Thirty-six Thousand Three Hundred
Fifty-nine Dollars ($236,359.00) of which Tenant has paid to Landlord One
Hundred Ten Thousand Nine Hundred Thirty-seven Dollars and Forty-eight Cents
($110,937.48) as rent for the months of April through September, 1997 at the
time of executing the Lease. The balance of such six months rent (i.e., 816
square feet times 17.75 = 14,484 DIVIDED BY 12 = 1,207 x 6 = $7,242.00) shall
be paid by Tenant to the Escrow Agent simultaneously with Tenant's execution
of this Amendment.
5. Expansion Rent. Effective as of June 1, 1997, Tenant shall pay to
Landlord Basic Annual Rent with respect to the Expansion Space, in addition to
the rent with respect to the Original Leased Premises, Twenty-nine Thousand
Seven Hundred Forty-nine Dollars ($29,749.00), of which rent for the period June
1, 1997 through September 30, 1997 in the amount of Nine Thousand Nine Hundred
Sixteen Dollars and Thirty-three Cents ($9,916.33) shall be paid by Tenant to
the Escrow Agent simultaneously with Tenant's execution of this Amendment.
6. Security Deposit. In addition to the Security Deposit previously
deposited with the Escrow Agent, Tenant shall, simultaneously with its execution
of this Amendment, deposit with the Escrow Agent the additional sum of Two
Thousand Six Hundred Forty-seven Dollars and Seventy-five Cents( $2,647.75) to
be held as part of the Security Deposit under the Lease.
7. Definition of Leased Premises. From and after June 1, 1997, all
references in the Lease to the "Leased Premises" shall be deemed to refer to the
Original Leased Premises and the Expansion Space, which contain in the aggregate
fourteen thousand nine hundred ninety-two (14,992) square feet.
8. Successors and Assigns. The terms, covenants, conditions, and
agreements contained in this Amendment shall bind and inure to the benefit of
Tenant and Landlord and their respective successors and permitted assigns.
9. Governing Law. This Amendment is made in the State of Maryland and
shall be governed by and construed in all respects in accordance with the laws
of the State of Maryland.
10. Entire Agreement; Amendment; Counterparts. This Amendment sets forth
all the covenants, promises, agreements, conditions or understandings among the
parties to this Amendment, and there are no covenants, promises, agreements,
conditions or understandings, either oral or written, between or among them
other than as set forth in this Amendment or in the Lease. Except as amended
hereby, the Lease remains in full force and effect. This Amendment may be
executed in counterparts, each of which shall be an original, but all of which
shall constitute one and the same instrument.
11. Authority. Tenant represents and warrants to Landlord that Tenant is
a Delaware corporation, qualified to transact business in the State of Maryland;
that the name and address of Tenant's resident agent in Maryland are The
Corporation Trust Incorporated, 32 South Street, Baltimore, Maryland 21202; that
the Lease and this Amendment were
2
<PAGE>
approved by all necessary parties and were validly executed by authorized
officers of Tenant; and that the Lease, as amended hereby, remains binding upon
and enforceable against Tenant in accordance with its terms.
IN WITNESS WHEREOF, Landlord and Tenant have respectfully signed this First
Amendment of Lease under seal as of the day and year first above written,
intending to be bound as of the Effective Date.
WITNESS/ATTEST: M.O.R. XVIII ASSOCIATES LIMITED
PARTNERSHIP
By: RA & DM, Inc., its general partner
_______________________ By: /s/ R. Colfax Schnorf, Jr. (SEAL)
-----------------------------------
Name: R. Colfax Schnorf, Jr.
-----------------------------------
Title: Vice President
----------------------------------
LANDLORD
GENE LOGIC, INC.
_______________________ By: /s/ Eric M. Eastman, Ph.D. (SEAL)
-----------------------------------
Eric M. Eastman, Ph.D.
Vice President, Scientific Operations
TENANT
3
<PAGE>
STATE OF MARYLAND )
) TO WIT:
CITY/COUNTY OF __________________ )
I HEREBY CERTIFY that on this _____ day of _________, 1997, before me, the
subscriber, a Notary Public of the State of Maryland, City/County of
_______________, personally appeared _________________, ________________ of RA &
DM, Inc., the general partner of M.O.R. XVIII ASSOCIATES LIMITED PARTNERSHIP,
Landlord, and she/he acknowledged the foregoing First Amendment of Lease to be
the act and deed of such limited partnership.
WITNESS my hand and Notarial Seal.
_______________________________
Notary Public
My Commission expires:_______________
STATE OF MARYLAND )
) TO WIT:
CITY/COUNTY OF __________________ )
I HEREBY CERTIFY that on this _____ day of _________, 1997, before me, the
subscriber, a Notary Public of the State of Maryland, City/County of
_______________, personally appeared Michael J. Brennan, the President and Chief
Executive Officer of GENE LOGIC, INC., Tenant, and he acknowledged the foregoing
First Amendment of Lease to be the act and deed of such corporation.
WITNESS my hand and Notarial Seal.
_______________________________
Notary Public
My Commission expires:_______________
4
<PAGE>
EXHIBIT A
Expansion Space
<PAGE>
SECOND AMENDMENT OF LEASE
THIS SECOND AMENDMENT OF LEASE (this "Amendment") is made this 3rd day of
July, 1997 by and between M.O.R. XVIII ASSOCIATES LIMITED PARTNERSHIP, a
Maryland limited partnership ("Landlord") and GENE LOGIC, INC., a Delaware
corporation ("Tenant").
Explanatory Statement
A. Landlord and Tenant entered into a Lease Agreement dated May 7, 1997,
as amended by a First Amendment of Lease dated June 27, 1997, but effective as
of May 7, 1997 (collectively, the "Lease"), whereby Landlord leased to Tenant a
portion of the Building constructed on land leased by Landlord and designated as
Parcel M-2 (the "Land"), which portion contains fourteen thousand nine hundred
ninety-two (14,992) rentable square feet (the "Leased Premises").
B. The Lease provided for an initial term of six (6) months to expire on
September 30, 1997 unless thereafter continued on a month-to-month basis until
notice to terminate was provided or unless terminated earlier as a result of an
Event of Default of the Lease by Tenant. Tenant has requested and Landlord has
agreed, subject to the provisions set forth below, to extend the initial term of
the Lease until 11:59 p.m. on November 30, 1997 (that is, an extension of two
(2) months). The parties desire, therefore, to set forth the modifications to
the Lease as a result of the parties' agreement to so extend the Lease.
C. Unless the context requires otherwise, any capitalized term not
defined herein shall have the meaning given to it in the Lease.
