<PAGE> 1
AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON SEPTEMBER 22, 1998
REGISTRATION NO. 333-60135
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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
------------------------
POST-EFFECTIVE AMENDMENT NO. 2
TO
FORM S-4
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) IDENTIFICATION NUMBER)
</TABLE>
------------------------
708 QUINCE ORCHARD ROAD
GAITHERSBURG, MARYLAND 20878
(301) 987-1700
(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.
708 QUINCE ORCHARD ROAD
GAITHERSBURG, MARYLAND 20878
(301) 987-1700
(NAME, ADDRESS, INCLUDING ZIP CODE, AND TELEPHONE NUMBER, INCLUDING AREA CODE,
OF AGENT FOR SERVICE)
------------------------
COPIES TO:
<TABLE>
<S> <C>
FREDERICK T. MUTO, ESQ. ALEXANDER D. LYNCH, ESQ.
L. KAY CHANDLER, ESQ. ALAN P. BLAUSTEIN, ESQ.
CARL R. SANCHEZ, ESQ. BROBECK, PHLEGER & HARRISON LLP
COOLEY GODWARD LLP 1633 BROADWAY, 47TH FLOOR
4365 EXECUTIVE DRIVE, SUITE 1100 NEW YORK, NY 10019-6013
SAN DIEGO, CA 92121 (212) 581-1600
(619) 550-6000
</TABLE>
------------------------
APPROXIMATE DATE OF COMMENCEMENT OF PROPOSED SALE TO THE PUBLIC:
With respect to the shares of Registrant's Common Stock to be issued in the
merger as described herein, as promptly as practicable following the
effectiveness of this Registration Statement and the effective time of the
proposed merger of Oncormed, Inc. ("Oncormed") with and into Gene Logic
Acquisition Corp., a wholly owned subsidiary of Registrant, as described in the
Agreement and Plan of Merger and Reorganization, dated as of July 6, 1998,
attached as Appendix A to the Prospectus/Joint Proxy Statement forming a part of
this Registration Statement.
With respect to the shares of Registrant's Common Stock to be offered for
resale by certain selling securityholders, from time to time after the
effectiveness of this Registration Statement.
------------------------
If the securities being registered in this Form are to be offered on a
delayed or continuous basis pursuant to Rule 415 under the Securities Act of
1933, other than securities offered only in connection with dividend or
reinvestment plans, please check the following box. [X]
If the securities being registered on this Form are to be offered in
connection with the formation of a holding company and there is compliance with
General Instruction G, 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, 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(d)
under the Securities Act, check the following box and list the Securities Act
registration statement number of the earlier effective registration statement
for the same offering. [ ]
------------------------
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 WHICH SPECIFICALLY STATES THAT THIS REGISTRATION
STATEMENT SHALL THEREAFTER BECOME EFFECTIVE IN ACCORDANCE WITH SECTION 8(a) OF
THE SECURITIES ACT OF 1933 OR UNTIL THE REGISTRATION STATEMENT SHALL BECOME
EFFECTIVE ON SUCH DATE AS THE COMMISSION, ACTING PURSUANT TO SAID SECTION 8(a),
MAY DETERMINE.
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- --------------------------------------------------------------------------------
<PAGE> 2
GENE LOGIC INC.
708 QUINCE ORCHARD ROAD
GAITHERSBURG, MARYLAND 20878
AUGUST 21, 1998
Dear Stockholder:
You are cordially invited to attend a Special Meeting of stockholders (the
"Gene Logic Special Meeting") of Gene Logic Inc., a Delaware corporation ("Gene
Logic"), which will be held on Monday, September 28, 1998 at 10:00 a.m., local
time, at the principal executive offices of Gene Logic located at 708 Quince
Orchard Road, Gaithersburg, Maryland 20878.
At the Gene Logic Special Meeting, you will be asked to consider and vote
upon a proposal (the "Merger Proposal") to (i) approve and adopt the Agreement
and Plan of Merger and Reorganization dated as of July 6, 1998 (the "Merger
Agreement") among Gene Logic, Gene Logic Acquisition Corp., a Delaware
corporation and wholly owned subsidiary of Gene Logic ("Merger Sub"), and
Oncormed, Inc., a Delaware corporation ("Oncormed"), and (ii) approve the merger
of Oncormed with and into Merger Sub (the "Merger"), pursuant to which Oncormed
will cease to exist and Merger Sub will be the surviving corporation. In the
Merger, Gene Logic will issue an aggregate of 4,849,815 shares of Gene Logic
Common Stock to the Oncormed stockholders (the "Total Merger Shares"); provided,
however, that in the event that the average closing price of Gene Logic's Common
Stock as reported on the Nasdaq National Market System (the "Nasdaq NMS") for
the fifteen trading days ending the second day prior to the Gene Logic Special
Meeting (the "Closing Price") is more than $7.88 per share, then the Total
Merger Shares shall be reduced to a number of shares of Gene Logic Common Stock
equal to $38,204,420 divided by the Closing Price; provided, further that in the
event the Closing Price of Gene Logic Common Stock is less than $6.34 per share,
Oncormed may terminate the Merger Agreement in accordance with its terms.
Immediately after the effective time of the Merger (the "Effective Time"), the
former holders of Oncormed Common Stock will hold in the aggregate approximately
24.7% of the shares of Gene Logic Common Stock to be outstanding immediately
after the Effective Time of the Merger (calculated on the basis of 14,788,445
shares of Gene Logic Common Stock outstanding as of August 17, 1998, and
assuming the issuance of an aggregate of 4,849,815 shares of Gene Logic Common
Stock to the Oncormed stockholders in the Merger). At August 17, 1998, the
closing sales price of a share of Gene Logic Common Stock as reported on the
Nasdaq NMS was $6.25 and the closing sales price of a share of Oncormed Common
Stock as reported on the American Stock Exchange was $2.125.
In the materials accompanying this letter you will find a Notice of Special
Meeting of Stockholders, a Prospectus/Joint Proxy Statement relating to the
Merger Proposal and a form of proxy. The Prospectus/Joint Proxy Statement more
fully describes the proposed Merger and includes information about Gene Logic,
Merger Sub and Oncormed. I urge you to read the information contained in the
accompanying Prospectus/ Joint Proxy Statement.
After careful consideration, the Gene Logic Board of Directors has
concluded that the Merger Proposal is fair to, and in the best interests of,
Gene Logic and its stockholders and has approved and adopted the Merger
Proposal. Your Board of Directors has unanimously recommended a vote FOR the
adoption and approval of the Merger Proposal described in the accompanying
Prospectus/Joint Proxy Statement. In addition, in connection with its approval
of the Merger Proposal, the Gene Logic Board of Directors has received a written
opinion from its financial advisor, ING Baring Furman Selz LLC ("ING Baring
Furman Selz"), to the effect that the consideration to be paid by Gene Logic to
the Oncormed stockholders pursuant to the Merger Agreement is fair from a
financial point of view to Gene Logic and its stockholders. A copy of ING Baring
Furman Selz' written opinion, which sets forth a description of the assumptions
made, matters considered and limitations of ING Baring Furman Selz' review, is
attached to the accompanying Prospectus/Joint Proxy Statement as Appendix C, and
the Gene Logic stockholders are urged to read carefully the opinion in its
entirety prior to voting on the Merger Proposal.
<PAGE> 3
Whether or not you plan to attend the Gene Logic Special Meeting, please
complete, sign, date and return the proxy in the enclosed envelope. If you
attend the Gene Logic Special Meeting, you may vote in person if you wish, even
though you have previously returned your proxy. It is important that your shares
be represented and voted at the Gene Logic Special Meeting.
On behalf of the Board, I thank you for your support and ask you to vote
FOR the Merger Proposal.
Sincerely,
/s/ MICHAEL J. BRENNAN
Michael J. Brennan, M.D., Ph.D.
President and Chief Executive Officer
<PAGE> 4
GENE LOGIC INC.
708 QUINCE ORCHARD ROAD
GAITHERSBURG, MARYLAND 20878
NOTICE OF SPECIAL MEETING OF STOCKHOLDERS
TO BE HELD ON SEPTEMBER 28, 1998
TO THE STOCKHOLDERS OF GENE LOGIC INC.:
NOTICE IS HEREBY GIVEN that a Special Meeting of stockholders (the "Gene
Logic Special Meeting") of Gene Logic Inc., a Delaware corporation ("Gene
Logic"), will be held on Monday, September 28, 1998, at 10:00 a.m., local time,
at the principal executive offices of Gene Logic located at 708 Quince Orchard
Road, Gaithersburg, Maryland 20878 for the following purposes:
1. To consider and vote upon a proposal (the "Merger Proposal") to
(i) approve and adopt the Agreement and Plan of Merger and Reorganization
dated as of July 6, 1998 (the "Merger Agreement") among Gene Logic, Gene
Logic Acquisition Corp., a Delaware corporation and wholly owned subsidiary
of Gene Logic ("Merger Sub"), and Oncormed, Inc., a Delaware corporation
("Oncormed"), and (ii) approve the merger of Oncormed with and into Merger
Sub (the "Merger"), pursuant to which Oncormed will cease to exist and
Merger Sub will be the surviving corporation. In the Merger, Gene Logic
will issue an aggregate of 4,849,815 shares of Gene Logic Common Stock to
the Oncormed stockholders (the "Total Merger Shares"); provided, however,
that in the event that the average closing price of Gene Logic's Common
Stock as reported on the Nasdaq National Market System (the "Nasdaq NMS")
for the fifteen trading days ending the second day prior to the Gene Logic
Special Meeting (the "Closing Price") is more than $7.88 per share, then
the Total Merger Shares shall be reduced to a number of shares of Gene
Logic Common Stock equal to $38,204,420 divided by the Closing Price;
provided, further that in the event the Closing Price of Gene Logic Common
Stock is less than $6.34 per share, Oncormed may terminate the Merger
Agreement in accordance with its terms. Immediately after the effective
time of the Merger (the "Effective Time"), the former holders of Oncormed
Common Stock will hold in the aggregate approximately 24.7% of the shares
of Gene Logic Common Stock to be outstanding immediately after the
Effective Time (calculated on the basis of 14,788,445 shares of Gene Logic
Common Stock outstanding as of August 17, 1998, and assuming the issuance
of an aggregate of 4,849,815 shares of Gene Logic Common Stock to the
Oncormed stockholders in the Merger). At August 17, 1998, the closing sales
price of a share of Gene Logic Common Stock as reported on the Nasdaq NMS
was $6.25 and the closing sales price of a share of Oncormed Common Stock
as reported on the American Stock Exchange was $2.125.
2. To transact such other business as may properly come before the
Gene Logic Special Meeting or any adjournment or postponement thereof.
The Merger Proposal is more fully described in the Prospectus/Joint Proxy
Statement accompanying this Notice.
The Board of Directors of Gene Logic unanimously recommends that you vote
FOR the Merger Proposal.
Only holders of record of Gene Logic Common Stock at the close of business
on August 17, 1998 are entitled to notice of, and will be entitled to vote at,
the Gene Logic Special Meeting or any adjournment or postponement thereof.
By Order of the Board of Directors
/s/ MARK D. GESSLER
Mark D. Gessler
Senior Vice President, Corporate
Development,
Chief Financial Officer and Secretary
Gaithersburg, Maryland
August 21, 1998
<PAGE> 5
ONCORMED, INC.
205 PERRY PARKWAY
GAITHERSBURG, MARYLAND 20877
August 21, 1998
Dear Stockholder:
You are cordially invited to attend a Special Meeting of stockholders (the
"Oncormed Special Meeting") of Oncormed, Inc., a Delaware corporation
("Oncormed"), which will be held on Monday, September 28, 1998 at 10:00 a.m.,
local time, at the principal executive offices of Oncormed located at 205 Perry
Parkway, Gaithersburg, Maryland 20877.
At the Oncormed Special Meeting, you will be asked to consider and vote
upon a proposal (the "Merger Proposal") to (i) approve and adopt the Agreement
and Plan of Merger and Reorganization dated as of July 6, 1998 (the "Merger
Agreement") among Oncormed, Gene Logic Inc., a Delaware corporation ("Gene
Logic"), and Gene Logic Acquisition Corp., a Delaware corporation and wholly
owned subsidiary of Gene Logic ("Merger Sub"), and (ii) approve the merger of
Oncormed with and into Merger Sub (the "Merger"), pursuant to which Oncormed
will cease to exist and Merger Sub will be the surviving corporation. In the
Merger, Gene Logic will issue an aggregate of 4,849,815 shares of Gene Logic
Common Stock to the Oncormed stockholders (the "Total Merger Shares"); provided,
however, that in the event that the average closing price of Gene Logic's Common
Stock as reported on the Nasdaq National Market System (the "Nasdaq NMS") for
the fifteen trading days ending the second day prior to the Gene Logic Special
Meeting (the "Closing Price") is more than $7.88 per share, then the Total
Merger Shares shall be reduced to a number of shares of Gene Logic Common Stock
equal to $38,204,420 divided by the Closing Price; provided, further that in the
event the Closing Price of Gene Logic Common Stock is less than $6.34 per share,
Oncormed may terminate the Merger Agreement in accordance with its terms. As a
result of the Merger, each share of Oncormed Common Stock outstanding
immediately prior to the effective time of the Merger (the "Effective Time")
will be entitled to receive in exchange therefor that fraction of a share of
Gene Logic Common Stock equal to the Exchange Ratio. The Exchange Ratio will be
determined by dividing the Total Merger Shares by the number of shares of
Oncormed Common Stock outstanding immediately prior to the Effective Time
(including all shares of Oncormed Common Stock issuable upon conversion of all
of the shares of Oncormed 6% Series A Convertible Preferred Stock outstanding
immediately prior to the Effective Time). At August 17, 1998, the closing sales
price of a share of Oncormed Common Stock as reported on the American Stock
Exchange was $2.125 and the closing sales price of a share of Gene Logic Common
Stock as reported on the Nasdaq NMS was $6.25.
Immediately after the Effective Time, the former holders of Oncormed Common
Stock will hold in the aggregate approximately 24.7% of the shares of Gene Logic
Common Stock to be outstanding immediately after the Effective Time (calculated
on the basis of 14,788,445 shares of Gene Logic Common Stock outstanding as of
August 17, 1998 and assuming the issuance of an aggregate of 4,849,815 shares of
Gene Logic Common Stock to the Oncormed stockholders in the Merger).
In the materials accompanying this letter you will find a Notice of Special
Meeting of Stockholders, a Prospectus/Joint Proxy Statement relating to the
Merger Proposal and a form of proxy. The Prospectus/Joint Proxy Statement more
fully describes the proposed Merger and includes information about Oncormed,
Gene Logic and Merger Sub. I urge you to read the information contained in the
accompanying Prospectus/Joint Proxy Statement.
After careful consideration, the Oncormed Board of Directors has concluded
that the Merger Proposal is fair to, and in the best interests of, Oncormed and
its stockholders and has approved and adopted the Merger Proposal. Your Board of
Directors has unanimously recommended a vote FOR the adoption and approval of
the Merger Proposal described in the accompanying Prospectus/Joint Proxy
Statement. In addition, in connection with its approval of the Merger Proposal,
the Oncormed Board of Directors has received a written opinion from its
financial advisor, Hambrecht & Quist LLC ("Hambrecht & Quist"), to the effect
that the
<PAGE> 6
consideration to be received by the holders of Oncormed Common Stock in the
Merger is fair to such holders from a financial point of view. A copy of
Hambrecht & Quist's written opinion, which sets forth a description of the
assumptions made, matters considered and limitations of Hambrecht & Quist's
review, is attached to the accompanying Prospectus/Joint Proxy Statement as
Appendix B, and the Oncormed stockholders are urged to read carefully the
opinion in its entirety prior to voting on the Merger Proposal.
Whether or not you plan to attend the Oncormed Special Meeting, please
complete, sign, date and return the proxy in the enclosed envelope. If you
attend the Oncormed Special Meeting, you may vote in person if you wish, even
though you have previously returned your proxy. It is important that your shares
be represented and voted at the Oncormed Special Meeting.
On behalf of the Oncormed Board of Directors, I thank you for your support
and ask you to vote FOR the Merger Proposal.
Sincerely,
/s/ TIMOTHY J. TRICHE, M.D.
Dr. Timothy J. Triche
Chief Executive Officer
<PAGE> 7
ONCORMED, INC.
205 PERRY PARKWAY
GAITHERSBURG, MARYLAND 20877
NOTICE OF SPECIAL MEETING OF STOCKHOLDERS
TO BE HELD ON SEPTEMBER 28, 1998
TO THE STOCKHOLDERS OF ONCORMED, INC.:
NOTICE IS HEREBY GIVEN that a Special Meeting of stockholders (the
"Oncormed Special Meeting") of Oncormed, Inc., a Delaware corporation
("Oncormed"), will be held on Monday, September 28, 1998, at 10:00 a.m., local
time, at the principal executive offices of Oncormed located at 205 Perry
Parkway, Gaithersburg, Maryland 20877 for the following purposes:
1. To consider and vote upon a proposal (the "Merger Proposal") to
(i) approve and adopt the Agreement and Plan of Merger and Reorganization
dated as of July 6, 1998 (the "Merger Agreement") among Oncormed, Gene
Logic Inc., a Delaware corporation ("Gene Logic"), and Gene Logic
Acquisition Corp., a Delaware corporation and wholly owned subsidiary of
Gene Logic ("Merger Sub"), and (ii) approve the merger of Oncormed with and
into Merger Sub (the "Merger"), pursuant to which Oncormed will cease to
exist and Merger Sub will be the surviving corporation. In the Merger, Gene
Logic will issue an aggregate of 4,849,815 shares of Gene Logic Common
Stock to the Oncormed stockholders (the "Total Merger Shares"); provided,
however, that in the event that the average closing price of Gene Logic's
Common Stock as reported on the Nasdaq National Market System (the "Nasdaq
NMS") for the fifteen trading days ending the second day prior to the Gene
Logic Special Meeting (the "Closing Price") is more than $7.88 per share,
then the Total Merger Shares shall be reduced to a number of shares of Gene
Logic Common Stock equal to $38,204,420 divided by the Closing Price;
provided, further that in the event the Closing Price of Gene Logic Common
Stock is less than $6.34 per share, Oncormed may terminate the Merger
Agreement in accordance with its terms. As a result of the Merger, each
holder of shares of Oncormed common stock, $.01 par value per share (the
"Oncormed Common Stock"), outstanding immediately prior to the effective
time of the Merger (the "Effective Time") will be entitled to receive in
exchange for each share of Oncormed Common Stock that fraction of a share
of Gene Logic Common Stock equal to the Exchange Ratio. The Exchange Ratio
will be determined by dividing the Total Merger Shares by the number of
shares of Oncormed Common Stock outstanding immediately prior to the
Effective Time (including all shares of Oncormed Common Stock issuable upon
conversion of all of the shares of Oncormed 6% Series A Convertible
Preferred Stock outstanding immediately prior to the Effective Time). At
August 17, 1998, the closing sales price of a share of Oncormed Common
Stock as reported on the American Stock Exchange was $2.125 and the closing
sales price of a share of Gene Logic Common Stock as reported on the Nasdaq
NMS was $6.25.
2. To transact such other business as may properly come before the
Oncormed Special Meeting or any adjournment or postponement thereof.
The Merger Proposal is more fully described in the Prospectus/Joint Proxy
Statement accompanying this Notice.
The Board of Directors of Oncormed unanimously recommends that you vote FOR
the Merger Proposal.
Only holders of record of Oncormed Common Stock at the close of business on
August 17, 1998 are entitled to notice of, and will be entitled to vote at, the
Oncormed Special Meeting or any adjournment or postponement thereof.
By Order of the Board of Directors
/s/ L. ROBERT JOHNSTON, JR.
L. Robert Johnston, Jr.
Senior Vice President,
Chief Financial Officer and Corporate
Secretary
Gaithersburg, Maryland
August 21, 1998
<PAGE> 8
GENE LOGIC INC. ONCORMED, INC.
PROSPECTUS/JOINT PROXY STATEMENT
This Prospectus/Joint Proxy Statement is being furnished to the
stockholders of Gene Logic Inc., a Delaware corporation ("Gene Logic"), in
connection with the solicitation of proxies on behalf of the Gene Logic Board of
Directors (the "Gene Logic Board") for use at the special meeting of the
stockholders of Gene Logic (the "Gene Logic Special Meeting") to be held on
Monday, September 28, 1998 at 10:00 a.m. local time, at Gene Logic's principal
executive offices located at 708 Quince Orchard Drive, Gaithersburg, Maryland,
and at any adjournments or postponements thereof.
This Prospectus/Joint Proxy Statement is also being furnished to the
stockholders of Oncormed, Inc., a Delaware corporation ("Oncormed"), in
connection with the solicitation of proxies on behalf of the Oncormed Board of
Directors (the "Oncormed Board") for use at the special meeting of the
stockholders of Oncormed (the "Oncormed Special Meeting") to be held on Monday,
September 28, 1998 at 10:00 a.m. local time, at Oncormed's principal executive
offices located at 205 Perry Parkway, Gaithersburg, Maryland, and at any
adjournments or postponements thereof.
This Prospectus/Joint Proxy Statement also constitutes the Prospectus of
Gene Logic for use in connection with the offer and issuance of shares of common
stock of Gene Logic, $.01 par value per share (the "Gene Logic Common Stock"),
to the Oncormed stockholders in connection with the merger (the "Merger") of
Oncormed with and into Gene Logic Acquisition Corp., a newly formed Delaware
corporation and wholly owned subsidiary of Gene Logic ("Merger Sub"), pursuant
to that certain Agreement and Plan of Merger and Reorganization dated July 6,
1998 (the "Merger Agreement") by and among Gene Logic, Merger Sub and Oncormed.
Pursuant to the Merger Agreement and upon the filing of a certificate of merger
with the office of the Secretary of State of the State of Delaware (the
"Effective Time"), Oncormed will cease to exist as a separate entity and Merger
Sub will survive the Merger as a wholly owned subsidiary of Gene Logic. In the
Merger, Gene Logic will issue an aggregate of 4,849,815 shares of Gene Logic
Common Stock to the Oncormed stockholders (the "Total Merger Shares"); provided
however, that in the event that the average closing price of Gene Logic's Common
Stock as reported on the Nasdaq National Market System (the "Nasdaq NMS") for
the fifteen trading days ending the second day prior to the Gene Logic Special
Meeting (the "Closing Price") is more than $7.88 per share, then the Total
Merger Shares shall be reduced to a number of shares of Gene Logic Common Stock
equal to $38,204,420 divided by the Closing Price; provided, further that in the
event the Closing Price of Gene Logic Common Stock is less than $6.34 per share,
Oncormed may terminate the Merger Agreement in accordance with its terms. As a
result of the Merger, each holder of shares of common stock of Oncormed, $.01
par value per share (the "Oncormed Common Stock"), outstanding immediately prior
to the Effective Time will be entitled to receive in exchange for each share of
Oncormed Common Stock that fraction of a share of Gene Logic Common Stock equal
to the Exchange Ratio. The Exchange Ratio will be determined by dividing the
Total Merger Shares by the number of shares of Oncormed Common Stock outstanding
immediately prior to the Effective Time (including all shares of Oncormed Common
Stock issuable upon conversion of all of the shares of Oncormed 6% Series A
Convertible Preferred Stock, $.01 par value per share (the "Oncormed Preferred
Stock"), outstanding immediately prior to the Effective Time). Cash will be paid
in lieu of issuing any fractional shares. At August 17, 1998, the closing sales
price of a share of Gene Logic Common Stock as reported on the Nasdaq NMS was
$6.25 and the closing sales price of a share of Oncormed Common Stock as
reported on the American Stock Exchange ("AMEX") was $2.125.
Neither the Gene Logic stockholders nor the Oncormed stockholders are
entitled to appraisal rights under Delaware law as a result of the Merger. See
"The Merger and Related Transactions -- Other Matters Related to the
Merger -- No Appraisal Rights."
If the requisite approvals of the stockholders of each of Gene Logic and
Oncormed of the proposal to (i) approve and adopt the Merger Agreement and (ii)
approve the Merger (the "Merger Proposal") are received and all other conditions
to the Merger are satisfied or waived, the Merger is expected to be consummated
on or after September 29, 1998.
This Prospectus/Joint Proxy Statement also relates to the offer and resale
by certain Oncormed stockholders (the "Selling Securityholders") of up to
approximately 1,006,631 shares of Gene Logic Common Stock, including shares of
Gene Logic Common Stock issuable upon the exercise of certain outstanding
Oncormed warrants that are being assumed by Gene Logic in the Merger. See
"Selling Securityholders."
This Prospectus/Joint Proxy Statement and the accompanying forms of proxy
are first being delivered to the stockholders of each of Gene Logic and Oncormed
on or about August 21, 1998.
THE ABOVE MATTERS ARE DISCUSSED IN DETAIL IN THIS PROSPECTUS/JOINT PROXY
STATEMENT. THE PROPOSED MERGER IS A COMPLEX TRANSACTION. THE STOCKHOLDERS OF
EACH OF GENE LOGIC AND ONCORMED ARE STRONGLY URGED TO READ AND CONSIDER
CAREFULLY THIS PROSPECTUS/JOINT PROXY STATEMENT IN ITS ENTIRETY, PARTICULARLY
THE MATTERS REFERRED TO UNDER "RISK FACTORS" BEGINNING ON PAGE 16.
THE SHARES OF GENE LOGIC COMMON STOCK TO BE ISSUED IN THE MERGER HAVE NOT BEEN
APPROVED OR DISAPPROVED BY THE SECURITIES AND EXCHANGE COMMISSION OR ANY STATE
SECURITIES COMMISSION NOR HAS THE SECURITIES AND EXCHANGE COMMISSION OR ANY
STATE SECURITIES COMMISSION PASSED UPON THE ACCURACY OR ADEQUACY OF THIS
PROSPECTUS/JOINT PROXY STATEMENT. ANY REPRESENTATION TO THE CONTRARY IS A
CRIMINAL OFFENSE.
THE DATE OF THIS PROSPECTUS/JOINT PROXY STATEMENT IS AUGUST 21, 1998.
<PAGE> 9
TABLE OF CONTENTS
<TABLE>
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PAGE
----
<S> <C>
AVAILABLE INFORMATION....................................... 1
INCORPORATION OF CERTAIN DOCUMENTS BY REFERENCE............. 2
SUMMARY..................................................... 3
General..................................................... 3
The Parties................................................. 3
The Merger.................................................. 4
Meetings of Stockholders.................................... 6
Recommendations of the Boards of Directors.................. 7
Opinion of ING Baring Furman Selz LLC....................... 7
Opinion of Hambrecht & Quist LLC............................ 7
The Merger Agreement........................................ 7
Related Agreements and Interests of Certain Persons In the
Merger.................................................... 9
Other Matters Related to the Merger......................... 10
MARKET PRICE DATA........................................... 12
SELECTED HISTORICAL FINANCIAL INFORMATION OF GENE LOGIC..... 14
SELECTED HISTORICAL FINANCIAL INFORMATION OF ONCORMED....... 15
RISK FACTORS................................................ 16
UNAUDITED PRO FORMA COMBINED CONDENSED FINANCIAL DATA....... 32
THE GENE LOGIC SPECIAL MEETING.............................. 38
Date, Time and Place........................................ 38
Record Date and Outstanding Shares.......................... 38
Voting of Proxies........................................... 38
Revocability of Proxies..................................... 38
Vote Required............................................... 38
Quorum; Abstentions and Broker Non-Votes.................... 38
Solicitation of Proxies and Expenses........................ 39
Board Recommendation........................................ 39
THE ONCORMED SPECIAL MEETING................................ 40
Date, Time and Place........................................ 40
Record Date and Outstanding Shares.......................... 40
Voting of Proxies........................................... 40
Revocability of Proxies..................................... 40
Vote Required............................................... 40
Quorum; Abstentions and Broker Non-Votes.................... 41
Solicitation of Proxies and Expenses........................ 41
Board Recommendation........................................ 41
THE MERGER AND RELATED TRANSACTIONS......................... 42
General..................................................... 42
Merger Consideration; Conversion of Shares.................. 43
Background of the Merger.................................... 45
Gene Logic's Reasons for the Merger......................... 49
Gene Logic Board Recommendation............................. 50
Opinion of ING Baring Furman Selz LLC....................... 50
Oncormed's Reasons for the Merger........................... 54
Oncormed Board Recommendation............................... 56
Opinion of Hambrecht & Quist LLC............................ 56
</TABLE>
i
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<TABLE>
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The Merger Agreement........................................ 61
Related Agreements and Interests of Certain Persons In the
Merger.................................................... 64
Other Matters Related to the Merger......................... 69
SELLING SECURITYHOLDERS..................................... 72
GENE LOGIC MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS....................... 75
Overview.................................................... 75
Results of Operations....................................... 76
Liquidity and Capital Resources............................. 77
Year 2000 Compliance........................................ 79
GENE LOGIC BUSINESS......................................... 80
Summary..................................................... 80
Industry Background......................................... 81
The Gene Logic Solution..................................... 84
Gene Logic's Strategy....................................... 84
Gene Logic's Accelerated Drug Discovery System.............. 85
Gene Logic Alliances, Independent Programs and Products..... 88
Intellectual Property....................................... 93
Competition................................................. 95
Government Regulation....................................... 96
Employees................................................... 97
Facilities.................................................. 97
Legal Proceedings........................................... 97
GENE LOGIC'S MANAGEMENT AND EXECUTIVE COMPENSATION.......... 98
Directors and Executive Officers............................ 98
Board Committees and Meetings............................... 100
Executive Compensation...................................... 100
Compensation of Executive Officers.......................... 101
Stock Option Grants and Exercises........................... 102
Employment Agreements....................................... 103
Certain Transactions........................................ 104
SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND
MANAGEMENT OF GENE LOGIC.................................. 105
ONCORMED MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS....................... 107
Overview.................................................... 107
Results of Operations....................................... 107
Liquidity and Capital Resources............................. 111
New Accounting Pronouncements............................... 113
ONCORMED BUSINESS........................................... 114
Overview.................................................... 114
Gene Characterization....................................... 114
Gene Discovery.............................................. 115
Molecular Profiling......................................... 115
Technology Platform......................................... 116
Collaborative Relationships................................. 118
Licensing Relationships..................................... 119
</TABLE>
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Human Resources............................................. 120
Oncormed Preferred Stock.................................... 120
DESCRIPTION OF CAPITAL STOCK................................ 121
Description of Gene Logic Capital Stock..................... 121
COMPARISON OF RIGHTS OF HOLDERS OF GENE LOGIC COMMON STOCK
AND HOLDERS OF ONCORMED COMMON STOCK...................... 122
EXPERTS..................................................... 124
LEGAL MATTERS............................................... 124
REPRESENTATIVES OF INDEPENDENT AUDITORS..................... 124
INDEX TO FINANCIAL STATEMENTS............................... F-1
APPENDIX A -- AGREEMENT AND PLAN OF MERGER AND
REORGANIZATION............................................ A-1
APPENDIX B -- OPINION OF HAMBRECHT & QUIST LLC.............. B-1
APPENDIX C -- OPINION OF ING BARING FURMAN SELZ LLC......... C-1
</TABLE>
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<PAGE> 12
NO PERSON HAS BEEN AUTHORIZED BY GENE LOGIC, MERGER SUB OR ONCORMED TO GIVE
ANY INFORMATION OR TO MAKE ANY REPRESENTATION NOT CONTAINED OR INCORPORATED BY
REFERENCE IN THIS PROSPECTUS/JOINT PROXY STATEMENT IN CONNECTION WITH THE
OFFERING OF SECURITIES OR THE SOLICITATION OF PROXIES MADE HEREBY AND, IF GIVEN
OR MADE, SUCH INFORMATION OR REPRESENTATION MUST NOT BE RELIED UPON AS HAVING
BEEN AUTHORIZED BY GENE LOGIC, MERGER SUB OR ONCORMED. THIS PROSPECTUS/JOINT
PROXY STATEMENT DOES NOT CONSTITUTE AN OFFER TO SELL, OR A SOLICITATION OF AN
OFFER TO PURCHASE, ANY SECURITIES, OR THE SOLICITATION OF A PROXY, IN ANY
JURISDICTION IN WHICH, OR TO ANY PERSON TO WHOM, IT IS UNLAWFUL TO MAKE SUCH AN
OFFER OR SOLICITATION.
NEITHER THE DELIVERY OF THIS PROSPECTUS/JOINT PROXY STATEMENT NOR ANY
DISTRIBUTION OF SECURITIES MADE HEREUNDER SHALL, UNDER ANY CIRCUMSTANCES, CREATE
ANY INFERENCE THAT THERE HAS NOT BEEN ANY CHANGE IN THE INFORMATION SET FORTH
HEREIN OR IN THE AFFAIRS OF GENE LOGIC, MERGER SUB OR ONCORMED SINCE THE DATE
HEREOF.
AVAILABLE INFORMATION
Gene Logic and Oncormed are subject to the informational requirements of
the Securities Exchange Act of 1934, as amended (the "Exchange Act"), and in
accordance therewith file reports, proxy statements and other information with
the Securities and Exchange Commission (the "Commission"). The reports, proxy
statements and other information filed by Gene Logic and Oncormed with the
Commission may be inspected and copied at the Public Reference Room maintained
by the Commission at Room 1024, 450 Fifth Street, N.W., Washington, D.C. 20549,
and at the Commission's regional offices at Northwest Atrium Center, 500 West
Madison Street, Suite 1400, Chicago, Illinois 60661 and 7 World Trade Center,
Suite 1300, New York, New York 10048. Copies of such material may also be
obtained from the Commission at prescribed rates by writing to the Public
Reference Section of the Commission, 450 Fifth Street, N.W., Washington, D.C.
20549. The public may obtain information on the operation of the Public
Reference Room by calling the Commission at 1-800-SEC-0330. The Commission
maintains a World Wide Web site that contains reports, proxy and information
statements and other information regarding registrants that file electronically
with the Commission. The address of the site is http://www.sec.gov. The Gene
Logic Common Stock is listed on the Nasdaq NMS and reports and other information
concerning Gene Logic may be inspected at the offices of the National
Association of Securities Dealers, Inc., 1735 K Street, N.W., Washington, D.C.
20006. The Oncormed Common Stock is listed on the AMEX and reports and other
information concerning Oncormed may be inspected at the offices of AMEX at 86
Trinity Place, New York, New York 10006-1872.
Under the rules and regulations of the Commission, the solicitation of
proxies from the stockholders of Oncormed to approve the Merger Proposal
constitutes an offering of the Gene Logic Common Stock to be issued in
connection with the Merger. Accordingly, Gene Logic has filed with the
Commission a Registration Statement on Form S-4 (herein, together with all
amendments and exhibits thereto, referred to as the "Registration Statement")
under the Securities Act of 1933, as amended (the "Securities Act"), with
respect to such offering. This Prospectus/Joint Proxy Statement constitutes the
prospectus of Gene Logic that is filed as part of the Registration Statement.
Certain portions of the Registration Statement have been omitted from this
Prospectus/Joint Proxy Statement pursuant to the rules and regulations of the
Commission. The Registration Statement and the exhibits thereto may be
inspected, without charge, at the offices of the Commission at 450 Fifth Street,
N.W., Washington, D.C. 20549, and copies may be obtained from the Commission at
prescribed rates.
Statements made in this Prospectus/Joint Proxy Statement concerning the
contents of any contract or other document are not necessarily complete. With
respect to each contract or other document filed as an exhibit to the
Registration Statement or incorporated herein by reference, reference is hereby
made to that exhibit for a more complete description of the matter involved, and
each such statement is hereby qualified in its entirety by such reference.
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<PAGE> 13
INCORPORATION OF CERTAIN DOCUMENTS BY REFERENCE
THIS PROSPECTUS/JOINT PROXY STATEMENT INCORPORATES BY REFERENCE CERTAIN
DOCUMENTS OF ONCORMED THAT ARE NOT PRESENTED HEREIN OR DELIVERED HEREWITH. SUCH
DOCUMENTS WILL BE PROVIDED WITHOUT CHARGE TO EACH PERSON, INCLUDING ANY
BENEFICIAL OWNER, TO WHOM A COPY OF THIS PROSPECTUS/JOINT PROXY STATEMENT IS
DELIVERED, UPON WRITTEN OR ORAL REQUEST OF SUCH PERSON, A COPY OF ANY OR ALL
DOCUMENTS INCORPORATED BY REFERENCE HEREIN (EXCLUDING EXHIBITS, UNLESS SUCH
EXHIBITS ARE INCORPORATED BY REFERENCE HEREIN). REQUESTS SHOULD BE DIRECTED TO
ONCORMED'S CORPORATE SECRETARY, 205 PERRY PARKWAY, GAITHERSBURG, MARYLAND 20877
(TELEPHONE NUMBER: (301) 208-1888). IN ORDER TO ENSURE TIMELY DELIVERY OF THE
DOCUMENTS IN ADVANCE OF THE SPECIAL MEETINGS TO WHICH THIS PROSPECTUS/JOINT
PROXY STATEMENT RELATES, ANY SUCH REQUEST SHOULD BE MADE BY SEPTEMBER 19, 1998.
The following documents previously filed with the Commission by Oncormed
(Commission File Number 001-13768) pursuant to the Exchange Act are incorporated
by reference into this Prospectus/Joint Proxy Statement:
1. Oncormed's Annual Report on Form 10-K for the fiscal year ended
December 31, 1997;
2. Oncormed's Quarterly Report on Form 10-Q for the quarterly period
ended March 31, 1998;
3. Oncormed's Quarterly Report on Form 10-Q for the quarterly period
ended June 30, 1998;
4. Oncormed's Amended Quarterly Report on Form 10-Q for the quarterly
period ended March 31, 1997;
5. Oncormed's Amended Quarterly Report on Form 10-Q for the quarterly
period ended September 30, 1997;
6. Oncormed's Current Report on Form 8-K filed with the Commission on
March 5, 1998;
7. Oncormed's Current Report on Form 8-K filed with the Commission on
July 7, 1998;
8. Oncormed's Current Report on Form 8-K filed with the Commission on
July 23, 1998;
9. Oncormed's Current Report on Form 8-K filed with the Commission on
September 22, 1998; and
10. Oncormed's Definitive Proxy Statement on Schedule 14A filed with
the Commission on March 30, 1998.
The information relating to Gene Logic and Oncormed contained in this
Prospectus/Joint Proxy Statement does not purport to be comprehensive and should
be read together with the information in the documents incorporated by
reference.
All information and documents contained or incorporated by reference herein
concerning Gene Logic have been furnished by Gene Logic, and all information and
documents contained or incorporated by reference herein concerning Oncormed have
been furnished by Oncormed.
This Prospectus/Joint Proxy Statement contains trademarks of Gene Logic and
Oncormed as well as trademarks of other companies.
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<PAGE> 14
SUMMARY
The following is a summary of certain information contained elsewhere in
this Prospectus/Joint Proxy Statement. The summary does not contain a complete
description of the terms of the Merger, the Merger Agreement or the related
agreements and transactions contemplated thereby and is qualified in its
entirety by reference to the full text of this Prospectus/Joint Proxy Statement,
including the Appendices hereto and the documents incorporated herein by
reference. Stockholders of each of Gene Logic and Oncormed are urged to read
carefully the entire Prospectus/Joint Proxy Statement, including the Appendices
hereto and the documents incorporated herein by reference.
This Prospectus/Joint Proxy Statement contains forward-looking statements
that involve risks and uncertainties, including, among others, statements as to
the benefits expected to be realized as a result of the Merger, future financial
performance of the combined company (referring to Gene Logic and Merger Sub,
assuming the merger of Oncormed with and into Merger Sub in the Merger), the
analysis performed by the financial advisors to Gene Logic and Oncormed, the
timing of availability of products under development, the ability to
commercialize products developed under collaborations and alliances, the
performance and utility of the combined company's products and services, and the
adequacy of capital resources. The combined company's actual results may differ
materially from those anticipated in these forward-looking statements as a
result of risks and uncertainties, including those set forth in the section
entitled "Risk Factors" and elsewhere in this Prospectus/Joint Proxy Statement.
Stockholders of each of Gene Logic and Oncormed are urged to consider carefully
the discussion of such risks and uncertainties in determining whether or not to
vote for the Merger Proposal and are cautioned not to place undue reliance on
the forward-looking statements contained in this Prospectus/Joint Proxy
Statement, which speak only as of the date hereof. Neither Gene Logic nor
Oncormed undertakes any obligations to release publicly any revisions to such
forward-looking statements which may be made to reflect events or circumstances
occurring after the date hereof. See "The Merger and Related
Transactions -- Gene Logic's Reasons for the Merger," "-- Gene Logic Board
Recommendation," "-- Opinion of ING Baring Furman Selz LLC," "-- Oncormed's
Reasons for the Merger," "-- Oncormed Board Recommendation," "-- Opinion of
Hambrecht & Quist LLC," "Gene Logic Business" and "Oncormed Business."