NOW, THEREFORE, in consideration of the Explanatory Statement which is a
substantive part of this Amendment and of the mutual covenants and agreements
set forth herein and in the Lease, the receipt, adequacy, and sufficiency of
which the parties hereby acknowledge, the parties hereby covenant, promise,
agree, represent and warrant as follows:
1. Term. Wherever in Section 2 of the Lease the date of September 30,
1997 appears, it shall be deleted and in place thereof shall be inserted the
date "November 30, 1997."
2. Rent. In consideration of Landlord's agreement to extend the initial
term for said two month period, Tenant shall pay, simultaneously with its
execution hereof, the rent attributable to October, 1997 in the amount of
Twenty-Two Thousand One Hundred Seventy-Five Dollars and Sixty-Seven Cents
($22,175.67). Said amount shall be paid to the Escrow Agent simultaneously with
Tenant's execution of the Amendment. Future monthly installments, in like
amounts and attributable to the months of November, 1997 and any months
thereafter so long as the Lease shall be in effect shall be due and payable,
without any deductions or setoffs, and without demand, in advance on the 25th
day of each and every calendar month during the Lease Term and applicable to the
next succeeding month (that is, rent for the month of November, 1997 shall be
due on October 25, 1997). Notwithstanding the foregoing, the monthly rent may
be paid, without penalty, on the first day of each month for which it is
applicable, if paid by electronic wire transfer of funds or by certified check.
3. Escrow Agreement. Section 4.3(i) shall be modified by (a) deleting
from the second line thereof the date of "September 2, 1997" and substituting in
place thereof the date of "November 2, 1997"; and (b) by deleting the date of
"September 30, 1997" from the tenth line thereof and inserting in place thereof
the date of "November 30, 1997".
<PAGE>
4. Holding Over. Section 9 of the Lease shall be amended by deleting
therefrom the dollar amount of "$36,979.16" and substituting in place thereof
the dollar amount of "$44,351.34".
5. Successors and Assigns. The terms, covenants, conditions, and
agreements contained in this Amendment shall bind and inure to the benefit of
Tenant and Landlord and their respective successors and permitted assigns.
6. Governing Law. This Amendment is made in the State of Maryland and
shall be governed by and construed in all respects in accordance with the laws
of the State of Maryland.
7. Entire Agreement; Amendment; Counterparts. This Amendment sets forth
all the covenants, promises, agreements, conditions or understandings among the
parties to this Amendment, and there are no covenants, promises, agreements,
conditions or understandings, either oral or written, between or among them
other than as set forth in this Amendment or in the Lease. Except as amended
hereby, the Lease remains in full force and effect. This Amendment may be
executed in counterparts, each of which shall be an original, but all of which
shall constitute one and the same instrument.
8. Authority. Tenant represents and warrants to Landlord that the Lease
and this Amendment were approved by all necessary parties and were validly
executed by authorized officers of Tenant; and that the Lease, as amended
hereby, remains binding upon and enforceable against Tenant in accordance with
its terms.
9. Contingency. This Amendment is specifically contingent on the
execution of a purchase and sale agreement for the Land and Building (the
"Contract") with Bio-Reliance Corporation (or an affiliate) in form approved by
Landlord's lender, New England Life Pension Properties: A Real Estate Limited
Partnership (the "Lender"). If the Contract in form approved by Lender has not
been executed by the close of business on Thursday, July 24, 1997, this
Amendment shall be null and void and of no further force and effect and the
October rent shall be returned to Tenant by the Escrow Agent. Tenant may cancel
this Amendment (and receive a full refund of the October rent) by written notice
received by Landlord prior to Tenant receiving written notice that this
contingency has been satisfied.
IN WITNESS WHEREOF, Landlord and Tenant have respectfully signed this
Second Amendment of Lease under seal as of the day and year first above written.
WITNESS/ATTEST: M.O.R. XVIII ASSOCIATES LIMITED
PARTNERSHIP
By: RA & DM, Inc., its general partner
_________________ By: /s/ Louis C. LaPenna (SEAL)
---------------------------------
Name: Louis C. LaPenna
----------------------------------
Title: Treasurer
---------------------------------
LANDLORD
[SIGNATURES CONTINUED ON NEXT PAGE]
2
<PAGE>
GENE LOGIC, INC.
_________________ By: /s/ Michael J. Brennan (SEAL)
---------------------------------
Michael J. Brennan, M.D., Ph. D
President and Chief Executive Officer
TENANT
STATE OF MARYLAND )
) TO WIT:
CITY/COUNTY OF _____________ )
I HEREBY CERTIFY that on this _____ day of July, 1997, before me, the
subscriber, a Notary Public of the State of Maryland, City/County of
_______________, personally appeared _________________, ________________ of RA &
DM, Inc., the general partner of M.O.R. XVIII ASSOCIATES LIMITED PARTNERSHIP,
Landlord, and she/he acknowledged the foregoing Second Amendment of Lease to be
the act and deed of such limited partnership.
WITNESS my hand and Notarial Seal.
_______________________________________
Notary Public
My Commission expires:_______________
STATE OF MARYLAND )
) TO WIT:
CITY/COUNTY OF _____________ )
I HEREBY CERTIFY that on this _____ day of July, 1997, before me, the
subscriber, a Notary Public of the State of Maryland, City/County of
_______________, personally appeared Michael J. Brennan, the President and Chief
Executive Officer of GENE LOGIC, INC., Tenant, and he acknowledged the foregoing
Second Amendment of Lease to be the act and deed of such corporation.
WITNESS my hand and Notarial Seal.
_______________________________________
Notary Public
My Commission expires:_______________
3
<PAGE>
THIRD AMENDMENT OF LEASE
THIS THIRD AMENDMENT OF LEASE (this "Amendment") is made this 10th day of
October, 1997 but shall be deemed effective as of October 1, 1997 (the
"Effective Date") by and between M.O.R. XVIII ASSOCIATES LIMITED PARTNERSHIP, a
Maryland limited partnership ("Landlord") and GENE LOGIC, INC., a Delaware
corporation ("Tenant").
Explanatory Statement
A. Landlord and Tenant entered into a Lease Agreement dated May 7, 1997
(the "Original Lease"), as amended by a First Amendment of Lease dated June 27,
1997, but effective as of May 7, 1997 (the "First Amendment") and by a Second
Amendment of Lease dated July 3, 1997 and amended by letter agreements dated
July 23, 1997 and July 30, 1997 (as so amended, the "Second Amendment")
(collectively, the "Lease"), whereby Landlord leased to Tenant a portion of the
Building constructed on land leased by Landlord and designated as Parcel M-2
(the "Land"), which portion contains fourteen thousand nine hundred ninety-two
(14,992) rentable square feet (the "Existing Leased Premises").