GENERAL
This Prospectus/Joint Proxy Statement is being provided to the stockholders
of Gene Logic and Oncormed in connection with the proposed merger of Oncormed
with and into Merger Sub, whereby Oncormed will cease to exist as a separate
entity and Merger Sub will survive the Merger and remain as a wholly owned
subsidiary of Gene Logic. The Merger will be effected pursuant to the Merger
Agreement, a copy of which is attached hereto as Appendix A.
THE PARTIES
Gene Logic
Gene Logic was incorporated in Delaware in September 1994 and has devoted
substantially all of its resources to the development of its genomics
technologies, bioinformatics technologies and database products used to identify
genes for the discovery and development of pharmaceutical and life science
products. Unless otherwise indicated herein, "Gene Logic" refers to Gene Logic
Inc. The principal executive offices of Gene Logic are located at 708 Quince
Orchard Road, Gaithersburg, Maryland 20878, and its telephone number is (301)
987-1700.
Merger Sub
Merger Sub was incorporated in Delaware in July 1998 for the sole purpose
of effecting the acquisition of Oncormed. It is a wholly owned subsidiary of
Gene Logic and has no material assets or liabilities and has not engaged in any
activities except in connection with the proposed acquisition of Oncormed.
Unless otherwise indicated herein, "Merger Sub" refers to Gene Logic Acquisition
Corp. The principal executive offices of
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<PAGE> 15
Merger Sub are located at 708 Quince Orchard Road, Gaithersburg, Maryland 20878,
and its telephone number is (301) 987-1700.
Oncormed
Oncormed was incorporated in Delaware in July 1993. Oncormed is a genomics
company that characterizes newly discovered genes to establish their medical
relevance and provides molecular profiling of patients for pharmacogenomic and
therapeutic purposes. Unless otherwise indicated herein, "Oncormed" refers to
Oncormed, Inc. The principal executive offices of Oncormed are located at 205
Perry Parkway, Gaithersburg, Maryland 20877, and its telephone number is (301)
208-1888.
THE MERGER
General
In the Merger, Gene Logic will issue an aggregate of 4,849,815 shares of
Gene Logic Common Stock to the Oncormed stockholders (the "Total Merger
Shares"); provided, however, that in the event that the average closing price of
Gene Logic's Common Stock as reported on the Nasdaq NMS for the fifteen trading
days ending the second day prior to the Gene Logic Special Meeting (the "Closing
Price") is more than $7.88 per share, then the Total Merger Shares shall be
reduced to a number of shares of Gene Logic Common Stock equal to $38,204,420
divided by the Closing Price; provided, further, that in the event the Closing
Price of Gene Logic Common Stock is less than $6.34 per share, Oncormed may
terminate the Merger Agreement in accordance with its terms. As a result of the
Merger, each share of Oncormed Common Stock outstanding immediately prior to the
Effective Time will be converted into the right to receive in exchange therefor
that fraction of a share of Gene Logic Common Stock equal to the Exchange Ratio.
The Exchange Ratio will be determined by dividing the Total Merger Shares by the
number of shares of Oncormed Common Stock outstanding immediately prior to the
Effective Time (including all shares of Oncormed Common Stock issuable upon
conversion of all of the shares of Oncormed Preferred Stock outstanding
immediately prior to the Effective Time). Cash will be paid in lieu of issuing
any fractional shares. At August 17, 1998, the closing sales price of a share of
Gene Logic Common Stock as reported on the Nasdaq NMS was $6.25 and the closing
sales price of a share of Oncormed Common Stock as reported on the AMEX was
$2.125.
Immediately after the Effective Time, the former holders of Oncormed Common
Stock will hold in the aggregate approximately 24.7% of the shares of Gene Logic
Common Stock to be outstanding immediately after the consummation of the Merger
(calculated on the basis of 14,788,445 shares of Gene Logic Common Stock
outstanding as of August 17, 1998 and assuming the issuance of an aggregate of
4,849,815 shares of Gene Logic Common Stock to the Oncormed stockholders in the
Merger).
Oncormed Common Stock Outstanding Immediately Prior to the Effective Time
As a result of the Merger, each share of Oncormed Common Stock outstanding
immediately prior to the Effective Time will be converted into the right to
receive in exchange therefor that fraction of a share of Gene Logic Common Stock
equal to the Exchange Ratio. The Exchange Ratio will be determined by dividing
the Total Merger Shares by the number of shares of Oncormed Common Stock
outstanding immediately prior to the Effective Time (the "Outstanding Oncormed
Common Stock"). See "-- General" for a discussion of those factors which may
affect the number of Total Merger Shares to be issued in connection with the
Merger.
Solely for purposes of determining an Assumed Exchange Ratio for use
throughout this Prospectus/Joint Proxy Statement, it is assumed that the
Outstanding Oncormed Common Stock shall equal 10,438,781 shares of Oncormed
Common Stock. There can be no assurance, however, as to the actual
capitalization of Oncormed as of the Effective Time. See "The Merger and Related
Transactions -- Merger Consideration; Conversion of Shares" and "-- Oncormed
Common Stock Outstanding Immediately Prior to the Effective Time" for a
discussion of the assumptions used in calculating the Outstanding Oncormed
Common Stock and the factors that may cause the actual Outstanding Oncormed
Common Stock to be greater or less than assumed herein.
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<PAGE> 16
Assuming therefore, for purposes of this Prospectus/Joint Proxy Statement,
that (i) the Total Merger Shares shall equal 4,849,815 shares of Gene Logic
Common Stock, and (ii) the Outstanding Oncormed Common Stock shall equal
10,438,781 shares of Oncormed Common Stock, then the Exchange Ratio would equal
.4646 (the "Assumed Exchange Ratio"). However, for the reasons set forth above
and throughout this Prospectus/Joint Proxy Statement, there can be no assurance
as to the actual capitalization of Gene Logic or Oncormed as of the Effective
Time or of Gene Logic at any time following the Effective Time. Accordingly, at
the Effective Time, the actual Exchange Ratio may be greater or less than the
Assumed Exchange Ratio. See "-- Oncormed Common Stock Outstanding Immediately
Prior to the Effective Time," "The Merger and Related Transactions -- Merger
Consideration; Conversion of Shares -- Exchange Ratio," "-- Oncormed Common
Stock Outstanding Immediately Prior to the Effective Time" and "-- Stock
Ownership Following the Merger."
Effect on Outstanding Warrants to Purchase Oncormed Common Stock and on an
Outstanding Convertible Note Convertible into Oncormed Common Stock
At the Effective Time, Gene Logic will assume outstanding warrants to
purchase up to an aggregate of 1,088,896 shares of Oncormed Common Stock. Each
such warrant will be deemed to constitute a warrant to acquire, on the same
terms and conditions as were applicable to such warrant as of the Effective
Time, that whole number of shares of Gene Logic Common Stock to which that
holder of such warrant would have been entitled to receive pursuant to the
Merger had such warrant been exercised in full prior to the Effective Time, at a
price per share equal to the exercise price per share under such warrant divided
by the Exchange Ratio. Following the Merger, an aggregate of approximately
505,898 shares of Gene Logic Common Stock will be issuable upon exercise of such
warrants based on the Assumed Exchange Ratio. In addition, upon consummation of
the Merger and in connection with the termination of certain license agreements
between Oncor, Inc., a Maryland corporation and a stockholder of Oncormed
("Oncor"), and Oncormed, an outstanding note payable by Oncormed in the
principal amount of $715,751 (the "Oncormed Note") will be cancelled upon
payment to Oncor of an aggregate amount of $500,000, $250,000 of which Oncormed
paid to Oncor on September 14, 1998. Notwithstanding the foregoing, if such
Merger is not consummated by December 31, 1998, the remaining principal due and
owing to Oncor under the Oncormed Note shall be $357,875.50, which amount shall
be repaid to Oncor in accordance with the terms of the Oncormed Note. See "The
Merger and Related Transactions -- Merger Consideration; Conversion of
Shares -- Treatment of Oncormed Warrants" and "-- Treatment of Oncormed
Convertible Note."
Effect on Outstanding Options to Purchase Oncormed Common Stock
Gene Logic will not assume any Oncormed stock options in connection with
the Merger. All outstanding Oncormed stock options will, by their terms,
accelerate and become fully vested immediately prior to the Effective Time as a
result of the Merger. The holders of Oncormed stock options that choose not to
exercise such options prior to the Effective Time will not be entitled to
receive any shares of Gene Logic Common Stock in the Merger with respect to such
options. At the Effective Time, all unexercised Oncormed stock options will
terminate and cease to exist. See "The Merger and Related Transactions -- Merger
Consideration; Conversion of Shares -- Treatment of Oncormed Stock Options."
Other Effects of the Merger
The Merger will be consummated promptly after approval of the Merger
Proposal by the Gene Logic stockholders and the Oncormed stockholders and the
satisfaction or waiver of the other conditions to consummation of the Merger.
The Merger will become effective at the time of filing of a properly executed
certificate of merger with the office of the Secretary of State of the State of
Delaware. At the Effective Time, Oncormed will merge with and into Merger Sub,
Oncormed will cease to exist as a separate entity and Merger Sub will survive
the Merger as a wholly owned subsidiary of Gene Logic. The former stockholders
of Oncormed will become stockholders of Gene Logic, and their rights will be
governed by the Delaware General Corporation Law (the "DGCL"), Gene Logic's
Amended and Restated Certificate of Incorporation (the
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<PAGE> 17
"Gene Logic Certificate") and Gene Logic's By-laws (the "Gene Logic By-laws").
See "Comparison of Rights of Holders of Gene Logic Common Stock and Holders of
Oncormed Common Stock."
There will be no change in the current Board of Directors and executive
officers of Gene Logic as a result of the Merger, except that Dr. Douglas
Dolginow, currently the President and Chief Operating Officer of Oncormed, will
become a Senior Vice President of Gene Logic. In addition, Dr. Timothy Triche,
the current Chief Executive Officer and Chairman of the Board of Oncormed, will
provide consulting services to Gene Logic. The Board of Directors and executive
officers of Merger Sub (as the surviving corporation) prior to the Effective
Time will continue to serve in the same positions with Merger Sub after the
Effective Time. The directors of Merger Sub are Drs. Michael J. Brennan and Alan
G. Walton and the executive officers of Merger Sub are Dr. Michael J. Brennan,
President and Chief Executive Officer and Mark D. Gessler, Chief Financial
Officer and Secretary.
MEETINGS OF STOCKHOLDERS
Date, Time and Place
The Gene Logic Special Meeting will be held on Monday, September 28, 1998
at 10:00 a.m., local time, at Gene Logic's principal executive offices located
at 708 Quince Orchard Road, Gaithersburg, Maryland 20878.
The Oncormed Special Meeting will be held on Monday, September 28, 1998 at
10:00 a.m., local time, at Oncormed's principal executive offices located at 205
Perry Parkway, Gaithersburg, Maryland 20877.
Purpose of the Meetings
At the Gene Logic Special Meeting and at the Oncormed Special Meeting, the
respective stockholders of Gene Logic and Oncormed will be asked to vote upon
and approve the Merger Proposal.
THE GENE LOGIC BOARD HAS APPROVED THE MERGER PROPOSAL AND UNANIMOUSLY
RECOMMENDS THAT THE GENE LOGIC STOCKHOLDERS VOTE FOR THE MERGER PROPOSAL. SEE
"THE MERGER AND RELATED TRANSACTIONS -- GENE LOGIC BOARD RECOMMENDATION" AND
"-- GENE LOGIC'S REASONS FOR THE MERGER."
THE ONCORMED BOARD HAS UNANIMOUSLY APPROVED THE MERGER PROPOSAL AND
RECOMMENDS THAT THE ONCORMED STOCKHOLDERS VOTE FOR THE MERGER PROPOSAL. SEE "THE
MERGER AND RELATED TRANSACTIONS -- ONCORMED BOARD RECOMMENDATION" AND
"-- ONCORMED'S REASONS FOR THE MERGER."
Record Date; Shares Entitled to Vote
Gene Logic. Only holders of record of Gene Logic Common Stock at the close
of business on August 17, 1998 (the "Record Date") are entitled to notice of and
to vote at the Gene Logic Special Meeting. At the close of business on the
Record Date, there were outstanding and entitled to vote 14,788,445 shares of
Gene Logic Common Stock, each of which will be entitled to one vote on each
matter to be acted upon at the Gene Logic Special Meeting.
Oncormed. Only holders of record of Oncormed Common Stock at the close of
business on the Record Date are entitled to notice of and to vote at the
Oncormed Special Meeting. At the close of business on the Record Date, there
were outstanding and entitled to vote 8,177,686 shares of Oncormed Common Stock,
each of which will be entitled to one vote on each matter to be acted upon at
the Oncormed Special Meeting.
Votes Required
Gene Logic. Approval of the Merger Proposal will require the affirmative
vote of the holders of a majority of the shares of Gene Logic Common Stock
outstanding on the Record Date and entitled to vote on the Merger Proposal. As a
group, all directors and executive officers and their respective affiliates
beneficially
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<PAGE> 18
owned 4,160,043 shares, or approximately 28.1% of the Gene Logic Common Stock
outstanding, as of the Record Date.
Oncormed. Approval of the Merger Proposal will require the affirmative
vote of the holders of a majority of the shares of Oncormed Common Stock
outstanding on the Record Date and entitled to vote on the Merger Proposal. All
of the directors and executive officers and certain holders of Oncormed Common
Stock (including certain holders of Oncormed Preferred Stock who converted all
or a portion of their shares of Oncormed Preferred Stock into Oncormed Common
Stock on or prior to the Record Date) (the "Voting Agreement Stockholders"), who
together hold approximately 40.8% of the Oncormed Common Stock outstanding on
the Record Date have entered into voting agreements with Gene Logic (the "Voting
Agreements") pursuant to which such persons have agreed to vote, and have
granted irrevocable proxies to Gene Logic to vote, all of the shares of Oncormed
Common Stock (including the Oncormed Common Stock issued on or prior to the
Record Date upon conversion of the Oncormed Preferred Stock) over which such
persons have voting power or control as of the Record Date in favor of the
Merger Proposal.
RECOMMENDATIONS OF THE BOARDS OF DIRECTORS
Gene Logic's Board of Directors. The Gene Logic Board has approved the
Merger Proposal and has determined that the Merger is in the best interests of
Gene Logic and its stockholders. The Gene Logic Board has unanimously
recommended approval of the Merger Proposal by the stockholders of Gene Logic.
The primary factors considered and relied upon by the Gene Logic Board in
reaching its recommendation are described below under "The Merger and Related
Transactions -- Gene Logic's Reasons for the Merger."
Oncormed's Board of Directors. The Oncormed Board has unanimously approved
the Merger Proposal and has determined that the Merger is in the best interests
of Oncormed and its stockholders. The Oncormed Board has unanimously recommended
approval of the Merger Proposal by the stockholders of Oncormed. The primary
factors considered and relied upon by the Oncormed Board in reaching its
recommendation are described below under "The Merger and Related
Transactions -- Oncormed's Reasons for the Merger."
OPINION OF ING BARING FURMAN SELZ LLC
On July 2, 1998 ING Baring Furman Selz ("ING Baring Furman Selz"), Gene
Logic's financial advisor, delivered to the Gene Logic Board an oral opinion,
followed with a written opinion dated July 6, 1998, to the effect that, as of
such date, and based upon procedures and subject to the assumptions and
limitations set forth therein, the consideration to be paid by Gene Logic to the
Oncormed stockholders pursuant to the Merger is fair from a financial point of
view to Gene Logic and its stockholders. The full text of the opinion of ING
Baring Furman Selz, is attached as Appendix C to this Prospectus/Joint Proxy
Statement. GENE LOGIC STOCKHOLDERS ARE URGED TO READ THE OPINION IN ITS ENTIRETY
PRIOR TO VOTING ON THE MERGER PROPOSAL. See "The Merger and Related
Transactions -- Opinion of ING Baring Furman Selz LLC."
OPINION OF HAMBRECHT & QUIST LLC
Hambrecht & Quist LLC ("Hambrecht & Quist"), Oncormed's financial advisor,
has delivered to Oncormed its written opinion dated July 2, 1998, to the effect
that, as of July 2, 1998, the consideration to be received by the holders of
Oncormed Common Stock in the Merger is fair to such holders from a financial
point of view. The full text of the opinion of Hambrecht & Quist, which sets
forth the assumptions made, matters considered and scope and limitation of the
review of Hambrecht & Quist in reaching its opinion, is attached as Appendix B
to this Prospectus/Joint Proxy Statement. ONCORMED STOCKHOLDERS ARE URGED TO
READ THE OPINION IN ITS ENTIRETY PRIOR TO VOTING ON THE MERGER PROPOSAL. See
"The Merger and Related Transactions -- Opinion of Hambrecht & Quist LLC."
THE MERGER AGREEMENT
Representations and Covenants. Under the Merger Agreement, Gene Logic,
Merger Sub and Oncormed have each made a number of representations regarding the
organization and capital structures of
7
<PAGE> 19
their respective companies, their operations, financial condition and other
matters, including their authority to enter into the Merger Agreement and to
consummate the Merger. In addition, each of Gene Logic, Merger Sub and Oncormed
have agreed that until the consummation of the Merger or the termination of the
Merger Agreement, they will not take certain actions relating to the operations
of their respective businesses without the others' consents and will use
reasonable efforts to take, or cause to be taken, all actions necessary to
consummate the Merger and make effective the other transactions contemplated by
the Merger Agreement. See "The Merger and Related Transactions -- The Merger
Agreement -- Representations" and "-- Covenants."
Pursuant to the Merger Agreement, Gene Logic has agreed to fulfill all
obligations of Oncormed under all indemnification agreements between Oncormed
and its directors and executive officers existing as of the date of the Merger
Agreement. Gene Logic has further agreed to maintain, for a period of six years
after the Effective Time, exculpation and indemnification provisions under the
surviving corporation's certificate of incorporation and by-laws that are at
least as favorable as those contained in Oncormed's Amended and Restated
Certificate of Incorporation (the "Oncormed Certificate") and Oncormed's By-laws
(the "Oncormed By-laws"), each in effect as of the date of the Merger Agreement
and, subject to certain limitations, directors' and officers' liability
insurance for the benefit of the current directors and officers of Oncormed
comparable in coverage to that maintained by Oncormed as of the date of the
Merger Agreement. See "The Merger and Related Transactions -- The Merger
Agreement -- Covenants."
No Solicitation. Pursuant to the Merger Agreement, Oncormed has agreed
that, prior to the consummation of the Merger, it will not (i) solicit, initiate
or encourage the making, submission or announcement of any alternate acquisition
proposal; (ii) furnish any information regarding Oncormed to any person or
entity in connection with or in response to any alternate acquisition proposal;
(iii) engage in discussions or negotiations with any person or entity with
respect to any alternate acquisition proposal; (iv) approve, endorse or
recommend any alternate acquisition proposal; or (v) enter into any letter of
intent or similar document or contract contemplating or otherwise relating to
any alternate acquisition proposal, subject in each case to the good faith
exercise by the Oncormed Board of its fiduciary obligations. An alternate
acquisition proposal includes any offer, proposal or inquiry (other than by Gene
Logic) contemplating or otherwise relating to with respect to Oncormed (a) any
merger, consolidation, share exchange, business combination, issuance or
acquisition of securities, tender offer or other similar transaction, or (b) any
sale, lease, exchange, transfer or license of more than 50% of Oncormed's assets
(an "Acquisition Transaction"). See "The Merger and Related Transactions -- The
Merger Agreement -- No Solicitation."
Conditions to the Merger. Consummation of the Merger is subject to the
satisfaction or waiver of a number of conditions, including among others, (i)
approval of the Merger Proposal by the stockholders of Gene Logic and the
stockholders of Oncormed; (ii) subject to certain materiality thresholds, the
accuracy of the representations and warranties of the parties contained in the
Merger Agreement; (iii) the performance by the parties in all material respects
of their respective covenants; (iv) the effectiveness of, and the absence of any
stop orders with respect to, the Registration Statement; (v) subject to certain
limitations, the absence of any material adverse change in the business,
capitalization, operations or financial condition of the parties; (vi) the
absence of any governmental proceeding related to the Merger; and (vii) the
receipt by each party from their respective counsel of legal opinions to the
effect that the Merger will be treated for federal income tax purposes as a tax
free reorganization. Oncormed's obligations to consummate the Merger is further
conditioned on the Closing Price of Gene Logic's Common Stock being more than
$6.34 per share. See "The Merger and Related Transactions -- The Merger
Agreement -- Conditions to the Merger."
Termination or Amendment. The Merger Agreement may be terminated at any
time prior to the Effective Time, whether before or after the approval by the
stockholders of Gene Logic or Oncormed, under certain limited circumstances as
described in the section entitled "The Merger and Related Transactions -- The
Merger Agreement -- Termination and Amendment." Under certain circumstances set
forth in the Merger Agreement, if the Merger Agreement is terminated, Oncormed
may be required to pay to Gene Logic a termination fee of $1,000,000 in cash.
8
<PAGE> 20
The Merger Agreement may be amended by Gene Logic and Oncormed before or
after approval of Oncormed's stockholders, except that after such approval, no
amendment may be made except as permitted by applicable law.
RELATED AGREEMENTS AND INTERESTS OF CERTAIN PERSONS IN THE MERGER
In connection with the Merger, Gene Logic, Oncormed and certain officers,
directors, stockholders and employees of Oncormed have entered into related
agreements (the "Related Agreements") as described below:
Credit Facility. In connection with the Merger, Gene Logic and Oncormed
have entered into a loan agreement (the "Loan Agreement") whereby Gene Logic has
agreed to make available to Oncormed through February 28, 1999 a credit facility
of up to $2,000,000 (the "Loan") to be used by Oncormed for working capital
purposes. Interest on all amounts outstanding under the Loan shall accrue daily
at the per annum rate that Citibank N.A. has announced as its prime lending
rate. Advances under the Loan shall not exceed $500,000 per month. All
outstanding principal and accrued interest on the Loan is due and payable upon
the earliest to occur of (i) March 31, 1999; (ii) in the event the Merger is not
consummated, that date upon which Oncormed secures alternate financing of at
least $2,000,000 on terms satisfactory to Oncormed in its sole discretion; or
(iii) the date on which Oncormed sells or otherwise disposes of all or
substantially all of the assets or business of Oncormed, or any liquidation,
merger or other business combination of Oncormed (other than the Merger). If any
of the Merger Agreement, the Loan Agreement or the non-exclusive license
agreement between Gene Logic and Oncormed entered into in accordance with the
Merger and the Loan (the "License Agreement") is terminated, Gene Logic will not
be obligated to make any further advances to Oncormed under the Loan. All
amounts outstanding under the Loan are secured by certain of Oncormed's tissue
biorepository assets. See "The Merger and Related Transactions -- Related
Agreements and Interests of Certain Persons in the Merger -- Credit Facility."
Non-Exclusive License Agreement. In connection with the Merger and the
Loan, Oncormed and Gene Logic have entered into the License Agreement whereby
Oncormed has granted to Gene Logic non-exclusive access until March 31, 1999 to
Oncormed's tissue biorepositories for the purpose of selecting tissue samples
for further analysis. All amounts payable by Gene Logic for selection of tissue
samples may be offset against any amounts owed by Oncormed to Gene Logic under
the Loan. See "The Merger and Related Transactions -- Related Agreements and
Interests of Certain Persons in the Merger -- Non-Exclusive License Agreement."
Voting Agreements. As discussed above and in connection with the execution
of the Merger Agreement, the Voting Agreement Stockholders have entered into the
Voting Agreements pursuant to which such persons have agreed to vote, and have
granted irrevocable proxies to Gene Logic to vote, all of the shares of Oncormed
Common Stock (including the Oncormed Common Stock issued on or prior to the
Record Date upon conversion of shares of Oncormed Preferred Stock) over which
such stockholders have voting power or control as of the Record Date in favor of
the Merger Proposal. See also "The Merger and Related Transactions -- Related
Agreements and Interests of Certain Persons in the Merger -- Voting Agreements."
Employment, Consulting and Separation Agreements. Effective upon the
consummation of the Merger, Dr. Douglas Dolginow, the current President and
Chief Operating Officer of Oncormed, will become a Senior Vice President of Gene
Logic. In addition, Dr. Timothy Triche, the current Chief Executive Officer and
Chairman of the Board of Oncormed, will provide consulting services to Gene
Logic. Pursuant to a separation agreement between Oncormed and Mr. L. Robert
Johnston, Jr., the current Senior Vice President and Chief Financial Officer of
Oncormed, Mr. Johnston will receive severance payments following his termination
in the form of the continuation of his salary for six months. In addition,
Oncormed will fulfill severance obligations provided to approximately ten
additional employees, including Dr. Leslie M. Alexandre, the former Vice
President, Corporate Affairs and Marketing of Oncormed, pursuant to employment
agreements. Dr. Alexandre is entitled to severance payments in the form of the
continuation of her current salary and benefits for a period of one year. See
"The Merger and Related Transactions -- Related Agreements and Interests of
Certain Persons in the Merger -- Employment, Consulting and Separation
Agreements."
9
<PAGE> 21
Lock-Up Agreements. All of the directors and certain executive officers of
Oncormed have entered into lock-up agreements whereby such persons have agreed
that for a period of 90 days following the Effective Time, they will not, except
under limited circumstances, sell or transfer any of the shares of Gene Logic
Common Stock to be issued to such persons in the Merger. In addition, Oncor has
entered into a lock-up agreement with Gene Logic whereby Oncor has agreed that
for a period of 60 days following the Effective Time, it will not sell or
transfer any of the shares of Gene Logic Common Stock to be issued to Oncor in
the Merger, subject to certain limited exceptions. During the 30-day period
thereafter and during each three-month period following the end of such 30-day
period, Oncor may sell or transfer only the number of shares of Gene Logic
Common Stock issued to Oncor in the Merger that Oncor would otherwise be able to
sell or transfer in accordance with the resale restrictions of Rule 145 pursuant
to this Prospectus/Joint Proxy Statement. See "-- Registration Rights," "The
Merger and Related Transactions -- Related Agreements and Interests of Certain
Persons in the Merger -- Lock-Up Agreements," "-- Registration Rights" and
"Selling Securityholders."
Affiliate Agreements. Each of the directors and executive officers of
Oncormed and certain stockholders who may be deemed affiliates of Oncormed have
entered into agreements restricting sales, dispositions or other transactions
reducing their risk of investment in respect of the shares of Gene Logic Common
Stock to be received by them in the Merger to help ensure compliance with the
requirements of applicable federal securities laws. See "The Merger and Related
Transactions -- Related Agreements and Interests of Certain Persons in the
Merger -- Affiliate Agreements."
Registration Rights. Although the shares of Gene Logic Common Stock to be
issued to the Oncormed stockholders in the Merger will have been registered
under the Securities Act, any stockholder of Oncormed receiving Gene Logic
Common Stock in the Merger who is an affiliate (as used under Rule 145 of the
Securities Act) of Oncormed at the time of the Oncormed Special Meeting will be
subject to the resale restrictions of Rule 145. Gene Logic has agreed to
register, and has registered, for resale pursuant to this Prospectus/Joint Proxy
Statement all shares of Gene Logic Common Stock to be received by Oncor in the
Merger. Such registration for resale will permit Oncor to sell its shares of
Gene Logic Common Stock received in the Merger under an agreed upon schedule
without the restrictions on resale otherwise imposed by Rule 145. To facilitate
such scheduled resales, Oncor has entered into a lock-up agreement whereby Oncor
has agreed that for a period of 60 days following the Effective Time, it will
not sell or transfer any of the shares of Gene Logic Common Stock to be issued
to Oncor in the Merger, subject to certain limited exceptions. During the 30-day
period thereafter and during each three-month period following the end of such
30-day period, Oncor may sell or transfer only the number of shares of the Gene
Logic Common Stock issued to Oncor in the Merger that Oncor would otherwise be
able to sell or transfer in accordance with the resale restrictions of Rule 145
pursuant to this Prospectus/Joint Proxy Statement. In addition, the holders of
Oncormed Preferred Stock received warrants to purchase Oncormed Common Stock in
connection with their investment, which warrants will be assumed by Gene Logic
in connection with the Merger. This Prospectus/ Joint Proxy Statement registers
for resale the shares of Gene Logic Common Stock issuable upon exercise of such
warrants. See "The Merger and Related Transactions -- Related Agreements and
Interests of Certain Persons in the Merger -- Lock-Up Agreements,"
"-- Registration Rights" and "Selling Securityholders."
OTHER MATTERS RELATED TO THE MERGER
Certain Federal Income Tax Consequences. It is the opinion, based on
certain assumptions and certifications, of Cooley Godward LLP ("Cooley
Godward"), counsel to Gene Logic, and of Brobeck, Phleger & Harrison LLP
("Brobeck"), counsel to Oncormed, that the Merger will constitute a
"reorganization" within the meaning of Section 368(a) of the Internal Revenue
Code of 1986, as amended (the "Code"), so that no gain or loss will be
recognized by Gene Logic stockholders or by the Oncormed stockholders on the
exchange of Oncormed Common Stock for Gene Logic Common Stock, except by the
Oncormed stockholders to the extent that Oncormed stockholders receive cash in
lieu of fractional shares. The Merger Agreement does not require the parties to
obtain a ruling from the Internal Revenue Service (the "IRS") as to the tax
consequences of the Merger. As a condition to Oncormed's and Gene Logic's
obligations to consummate the Merger, Oncormed and Gene Logic are to receive
opinions at the Effective Time from their respective legal
10
<PAGE> 22
counsel that, based on certain assumptions and certifications, the Merger will
be treated as a "reorganization" for federal income tax purposes. ONCORMED
STOCKHOLDERS ARE URGED TO CONSULT THEIR OWN TAX ADVISORS AS TO THE SPECIFIC TAX
CONSEQUENCES OF THE MERGER, INCLUDING THE APPLICABLE FEDERAL, STATE, LOCAL AND
FOREIGN TAX CONSEQUENCES. See "The Merger and Related Transactions -- Other
Matters Related to the Merger -- Certain Federal Income Tax Consequences."
Accounting Treatment. For financial reporting purposes, the Merger is
intended to be accounted for as a "purchase" in accordance with generally
accepted accounting principles. See "The Merger and Related
Transactions -- Other Matters Related to the Merger -- Accounting Treatment."
No Appraisal Rights. Under the DGCL, neither Gene Logic's nor Oncormed's
stockholders are entitled to appraisal rights in connection with the Merger. See
"The Merger and Related Transactions -- Other Matters Related to the
Merger -- No Appraisal Rights."
Regulatory Matters. No state or federal regulatory requirements must be
complied with nor are state or federal regulatory approvals required in
connection with the Merger, other than the filing of this Prospectus/ Joint
Proxy Statement with the Commission and obtaining the approval of the Merger
Proposal by the stockholders of each of Gene Logic and Oncormed. See "The Merger
and Related Transactions -- Other Matters Related to the Merger -- Regulatory
Matters."
Merger Expenses and Fees and Other Costs. Pursuant to the Merger
Agreement, all fees and expenses incurred in connection with the Merger
Agreement and the transactions contemplated by the Merger Agreement shall be
paid by the party incurring such expenses, whether or not the Merger is
consummated; provided, however, that Gene Logic and Oncormed shall share equally
all fees and expenses, other than attorneys' and accountants' fees, incurred in
connection with the printing and filing of this Prospectus/Joint Proxy Statement
and the Registration Statement of which this Prospectus/Joint Proxy Statement is
a part and any amendments or supplements thereto with the Commission. If the
Merger Agreement is terminated under certain circumstances, Oncormed will be
required to pay to Gene Logic a nonrefundable fee, in cash, of $1,000,000. See
"The Merger and Related Transactions -- The Merger Agreement -- Termination and
Amendment."
Gene Logic and Oncormed estimate that they will incur direct transaction
costs of approximately $2.0 million associated with the Merger. Direct
transaction costs incurred by Gene Logic will be added to the purchase price of
Oncormed. Direct transaction costs incurred by Oncormed will be expensed as
incurred. In addition, Gene Logic anticipates incurring additional charges upon
consummation of the Merger of approximately $35.2 million relating to the
write-off of acquired in-process research and development. Gene Logic also
anticipates that it will incur other costs associated with integrating the two
companies which will be expensed as incurred. Gene Logic also anticipates that
certain charges will be recorded as a restructuring liability and will be
included in the purchase price allocation. See "Unaudited Pro Forma Combined
Condensed Financial Data." and "The Merger and Related Transactions -- Other
Matters Related to the Merger -- Merger Expenses and Fees and Other Costs."
Surrender of Certificates. As soon as practicable after the Effective
Time, Gene Logic, acting through its exchange agent, will mail a letter of
transmittal with instructions to all holders of record of Oncormed Common Stock
(including shares of Oncormed Preferred Stock which were automatically converted
into Oncormed Common Stock immediately prior to the Effective Time) as of the
Effective Time for use in surrendering their stock certificates in exchange for
certificates representing Gene Logic Common Stock and a cash payment in lieu of
fractional shares. CERTIFICATES REPRESENTING SHARES OF ONCORMED COMMON STOCK
SHOULD NOT BE SURRENDERED UNTIL THE LETTER OF TRANSMITTAL IS RECEIVED. See "The
Merger and Related Transactions -- Other Matters Related to the
Merger -- Surrender of Certificates."
11
<PAGE> 23
MARKET PRICE DATA
Since November 21, 1997, the Gene Logic Common Stock has been listed and
traded on the Nasdaq NMS under the symbol "GLGC." The table below sets forth,
for the quarters indicated, the reported high and low sale prices of Gene Logic
Common Stock as reported on the Nasdaq NMS since November 21, 1997. Since May
15, 1995, the Oncormed Common Stock has been listed for trading on the AMEX
under the symbol "ONM." From September 28, 1994 until May 15, 1995, the Oncormed
Common Stock was traded on the Nasdaq SmallCap Market under the symbol "ONCM."
The table below sets forth, for the quarters indicated, the reported high and
low sale prices of Oncormed Common Stock as reported on the AMEX and on the
Nasdaq SmallCap Market.
<TABLE>
<CAPTION>
GENE LOGIC ONCORMED
COMMON COMMON
STOCK STOCK
----------- -----------
HIGH LOW HIGH LOW
---- --- ---- ---
<S> <C> <C> <C> <C>
Quarterly Period
Fiscal year ended December 31, 1996:
First Quarter............................................... $-- $-- $9 1/8 $6 1/8
Second Quarter.............................................. -- -- 8 1/2 5 7/8
Third Quarter............................................... -- -- 7 2 3/4
Fourth Quarter.............................................. -- -- 5 3 1/4
Fiscal year ended December 31, 1997:
First Quarter............................................... -- -- 7 15/16 4
Second Quarter.............................................. -- -- 6 1/16 3 1/2
Third Quarter............................................... -- -- 8 1/8 4 7/8
Fourth Quarter.............................................. 9 7 8 5 7/16
Fiscal year ending December 31, 1998:
First Quarter............................................... 9 1/4 7 5/8 7 1/2 4 3/4
Second Quarter.............................................. 9 5/8 5 7/8 5 3/8 2 7/16
Third Quarter (through August 17, 1998)..................... 10 5/8 5 3 3/4 1 3/4
</TABLE>
As of the Record Date, there were approximately 123 holders of record of
Gene Logic Common Stock and approximately 51 holders of record of Oncormed
Common Stock. Neither Gene Logic nor Oncormed has ever paid cash dividends on
their respective capital stock. The policies of Gene Logic and Oncormed are to
retain earnings for use in their respective businesses.
On July 6, 1998, the last full trading day prior to the execution and
delivery of the Merger Agreement and the public announcement thereof, the
reported sales prices of Gene Logic Common Stock and Oncormed Common Stock were
$8 3/16 and $3 5/16, respectively. On August 17, 1998, the most recent
practicable trading day prior to the printing of this Prospectus/Joint Proxy
Statement, the last reported sales prices of Gene Logic Common Stock and
Oncormed Common Stock were $6 1/4 and $2 1/8, respectively. Based on the Assumed
Exchange Ratio of approximately .4646 shares of Gene Logic Common Stock to be
issued in exchange for each share of Outstanding Oncormed Common Stock in the
Merger, the pro forma equivalent market value of Oncormed Common Stock on August
17, 1998 was $2.90 per share. See "The Merger and Related Transactions -- Merger
Consideration; Conversion of Shares -- Exchange Ratio," "-- Oncormed Common
Stock Outstanding Immediately Prior to the Effective Time" and "-- Stock
Ownership Following the Merger" for a discussion of the assumptions relating to
the Exchange Ratio, the Outstanding Oncormed Common Stock and the Assumed
Exchange Ratio.
The market value of the Gene Logic Common Stock and the Oncormed Common
Stock at the Effective Time may vary significantly from the price as of the date
of the execution of the Merger Agreement, the date hereof, or the date on which
the stockholders of each of Gene Logic and Oncormed vote on the Merger due to,
among other factors, market perception of the benefits expected to be achieved
by the Merger, changes in the business operations or prospects of Gene Logic or
Oncormed, market assessments of the likelihood that the
12
<PAGE> 24
Merger will be consummated and the timing thereof, and general market and
economic conditions. Because changes in the market value of Gene Logic Common
Stock or Oncormed Common Stock will generally not affect the Exchange Ratio, the
market value of the Gene Logic Common Stock issued in the Merger, and the value
of the Oncormed Common Stock surrendered in the Merger, may be higher or lower
than the value of such shares at the time the Merger was negotiated or approved
by the stockholders of each of Gene Logic and Oncormed.
STOCKHOLDERS ARE URGED TO OBTAIN CURRENT MARKET QUOTATIONS FOR GENE LOGIC
COMMON STOCK AND ONCORMED COMMON STOCK. NO ASSURANCE CAN BE GIVEN AS TO THE
FUTURE PRICES OR MARKET FOR GENE LOGIC COMMON STOCK.
13
<PAGE> 25
SELECTED HISTORICAL FINANCIAL INFORMATION OF GENE LOGIC
The selected financial data set forth below with respect to Gene Logic's
statements of operations for the years ended December 31, 1997, 1996 and 1995
and with respect to the balance sheets at December 31, 1997 and 1996 have been
derived from audited financial statements of Gene Logic included elsewhere in
this Prospectus/Joint Proxy Statement. The statement of operations data for the
period from September 22, 1994 (inception) through December 31, 1994 and the
balance sheet data at December 31, 1995 are derived from the audited financial
statements of Gene Logic which are not included in this Prospectus/Joint Proxy
Statement, but which are on file with the Commission. The balance sheet data at
December 31, 1994 are derived from the internal financial records of Gene Logic.
The statement of operations data for the six months ended June 30, 1998 and 1997
and the balance sheet data at June 30, 1998 are derived from unaudited financial
statements included elsewhere in this Prospectus/Joint Proxy Statement. The
unaudited financial statements include all adjustments (consisting of normal
recurring adjustments) that Gene Logic considers necessary for a fair
presentation. Operating results for the six months ended June 30, 1998 are not
necessarily indicative of the results that may be expected for the entire year
ending December 31, 1998. The following selected financial data should be read
in conjunction with, and are qualified in their entirety by reference to, the
financial statements and notes thereto included elsewhere in this
Prospectus/Joint Proxy Statement or on file with the Commission.