B. The Lease provided for an initial term of six (6) months to expire on
September 30, 1997 unless thereafter continued on a month-to-month basis until
notice to terminate was provided or unless terminated earlier as a result of an
Event of Default of the Lease by Tenant. Pursuant to the Second Amendment,
Landlord had agreed to extend such initial term to November 30, 1997. However,
such agreement was contingent upon satisfaction of the conditions set forth in
paragraph 9 of said Second Amendment. Such conditions were not satisfied and the
extension set forth in said Second Amendment is, therefore, void.
C. Tenant has requested and Landlord has agreed, subject to the
provisions set forth below, to extend the initial term of the Lease until 11:59
p.m. on February 28, 1998 (that is, an extension of five (5) months).
D. In addition, Tenant desires to expand the Existing Leased Premises by
an additional 6,595 rentable square feet (the "Second Expansion Space") as more
particularly described on Exhibit A attached hereto and incorporated by
reference herein. The parties desire, therefore, to set forth the modifications
to the Lease as a result of the parties' agreement to so extend the Lease and
expand the Existing Leased Premises.
E. Unless the context requires otherwise, any capitalized term not
defined herein shall have the meaning given to it in the Lease.
F. On October 1, 1997, Landlord's agent delivered to Tenant a notice of
termination pursuant to which the Lease would terminate at 11:59 p.m. on
November 30, 1997 (the "Termination Notice").
<PAGE>
NOW, THEREFORE, in consideration of the Explanatory Statement which is a
substantive part of this Amendment and of the mutual covenants and agreements
set forth herein and in the Lease, the receipt, adequacy, and sufficiency of
which the parties hereby acknowledge, the parties hereby covenant, promise,
agree, represent and warrant as follows:
1. Term. Wherever in Section 2 of the Lease the date of September 30,
1997 appears, it shall be deleted and in place thereof shall be inserted the
date "February 28, 1998."
2. Expansion. Landlord hereby agrees to lease to Tenant and Tenant
hereby agrees to Lease from Landlord the Second Expansion Space for a term
commencing on October 1, 1997 and continuing until the expiration or sooner
termination of the Lease.
3. As Is Condition. Landlord shall deliver and Tenant shall accept the
Second Expansion Space as of October 1, 1997 in "AS IS" condition. Therefore,
from and after October 1, 1997, the term "Leased Premises" shall be deemed to
include the Existing Leased Premises and the Second Expansion Space for an
aggregate rentable square footage of twenty-one thousand five hundred
eighty-seven (21,587).
4. Rent. In consideration of Landlord's agreement to extend the initial
term for said five (5) month period, Tenant shall pay, simultaneously with its
execution hereof, the rent attributable to October, 1997 in the amount of
Forty-Seven Thousand Nine Hundred Five Dollars and Fifteen Cents ($47,905.15)
(that is, $26.63 per rentable square foot) of which amount Tenant previously
paid to the Escrow Agent the sum of Twenty-Two Thousand One Hundred Seventy-Five
Dollars and Sixty-Seven Cents ($22,175.67), leaving a net monthly rent amount
due for October, 1997 of Twenty-Five Thousand Seven Hundred Twenty-Nine Dollars
and Forty-Eight Cents ($25,729.48) (the "October Balance"). Said October
Balance shall be paid to Landlord by Tenant simultaneously with Tenant's
execution of this Amendment. Future monthly installments, in like amounts (i.e.
$47,905.15) and attributable to the month of November, 1997 and any months
thereafter so long as the Lease shall be in effect shall be due and payable,
without any deductions or setoffs, and without demand, in advance on the 25th
day of each and every calendar month during the Lease Term and applicable to the
next succeeding month (that is, rent for the month of November, 1997 shall be
due on October 25, 1997). Notwithstanding the foregoing, the monthly rent may
be paid, without penalty, on the first day of each month for which it is
applicable, if paid by electronic wire transfer of funds or by certified check.
5. Security Deposit. In addition to the Security Deposit previously
deposited with Escrow Agent and delivered by Escrow Agent to the Landlord,
Tenant shall, simultaneously with its execution of this Amendment, deposit with
the Landlord the additional sum of Seven Thousand Seven Dollars and Nineteen
Cents ($7,007.19) (that is, $12.75 per rentable square foot) to be held as part
of the Security Deposit under the Lease.
6. Holding Over. Section 9 of the Lease (as amended) shall be further
amended by deleting therefrom the dollar amount of "$44,351.34" and substituting
in place thereof the dollar amount of "$95,810.30".
-2-
<PAGE>
7. Escrow Agreement. The parties acknowledge that the Contingency set
forth in Section 12 of the Lease has been satisfied and all funds held by the
Escrow Agent have been delivered to the Landlord for application in accordance
with Section 4.3 the Lease. Therefore, Sections 4.3 and 12 of the Lease are of
no further force and effect and the Escrow Agent is fully and finally released
and discharged from any and all duties, obligations and liabilities arising in
connection with the Lease.
8. Successors and Assigns. The terms, covenants, conditions, and
agreements contained in this Amendment shall bind and inure to the benefit of
Tenant and Landlord and their respective successors and permitted assigns.
9. Governing Law. This Amendment is made in the State of Maryland and
shall be governed by and construed in all respects in accordance with the laws
of the State of Maryland.
10. Entire Agreement; Amendment; Counterparts. This Amendment sets forth
all the covenants, promises, agreements, conditions or understandings among the
parties to this Amendment, and there are no covenants, promises, agreements,
conditions or understandings, either oral or written, between or among them
other than as set forth in this Amendment or in the Lease. Except as amended
hereby, the Lease remains in full force and effect. This Amendment may be
executed in counterparts, each of which shall be an original, but all of which
shall constitute one and the same instrument.
11. Authority. Tenant represents and warrants to Landlord that the Lease
and this Amendment were approved by all necessary parties and were validly
executed by authorized officers of Tenant; and that the Lease, as amended
hereby, remains binding upon and enforceable against Tenant in accordance with
its terms.
12. Notice. At such time as this Amendment is fully executed and Tenant
has made all payments required of it hereunder, the Termination Notice shall be
deemed rescinded and of no further force and effect. The offer represented by
this Amendment shall expire and be of no further force and effect unless
executed by Tenant and submitted to Landlord, together with all funds called for
herein, on or before noon on Friday, October 10, 1997.
-3-
<PAGE>
IN WITNESS WHEREOF, Landlord and Tenant have respectfully signed this Third
Amendment of Lease under seal as of the day and year first above written,
intending to be bound as of the Effective Date.