<TABLE>
<CAPTION>
PERIOD FROM SIX MONTHS
SEPTEMBER 22, 1994 YEARS ENDED DECEMBER 31, ENDED JUNE 30,
(INCEPTION) THROUGH -------------------------- -----------------
DECEMBER 31, 1994 1995 1996 1997 1997 1998
------------------- ------ ------- ------- ------- -------
(IN THOUSANDS, EXCEPT PER SHARE DATA) (UNAUDITED)
<S> <C> <C> <C> <C> <C> <C>
STATEMENT OF OPERATIONS DATA:
Revenues............................... $ -- $ -- $ -- $ 2,047 $ 167 $ 5,875
Operating expenses:
Research and development............. 44 486 1,741 6,061 1,837 7,144
General and administrative........... 46 258 1,345 3,826 1,236 3,318
---- ------ ------- ------- ------- -------
Total operating expenses............... 90 744 3,086 9,887 3,073 10,462
Interest income, net................... -- -- 221 745 91 1,099
Other expense.......................... -- -- -- -- -- (80)
Income tax expense..................... -- -- -- 100 -- --
---- ------ ------- ------- ------- -------
Net loss............................... $(90) $ (744) $(2,865) $(7,195) $(2,815) $(3,568)
Basic and diluted net loss per
common share......................... $(3.48) $ (5.87) $ (3.97) $ (4.99) $ (0.25)
====== ======= ======= ======= =======
Shares used in computing basic and
diluted net loss per common share.... 214 572 2,138 638 14,060
====== ======= ======= ======= =======
Pro forma net loss per common share.... $ (0.72) $ (0.90) $ (0.51)
======= ======= =======
Shares used in computing pro forma net
loss per common share................ 3,987 8,004 5,474
======= ======= =======
</TABLE>
<TABLE>
<CAPTION>
DECEMBER 31,
-------------------------------- JUNE 30,
1994 1995 1996 1997 1998
---- ------ ------ ------- -----------
(IN THOUSANDS) (UNAUDITED)
<S> <C> <C> <C> <C> <C>
BALANCE SHEET DATA:
Cash and marketable securities......................... $298 $ 348 $5,671 $46,621 $40,137
Working capital........................................ 311 246 4,581 42,455 38,094
Total assets........................................... 311 424 7,819 53,972 53,700
Total long-term debt and capital lease obligation...... -- -- 446 1,551 4,781
Total mandatorily redeemable convertible preferred
stock................................................ 400 1,153 10,471 -- --
Total stockholders' equity............................. (89) (833) (4,187) 46,067 43,502
</TABLE>
14
<PAGE> 26
SELECTED HISTORICAL FINANCIAL INFORMATION OF ONCORMED
The selected financial data set forth below with respect to Oncormed's
statements of operations for the years ended December 31, 1997, 1996 and 1995
and with respect to the balance sheets as of December 31, 1997 and 1996 have
been derived from audited financial statements of Oncormed included elsewhere in
this Prospectus/Joint Proxy Statement. The statement of operations data for the
year ended December 31, 1994 and for the period from July 12, 1993 (inception)
through December 31, 1993 and the balance sheet data as of December 31, 1995,
1994 and 1993 are derived from the audited financial statements of Oncormed
which are not included in this Prospectus/Joint Proxy Statement, but which are
on file with the Commission. The statement of operations data for the six months
ended June 30, 1998 and 1997 and the balance sheet data as of June 30, 1998 are
derived from unaudited financial statements included elsewhere in this
Prospectus/Joint Proxy Statement. The unaudited financial statements include all
adjustments (consisting of normal recurring adjustments) that Oncormed considers
necessary for a fair presentation. The results of operations for the six months
ended June 30, 1998 are not necessarily indicative of results for any future
period or the full year. The following selected financial data of Oncormed
should be read in conjunction with, and are qualified in their entirety by
reference to, the financial statements and notes thereto included elsewhere in
this Prospectus/Joint Proxy Statement or on file with the Commission.
<TABLE>
<CAPTION>
FROM
INCEPTION
(JULY 12,
1993) SIX MONTHS ENDED
THROUGH YEARS ENDED DECEMBER 31, JUNE 30,
DECEMBER -------------------------------------- -----------------
31, 1993 1994 1995 1996 1997 1997 1998
--------- ------- ------- ------- -------- ------- -------
(IN THOUSANDS, EXCEPT PER SHARE DATA) (UNAUDITED)
<S> <C> <C> <C> <C> <C> <C> <C>
STATEMENT OF OPERATIONS DATA:
Revenues......................... $ -- $ 34 $ 311 $ 627 $ 960 $ 322 $ 849
Operating expenses:
Cost of sales -- direct........ -- 11 168 283 474 165 367
Laboratory operations.......... 217 1,126 2,259 2,760 3,426 1,374 1,573
Selling, general and
administrative.............. 349 2,471 4,119 4,791 5,780 2,688 3,729
Research and development....... 274 524 452 709 773 422 332
Acquired in-process research
and development projects.... -- -- -- -- 1,481 1,481 --
------ ------- ------- ------- -------- ------- -------
Total operating expense.......... 840 4,132 6,998 8,543 11,934 6,130 6,001
Other income..................... -- -- -- -- -- -- 525
Interest income, net............. 2 117 176 460 228 160 19
------ ------- ------- ------- -------- ------- -------
Net loss......................... $ (838) $(3,981) $(6,511) $(7,456) $(10,746) $(5,648) $(4,608)
------ ------- ------- ------- -------- ------- -------
Preferred stock dividends and
accretion...................... -- -- -- -- -- -- (1,127)
------ ------- ------- ------- -------- ------- -------
Net loss attributable to common
stockholders................... $ (838) $(3,981) $(6,511) $(7,456) $(10,746) $(5,648) $(5,735)
====== ======= ======= ======= ======== ======= =======
Basic and diluted net loss per
common share................... $(0.20) $ (0.90) $ (1.32) $ (1.10) $ (1.39) $ (0.75) $ (0.73)
====== ======= ======= ======= ======== ======= =======
Shares used in computing basic
and diluted net loss per common
share.......................... 4,255 4,405 4,948 6,805 7,709 7,567 7,883
====== ======= ======= ======= ======== ======= =======
</TABLE>
<TABLE>
<CAPTION>
DECEMBER 31,
---------------------------------------------- AS OF JUNE 30,
1993 1994 1995 1996 1997 1998
------ ------ ------ ------ ------ ---------------
(IN THOUSANDS) (UNAUDITED)
<S> <C> <C> <C> <C> <C> <C>
BALANCE SHEET DATA:
Cash, cash equivalents and short-term
investments......................... $3,849 $7,262 $ 719 $7,499 $1,479 $1,178
Total assets.......................... 4,046 8,372 2,452 9,114 3,177 2,470
Total debt............................ 664 716 716 716 716 716
Total stockholders' equity
(deficit)........................... 3,332 6,840 394 6,950 677 (1,053)
</TABLE>
15
<PAGE> 27
RISK FACTORS
This Prospectus/Joint Proxy Statement contains forward-looking statements
that involve risks and uncertainties, including, among others, statements as to
the benefits expected to be realized as a result of the Merger, future financial
performance of the combined company (referring to Gene Logic and Merger Sub,
assuming the merger of Oncormed with and into Merger Sub in the Merger), the
analyses performed by the financial advisors to Gene Logic and Oncormed, the
timing of availability of products under development, the ability to
commercialize products developed under collaborations and alliances, the
performance and utility of the combined company's products and services, and the
adequacy of capital resources. The combined company's actual results may differ
materially from those anticipated in these forward-looking statements as a
result of certain risks and uncertainties, including those set forth in the
following risk factors and elsewhere in this Prospectus/Joint Proxy Statement.
Stockholders of each of Gene Logic and Oncormed are urged to consider carefully
the discussion of such risks and uncertainties in determining whether or not to
vote for the Merger Proposal and are cautioned not to place undue reliance on
the forward-looking statements contained in this Prospectus/Joint Proxy
Statement, which speak only as of the date hereof. Neither Gene Logic nor
Oncormed undertakes any obligation to release publicly any revisions to such
forward-looking statements which may be made to reflect events or circumstances
occurring after the date hereof.
UNCERTAINTY RELATING TO INTEGRATION
The Merger involves the integration of two companies that have previously
operated independently. Such integration will require significant effort from
the personnel of each company, including the coordination of the companies'
research and development efforts. There can be no assurance that the combined
company will be able to integrate the respective operations of Gene Logic and
Oncormed without encountering difficulties or experiencing the loss of personnel
or that the benefits expected from such integration will be realized. The
diversion of the attention of management of the combined company and any
difficulties encountered in the transition process (including the interruption
of, or a loss of momentum in, either company's activities, problems associated
with integration of research and development activities, management information
and reporting systems, and delays in implementation of consolidation plans)
could have an adverse impact on the combined company's ability to realize
anticipated synergies from the Merger, which would have a material adverse
effect on the combined company's business, financial condition and results of
operations.
EFFECT OF THE MERGER ON RELATIONSHIPS WITH STRATEGIC PARTNERS AND OTHERS
The terms of a license agreement between Oncormed and Incyte
Pharmaceuticals, Inc. ("Incyte") provide that Incyte may terminate the license
agreement following consummation of the Merger. Incyte intends to terminate the
license to certain gel-based sequencing technology improvements granted by
Incyte under such agreement upon consummation of the Merger. Gene Logic and
Incyte have agreed that Incyte will terminate the license agreement in its
entirety in connection with the Merger, unless Gene Logic agrees to provide
Incyte with human tissue samples in accordance with the license agreement or
Gene Logic and Incyte agree to amend the license agreement on mutually
acceptable terms. The Merger will also require the consent of certain strategic
partners and other parties who have entered into agreements with Oncormed to the
assignment of such agreements in connection with the Merger. There can be no
assurance that such consents will be obtained and, if not obtained, that such
agreements will not be terminated. Any adverse impact on the combined company's
relationship with its strategic partners as a result of the Merger could have a
material adverse effect on the combined company's business, financial condition
and results of operations. See "-- Reliance on Strategic Partners and
Licensees," "Gene Logic Business -- Gene Logic Alliances, Independent Programs
and Products -- Drug Target and Lead Discovery Programs -- Strategic Alliances"
and "Oncormed Business -- Collaborative Relationships."
RIGHTS OF HOLDERS OF ONCORMED COMMON STOCK FOLLOWING THE MERGER
Following the Merger, holders of Oncormed Common Stock outstanding as of
the Effective Time will become holders of Gene Logic Common Stock. Certain
differences exist between the rights of stockholders of Oncormed under the
Oncormed Certificate and the Oncormed By-laws, and the rights of stockholders of
Gene
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Logic under the Gene Logic Certificate and the Gene Logic By-laws. See
"Comparison of Rights of Holders of Gene Logic Common Stock and Holders of
Oncormed Common Stock."
INCURRENCE OF SIGNIFICATION TRANSACTION CHARGES
Gene Logic and Oncormed estimate that they will incur direct transaction
costs of approximately $2.0 million associated with the Merger, primarily for
investment banking, legal and accounting fees incurred in connection with the
Merger. The nonrecurring transaction costs incurred by Oncormed will be charged
to operations as incurred. The nonrecurring transaction costs incurred by Gene
Logic will be added to the purchase price as a direct cost of the transaction.
In addition, Gene Logic anticipates incurring an additional charge upon
consummation of the Merger of approximately $35.2 million related to the
write-off of acquired in-process research and development. Gene Logic also
anticipates that it will incur other costs associated with integrating the two
companies which will be expensed as incurred. Additional unanticipated expenses
may be incurred relating to the integration of the businesses of Gene Logic and
Oncormed. There can be no assurance that combining the businesses of Gene Logic
and Oncormed, even if achieved in an efficient and effective manner, will result
in combined results of operations and financial condition superior to what would
have been achieved by either company independently. In accordance with purchase
accounting rules, the historical book values of the assets and liabilities of
Oncormed will be adjusted to their fair values. The excess of the purchase price
paid by Gene Logic (including Gene Logic's direct costs) over the adjusted fair
values of the assets and liabilities of Oncormed acquired (including the fair
value of in-process research and development) will be recorded by the combined
company as goodwill which will be amortized over approximately five years. The
acquired in-process research and development will be written off upon
consummation of the Merger. See "The Merger and Related Transactions -- Other
Matters Related to the Merger -- Merger Expenses and Fees and Other Costs."
ADDITIONAL SHARES TO BE ISSUED BY GENE LOGIC; SHARES ELIGIBLE FOR FUTURE SALE;
DILUTIVE EFFECT TO GENE LOGIC STOCKHOLDERS
As a result of the Merger, it is anticipated that Gene Logic will issue
approximately 4,849,815 shares of Gene Logic Common Stock, and approximately
505,898 shares of Gene Logic Common Stock will be issuable upon the exercise of
warrants assumed by Gene Logic in connection with the Merger (based on the
Assumed Exchange Ratio). In general, these shares will be freely tradable
following the Merger, subject to certain volume and other resale restrictions
for affiliates of Oncormed or Oncormed stockholders who become affiliates of
Gene Logic pursuant to Rule 144 and Rule 145 under the Securities Act. An
aggregate of approximately 113,246 of the shares issued in the Merger will be
beneficially owned by such persons, including 112,897 shares issuable pursuant
to the exercise of options held by such persons. The approximately 929,200
shares of Gene Logic Common Stock to be issued to Oncor, an affiliate of
Oncormed, in the Merger have been registered for resale pursuant to this
Prospectus/Joint Proxy Statement, permitting Oncor to resell its shares without
the restrictions otherwise imposed by Rule 145, subject to any contractual
obligations of Oncor. Oncor has entered into a lock-up agreement with Gene Logic
whereby Oncor has agreed that, for a period of 60 days following the Effective
Time, it will not sell or transfer any of the shares of Gene Logic Common Stock
to be issued to Oncor in the Merger, subject to certain limited exceptions.
During the 30-day period thereafter and during each three-month period following
the end of such 30-day period, Oncor may sell or transfer only the number of
shares of the Gene Logic Common Stock issued to Oncor in the Merger that Oncor
would otherwise be able to sell or transfer in accordance with the resale
restrictions of Rule 145 pursuant to this Prospectus/Joint Proxy Statement. All
of the directors and certain of the executive officers of Oncormed have entered
into lock-up agreements with Gene Logic pursuant to which they have agreed not
to sell or transfer any of the shares of Gene Logic Common Stock to be issued to
them in the Merger, subject to certain exceptions, for a period of 90 days
following the Effective Time. The sale of a significant number of the foregoing
shares may cause substantial fluctuations in the price of Gene Logic Common
Stock. As of August 17, 1998, there were 14,788,445 shares of Gene Logic Common
Stock outstanding. As a result of the Merger, any given Gene Logic stockholder's
percentage ownership of Gene Logic capital stock prior to the Merger will
decrease and the percentage ownership of all pre-Merger Gene Logic stockholders
will be decreased from 100% of the outstanding capital stock of Gene Logic
immediately prior to the Merger to approximately 75.3% of the outstanding
capital stock of Gene Logic immediately following the Merger (based
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upon the number of shares of Gene Logic Common Stock outstanding on the Record
Date and assuming the issuance of 4,849,815 shares of Gene Logic Common Stock in
the Merger). See "The Merger and Related Transactions -- Merger Consideration;
Conversion of Shares," "-- Related Agreements and Interests of Certain Persons
in the Merger -- Affiliate Agreements," "-- Lock-Up Agreements" and "Selling
Securityholders."
POSSIBLE DECREASE IN ONCORMED COMMON STOCK EXCHANGE RATIO; MARKET PRICE
FLUCTUATIONS
Pursuant to the Merger Agreement, the Assumed Exchange Ratio of .4646
shares of Gene Logic Common Stock to be issued in exchange for each share of
Oncormed Common Stock in the Merger will be subject to change in the event that
the Closing Price of Gene Logic Common Stock is greater than $7.88 per share or
in the event that the Outstanding Oncormed Common Stock is greater or less than
10,438,781 shares of Oncormed Common Stock. There can be no assurance as to the
actual capitalization of Gene Logic or Oncormed as of the Effective Time or of
Gene Logic at any time following the Effective Time. In the event that the
Closing Price of Gene Logic Common Stock is less than $6.34 per share, Oncormed
may terminate the Merger Agreement. The market value of Gene Logic Common Stock
and/or Oncormed Common Stock at the Effective Time may vary significantly from
the price as of the date of the execution of the Merger Agreement, the date
hereof or the date on which the stockholders of each of Gene Logic and Oncormed
vote on the Merger due to, among other factors, market perception of the
benefits expected to be achieved by the Merger, changes in the business,
operations or prospects of Gene Logic or Oncormed, market assessments of the
likelihood that the Merger will be consummated and the timing thereof, and
general market and economic conditions. Because changes in the market value of
Gene Logic Common Stock or Oncormed Common Stock will generally not affect the
Exchange Ratio, except as described above, the market value of the Gene Logic
Common Stock issued in the Merger, and the value of the Oncormed Common Stock
surrendered in the Merger, may be higher or lower than the value of such shares
at the time the Merger was negotiated or approved by the stockholders of each of
Gene Logic and Oncormed. STOCKHOLDERS ARE URGED TO OBTAIN CURRENT MARKET
QUOTATIONS FOR GENE LOGIC COMMON STOCK AND ONCORMED COMMON STOCK. NO ASSURANCE
CAN BE GIVEN AS TO THE FUTURE PRICES OR MARKET FOR GENE LOGIC COMMON STOCK. See
"The Merger and Related Transactions -- Merger Consideration; Conversion of
Shares."
DETERRENT EFFECT OF TERMINATION PROVISIONS AND OTHER AGREEMENTS
In the event the Merger Agreement is terminated under certain
circumstances, Oncormed will be required to pay to Gene Logic a nonrefundable
fee, in cash, of $1,000,000. Oncormed has also agreed not to (i) solicit,
initiate or encourage the making, submission or announcement of, (ii) furnish
any information regarding Oncormed in connection with or in response to, (iii)
engage in discussions or negotiations with respect to, (iv) approve, endorse or
recommend, or (v) enter into any letter of intent or similar document or any
contract contemplating or otherwise relating to, any proposal regarding an
Acquisition Transaction. In addition, the Voting Agreement Stockholders, who
together hold approximately 40.8% of the Oncormed Common Stock outstanding on
the Record Date, have agreed to vote and have granted irrevocable proxies to
Gene Logic to vote all of the shares of Oncormed Common Stock over which such
stockholders have voting power as of the Record Date in favor of the Merger
Proposal. The combined effect of the agreements described above could be to
render more difficult or discourage an attempt by a party other than Gene Logic
to obtain control of Oncormed by means of a merger or otherwise. See "The Merger
and Related Transactions -- The Merger Agreement -- No Solicitation" and
"-- Termination and Amendment" and "-- Related Agreements and Interests of
Certain Persons in the Merger -- Voting Agreements."
TECHNOLOGICAL UNCERTAINTY AND PRODUCT DEVELOPMENT RISK
Gene Logic has developed and intends to continue to develop its Accelerated
Drug Discovery system, including its proprietary genomic and bioinformatics
technologies and Flow-thru Chip, for the identification of genes, drug targets
and drug leads useful for the discovery and development of therapeutic,
diagnostic and other life science products. Oncormed employs gene
characterization and molecular profiling platforms that use proprietary tools
and technologies designed to characterize genes. The Gene Logic and Oncormed
technologies are new and unproven approaches and are based on the assumption
that information about gene
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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 Gene Logic's or Oncormed's technologies will enable the combined company or
its strategic partners to identify genes, drug targets and drug leads useful for
the discovery and development of therapeutic, diagnostic and other life science
products. Even if the combined company is successful in identifying genes and
drug targets associated with specific diseases, there can be no assurance that
the combined company or its strategic partners will be able to discover or
develop products based on such discoveries. To date, no therapeutic, diagnostic
or agricultural products have been developed based on Gene Logic's or Oncormed's
technologies, and Gene Logic and Oncormed have not commercialized any
therapeutic, diagnostic or agricultural 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, diagnostic and
other life science products will have a material adverse effect on the combined
company's business, financial condition and results of operations.
The development of therapeutic, diagnostic and other life science products
based on the combined company's discoveries will also be subject to other risks
of failure inherent in their 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 combined 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 combined company or its strategic partners
will result in any commercially viable products.
Gene Logic 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. Gene Logic is in the process of developing its suite
of genomic database products, but, to date, only the GENE EXPRESS NORMAL
database has been commercially launched. 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 combined company will be successful in
marketing such products.
The success of the combined company's genomic database products will depend
on the combined company's ability to generate genomic data content and analyze
such data using software tools. The combined company's database products are
complex and sophisticated and could contain erroneous data, design defects or
software errors that could be difficult to detect and correct. There can be no
assurance that, despite testing by the combined company and its strategic
partners and customers, errors, bugs and viruses will not be found in current
and future products, if any. Failure to maintain and further develop the
necessary bioinformatics platform to support the drug discovery efforts of the
combined company and its strategic partners could result in the loss of or delay
in revenues and market acceptance, which could have a material adverse effect on
the combined company's business, financial condition and results of operations.
Because the combined company's genomic database products contain genomic
information generated by Gene Logic's and Oncormed's technologies, the
development and commercialization of the combined company's genomic database
products will be materially adversely affected in the event that its
technologies fail to generate such information.
Oncormed's pharmacogenomic technologies, designed to help accelerate the
translation of genetic discoveries into clinically useful therapeutics,
represent a new approach to disease management for which there is little
precedent and for which the market is evolving. The ability of the combined
company to successfully develop this business is unproven, and there can be no
assurance that the market for these technologies and products will continue to
evolve. The discoveries and technologies which form the basis for these products
have not been widely adopted by pharmaceutical companies, and there can be no
assurance that adoption of these technologies and products will occur. See "Gene
Logic Business -- Gene Logic's Accelerated Drug Discovery System," "-- Gene
Logic Alliances, Independent Programs and Products" and "Oncormed
Business -- Technology Platform."
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RELIANCE ON STRATEGIC PARTNERS AND LICENSEES
The combined company's strategy for development and commercialization of
therapeutic, diagnostic and other life science products based on its discoveries
depends, in large part, upon forming and maintaining multiple strategic
alliances and licensing arrangements. Gene Logic has established strategic
alliances with Procter & Gamble Pharmaceuticals, Inc. ("Procter & Gamble"),
Japan Tobacco, Inc. ("Japan Tobacco"), N.V. Organon ("Organon"), a
pharmaceutical business unit of Akzo Nobel, N.V., the Wyeth-Ayerst Research
Divison ("Wyeth-Ayerst") of American Home Products and Hoechst Schering AgrEvo
GmbH ("AgrEvo"), as well as a bioinformatics alliance with SmithKline Beecham
("SmithKline"). These strategic alliances have only been formed within the past
15 months. Oncormed has entered into certain commercial relationships with
Affymetrix, Inc. ("Affymetrix"), Incyte, Merck & Co., Inc. ("Merck"),
Rhone-Poulenc Rorer Pharmaceuticals, Inc. ("Rhone-Poulenc") and Schering-Plough
Research Institute ("Schering-Plough"). There can be no assurance that any of
such alliances will be maintained or will be successful. There can also be no
assurance that the combined 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 combined company or that
any future strategic alliances or licensing arrangements will ultimately be
successful. Gene Logic and Oncormed have received a substantial portion of their
revenues since inception from alliances with their strategic partners and expect
to continue to do so. Failure of the combined company to maintain existing
strategic alliances or to enter into additional strategic alliances could have a
material adverse effect on the combined company's business, financial condition
and results of operations.
The combined company's strategy includes entering into multiple, concurrent
strategic alliances. There can be no assurance that the combined company will
successfully manage simultaneous collaborative programs. Failure by the combined
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 combined
company's business, financial condition and results of operations.
The combined company intends to rely on strategic partners for product
development, regulatory approval, manufacturing and marketing of therapeutic,
diagnostic or other life science 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 combined company cannot control the amount and timing of resources its
strategic partners may devote to the combined 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 combined 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 combined company, or otherwise fail to conduct its
collaborative activities in a timely manner, such conduct could have a material
adverse effect on the combined company's business, financial condition and
results of operations. Each of Gene Logic's current strategic alliances provide
the strategic partner with certain rights to terminate the alliance agreement
prior to the natural expiration of its term. Certain of Oncormed's strategic
alliances provide the strategic partner with certain rights to terminate the
alliance agreement prior to the natural expiration of its term, including as a
result of the Merger. The early termination of any strategic alliance could have
a material adverse effect on the combined company's business, financial
condition and results of operations. The combined company intends to rely on its
strategic partners for significant funding in support of its operations. The
combined company would be required to devote additional internal resources to
such programs, or to scale back or terminate certain programs, if such funding
were not available or were reduced in amount.
Should a strategic partner fail to develop or commercialize a product to
which it has the rights, the combined 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
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with any that might result from the combined company's research program with the
strategic partner. Possible disagreements between the combined company and its
strategic 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 combined company's business,
financial conditions and results of operations. See "-- Effect of the Merger on
Relationships with Strategic Partners and Others," "Gene Logic Business -- Gene
Logic Alliances, Independent Programs and Products -- Drug Target and Lead
Discovery Programs -- Strategic Alliances" and "Oncormed
Business -- Collaborative Relationships."
LIMITED OPERATING HISTORY; HISTORY OF OPERATING LOSSES; ONCORMED GOING CONCERN;
PROFITABILITY UNCERTAIN
Each of Gene Logic and Oncormed has a limited operating history and is at
an early stage of development. Substantially all of Gene Logic's and a
significant percentage of Oncormed's resources have been dedicated to the
development of their proprietary technologies and the application of such
technologies to the identification of genes, useful for the development of
therapeutic, diagnostic and other life science products. Oncormed has also
allocated a percentage of its resources to the development of, and sales and
marketing efforts relating to, its services. All of Gene Logic's and Oncormed's
gene discovery and drug development programs and strategic alliances are at an
early stage. The continued development of the combined company's technologies
and their application to the discovery of genes useful for the development of
therapeutic, diagnostic and other life science products will require significant
additional research and development and investment. There can be no assurance
that the combined company's technologies will continue to be developed
successfully, or that any therapeutic, diagnostic or other life science 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, products and services, avoid infringing the
proprietary rights of others, be manufactured in sufficient quantities or at
reasonable costs or be marketed successfully. Gene Logic and Oncormed expect
that it will be a number of years, if ever, before the combined company will
recognize revenue from therapeutic, diagnostic or agricultural product sales or
royalties.
Gene Logic has incurred operating losses in each year since its inception,
including net losses of approximately $2.9 million, $7.2 million and $3.6
million during the years ended December 31, 1996 and 1997 and the six months
ended June 30, 1998, respectively, and as of June 30, 1998, had an accumulated
deficit of $16.2 million. Oncormed has incurred cumulative losses since its
inception and, as of June 30, 1998, had an accumulated deficit of $35.3 million.
Gene Logic and Oncormed expect the combined company to incur additional losses
for at least the next several years and that such losses may increase as the
combined company expands its research and development activities. At August 7,
1998, Oncormed had cash and cash equivalents of approximately $1.4 million. In
the event the Merger is not consummated, Oncormed will need to raise additional
funds to continue its operations, which raises substantial doubt about whether
Oncormed can continue as a going concern. Gene Logic's losses to date have
resulted principally from costs incurred in research and development and general
and administrative costs associated with operations. Oncormed's losses to date
have resulted principally from selling, general and administrative costs
associated with operations, as well as costs incurred in research and
development. To date, substantially all of Gene Logic's revenues have been
derived from payments from strategic alliances and licensing arrangements, and
Oncormed's revenues have been principally derived from providing genetic
analysis and information services and technology and software licensing
associated with its proprietary information. Gene Logic and Oncormed expect that
substantially all of the combined company's 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 combined company will
receive additional revenues under existing strategic alliances or licensing
arrangements or that the combined company will be successful in entering into
any new strategic alliance or licensing arrangements that results in revenues.
The combined company's ability to generate revenues and achieve profitability
will be dependent in large part on its ability to maintain existing strategic
alliances and licensing arrangements and enter into additional strategic
alliances and licensing arrangements, and on the ability of the combined company
and its strategic partners to discover genes and, thereafter, utilize such
discoveries to identify, develop manufacture and commercialize therapeutic,
diagnostic and other life science products. In
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addition, to the extent that the combined company relies upon others for these
research, development and commercialization activities, its 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 combined 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 combined
company's business, financial condition and results of operations. See "Gene
Logic Management's Discussion and Analysis of Financial Condition and Results of
Operations" and "Oncormed Management's Discussion and Analysis of Financial
Condition and Results of Operations."
DEPENDENCE UPON ACCESS TO CERTAIN MATERIALS AND INFORMATION AND LICENSED
TECHNOLOGIES
Gene Logic and Oncormed obtain 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 combined company's technologies to discover genes
useful for the development of therapeutic, diagnostic and other life science
products will require access to such materials and information, and there is
substantial competition for such materials and information. There can be no
assurance that the combined company will be able to obtain and maintain access
to such materials and information upon terms acceptable to the combined company,
if at all, and any material lack of availability of such materials would have a
material adverse effect on the combined company's business, financial condition
and results of operations. See "Gene Logic Business -- Gene Logic Alliances,
Independent Programs and Products" and "Oncormed Business -- Licensing
Relationships."
Certain of Gene Logic's and Oncormed's genomics and bioinformatics
technologies 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 combined company's research and
development activities. There can be no assurance that the combined 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 combined company's business, financial condition and
results of operations. There also can be no assurance that there will not be
disruptions in the combined company's relationships with third parties from whom
the combined 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 combined company's
business, financial condition and results of operations.
FLUCTUATIONS IN OPERATING RESULTS
The combined 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 combined company's technologies, products, variations in payments
under strategic alliances and licensing arrangements, including milestone
payments, royalties, license fees and other revenues, the timing of new product
introductions, if any, by the combined company, changes in the research and
development budgets of the combined company's strategic partners and any
potential partners, the introduction of new products and services by the
combined 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 and technologies. If revenue in a particular period does not meet
expectations, the combined company may not be able to adjust significantly its
level of expenditures in such period, which would have an adverse effect on the
combined company's operating results. Gene Logic and Oncormed believe that
quarterly comparisons of the combined company's 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
combined company's operating results may be below the expectations of public
market analysts and investors. In such event, the price of Gene Logic Common
Stock could be materially and adversely affected. See "Gene Logic Management's
Discussion and Analysis of Financial Condition and Results of Operations" and
"Oncormed 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 and Oncormed seek United States and international patent
protection for major components of their technology platforms; they rely upon
trade secret protection for certain of their confidential and proprietary
information; and they use license agreements both to access external
technologies and assets and to convey certain intellectual property rights to
others. The combined 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 June 30, 1998, Gene Logic had exclusive rights to 23 United States
patent applications relating to its technologies. Gene Logic has exclusive
rights to a United States patent covering key aspects of the READS gene
expression analysis. Gene Logic has also received notice of allowance for a
United States patent application covering key aspects of gene expression
analysis, notice of allowance for a United States patent application covering
its Flow-thru Chip and notice of allowance for a United States patent
application covering its MuST technology.
As of June 30, 1998, Oncormed owned four United States patents, including
one patent related to a pattern recognition methodology and three patents
related to the BRCA1 gene, and 35 United States patent applications relating to
its technologies.
The patent positions of pharmaceutical, biopharmaceutical and biotechnology
companies, including Gene Logic and Oncormed, are generally uncertain and
involve complex legal and factual questions. There can be no assurance that any
of the pending patent applications filed by Gene Logic or Oncormed or to which
Gene Logic or Oncormed have exclusive rights will result in issued patents, that
the claims of any patents which are issued will provide meaningful protection,
that the combined company will develop additional proprietary technologies that
are patentable, that any patents licensed or issued to the combined company or
its strategic partners will provide a basis for commercially viable products or
services or will provide the combined 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 combined company to do business. In
addition, patent law relating to the scope of claims in the technology field in
which the combined company will operate is still evolving. The degree of future
protection for the combined 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
combined company's technologies, or, if patents are licensed or issued to the
combined company, design around the patented technologies licensed to or
developed by the combined company. In addition, the combined 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.
Gene Logic 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 combined
company and will not have a material adverse effect on the combined 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 combined 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 combined
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 combined company from utilizing or commercializing one or more
of its technologies and could have a material adverse effect on the combined
company's business, financial condition and results of operations.
Gene Logic and Oncormed have applied, and intend to make additional
applications, for patent protection for methods relating to gene expression, for
the disease-specific patterns of gene expression they identify and for the
individual disease genes and targets they discover. Such patents may include
claims
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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 combined 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
combined 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 combined 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 combined company applies for patent
protection on a corresponding gene could adversely affect the combined 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 combined company may seek patent
protection. There can be no assurance that any such patent application will not
have priority over patent applications filed by Gene Logic, Oncormed or the
combined company. Any legal action against the combined company or its strategic
partners claiming damages and seeking to enjoin commercial activities relating
to the affected products, processes and services could, in addition to
subjecting the combined company to potential liability for damages, require the
combined company or its strategic partners to obtain a license in order to
continue to manufacture or market the affected products, processes and services.
There can be no assurance that the combined 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. Gene
Logic and Oncormed believe that there is likely to be significant litigation in
the industry regarding patent and other intellectual property rights. If the
combined company becomes involved in such litigation, it could consume a
substantial portion of the combined company's managerial and financial resources
and have a material adverse effect on the combined company's business, financial
condition and results of operations.
Third parties, including competitors of Oncormed such as Myriad Genetics
Inc. ("Myriad") and other potential competitors, have been issued patents
relating to certain genes and genetic mutations including BRCA1 and related
mutations, and have filed and may in the future file additional patent
applications relating to genes and genetic mutations including BRCA2, p16 and
related mutations. In May 1998, Myriad and Oncormed settled all outstanding
lawsuits between the parties. As part of the settlement, Oncormed granted to
Myriad exclusive rights to all current and pending Oncormed patents in the field
of BRCA1 and BRCA2 for reference lab testing in consideration for certain
payments and royalties payable to Oncormed. Both parties will retain diagnostic
product and therapeutic rights in their respective patents.
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 combined
company's patent position. If this change results in a shorter period of patent
coverage, the combined 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, Gene Logic and Oncormed
rely on trade secret protection and confidentiality agreements to protect their
interests. Gene Logic believes that several elements of its Accelerated Drug
Discovery system
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involve proprietary know-how, technology or data which are not covered by
patents or patent applications. In addition, Gene Logic 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.
Gene Logic and Oncormed have taken security measures to protect their
proprietary know-how and technologies and confidential data and continue to
explore further methods of protection. While Gene Logic and Oncormed require 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 combined
company's trade secrets, or that the combined company will be able to
meaningfully protect its trade secrets. In the case of a strategic partnership
or other collaborative arrangement which requires the sharing of data, Gene
Logic's and Oncormed's policy is to make available to their 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 their partner or collaborator. There can be no assurance, however, that
such measures will adequately protect the combined 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 combined company's business, financial condition
and results of operations.
Gene Logic and Oncormed are parties to various license agreements which
give them rights to use certain technologies and biological materials in their
research and development processes. There can be no assurance that the combined
company will be able to maintain such rights on commercially reasonable terms,
if at all. Failure by the combined company to maintain such rights could have a
material adverse effect on the combined company's business, financial condition
and results of operations. See "Gene Logic Business -- Intellectual Property."
INTENSE COMPETITION; RAPID TECHNOLOGICAL CHANGE
Competition among entities attempting to identify genes associated with
specific diseases and to develop products and services based on such discoveries
is intense. Gene Logic and Oncormed face, and the combined company 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 genes and gene fragments, while others are pursuing a gene
identification, characterization and product development strategy based on
positional cloning. Gene Logic and Oncormed are 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 Gene Logic's and
Oncormed's competitors. Competition among such entities is intense and is
expected to increase. In order to compete against existing and future
technologies, the combined company will need to demonstrate to potential
customers that its technologies and capabilities are superior to competing
technologies.
Many of Gene Logic's and Oncormed's competitors have substantially greater
capital resources, research and development staffs, facilities, manufacturing
and marketing experience, distribution channels and human resources than Gene
Logic, Oncormed or the combined company. These competitors may discover,
characterize or develop important genes useful for the development of
therapeutic, diagnostic and other life science products in advance of the
combined company or which are more effective than those developed by the
combined company or its strategic partners, or may obtain regulatory approvals
of products more rapidly than the combined company and its strategic partners,
any of which could have a material adverse effect on the combined company's
business, financial condition and results of operations. Moreover, there can be
no assurance that the combined company's competitors will not obtain patent
protection or other intellectual property rights that would limit the combined
company's or its strategic partners' ability to use the combined company's
discovery technologies or commercialize therapeutic, diagnostic or other life
science products, which could have a material adverse effect on the combined
company's business, financial condition and
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results of operations. The combined company also faces competition from these
and other entities in gaining access to relevant samples used in its discovery
programs.
The combined company will rely on its strategic partners for support of
certain of its discovery programs and intends to rely on its strategic partners
for development of related potential products and the manufacturing and
marketing of such products. Each of Gene Logic's and Oncormed's strategic
partners is conducting multiple product development efforts within each area
which is the subject of its strategic alliance with Gene Logic or Oncormed.
Generally, Gene Logic's and Oncormed'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 combined 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 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 combined company's future
success will depend in large part on its maintaining a competitive position in
the genomics field. Rapid technological development by the combined company or
others may result in products or technologies becoming obsolete before the
combined company recovers the expenses it incurs in connection with their
development. Products and services offered by the combined 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 combined company will be able to make the
enhancements to its technology necessary to compete successfully with newly
emerging technologies.
Gene Logic and Oncormed require that all employees and consultants
(including certain scientific advisors) enter into confidentiality agreements
that prohibit the disclosure of confidential information to anyone outside of
Gene Logic or Oncormed, as applicable, and require disclosure and assignment to
Gene Logic or Oncormed, as applicable, of their ideas, developments, discoveries
or inventions developed during the course of their service to Gene Logic or
Oncormed. However, no assurance can be given that competitors of Gene Logic and
Oncormed will not gain access to trade secrets and other proprietary information
developed by them and disclosed to employees, consultants and/or scientific
advisors. See "Gene Logic Business -- Competition."
FUTURE CAPITAL REQUIREMENTS; UNCERTAINTY OF ACCESS TO ADDITIONAL FUNDING
Gene Logic and Oncormed have invested significant capital in their
infrastructure and scientific and business development activities and expect
capital and operating expenditures to increase over the next several years as
the combined company expands its operations. Gene Logic believes that existing
cash and marketable securities and anticipated cash flow from the combined
company's current strategic alliances and licensing arrangements will be
sufficient to support the combined company's operations for at least the next 24
months. This expectation is based on the combined company's current operating
plan, which could change as a result of many factors, including factors
affecting the integration of the operations of Gene Logic and Oncormed, and the
combined company could require additional funding sooner than expected. In
addition, Gene Logic may choose to raise additional capital due to market
conditions or strategic considerations even if it has sufficient funds for its
operating plan. The estimate for the period for which Gene Logic expects the
combined company's available cash balances and estimated cash flow from its
current strategic alliances and licensing arrangements to be sufficient to meet
capital requirements is a forward-looking statement that involves risks and
uncertainties as set forth herein and elsewhere in this Prospectus/Joint Proxy
Statement or incorporated by reference herein. The combined 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 combined company to establish and
maintain strategic alliance and licensing arrangements and the progress of the
development and commercialization efforts of the combined company's strategic
partners and licensees. These factors also include the level of the combined
company's activities relating to its independent discovery programs and to the
development and commerciali-
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zation 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 technologies and the costs
involved in preparing, filing, prosecuting, maintaining and enforcing patent
claims and other intellectual property rights.
Gene Logic expects that the combined company 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. There can be no assurance 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 combined
company or its stockholders. To the extent that Gene Logic raises additional
capital by issuing equity or convertible debt securities, ownership dilution to
stockholders of Gene Logic will result. If adequate funds are not available when
needed, the combined company may be required to curtail operations significantly
or to obtain funds by entering into strategic alliances and licensing
arrangements, in which case the combined 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 combined company, any of
which could have a material adverse effect on the combined company's business,
financial condition and results of operations. In the event that adequate funds
are not available, the combined company's business would be adversely affected.
See "Gene Logic Management's Discussion and Analysis of Financial Condition and
Results of Operations" and "Oncormed Management's Discussion and Analysis of
Financial Condition and Results of Operations."
ATTRACTION AND RETENTION OF KEY EMPLOYEES
Each of Gene Logic and Oncormed are, and the combined company will be,
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 combined company's scientific and business
objectives. The combined 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
combined 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 combined 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 combined
company's business, financial condition and results of operations. See "Gene
Logic Business -- Competition," "-- Employees" and "Oncormed Business -- Human
Resources."
GOVERNMENT REGULATION; NO ASSURANCE OF REGULATORY APPROVAL
Gene Logic does not expect the combined company 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 expects the combined
company to rely on its strategic partners to conduct such activities. Prior to
marketing, any new drug developed by the combined 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 the 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 biological
license application ("BLA") in the case of biological therapeutics. Similar
delays may also be encountered in the regulatory approval of any diagnostic or
agricultural 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
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products developed by the combined company or its strategic partners, impose
costly procedures upon the combined company's or its strategic partners'
activities, diminish any competitive advantages that the combined company or its
strategic partners may attain and adversely affect the combined company's
receipt of royalties. There can be no assurance that regulatory approval will be
obtained for any products developed by the combined 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 combined company's drug target and drug lead discovery programs involve the
application of new technologies and may be based upon a new therapeutic or
diagnostic 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 a material adverse effect on the combined company's business,
financial condition 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 combined 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 product candidate resulting from Gene Logic's discovery
programs, and no product candidate has been approved for commercialization in
the United States or elsewhere. Gene Logic expects the combined company to rely
on its strategic partners to file INDs and generally direct the regulatory
approval process. There can be no assurance that the combined 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 combined
company's strategic partners from marketing drugs or diagnostic products
developed through the combined company's research or limit the commercial use of
such products and could have a material adverse effect on the combined company's
business, financial condition and results of operations.
The Clinical Laboratory Improvement Act, as amended in 1988 ("CLIA"),
provides for regulation of clinical laboratories by the United States Department
of Health and Human Services ("HHS"). These regulations mandate that virtually
all clinical laboratories be certified to perform testing on human specimens and
provide specific conditions for certification. These regulations also contain
requirements for the qualifications, responsibilities, training, working
conditions and oversight of clinical laboratory employees. In addition, specific
standards are imposed for each type of test that is performed in a laboratory.
Oncormed's laboratory is certified under these regulations, and Oncormed
believes that it is in substantial compliance with them. CLIA and the
regulations promulgated thereunder are enforced through continuous quality
inspections of test methods, equipment, instrumentation, materials and supplies
on a bi-annual and "spot" basis. While the FDA minimally regulates the genetic
analyses performed in Oncormed's CLIA certified clinical laboratory, there can
be no assurance that the FDA will not seek to further regulate such tests in the
future. If, in the future, the FDA should determine that any tests performed by
the combined company should receive FDA approval, or impose other requirements,
there can be no assurance that such requirement would be met on a timely basis
or at all. Any change in CLIA or related regulations, or in the interpretation
thereof, or in the combined company's certification under CLIA, or in the FDA's
position on regulating genetic tests, could have a material adverse effect on
the combined company's business, financial condition and results of operations.
Oncormed's laboratory is licensed and regulated by the State of Maryland, in
which it is located. Oncormed's laboratory is also regulated by certain other
states from which Oncormed may accept specimens. Oncormed has received approval
for a license from the State of New York and the State of Florida, and the
combined company intends to seek approval from other states as required. No
assurance can be given that the combined company will be able to obtain such
approvals on a timely basis or at all. The loss of, or the failure to obtain,
any required state license or other required approval, could have a material
adverse effect on the combined company's business, financial condition and
results of operations.
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The use of human tissue in medical research and the operation of human
tissue repositories to collect, store and distribute human tissue materials for
research purposes are regulated under federal regulations. These regulations
mandate that institutional review boards ("IRBs") are the mechanism by which
research protocols are reviewed and approved to assure the protection of human
rights. The HHS Office for the Protection from Research Risks oversees this
process and issues guidelines for IRBs to use when evaluating research protocols
to assure informed consent and that privacy is protected and confidentiality is
maintained. Some states have requirements that are similar to the foregoing
guidelines. Oncormed believes that it is in compliance with federal and state
regulations in the establishment and operation of a human tissue repository for
use in genomic research. Oncormed operates its repository under an IRB-approved
protocol and requires that all institutions and pathologists supplying tissue
have an IRB-approved protocol to assure patient informed consent, privacy and
confidentiality. Oncormed does not have access to patient identifiers. The use
of human tissue, especially for genetic research, is continuously examined by a
number of agencies. There are no assurances that federal or state regulations
will not be passed in the future that would materially affect the combined
company's ability to operate a human tissue repository.
Gene Logic's and Oncormed's research and development activities involve the
controlled use of certain biological and other hazardous materials, chemicals
and various radioactive materials. Gene Logic and Oncormed are, and the combined
company will be, subject to federal, state and local laws and regulations
governing the use, storage, handling and disposal of such materials and certain
waste products. Although Gene Logic and Oncormed believe that their 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 combined company could be held
liable for any damages that result, and any liability could exceed the resources
of the combined company.
Although Oncormed's services are currently considered screening services
under Medicare and are therefore excluded from coverage under Medicare,
Oncormed's services may still be subject to laws, rules and regulations
governing reimbursement and fraud and abuse and prohibiting the filing of false
claims. These laws, rules and regulations include "anti-kickback" and "Stark"
laws, which contain extremely broad proscriptions, the violation of which may
result in exclusion from Medicare and Medicaid and criminal and civil penalties.
In addition, Oncormed is subject to state laws, rules and regulations limiting
certain financial relationships between health care service providers and
physicians and other referral sources as well as state Medicaid requirements.
Although Oncormed believes that it is in substantial compliance with all
applicable laws, rules and regulations, there can be no assurance that the
combined company will remain in compliance with applicable laws, rules and
regulations or that changes in, or new interpretations of, existing laws, rules
and regulations would not have a material adverse effect on the combined
company's business, financial condition and results of operations. See "Gene
Logic Business -- Government Regulation."
EXPANSION OF OPERATIONS; MANAGEMENT OF GROWTH
Gene Logic has recently experienced, and expects the combined company to
continue to experience, significant growth in the number of its employees and
the scope of its operations. Gene Logic has significantly increased the scale of
its operations and number of employees to support its partnered and independent
discovery programs and to manage its strategic alliances. The number of
full-time employees of Gene Logic increased from three on January 1, 1996 to 114
on June 30, 1998, and in March 1998 Gene Logic relocated its principal business
offices. This growth and relocation has placed a significant strain on Gene
Logic's management, operations and systems and may continue to place a
significant strain on the combined company's management, operations and systems.
The combined 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
combined company will be required to acquire additional capital equipment and
resources. There can be no assurance that the combined company will be able to
manage its growth, and the combined company's inability to manage growth
effectively could have a material adverse effect on the
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combined company's business, financial condition and results of operations. See
"Gene Logic Business -- Employees" and "-- Facilities."
LIMITED CLINICAL DEVELOPMENT, MANUFACTURING, MARKETING AND SALES EXPERIENCE
Gene Logic has made no investment in therapeutic, diagnostic or other life
science product manufacturing, marketing or sales resources and does not expect
the combined company generally to engage directly in the manufacturing,
marketing or sale of such products. Instead, Gene Logic expects the combined
company's strategic partners to pursue the commercialization of products based
upon or discovered using the combined company's technologies. There can be no
assurance that the combined company will be able to enter into such arrangements
with others for the commercialization of products on acceptable terms, if at
all. The combined company will be dependent to a significant extent on partners,
licensees or other entities for development, manufacturing and commercialization
of such products. The combined company's dependence upon third parties for the
manufacture, marketing and sales of products may materially adversely affect the
combined company's ability to develop and deliver such products on a timely and
competitive basis, if at all. To the extent the combined company directly
engages in development, manufacturing and marketing of certain therapeutic,
diagnostic or other life science products, it will require substantial
additional funds, personnel and production facilities. See "-- Reliance on
Strategic Partners and Licensees."
RISK OF LIABILITY
Clinical trials, manufacturing, marketing and sale of any of the combined
company's or its partners' potential products may expose the combined company to
liability claims from the use of such products. Gene Logic currently maintains
product liability insurance. In addition, genetic testing and information
services that have been provided by Oncormed could expose the combined company
to the risk of certain types of litigation, including medical malpractice or
negligence claims or contract disputes. Oncormed currently maintains medical
malpractice insurance coverage with respect to such past services. There can be
no assurance, however, that such product liability and medical malpractice
insurance maintained by Gene Logic and Oncormed will be adequate to protect Gene
Logic or the combined company against future claims or that insurance will be
available to the combined company in the future on acceptable terms, if at all.
The inability to obtain or maintain sufficient insurance coverage at an
acceptable cost or to otherwise protect against potential product liability or
medical malpractice claims could prevent or inhibit the commercialization of
products or services developed by the combined company or its partners. A
product liability claim or recall or a medical malpractice claim would have a
material adverse effect on the combined company's business, financial condition
and results of operations.
POSSIBLE VOLATILITY OF STOCK 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 combined company or its competitors, disputes
or other developments concerning proprietary rights, including patents and
litigation matters, developments concerning strategic alliance agreements or
licensing arrangements, publicity regarding actual or potential results with
respect to products, or technology under development by the combined company,
its strategic partners or to the efficacy of new technologies, quarterly
fluctuations in the combined company's operating results, future sales of
substantial amounts of Gene Logic Common Stock by existing stockholders of Gene
Logic and Oncormed 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 Gene Logic 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 Gene Logic Certificate provides for staggered terms for the members of
the Board of Directors. In addition, the Gene Logic Certificate authorizes the
Board of Directors of Gene Logic, without stockholder
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approval, to issue additional shares of Gene Logic Common Stock and to fix the
rights, preferences and privileges of and issue additional shares of Gene Logic
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 Gene Logic Common Stock. The issuance of Gene Logic Preferred Stock,
rights to purchase Gene Logic Preferred Stock or additional shares of Gene Logic
Common Stock may have the effect of delaying or preventing a change in control
of the combined company. In addition, the possible issuance of Gene Logic
Preferred Stock or additional shares of Gene Logic Common Stock could discourage
a proxy contest, make more difficult the acquisition of a substantial block of
Gene Logic's Common Stock or limit the price that investors might be willing to
pay for shares of Gene Logic's Common Stock. Further, the Gene Logic Certificate
provides that any action required or permitted to be taken by stockholders of
Gene Logic 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 Gene Logic may be called only by the Chairman of the Board of
Directors, the President of Gene Logic 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 Gene Logic Certificate and Gene
Logic 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 combined 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 combined company or approve
transactions that stockholders may deem to be in their best interests and,
therefore, could adversely affect the price of the Gene Logic Common Stock. See
"Comparison of Rights of Holders of Gene Logic Common Stock and Holders of
Oncormed Common Stock."
ACQUISITIONS
Gene Logic expects that the combined company may consider the acquisition
of complementary businesses and technologies as appropriate. The combined
company's ability to effect any such acquisition successfully will depend upon
the availability of suitable acquisition candidates and whether acquisitions can
be completed on acceptable terms. Competition from other acquirors may adversely
affect both the availability and terms of future acquisitions. Further
acquisitions by the combined company may require the use of debt or equity
financing. There can be no assurance that any such acquisition will be
successful or result in the expected benefits to the combined company.
31
<PAGE> 43
UNAUDITED PRO FORMA COMBINED CONDENSED FINANCIAL DATA
The following unaudited pro forma combined condensed financial data is
provided for illustrative purposes only and is not necessarily indicative of the
operating results or financial position that would have occurred if the Merger
had been consummated, nor is it necessarily indicative of future operating
results or financial position. The unaudited pro forma combined condensed
financial data presented below has been derived from the historical financial
statements of each of Gene Logic and Oncormed and give effect to (i) the Merger
as a purchase of Oncormed by Gene Logic, and (ii) the costs associated with the
consummation of the Merger. The unaudited pro forma combined condensed balance
sheet gives effect to the Merger as if it had occurred on June 30, 1998 using
Gene Logic's and Oncormed's respective June 30, 1998 financial statements. The
unaudited pro forma combined condensed statements of operations give effect to
the Merger as if it had occurred at the beginning of the periods of each of Gene
Logic and Oncormed. The pro forma adjustments are based on preliminary
estimates, available information and certain assumptions that management deems
appropriate. The unaudited pro forma combined condensed financial data does not
purport to represent what the combined company's financial position or results
of operations would actually have been if such transactions in fact had occurred
on those dates or to project the combined company's financial position or
results of operations for any future period. The unaudited pro forma combined
condensed financial statements should be read in conjunction with Gene Logic's
and Oncormed's financial statements and the notes thereto included elsewhere
herein.
SUMMARY UNAUDITED PRO FORMA COMBINED CONDENSED FINANCIAL DATA
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<TABLE>
<CAPTION>
SIX MONTHS ENDED YEAR ENDED
JUNE 30, 1998 DECEMBER 31, 1997
---------------- -----------------
<S> <C> <C>
Pro Forma Statement of Operations Data:
Revenue................................................... $ 6,724 $ 3,007
Net (loss)................................................ (8,772) (19,033)
Net (loss) per common share............................... (0.46) (2.91)(1)
Weighted average shares outstanding....................... 18,910 6,988(1)
</TABLE>
<TABLE>
<CAPTION>
JUNE 30, 1998
-------------
<S> <C>
Pro Forma Balance Sheet Data:
Cash, cash equivalent and marketable securities........... $40,425
Total assets.............................................. 60,740
Stockholders' equity...................................... 46,519
Book value per common share............................... 2.46
Common shares............................................. 18,910
</TABLE>
- ---------------
(1) Assuming the conversion of Gene Logic convertible preferred shares that
automatically converted to Gene Logic Common Stock upon the completion of
Gene Logic's initial public offering using the if-converted method from the
original date of issuance, the pro forma net loss per common share and
weighted average shares outstanding would be $(1.48) and 12,854,000,
respectively.
32
<PAGE> 44
COMPARATIVE HISTORICAL AND PRO FORMA PER SHARE DATA
<TABLE>
<CAPTION>
SIX MONTHS ENDED YEAR ENDED
JUNE 30, 1998 DECEMBER 31, 1997(1)
---------------- --------------------
<S> <C> <C>
Net Loss per Common Share:
(Basic and diluted)
Historical Gene Logic.................................. $(0.25) $(3.97)
Historical Oncormed.................................... (0.73) (1.39)
Pro forma combined..................................... (0.46) (2.91)
Pro forma equivalent................................... (0.21) (1.35)
</TABLE>
<TABLE>
<CAPTION>
JUNE 30, 1998
-------------
<S> <C>
Book Value per Common Share:
Historical Gene Logic..................................... $ 2.97
Historical Oncormed....................................... (0.13)
Pro forma combined........................................ 2.46
Pro forma equivalent...................................... 1.14
</TABLE>
- ---------------
(1) Assuming the conversion of Gene Logic convertible preferred shares that
automatically converted to Gene Logic Common Stock upon the completion of
Gene Logic's initial public offering using the if-converted method from the
original date of issuance, the amounts would be as follows:
<TABLE>
<S> <C>
(Basic and diluted)
Historical Gene Logic....................................... $(0.90)
Historical Oncormed......................................... (1.39)
Pro forma combined.......................................... (1.48)
Pro forma equivalent........................................ (0.69)
</TABLE>
33
<PAGE> 45
GENE LOGIC AND ONCORMED
UNAUDITED PRO FORMA COMBINED CONDENSED BALANCE SHEET
AS OF JUNE 30, 1998
<TABLE>
<CAPTION>
HISTORICAL
JUNE 30, 1998 PRO FORMA
---------------------- -------------------------
GENE LOGIC ONCORMED ADJUSTMENTS COMBINED
---------- -------- ----------- --------
(IN THOUSANDS)
<S> <C> <C> <C> <C>
ASSETS
Current Assets:
Cash and Cash Equivalents................... $35,849 $1,178 $ (890)(6) $36,137
Marketable Securities....................... 4,288 -- -- 4,288
Receivables................................. 2,357 180 -- 2,537
Other Current Assets........................ 1,828 136 -- 1,964
------- ------ ------ -------
44,322 1,494 (890) 44,926
Property and Equipment, net................... 8,341 976 -- 9,317
Intangible and Other Assets, net.............. 1,037 -- 5,460(2) 6,497
------- ------ ------ -------
$53,700 $2,470 $4,570 $60,740
======= ====== ====== =======
LIABILITIES AND STOCKHOLDERS' EQUITY
Current Liabilities:
Accounts Payable............................ $ 746 $ 838 $ -- $ 1,584
Accrued Liabilities......................... 1,828 887 -- 2,715
Accrued restructuring....................... -- -- 500(2) 500
Debt and Capital Lease Obligation........... 1,237 716 -- 1,953
Deferred Revenue............................ 2,417 1,078 -- 3,495
------- ------ ------ -------
6,228 3,519 500 10,247
Long-term Debt and Capital Lease Obligation... 3,545 -- -- 3,545
Deferred Revenue.............................. -- 4 -- 4
Other......................................... 425 -- -- 425
Stockholders' Equity.......................... 43,502 (1,053) 4,070(2)(5) 46,519
------- ------ ------ -------
$53,700 $2,470 $4,570 $60,740
======= ====== ====== =======
</TABLE>
See accompanying Notes to Unaudited Pro Forma Combined Condensed Financial Data.
34
<PAGE> 46
GENE LOGIC AND ONCORMED
UNAUDITED PRO FORMA COMBINED CONDENSED STATEMENT OF OPERATIONS
FOR THE YEAR ENDED DECEMBER 31, 1997
<TABLE>
<CAPTION>
HISTORICAL YEAR ENDED
DECEMBER 31, 1997 PRO FORMA
---------------------- -----------------------
GENE LOGIC ONCORMED ADJUSTMENTS COMBINED
---------- -------- ----------- --------
(IN THOUSANDS)
<S> <C> <C> <C> <C>
Revenues...................................... $ 2,047 $ 960 $ -- $ 3,007
Operating Expenses:
Cost of sales -- direct..................... -- 474 -- 474
Laboratory operations....................... -- 3,426 -- 3,426
Research and development.................... 6,061 773 -- 6,834
Selling, general and administrative......... 3,826 5,780 -- 9,606
Acquired in-process research and development
projects................................. -- 1,481 --(1) 1,481
Amortization of goodwill.................... -- -- 1,092(2) 1,092
------- -------- ------- --------
Total operating expenses................. 9,887 11,934 1,092 22,913
------- -------- ------- --------
Operating loss................................ (7,840) (10,974) (1,092) (19,906)
Interest income, net........................ 745 228 -- 973
Other expense............................... -- -- -- --
Income tax expense.......................... (100) -- -- (100)
------- -------- ------- --------
Net loss...................................... (7,195) (10,746) (1,092) (19,033)
Preferred stock dividends and accretion....... 1,286 -- -- 1,286
------- -------- ------- --------
Net loss attributable to common
stockholders................................ $(8,481) $(10,746) $(1,092) $(20,319)
======= ======== ======= ========
Basic and diluted net loss per share.......... $ (3.97) $ (1.39) $ (2.91)(3)
======= ======== ========
Basic and diluted weighted average shares
outstanding................................. 2,138 7,709 6,988(3)
======= ======== ========
Pro forma net loss per share.................. $ (0.90) $ (1.48)(3)
======= ========
Pro forma weighted average shares
outstanding................................. 8,004 12,854(3)
======= ========
</TABLE>
See accompanying Notes to Unaudited Pro Forma Combined Condensed Financial Data.
35
<PAGE> 47
GENE LOGIC AND ONCORMED
UNAUDITED PRO FORMA COMBINED CONDENSED STATEMENT OF OPERATIONS
FOR THE SIX MONTHS ENDED JUNE 30, 1998
<TABLE>
<CAPTION>
HISTORICAL SIX MONTHS
ENDED JUNE 30, 1998 PRO FORMA
---------------------- -----------------------
GENE LOGIC ONCORMED ADJUSTMENTS COMBINED
---------- -------- ----------- --------
(IN THOUSANDS)
<S> <C> <C> <C> <C>
Revenues........................................ $ 5,875 $ 849 $ -- $ 6,724
Operating Expenses:
Cost of sales -- direct....................... -- 367 -- 367
Laboratory operations......................... -- 1,573 -- 1,573
Research and development...................... 7,144 332 -- 7,476
Selling, general and administrative........... 3,318 3,729 -- 7,047
Acquired in-process research and development
projects................................... -- -- --(1) --
Amortization of goodwill...................... -- -- 546(2) 546
------- ------- ------- -------
Total operating expenses................... 10,462 6,001 546 17,009
------- ------- ------- -------
Operating loss.................................. (4,587) (5,152) (546) (10,285)
Interest income, net.......................... 1,099 19 -- 1,118
Other expense................................. (80) 525 -- 445
Income tax expense............................ -- -- -- --
------- ------- ------- -------
Net loss........................................ (3,568) (4,608) (546) (8,772)
Preferred stock dividends and accretion......... -- (1,127) 1,127(4) --
------- ------- ------- -------
Net loss attributable to common stockholders.... $(3,568) $(5,735) $ 581 $(8,772)
======= ======= ======= =======
Basic and diluted net loss per share............ $ (0.25) $ (0.73) $ (0.46)(3)
======= ======= =======
Basic and diluted weighted average shares
outstanding................................... 14,060 7,883 18,910(3)
======= ======= =======
</TABLE>
See accompanying Notes to Unaudited Pro Forma Combined Condensed Financial Data.
36
<PAGE> 48
NOTES TO UNAUDITED PRO FORMA
COMBINED CONDENSED FINANCIAL DATA
The unaudited pro forma combined condensed financial data reflect the
Merger of Oncormed into Merger Sub and have been prepared under the purchase
method of accounting. Adjustments reflected in these unaudited pro forma
financial statements include the following:
(1) In connection with the Merger, Gene Logic expects to record a
write-off of acquired in-process research and development of approximately
$35,200,000, which will be recorded when the Merger is consummated. This
amount has not been included in the pro forma combined condensed statements
of operation because it is a nonrecurring charge attributable to the
transaction.
(2) The estimated total purchase price ($39,110,000) includes the
value of the Gene Logic Common Stock to be issued by Gene Logic to the
Oncormed stockholders and transaction costs. No purchase price allocation
has been included for the warrants assumed since their value, calculated
using the Black-Scholes model, is immaterial. In connection with the
purchase, a restructuring liability of $500,000 for employee severance has
been recorded. The excess of the purchase price over the estimated and
tangible and intangible value ($33,650,000, including in-process research
and development) of assets acquired has been preliminarily allocated to
goodwill. It is expected that goodwill will be amortized over 5 years.
(3) Basic and diluted net loss per share have been calculated assuming
the aggregate of 4,849,815 shares issuable in the Merger were outstanding
for all periods. Pro forma net loss per share has been calculated also
assuming the conversion of Gene Logic convertible preferred shares that
automatically converted to Gene Logic Common Stock upon the completion of
Gene Logic's initial public offering using the if-converted method from the
original date of issuance.
(4) Accretion of dividends on the Oncormed Preferred Stock will no
longer be recorded upon the conversion of the Oncormed Preferred Stock into
Oncormed Common Stock.
(5) In the Merger, Gene Logic will issue an aggregate of 4,849,815
shares of Gene Logic Common Stock to the Oncormed stockholders; provided,
however, that in the event that the Closing Price is more than $7.88 per
share, then the total number shares of Gene Logic Common Stock to be issued
shall be equal to $38,204,420 divided by the Closing Price.
(6) Financial advisory fees, legal and accounting expenses, and other
transaction costs of Gene Logic are estimated to be $890,000.
37
<PAGE> 49
THE GENE LOGIC SPECIAL MEETING
DATE, TIME AND PLACE
The Gene Logic Special Meeting will be held at the principal executive
offices of Gene Logic located at 708 Quince Orchard Road, Gaithersburg, Maryland
20878 on Monday, September 28, 1998, at 10:00 a.m., local time.
RECORD DATE AND OUTSTANDING SHARES
Only holders of record of Gene Logic Common Stock at the close of business
on August 17, 1998, the Record Date, are entitled to notice of and to vote at
the Gene Logic Special Meeting. As of the close of business on the Record Date,
there were 14,788,445 shares of Gene Logic Common Stock outstanding and entitled
to vote, held of record by approximately 123 stockholders. Each Gene Logic
stockholder is entitled to one vote for each share of Gene Logic Common Stock
held as of the Record Date.
VOTING OF PROXIES
The Gene Logic proxy accompanying this Prospectus/Joint Proxy Statement is
solicited on behalf of the Gene Logic Board for use at the Gene Logic Special
Meeting and at any adjournment or postponement thereof. Gene Logic stockholders
are requested to complete, date and sign the accompanying proxy and promptly
return it in the accompanying envelope. All proxies that are properly executed
and returned, and that are not revoked, will be voted at the Gene Logic Special
Meeting in accordance with the instructions indicated on the proxies or, if no
direction is indicated, FOR the Merger Proposal, as unanimously recommended by
the Gene Logic Board as indicated herein. The Gene Logic Board is not currently
aware of any business to be brought before the Gene Logic Special Meeting other
than the Merger Proposal referred to in this Prospectus/Joint Proxy Statement
and specified in the accompanying notice of the Gene Logic Special Meeting. As
to any other business that may properly come before the Gene Logic Special
Meeting, it is intended that proxies, in the form enclosed, will be voted in
respect thereof in accordance with the judgment of the persons voting such
proxies.
REVOCABILITY OF PROXIES
A Gene Logic stockholder who has executed and returned a proxy may revoke
it at any time before it is voted at the Gene Logic Special Meeting by (i)
executing and returning a proxy bearing a later date prior to the vote at the
Gene Logic Special Meeting, (ii) delivering written notice (by any means
including facsimile) of such revocation with the Corporate Secretary of Gene
Logic stating that the proxy is revoked or (iii) attending the Gene Logic
Special Meeting and voting in person (although attendance at the Gene Logic
Special Meeting will not, by itself, revoke a proxy). All written notices of
revocation and other communications with respect to revocation of Gene Logic
proxies should be addressed to: Gene Logic Inc., 708 Quince Orchard Road,
Gaithersburg, Maryland 20878, Attention: Corporate Secretary.
VOTE REQUIRED
Approval of the Merger Proposal requires the affirmative vote of the
holders of a majority of the outstanding shares of Gene Logic Common Stock
entitled to vote on the Record Date. Each stockholder of record of Gene Logic
Common Stock on the Record Date is entitled to cast one vote per share,
exercisable in person or by properly executed proxy, on each matter properly
submitted for the vote of the stockholders of Gene Logic at the Gene Logic
Special Meeting. As a group, all directors and executive officers of Gene Logic
and their respective affiliates beneficially owned 4,160,043 shares, or
approximately 28.1% of the Gene Logic Common Stock outstanding on the Record
Date.
QUORUM; ABSTENTIONS AND BROKER NON-VOTES
The presence, in person or by properly executed proxy, of the holders of a
majority of the outstanding shares of Gene Logic Common Stock entitled to vote
at the Gene Logic Special Meeting is necessary to
38
<PAGE> 50
constitute a quorum for the transaction of business at the Gene Logic Special
Meeting. Abstentions and broker non-votes will each be included in determining
whether a quorum is present and each will have the same effect as a vote against
the Merger Proposal.
SOLICITATION OF PROXIES AND EXPENSES
Gene Logic and Oncormed will share equally the fees and costs, except
attorneys' and accountants' fees, of filing and printing this Prospectus/Joint
Proxy Statement. Gene Logic will bear all attorneys' and accountants' fees
incurred by Gene Logic in connection with filing and printing this
Prospectus/Joint Proxy Statement and the entire fees and costs incurred in the
mailing of this Prospectus/Joint Proxy Statement, proxy and any additional
information furnished to Gene Logic's stockholders. Copies of the solicitation
materials will be furnished to banks, brokerage houses, fiduciaries and
custodians holding in their names shares of Gene Logic Common Stock beneficially
owned by others to forward to such beneficial owners. Gene Logic may reimburse
persons representing beneficial owners of Gene Logic Common Stock for their
costs of forwarding solicitation materials to such beneficial owners. Original
solicitation of proxies by mail may be supplemented by telephone, facsimile or
personal solicitation by directors, officers or other employees of Gene Logic.
No additional compensation will be paid to such persons for such solicitation
services.
BOARD RECOMMENDATION
THE GENE LOGIC BOARD BELIEVES THAT THE MERGER IS IN THE BEST INTERESTS OF
GENE LOGIC AND ITS STOCKHOLDERS. THE GENE LOGIC BOARD UNANIMOUSLY RECOMMENDS A
VOTE FOR APPROVAL OF THE MERGER PROPOSAL BY THE GENE LOGIC STOCKHOLDERS.
39
<PAGE> 51
THE ONCORMED SPECIAL MEETING
DATE, TIME AND PLACE
The Oncormed Special Meeting will be held at the principal executive
offices of Oncormed located at 205 Perry Parkway, Gaithersburg, Maryland 20877
on Monday, September 28, 1998, at 10:00 a.m., local time.
RECORD DATE AND OUTSTANDING SHARES
Only holders of record of Oncormed Common Stock at the close of business on
August 17, 1998, the Record Date, are entitled to notice of and to vote at the
Oncormed Special Meeting. As of the close of business on the Record Date, there
were 8,177,686 shares of Oncormed Common Stock outstanding and entitled to vote,
held of record by approximately 51 stockholders. Each Oncormed stockholder is
entitled to one vote for each share of Oncormed Common Stock held as of the
Record Date.
VOTING OF PROXIES
The Oncormed proxy accompanying this Prospectus/Joint Proxy Statement is
solicited on behalf of the Oncormed Board for use at the Oncormed Special
Meeting and at any adjournment or postponement thereof. Oncormed stockholders
are requested to complete, date and sign the accompanying proxy and promptly
return it in the accompanying envelope. All proxies that are properly executed
and returned, and that are not revoked, will be voted at the Oncormed Special
Meeting in accordance with the instructions indicated on the proxies or, if no
direction is indicated, FOR the Merger Proposal, as unanimously recommended by
the Oncormed Board as indicated herein. The Oncormed Board is not currently
aware of any business to be brought before the Oncormed Special Meeting other
than the Merger Proposal referred to in this Prospectus/Joint Proxy Statement
and specified in the accompanying notice of the Oncormed Special Meeting. As to
any other business that may properly come before the Oncormed Special Meeting,
it is intended that proxies, in the form enclosed, will be voted in respect
thereof in accordance with the judgment of the persons voting such proxies.
REVOCABILITY OF PROXIES
Any Oncormed stockholder, other than a Voting Agreement Stockholder, who
has executed and returned a proxy may revoke it at any time before it is voted
at the Oncormed Special Meeting by (i) executing and returning a proxy bearing a
later date prior to the vote at the Oncormed Special Meeting, (ii) delivering
written notice (by any means including facsimile) of such revocation with the
Corporate Secretary of Oncormed stating that the proxy is revoked or (iii)
attending the Oncormed Special Meeting and voting in person (although attendance
at the Oncormed Special Meeting will not, by itself, revoke a proxy). The Voting
Agreement Stockholders, who together hold in the aggregate 3,336,902 shares of
Oncormed Common Stock, or approximately 40.8% of the Oncormed Common Stock
outstanding on the Record Date, have agreed to vote and have granted irrevocable
proxies to Gene Logic to vote all of the shares of Oncormed Common Stock over
which such persons have voting power or control on the Record Date in favor of
the Merger Proposal. All written notices of revocation and other communications
with respect to revocation of Oncormed proxies should be addressed to: Oncormed,
Inc., 205 Perry Parkway, Gaithersburg, Maryland 20877, Attention: Corporate
Secretary.
VOTE REQUIRED
Approval of the Merger Proposal requires the affirmative vote of the
holders of a majority of the outstanding shares of Oncormed Common Stock
entitled to vote on the Record Date. Each stockholder of record of Oncormed
Common Stock on the Record Date is entitled to cast one vote per share,
exercisable in person or by properly executed proxy, on each matter properly
submitted for the vote of the stockholders of Oncormed at the Oncormed Special
Meeting. The Voting Agreement Stockholders, who together hold in the aggregate
3,336,902 shares of Oncormed Common Stock, or approximately 40.8% of the
Oncormed Common Stock outstanding on the Record Date, have agreed to vote and
have granted irrevocable proxies to
40
<PAGE> 52
Gene Logic to vote all of the shares of Oncormed Common Stock over which such
persons have voting power or control on the Record Date in favor of the Merger
Proposal. See "The Merger and Related Transactions -- Related Agreements and
Interests of Certain Persons in the Merger -- Voting Agreements."
QUORUM; ABSTENTIONS AND BROKER NON-VOTES
The presence, in person or by properly executed proxy, of the holders of a
majority of the outstanding shares of Oncormed Common Stock entitled to vote at
the Oncormed Special Meeting is necessary to constitute a quorum for the
transaction of business at the Oncormed Special Meeting. Abstentions and broker
non-votes will each be included in determining whether a quorum is present and
each will have the same effect as a negative vote against the Merger Proposal.
SOLICITATION OF PROXIES AND EXPENSES
Gene Logic and Oncormed will share equally the fees and costs, except
attorneys' and accountants' fees, of filing and printing this Prospectus/Joint
Proxy Statement. Oncormed will bear all attorneys' and accountant's fees
incurred by Oncormed in connection with the filing and printing this
Prospectus/Joint Proxy Statement. Oncormed will bear all costs incurred in the
mailing of this Prospectus/Joint Proxy Statement, proxy and any additional
information furnished to its stockholders and the solicitation of proxies in
connection with the Oncormed Special Meeting. Copies of the solicitation
materials will be furnished to banks, brokerage houses, fiduciaries and
custodians holding in their names shares of Oncormed Common Stock beneficially
owned by others to forward to such beneficial owners. Oncormed may reimburse
persons representing beneficial owners of Oncormed Common Stock for their costs
of forwarding solicitation materials to such beneficial owners. Original
solicitation of proxies by mail may be supplemented by telephone, facsimile or
personal solicitation by directors, officers or other employees of Oncormed. No
additional compensation will be paid to such persons for such solicitation
services.
BOARD RECOMMENDATION
THE ONCORMED BOARD BELIEVES THAT THE MERGER IS IN THE BEST INTERESTS OF
ONCORMED AND ITS STOCKHOLDERS. THE ONCORMED BOARD UNANIMOUSLY RECOMMENDS A VOTE
FOR APPROVAL OF THE MERGER PROPOSAL BY THE ONCORMED STOCKHOLDERS.
41
<PAGE> 53
THE MERGER AND RELATED TRANSACTIONS
This Prospectus/Joint Proxy Statement contains forward-looking statements
that involve risks and uncertainties, including, among others, statements as to
the benefits expected to be realized as a result of the Merger, future financial
performance of the combined company (referring to Gene Logic and Merger Sub,
assuming the merger of Oncormed with and into Merger Sub in the Merger), the
analysis performed by the financial advisors to Gene Logic and Oncormed, the
timing of availability of products under development, the ability to
commercialize products developed under collaborations and alliances, the
performance and utility of the combined company's products and services, and the
adequacy of capital resources. The combined company's actual results may differ
materially from those anticipated in these forward-looking statements as a
result of risks and uncertainties, including those set forth in the section
entitled "Risk Factors" and elsewhere in this Prospectus/Joint Proxy Statement.
Stockholders of each of Gene Logic and Oncormed are urged to consider carefully
the discussion of such risks and uncertainties in determining whether or not to
vote for the Merger Proposal and are cautioned not to place undue reliance on
the forward-looking statements contained in this Prospectus/Joint Proxy
Statement, which speak only as of the date hereof. Neither Gene Logic nor
Oncormed undertakes any obligations to release publicly any revisions to such
forward-looking statements which may be made to reflect events or circumstances
occurring after the date hereof. See "-- Gene Logic's Reasons for the Merger,"
"-- Gene Logic Board Recommendation," "-- Opinion of ING Baring Furman Selz
LLC," "-- Oncormed's Reasons for the Merger," "-- Oncormed Board
Recommendation," "-- Opinion of Hambrecht & Quist LLC," "Gene Logic Business"
and "Oncormed Business." There are a number of important factors that could
cause actual results to differ materially from those indicated by such forward-
looking statements including, those set forth in this Prospectus/Joint Proxy
Statement under "Risk Factors."
The discussion in this Prospectus/Joint Proxy Statement relating to the
Merger, the Merger Agreement and the related agreements and transactions
contemplated thereby are subject to and qualified in their entirety by reference
to the Merger Agreement and related agreements, copies of which are either
attached hereto as Appendices or incorporated herein by reference. All Gene
Logic and Oncormed stockholders are urged to read the Merger Agreement in its
entirety, including the Appendices hereto and all documents incorporated herein
by reference.
GENERAL
The Merger will be consummated following the approval of the Merger
Proposal by the Gene Logic stockholders and the Oncormed stockholders and upon
the satisfaction or waiver of all other conditions to consummation of the Merger
(the "Closing Date"). The Merger will become effective at the time of filing of
a properly executed certificate of merger with the office of the Secretary of
State of the State of Delaware. At the Effective Time, Oncormed will be merged
with and into Merger Sub, a newly formed Delaware corporation and wholly owned
subsidiary of Gene Logic, whereby Oncormed will cease to exist and Merger Sub
will be the surviving corporation and a wholly owned subsidiary of Gene Logic.
As described below, the stockholders of Oncormed will become stockholders of
Gene Logic, and their rights will be governed by the Gene Logic Certificate and
the Gene Logic By-laws. See "Comparison of Rights of Holders of Gene Logic
Common Stock and Holders of Oncormed Common Stock."
There will be no change in the current Board of Directors and executive
officers of Gene Logic as a result of the Merger, except that Dr. Douglas
Dolginow, currently the President and Chief Operating Officer of Oncormed, will
become a Senior Vice President of Gene Logic. In addition, Dr. Timothy Triche,
the current Chief Executive Officer and Chairman of the Board of Oncormed, will
provide consulting services to Gene Logic. The Board of Directors and executive
officers of Merger Sub (as the surviving corporation) prior to the Effective
Time will continue to serve in the same positions with Merger Sub after the
Effective Time. The directors of Merger Sub are Drs. Michael J. Brennan and Alan
G. Walton and the executive officers of Merger Sub are Dr. Michael J. Brennan,
President and Chief Executive Officer and Mark D. Gessler, Chief Financial
Officer and Secretary. See "-- Related Agreements and Interests of Certain
Persons in the Merger -- Employment, Consulting and Separation Agreements" for a
discussion of the terms of the employment agreement with Dr. Dolginow and the
consulting agreement with Dr. Triche.
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MERGER CONSIDERATION; CONVERSION OF SHARES
Merger Consideration. In the Merger, Gene Logic will issue an aggregate of
4,849,815 shares of Gene Logic Common Stock to the Oncormed stockholders (the
"Total Merger Shares"); provided however, that in the event that the Closing
Price is more than $7.88 per share, then the Total Merger Shares shall be
reduced to a number of shares of Gene Logic Common Stock equal to $38,204,420
divided by the Closing Price; provided, further that in the event the Closing
Price of Gene Logic Common Stock is less than $6.34 per share, Oncormed may
terminate the Merger Agreement in accordance with its terms. At August 17, 1998,
the closing sales price of a share of Gene Logic Common Stock as reported on the
Nasdaq NMS was $6.25 and the closing sales price of a share of Oncormed Common
Stock as reported on the AMEX was $2.125.
Exchange Ratio. As a result of the Merger, each share of Oncormed Common
Stock outstanding immediately prior to the Effective Time will be converted into
the right to receive in exchange therefor that fraction of a share of Gene Logic
Common Stock equal to the Exchange Ratio. The Exchange Ratio will be determined
by dividing the Total Merger Shares by the number of shares of Oncormed Common
Stock outstanding immediately prior to the Effective Time (including all shares
of Oncormed Common Stock issuable upon conversion of all of the shares of
Oncormed Preferred Stock outstanding immediately prior to the Effective Time).
If the outstanding shares of Gene Logic Common Stock on the one hand or Oncormed
Common Stock or Oncormed Preferred Stock on the other hand, are changed into a
different number or class of shares by reason of any dividend or
recapitalization of the parties, then the Total Merger Shares or the Exchange
Ratio, respectively would be appropriately adjusted.
Oncormed Common Stock Outstanding Immediately Prior to the Effective
Time. As a result of the Merger, each share of Oncormed Common Stock outstanding
immediately prior to the Effective Time will be converted into the right to
receive in exchange therefor that fraction of a share of Gene Logic Common Stock
equal to the Exchange Ratio. The Exchange Ratio will be determined by dividing
the Total Merger Shares by the Outstanding Oncormed Common Stock. See "-- Merger
Consideration" and "-- Exchange Ratio" for a discussion of those factors which
may affect the number of Total Merger Shares to be issued in connection with the
Merger.
Solely for purposes of determining an Exchange Ratio for use throughout
this Prospectus/Joint Proxy Statement, it is assumed that the Outstanding
Oncormed Common Stock shall equal 10,438,781 shares of Oncormed Common Stock,
consisting of (i) an aggregate of 7,887,300 shares of Oncormed Common Stock
which were issued and outstanding as of July 6, 1998 (the date of the Merger
Agreement); (ii) an aggregate of 1,574,915 shares of Oncormed Common Stock
issued or issuable upon conversion of the Oncormed Preferred Stock, which
conversion is to be effected prior to the Effective Time; (iii) an aggregate of
60,205 shares of Oncormed Common Stock issued or issuable to the holders of
Oncormed Preferred Stock upon conversion of the Oncormed Preferred Stock in
consideration of dividends accrued on the Oncormed Preferred Stock at the time
of such conversions, assuming all outstanding shares of Oncormed Preferred Stock
were converted into Oncormed Common Stock on October 31, 1998 (the "Dividend
Shares"); (iv) an aggregate of 825,642 shares of Oncormed Common Stock issued or
issuable to the holders of certain outstanding options to purchase Oncormed
Common Stock, which options shall terminate to the extent not exercised on or
prior to the Effective Time; and (v) an aggregate of 90,719 shares of Oncormed
Common Stock issued or issuable to Incyte upon the exercise of the options set
forth in clause (iv) hereof. However, the Outstanding Oncormed Common Stock may
be greater or less than the number of shares set forth above based on a number
of factors, including (i) the number of shares of Oncormed Common Stock which
may be issued upon the exercise of any warrants to acquire Oncormed Common Stock
prior to the Effective Time; (ii) the timing of the actual conversion of shares
of Oncormed Preferred Stock into Oncormed Common Stock and the price of the
Oncormed Common Stock at such time for purposes of determining the aggregate
number of Dividend Shares issuable; (iii) the number of shares of Oncormed
Common Stock actually issued upon the exercise of outstanding options to
purchase Oncormed Common Stock; and (iv) the number of shares of Oncormed Common
Stock actually issued to Incyte upon the exercise of the options set forth in
clause (iv) of the immediately preceding sentence. Accordingly, there can be no
assurance as to the actual capitalization of Oncormed as of the Effective Time.
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Assuming therefore, for purposes of this Prospectus/Joint Proxy Statement,
that (i) the Total Merger Shares shall equal 4,849,815 shares of Gene Logic
Common Stock, and (ii) the Outstanding Oncormed Common Stock shall equal
10,438,781 shares of Oncormed Common Stock (as more fully described in the
following paragraph), then the Assumed Exchange Ratio would equal .4646.