WITNESS/ATTEST: M.O.R. XVIII ASSOCIATES LIMITED
PARTNERSHIP
By: RA & DM, Inc., its general partner
____________________________ By: /s/ Louis C. LaPenna (SEAL)
-----------------------------
Name: Louis C. LaPenna
---------------------------------
Title: Treasurer
-------------------------------
LANDLORD
GENE LOGIC, INC.
____________________________ By: /s/ Michael J. Brennan (SEAL)
-----------------------------
Michael J. Brennan, M.D., Ph. D
President and Chief Executive Officer
TENANT
STATE OF MARYLAND )
)TO WIT:
CITY/COUNTY OF _________________)
I HEREBY CERTIFY that on this _____ day of October, 1997, before me, the
subscriber, a Notary Public of the State of Maryland, City/County of
_______________, personally appeared _________________, ________________ of RA &
DM, Inc., the general partner of M.O.R. XVIII ASSOCIATES LIMITED PARTNERSHIP,
Landlord, and she/he acknowledged the foregoing Third Amendment of Lease to be
the act and deed of such limited partnership.
WITNESS my hand and Notarial Seal.
_____________________________________
Notary Public
My Commission expires:_______________
-4-
<PAGE>
STATE OF MARYLAND )
)TO WIT:
CITY/COUNTY OF _________________)
I HEREBY CERTIFY that on this _____ day of October, 1997, before me, the
subscriber, a Notary Public of the State of Maryland, City/County of
_______________, personally appeared Michael J. Brennan, the President and Chief
Executive Officer of GENE LOGIC, INC., Tenant, and he acknowledged the foregoing
Third Amendment of Lease to be the act and deed of such corporation.
WITNESS my hand and Notarial Seal.
_____________________________________
Notary Public
My Commission expires:_______________
-5-
<PAGE>
Exhibit 10.23
THESE SECURITIES HAVE NOT BEEN REGISTERED UNDER THE SECURITIES ACT OF 1933,
AS AMENDED, OR ANY STATE SECURITIES LAWS. THEY MAY NOT BE SOLD, OFFERED FOR
SALE, PLEDGED, OR HYPOTHECATED IN THE ABSENCE OF AN EFFECTIVE REGISTRATION
STATEMENT RELATED THERETO OR AN OPINION OF COUNSEL (WHICH MAY BE COMPANY
COUNSEL) REASONABLY SATISFACTORY TO THE COMPANY THAT SUCH REGISTRATION IS NOT
REQUIRED UNDER THE SECURITIES ACT OF 1933, AS AMENDED, OR ANY APPLICABLE
STATE SECURITIES LAWS.
WARRANT AGREEMENT
To Purchase Shares of the Series B Preferred Stock of
GENE LOGIC INC.
Dated as of April 15, 1997 (the "Effective Date")
WHEREAS, Gene Logic Inc., a Delaware corporation (the "Company") has
entered into a Master Lease Agreement dated as of March 18, 1996, Equipment
Schedule No. VL-1 dated as of March 18, 1996, and Equipment Schedule No. VL-2
dated as of April 23, 1996, and related Summary Equipment Schedules
(collectively, the "Leases") with Comdisco, Inc., a Delaware corporation (the
"Warrantholder"); and
WHEREAS, the Company desires to grant to Warrantholder, in consideration
for such Leases, the right to purchase shares of its Series B Preferred Stock;
NOW, THEREFORE, in consideration of the Warrantholder executing and
delivering such Leases and in consideration of mutual covenants and
agreements contained herein, the Company and Warrantholder agree as follows:
1. GRANT OF THE RIGHT TO PURCHASE PREFERRED STOCK.
The Company hereby grants to the Warrantholder, and the Warrantholder is
entitled, upon the terms and subject to the conditions hereinafter set forth,
to subscribe to and purchase from the Company, 13,636 fully paid and
non-assessable shares of the Company's Series B Preferred Stock ("Preferred
Stock") at a purchase price of $2.20 per share (the "Exercise Price"). The
number and purchase price of such shares are subject to adjustment as
provided in Section 8 hereof.
2. TERM OF THE WARRANT AGREEMENT.
Except as otherwise provided for herein, the term of this Warrant
Agreement and the right to purchase Preferred Stock as granted herein shall
commence on the Effective Date and shall be wholly void and of no effect
after the date (the "Expiration Date") which is the earlier of (i) ten (10)
years from the Effective Date, (ii) five (5) five years from the effective
date of the Company's initial public offering, (iii) the effective time of a
merger or reorganization following which the stockholders of the Company
immediately prior to such transaction own after such transaction less than
fifty percent (50%) of the equity securities of the surviving corporation
(or its parent, if any), or (iv) the closing of a sale of all or
substantially all of the Company's assets; provided that, if the last day on
which this Warrant Agreement may be exercised is a Sunday or a legal holiday
or a day on which banking institutions doing business in the City of
Baltimore are authorized by law to close, this Warrant Agreement may be
exercised prior to 5:00 p.m. (Eastern time) on the next succeeding full
business day with the same force and effect as if exercised on such last day
specified herein.
The Company shall notify the Warrantholder ten (10) business days prior
to the closing of the transaction set forth in clauses (iii) or (iv) above,
and if the Company fails to deliver such notice, then notwithstanding
anything to the contrary in this Warrant Agreement, the rights to purchase
the Company's Stock shall not expire until the Company complies with such
notice provisions. Such notice shall also contain such details of the
proposed transaction are reasonable in the circumstances. If such closing
does not take place, the Company shall promptly notify the Warrantholder that
such proposed transaction has been terminated, and the Warrantholder may
rescind any exercise of its purchase rights promptly after such notice of
termination of the proposed transaction. In the event of such rescission,
the Warrant Agreement will continue to be exercisable on the same terms and
conditions contained herein.
-1-
<PAGE>
3. EXERCISE OF THE PURCHASE RIGHTS.
The purchase rights set forth in this Warrant Agreement are exercisable
by the Warrantholder, in whole or in part, at any time, or from time to time,
prior to the expiration of the term set forth in Section 2 above, by
tendering to the Company at its principal office a notice of exercise in the
form attached hereto as Exhibit I (the "Notice of Exercise"), duly completed
and executed. Promptly upon receipt of the Notice of Exercise and the payment
of the purchase price in accordance with the terms set forth below, and in no
event later than twenty-one (21) days thereafter, the Company shall issue to
the Warrantholder a certificate for the number of shares of Preferred Stock
purchased and shall execute the acknowledgment of exercise in the form
attached hereto as Exhibit II (the "Acknowledgment of Exercise") indicating
the number of shares which remain subject to future purchases, if any.
The Exercise Price may be paid at the Warrantholder's election either
(i) by cash or check, or (ii) by surrender of Warrants ("Net Issuance") as
determined below. If the Warrantholder elects the Net Issuance method, the
Company will issue Preferred Stock in accordance with the following formula:
X = Y(A-B)
------
A
Where: X = the number of shares of Preferred Stock to be
issued to the Warrantholder.