However, for the reasons set forth above and throughout this Prospectus/Joint
Proxy Statement, there can be no assurance as to the actual capitalization of
Gene Logic or Oncormed as of the Effective Time or of Gene Logic at any time
following the Effective Time. Accordingly, at the Effective Time, the actual
Exchange Ratio may be greater or less than the Assumed Exchange Ratio.
Fractional Shares. No fractional shares of Gene Logic Common Stock will be
issued in the Merger. Instead, each Oncormed stockholder who would otherwise be
entitled to a fractional share of Gene Logic Common Stock will receive an amount
of cash equal to the closing sales price of a share of Gene Logic Common Stock
on the Closing Date multiplied by the fraction of a share of Gene Logic Common
Stock to which the Oncormed stockholder would otherwise be entitled. Gene Logic
expects to use its current cash resources to fund the payments for fractional
shares.
Treatment of Oncormed Warrants. As a result of the Merger, Gene Logic will
assume warrants to purchase approximately 1,088,896 shares of Oncormed Common
Stock outstanding as of the close of business on the Record Date. Each such
warrant will be deemed to constitute a warrant to acquire, on the same terms and
conditions as were applicable to such warrant as of the Effective Time, that
whole number of shares of Gene Logic Common Stock to which that holder of such
warrant would have been entitled to receive pursuant to the Merger had such
warrant been exercised in full prior to the Effective Time, at a price per share
equal to the exercise price per share under such warrant divided by the Exchange
Ratio. Following the Merger, an aggregate of approximately 505,898 shares of
Gene Logic Common Stock will be issuable upon exercise of such warrants based on
the Assumed Exchange Ratio. See "-- Related Agreements and Interests of Certain
Persons in the Merger -- Warrants."
Treatment of Oncormed Convertible Note. Upon consummation of the Merger,
and in connection with the termination of certain license agreements between
Oncor and Oncormed, an outstanding note payable by Oncormed to Oncor in the
principal amount of $715,751, will be cancelled upon payment to Oncor of an
aggregate amount of $500,000, $250,000 of which Oncormed paid to Oncor on
September 14, 1998. Notwithstanding the foregoing, if such Merger is not
consummated by December 31, 1998, the remaining principal due and owing to Oncor
under the Oncormed Note shall be $357,875.50, which amount shall be repaid to
Oncor in accordance with the terms of the Oncormed Note. See "-- Related
Agreements and Interests of Certain Persons in the Merger -- Convertible Note."
Treatment of Oncormed Stock Options. By their terms, the vesting of all
outstanding options to acquire Oncormed Common Stock will accelerate and become
fully exercisable prior to the Effective Time and, if not exercised prior to the
Effective Time, will terminate and cease to remain outstanding. Under the terms
of the Merger Agreement, Gene Logic will not assume any Oncormed stock options,
and the holders of Oncormed stock options that choose not to exercise such
options prior to the Effective Time will not be entitled to receive any shares
of Gene Logic Common Stock in the Merger.
Treatment of Oncormed Preferred Stock. Pursuant to agreements dated July 2,
1998 between Oncormed and all of the holders of Oncormed Preferred Stock (the
"Preferred Holders"), the Preferred Holders have agreed to convert their
respective shares of Oncormed Preferred Stock into Oncormed Common Stock prior
to the Effective Time at a conversion price of $2.1144 per share of Oncormed
Common Stock. As a result, an aggregate of 1,574,915 shares of Oncormed Common
Stock are issuable upon conversion of the Oncormed Preferred Stock. In addition,
upon conversion of the Oncormed Preferred Stock into Oncormed Common Stock, the
Preferred Holders have a right to receive shares of Oncormed Common Stock as
payment for dividends then accrued on the Oncormed Preferred Stock. The Oncormed
Preferred Stock accrues dividends at the rate of 6% per annum. The aggregate
number of shares of Oncormed Common Stock issuable to the Preferred Holders as
payment for accrued dividends on the Oncormed Preferred Stock will be based upon
the timing of the conversion of the Oncormed Preferred Stock and the price of
Oncormed Common Stock on the trading day immediately prior to such conversion.
Accordingly, the number of Dividend Shares utilized in the
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Assumed Exchange Ratio calculation may be greater or less than the actual number
of Dividend Shares issued by Oncormed.
Stock Ownership Following the Merger. Based upon the capitalization of
Gene Logic as of the close of business on the Record Date, and assuming the
issuance of an aggregate of 4,849,815 shares of Gene Logic Common Stock to the
Oncormed stockholders in the Merger, the former holders of Oncormed Common Stock
(assuming the automatic conversion of all Oncormed Preferred Stock into Oncormed
Common Stock immediately prior to the Effective Time) outstanding as of the
close of business on the Record Date, would, in the aggregate, hold, and have
voting power with respect to, approximately 24.7% of the outstanding Gene Logic
Common Stock immediately following the Merger. The foregoing numbers of shares
and percentages do not reflect the exercise of any options or warrants to
acquire Oncormed Common Stock that may be exercised during the period between
the Record Date and the Effective Time, or the number of shares of Oncormed
Common Stock issuable as dividends upon the conversion of the Oncormed Preferred
Stock, and there can be no assurance as to the actual capitalization of Gene
Logic or Oncormed as of the Effective Time or of Gene Logic at any time
following the Effective Time.
Surrender of Certificates. As soon as practicable after the Effective
Time, Gene Logic, acting through its exchange agent, will mail to each holder of
record of Oncormed Common Stock (including holders of shares of Oncormed
Preferred Stock automatically converted into Oncormed Common Stock immediately
prior to the Effective Time) as of the Effective Time a letter of transmittal
and instructions to be used by such holder in surrendering their certificate or
certificates representing shares of Oncormed Common Stock in exchange for a
certificate or certificates representing shares of Gene Logic Common Stock. If
any certificate representing shares of Oncormed Common Stock has been lost,
stolen or destroyed, Gene Logic may require the owner of such lost, stolen or
destroyed certificate to provide an appropriate affidavit and to deliver a bond
(in such sum as Gene Logic may reasonably direct) as indemnity against any claim
that may be made against Gene Logic, its exchange agent or the surviving
corporation. CERTIFICATES REPRESENTING SHARES OF ONCORMED COMMON STOCK SHOULD
NOT BE SURRENDERED BY ONCORMED STOCKHOLDERS UNTIL SUCH HOLDERS RECEIVE THE
LETTER OF TRANSMITTAL FROM THE EXCHANGE AGENT, AND THEN ONLY IN ACCORDANCE WITH
THE TERMS OF SUCH LETTER.
BACKGROUND OF THE MERGER
An element of Gene Logic's corporate growth strategy has been the
consideration and consummation of technology or business acquisitions that
complement or expand Gene Logic's existing business. Gene Logic and Oncormed
both use genomics technologies to facilitate the discovery and development of
drugs and other life science products.
Between November 25, 1996 and September 15, 1997, Dr. Michael Brennan and
Mr. Mark Gessler, the President and Chief Executive Officer and the Senior Vice
President, Corporate Development and Chief Financial Officer, respectively, of
Gene Logic and Drs. Timothy Triche and Douglas Dolginow, the Chairman of the
Board and Chief Executive Officer and the President and Chief Operating Officer,
respectively, of Oncormed, met several times to discuss potential collaborations
between the two companies on various aspects of drug development and discovery.
At such meetings, each of the parties exchanged with the other certain
information about their respective technologies, business operations, financial
conditions and other related matters. The parties discussed, among other things,
various options that would provide each company access to the other's
proprietary technology for use in furthering their drug discovery and
development efforts. In addition, the parties discussed the impact of the recent
collaboration entered into between Oncormed and Incyte and on the ability of
Gene Logic to use certain of Oncormed's technologies. During this period, Drs.
Triche and Dolginow presented to Dr. Brennan and Mr. Gessler a draft proposal
for a scientific collaboration between Oncormed and Gene Logic.
On January 13, 1998, Drs. Brennan, Triche and Dolginow, Mr. L. Robert
Johnston, Jr., Oncormed's Senior Vice President and Chief Financial Officer, and
Mr. Gessler met to review the proposal for a scientific collaboration between
the two companies. At this meeting, the parties commenced discussions concerning
a
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possible strategic acquisition of Oncormed by Gene Logic. As part of such
discussions, the parties presented general overviews of their respective
businesses, strategic direction, products, services, market presence, financial
performance and management personnel.
On January 17, 1998, Drs. Brennan and Triche and Messrs. Gessler and
Johnston held further discussions regarding a potential strategic acquisition of
Oncormed by Gene Logic. Thereafter, on January 20, 1998, Drs. Triche and
Dolginow met at the offices of Oncormed with Dr. Brennan, Mr. Gessler and Drs.
Keith O. Elliston and Gregory G. Lennon, Gene Logic's Senior Vice President and
Chief Scientific Officer and Vice President, Genomics Research, respectively, to
explore in greater detail the complementary nature of the parties' respective
proprietary technologies and to discuss the availability to Gene Logic of
certain tissue samples held in Oncormed's biorepository. In addition, the
parties discussed the potential benefits of a combination of the two companies,
including discussions concerning potential cost savings and revenue enhancement
opportunities.
On February 9 and 12, 1998, senior executives from both companies met at
the offices of Oncormed to begin due diligence discussions with respect to a
potential strategic acquisition of Oncormed by Gene Logic. After conducting due
diligence interviews with senior management of Oncormed, Gene Logic determined
that, as a result of certain financial issues, including the pendency of a
financing transaction in which Oncormed was engaged, discussions relating to a
potential acquisition of Oncormed were terminated. However, the parties agreed
to resume discussions regarding a potential collaborative arrangement later in
March 1998.
In March 1998, Oncormed formally engaged Hambrecht & Quist to consider
strategic transactions between Oncormed and companies with complementary
technologies, as well as to explore other strategic alternatives pursuant to the
terms of a letter agreement. In March 1998, members of Oncormed's senior
management met with representatives of Hambrecht & Quist to discuss Oncormed's
business activities, including services and technology, sales and marketing,
organizational and personnel matters, financial performance and market
performance. Possible strategic partners were also discussed based on strategic
imperative and business fit with Oncormed, proclivity for acquisitions and the
availability of cash or liquid stock. Hambrecht & Quist pursued the initiation
of discussions with companies within the pharmaceutical or biotechnology
industry that Oncormed and Hambrecht & Quist believed would have an interest in
pursuing a strategic combination. A number of potential partners was contacted
by Hambrecht & Quist, and several conversations between representatives of
Hambrecht & Quist, Oncormed and such parties ensued. Following these
discussions, Oncormed determined that a strategic transaction with any of such
parties would not be in the best interests of Oncormed's stockholders.
Thereafter, discussions between Oncormed and such parties concerning a strategic
acquisition transaction ceased.
On April 7, 1998 Mr. Dennis Purcell of Hambrecht & Quist had a meeting with
Mr. Charles Dimmler, a director of Gene Logic, at which time Mr. Purcell
outlined the potential merits of an acquisition of Oncormed by Gene Logic.
On April 9, 1998, Mr. Purcell had a telephone conversation with Dr.
Brennan, Mr. Gessler and Mr. Dimmler, at which time Mr. Purcell further outlined
the potential merits of an acquisition of Oncormed by Gene Logic.
On May 20, 1998, Dr. Dolginow again met with Dr. Brennan and Mr. Gessler to
review the status of discussions between the companies regarding a potential
collaborative arrangement. Messrs. Gill Sawhney and Marshall Smith of ING Baring
Furman Selz were present at such meeting. At this meeting, the parties resumed
discussions regarding a potential strategic acquisition of Oncormed by Gene
Logic. In the interval since the parties' meeting on February 12, Oncormed had
completed a private placement of Oncormed Preferred Stock. Consequently, Gene
Logic management believed it was appropriate to resume conversations regarding a
strategic acquisition of Oncormed by Gene Logic.
After the May 20, 1998 meeting, Dr. Brennan informed certain members of the
Gene Logic Board of the preliminary discussions between Gene Logic and Oncormed
regarding a potential strategic acquisition. Thereafter, from time to time, the
members of the Gene Logic Board were informally advised of the progress of the
discussions with Oncormed.
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On May 26, 1998, the Gene Logic Board held a telephonic meeting, in which
all of the directors participated, to discuss the merits of the potential
acquisition of Oncormed. At this meeting, the Gene Logic Board expressed its
support for the transaction and authorized Gene Logic management to proceed with
the negotiation of the terms of the transaction. The Gene Logic Board approved a
management proposal to engage the investment banking firm of ING Baring Furman
Selz to serve as Gene Logic's financial advisors and authorized the officers of
Gene Logic to proceed with discussions with Oncormed. The same day, Dr. Dolginow
met with Dr. Lennon, recently promoted to Senior Vice President, Research and
Development and Chief Scientific Officer of Gene Logic, to discuss operational
issues and the reorganization of research efforts in the event a business
combination were to take place between the two companies.
On May 27, 1998, the Oncormed Board held a telephonic meeting, in which all
of the directors of Oncormed, other than Mr. John W. Colloton, participated. In
addition, representatives of Brobeck, Oncormed's legal counsel, attended by
invitation. The purpose of the meeting was to discuss the potential strategic
acquisition of Oncormed by Gene Logic and alternative strategic arrangements
under consideration. The Oncormed Board authorized officers of Oncormed to
continue their discussions with Gene Logic and instructed such officers to
direct Hambrecht & Quist to seek various alternative strategic arrangements.
On June 1, June 2 and June 3, 1998, Drs. Triche and Dolginow and Mr.
Johnston met with Dr. Brennan or Mr. Gessler or both, either in person or by
telephone, to discuss the terms under which Gene Logic would propose to acquire
Oncormed. On June 3, 1998, following review and approval by the Gene Logic
Board, Mr. Gessler delivered a proposed term sheet to Dr. Triche for Oncormed's
consideration.
On June 4, 1998, the Oncormed Board held a meeting, with all of the members
of the Oncormed Board present and Messrs. Purcell and Michael Gaito of Hambrecht
& Quist, in person or telephonically, to hear a presentation by Dr. Brennan and
to consider the material provisions of the proposed term sheet prepared by Gene
Logic. Mr. Gessler and representatives of ING Baring Furman Selz were also
present at such meeting. In discussing the term sheet, the Oncormed Board
queried Dr. Brennan on the proposal. After responding to all queries, Dr.
Brennan, Mr. Gessler and the representatives of ING Baring Furman Selz retired
from the meeting. The Oncormed Board then reviewed various alternative
strategies for Oncormed and its long term prospects. The relative merits of an
independent financing versus acquisition were considered, and the proposed
acquisition of Oncormed by Gene Logic versus other potential partners was
discussed. After due consideration, with concurrence of Hambrecht & Quist, the
Oncormed Board decided to pursue the Gene Logic proposal.
On June 5, 1998, Drs. Triche and Dolginow advised Dr. Brennan that the
Oncormed Board had authorized Dr. Triche to negotiate the terms of a definitive
merger agreement based upon the terms that had been presented to the Oncormed
Board.
Also on June 5, 1998, the Gene Logic Board held a regularly-scheduled
meeting, which was attended by all directors, at its principal offices. The
proposed acquisition was discussed fully.
On June 11, 1998, Drs. Triche and Dolginow and Mr. Johnston met with
Messrs. Purcell and Pollack of Hambrecht & Quist, Oncormed's financial advisors.
Dr. Triche reviewed with Messrs. Purcell and Pollack the material terms of the
proposed acquisition of Oncormed by Gene Logic. Discussions also focused on
alternative potential strategic transactions and equity financings available to
Oncormed. Thereafter, Drs. Triche and Dolginow and Mr. Johnston and Dr. Brennan
and Mr. Gessler, together with representatives from Hambrecht & Quist and ING
Baring Furman Selz, met and agreed upon the principle financial terms of the
acquisition of Oncormed by Gene Logic.
On June 12, 1998, the Gene Logic Board held a telephonic meeting in which
all directors participated to discuss how best to structure the consideration to
be paid to the stockholders of Oncormed in connection with the Merger. Also in
attendance were Mr. Gessler, representatives of Cooley Godward, Gene Logic's
legal counsel, and representatives of ING Baring Furman Selz. Mr. Sawhney
reviewed for the Gene Logic Board various alternative structures aimed at
minimizing market risk and dilution to the existing stockholders of Gene Logic
in connection with the proposed business combination. The Gene Logic Board
considered various alternatives, including proposing a fixed exchange ratio, a
fixed price and other protections such as maximum
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and minimum price protections. The Gene Logic Board authorized the officers of
Gene Logic to proceed with negotiations with Oncormed.
On June 12, 1998, the Oncormed Board held a telephonic meeting, in which
all of the directors of Oncormed participated. In addition, representatives of
Brobeck, Oncormed's legal counsel, attended by invitation. The purpose of the
meeting was to discuss the proposed terms of the potential acquisition of
Oncormed by Gene Logic, including discussions concerning the structure of the
transaction , the nature of any proposed fixed exchange ratio, the nature of any
proposed maximum and minimum price protections, the nature of the consideration
payable to Oncormed stockholders, and the impact of the transaction on existing
strategic relationships. Dr. Triche also set forth the status of discussions and
a proposed timetable for negotiating and completing the transaction. The
Oncormed Board authorized the officers of Oncormed to continue their discussions
with Gene Logic, to continue to move forward in drafting a definitive agreement
based on the proposed terms of the potential acquisition of Oncormed by Gene
Logic and to direct Hambrecht & Quist to continue to seek various alternative
strategic arrangements.
On June 17, 1998, Dr. Dolginow and Mr. Johnston met with Mr. Gessler to
negotiate the terms of the definitive merger agreement. Also present at the
meeting were the companies' respective legal counsel. The parties first
discussed certain unresolved issues related to the proposed definitive merger
agreement, including issues related to the scope of employee benefits to be
provided to Oncormed's employees upon consummation of the Merger, break-up fees
and termination provisions and the establishment by Gene Logic of a working
capital credit line in favor of Oncormed to be drawn upon prior to the closing
of the Merger. In addition, the companies engaged in detailed negotiations of
other terms of the definitive merger agreement.
On June 26, 1998, the Oncormed Board held a telephonic meeting in which all
Oncormed Board members participated to discuss further the proposed definitive
merger agreement. The Oncormed Board authorized the officers of Oncormed to
continue their discussions with Gene Logic, to continue to move forward in
drafting a definitive agreement based on the proposed terms of the potential
acquisition of Oncormed by Gene Logic and to direct Hambrecht & Quist to
continue to seek various alternative strategic arrangements. That afternoon, Dr.
Dolginow met with Mr. Gessler to discuss open issues related to the definitive
merger agreement.
On June 29, 1998, Dr. Triche, Mr. Johnston, Mr. Gessler and the respective
companies' legal counsel held a telephonic meeting to resolve open issues with
respect to certain aspects of the proposed definitive merger agreement and to
discuss the relationship between Oncormed and Incyte. In addition, the parties
discussed severance and credit facility issues in connection with the Merger. At
noon that day, Mr. Gessler and other management personnel participated in
several conference calls with members of Oncormed's key management personnel to
discuss open financial, corporate and intellectual property due diligence
issues.
On June 30, 1998, Drs. Triche and Dolginow, Messrs. Johnston and Gessler,
and the respective companies' legal counsel participated in a conference call to
review due diligence matters, including lock-up agreements, voting agreements,
line of credit matters and matters concerning Incyte.
On July 1, 1998, Dr. Dolginow and Mr. Gessler discussed due diligence
matters, including the matters discussed on June 30, 1998 and matters concerning
Oncor. In addition, Dr. Triche contacted Incyte to assess the status of their
waiver and voting agreement.
On July 2, 1998, Dr. Triche and Mr. Johnston met in person and
telephonically with Mr. Gessler throughout the day to negotiate the final terms
of the proposed definitive merger agreement and to discuss certain issues
relating to Oncormed's tissue biorepository, Incyte and Oncor.
On July 2, 1998, the Gene Logic Board held a special meeting via telephone
in which all Gene Logic Board members, other than Mr. Jeffrey D. Sollender,
participated to discuss the final terms of the Merger. Mr. Gessler and
representatives of ING Baring Furman Selz and Cooley Godward also attended the
meeting. At the meeting, Mr. Gessler first reviewed for the Board the material
terms of the definitive merger agreement and certain other documents related to
the Merger, including voting agreements, lock-up agreements, severance and
employment agreements and the credit facility which Gene Logic would establish
in favor of Oncormed concurrent with the signing of the definitive merger
agreement. Copies of the most recent draft of
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the definitive merger agreement and other documents relating to the proposed
acquisition were distributed to the Gene Logic Board prior to the meeting. In
addition, Mr. Gessler advised the Board that the Merger would be accounted for
as a "purchase" for financial reporting purposes and would qualify as a tax-free
reorganization for federal income tax purposes. Next, Mr. Sawhney reviewed for
the Board ING Baring Furman Selz' analysis of the fairness of the proposed
consideration to be paid by Gene Logic for Oncormed, including the scope of the
analysis, various material assumptions made and financial models used in
performing the analysis and the limitations of the analysis. Upon conclusion of
Mr. Sawhney's presentation, he informed the Gene Logic Board that, in the
opinion of ING Baring Furman Selz, the consideration to be paid by Gene Logic to
the stockholders of Oncormed in connection with the Merger was fair, from a
financial point of view, to Gene Logic and its stockholders. By unanimous
approval of the members of the Gene Logic Board present at the meeting, the Gene
Logic Board authorized the officers of Gene Logic to enter into a definitive
merger agreement with Oncormed based upon the terms previously disclosed to the
Gene Logic Board, with such modifications thereto as the officers of Gene Logic
deemed necessary or appropriate and to take certain other actions in connection
with the proposed acquisition of Oncormed.
On July 2, 1998, the Oncormed Board held a special meeting via telephone,
in which all of the directors of Oncormed participated. In addition,
representatives of Brobeck, Oncormed's legal counsel, and Hambrecht & Quist,
Oncormed's financial advisor, attended by invitation. The purpose of the meeting
was to discuss the final terms of the proposed merger of Oncormed with and into
Merger Sub. Copies of the June 29, 1998 draft of the definitive merger agreement
and a draft of Hambrecht & Quist's written opinion were distributed to the
Oncormed Board prior to the meeting. Mr. Pollack first summarized for the
Oncormed Board material proposed terms of the Merger, including the transaction
structure, exchange ratio and tax-free treatment. Representatives of Brobeck
then summarized for the Oncormed Board material proposed terms of the Merger,
including the treatment of stock options, deal protection terms and the break-up
fees payable by Oncormed in the event of certain termination events. Such
representatives also reviewed for the Oncormed Board its fiduciary duties under
Delaware law as directors, including in connection with considering acquisition
proposals from third parties during the period prior to the closing of the
Merger. Next, Messrs. Purcell and Pollack reviewed Hambrecht & Quist's analysis
of the fairness of the proposed consideration to be paid by Gene Logic to the
Oncormed stockholders, including a valuation analysis, financial analysis,
comparison to comparable transactions analysis and other financial information.
Upon conclusion of Mr. Pollack's presentation, he informed the Oncormed Board
that, in the opinion of Hambrecht & Quist, as of July 2, 1998, the consideration
to be received by the holders of Oncormed Common Stock in the Merger was fair to
such holders from a financial point of view. After further deliberations, the
Oncormed Board unanimously determined that it was in the best interests of
Oncormed and its stockholders to enter into the proposed merger. The Oncormed
Board authorized the appropriate officers of Oncormed to enter into a definitive
merger agreement with Gene Logic based upon the terms previously disclosed to
the Oncormed Board, with such changes, deletions, supplements and amendments
thereto as the appropriate officers of Oncormed may deem necessary or advisable.
On July 6, 1998, the parties finalized the Merger Agreement and exchanged
signature pages. The execution of the Merger Agreement was announced on July 7,
1998 by issuance of a press release.
GENE LOGIC'S REASONS FOR THE MERGER
In the course of reaching its decision to approve the Merger Agreement and
the transactions contemplated thereby, the Gene Logic Board consulted with Gene
Logic's management, as well as its financial advisor and legal counsel and
considered a number of factors, including the following:
- The Merger would provide Gene Logic with access to Oncormed's proprietary
technologies and resources and clinical experience, enabling the combined
company to offer an integrated genomics, bioinformatics and
pharmacogenomics platform;
- The Merger would provide Gene Logic with access to Oncormed's
biorepository of tissue samples, assuring the availability of samples
useful for Gene Logic's drug target and drug lead discovery programs;
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- The Merger would provide the combined company with the critical mass and
range of technologies necessary to support key aspects of the drug
discovery and development process and to enable penetration of the
growing market for genomic information and bioinformatics technologies;
- The Merger would enhance Gene Logic's existing collaborative alliances by
adding a portfolio of pharmacogenomics alliances with major
pharmaceutical companies; and
- The Merger could create new business opportunities for the combined
company to accelerate its rate of commercial development and revenue
growth.
In the course of its deliberations, the Gene Logic Board reviewed with
management a number of other factors relevant to the Merger. In particular, the
Gene Logic Board considered, among other things: (i) information concerning Gene
Logic's and Oncormed's respective businesses, prospects, financial performances,
financial conditions and operations; (ii) the presentation made by ING Baring
Furman Selz to the Gene Logic Board and its opinion rendered in connection
therewith (see "-- Opinion of ING Baring Furman Selz LLC"); (iii) an analysis of
the respective contributions to revenues of the combined company; (iv) potential
synergies and alternatives for growth within the combined company; and (v)
reports from management and legal advisors on the results of Gene Logic's due
diligence investigation of Oncormed.
The Gene Logic Board also considered a variety of potentially negative
factors in its deliberations concerning the Merger, including (i) the risk that
the combined company might not achieve revenue equal to the sum of the separate
companies' anticipated revenues; (ii) the charges expected to be incurred in
connection with the Merger, primarily in the third and fourth quarters of 1998,
including transaction costs and costs of integrating the businesses of the
companies, anticipated to be approximately $1.4 million (see "Unaudited Pro
Forma Combined Condensed Financial Data"); (iii) the risk that the combined
company's ability to increase or maintain revenues might be diminished by
intensified competition among providers of similar or related products; (iv) the
possible dilutive effect of the issuance of Gene Logic Common Stock in the
Merger; (v) the risk that other benefits sought to be achieved through the
Merger would not be achieved; and (vi) other risks described above under "Risk
Factors."
Based on the factors described above, the Gene Logic Board determined that
the Merger is fair to and in the best interests of Gene Logic and its
stockholders, approved the Merger Agreement and the transactions contemplated
thereby and recommended that the stockholders of Gene Logic vote for approval of
the Merger Proposal.
The foregoing discussion of the information and factors considered is not
intended to be exhaustive but is believed to include the material factors
considered by the Gene Logic Board. In reaching a determination whether to
approve the Merger, in view of the wide variety of factors considered, the Gene
Logic Board did not find it practicable to quantify or otherwise attempt to
assign any relative or specific weights to the foregoing factors, and individual
directors may have given differing weights to different factors.
GENE LOGIC BOARD RECOMMENDATION
THE BOARD OF DIRECTORS OF GENE LOGIC HAS DETERMINED THAT THE MERGER IS
ADVISABLE AND IN THE BEST INTERESTS OF GENE LOGIC AND ITS STOCKHOLDERS AND HAS
UNANIMOUSLY RECOMMENDED A VOTE FOR APPROVAL OF THE MERGER PROPOSAL.
OPINION OF ING BARING FURMAN SELZ LLC
ING Baring Furman Selz LLC has acted as financial advisor to Gene Logic in
connection with the Merger and in that capacity has been requested by the Gene
Logic Board to render an opinion with respect to the fairness, from a financial
point of view, to Gene Logic and its stockholders of the consideration to be
paid by Gene Logic to the Oncormed stockholders in the Merger.
On July 2, 1998 ING Baring Furman Selz delivered an oral opinion to the
Gene Logic Board followed with a written opinion to the Gene Logic Board dated
July 6, 1998 (the "ING Baring Furman Selz Opinion")
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to the effect that, as of such date and based upon procedures and subject to the
assumptions and limitations set forth in the ING Baring Furman Selz Opinion, the
consideration to be paid by Gene Logic to the Oncormed stockholders pursuant to
the Merger is fair from a financial point of view to Gene Logic and its
stockholders. The full text of the ING Baring Furman Selz Opinion is attached as
Appendix C to this Prospectus/Joint Proxy Statement and is incorporated herein
by reference. Gene Logic stockholders should read the ING Baring Furman Selz
Opinion for a discussion of the assumptions made, matters considered and
limitations on the review undertaken by ING Baring Furman Selz in rendering its
opinion. The summary of the ING Baring Furman Selz Opinion set forth in this
Prospectus/Joint Proxy Statement is qualified in its entirety by reference to
the full text of the ING Baring Furman Selz Opinion.
No limitations were imposed by Gene Logic on the scope of ING Baring Furman
Selz' investigations or the procedures to be followed by ING Baring Furman Selz
in rendering its opinion. ING Baring Furman Selz was not requested to, and did
not, make any recommendation to the Gene Logic Board as to the form or amount of
the consideration to be paid to the Oncormed stockholders which was determined
through arms-length negotiations between the parties. Furthermore, ING Baring
Furman Selz was not requested to opine as to, and the opinion does not address,
Gene Logic's underlying business decision to proceed with or effect the Merger
or constitute a recommendation of the Merger over any alternative transactions
which may be available to Gene Logic. Finally, ING Baring Furman Selz was not
requested to opine as to, and its opinion does not address, the market value of
the shares to be received by the Oncormed stockholders or the price at which the
Gene Logic Common Stock will trade at any time before or after consummation of
the Merger.
In conducting its analysis and arriving at its opinion, ING Baring Furman
Selz, among other things, (i) reviewed the Merger Agreement and certain related
documents and the financial terms set forth therein; (ii) reviewed Oncormed's
Annual Report on Form 10-K for the fiscal year ended December 31, 1997,
Oncormed's Quarterly Report on Form 10-Q for the quarter ended March 31, 1998
and certain other filings with the Commission made by Oncormed; (iii) reviewed
Gene Logic's Annual Report on Form 10-K for the fiscal year ended December 31,
1997, Gene Logic's Quarterly Report on Form 10-Q for the quarter ended March 31,
1998 and certain other filings with the Commission made by Gene Logic; (iv)
reviewed certain other publicly available information concerning Oncormed and
recent historical stock prices and trading volume for Oncormed Common Stock; (v)
reviewed certain other publicly available information concerning Gene Logic and
recent historical stock prices and trading volume for Gene Logic Common Stock;
(vi) reviewed and relied upon, without independent assessment as to its accuracy
or reasonableness, certain non-public information relating to Gene Logic and
Oncormed, including financial forecasts and projections for each, furnished to
ING Baring Furman Selz by Gene Logic and Oncormed, respectively; (vii) reviewed
and relied upon, without independent assessment as to their accuracy or
reasonableness, the pro forma financial projections of the combined company,
prepared and provided to ING Baring Furman Selz jointly by the managements of
Gene Logic and Oncormed; (viii) reviewed certain publicly available information,
including research reports, concerning certain other companies engaged in
businesses which ING Baring Furman Selz believes to be comparable to Gene Logic
and Oncormed and the trading markets for certain of such companies' securities;
(ix) reviewed selected terms of certain recent mergers and acquisitions, which
ING Baring Furman Selz believes to be relevant; (x) conducted discussions with
certain members of senior management of Gene Logic and Oncormed concerning their
respective businesses and operations, assets, present condition and future
prospects; and (xi) performed such other analyses, examinations and procedures,
reviewed such other agreements and documents, and considered such other factors
as ING Baring Furman Selz deemed in its sole judgment to be necessary,
appropriate or relevant to the ING Baring Furman Selz Opinion.
ING Baring Furman Selz assumed and relied upon, without independent
investigation or verification, the accuracy and completeness of the information
reviewed by it for the purposes of its opinion. With respect to the internal
financial projections and other financial and operating data and discussions
relating to the independent businesses of both Gene Logic and Oncormed and to
the strategic, financial and operational benefits anticipated from the Merger
provided by Gene Logic and Oncormed, ING Baring Furman Selz assumed that they
have been reasonably prepared on bases reflecting the best currently available
estimates and judgments of the prospects of Gene Logic and Oncormed,
respectively and jointly. ING Baring Furman Selz
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relied upon, without independent investigation or verification, the assessment
by the managements of Gene Logic and Oncormed of their ability to retain key
employees of both Gene Logic and Oncormed. ING Baring Furman Selz also relied
upon, without independent investigation or verification, the assessment by the
managements of Gene Logic and Oncormed of Gene Logic's and Oncormed's strategic
alliances, technologies and potential future products, and the timing and risks
associated with the integration of Oncormed with Gene Logic.
In arriving at its opinion, ING Baring Furman Selz made limited physical
inspections of the properties and facilities of Oncormed and Gene Logic. ING
Baring Furman Selz has not made any independent valuation or appraisal of any
such properties or facilities, or of the assets, liabilities or technology of
Oncormed or Gene Logic, respectively, nor has ING Baring Furman Selz been
furnished with any such appraisals.
ING Baring Furman Selz assumed the correctness of all legal, tax and
accounting advice given to Gene Logic and Oncormed and that the Merger will be
accounted for as a "purchase" business combination in accordance with U.S.
Generally Accepted Accounting Principles, will be treated as a tax-free
reorganization and exchange pursuant to the Internal Revenue Code of 1986, as
amended, and will be consummated in accordance with the terms set forth in the
Merger Agreement.
ING Baring Furman Selz has taken into account its assessment of general
economic, market and financial conditions as they exist and can be evaluated and
its experience in similar transactions, as well as its experience in securities
valuation in general.
For purposes of rendering its opinion, ING Baring Furman Selz assumed that,
in all respects material to its analysis, the representations and warranties of
Oncormed contained in the Merger Agreement are true and correct and that
Oncormed will perform all of the covenants and agreements to be performed by it
under the Merger Agreement and all conditions to the obligations of Gene Logic
to consummate the Merger will be satisfied without any waiver thereof. ING
Baring Furman Selz also assumed that all material governmental, regulatory or
other approvals and consents required in connection with the consummation of the
Merger will be obtained and that in connection with obtaining any governmental,
regulatory or other approvals or consents, or any amendments, modifications or
waivers to any agreements, instruments or orders to which either Gene Logic or
Oncormed are a party or are subject or by which they are bound, no limitations,
restrictions or conditions will be imposed or amendments, modifications or
waivers made that would have a material adverse effect on Gene Logic or Oncormed
or materially reduce the contemplated benefits of the Merger to Gene Logic.
In connection with the preparation of its opinion, ING Baring Furman Selz
performed a variety of financial and comparative analyses, as described below.
The preparation of a fairness opinion involves various determinations as to the
most appropriate and relevant methods of financial and comparative analysis and
the application of those methods to particular circumstances and therefore such
an opinion is not readily susceptible to summary description. Furthermore, in
arriving at its opinion, ING Baring Furman Selz did not attribute any particular
weight to any analysis or factor considered by it but rather made qualitative
judgments as to the significance and relevance of each analysis or factor.
Accordingly, ING Baring Furman Selz believes that its analyses must be
considered as a whole and that, considering any portion of such analyses and of
the factors considered without considering all analyses and factors could create
a misleading or incomplete view of the process underlying its opinion. In its
analyses, ING Baring Furman Selz made numerous assumptions with respect to
industry performance, general business and economic conditions and other
matters, many of which are beyond the control of Gene Logic or Oncormed. Any
estimates or projections contained in these analyses are not necessarily
indicative of actual values or predict future results or values which may be
significantly more or less favorable than those set forth therein. In addition,
analyses relating to the value of businesses do not purport to be appraisals or
to reflect the prices at which businesses actually may be sold.
The following paragraphs summarize the significant qualitative and
quantitative analyses performed by ING Baring Furman Selz in arriving at its
opinion.
Transaction Analysis. ING Baring Furman Selz reviewed and analyzed the
proposed terms of the Merger, noting in particular the following: (i) the number
of shares to be issued in the Merger was negotiated
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on the basis of the average closing price for the 15 consecutive trading days
ending June 10, 1998 of Gene Logic's Common Stock ($6.85) and Oncormed's Common
Stock ($3.29); (ii) Gene Logic will issue an aggregate of 4,849,815 shares of
Gene Logic Common Stock in exchange for all outstanding shares of Oncormed
Common Stock; provided, however, that in the event that the average closing
price of Gene Logic Common Stock for the 15 consecutive trading days ending the
second day immediately prior to the Gene Logic Special Meeting called for the
purpose of approving the Merger (the "Closing Price") exceeds $7.88, the total
number of shares to be issued by Gene Logic shall equal $38,204,420 divided by
the Closing Price; and (iii) if 4,849,815 shares of Gene Logic Common Stock are
issued in the Merger, the Oncormed stockholders would own approximately 23.3% of
Gene Logic following the Merger, such percentage being subject to reduction in
the event that the Closing Price exceeds $7.88.
Stock Price Analysis. ING Baring Furman Selz examined the stock ownership
of Oncormed and Gene Logic, respectively, and the pro forma stock ownership of
Gene Logic, assuming 4,849,815 shares of Gene Logic Common Stock are issued in
the Merger. ING Baring Furman Selz then reviewed the history of the trading
prices and volume for Oncormed Common Stock and Gene Logic Common Stock for the
period January 2, 1998 to June 26, 1998. ING Baring Furman Selz noted that the
average closing prices for the 15 consecutive trading days ending June 10, 1998
for Oncormed Common Stock and Gene Logic Common Stock were $3.29 and $6.85,
respectively. The closing prices on June 10, 1998 of the Oncormed Common Stock
and the Gene Logic Common Stock were $3.50 and $7.25, respectively. The closing
prices of the Oncormed Common Stock and the Gene Logic Common Stock on June 26,
1998 were $3.00 and $8.00, respectively.
ING Baring Furman Selz then analyzed the relative price performance of
Oncormed Common Stock and Gene Logic Common Stock compared to an index of ten
selected comparable genomics companies during the period January 2, 1998 to June
26, 1998. The comparable genomics companies included in the analysis were
Affymetrix, Inc., CuraGen Corporation, Genome Therapeutics Corp., Genset SA,
Human Genome Sciences, Inc., Hyseq, Inc., Incyte Pharmaceuticals, Inc., Lynx
Therapeutics, Inc., Millenium Pharmaceuticals, Inc. and Myriad Genetics, Inc.
(the "Comparable Companies"). ING Baring Furman Selz noted that from January 2,
1998 to June 10, 1998 the Comparable Companies index declined 10.9% whereas Gene
Logic Common Stock declined 9.4% and Oncormed Common Stock declined 50.9%. From
January 2, 1998 to June 26, 1998 the Comparable Companies index declined 16.6%
whereas Gene Logic Common Stock was unchanged and Oncormed Common Stock declined
57.9%.
Exchange Ratio Analysis. ING Baring Furman Selz compared the ratios of
historical prices of Oncormed Common Stock and Gene Logic Common Stock to the
exchange ratio that formed the basis for the proposed terms of the Merger. ING
Baring Furman Selz reviewed the ratios of the fifteen day trailing average
closing prices of Oncormed to Gene Logic from January 2, 1998 to June 26, 1998.
The ratios of the fifteen day trailing average closing prices of Oncormed Common
Stock to Gene Logic Common Stock were 0.7638, 0.7976, 0.7124 and 0.5605 as of
January 2, 1998, March 10, 1998, April 10, 1998 and May 10, 1998, respectively.
As of June 10, 1998, the exchange ratio of the 15-day trailing average of
Oncormed Common Stock ($3.29) and Gene Logic Common Stock ($6.85) was 0.4805,
which was the exchange ratio implied by the terms of the Merger.
Comparable Transactions Analysis. ING Baring Furman Selz compared the
Merger with nine selected comparable merger and acquisition transactions
involving biotechnology companies announced during the period from March 2, 1994
to June 26, 1998. ING Baring Furman Selz reviewed the per share transaction
price paid in each such transaction compared to the acquired company's stock
price at various times preceding the announcement of the transaction. ING Baring
Furman Selz noted that the mean premium paid in the comparable transactions over
the acquired company's stock price one week, four weeks, two months and three
months prior to the announcement ranged from 50.4% to 82.1% and that, on
average, there was no premium paid relative to the 52 week high. With respect to
the Merger, ING Baring Furman Selz noted that the average closing price for the
Oncormed Common Stock for the 15 consecutive trading days ending June 10, 1998
($3.29) represented a discount of 4.3%, 2.5%, 30.7% and 29.8% to the Oncormed
Common Stock price one week, four weeks, two months and three months prior to
the expected announcement date of July 7, 1998, respectively. The $3.29 price
represented a 59.5% discount to the 52 week high for Oncormed Common Stock.