Y = the number of shares of Preferred Stock
requested to be exercised under this Warrant
Agreement.
A = the fair market value of one (1) share of
Preferred Stock.
B = the Exercise Price.
For purposes of the above calculation, current fair market value of
Preferred Stock shall mean with respect to each share of Preferred Stock:
(i) if this Warrant is exercised in connection with an
initial public offering of the Company's Common Stock, and if
the Company's Registration Statement relating to such public
offering has been declared effective by the Securities and
Exchange Commission, then the fair market value per share
shall be the product of (x) the initial "Price to Public"
specified in the final prospectus with respect to the offering
and (y) the number of shares of Common Stock into which each
share of Preferred Stock is convertible at the time of such
exercise;
(ii) if this Warrant is exercised after, and not in
connection with the Company's initial public offering, and:
(a) if traded on a securities exchange, the fair
market value shall be deemed to be the product of (x) the
average of the closing prices over a twenty-one (21) day
period ending three days before the day the current fair
market value of the securities is being determined and
(y) the number of shares of Common Stock into which each
share of Preferred Stock is convertible at the time of
such exercise; or
(b) if actively traded over-the-counter, the fair
market value shall be deemed to be the product of (x) the
average of the closing bid and asked prices quoted on the
NASDAQ system (or similar system) over the twenty-one
(21) day period ending three days before the day the
current fair market value of the securities is being
determined and (y) the number of shares of Common Stock
into which each share of Preferred Stock is convertible
at the time of such exercise;
(iii) if at any time the Common Stock is not listed
on any securities exchange or quoted in the NASDAQ System or
the over-the-counter market, the current fair market value of
Preferred Stock shall be the product of (x) the highest price
per share which the Company could obtain from a willing buyer
(not a current employee or director) for shares of Common
Stock sold by the Company, from authorized but unissued
shares, as determined in good faith by its Board of Directors
and (y) the number of shares of Common Stock into which each
share of Preferred Stock is convertible at the time of such
exercise, unless the Company shall become
-2-
<PAGE>
subject to a merger, acquisition or other consolidation
pursuant to which the Company is not the surviving party, in
which case the fair market value of Preferred Stock shall be
deemed to be the value received by the holders of the
Company's Preferred Stock on a common equivalent basis
pursuant to such merger or acquisition.
Upon partial exercise by either cash or Net Issuance, the Company shall
promptly issue an amended Warrant Agreement representing the remaining number
of shares purchasable hereunder. All other terms and conditions of such
amended Warrant Agreement shall be identical to those contained herein,
including, but not limited to the Effective Date hereof.
4. RESERVATION OF SHARES.
(a) Authorization and Reservation of Shares. During the term of this
Warrant Agreement, the Company will at all times have authorized and reserved
a sufficient number of shares of its Preferred Stock to provide for the
exercise of the rights to purchase Preferred Stock as provided for herein.
(b) Registration or Listing. If any shares of Preferred Stock required
to be reserved hereunder require registration with or approval of any
governmental authority under any Federal or State law (other than any
registration under the Securities Act of 1933, as amended (the "1933 Act"),
as then in effect, or any similar Federal statute then enforced, or any state
securities law, required by reason of any transfer involved in such
conversion), or listing on any domestic securities exchange, before such
shares may be issued upon conversion, the Company will, at its expense and as
expeditiously as possible, use its best efforts to cause such shares to be
duly registered, listed or approved for listing on such domestic securities
exchange, as the case may be. Nothing herein shall be deemed to require the
Company to register the issuance of its Preferred Stock or Common Stock in
connection with any exercise of this Warrant under the 1933 Act.
5. NO FRACTIONAL SHARES OR SCRIP.
No fractional shares or scrip representing fractional shares shall be
issued upon the exercise of the Warrant, but in lieu of such fractional
shares the Company shall make a cash payment therefor upon the basis of the
Exercise Price then in effect.
6. NO RIGHTS AS SHAREHOLDER.
This Warrant Agreement does not entitle the Warrantholder to any voting
rights or other rights as a shareholder of the Company prior to the exercise
of the Warrant.
7. WARRANTHOLDER REGISTRY.
The Company shall maintain a registry showing the name and address of
the registered holder of this Warrant Agreement.
8. ADJUSTMENT RIGHTS.
The purchase price per share and the number of shares of Preferred Stock
purchasable hereunder are subject to adjustment, as follows:
(a) Merger and Sale of Assets. If at any time there shall be a capital
reorganization of the shares of the Company's stock (other than a
combination, reclassification, exchange or subdivision of shares otherwise
provided for herein), or a merger or consolidation of the Company with or
into another corporation whether or not the Company is the surviving
corporation (other than as provided for in Section 2. hereof), (hereinafter
referred to as a "Merger Event"), then, as a part of such Merger Event,
lawful provision shall be made so that the Warrantholder shall thereafter be
entitled to receive, upon exercise of the Warrant, the number of shares of
Preferred Stock or other securities of the successor corporation resulting
from such Merger Event, equal to that which would have been issuable if
Warrantholder had exercised this Warrant immediately prior to the Merger
Event. In any such case, appropriate adjustment (as determined in good faith
by the Company's Board of Directors) shall be made in the application of the
provisions of this Warrant Agreement with respect to the rights and interest
of the Warrantholder after the Merger Event to the end that the provisions of
this Warrant Agreement (including adjustments of the Exercise Price and
number of shares of Preferred Stock purchasable) shall be applicable to the
greatest extent possible.
-3-
<PAGE>
(b) Reclassification of Shares. If the Company at any time shall, by
combination, reclassification, exchange or subdivision of securities or
otherwise, change any of the securities as to which purchase rights under
this Warrant Agreement exist into the same or a different number of
securities of any other class or classes, this Warrant Agreement shall
thereafter represent the right to acquire such number and kind of securities
as would have been issuable as the result of such change with respect to the
securities which were subject to the purchase rights under this Warrant
Agreement immediately prior to such combination, reclas-sification, exchange,
subdivision or other change.
(c) Subdivision or Combination of Shares. If the Company at any time
shall combine or subdivide its Preferred Stock, the Exercise Price shall be
proportionately decreased in the case of a subdivision, or proportionately
increased in the case of a combination.
(d) Stock Dividends. If the Company at any time shall pay a dividend
payable in, or make any other distribution (except any distribution
specifically provided for in the foregoing subsections (a) or (b)) of the
Company's Preferred Stock, then the Exercise Price shall be adjusted, from
and after the record date of such dividend or distribution, to that price
determined by multiplying the Exercise Price in effect immediately prior to
such record date by a fraction (i) the numerator of which shall be the total
number of all shares of the Company's Preferred Stock outstanding immediately
prior to such dividend or distribution, and (ii) the denominator of which
shall be the total number of all shares of the Company's Preferred Stock
outstanding immediately after such dividend or distribution. The
Warrantholder shall thereafter be entitled to purchase, at the Exercise Price
resulting from such adjustment, the number of shares of Preferred Stock
(calculated to the nearest whole share) obtained by multiplying the Exercise
Price in effect immediately prior to such adjustment by the number of shares
of Preferred Stock issuable upon the exercise hereof immediately prior to
such adjustment and dividing the product thereof by the Exercise Price
resulting from such adjustment.
(e) Antidilution Rights. Additional antidilution rights applicable to
the Preferred Stock purchasable hereunder are as set forth in the Company's
Restated Certificate of Incorporation, as amended through the Effective Date,
a true and complete copy of which is attached hereto as Exhibit IV (the
"Charter"). The Company shall promptly provide the Warrantholder with any
restatement, amendment, modification or waiver of the Charter.
(f) Notice of Certain Events. If: (i) the Company shall declare any
dividend or distribution upon its Preferred Stock, whether in cash, property,
stock or other securities; (ii) the Company shall offer for subscription
prorata to the holders of its Preferred Stock any additional shares of
stock of any class or other rights; (iii) there shall be any Merger Event;
(iv) there shall be an initial public offering; or (v) there shall be any
voluntary dissolution, liquidation or winding up of the Company; then, in
connection with each such event, the Company shall send to the Warrantholder:
(A) at least twenty (20) days' prior written notice of the date on which the
books of the Company shall close or a record shall be taken for such
dividend, distribution, subscription rights (specifying the date on which the
holders of Preferred Stock shall be entitled thereto) or for determining
rights to vote in respect of such Merger Event, dissolution, liquidation or
winding up; (B) in the case of any such Merger Event, dissolution,
liquidation or winding up, at least twenty (20) days' prior written notice of
the date when the same shall take place (and specifying the date on which the
holders of Preferred Stock shall be entitled to exchange their Preferred
Stock for securities or other property deliverable upon such Merger Event,
dissolution, liquidation or winding up); and (C) in the case of a public
offering, the Company shall give the Warrantholder at least twenty (20) days
written notice prior to the effective date thereof.
(g) Notice of Adjustment. Upon any adjustment of the Exercise Price
and/or any increase or decrease in the number of shares that may be purchased
upon exercise of this Warrant, the Company shall give written notice thereof
to the Warrantholder. Each such written notice shall set forth, in reasonable
detail, (i) the event requiring the adjustment, (ii) the amount of the
adjustment, (iii) the method by which such adjustment was calculated, (iv)
the Exercise Price, and (v) the number of shares subject to purchase
hereunder after giving effect to such adjust-ment, and shall be given by
first class mail, postage prepaid, addressed to the Warrantholder, at the
address as shown on the books of the Company.
9. REPRESENTATIONS, WARRANTIES AND COVENANTS OF THE COMPANY.
(a) Reservation of Preferred Stock. The Preferred Stock issuable upon
exercise of the Warrantholder's rights has been duly and validly reserved
and, when issued in accordance with the provisions of this Warrant Agreement,
will be validly issued, fully paid and non-assessable, and will be free of
any taxes, liens, charges or encumbrances of any nature whatsoever; provided,
however, that the Preferred Stock issuable pursuant to this Warrant Agreement
may be subject to restrictions on transfer under state and/or Federal
securities laws. The issuance of
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certificates for shares of Preferred Stock upon exercise of the Warrant
Agreement shall be made without charge to the Warrantholder for any issuance
tax in respect thereof, or other cost incurred by the Company in connection
with such exercise and the related issuance of shares of Preferred Stock. The
Company shall not be required to pay any tax which may be payable in respect
of any transfer involved and the issuance and delivery of any certificate in
a name other than that of the Warrantholder.
(b) Due Authority. The execution and delivery by the Company of this
Warrant Agreement and the performance of all obligations of the Company
hereunder, including the issuance to Warrantholder of the right to acquire
the shares of Preferred Stock, have been duly authorized by all necessary
corporate action on the part of the Company, and the Leases and this Warrant
Agreement are not inconsistent with the Company's Charter or Bylaws, do not
contra-vene any law or governmental rule, regulation or order applicable to
it, do not and will not contravene any provision of, or constitute a default
under, any indenture, mortgage, contract or other instrument to which it is a
party or by which it is bound, and the Leases and this Warrant Agreement
constitute legal, valid and binding agreements of the Company, enforceable in
accordance with their respective terms.
(c) Consents and Approvals. No consent or approval of, giving of
notice to, registration with, or taking of any other action in respect of any
state, Federal or other governmental authority or agency is required with
respect to the execution, delivery and performance by the Company of its
obligations under this Warrant Agreement, except for the filing of notices
pursuant to Regulation D under the 1933 Act (if applicable) and any filing
required by applicable state securities law, which filings will be effective
by the time required thereby.
(d) Insurance. The Company has in full force and effect insurance
policies, with extended coverage, insuring the Company and its property and
business against such losses and risks, and in such amounts, as are customary
for corporations engaged in a similar business and similarly situated and as
otherwise may be required pursuant to the terms of any other contract or
agreement.
(e) Exempt Transaction. Subject to the accuracy of the Warrantholder's
representations in Section 10 hereof, the issuance of the Preferred Stock
upon exercise of this Warrant will constitute a transaction exempt from (i)
the registration requirements of Section 5 of the 1933 Act, in reliance upon
Section 4(2) thereof, and (ii) the qualification requirements of the
applicable state securities laws.
(f) Compliance with Rule 144. At the written request of the
Warrantholder, who proposes to sell Preferred Stock issuable upon the
exercise of the Warrant in compliance with Rule 144 promulgated by the
Securities and Exchange Commission, if the Company is then subject to the
reporting requirements under the Securities Exchange Act of 1934, as amended
(the "1934 Act"), the Company shall furnish to the Warrantholder, within ten
days after receipt of such request, a written statement confirming the
Company's compliance with the filing requirements of the Securities and
Exchange Commission as set forth in such Rule, as such Rule may be amended
from time to time.
10. REPRESENTATIONS AND COVENANTS OF THE WARRANTHOLDER.
This Warrant Agreement has been entered into by the Company in reliance
upon the following representations and covenants of the Warrantholder:
(a) Investment Purpose. The right to acquire Preferred Stock or the
Preferred Stock issuable upon exercise of the Warrantholder's rights
contained herein (and Common Stock issuable upon conversion thereof) will be
acquired for investment and not with a view to the sale or distribution of
any part thereof, and the Warrantholder has no present intention of selling
or engaging in any public distribution of the same except pursuant to a
registration or exemption.