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Comparable Company Valuation Analysis. ING Baring Furman Selz analyzed the
share prices of the Comparable Companies at July 1, 1998 and the percentage of
such prices of the 52 week high share price, the fully diluted equity market
value, the total enterprise value (total equity market value plus indebtedness,
less cash and marketable securities), the total enterprise value/revenue ratio
and price/earnings ratio projected for 1999 and 2000 for each of the Comparable
Companies and compared such information with comparable information for Gene
Logic and Oncormed as of June 10, 1998 and July 1, 1998. It was noted that as of
July 1, 1998, Gene Logic's closing share price of $10.13 was 95.3% of its 52
week high compared to 40.8% for Oncormed and a mean of 57.5% for the Comparable
Companies. As of June 10, 1998, the 15 day trailing average closing price for
Gene Logic Common Stock ($6.85) was 64.5% of its 52 week high compared to 40.5%
for Oncormed. The ratio of total enterprise value to projected revenue as of
July 1, 1998 was estimated at 3.7x and 2.5x for Gene Logic for 1999 and 2000,
respectively, compared to 1.9x and 1.3x, respectively, for Oncormed and means of
5.2x and 4.0x, respectively, for the Comparable Companies.
ING Baring Furman Selz analyzed the projected combined post-merger pro
forma income statement for Gene Logic for the years 1998 through 2000. By
applying the mean ratio of projected total enterprise value to revenue for the
Comparable Companies for the years 1999 and 2000 to the revenues of the combined
entity projected for those years by the managements of Gene Logic and Oncormed,
jointly, the pro forma total enterprise value of the combined entity was
estimated at $212.3 million and $262.6 million for 1999 and 2000, respectively.
By applying the same methodology to revenues projected by Gene Logic's
management for Gene Logic as a stand-alone entity, the total enterprise value
for Gene Logic was estimated at $175.4 million and $203.6 million for 1999 and
2000, respectively. By comparing the estimated total enterprise value of the
combined entity to that of Gene Logic on a stand-alone basis, an estimate of the
incremental value to Gene Logic attributable to the Merger was derived ($36.9
million and $59.0 million in 1999 and 2000, respectively). The incremental value
of Gene Logic attributable to the Merger was then compared to the market value
of the Gene Logic shares to be issued in the Merger ($33.2 million) based on the
average closing price of Gene Logic Common Stock for the 15 consecutive trading
days ending June 10, 1998, and the maximum total transaction value of $38.2
million.
Terms of Engagement. As compensation for its services in connection with
the Merger, Gene Logic has agreed to pay ING Baring Furman Selz a fee equal to
the greater of 1% of the total consideration to be paid by Gene Logic in the
Merger or $400,000 for acting as financial advisor in connection with the
Merger, including rendering the ING Baring Furman Selz Opinion. In addition,
Gene Logic has agreed to reimburse ING Baring Furman Selz for its reasonable
out-of-pocket expenses incurred with connection of the Merger (up to $30,000)
and to indemnify ING Baring Furman Selz and certain related persons for certain
liabilities, including liabilities under the federal securities laws, that may
arise out of, or relate to, its engagement as financial advisor by Gene Logic
and the rendering of the ING Baring Furman Selz Opinion.
In the ordinary course of its business, ING Baring Furman Selz may trade
the securities of Gene Logic and Oncormed for its own account or for the
accounts of its customers and accordingly may at any time hold a long or short
position in those securities.
ONCORMED'S REASONS FOR THE MERGER
The Oncormed Board has carefully considered the advisability of the Merger
and believes that the terms of the Merger Agreement are fair to, and that the
Merger is in the best interests of, Oncormed and its stockholders. In reaching
its determination, the Oncormed Board consulted with Oncormed's management, as
well as its financial and legal advisors, and considered a number of factors,
including, but not limited to, the following:
- The strategic and financial alternatives available to Oncormed, including
remaining a separate company and pursuing its existing corporate
strategy;
- The results of Oncormed's process of identifying possible strategic
partners and soliciting indications of interest from third parties,
including the absence of any acceptable alternate acquisition proposals;
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- The strategic fit between Gene Logic and Oncormed, including the benefits
which may be derived from combining Oncormed's proprietary technologies
and resources and clinical experience with Gene Logic's genomics and
bioinformatics platform;
- Gene Logic's and Oncormed's respective businesses, financial condition,
results of operation and prospects;
- The consideration to be received by Oncormed's stockholders;
- The terms and conditions of the Merger including: (a) the nature of any
voting, affiliate and lock-up agreements to be executed by Oncormed's
officers and directors and certain of Oncormed's stockholders, (b) the
limitations on Oncormed's ability to consider alternate acquisition
proposals from third parties following the execution of the Merger
Agreement and Oncormed's ability, subject to certain conditions, to
provide information to, and enter into negotiations with, such third
parties, (c) the right of Oncormed to terminate the Merger Agreement in
the event the Closing Price of Gene Logic Common Stock is less than $6.34
per share, and (d) the size of the break-up termination fees and the
events that would result in the payment thereof;
- The opportunity for Oncormed's stockholders to receive Gene Logic Common
Stock in a "reorganization" within the meaning of Section 368(a) of the
Code and thus continue to participate in the growth of the business
conducted by the combined company after the Merger without paying current
United States federal income tax (except to the extent that such
stockholders receive cash in lieu of fractional shares);
- The likelihood that holders of Oncormed Common Stock would have greater
liquidity in their holdings in the combined company following the Merger;
and
- The written opinion of Hambrecht & Quist, dated July 2, 1998, to the
effect that the consideration to be received by the Oncormed stockholders
was fair from a financial point of view to the holders of Oncormed Common
Stock as of the date of such opinion.
The Oncormed Board also considered a variety of potentially negative
factors in its deliberations concerning the Merger. In particular, the Oncormed
Board considered, among other things:
- The potential disruption of Oncormed's business that might result from
employee uncertainty and lack of focus following announcement of the
Merger and during the integration of the operations of Gene Logic and
Oncormed;
- The possibility that the Merger might not be consummated and the effects
of the public announcement of the Merger on (i) Oncormed's ability to
secure additional working capital financing on terms acceptable to
Oncormed, (ii) Oncormed's ability to attract and retain key management
and technical personnel, (iii) progress of certain development projects,
and (iv) Oncormed's vulnerability to an unsolicited takeover bid or other
change of control transaction on terms less favorable to Oncormed's
stockholders than the Merger;
- The risk that the respective market prices of Oncormed Common Stock and
Gene Logic Common Stock might be adversely affected by the public
announcement of the Merger;
- The risk that other benefits sought to be achieved in the Merger will not
be achieved; and
- Other risks described above under "Risk Factors."
The foregoing discussion of the information and factors considered and
given weight by the Oncormed Board is not intended to be exhaustive. In view of
the variety of factors considered in connection with its evaluation of the
Merger, the Oncormed Board did not find it practicable to and did not quantify
or otherwise assign relative weights to the specific factors considered in
reaching its determination. In addition, individual members of the Oncormed
Board may have given different weights to different factors. For a discussion of
the interests of certain members of Oncormed management and the Oncormed Board
relating to the Merger, see "-- Related Agreements and Interests of Certain
Persons in the Merger."
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ONCORMED BOARD RECOMMENDATION
THE BOARD OF DIRECTORS OF ONCORMED HAS DETERMINED THAT THE MERGER IS
ADVISABLE AND IN THE BEST INTERESTS OF ONCORMED AND ITS STOCKHOLDERS AND HAS
UNANIMOUSLY RECOMMENDED A VOTE FOR APPROVAL OF THE MERGER PROPOSAL.
OPINION OF HAMBRECHT & QUIST LLC
The Oncormed Board engaged Hambrecht & Quist to act as its financial
advisor in connection with the Merger and to render an opinion as to the
fairness from a financial point of view to the holders of the outstanding shares
of Oncormed Common Stock of the consideration to be received by such holders in
the proposed Merger with Gene Logic. Hambrecht & Quist rendered its opinion on
July 2, 1998 (subsequently confirmed in writing on July 2, 1998) to the Oncormed
Board that, as of such date, the consideration to be received by the Oncormed
stockholders in the Merger is fair to the holders of Oncormed Common Stock from
a financial point of view. A COPY OF HAMBRECHT & QUIST'S OPINION DATED JULY 2,
1998, WHICH SETS FORTH THE ASSUMPTIONS MADE, MATTERS CONSIDERED, THE SCOPE AND
LIMITATIONS OF THE REVIEW UNDERTAKEN AND THE PROCEDURES FOLLOWED BY HAMBRECHT &
QUIST IS ATTACHED AS APPENDIX B TO THIS PROSPECTUS/JOINT PROXY STATEMENT.
ONCORMED STOCKHOLDERS ARE ADVISED TO READ THIS OPINION IN ITS ENTIRETY.
Stockholders of Oncormed should note that the opinion expressed by Hambrecht &
Quist was provided for the information of the Oncormed Board of Oncormed in its
evaluation of the Merger and does not constitute a recommendation to any
stockholder as to how such stockholder should vote with respect to the Merger.
No limitations were placed on Hambrecht & Quist by the Oncormed Board with
respect to the investigation made or the procedures followed in preparing and
rendering its opinion.
In connection with its review of the Merger, and in arriving at its
opinion, Hambrecht & Quist, among other things: (i) reviewed the publicly
available financial statements of Gene Logic for recent years and interim
periods to date and certain other relevant financial and operating data of Gene
Logic made available to Hambrecht & Quist from published sources and from the
internal records of Gene Logic; (ii) reviewed certain internal financial and
operating information, including certain projections, relating to Gene Logic
prepared by the management of Gene Logic; (iii) discussed the business,
financial condition and prospects of Gene Logic with certain of its officers;
(iv) reviewed the publicly available financial statements of Oncormed for recent
years and interim periods to date and certain other relevant financial and
operating data of Oncormed made available to Hambrecht & Quist from published
sources and from the internal records of Oncormed; (v) reviewed certain internal
financial and operating information, including certain projections, relating to
Oncormed prepared by the management of Oncormed; (vi) discussed the business,
financial condition and prospects of the Oncormed with certain of its officers;
(vii) reviewed the recent reported prices and trading activity for the common
stocks of Gene Logic and Oncormed and compared such information and certain
financial information for Gene Logic and Oncormed with similar information for
certain other companies engaged in businesses Hambrecht & Quist consider
comparable; (viii) reviewed the financial terms, to the extent publicly
available, of certain comparable merger and acquisition transactions; (ix)
reviewed drafts of the Merger Agreement; and (x) performed such other analyses
and examinations and considered such other information, financial studies,
analyses and investigations and financial, economic and market data as Hambrecht
& Quist deemed relevant.
In rendering its opinion, Hambrecht & Quist assumed and relied upon the
accuracy and completeness of all of the information concerning Oncormed and Gene
Logic considered in connection with its review of the proposed transaction, and
Hambrecht & Quist did not assume any responsibility for independent verification
of such information. Hambrecht & Quist did not prepare any independent
evaluation or appraisal of any of the assets or liabilities of Oncormed or Gene
Logic, nor did they conduct a physical inspection of the properties and
facilities of Oncormed or Gene Logic. With respect to the financial projections
made available to Hambrecht & Quist and used in its analysis, Hambrecht & Quist
assumed that they reflected the best currently available estimates and judgments
of the expected future financial performance of Oncormed and Gene Logic,
respectively. For purposes of its opinion, Hambrecht & Quist assumed that
neither Gene Logic nor Oncormed was a party to any pending transactions,
including external financings, recapitalizations or
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material merger discussions, other than the Merger and those activities
undertaken in the ordinary course of conducting their respective businesses.
Hambrecht & Quist's opinion was necessarily based upon market, economic,
financial and other conditions as they existed and could be evaluated as of the
date of its opinion and any material change in such conditions would require a
reevaluation of its opinion. Hambrecht & Quist expressed no opinion as to the
price at which Gene Logic Common Stock would trade subsequent to the Effective
Time.
The preparation of a fairness opinion is a complex process and is not
necessarily susceptible to partial analysis or summary description. The summary
of the Hambrecht & Quist analyses set forth below does not purport to be a
complete description of the analyses underlying the opinion of Hambrecht &
Quist. In arriving at its opinion, Hambrecht & Quist did not attribute any
particular weight to any analysis or factor considered by it, but rather made
qualitative judgments as to the significance and relevance of each analysis and
factor.
Accordingly, Hambrecht & Quist believes that its analyses and the summary
set forth below must be considered as a whole and that selecting portions of its
analyses, without considering all analyses, or of the summary set forth below,
without considering all factors and analyses, could create an incomplete view of
the processes underlying the analyses set forth in the Hambrecht & Quist
presentation to the Oncormed Board and the opinion of Hambrecht & Quist. In
performing its analyses, Hambrecht & Quist made numerous assumptions with
respect to industry performance, general business and economic conditions and
other matters, many of which are beyond the control of Oncormed and Gene Logic.
The analyses performed by Hambrecht & Quist (and summarized below) are not
necessarily indicative of actual values or actual future results, which may be
significantly more or less favorable than suggested by such analyses.
Additionally, analyses relating to the values of businesses do not purport to be
appraisals or to reflect the prices at which businesses actually may be sold.
Transaction Analysis. Hambrecht & Quist reviewed and analyzed the proposed
terms of the Merger and performed a sensitivity analysis of the consideration to
be received by Oncormed stockholders, based on fluctuating values of Gene Logic
Common Stock. On the basis of its analysis, Hambrecht & Quist observed the
following: (i) Oncormed stockholders will receive an aggregate of 4,849,815
shares of Gene Logic Common Stock, subject to reduction in the event the Closing
Price of Gene Logic Common Stock exceeds $7.88 per share, at which point the
number of shares to be issued will be reduced so that the maximum transaction
value does not exceed $38.2 million; (ii) based on the closing price of Gene
Logic Common Stock of $8.00 per share on June 29, 1998, the total acquisition
consideration would be fixed at $38.2 million, or $3.77 per share of Oncormed
Common Stock, which represented a 20.5% premium to Oncormed's closing stock
price of $3.13 per share on June 29, 1998, and a 11.2% premium to Oncormed's
30-day trailing average stock price of $3.39 per share; and (iii) based the
closing stock price of Gene Logic Common Stock of $8.00 per share on June 29,
1998, Oncormed stockholders would own approximately 23.0% of Gene Logic
following the Merger, up to a maximum of 23.2% if the maximum of 4,849,815
shares of Gene Logic are issued in the Merger and subject to reduction to the
extent that the Closing Price of Gene Logic Common Stock exceeds $7.88 per share
as of the Gene Logic Special Meeting.
Analysis of Alternatives to the Merger. Hambrecht & Quist reviewed and
analyzed Oncormed's alternatives to the proposed Merger. Hambrecht & Quist
observed that in the first three months of 1998, Oncormed's net loss was
approximately $964,000 per month and that, as of June 18, 1998, Oncormed had
cash and marketable securities of approximately $1.3 million. Based on
Oncormed's historical net loss, Hambrecht & Quist estimated that Oncormed had
less than two months of cash and that even allowing for a reduction in legal and
related expenses as a result of the settlement of outstanding litigation with
Myriad, Oncormed would have less than four months to accomplish one of the
following alternatives to the proposed Merger: (i) raise money through a
financing; (ii) find an alternative acquiror; (iii) raise money through an
auction of key assets; or (iv) file for bankruptcy. Hambrecht & Quist analyzed
each of these alternatives and their respective advantages and disadvantages for
the Oncormed Board.
In order to determine the relative benefits of the Merger compared to a
potential financing, Hambrecht & Quist reviewed a number of private placement
transactions since 1992 involving public companies and calculated that the
average discount to the prior day's close was 24.7%, implying a pre-money value
of
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Oncormed Common Stock of $2.35 per share. Hambrecht & Quist compared this
implied valuation to the proposed purchase price per share of $3.78 and
calculated that the consideration to be received in the Merger represented a
60.0% premium over the value per share that existing Oncormed stockholders would
be accorded if they raised money in a private placement of securities. Moreover,
Hambrecht & Quist noted that the following factors might result in Oncormed
having to issue securities at a greater discount than average: (i) its extremely
low cash balance; (ii) the volatility of and downward trend in Oncormed's stock
price; (iii) the fact that potential investors would be receiving restricted
securities; and (iv) the number of shares of Oncormed Common Stock owned by
Oncor.
Comparable Company Analysis -- Oncormed. Hambrecht & Quist reviewed and
compared selected historical financials, operating and stock market performance
data of Oncormed to the corresponding data of five combinatorial chemistry
companies (the "Combinatorial Chemistry Companies"), eleven genomics companies
(the "Genomics Companies"), five integrated discovery companies (the "Integrated
Companies") and eight screening companies (the "Screening Companies"). The
Combinatorial Chemistry Companies included ArQule, Inc., CombiChem, Inc.,
Pharmacopeia, Inc., Trega Biosciences, Inc. and Tripos, Inc. The Genomics
Companies included CuraGen Corporation, Gene Logic, Genome Therapeutics Corp.,
Genset SA, Human Genome Sciences, Inc., Incyte, Lynx Therapeutics, Inc.,
Millennium Pharmaceuticals, Inc., Myriad, Nanogen, Inc. and Progenitor, Inc. The
Integrated Companies included Ariad Pharmaceuticals, Inc., AXYS Pharmaceuticals,
Inc., Ligand Pharmaceuticals Incorporated, Microcide Pharmaceuticals, Inc. and
Sugen, Inc. The Screening Companies included Affymetrix, Inc., Aurora
Biosciences Corporation, Cadus Pharmaceutical Corporation, Cubist
Pharmaceuticals, Inc., Hyseq, Inc., OSI Pharmaceuticals, Inc., Synaptic
Pharmaceutical Corporation and SIBIA Neurosciences, Inc. Hambrecht & Quist
compared the market value, cash, enterprise value (consisting of equity value
plus debt, less cash), revenues for the latest available 12 month period
("LTM"), LTM net income, as well as the ratio of their enterprise value to LTM
revenues, and compared such information with Oncormed. The enterprise value of
Oncormed was $31.1 million, compared to an average enterprise value of $66.4
million for the Combinatorial Chemistry Companies, $262.1 million for the
Genomics Companies, $175.3 million for the Integrated Companies and $130.7
million for the Screening Companies. The ratio of enterprise value to revenues
was 4.2x for the Combinatorial Chemistry Companies, 15.0x for the Genomics
Companies, 11.7x for the Integrated Companies and 9.5x for the Screening
Companies, compared to 28.1x for Oncormed. The average cash for all companies
(excluding the high and low) was $45.2 million, compared to $1.3 million for
Oncormed.
Comparable Company Analysis -- Gene Logic. Hambrecht & Quist reviewed and
compared selected historical financials, operating and stock market performance
data of Gene Logic to the corresponding data of the same companies used in the
Oncormed comparable company analysis, with the one change that Gene Logic was
excluded from the list of Genomics Companies. Hambrecht & Quist compared the
market value, cash, enterprise value, LTM revenue, LTM net income, as well as
the ratio of their enterprise value to LTM revenues, and compared such
information with Gene Logic. The enterprise value of Gene Logic was $88.0
million, compared to an average enterprise value of $66.4 million for the
Combinatorial Chemistry Companies, $279.5 million for the Genomics Companies
(excluding Gene Logic), $175.3 million for the Integrated Companies and $130.7
million for the Screening Companies. The ratio of enterprise value to revenues
was 4.2x for the Combinatorial Chemistry Companies, 14.4x for the Genomics
Companies (excluding Gene Logic), 11.7x for the Integrated Companies and 9.5x
for the Screening Companies, compared to 20.7x for Gene Logic. The average cash
for all companies (excluding the high and low) was $45.4 million, compared to
$41.8 million for Gene Logic.
Established Pharmaceutical Company. Hambrecht & Quist reviewed and
compared selected historical and projected financials, operating and stock
market performance data of certain publicly traded pharmaceutical companies (the
"Established Companies Comparables"). The companies included in the Established
Companies Comparables were the following: Abbott Laboratories, American Home
Products Corporation, Bristol-Myers Squibb Company, Johnson & Johnson, Eli Lilly
and Company, Merck & Co., Inc., Pfizer Inc., Pharmacia & Upjohn and SmithKline
Beecham Corporation. The Established Companies Comparables provided a basis for
the range of Price-Earnings ("P/E") multiples used in further analysis,
particularly the Terminal Value (as defined below) in connection with the
discounted cash flow analyses described below and
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Hambrecht & Quist did not attempt to prepare any further quantitative valuation
analyses based on the Established Companies Comparables because Hambrecht &
Quist believed that any comparative multiples that might be derived based upon
earnings or other financial data of such companies or products would not be
meaningful when applied to the operating losses or businesses of Oncormed and
Gene Logic.
Discounted Cash Flow Analysis (Oncormed Stand-Alone). Hambrecht & Quist
analyzed the theoretical valuation of Oncormed, on a stand-alone basis, based on
the discounted cash flow of its projected financial performance (the "Oncormed
Projections"). Hambrecht & Quist used discount rates ranging from 40% to 60% to
calculate the present value (the "Present Value") of Oncormed's projected stream
of after-tax cash flows generated in the Oncormed Projections through 2001.
Hambrecht & Quist then calculated a terminal value (the "Terminal Value") for
Oncormed which represents the hypothetical value of selling the entire business
at the end of 2001 and discounting the amount received from such hypothetical
sale to its net present value (using the same discount rate as applied to the
Present Value). The Terminal Value was based upon multiples of 20.0x to 35.0x
projected net income for the year 2001. The range of 20.0x to 35.0x projected
net income reflects a range of P/E multiples derived from the Established
Companies Comparables. To estimate the total present value of Oncormed, before
giving effect to its capital structure, Hambrecht & Quist added the Present
Value to the Terminal Value. Using the Oncormed Projections, Hambrecht & Quist
calculated a range of present values for Oncormed, including $68.6 million at a
55% discount rate and a 25.0x exit multiple, $105.5 million at a 45% discount
rate and a 30.0x exit multiple, $87.8 million at a 45% discount rate and a 25.0x
exit multiple and $82.6 million at a 55% discount rate and a 30.0x exit
multiple. Hambrecht & Quist observed that these valuations were higher than the
proposed purchase price of $38.2 million offered in the Merger. Hambrecht &
Quist noted, however, that the discounted cash flow analysis did not account for
the fact that existing stockholders would be substantially diluted as new money
to fund Oncormed was raised. In addition, Hambrecht & Quist observed that the
discounted cash flow based on the Oncormed Projections was extremely sensitive
to small changes in projected revenues and assumed net income margins that were
substantially greater than the net income margins experienced by the Established
Companies Comparables, i.e. 25.1% and 35.8% in 2000 and 2001 for Oncormed,
compared to an average net income margin of 15.3% for the Established Companies
Comparables. Based on the extreme sensitivity of the discounted cash flow
analysis to relatively small changes in projected revenues and net income,
Hambrecht & Quist concluded that the values generated by this analysis were not
meaningful.
Discounted Cash Flow Analysis (Gene Logic Stand-Alone). Hambrecht & Quist
analyzed the theoretical valuation of Gene Logic, on a stand-alone basis, based
on the discounted cash flow of its projected financial performance (the "Gene
Logic Projections"). Hambrecht & Quist used discount rates ranging from 40% to
60% to calculate the Present Value of Gene Logic's projected stream of after-tax
cash flows generated in the Gene Logic Projections through 2001. Hambrecht &
Quist then calculated the Terminal Value for Gene Logic using multiples of 20.0x
to 35.0x projected net income for the year 2001 and the same discount rate as
applied to the Present Value (again assuming the hypothetical sale of Gene Logic
at the end of 2001). The range of 20.0x to 35.0x projected net income reflects a
range of P/E multiples derived from the Established Companies Comparables. To
estimate the total present value of Gene Logic, before giving effect to its
capital structure, Hambrecht & Quist added the Present Value to the Terminal
Value. Using the Gene Logic Projections, Hambrecht & Quist calculated a range of
present values for Gene Logic, including $93.0 million at a 55% discount rate
and a 25.0x exit multiple, $148.1 million at a 45% discount rate and a 30.0x
exit multiple, $120.7 million at a 45% discount rate and a 25.0x exit multiple
and $114.7 million at a 55% discount rate and a 30.0x exit multiple. Hambrecht &
Quist observed that Gene Logic's market value as of June 29, 1998 of $128.2
million fell within the range of values generated through the discounted cash
flow analysis. Hambrecht & Quist noted Gene Logic's current cash balance of more
than $40 million was estimated to be sufficient to finance Gene Logic through
profitability and that no additional dilution would therefore be necessary to
achieve the projections used in the discounted cash flow analysis. Nevertheless,
Hambrecht & Quist noted that the values generated from the discounted cash flow
analysis based on the Gene Logic Projections were extremely sensitive to small
changes in projected revenues and net income. Based on this extreme sensitivity,
Hambrecht & Quist concluded that the values generated by this analysis were not
meaningful.
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Discounted Cash Flow Analysis (Combined Entity). Hambrecht & Quist
analyzed the theoretical valuation of Oncormed and Gene Logic together based on
the discounted cash flow of combining the Oncormed Projections with the Gene
Logic Projections (the "Combined Company Projections"). Hambrecht & Quist used
discount rates ranging from 30% to 50% to calculate the Present Value of the
combined company's projected stream of after-tax cash flows generated in the
Combined Company Projections through 2001. The lower discount rates applied in
the Combined Company Projections reflected the lower risk of achieving future
revenue streams with the diversified product portfolio of the combined company,
compared to each company alone. Hambrecht & Quist then calculated the Terminal
Value of the combined company using multiples of 20.0x to 35.0x projected net
income for the year 2001 and the same discount rate as applied to the Present
Value. To estimate the total present value of the combined company, before
giving effect to its capital structure, Hambrecht & Quist added the Present
Value to the Terminal Value. Using the Combined Company Projections, Hambrecht &
Quist calculated a range of present values for the combined company, including
$224.6 million at a 45% discount rate and a 25.0x exit multiple, $348.9 million
at a 35% discount rate and a 30.0x exit multiple, $290.9 million at a 35%
discount rate and a 25.0x exit multiple and $269.7 million at a 45% discount
rate and a 30.0x exit multiple.
Stock Trading History Analysis. Hambrecht & Quist examined (i) the
comparable price performance from December 31, 1996 to June 29, 1998 of Oncormed
Common Stock, the Combinatorial Chemistry Companies, the Genomics Companies, the
Integrated Companies, the Screening Companies and the Nasdaq Biotechnology Index
and (ii) the comparable price performance from November 21, 1997 (the date of
Gene Logic's initial public offering) to June 29, 1998 of Gene Logic Common
Stock, the Combinatorial Chemistry Companies, the Genomics Companies (excluding
Gene Logic), the Integrated Companies, the Screening Companies and the Nasdaq
Biotechnology Index. With respect to Oncormed, the data indicated that, over the
period, Oncormed's Common Stock price declined 35%, the Combinatorial Chemistry
Companies increased 2%, the Genomics Companies increased 4%, the Integrated
Companies declined 10%, the Screening Companies rose 19% and the Nasdaq
Biotechnology Index increased by 6%. With respect to Gene Logic, the data
indicated that, over the period, Gene Logic's stock price was unchanged, the
Combinatorial Chemistry Companies decreased 17%, the Genomics Companies
decreased 12%, the Integrated Companies declined 11%, the Screening Companies
declined 22% and the NASDAQ biotechnology index increased by 1%.
Selected Comparable Transaction Analysis. Hambrecht & Quist compared the
Merger with 22 selected comparable merger and acquisition transactions in the
biotechnology area. Hambrecht & Quist reviewed the premiums paid in such
transactions and noted the following: (i) the average premium paid over the
trading price one day prior to the announcement of the transaction in the
foregoing transactions was 34.2%; (ii) the average premium paid over the trading
price one week prior to the announcement of the transaction in the foregoing
transactions was 33.5%; and (iii) the average premium paid over the trading
price four weeks prior to the announcement of the transaction in the foregoing
transactions was 43.1%. Hambrecht & Quist determined that, based on the closing
prices for Common Stock of Oncormed and Gene Logic on June 29, 1998, the
consideration to be paid in the Merger implied a one-day premium of 20.5%, a one
week premium of 9.6% and a one month premium of 43.5%. Hambrecht & Quist did not
attempt to prepare any further quantitative valuation analyses based on these
acquisition transactions because Hambrecht & Quist believed that difference in
the technologies of each company and the differences in the market conditions at
the time such acquisitions were made would make such analyses meaningless.
Relative Contribution Analysis. Hambrecht & Quist analyzed the pro forma
projected contribution of Oncormed and Gene Logic to the combined company in
1998 assuming the Merger had been consummated on January 1, 1998 (and using the
most recently available cash balances for both companies). Hambrecht & Quist
noted that Oncormed would contribute 3.0% of the combined company's cash, 22.7%
of 1998 projected net revenue and 64.5% of the combined company's 1998 projected
net loss.
No company or transaction used in the above analyses is identical to
Oncormed, Gene Logic or the Merger. Accordingly, an analysis of the results of
the foregoing is not mathematical; rather it involves complex considerations and
judgments concerning differences in financial and operating characteristics of
the companies and other factors that could affect the public trading values of
the companies or company to which they are compared. The foregoing description
of Hambrecht & Quist's opinion is qualified in its entirety by
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reference to the full text of such opinion, which is attached at Appendix B to
this Prospectus/Joint Proxy Statement.
Certain Relationship; Terms of Engagement. Hambrecht & Quist, as part of
its investment banking services, is regularly engaged in the valuation of
businesses and their securities in connection with mergers and acquisitions,
strategic transactions, corporate restructurings, negotiated underwritings,
secondary distributions of listed and unlisted securities, private placements
and valuations for corporate and other purposes. The Oncormed Board selected
Hambrecht & Quist to serve as its financial advisor in connection with the
proposed transaction with Gene Logic because it is an internationally recognized
investment banking firm whose professionals have substantial experience in
merger and acquisition transactions and transactions similar to the Merger.
Hambrecht & Quist has, from time to time, provided investment banking services
to Gene Logic, and has received fees for rendering these services. In 1997,
Hambrecht & Quist acted as placement agent in connection with a private
placement transaction for Gene Logic and as a co-managing underwriter for Gene
Logic's initial public offering. In addition, Hambrecht & Quist (together with
its affiliates) currently own 210,000 shares of Gene Logic Common Stock.
Investment funds for which Hambrecht & Quist or its affiliates serve as
investment advisor, H&Q Life Sciences Investors and H&Q Healthcare Investors,
own 140,000 and 210,000 shares of Gene Logic Common Stock, respectively. In the
ordinary course of business, Hambrecht & Quist acts as a market maker and broker
in the publicly traded securities of Gene Logic and receives customary
compensation in connection therewith, and also provides research coverage for
Gene Logic. In the ordinary course of business, Hambrecht & Quist may actively
trade in the equity securities of Oncormed and Gene Logic for its own account
and for the accounts of its customers and, accordingly, may at any time hold a
long or short position in such securities. Hambrecht & Quist may in the future
provide additional investment banking or other financial advisory services to
Gene Logic.
Pursuant to an engagement letter dated March 12, 1998, Oncormed has agreed
to pay Hambrecht & Quist a fee in connection with its services as financial
advisor to the Oncormed Board and the rendering of a fairness opinion. Oncormed
has agreed to pay a fee of $250,000 upon the delivery of the fairness opinion.
The retainer and fairness opinion fee shall be credited against any Transaction
Fee (as defined below). Upon consummation by Oncormed of the Merger, Oncormed
shall pay Hambrecht & Quist a fee (the "Transaction Fee"), payable in cash at
the Closing, of 1.9% of all consideration received less any fees previously
paid. Oncormed has agreed to reimburse Hambrecht & Quist for its reasonable out
of pocket expenses, and to indemnify Hambrecht & Quist against certain
liabilities, including liabilities under the federal securities laws or relating
to or arising out of Hambrecht & Quist's engagement as financial advisor. The
amount of compensation to be paid to Hambrecht & Quist was determined by
negotiations between the Oncormed Board and Hambrecht & Quist.
THE MERGER AGREEMENT
Representations.
Under the Merger Agreement, Oncormed has made, among others, certain
representations relating to: (i) its due organization and good standing; (ii)
its authority to own its assets and carry on its business; (iii) its capital
structure; (iv) its filings with the Commission; (v) the completeness,
preparation and compliance of its financial statements in accordance with
generally accepted accounting principles of its financial statements; (vi) the
absence of changes in its business since December 31, 1997 that would materially
adversely affect Oncormed; (vii) its intellectual property and other assets;
(viii) tax, insurance, employee and environmental matters; (ix) the
enforceability of its material contracts; (x) absence of material litigation;
and (xi) authority to enter into the Merger Agreement and to consummate the
Merger. Under the Merger Agreement, Gene Logic also has made, among others,
certain representations relating to (i) its due organization and good standing;
(ii) its authority to own its assets and carry on its business; (iii) its
capital structure; (iv) the accuracy of all filings with the Commission; (v) the
accuracy, completeness and preparation in accordance with generally accepted
accounting principles of its financial statements; (vi) the absence of changes
in its business that would materially adversely affect it; (vii) tax matters;
(viii) the enforceability of certain of its material contracts; (ix) absence of
material litigation; (x) valid issuance of the Total Merger Shares; and (xi)
authority to enter into the Merger Agreement and to consummate the Merger.
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Covenants.
Pursuant to the terms of the Merger Agreement, Oncormed has made certain
covenants regarding the conduct of its business prior to the consummation of the
Merger or the termination of the Merger Agreement, including among others,
covenants to: (i) conduct its business and operations in the ordinary course and
consistent with past practices; (ii) use reasonable efforts to preserve intact
its current business organization and relationships; (iii) keep all insurance
policies in force; (iv) use reasonable efforts to protect its intellectual
property and other assets; and (v) provide Gene Logic with status updates as to
Oncormed's business, including bi-weekly financial position updates. Oncormed
has further agreed that prior to the consummation of the Merger or the
termination of the Merger Agreement, it will not take certain actions relating
to: (i) declaring, accruing, setting aside or paying any dividends or other
distributions on or redemptions or repurchases of any capital stock (other than
in connection with the Oncormed Preferred Stock); (ii) the amendment or
modification of any options, warrants or stock plans; (iii) the amendment of
charter documents; (iv) the acquisition of any business or other entity; (v) the
acquisition, lease, license, sale or disposal of assets (except, in each case,
with respect to immaterial assets); (vi) the loaning of any money, except under
limited circumstances; (vii) the prepayment of any material claim, liability or
obligation; (viii) the establishment or amendment of employment or severance
agreements or any employee benefit plan; (ix) the making of any bonus or similar
payment or the alteration of any compensation payable to its directors, officers
or employees; (x) changes in its methods of accounting; (xi) changes to its
material contracts; (xii) the making of any capital expenditure in excess of
$25,000; (xiii) the establishment or alteration of any real property lease;
(xiv) the commencement, settlement or compromise of any legal proceeding; or
(xv) any transaction with any stockholder, director, officer, employee or other
individual or entity other than in the ordinary course of business consistent
with past practice.
Pursuant to the terms of the Merger Agreement, Gene Logic has agreed that
prior to the consummation of the Merger or the termination of the Merger
Agreement, it will not (i) declare or pay any dividend on or repurchase or
redeem any of its capital stock; or (ii) amend its charter documents in a way
that would adversely affect the provisions of the Gene Logic Common Stock.
Gene Logic and Oncormed have also agreed that, prior to the consummation of
the Merger or termination of the Merger Agreement, they will, among other
things, (i) provide reasonable access to their respective books, records,
properties and personnel; (ii) take all actions reasonably necessary to hold
their respective stockholder meetings to vote upon the Merger Proposal within 45
days of the effectiveness of this Prospectus/Joint Proxy Statement; (iii) notify
the other party of any breach of any representation or covenant or any event
that would make the timely satisfaction of any of the conditions to consummation
of the Merger contained in the Merger Agreement unlikely; and (iv) use
reasonable efforts to obtain all third party and governmental consents and
remove any legal impediments, if any to the Merger.
Pursuant to the Merger Agreement, Gene Logic has covenanted to fulfill all
obligations of Oncormed under all indemnification agreements between Oncormed
and its directors and executive officers existing as of the date of the Merger
Agreement. Gene Logic has further agreed to maintain, for a period of six years
after the Effective Time, exculpation and indemnification provisions under the
Certificate of Incorporation and By-laws of Merger Sub, as the surviving
corporation in the Merger, that are at least as favorable as those contained in
Oncormed's Certificate of Incorporation and By-laws as of the date of the Merger
Agreement and, subject to certain limitations, directors' and officers'
liability insurance for the benefit of the current directors and officers of
Oncormed comparable in coverage to that maintained by Oncormed as of the date of
the Merger Agreement. Gene Logic has also agreed to maintain or cause Merger
Sub, as the surviving corporation in the Merger, to maintain employee benefit
plans for the benefit of Oncormed employees which are substantially similar to
the benefits provided to Gene Logic's employees.
No Solicitation.
Pursuant to the Merger Agreement, Oncormed has agreed that, prior to the
consummation of the Merger, it will not (i) solicit, initiate, or encourage the
making, submission or announcement of any alternate acquisition proposal; (ii)
furnish any information regarding Oncormed to any person or entity in connection
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with or in response to any alternate acquisition proposal; (iii) engage in
discussions or negotiations with any person or entity with respect to any
alternate acquisition proposal; (iv) approve, endorse or recommend any alternate
acquisition proposal; or (v) enter into any letter of intent or similar document
or contract contemplating or otherwise relating to any alternate acquisition
proposal, subject in each case to the good faith exercise by the Oncormed Board
of its fiduciary obligations. An alternate acquisition proposal includes any
offer, proposal or inquiry (other than by Gene Logic) contemplating or otherwise
relating to with respect to Oncormed and any Acquisition Transaction.
Conditions to the Merger.
The obligations of Gene Logic and Oncormed to consummate the Merger are
subject to the satisfaction or waiver of a number of conditions, including among
others, (i) approval of the Merger Proposal by the stockholders of Gene Logic
and the stockholders of Oncormed; (ii) subject to certain materiality
thresholds, the accuracy of the representations and warranties of the parties
contained in the Merger Agreement; (iii) the performance by the parties in all
material respects of their respective covenants; (iv) the effectiveness of, and
the absence of any stop orders with respect to, the Registration Statement; (v)
the absence of any material adverse change in the business, capitalization,
operations or financial condition of the parties; (vi) the absence of any
governmental restraint or governmental proceeding challenging or seeking to
prohibit the consummation of the Merger or relating to the ability of Gene Logic
or the surviving corporation to own the assets or operate the business of
Oncormed; and (vii) the receipt by each party from their respective counsel of
legal opinions to the effect that the Merger will be treated for federal income
tax purposes as a "reorganization" within the meaning of Section 368(a) of the
Code.
Gene Logic's obligations to consummate the Merger are further conditioned
on, among other things, (i) the receipt of a comfort letter from Oncormed's
accountants, Arthur Andersen LLP, in connection with the Registration Statement
of which this Prospectus/Joint Proxy Statement is a part; (ii) receipt of
executed and valid employment agreements or consulting agreements with respect
to certain officers of Oncormed; (iii) the written resignation of all officers
and directors of Oncormed; and (iv) the termination of all options to acquire
Oncormed Common Stock that have not been exercised prior to the Effective Time.
Oncormed's obligations to consummate the Merger are further conditioned on,
among other things, (i) the Closing Price of Gene Logic's Common Stock being
more than $6.34; and (ii) the approval for quotation on the Nasdaq NMS of the
Gene Logic Common Stock to be issued in the Merger, subject to notice of
issuance thereof.
Termination and Amendment.
The Merger Agreement may be terminated prior to the Effective Time, whether
before or after approval of the Merger by the stockholders of Gene Logic and
Oncormed, by Gene Logic or Oncormed: (i) upon their mutual written consent; (ii)
if the Merger shall not have been consummated by December 31, 1998, unless the
failure to consummate the Merger is attributable to a failure by the party
seeking to terminate the Merger Agreement to perform any material obligation
required to be performed by that party; (iii) in connection with certain legal
or governmental actions having the effect of permanently restraining, enjoining
or otherwise prohibiting the Merger; or (iv) if the Merger Agreement shall not
have been approved by the stockholders of both parties, provided, however, that
neither party shall be permitted to terminate the Merger Agreement if the reason
for such party's stockholders failing to approve the Merger Agreement is
attributable to such party's failure to perform any material obligation required
to be performed by such party, and provided further that in the event that the
Merger Agreement is not approved by the stockholders of Oncormed at the Oncormed
Special Meeting and the Merger Agreement is thereafter terminated by Gene Logic
or Oncormed under the conditions specified in this clause (iv), then Oncormed
shall be required to pay to Gene Logic a nonrefundable cash fee in the amount of
$1,000,000.