(b) Private Issue. The Warrantholder understands (i) that the
Preferred Stock issuable upon exercise of this Warrant (or Common Stock
issuable upon conversion thereof) is not registered under the 1933 Act or
qualified under applicable state securities laws on the ground that the
issuance contemplated by this Warrant Agreement will be exempt from the
registration and qualifications requirements thereof, and (ii) that the
Company's reliance on such exemption is predicated on the representations set
forth in this Section 10.
(c) Disposition of Warrantholder's Rights. In no event will the
Warrantholder make a disposition of any of its rights to acquire Preferred
Stock or Preferred Stock issuable upon exercise of such rights (or Common
Stock issuable upon conversion thereof) unless and until (i) it shall have
notified the Company of the proposed disposition, and (ii) if requested by
the Company, it shall have furnished the Company with an opinion of counsel
(which counsel may
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either be inside or outside counsel to the Warrantholder) satisfactory to the
Company and its counsel to the effect that (A) appropriate action necessary
for compliance with the 1933 Act has been taken, or (B) an exemption from the
registration requirements of the 1933 Act is available. Notwithstanding the
foregoing, the restrictions imposed upon the transferability of any of its
rights to acquire Preferred Stock or Preferred Stock issuable on the exercise
of such rights (or Common Stock issuable upon conversion thereof) do not
apply to transfers from the beneficial owner of any of the aforementioned
securities to its nominee or from such nominee to its beneficial owner, and
shall terminate as to any particular share of Preferred Stock (or Common
Stock issuable upon conversion thereof) when (1) such security shall have
been effectively registered under the 1933 Act and sold by the holder thereof
in accordance with such registration or (2) such security shall have been
sold without registration in compliance with Rule 144 under the 1933 Act, or
(3) a letter shall have been issued to the Warrantholder at its request by
the staff of the Securities and Exchange Commission or a ruling shall have
been issued to the Warrantholder at its request by such Commission stating
that no action shall be recommended by such staff or taken by such
Commission, as the case may be, if such security is transferred without
registration under the 1933 Act in accordance with the conditions set forth
in such letter or ruling and such letter or ruling specifies that no
subsequent restrictions on transfer are required. Whenever the restrictions
imposed hereunder shall terminate, as hereinabove provided, the Warrantholder
or holder of a share of Preferred Stock then outstanding or Common Stock
issuable upon conversion thereof as to which such restrictions have
terminated shall be entitled to receive from the Company, without expense to
such holder, one or more new certificates for the Warrant or for such shares
of Preferred Stock (or Common Stock issuable upon conversion thereof) not
bearing any restrictive legend.
(d) Financial Risk. The Warrantholder has such knowledge and
experience in financial and business matters as to be capable of evaluating
the merits and risks of its investment, and has the ability to bear the
economic risks of its investment.
(e) Risk of No Registration. The Warrantholder understands that if the
Company does not register with the Securities and Exchange Commission
pursuant to Section 12 of the 1933 Act, or file reports pursuant to Section
15(d) of the 1934 Act, or if a registration statement covering the securities
under the 1933 Act is not in effect when it desires to sell (i) the rights to
purchase (or Common Stock issuable upon conversion thereof) Preferred Stock
pursuant to this Warrant Agreement, or (ii) the Preferred Stock issuable upon
exercise of the right to purchase, it may be required to hold such securities
for an indefinite period. The Warrantholder also understands that any sale
of its rights of the Warrantholder to purchase Preferred Stock or Preferred
Stock (or Common Stock issuable upon conversion thereof) which might be made
by it in reliance upon Rule 144 under the 1933 Act may be made only in
accordance with the terms and conditions of that Rule.
(f) Accredited Investor. Warrantholder is an "accredited investor"
within the meaning of the Securities and Exchange Rule 501 of Regulation D,
as presently in effect.
11. TRANSFERS.
Subject to the terms and conditions contained in Section 10 hereof, this
Warrant Agreement and all rights hereunder are transferable in whole or in
part by the Warrantholder and any successor transferee, provided, however, in
no event shall the number of transfers of the rights and interests in all of
the Warrants exceed three (3) transfers. The transfer shall be recorded on
the books of the Company upon receipt by the Company of a notice of transfer
in the form attached hereto as Exhibit III (the "Transfer Notice"), at its
principal offices and the payment to the Company of all transfer taxes and
other governmental charges imposed on such transfer.
12. MARKET STAND-OFF.
If requested by the Company or the representative of the underwriters of
Common Stock (or other securities) of the Company, Warrantholder shall not
sell or otherwise transfer or dispose of any Common Stock (or other
securities) of the Company held by such Warrantholder (other than those
included in the registration, if any) for a period specified by the
representative of the underwriters not to exceed one hundred eighty (180)
days following the effective date of a registration statement of the Company
filed under the 1933 Act pertaining to the Company's initial public offering.
The Company may impose stop-transfer instructions with respect to the shares
of Common Stock (or other securities) subject to the foregoing restriction
until the end of said one hundred eighty (180) day period.
13. MISCELLANEOUS.
(a) Effective Date. The provisions of this Warrant Agreement shall be
construed and shall be given effect in all respects as if it had been
executed and delivered by the Company on the date hereof. This Warrant
Agreement
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shall be binding upon any successors or assigns of the Company.
(b) Attorney's Fees. In any litigation, arbitration or court
proceeding between the Company and the Warrantholder relating hereto, the
prevailing party shall be entitled to attorneys' fees and expenses and all
costs of proceedings incurred in enforcing this Warrant Agreement.
(c) Governing Law. This Warrant Agreement shall be governed by and
construed for all purposes under and in accordance with the laws of the State
of Delaware.
(d) Counterparts. This Warrant Agreement may be executed in two or
more counterparts, each of which shall be deemed an original, but all of
which together shall constitute one and the same instrument.
(e) Notices. Except as otherwise provided in this Warrant Agreement,
any requirement for a notice, demand or request under this Warrant will be
satisfied by a writing (a) hand-delivered with receipt; (b) mailed by United
States registered or certified mail or Express Mail, return receipt
requested, postage prepaid; or (c) sent by Federal Express or any other
nationally recognized overnight courier service, and addressed as follows:
if to the Warrantholder, at its address as shown on the books of the Company,
with a copy to the attention of General Counsel, 6111 North River Road,
Rosemont, Illinois 60018; and if to the Company, at 10150 Old Columbia Road,
Columbia, MD 21046, Attention: Chief Financial Officer, with a copy to L. Kay
Chandler, Esq., Cooley Godward LLP, 4365 Executive Drive, Suite 1100, San
Diego, California 92121. All notices that are sent in accordance with this
Section 13(e) will be deemed received by the Warrantholder or the Company on
the earliest of the following applicable time periods: (i) the date the
return receipt is executed; or (ii) the date delivered as documented by the
overnight courier service or the hand delivery receipt. Either the
Warrantholder or the Company may designate a change of address by written
notice to the other party.