Gene Logic may also terminate the Merger Agreement (i) subject to certain
limitations, following a breach of any covenant or agreement of Oncormed
contained in the Merger Agreement or if any of Oncormed's representations and
warranties contained in the Merger Agreement shall be or shall have become
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inaccurate; or (ii) prior to the approval of the Merger Agreement by the
Oncormed stockholders if any of the following events ("Triggering Events")
occurs: (a) a breach of the Merger Agreement by Oncormed; (b) the Oncormed Board
of Directors shall have failed to recommend, or shall for any reason have
withdrawn or shall have amended or modified in a manner adverse to Gene Logic
its recommendation in favor of the adoption and approval of the Merger Agreement
or the approval of the Merger; (c) Oncormed shall have failed to include in this
Prospectus/Joint Proxy Statement the recommendation of its Board in favor of
this Merger Agreement and the Merger; (d) Oncormed shall have approved, endorsed
or recommended any proposal relating to an Acquisition Transaction or Gene Logic
terminates the Merger Agreement after Oncormed publicly announces it is
considering any proposal relating to an Acquisition Transaction; (e) a tender or
exchange offer relating to securities of Oncormed shall have been commenced and
Oncormed shall not have sent to its securityholders, within ten business days
after the commencement of such tender or exchange offer, a statement disclosing
that Oncormed does not recommend acceptance of such tender or exchange offer;
(f) a proposal relating to an Acquisition Transaction is publicly announced, and
Oncormed fails to issue a press release announcing its opposition to such
proposal within five business days after such proposal is announced or otherwise
fails to actively oppose such proposal; or (g) Oncormed shall have failed to
hold the Oncormed Special Meeting as promptly as practicable and in any event
within 45 days after the S-4 Registration Statement of which this
Prospectus/Joint Proxy Statement is a part is declared effective under the
Securities Act. In the event Gene Logic terminates the Merger Agreement upon any
Triggering Event specified in clause (ii) above, Oncormed will be required to
pay to Gene Logic a nonrefundable cash fee in the amount of $1,000,000.
Oncormed may also terminate the Merger Agreement (i) subject to certain
limitations, following a breach of a covenant or agreement of Gene Logic
contained in the Merger Agreement or if any of Gene Logic's representations and
warranties contained in the Merger Agreement shall be or shall have become
inaccurate; or (ii) if the Closing Price of Gene Logic Common Stock is less than
$6.34.
The Merger Agreement may be amended with the approval of the respective
Boards of the parties at any time before or after the approval of the Merger
Agreement by the Oncormed stockholders; provided however, that after any such
stockholder approval, no amendment may be made excepted as permitted by
applicable law.
RELATED AGREEMENTS AND INTERESTS OF CERTAIN PERSONS IN THE MERGER
In considering the recommendation of the Oncormed Board FOR approval of the
Merger Proposal, Oncormed stockholders should be aware that certain members of
the Oncormed Board and certain executive officers of Oncormed have interests in
the Merger that are in addition to the interests of the Oncormed stockholders
generally. In particular, as set forth below, certain executive officers and
directors of Oncormed will enter into employment agreements, consulting
agreements, severance agreements and non-competition agreements with Gene Logic.
The Oncormed Board was aware of these interests and considered them, among other
matters, in approving the Merger Proposal.
Credit Facility.
In connection with the Merger, Gene Logic and Oncormed have entered into
the Loan Agreement whereby Gene Logic has agreed to make available to Oncormed
through February 28, 1999 a credit facility of up to $2,000,000 (the "Loan") to
be used by Oncormed for working capital purposes. Interest on all amounts
outstanding under the Loan shall accrue daily at the per annum rate that
Citibank N.A. has announced as its prime lending rate. Advances under the Loan
shall not exceed $500,000 per month. All outstanding principal and accrued
interest on the Loan is due and payable upon the earliest to occur of (i) March
31, 1999, (ii) in the event the Merger is not consummated, that date upon which
Oncormed secures alternate financing of at least $2,000,000 on terms
satisfactory to Oncormed in its sole discretion, or (iii) the date on which
Oncormed sells or otherwise disposes of, all or substantially all of the assets
or business of Oncormed, or any liquidation, merger or other business
combination of Oncormed (other than the Merger). All amounts outstanding under
the Loan are secured by certain of Oncormed's tissue biorepository assets.
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If the Merger Agreement, the License Agreement or the Loan Agreement is
terminated, or Oncormed is in material breach of any term, representation or
warranty contained in the Merger Agreement, License Agreement or Loan Agreement,
and under certain other circumstances, Gene Logic is not obligated to advance
additional sums under the Loan. In addition, if Oncormed, among other things (i)
fails to pay all principal and interest due on the maturity date; (ii) breaches
certain negative covenants contained in the Loan Agreement; or (iii) becomes
insolvent or makes an assignment for the benefit of creditors or any enters into
any proceeding in bankruptcy, whether voluntarily or involuntarily, then in each
such case Gene Logic may exercise a number of remedies including but not limited
to terminating its obligations to make additional advances to Oncormed under the
Loan Agreement and taking possession of the collateral securing the Loan.
Non-Exclusive License Agreement.
In connection with the Merger and the Loan, Oncormed and Gene Logic have
entered into the License Agreement whereby Oncormed has granted to Gene Logic
non-exclusive access, until March 31, 1999, to Oncormed's tissue biorepositories
for the purpose of reviewing and selecting tissue samples for further analysis.
In addition, under the terms of the License Agreement, Oncormed has granted Gene
Logic a non-exclusive perpetual, worldwide license to use the technology,
know-how and other proprietary rights owned or controlled by Oncormed that is
related to the tissue biorepositories and tissue samples to analyze the tissue
samples selected by Gene Logic. All amounts payable by Gene Logic for selection
of tissue samples may be offset against any amounts owed by Oncormed to Gene
Logic under the Loan.
Either party may terminate the License Agreement prior to March 31, 1999,
the end of the term, upon the bankruptcy, insolvency, dissolution or winding up
of the other party or upon the breach by the other party of a material provision
of the License Agreement which is not cured within 60 days after written notice
thereof by the other party. Further, Gene Logic may terminate the License
Agreement, with or without cause, upon 30 days prior written notice.
Voting Agreements.
The Voting Agreement Stockholders, who together hold approximately 40.8% of
the Oncormed Common Stock outstanding on the Record Date, have entered into
Voting Agreements with Gene Logic pursuant to which such persons have agreed to
vote and have granted irrevocable proxies to Gene Logic to vote all of the
shares of Oncormed Common Stock over which such persons have voting power or
control on the Record Date in favor of the Merger Proposal. A more detailed
discussion of the Voting Agreements follows.
Directors and Executive Officers. Each of the directors and executive
officers of Oncormed, which includes Dr. Timothy J. Triche, Dr. Douglas
Dolginow, Mr. L. Robert Johnston, Jr., Mr. John Pappajohn, Dr. Leslie Alexandre,
Mr. John W. Colloton, Mr. Stephen Turner and Dr. Wayne Patterson (collectively,
the "Executives"), has entered into a voting agreement with Gene Logic
(collectively, the "Executives' Voting Agreements"). Pursuant to the Executives'
Voting Agreements, the Executives have agreed generally that, among other
things, prior to the Expiration Date (as defined below), they will vote their
shares of Oncormed Common Stock in favor of the Merger Proposal, against any
action or agreement that would result in a breach of any representation,
warranty, covenant or obligation of Oncormed in the Merger Agreement, and
against any extraordinary corporate transactions (other than the Merger
Proposal). For the purposes of the Executives' Voting Agreements, the
"Expiration Date" is defined as the earlier of the date upon which (i) the
Merger becomes effective, or (ii) the Merger Agreement is validly terminated;
provided, however, that the "Expiration Date" shall be the date 180 days after
the date upon which the Merger Agreement is terminated if such termination is
effected by Gene Logic as the result of (i) the failure of the Oncormed
stockholders to approve the Merger Proposal at the Oncormed Special Meeting, or
(ii) upon a Triggering Event, other than as the result of the termination of the
Merger Agreement as a result of a breach by Oncormed (each an "Identified
Termination").
Pursuant to the terms of the Executives' Voting Agreements, the Executives
have agreed that, prior to the Expiration Date, they will not directly or
indirectly: (i) offer, sell, offer to sell, contract to sell, pledge,
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grant any option to purchase or otherwise dispose of or transfer to any person
other than Gene Logic; (ii) create or encumber; or (iii) reduce their beneficial
ownership in, in each case the shares of Oncormed Common Stock subject to such
voting agreements. The Executive Voting Agreement executed by Mr. Turner permits
Mr. Turner to sell shares of Oncormed Common Stock prior to the Effective Time
and Mr. Johnston may also sell shares of Oncormed Common Stock held by him.
Certain Holders of Oncormed Common Stock. Oncor and Incyte, each a
stockholder of Oncormed, have entered into voting agreements with Gene Logic
substantially similar to the Executives' Voting Agreements, except that under
Oncor's voting agreement, Oncor is permitted to transfer in a private sale (i)
all or a portion of the shares of Oncormed Common Stock subject to such voting
agreement so long as the proposed transferee agrees to be bound by the terms of
Oncor's voting agreement; and (ii) certain shares of Oncormed Common Stock to
certain third parties and their affiliates as the result of preexisting
obligations to transfer such shares. Such third parties and their affiliates
have agreed to accept such shares subject to the provisions of the Oncor voting
agreement.
Certain Holders of Oncormed Preferred Stock. Each of the Preferred
Holders, namely Southbrook International Investments, Ltd., Westover Investments
L.P., Montrose Investments, Ltd., Brown Simpson Strategic Growth Fund, L.P.,
Brown Simpson Strategic Growth Fund, Ltd. and Incyte have entered into letter
agreements with Oncormed whereby the Preferred Holders have agreed to vote all
shares of Oncormed Common Stock held by such holders as of the Record Date and
at the time of the Oncormed Special Meeting, in favor of the Merger Proposal,
against any action or agreement that would result in a breach of any
representation, warranty, covenant or obligation of Oncormed in the Merger
Agreement, and against any extraordinary corporate transactions (other than the
Merger Proposal). However, under the letter agreement, the Preferred Holders are
not prohibited from selling or otherwise transferring any interest they may have
in any shares of Oncormed Common Stock prior to the Oncormed Special Meeting.
Employment, Consulting and Separation Agreements.
Effective upon the consummation of the Merger, Dr. Douglas Dolginow, the
current President and Chief Operating Officer of Oncormed, will become Senior
Vice President, Pharmacogenomics of Gene Logic pursuant to a letter of
employment between Dr. Dolginow and Gene Logic (the "Dolginow Letter"). Under
the terms of the Dolginow Letter, Dr. Dolginow will receive an annual base
salary of $200,000 and will be eligible to receive annual cash bonuses of up to
$50,000, with the actual amount of such bonus being determined based upon the
attainment of objectives mutually agreed to between Gene Logic and Dr. Dolginow.
The Oncormed Board has approved the payment of a bonus to Dr. Dolginow of
$50,000, which Gene Logic has agreed to approve should the Merger be
consummated. In addition to his annual salary and bonus, Dr. Dolginow will
receive options to purchase up to 100,000 shares of Gene Logic Common Stock, of
which options to purchase 20,000 shares will vest on the one year anniversary of
Dr. Dolginow's employment with Gene Logic and the remaining options to purchase
80,000 shares will vest ratably and monthly over four years, commencing on Dr.
Dolginow's first day of employment. Dr. Dolginow's employment with Gene Logic
will initially be for a four-year term. Upon any termination by Gene Logic of
Dr. Dolginow's employment with Gene Logic without cause, Gene Logic shall pay to
Dr. Dolginow a severance payment equal to one-half of Dr. Dolginow's then
current base salary plus any annual bonus to which Dr. Dolginow would then be
entitled for such year.
In connection with the Merger, Oncormed entered into a severance and
consulting agreement with Dr. Timothy J. Triche, the current Chief Executive
Officer of Oncormed, which provides for the termination of Dr. Triche's
employment with Oncormed upon the Effective Time and the engagement of Dr.
Triche as a consultant to the surviving corporation at a base salary of $15,000
per month for a period of nine months following the Effective Time. Dr. Triche
shall provide up to thirty additional days of consulting services at a base
salary of $5,000 per month over the following one-year period.
In connection with the Merger, Oncormed entered into a separation agreement
with Mr. L. Robert Johnston, Jr. The agreement provides for severance payments
to Mr. Johnston in the form of the continuation of Mr. Johnston's base salary
for a period of six months. In addition, Mr. Johnston will receive an additional
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lump-sum payment equivalent to three months' salary if he continues to provide
services to Oncormed during the period leading up to the Effective Time. In
addition, Oncormed will fulfill severance obligations to approximately ten
additional Oncormed employees, including Dr. Alexandre, pursuant to existing
employment agreements. Dr. Alexandre, the current Vice President, Corporate
Affairs of Oncormed, is entitled to severance payments in the form of the
continuation of her current salary and benefits for a period of one year.
Lock-Up Agreements.
Each of Dr. Timothy J. Triche, Dr. Douglas Dolginow, Mr. John Pappajohn,
Mr. John W. Colloton, Mr. Stephen Turner and Dr. Wayne Patterson have entered
into lock-up agreements with Gene Logic whereby such persons have agreed that
for a period of 90 days following the Effective Time, they will not sell or
transfer any of the shares of Gene Logic Common Stock to be issued to such
persons in the Merger, except with respect to a bona fide gift or to transfers
to family members and only if such transferees agree to be bound by the terms of
the lock-up agreements.
Oncor has also entered into a lock-up agreement with Gene Logic with
respect to the shares of Gene Logic Common Stock to be issued to it in the
Merger. Under such lock-up agreement, Oncor has agreed that it will not sell or
transfer any shares of Gene Logic Common Stock to be received by it in the
Merger during the period beginning on the closing date and ending 60 days
thereafter (the "Initial Lock-Up Period"). During the period beginning the day
following the Initial Lock-Up Period and ending the 30-day period thereafter
(the "Second Lock-Up Period"), and during each three-month period beginning
after the Second Lock-Up Period, Oncor may sell or transfer that number of
shares of Gene Logic Common Stock received by it in the Merger equal to the
greater of (i) 1% of the then outstanding shares of Gene Logic Common Stock, and
(ii) the average weekly reported volume of trading in Gene Logic Common Stock
during the four calendar weeks preceding the date of any such sale or transfer.
This Prospectus/Joint Proxy Statement registers for resale the shares of
Oncormed Common Stock held by Oncor. Certain third parties affiliated with Oncor
have rights to purchase shares of Oncormed Common Stock currently held by Oncor.
Each such third party has agreed that, to the extent that such third party
exercises its option to purchase Oncormed Common Stock currently held by Oncor,
such third party will be bound by the terms of the lock-up agreement executed by
and between Oncor and Gene Logic. See "-- Registration Rights."
Gene Logic may issue stop transfer instructions in order to enforce the
terms of the foregoing lock-up agreements.
Affiliate Agreements.
Each of the directors and executive officers of Oncormed, and Oncor, each
of whom may be deemed to be an affiliate of Oncormed, have entered into an
agreement with Gene Logic restricting sales, dispositions or other transactions
reducing their risk of investment in respect of the shares of Gene Logic Common
Stock to be received by them in the Merger to help ensure compliance with the
requirements of applicable federal securities laws. In general, Rule 145 as
currently in effect, imposes restrictions on the manner in which such affiliates
may make resales of Gene Logic Common Stock received by them in the Merger and
on the number of shares of Gene Logic Common Stock that such affiliates and
others (including persons with whom the affiliates act in concert) may sell
within any three-month period. Rule 145 will not generally preclude sales by
affiliates. These Rule 145 restrictions will apply for a period of at least one
year after the Effective Time (or longer if the person remains or becomes an
affiliate of Gene Logic). Dr. Douglas Dolginow will become an affiliate of Gene
Logic after the Merger. See, however, "-- Registration Rights."
Warrants.
As a result of the Merger, Gene Logic will assume warrants to purchase
approximately 1,088,896 shares of Oncormed Common Stock, described in this
section, outstanding as of the close of business on the Record Date.
Pursuant to the 6% Series A Convertible Preferred Stock Purchase Agreement,
dated February 27, 1998 (as amended March 17, 1998, the "Oncormed Preferred
Stock Purchase Agreement"), the Preferred Holders
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received warrants to purchase an aggregate of 166,666 shares of Oncormed Common
Stock at an exercise price of $8.54 per share (the "Preferred Warrants").
Following the Merger, an aggregate of approximately 77,431 shares of Gene Logic
Common Stock will be issuable upon exercise of the Preferred Warrants (at an
exercise price of $18.38 per share), based on the Assumed Exchange Ratio. The
Preferred Warrants expire on February 27, 2001.
In connection with a license agreement with Incyte, Oncormed issued to
Incyte a warrant to purchase up to an aggregate of 10% of the Oncormed Common
Stock issued and outstanding on the date of the exercise of the warrant. Incyte
has agreed that, for purposes of determining the number of shares of Gene Logic
Common Stock issuable upon exercise of the warrant, that the number of shares of
Oncormed Common Stock issuable upon exercise of the warrant shall equal 788,730.
The warrant is exercisable until February 25, 2000 at an exercise price per
share equal to the greater of 110% of the fair market value per share of
Oncormed Common Stock on the trading day prior to the date of exercise and (i)
$9.00 per share (if the warrant is exercised after February 25, 1998 but on or
prior to February 25, 1999), or (ii) $13.50 per share (if the warrant is
exercised after February 25, 1999 but on or prior to February 25, 2000).
Following the Merger, based on the Assumed Exchange Ratio, an aggregate of
approximately 366,443 shares of Gene Logic Common Stock will be issuable upon
the exercise of such warrant at an exercise price equal to the greater of 110%
of the fair market value per share of Gene Logic Common Stock on the trading day
prior to the date of exercise and (i) $19.37 per share (if the warrant is
exercised on or prior to February 25, 1999), or (ii) $29.06 per share (if the
warrant is exercised after February 25, 1999 but on or prior to February 25,
2000). Notwithstanding the foregoing, Incyte has the option to fix the exercise
price per share during each of the aforementioned periods; provided, however,
that in no event shall the exercise price per share during each of the
aforementioned periods be less than $9.00 or $13.50 per share of Oncormed Common
Stock, respectively ($19.37 or $29.06 per share of Gene Logic Common Stock,
based on the Assumed Exchange Ratio). Further, Oncormed has also agreed to issue
to Incyte, under certain circumstances, up to an additional aggregate of
approximately 90,719 shares of Oncormed Common Stock (42,148 shares of Gene
Logic Common Stock, based on the Assumed Exchange Ratio).
Oncormed also has warrants outstanding to purchase an aggregate of 133,500
shares of Oncormed Common Stock at an exercise price of $6.90 per share (subject
to adjustment in certain circumstances) (the "Underwriter Warrants"). The
Underwriter Warrants expire on September 27, 1999. Following the Merger, an
aggregate of approximately 62,024 shares of Gene Logic Common Stock will be
issuable upon exercise of the Underwriter Warrants at an exercise price of
$14.85 per share, based on the Assumed Exchange Ratio. See "-- Merger
Consideration; Conversion of Shares -- Treatment of Oncormed Warrants."
Convertible Note.
Oncormed has a note outstanding, in the principal amount of $715,751,
payable to Oncor. Upon consummation of the Merger, and in connection with the
termination of certain license agreements between Oncor and Oncormed, such note
will be cancelled upon payment to Oncor of the aggregate amount of $500,000,
$250,000 of which Oncormed paid to Oncor on September 14, 1998. Notwithstanding
the foregoing, if such Merger is not consummated by December 31, 1998, the
remaining principal due and owing to Oncor under the Oncormed Note shall be
$357,875.50, which amount shall be repaid to Oncor in accordance with the terms
of the Oncormed Note. See "-- Merger Consideration; Conversion of
Shares -- Treatment of Oncormed Convertible Note."
Registration Rights.
Although the shares of Gene Logic Common Stock to be issued to the Oncormed
stockholders in the Merger will have been registered under the Securities Act,
as discussed above, any stockholder of Oncormed receiving Gene Logic Common
Stock in the Merger who is an affiliate (as "affiliate" is used under Rule 145
of the Securities Act) of Oncormed at the time of the Oncormed Special Meeting
will be subject to the resale restrictions of Rule 145. Gene Logic has agreed to
register, and has registered, for resale pursuant to this Prospectus/Joint Proxy
Statement all shares of Gene Logic Common Stock to be received by Oncor in the
Merger subject to the restrictions contained in the Oncor lock-up agreement.
Under the lock-up agreement,
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Oncor has agreed that, for a period of 60 days following the Effective Time, it
will not sell or transfer any of the shares of Gene Logic Common Stock to be
issued to Oncor in the Merger, subject to certain limited exceptions. During the
30-day period thereafter and during each three-month period following the end of
such 30-day period, Oncor may sell or transfer only the number of shares of the
Gene Logic Common Stock issued to Oncor in the Merger that Oncor would otherwise
be able to sell or transfer in accordance with the resale restrictions of Rule
145. See "-- Lock-Up Agreements" and "Selling Securityholders."
As a result of the Merger, Gene Logic will assume additional registration
obligations of Oncormed. Such rights exist in connection with the Preferred
Warrants, the warrant issued to Incyte pursuant to the license agreement with
Oncormed, and the Underwriter Warrants. Gene Logic has registered for resale
pursuant to this Prospectus/Joint Proxy Statement, all shares of Gene Logic
Common Stock to be received by the Preferred Holders upon the exercise of the
Preferred Warrants following consummation of the Merger. See "-- Warrants."
OTHER MATTERS RELATED TO THE MERGER
Certain Federal Income Tax Consequences
The following discussion summarizes the material federal income tax
consequences of the Merger that are generally applicable to holders of Oncormed
Common Stock. This discussion assumes that holders of shares of Oncormed Common
Stock hold such shares as capital assets. This discussion is based on currently
existing provisions of the Code, existing Treasury Regulations thereunder and
current administrative rulings and court decisions, all of which are subject to
change. Any such change, which may or may not be retroactive, could alter the
tax consequences to the Oncormed stockholders.
Oncormed stockholders should be aware that this discussion does not deal
with all federal income tax considerations that may be relevant to particular
Oncormed stockholders in light of their particular circumstances, such as
stockholders who are dealers in securities, banks, insurance companies or
tax-exempt organizations, who are subject to the alternative minimum tax
provisions of the Code, who are non-United States persons, who acquired their
shares in connection with stock option or stock purchase plans or in other
compensatory transactions or who hold their shares as a hedge or as part of a
hedging, straddle, conversion or other risk reduction transaction. In addition,
the following discussion does not address the tax consequences of transactions
effectuated prior to or after the Merger (whether or not such transactions are
in connection with the Merger).
It is the opinion of Cooley Godward, counsel to Gene Logic, and Brobeck,
counsel to Oncormed, that the Merger will constitute a reorganization (a
"Reorganization") pursuant to Section 368(a) of the Code (collectively, the "Tax
Opinions"). In addition, Gene Logic's obligation to consummate the Merger is
conditioned on the receipt by Gene Logic of an opinion from Cooley Godward, and
Oncormed's obligation to consummate the Merger is conditioned on the receipt by
Oncormed of an opinion from Brobeck, in each case, confirming that the Merger
will constitute a Reorganization (the "Closing Opinions"). Cooley Godward and
Brobeck have advised Gene Logic and Oncormed, respectively, that they currently
expect to be able to deliver such Closing Opinions. See "The Merger and Related
Transactions -- The Merger Agreement -- Conditions to the Merger." The Tax
Opinions and Closing Opinions (i) will not be binding on the IRS nor preclude
the IRS from adopting a contrary position, (ii) will be based on the assumptions
discussed below, as well as representations received from Gene Logic, Merger Sub
and Oncormed, (iii) will be based on the assumption that the Merger will be
consummated in accordance with the terms of the Merger Agreement and (iv) will
be subject to the limitations discussed below. Neither Gene Logic nor Oncormed
has requested, or will request, a ruling from the IRS with regard to any of the
federal income tax consequences of the Merger. The Tax Opinions and Closing
Opinions assume and are conditioned upon (i) the truth and accuracy of the
statements, covenants, representations and warranties contained in the Merger
Agreement, in the representations received from Gene Logic, Merger Sub and
Oncormed to support the Tax Opinions and Closing Opinions (the "Tax
Representations") and in all other instruments and documents related to the
formation, organization and operation of Gene Logic, Merger Sub and Oncormed
examined by and relied upon by Cooley Godward and Brobeck in connection with the
Merger; (ii) that original documents submitted to such counsel are authentic,
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documents submitted to such counsel as copies conform to the original documents,
and that all such documents have been (or will be by the Effective Time) duly
and validly executed and delivered where due execution and delivery are a
prerequisite to the effectiveness thereof; (iii) that all covenants contained in
the Merger Agreement and in the Tax Representations are performed without waiver
or breach of any material provision thereof; and (iv) that any representation or
statement made "to the best of knowledge" or similarly qualified is correct
without such qualification.
Subject to the limitations and qualifications referred to herein and in the
Tax Opinions and Closing Opinions, it is the opinion of Cooley Godward and
Brobeck that as a result of the Merger's qualifying as a Reorganization, the
following U.S. federal income tax consequences will result:
- No gain or loss will be recognized for federal income tax purposes by the
holders of Oncormed Common Stock upon the receipt of Gene Logic Common
Stock solely in exchange for such Oncormed Common Stock in the Merger
(except to the extent that cash is received in lieu of fractional
shares).
- The aggregate tax basis of the Gene Logic Common Stock so received by
Oncormed stockholders in the Merger (including any fractional shares of
Gene Logic Common Stock not actually received) will be the same as the
aggregate tax basis of the Oncormed Common Stock surrendered in exchange
therefor.
- The holding period of the Gene Logic Common Stock so received by each
Oncormed stockholder in the Merger will include the holding period of the
shares of Oncormed Common Stock surrendered in exchange therefor.
- Cash payments received by holders of Oncormed Common Stock in lieu of
fractional shares of Gene Logic Common Stock will be treated as if such
fractional shares had been issued in the Merger and then redeemed by Gene
Logic. An Oncormed stockholder receiving such cash will recognize gain or
loss upon such payment, measured by the difference (if any) between the
amount of cash received and the basis allocated to such fractional share.
The gain or loss should be capital gain or loss, provided that each such
fractional share of Gene Logic Common Stock was held as a capital asset
at the Effective Time of the Merger.
A successful IRS challenge to the Reorganization status of the Merger would
result in (i) Oncormed recognizing a corporate level gain or loss on the deemed
sale of all of its assets equal to the difference between the sum of the fair
market value of the Gene Logic Common Stock issued in the Merger and the amount
of the liabilities of Oncormed as of the time of the Merger and Oncormed's basis
in such assets; and (ii) all Oncormed stockholders recognizing gain or loss with
respect to each share of Oncormed Common Stock surrendered equal to the
difference between the fair market value, as of the time of the Merger, of the
Gene Logic Common Stock received in exchange therefor and the stockholder's
basis in such share of Oncormed Common Stock. In such event, the Oncormed
stockholder's aggregate basis in the shares of Gene Logic Common Stock received
in exchange would equal the fair market value of such shares, and the Oncormed
stockholder's holding period for such shares would not include the period during
which the shares of Oncormed Common Stock were held.
Even if the Merger qualifies as a Reorganization, a recipient of Gene Logic
Common Stock would recognize income to the extent that, for example, any such
shares were determined to have been received in exchange for services, to
satisfy obligations or in consideration for anything other than the Oncormed
Common Stock surrendered. In addition, to the extent that an Oncormed
stockholder were treated as receiving (directly or indirectly) consideration
other than Gene Logic Common Stock in exchange for such stockholder's Oncormed
Common Stock, gain, if any, would have to be recognized.
Certain noncorporate Oncormed stockholders may be subject to backup
withholding at a rate of 31% on cash payments received in lieu of a fractional
share interest in Gene Logic Common Stock. Backup withholding will not apply,
however, to a stockholder who furnishes a correct taxpayer identification number
("TIN") and certifies that he, she or it is not subject to backup withholding on
the substitute Form W-9 included in the letter of transmittal, who provides a
certificate of foreign status on Form W-8, or who is
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otherwise exempt from backup withholding. A stockholder who fails to provide the
correct TIN on Form W-9 may be subject to a $50 penalty imposed by the IRS.
Each Oncormed stockholder will be required to retain records and file with
such holder's U.S. federal income tax return a statement setting forth certain
facts relating to the Merger.
THE PRECEDING DISCUSSION DOES NOT PURPORT TO BE A COMPLETE ANALYSIS OR
DISCUSSION OF ALL POTENTIAL TAX EFFECTS RELEVANT TO THE MERGER. THUS, HOLDERS OF
ONCORMED COMMON STOCK ARE URGED TO CONSULT THEIR OWN TAX ADVISORS AS TO THE
SPECIFIC TAX CONSEQUENCES TO THEM OF THE MERGER, INCLUDING TAX RETURN REPORTING
REQUIREMENTS, THE APPLICABILITY AND EFFECT OF FEDERAL, STATE, LOCAL AND OTHER
APPLICABLE TAX LAWS AND THE EFFECTS OF ANY PROPOSED CHANGES IN THE TAX LAWS.
Accounting Treatment.
For financial reporting purposes, the Merger is intended to be accounted
for as a "purchase" in accordance with generally accepted accounting principles.
No Appraisal Rights.
Under the DGCL, neither Gene Logic's nor Oncormed's stockholders are
entitled to appraisal rights in connection with the Merger.
Regulatory Matters.
No state or federal regulatory requirements must be complied with nor are
state or federal regulatory approvals required in connection with the Merger,
other than the filing of this Prospectus/Joint Proxy Statement with the
Commission and obtaining the approval of the Merger Proposal by the stockholders
of each of Gene Logic and Oncormed.
Merger Expenses and Fees and Other Costs.
Pursuant to the Merger Agreement, all fees and expenses incurred in
connection with the Merger Agreement and the transactions contemplated by the
Merger Agreement shall be paid by the party incurring such expenses, whether or
not the Merger is consummated; provided, however, that Gene Logic and Oncormed
shall share equally all fees and expenses, other than attorneys' and
accountants' fees, incurred in connection with the printing and filing of this
Prospectus/Joint Proxy Statement and the Registration Statement of which this
Prospectus/Joint Proxy Statement is a part and any amendments or supplements
thereto with the Commission. If the Merger Agreement is terminated under certain
circumstances, Oncormed will be required to pay to Gene Logic a nonrefundable
fee, in cash, of $1,000,000. See "-- The Merger Agreement -- Termination and
Amendment."
Gene Logic and Oncormed estimate that they will incur direct transaction
costs of approximately $2.0 million associated with the Merger. The nonrecurring
transaction costs incurred by Oncormed will be charged to operations as
incurred. The nonrecurring transaction costs incurred by Gene Logic will be
added to the purchase price as a direct cost of the transaction. In addition,
Gene Logic anticipates incurring additional charges upon consummation of the
Merger of approximately $35.2 million relating to the write-off of acquired
in-process research and development. Gene Logic also anticipates that it will
incur other costs associated with integrating the two companies which will be
expensed as incurred. Gene Logic also anticipates that certain charges will be
recorded as a restructuring liability and will be included in the purchase price
allocation. See "Unaudited Pro Forma Combined Condensed Financial Data."
Surrender of Certificates.
Following the Effective Time, Gene Logic, acting through its exchange
agent, will mail a letter of transmittal with instructions to all holders of
record of Oncormed Common Stock (including the holders of shares of Oncormed
Preferred Stock automatically converted into Oncormed Common Stock immediately
prior to the Effective Time) as of the Effective Time for use in surrendering
their stock certificates in exchange for certificates representing Gene Logic
Common Stock and a cash payment in lieu of fractional shares. CERTIFICATES
REPRESENTING SHARES OF ONCORMED COMMON STOCK SHOULD NOT BE SURRENDERED UNTIL THE
LETTER OF TRANSMITTAL IS RECEIVED.
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SELLING SECURITYHOLDERS
In connection with the Merger, Gene Logic is hereby registering for resale
pursuant to this Prospectus/ Joint Proxy Statement certain shares of Gene Logic
Common Stock to be issued to Oncor, and certain shares of Gene Logic Common
Stock issuable to the Preferred Holders upon exercise of the Preferred Warrants
(collectively, the "Selling Securityholders"). Based on the Assumed Exchange
Ratio of .4646, following the Merger, an aggregate of approximately 77,431
shares of Gene Logic Common Stock will be issuable upon exercise of such
Preferred Warrants at an exercise price of approximately $18.38 per share. See
"The Merger and Related Transactions -- Merger Consideration; Conversion of
Shares -- Treatment of Oncormed Warrants" and "-- Related Agreements and
Interests of Certain Persons in the Merger -- Warrants." The following table
sets forth the name and address of the Selling Securityholders, the number of
shares of Gene Logic Common Stock that the Selling Securityholders beneficially
owned prior to the offering for resale of any of the shares of Gene Logic Common
Stock being registered hereby, the maximum number of shares of Gene Logic Common
Stock that may be offered for resale for the account of the Selling
Securityholders pursuant to this Prospectus/Joint Proxy Statement (the "Resale
Shares") and the number of shares of Gene Logic Common Stock to be held by the
Selling Securityholders after the offering of the Resale Shares (assuming all of
the Resale Shares are sold by the Selling Securityholders).
<TABLE>
<CAPTION>
PERCENTAGE OF
SHARES OF GENE
SHARES OF NUMBER OF LOGIC COMMON STOCK
GENE LOGIC SHARES OF BENEFICIALLY OWNED(2)
COMMON GENE LOGIC --------------------------
STOCK TO BE COMMON BEFORE AFTER
RESOLD STOCK OFFERING OF OFFERING OF
IN THE BENEFICIALLY THE RESALE THE RESALE
SELLING SECURITYHOLDERS(1) OFFERING OWNED(2) SHARES SHARES(3)
-------------------------- ----------- ------------ ----------- -----------
<S> <C> <C> <C> <C>
Oncor, Inc. ................................... 929,200 929,200 4.7% --
209 Perry Parkway
Gaithersburg, Maryland 20877
Incyte Pharmaceuticals, Inc. .................. 7,743 811,848(4) 4.0% 4.0%
3174 Porter Drive
Palo Alto, CA 94304
Southbrook International Investments, Ltd. .... 29,037 314,433(4) 1.6% 1.5%
c/o Trippoak Advisors, Inc.
630 Fifth Avenue, Suite 2000
New York, New York 10111
Westover Investments L.P. ..................... 10,163 110,359(4) * *
777 Main Street, Suite 2750
Forth Worth, Texas 76102
Montrose Investments, LTD...................... 18,874 203,258(4) 1.0% *
777 Main Street, Suite 2750
Forth Worth, Texas 76102
Brown Simpson Strategic Growth Fund, L.P....... 2,787 30,224(4) * *
152 West 57th Street, 40th Floor
New York, New York 10019
Brown Simpson Strategic Growth Fund, Ltd. ..... 8,827 95,715(4) * *
152 West 57th Street, 40th Floor
New York, New York 10019
</TABLE>
- ---------------
* Represents beneficial ownership of less than 1%.
(1) This table is based upon information supplied to Gene Logic by Oncormed or
the Selling Securityholders.
(2) Number of Shares Beneficially Owned and Percentage of Shares Beneficially
Owned are determined as of the Record Date and in accordance with the rules
of the Commission based upon (i) 14,788,445 shares of Gene Logic Common
Stock issued and outstanding on the Record Date, and (ii) the issuance of an
aggregate of 4,849,815 shares of Gene Logic Common Stock in the Merger.
(3) Assumes that the Selling Securityholders sell all of the Resale Shares.
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(4) Includes for (i) Incyte Pharmaceuticals, Inc., currently exercisable
warrants to purchase 7,743 shares of Gene Logic Common Stock at an exercise
price of approximately $18.38 per share and 366,444 shares of Gene Logic
Common Stock at an exercise price equal to the greater of 110% of the fair
market value per share of Gene Logic Common Stock on the trading day prior
to the date of exercise and (a) $19.37 per share (if the warrant is
exercised after February 25, 1998 but on or prior to February 25, 1999), or
(b) $29.06 per share (if the warrant is exercised after February 25, 1999
but on or prior to February 25, 2000, each based on the Assumed Exchange
Ratio of .4646), each based on the Assumed Exchange Ratio of .4646; (ii)
Southbrook International Investments, L.P., currently exercisable warrants
to purchase 29,037 shares of Gene Logic Common Stock at an exercise price of
approximately $18.38 per share, based on the Assumed Exchange Ratio of
.4646; (iii) Westover Investments L.P., currently exercisable warrants to
purchase 10,163 shares of Gene Logic Common Stock at an exercise price of
approximately $18.38 per share, based on the Assumed Exchange Ratio of
.4646; (iv) Montrose Investments LTD, currently exercisable warrants to
purchase 18,874 shares of Gene Logic Common Stock at an exercise price of
approximately $18.38 per share, based on the Assumed Exchange Ratio of
.4646; (v) Brown Simpson Strategic Growth Fund, L.P., currently exercisable
warrants to purchase 2,787 shares of Gene Logic Common Stock at an exercise
price of approximately $18.38 per share, based on the Assumed Exchange Ratio
of .4646; and (vi) Brown Simpson Strategic Growth Fund, Ltd., 8,827 shares
of Gene Logic Common Stock at an exercise price of approximately $18.38 per
share, based on the Assumed Exchange Ratio of .4646. See "The Merger and
Related Transactions -- Merger Consideration; Conversion of
Shares -- Treatment of Oncormed Warrants" and "-- Related Agreements and
Interests of Certain Persons in the Merger -- Warrants."
Gene Logic will not receive any of the proceeds from the sale by the
Selling Securityholders of any of the Resale Shares. All proceeds from the sale
of such Resale Shares will be for the accounts of the Selling Securityholders.
Gene Logic has been advised that the Selling Securityholders or pledgees,
donees, transferees of or other successors in interest to the Selling
Securityholders may sell the Resale Shares from time to time in transactions on
the Nasdaq NMS, in privately negotiated transactions or a combination of such
methods of sale, at fixed prices which may be changed, at market prices
prevailing at the time of sale, at prices related to such prevailing market
prices or at negotiated prices. The Selling Securityholders may effect such
transactions by selling the Resale Shares to or through broker-dealers, and such
broker-dealers may receive compensation in the form of discounts, concessions or
commissions from the Selling Securityholders or the purchasers of the Resale
Shares for whom such broker-dealers may act as agent or to whom they sell as
principal, or both (which compensation to a particular broker-dealer might be in
excess of customary commission).
At any time a particular offer of Resale Shares is made, to the extent
required, a supplemental Prospectus will be distributed which will set forth the
number of Resale Shares offered and the terms of the offering including the name
or names of any underwriters, dealers or agents, the purchase price paid by any
underwriter for the Resale Shares purchased from the Selling Securityholders,
any discounts, commission and other items constituting compensation from the
Selling Securityholders and any discounts, concessions or commissions allowed or
reallowed or paid to dealers.
The Selling Securityholders and any broker-dealers who act in connection
with the sale of Resale Shares hereunder may be deemed to be "underwriters" as
that term is defined in the Securities Act, and any commissions received by them
and profit on any resale of the Resale Shares as principal might be deemed to be
underwriting discounts and commissions under the Securities Act.
Any or all of the sales or other transactions involving the Resale Shares
described above, whether effected by the Selling Securityholders, any
broker-dealer or others, may be made pursuant to this Prospectus. In addition,
any Resale Shares that qualify for sale pursuant to Rule 145 under the
Securities Act may be sold under Rule 145 rather than pursuant to this
Prospectus.
In order to comply with the securities laws of certain states, if
applicable, the Resale Shares may be sold in such jurisdictions only through
registered or licensed brokers or dealers. In addition, in certain states the
Resale Shares may not be sold unless they have been registered or qualified for
sale or an exemption from registration or qualification requirements is
available and is complied with.
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Under applicable rules and regulations under the Exchange Act, any person
engaged in the distribution of the Resale Shares may not simultaneously engage
in market making activities with respect to Gene Logic's Common Stock for a
period of two business days prior to the commencement of such distribution. In
addition and without limiting the foregoing, the Selling Securityholders will be
subject to applicable provisions of the Exchange Act and the rules and
regulations thereunder, including without limitation, Regulation M under the
Exchange Act, which may limit the timing of purchases and sales of shares of
Gene Logic Common Stock (including the Resale Shares) by the Selling
Securityholders.
In the event of a "distribution" of Gene Logic Common Stock, the Selling
Securityholders, any selling broker-dealer or agent and any "affiliated
purchasers" may be subject to Regulation M under the Exchange Act, which would
prohibit, with certain exceptions, each such person from bidding for, purchasing
or attempting to induce any person to bid for or purchase any security which is
the subject of such distribution until his participation in that distribution is
completed. In addition, Regulation M under the Exchange Act prohibits certain
"stabilizing bids" or "stabilizing purchases" for the purpose of pegging, fixing
or maintaining the price of Gene Logic Common Stock in connection with any offer
of Gene Logic Common Stock by the Selling Securityholders.
Gene Logic will make copies of this Prospectus/Joint Proxy Statement
available to the Selling Securityholders and has informed the Selling
Securityholders of the need for delivery of a copy of this Prospectus/Joint
Proxy Statement to each purchaser of the Resale Shares prior to or at the time
of any sale of the Resale Shares offered hereby. Gene Logic has agreed with the
Selling Securityholders to keep the Registration Statement of which this
Prospectus/Joint Proxy Statement is a part effective until the earlier to occur
of (i) the time when all of the Resale Shares may be resold pursuant to an
exemption from registration under the Securities Act, and (ii) the time at which
the Selling Securityholders no longer hold any Resale Shares. Notwithstanding
the foregoing, Gene Logic may convert the Form S-4 Registration Statement of
which this Prospectus/Joint Proxy Statement is a part to a Registration
Statement on another form permitted to be used by Gene Logic for the
registration under the Securities Act of the Resale Shares.