(f) Remedies. In the event of any default hereunder, the
non-defaulting party may proceed to protect and enforce its rights either by
suit in equity and/or by action at law, including but not limited to an
action for damages as a result of any such default, and/or an action for
specific performance for any default where Warrantholder will not have an
adequate remedy at law and where damages will not be readily ascertainable.
The Company expressly agrees that it shall not oppose an application by the
Warrantholder or any other person entitled to the benefit of this Agreement
requiring specific performance of any or all provisions hereof or enjoining
the Company from continuing to commit any such breach of this Agreement.
(g) No Impairment of Rights. The Company will not, by amendment of its
Charter or through any other means, avoid or seek to avoid the observance or
performance of any of the terms of this Warrant, but will at all times in
good faith assist in the carrying out of all such terms and in the taking of
all such actions as may be necessary or appropriate in order to protect the
rights of the Warrantholder against impairment.
(h) Survival. The representations, warranties, covenants and
conditions of the respective parties contained herein or made pursuant to
this Warrant Agreement shall survive the execution and delivery of this
Warrant Agreement.
(i) Severability. In the event any one or more of the provisions of
this Warrant Agreement shall for any reason be held invalid, illegal or
unenforceable, the remaining provisions of this Warrant Agreement shall be
unimpaired, and the invalid, illegal or unenforceable provision shall be
replaced by a mutually acceptable valid, legal and enforceable provision,
which comes closest to the intention of the parties underlying the invalid,
illegal or unenforceable provision.
(j) Amendments. Any provision of this Warrant Agreement may be amended
by a written instrument signed by the Company and by the Warrantholder.
(k) Additional Documents. The Company, upon execution of this Warrant
Agreement, shall provide the Warrantholder with certified resolutions with
respect to the representations, warranties and covenants set forth in
subparagraphs (a) through (d), and (f) of Section 9 above. If the purchase
price for the Leases referenced in the preamble of this Warrant Agreement
exceeds $1,000,000, the Company will also provide Warrantholder with an
opinion from the Company's counsel with respect to those same
representations, warranties and covenants. The Company shall also supply
such other documents as the Warrantholder may from time to time reasonably
request.
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<PAGE>
14. CONFIDENTIALITY.
In handling any confidential information Warrantholder shall exercise
the same degree of care that it exercises with respect to its own proprietary
information of the same type to maintain the confidentiality of any nonpublic
information thereby received or received pursuant to this or any other
agreement except that disclosure of such information may be made (i) to the
subsidiaries or affiliates of Warrantholder in connection with their present
or prospective business relations with Company, (ii) to prospective
transferees or purchasers of any interest in this or any other agreement,
provided that they have entered into a comparable confidentiality agreement
in favor of Company, (iii) as may be required in connection with the
examination, audit or similar investigation of Warrantholder. Confidential
information hereunder shall not include information that either: (a) is in
the public domain or in the knowledge or possession of Warrantholder when
disclosed to Warrantholder, or becomes part of the public domain after
disclosure to Warrantholder through no fault of Warrantholder; or (b) is
disclosed to Warrantholder by a third party, provided Warrantholder does not
have actual knowledge that such third party is prohibited from disclosing
such information.
IN WITNESS WHEREOF, the parties hereto have caused this Warrant
Agreement to be executed by its officers thereunto duly authorized as of the
Effective Date.
Company: GENE LOGIC INC.
By: /s/ Mark Gessler
------------------------------
Title: SVP Corp. Dev. & CFO
------------------------------
Warrantholder: COMDISCO, INC.
By: _____________________________
Title: _____________________________
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EXHIBIT I
NOTICE OF EXERCISE
To: ____________________________
(1) The undersigned Warrantholder hereby elects to purchase
_______ shares of the Series B Preferred Stock of Gene Logic
Inc., pursuant to the terms of the Warrant Agreement dated the
15th day of April, 1997 (the "Warrant Agreement") between Gene
Logic Inc. and the Warrantholder, and tenders herewith payment
of the purchase price for such shares in full, together with
all applicable transfer taxes, if any.
(2) In exercising its rights to purchase the Series B Preferred
Stock of Gene Logic Inc., the undersigned hereby confirms and
acknowledges the investment representations and warranties
made in Section 10 of the Warrant Agreement and the agreements
made in Section 12 of the Warrant Agreement.
(3) Please issue a certificate or certificates representing said
shares of Series B Preferred Stock in the name of the under-
signed or in such other name as is specified below.
_________________________________
(Name)
_________________________________
(Address)
Warrantholder: COMDISCO, INC.
By: _____________________________
Title: _____________________________
Date: _____________________________
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EXHIBIT II
ACKNOWLEDGMENT OF EXERCISE
The undersigned ____________________________________, hereby acknowledge
receipt of the "Notice of Exercise" from Comdisco, Inc., to purchase ____
shares of the Series B Preferred Stock of Gene Logic Inc., pursuant to the
terms of the Warrant Agreement, and further acknowledges that ______ shares
remain subject to purchase under the terms of the Warrant Agreement.
Company:
By: ____________________________
Title: ___________________________
Date: ____________________________
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EXHIBIT III
TRANSFER NOTICE
(To transfer or assign the foregoing Warrant Agreement execute this form and
supply required information. Do not use this form to purchase shares.)
FOR VALUE RECEIVED, the foregoing Warrant Agreement and all rights
evidenced thereby are hereby transferred and assigned to
_________________________________________________________________
(Please Print)
whose address is___________________________________________________
___________________________________________________________________
Dated __________________________________________
Holder's Signature ______________________________
Holder's Address ________________________________
______________________________________________
Signature
Guaranteed ____________________________________________
NOTE: The signature to this Transfer Notice
must correspond with the name as it
appears on the face of the Warrant
Agreement, without alteration or
enlargement or any change whatever.
Officers of corporations and those acting
in a fiduciary or other representative
capacity should file proper evidence of
authority to assign the foregoing Warrant
Agreement.
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Exhibit 23.1
[ARTHUR ANDERSEN LLP LETTERHEAD]
CONSENT OF INDEPENDENT PUBLIC ACCOUNTANTS
As independent public accountants, we hereby consent to the use of our
reports and to all references to our Firm included in or made a part of this
Registration Statement.
/s/ Arthur Andersen LLP
Baltimore, Maryland,
October 17, 1997