All costs and expenses associated with registering the Resale Shares being
offered hereunder with the Commission will be paid by Gene Logic.
The Selling Securityholders may agree to indemnify certain persons
including broker-dealers or others, against certain liabilities in connection
with any offering of the Resale Shares including liabilities under the
Securities Act.
Oncor has also entered into a lock-up agreement with Gene Logic with
respect to the shares of Gene Logic Common Stock to be issued to it in the
Merger. Under such lock-up agreement, Oncor has agreed that it will not sell or
transfer any shares of Gene Logic Common Stock to be received by it in the
Merger during the Initial Lock-Up Period. During the Second Lock-Up Period, and
during each three-month period beginning after the Second Lock-Up Period, Oncor
may sell or transfer that number of shares of Gene Logic Common Stock received
by it in the Merger equal to the greater of (i) 1% of the then outstanding
shares of Gene Logic Common Stock, and (ii) the average weekly reported volume
of trading in Gene Logic Common Stock during the four calendar weeks preceding
the date of any such sale or transfer. Certain third parties affiliated with
Oncor have rights to purchase shares of Oncormed Common Stock currently held by
Oncor. Each such third party has agreed that, to the extent that such third
party exercises its option to purchase Oncormed Common Stock currently held by
Oncor, such third party will be bound by the terms of the lock-up agreement
executed by and between Oncor and Gene Logic. Gene Logic may issue stop-transfer
instructions in order to enforce the terms of such lock-up agreement. See "The
Merger and Related Transactions -- Related Agreements and Interests of Certain
Persons in the Merger -- Lock-Up Agreements."
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GENE LOGIC MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
This Prospectus/Joint Proxy Statement contains forward-looking statements
that involve risks and uncertainties, including, among others, statements as to
the benefits expected to be realized as a result of the Merger, future financial
performance of the combined company, the analysis performed by the financial
advisors to Gene Logic and Oncormed, the timing of availability of products and
services under development, the ability to commercialize products and services
developed under collaborations and alliances, the performance and utility of the
combined company's products and services, and the adequacy of capital resources.
The combined company's actual results may differ materially from those
anticipated in these forward-looking statements as a result of risks and
uncertainties, including those set forth in the section entitled "Risk Factors"
and elsewhere in this Prospectus/Joint Proxy Statement. Stockholders of each of
Gene Logic and Oncormed are urged to consider carefully the discussion of such
risks and uncertainties in determining whether or not to vote for the Merger
Proposal and are cautioned not to place undue reliance on the forward-looking
statements contained in this Prospectus/Joint Proxy Statement, which speak only
as of the date hereof.
OVERVIEW
Gene Logic 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. To date, Gene Logic has entered into
strategic alliances with Procter & Gamble, Japan Tobacco, Organon, SmithKline
and Wyeth-Ayerst. In addition, Gene Logic has an exclusive alliance with AgrEvo
for discovery of genes to develop crop protection and improvement products.
These agreements provide Gene Logic with various combinations of technology and
database access fees, signing fees and research funding, and provide certain
additional payments upon the attainment of research and product development
milestones and royalty payments based on sales of any products resulting from
the strategic alliances. Procter & Gamble and Japan Tobacco each have the option
to expand the alliances to cover additional research areas. Japan Tobacco
purchased $3.0 million of Gene Logic's Common Stock in a private placement that
closed simultaneously with Gene Logic's initial public offering.
Gene Logic's future profitability will depend in part on the successful
establishment of strategic alliances, marketing of genomic databases and
bioinformatics software, and development of the Flow-thru Chip. Payments from
strategic alliance partners and interest income are expected to be the only
sources of revenue for the foreseeable future. Such revenue is dependent in
large part on the discovery of genes, drug targets and drug leads using Gene
Logic's technologies. Royalties or other revenue from commercial sales of
products developed from any therapeutic, diagnostic or agricultural products
identified using Gene Logic's technologies are not expected for at least several
years, if at all. Revenues under strategic alliances may be subject to
significant fluctuation in both timing and amount, and, therefore, Gene Logic'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 Gene Logic entering into additional
alliances. There can be no assurance that Gene Logic will enter into additional
alliances on acceptable terms, if at all, or that current or future alliances
will be successful.
Gene Logic has incurred operating losses in each year since its inception,
and, at June 30, 1998, Gene Logic had an accumulated deficit of approximately
$16.2 million. Gene Logic's losses have resulted principally from costs incurred
in research and development and from general and administrative costs associated
with Gene Logic's operations. These costs have exceeded Gene Logic's revenues
which to date have been generated principally from strategic alliances. Gene
Logic expects to incur additional operating losses over the next few years as a
result of increases in its expenses for research and development capabilities.
Gene Logic's quarterly operating results may fluctuate significantly as a
result of a variety of factors, including changes in the demand for Gene Logic's
technologies and products, variations in revenues under strategic alliances,
including milestone payments, royalties, license fees and other contract
revenues, and the timing of new product introductions, if any, by Gene Logic.
Gene Logic's quarterly operating results may also
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fluctuate significantly depending on changes in the research and development
budgets of Gene Logic's strategic partners, the introduction of new products by
Gene Logic's competitors and other competitive factors, adoption of new
technologies, and the cost, quality and availability of cell and tissue samples
and related reagents.
RESULTS OF OPERATIONS
Six Months Ended June 30, 1998 and June 30, 1997
Revenue was $3.7 million and $5.9 million for the three months and six
months ended June 30, 1998, respectively, compared to $167,000 for the same
periods in 1997. The increase in revenues resulted from Gene Logic's strategic
alliance agreements which were entered into primarily during the last year.
Under the terms of the strategic alliance agreements, payments for technology
and database access fees and research funding are recognized over the period for
which they are earned. Payments for nonrefundable signing fees, which are not
contingent upon future performance under the terms of the agreement, are
recognized as revenue upon execution of such agreement. Payments related to the
achievement of certain milestones are recognized as revenue when the milestones
are achieved.
Research and development expenses increased to $3.9 million and $7.1
million for the three months and six months ended June 30, 1998, respectively,
compared to $921,000 and $1.8 million for the same periods in 1997. The increase
in research and development expenses was attributable to increased personnel
expenses, laboratory supplies and facility costs as a result of Gene Logic
expanding its target discovery programs, Flow-thru Chip development and
bioinformatics business. Gene Logic 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 $1.7 million and $3.3
million for the three months and six months ended June 30, 1998, respectively,
compared to $760,000 and $1.2 million for the same periods in 1997. The increase
is due primarily to increased personnel expenses, professional fees and facility
costs as a result of Gene Logic's overall scale-up of operations and business
development efforts. Gene Logic expects that general and administrative expenses
will continue to increase as Gene Logic continues to expand its operations.
Net interest income increased to $491,000 and $1.1 million for the three
months and six months ended June 30, 1998, respectively, from $30,000 and
$91,000 for the same periods in 1997 due to investment of proceeds from Gene
Logic's private placement of equity securities and initial public offering in
1997.
Years Ended December 31, 1997 and December 31, 1996
Revenue under strategic alliance agreements was $2.0 million for 1997.
There was no revenue in 1996. The 1997 revenue resulted from Gene Logic's
strategic alliance agreements with Procter & Gamble, Japan Tobacco and Organon.
Under the terms of the strategic alliance agreements, payments for technology
and database access fees and research funding are recognized as revenue ratably
over the period for which the payments are made. Payments related to the
achievement of certain milestones are recognized as revenue when the milestones
are achieved.
Research and development expenses increased to $6.1 million for 1997 from
$1.7 million in 1996. This increase was primarily attributable to increased
payroll and personnel expenses as Gene Logic hired additional research and
development personnel, increased purchases of laboratory supplies and increased
equipment depreciation as a result of capital expenditures. Gene Logic 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 $3.8 million for 1997 from
$1.3 million in 1996. This increase was primarily attributable to increased
payroll and personnel expenses as Gene Logic hired additional management and
administrative personnel and professional fees in connection with the overall
scale up of
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Gene Logic's operations and business development efforts. Gene Logic expects
that general and administrative expenses will continue to increase as Gene Logic
continues to expand its operations.
Net interest income increased to $745,000 for 1997 from $221,000 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 and the
completion of Gene Logic's initial public offering.
As of December 31, 1997, Gene Logic had accumulated losses of $12.7 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 $1.7 million in 1996 from
$486,000 in 1995. This increase was primarily attributable to increased payroll
and personnel expenses as Gene Logic hired additional research and development
personnel, increased purchases of laboratory supplies and increased contracted
services.
General and administrative expenses increased to $1.3 million in 1996 from
$258,000 in 1995. This increase was primarily attributable to increased payroll
and personnel expenses as Gene Logic hired additional management and
administrative personnel and professional fees in connection with the expansion
of Gene Logic's operations and business development efforts.
Gene Logic 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. Gene Logic did not earn interest income in
1995.
LIQUIDITY AND CAPITAL RESOURCES
From inception through June 30, 1998, Gene Logic financed its operations
through proceeds from Gene Logic's initial public offering and private
placements of equity securities, payments from strategic alliance partners, a
capital lease and equipment loans. In November 1997, Gene Logic completed an
initial public offering of 3,347,000 shares of Gene Logic Common Stock
(including exercise of the underwriters' over-allotment option), generating net
proceeds of approximately $23.9 million. The private placements of equity
securities have provided Gene Logic with aggregate gross proceeds of
approximately $33.2 million. Gene Logic has received, as of June 30, 1998, $8.0
million under its strategic alliances for technology and database access fees
and research funding. In connection with Gene Logic's alliance with AgrEvo, Gene
Logic holds a promissory note for $1.0 million due from AgrEvo in January 1999.
Gene Logic has also obtained $471,000 of capital lease financing and $4.7
million under equipment loans. As of June 30, 1998, Gene Logic had approximately
$40.1 million in cash and marketable securities, compared to $46.6 million as of
December 31, 1997.
Net cash used in operating activities was $5.0 million for the six months
ended June 30, 1998, as compared to net cash used in operating activities of
$804,000 for the six months ended June 30, 1997. The increase in net cash used
in operating activities resulted from timing of payments from strategic
partners, revenue recognized under strategic alliances and timing of payments
relating to Gene Logic's obligations. Gene Logic's investing activities, other
than purchases, sales and maturities of available-for-sale securities, primarily
consisted of capital expenditures, which totaled $4.9 million for the six months
ended June 30, 1998, as compared to $762,000 for the six months ended June 30,
1997. The increase was primarily due to funding tenant improvements relating to
the completion of Gene Logic's new office and research laboratory facility in
February 1998 and laboratory and computer equipment and furniture purchases to
support Gene Logic's expanding business. Net cash provided by financing
activities was $3.4 million for the six months ended June 30, 1998, as compared
to net cash provided by financing activities of $1.0 million for the six months
ended June 30, 1997. The increase is due to proceeds received under an equipment
loan that was entered into in June 1998.
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During 1995, 1996 and 1997, Gene Logic had expenditures relating to
intangible and other assets of approximately $63,000, $126,000 and $643,000,
respectively. These expenditures were primarily for patent costs and license
fees. Gene Logic will amortize capitalized patent costs to research and
development expense once the patents issue. These expenditures are necessary to
protect Gene Logic's intellectual property and to secure rights to current
technology and are expected to continue to increase.
Amounts financed for equipment under a capital lease for the year ended
December 31, 1996 were approximately $471,000. Gene Logic also had purchases of
equipment of approximately $12,000, $1.3 million and $3.1 million during 1995,
1996 and 1997, respectively. Gene Logic's new office and research laboratory
facility was completed in February 1998. Payments for tenant improvements were
approximately $326,000 as of December 31, 1997. Gene Logic anticipates funding
additional improvements for the new facility in the amount of $1.7 million in
1998. In addition, Gene Logic expects capital expenditures to increase over the
next several years as it expands its facilities and acquires significant
scientific and computer equipment to support the planned expansion of its
research and development efforts.
As of December 31, 1997, Gene Logic had net operating loss carryforwards of
approximately $10.4 million to offset federal and state income taxes. Gene
Logic's research and development tax credit carryforwards were estimated to be
approximately $279,000 as of December 31, 1997 for federal income tax purposes.
If not utilized, the federal and state net operating loss carryforwards will
expire through 2012.
To date, all revenue received by Gene Logic has been from its strategic
alliances. Gene Logic expects that substantially all revenue for the foreseeable
future will come from strategic alliance partners and interest income.
Furthermore, Gene Logic's ability to achieve profitability will be dependent
upon the ability of Gene Logic to enter into additional strategic alliances.
There can be no assurance that Gene Logic 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 Gene Logic
with expected benefits.
In June 1998, Gene Logic and Oxford Venture Leasing, LLC ("Oxford Leasing")
entered into a Master Loan and Security Agreement (the "Oxford Loan") for the
financing of laboratory, computer and office equipment. Under the Oxford Loan,
Gene Logic may borrow up to $5.0 million through June 1999. In addition, Gene
Logic entered into a promissory note with Oxford Leasing (the "Promissory Note")
in the amount of approximately $3.6 million relating to its initial equipment
schedule. The Promissory Note bears interest at 8.8% and is payable in 48 equal
monthly installments including a 15% balloon payment at the end of the initial
term. Gene Logic granted Oxford Leasing a security interest, collateralized by
all the equipment and fixtures acquired under the Oxford Loan. Simultaneous with
entering into the Oxford Loan, the Promissory Note was assigned by Oxford
Leasing to Phoenixcor, Inc.
In connection with the Merger, the Company and Oncormed have entered into
the Loan Agreement whereby the Company has agreed to make available to Oncormed
through February 28, 1999 a credit facility of up to $2,000,000 to be used by
Oncormed for working capital purposes. Interest on all amounts outstanding under
the Loan shall accrue daily at the per annum rate that Citibank N.A. has
announced as its prime lending rate. Advances under the Loan shall not exceed
$500,000 per month. All outstanding principal and accrued interest on the Loan
is due and payable upon the earliest to occur of (i) March 31, 1999; (ii) in the
event the Merger is not consummated, that date upon which Oncormed secures
alternate financing of at least $2,000,000 on terms satisfactory to Oncormed in
its sole discretion; or (iii) the date on which Oncormed sells or otherwise
disposes of all or substantially all of the assets or business of Oncormed, or
any liquidation, merger or other business combination of Oncormed (other than
the Merger). If any of the Merger Agreement, Loan Agreement or License Agreement
is terminated, Gene Logic will not be obligated to make any further advances to
Oncormed under the Loan. All amounts outstanding under the Loan are secured by
certain of Oncormed's tissue biorepository assets.
Gene Logic believes that existing cash and marketable securities and
anticipated cash flow from its current strategic alliances will be sufficient to
support Gene Logic's operations for at least the next 24 months. The estimate
for the period for which Gene Logic expects its available cash balances and
estimated cash flow from its current strategic alliances to be sufficient to
meet its capital requirements is a forward-looking statement that involves risks
and uncertainties as set forth herein and elsewhere in this Prospectus/Joint
Proxy Statement. Gene Logic's actual future capital requirements and the
adequacy of its available funds, will
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depend on many factors, including progress of its discovery programs, the number
and breadth of these programs, the ability of Gene Logic to establish and
maintain additional strategic alliance and licensing arrangements and the
progress of the development and commercialization efforts of Gene Logic's
strategic partners. These factors also include the level of Gene Logic'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. Gene Logic 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, will be obtained on
terms favorable to Gene Logic and its stockholders. To the extent that Gene
Logic raises additional capital by issuing equity or convertible debt
securities, ownership dilution to stockholders will result. If adequate
financing is not available when needed, Gene Logic 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
Gene Logic to relinquish rights to certain of its technologies, discoveries or
potential products, or to grant licenses on terms that are not favorable to Gene
Logic, any of which could have a material adverse effect on Gene Logic's
business, financial condition and results of operations. In the event that
adequate funds are not available, Gene Logic's business would be adversely
affected.
YEAR 2000 COMPLIANCE
Many computer systems and software products are coded to accept two digit
entries in the date code field. These date code fields will need to accept four
digit entries to distinguish 21st century dates from 20th century dates. As a
result, in less than two years, computer systems and software used by many
companies may need to be upgraded to comply with such "Year 2000" requirements.
Gene Logic uses a significant number of computer software programs and operating
systems in connection with its database products, services and internal
operations. Such software and systems were purchased and installed with a view
towards Year 2000 compliance. Nevertheless, Year 2000 problems could affect Gene
Logic's research and development, financial, administrative and communication
operations.
Gene Logic is in the process of formulating and implementing a program
designed to address any Year 2000 problems. As a result, a project team has
performed an initial review of all internal computer systems and is developing
and implementing a more detailed assessment to include internal and external
compliance audits, Year 2000 validation testing, Year 2000 certification from
third parties Gene Logic has material agreements with and contingency plans.
Systems critical to Gene Logic's business identified as non-Year 2000 compliant
will be replaced or corrected through programming modifications and/or software
upgrades. In addition, third parties such as vendors, major strategic partners,
service suppliers, communication providers and banks will be asked to verify,
through a compliance assurance questionnaire, their Year 2000 readiness. Gene
Logic expects these projects to be successfully completed in 1999. Gene Logic
has not assessed software and systems which would be acquired upon consummation
of the proposed Merger with Oncormed, however Gene Logic plans to undertake a
review commensurate with its review of existing software and systems.
External and internal costs specifically associated with modifying internal
software for Year 2000 compliance are expensed as incurred. To date, costs have
not been material and are not expected to be in the future. Such costs do not
include normal system upgrades and replacements. Based on Gene Logic's current
plans and efforts to date, Gene Logic believes that changes mandated by the Year
2000 issue will not cause any material adverse effects on Gene Logic's business,
financial condition and results of operations. There is no guarantee, however,
that all problems will be foreseen and corrected, or that no material disruption
of Gene Logic's business will occur.
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GENE LOGIC BUSINESS
This Prospectus/Joint Proxy Statement contains forward-looking statements
that involve risks and uncertainties, including among others, statements as to
the benefits expected to be realized as a result of the Merger, future financial
performance of the combined company, the analysis performed by the financial
advisors to Gene Logic and Oncormed, the timing of availability of products and
services under development, the ability to commercialize products and services
developed under collaborations and alliances, the performance and utility of the
combined company's products and services, and the adequacy of capital resources.
The combined company's actual results may differ materially from those
anticipated in these forward-looking statements as a result of risks and
uncertainties, including those set forth in the section entitled "Risk Factors"
and elsewhere in this Prospectus/Joint Proxy Statement. Stockholders of each of
Gene Logic and Oncormed are urged to consider carefully the discussion of such
risks and uncertainties in determining whether or not to vote for the Merger
Proposal and are cautioned not to place undue reliance on the forward-looking
statements contained in this Prospectus/Joint Proxy Statement, which speak only
as of the date hereof.
SUMMARY
Gene Logic uses a proprietary system, based on analysis of gene expression
and regulation, designed to discover drug targets and drug leads. Gene Logic'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. Gene Logic 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
strategic alliances with Procter & Gamble, Japan Tobacco, Organon, a
pharmaceutical business unit of Akzo Nobel NV., Wyeth-Ayerst, AgrEvo and
SmithKline.
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. Gene Logic compares
normal and diseased tissues through a series of Molecular Topography snapshots
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.
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. Gene Logic 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,
Gene Logic 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 screening 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. Gene Logic plans to market its genomic database products, either in a
single package or as separate modules, to multiple pharmaceutical company
customers. Gene Logic's database products are: (i) the GENE EXPRESS NORMAL
database, a reference set of gene expression profiles in a variety
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of normal tissues; (ii) the rare expressed sequence tag (rEST) database
containing sequences for rarely-expressed genes that are not available through
public sources; (iii) the Toxicology EXPRESS database for screening of lead
compounds for common classes of toxicological effects; (iv) the Pharmacology
EXPRESS database to predict efficacy of lead compounds at the preclinical drug
development stage and (v) The Annotated Genome (TAG) database which assigns
human genes to functional pathways based on their patterns of expression and
regulation.
Bioinformatics and Data Management. Gene Logic has developed software
toolkits based on the Object Procotol Model ("OPM"), as commercial products and
intends to grant non-exclusive licenses to pharmaceutical companies for their
use in building and integrating databases. Such licenses would generally provide
Gene Logic with annual license and other fees. Using OPM, Gene Logic 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 Gene Logic'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, (ii)
establish independent discovery programs and license resulting data, drug
targets or 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. Gene Logic expects to receive a diversified stream of technology and
database access fees, signing 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. 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 in these areas.
To date, Gene Logic has established five major alliances with
pharmaceutical companies. In May 1997, Gene Logic entered into a 4 1/2-year
strategic alliance with Procter & Gamble for drug target discovery in heart
failure; in September 1997, Gene Logic and Japan Tobacco entered into a 5-year
strategic alliance for drug target and drug lead discovery in renal disease; in
December 1997, Gene Logic entered into a 3-year database agreement for drug
target discovery with Organon; and in June 1998, Gene Logic entered into an
agreement with Wyeth-Ayerst regarding a pharmacogenomics alliance in the field
of preclinical toxicology. In addition, in June 1998, Gene Logic entered into a
3-year agreement with AgrEvo for discovery of genes for the development of crop
protection and crop improvement products. Through these alliances, Gene Logic
will receive committed technology and database access fees, signing fees, and
research funding. In both the Procter & Gamble and Japan Tobacco alliances, Gene
Logic'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. In each alliance,
Gene Logic is also entitled to receive additional payments for the achievement
of specified target discovery and product development milestones and royalties
on worldwide net sales of all products that may result from the alliances. Gene
Logic has retained certain rights to diagnostic products and certain classes of
therapeutics under these alliances. As part of its alliance, Japan Tobacco
purchased $3.0 million of Gene Logic Common Stock in a private placement
concurrent with the closing of Gene Logic's initial public offering of Gene
Logic Common Stock at a price of $8.00 per share. Gene Logic has also entered a
bioinformatics alliance with SmithKline with respect to its OPM software tools.
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
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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. Gene Logic 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 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
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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 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
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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 Gene Logic to identify multiple, novel drug targets more rapidly than
competing technologies. Gene Logic's Accelerated Drug Discovery system allows
Gene Logic to display the changes in gene expression patterns as a disease
develops and progresses. Gene Logic 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, Gene Logic 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. Gene Logic 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. 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 Gene Logic 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. Gene Logic
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 believes
that this portfolio approach will maximize the likelihood of drugs being
discovered and developed using its system. Gene Logic's strategy for building
commercial value is to:
- Provide An Integrated Drug Discovery Platform. Gene Logic 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 Drug Target and Lead Discovery Alliances. Gene Logic intends
to continue to establish strategic alliances with pharmaceutical
companies for drug target and drug lead discovery programs. Such
strategic alliances would generally require Gene Logic to develop
research databases of gene expression for drug target discovery for its
partner's specific programs and, in certain cases, to use its Flow-thru
Chip technology to identify drug leads. Gene Logic expects that these
alliances would provide technology and database access fees, signing
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 alliances of this type with Procter
& Gamble, Japan Tobacco, Organon, and a similar kind of alliance with
AgrEvo in the field of crop protection and crop improvement.
- 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. Gene Logic expects to license drug leads discovered through its
independent programs to pharmaceutical companies for clinical development
and commercialization and to receive license fees, development milestone
payments and royalty or profit-sharing income from such licensees.
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- Market Genomic Database Products under Non-Exclusive License. Gene Logic
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. Gene Logic intends to grant non-exclusive licenses independent
of, or in conjunction with, strategic alliances. Such licenses would
generally provide Gene Logic annual subscription fees, milestone payments
and royalties. To date, Gene Logic has granted Japan Tobacco and Organon
non-exclusive licenses to its GENE EXPRESS NORMAL database and granted
Wyeth-Ayerst a non-exclusive license to its Toxicology EXPRESS database.
- Establish Data Management Business based on OPM. Gene Logic has
developed the OPM software toolkits as commercial products and intends to
grant non-exclusive licenses to pharmaceutical companies for their use in
building and integrating databases. Such licenses would generally provide
Gene Logic with annual license and other fees. To date, Gene Logic has
granted SmithKline Beecham a non-exclusive license to the OPM software
products.
- 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, Gene
Logic 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. Gene Logic
may pursue these applications independently or in alliances with
additional partners.
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
Gene Logic 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. Gene Logic has an exclusive license from
Yale University to a United States patent and patent applications covering the
READS technology. Gene Logic has also received notice of allowance for an
independent patent application, covering key aspects of gene expression
analysis, from the United States Patent and Trademark Office (the "USPTO").
Using READS, Gene Logic rapidly generates a gene expression profile representing
a quantitative snapshot of the levels of expression of essentially all the genes
in a tissue sample. Gene Logic compares normal and diseased tissues through a
series of such snapshots 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, Gene Logic 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, Gene Logic 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. Gene Logic uses its bioinformatics system to
compile these data into a gene expression profile which represents the levels of
expression of genes active in the sample. The READS process typically takes two
days.
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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 is capable of
generating approximately 1,000 gene expression profiles per year. Gene Logic has
installed its first production unit and is scaling up operations. Gene Logic
expects to install a second production unit during 1998. There can be no
assurance, however, that Gene Logic 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 Gene Logic to identify the nucleotide sequences of
the transcription factor binding sites through which the expression of genes is
regulated. Gene Logic believes that the information generated by MuST, in
combination with the information on gene expression levels generated by its
READS technology, will enable Gene Logic to assign genes to functional pathways
based on the observation that genes in such pathways share common regulatory
mechanisms and are coordinately expressed. Gene Logic has an exclusive license
from Yale University to patent applications covering the MuST technology and has
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 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
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. Gene Logic has exclusive licenses to the technology underlying
the Flow-thru Chip from the United States Department of Energy and the inventor
of the technology. Gene Logic has also received notice of allowance for a patent
application, covering key aspects of the Flow-thru Chip technology, from the
USPTO.
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, Gene Logic 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 glass or silicon wafer traversed
by a grid of micro-channels. The current version of the chip is laid out in a
format which is intended to be compatible with current high-throughput cellular
assay systems. Each well is configured to contain an array of approximately 400
genes identified using Gene Logic'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. Gene Logic expects to commence in-house
testing during 1998, but there can be no assurance that such testing will
commence in 1998, or at all.
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 Gene Logic's signal detection system, the hybridized test sample
generates a fluorescent signal which can be correlated with the expression
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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.
Gene Logic 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, Gene Logic 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, Gene Logic
expects to be able to use a commercially available digital signal
detection system to provide 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.
Gene Logic 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 Gene Logic'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 Gene Logic. 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. Gene Logic 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.
Gene Logic 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 Gene Logic will be able to maintain such
relationships on terms acceptable to Gene Logic.
There can be no assurance that further development and scale up of the
Flow-thru Chip will be successful or that Gene Logic will be successful in
marketing the Flow-thru Chip to strategic partners or others.
Gene Logic's Bioinformatics System
Gene Logic 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 Gene
Logic 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 enables Gene Logic 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
Gene Logic's bioinformatics system was developed using scientific data
management tools based on the 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. Gene Logic'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. Gene Logic's bioinformatics system enables the integration of
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Gene Logic's information content into the data management systems of its
strategic partners, and Gene Logic 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
Gene Logic's bioinformatics system includes tools for the analysis of data
generated by READS for both normal and diseased cell and tissue types. Gene
expression data are analyzed using Gene Logic's proprietary software tools. The
tools allow intuitive "point and click" navigation among the expressed genes.
The system can identify genes as known (represented in Gene Logic's databases of
indexed 3' 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.
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.
GENE LOGIC ALLIANCES, INDEPENDENT PROGRAMS AND PRODUCTS
Drug Target and Lead Discovery Programs -- Strategic Alliances
As part of its business strategy, Gene Logic intends to establish strategic
alliances 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. Gene Logic's strategic alliances would generally provide
for Gene Logic to receive technology and database access fees, research funding,
milestone payments and royalty or profit-sharing income. To date, Gene Logic has
entered into alliances with Procter & Gamble, Japan Tobacco, Organon,
Wyeth-Ayerst, AgrEvo and SmithKline.
Procter & Gamble Pharmaceuticals, Inc.
In May 1997, Gene Logic and Procter & Gamble entered into a 4 1/2-year
strategic alliance for drug target discovery in heart failure. Payments by
Procter & Gamble to Gene Logic 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 Gene Logic 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 Gene Logic for the achievement of specified target
discovery, product development and associated regulatory milestones. Procter &
Gamble will also pay Gene Logic royalties on worldwide net sales of all products
that may result from the alliance. Payments for technology access fees and
research and development support will be recognized as revenue ratably over the
period for which the payments are made. Payments related to the achievement of
milestones will be recognized as revenue when the milestones are achieved.
There can be no assurance that Gene Logic'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 Gene Logic. As a result, there can be no assurance that Gene
Logic will receive any milestone payments, royalties or other payments
contemplated by the agreement, nor can there be any assurance that the alliance
will not be terminated prior to the natural expiration of its term pursuant to
provisions under the alliance agreement.
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Japan Tobacco Inc.
In September 1997, Gene Logic and Japan Tobacco entered into a 5-year
strategic alliance for drug target and drug lead discovery in renal disease.
Payments by Japan Tobacco to Gene Logic in the form of committed technology and
database access fees and research funding total a minimum of $15.0 million if
the research program continues for its full term and Gene Logic 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 Gene Logic 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 Gene Logic royalties on worldwide net sales of all
products that may result from targets discovered pursuant to the alliance.
Payments for technology and database access fees and research and development
support will be recognized as revenue ratably over the period for which the
payments are made. Payments related to the achievement of milestones will be
recognized as revenue when the milestones are achieved.
As part of the alliance and during the research term of the alliance
agreement, Gene Logic 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
purchased $3.0 million of Gene Logic Common Stock in a private transaction
concurrent with Gene Logic's initial public offering of Gene Logic Common Stock
at $8.00 per share. 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 Gene Logic to royalties
on net sales of therapeutic products based on lead compounds identified through
such assays.
There can be no assurance that Gene Logic'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 Gene Logic. As a result, there can be no assurance
that Gene Logic will receive any milestone payments, royalties or other payments
contemplated by the agreement, nor can there be any assurance that the alliance
will not be terminated prior to the natural expiration of its term pursuant to
provisions under the alliance agreement.
N.V. Organon
In December 1997, Gene Logic and Organon entered into a 3-year strategic
alliance for drug target discovery. Payments by Organon to Gene Logic in the
form of committed database access fees and research funding total a minimum of
$12.5 million if the research program continues for its full term and Gene Logic
performs its research obligations under the agreement. As part of the alliance
and during the research term of the alliance agreement, Gene Logic granted
Organon a non-exclusive license to the GENE EXPRESS NORMAL database. Organon
will be obligated to make additional payments to Gene Logic for the achievement
of specified target discovery and related product development milestones.
Organon will also pay Gene Logic royalties on worldwide net sales of all
products that may result from targets discovered pursuant to the alliance.
Payments for database access fees and research and development support will be
recognized as revenue ratably over the period for which the payments are made.
Payments related to the achievement of milestones will be recognized as revenue
when the milestones are achieved.
There can be no assurance that Gene Logic's research pursuant to the
agreement will be successful in discovering drug targets or that Organon will be
successful in developing or commercializing any products based upon such
discoveries made by Gene Logic. As a result, there can be no assurance that Gene
Logic will
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receive any milestone payments, royalties or other payments contemplated by the
agreement, nor can there be any assurance that the alliance will not be
terminated prior to the natural expiration of its term pursuant to provisions
under the alliance agreement.
Hoechst Schering AgrEvo GmbH
In June 1998, Gene Logic and AgrEvo entered into a 3-year strategic
alliance for discovery of genes for the development of crop protection and crop
improvement products. The initial research term may be extended for up to 5
additional years. Payments by AgrEvo to Gene Logic in the form of committed
signing fees, technology and database access fees and research funding total a
minimum of $45 million if the research program continues for its full expanded
term and Gene Logic performs its research obligations under the agreement. As
part of the alliance, AgrEvo will also receive access to Gene Logic's Flow-thru
Chip technology for further analysis of genes identified in the research
program. AgrEvo will be obligated to make additional payments to Gene Logic for
the achievement of specified target discovery and related agricultural product
development milestones. AgrEvo will also pay Gene Logic royalties on worldwide
net sales of all agricultural products that may result from targets discovered
pursuant to the alliance. Payments for technology and database access fees and
research and development support will be recognized as revenue ratably over the
period for which the payments are made. Payments for non-refundable signing
fees, which are not contingent upon future performance under the alliance, are
recognized as revenue upon execution of the agreement. Payments related to the
achievement of milestones will be recognized as revenue when the milestones are
achieved.
There can be no assurance that Gene Logic's research pursuant to the
agreement will be successful in discovering genetic targets or that AgrEvo will
be successful in developing or commercializing any agricultural products based
upon such discoveries made by Gene Logic. As a result, there can be no assurance
that Gene Logic will receive any milestone payments, royalties or other payments
contemplated by the agreement, nor can there be any assurance that the alliance
will not be terminated prior to the natural expiration of its term pursuant to
provisions under the alliance agreement.
Wyeth-Ayerst Research Division
In June 1998, Gene Logic and Wyeth-Ayerst entered into a pharmacogenomics
strategic alliance in the field of preclinical toxicology. Gene Logic and
Wyeth-Ayerst will collaborate, using Gene Logic's proprietary gene expression
and bioinformatics technologies and Wyeth-Ayerst's expertise in toxicology, to
develop a database of gene expression profiles predictive of different classes
of drug toxicity. Wyeth-Ayerst will have the right to use information and
inventions resulting from the alliance to perform toxicology studies in
connection with its internal research and drug discovery and development
activities. As part of the alliance and during the research term of the alliance
agreement, Wyeth-Ayerst will have access to Gene Logic's Flow-thru Chip
technology, which will enable the design of DNA microarray chips based on genes
selected for the Toxicology EXPRESS Database and the use of such chips for
screening preclinical compounds. Gene Logic may non-exclusively license
databases, Flow-thru Chips and other products developed under the alliance to
third party customers.
There can be no assurance that Gene Logic and Wyeth-Ayerst will be
successful in research conducted pursuant to the agreement or in the development
or commercialization of any products based upon such discoveries.
SmithKline Beecham
In May 1998, Gene Logic granted to SmithKline a license to Gene Logic's
OPM-based bioinformatics system and software tools. Under the agreement, Gene
Logic and SmithKline have agreed to use OPM to develop a series of customized
databases and servers to integrate a range of public and proprietary data
sources into SmithKline's data mining process. Gene Logic retains the right to
license software and products developed under the agreement to third party
customers. Under the agreement Gene Logic will receive software license fees and
will be entitled to research funding for its portion of the collaborative
development program.
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There can be no assurance that Gene Logic will be successful in the work to
be performed under the agreement or that Gene Logic and SmithKline will be able
to negotiate a collaboration on mutually acceptable terms.
Independent Programs
Gene Logic has established independent discovery programs to identify drug
targets for certain diseases of the central nervous system, osteoporosis and
prostate cancer and has established collaborations with academic institutions
and commercial organizations for access to relevant normal and diseased human
tissues and cell types and animal disease models. Gene Logic uses these tissues
for analysis of gene expression and gene regulation and to build its genomic
databases. Under the terms of these agreements, Gene Logic generally retains all
commercial rights to gene discoveries made through the use of cells and tissues
provided by its collaborators. Gene Logic also intends to obtain access to
compound libraries from combinatorial chemistry and pharmaceutical companies for
screening using its Flow-thru Chip.
To date, Gene Logic has established the following independent programs:
Schizophrenia. 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. Gene Logic has also begun evaluating
the effects of established and experimental anti-psychotic drugs on gene
expression in the brain in animal models.
Depression. Gene Logic 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. Gene Logic 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. 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. Gene Logic has exclusive rights to any genes useful
in the development of therapeutic products which are identified through the
collaboration. Gene Logic may pursue such rights independently or in alliance
with a strategic partner. Molecular Geriatrics Corporation retains rights to
develop diagnostic products.
Osteoporosis. 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.
Gene Logic intends to develop drug targets identified through these programs
independently or in alliance with a strategic partner.
Prostate Cancer. 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, Gene Logic 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 drug target and drug lead discovery programs, Gene
Logic 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 these 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. Gene
Logic expects to receive annual database access subscription fees, milestone
payments based on
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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 variety of normal human tissues, which enables Gene Logic 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. Gene
Logic uses the database with its 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. Gene Logic has
granted non-exclusive licenses to the GENE EXPRESS NORMAL database to Japan
Tobacco and Organon.
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 are 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. Gene Logic is developing a database of rare ESTs, with the potential
to provide promising drug targets not available through other sources of
sequence data. Gene Logic anticipates that the rEST database will be 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. Gene Logic 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. Gene Logic has granted a non-exclusive license to the Toxicology
EXPRESS database to Wyeth-Ayerst.
Pharmacology EXPRESS Database
Gene Logic 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. Gene Logic 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. Gene Logic anticipates that such database will be
available in 1998, but there can be no assurance that it will be available by
such date, or at all.
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
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binding site sequence information generated by Gene Logic'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. Gene Logic 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.
The statements made in this section regarding anticipated dates for
commercial availability of certain 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 Gene
Logic's technologies, changes in Gene Logic's business priorities and other
factors discussed in "Risk Factors." There can be no assurance that Gene Logic
will not experience difficulties that could delay or prevent the successful
development and commercialization of products or that Gene Logic's products will
address the requirements of the market or achieve market acceptance.
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. Gene Logic 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.
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. Gene Logic'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 June 30, 1998, Gene Logic had exclusive rights to 23 United States
patent applications relating to its technologies. Gene Logic has exclusive
rights to a United States patent covering key aspects of the READS gene
expression analysis. Gene Logic has also received notice of allowance for a
United States patent application covering key aspects of gene expression
analysis, and notice of allowance for a United States patent application
covering its MuST technology and notice of allowance for a United States patent
application covering its Flow-thru Chip.
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 Gene Logic has exclusive rights will result in
issued patents, that the claims of any patents which are issued will provide
meaningful protection, that Gene Logic will develop additional proprietary
technologies that are patentable, that any patents licensed or issued to Gene
Logic or its strategic partners will provide a basis for commercially viable
products or will provide Gene Logic 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 Gene Logic to do business. In addition, patent
law relating to the scope of claims in the technology field in which Gene Logic
operates is still evolving. The degree of future protection for Gene Logic'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 Gene Logic's technologies,
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or, if patents are licensed or issued to Gene Logic, design around the patented
technologies licensed to or developed by Gene Logic. In addition, Gene Logic
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.
Gene Logic 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 Gene Logic and
will not have a material adverse effect on Gene Logic'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 Gene Logic
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 Gene Logic'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 Gene Logic from utilizing
or commercializing one or more of its technologies and could have a material
adverse effect on Gene Logic's business, financial condition and results of
operations.
Gene Logic has applied, and intends to make additional applications, for
patent protection for methods relating to gene expression, for the
disease-specific patterns of gene expression it identifies and 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 Gene Logic 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 Gene Logic'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 Gene Logic 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 Gene Logic applies for patent protection on a corresponding
gene could adversely affect Gene Logic'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
Gene Logic may seek patent protection. No assurance can be given that any such
patent application will not have priority over patent applications filed by Gene
Logic. Any legal action against Gene Logic or its strategic partners claiming
damages and seeking to enjoin commercial activities relating to the affected
products and processes could, in addition to subjecting Gene Logic to potential
liability for damages, require Gene Logic 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 Gene Logic 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. Gene
Logic believes that there is likely to be significant litigation in the industry
regarding patent and other intellectual property rights. If Gene Logic becomes
involved in such litigation, it could consume a substantial portion of Gene
Logic's managerial and financial resources and have a material adverse effect on
Gene Logic'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
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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 Gene Logic's patent position. If
this change results in a shorter period of patent coverage, Gene Logic'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, Gene Logic has chosen to
rely on trade secret protection and confidentiality agreements to protect its
interests. Gene Logic 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, Gene Logic 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.
Gene Logic 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 Gene Logic's trade secrets, or that Gene
Logic can meaningfully protect its trade secrets. In the case of a strategic
partnership or other collaborative arrangement which requires the sharing of
data, Gene Logic'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 Gene Logic's data. Any material leak of
confidential data into the public domain or to third parties may have a material
adverse effect on Gene Logic's business, financial condition and results of
operations.
Gene Logic 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 Gene Logic will be able to
maintain such rights on commercially reasonable terms, if at all. Failure by
Gene Logic to maintain such rights could have a material adverse effect on Gene
Logic'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. Gene Logic 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 Gene
Logic's competitors. Competition among such entities is intense and is expected
to increase. In order to compete against existing and future technologies, Gene
Logic will need to demonstrate to potential customers that its technologies and
capabilities are superior to competing technologies.
Many of Gene Logic's competitors have substantially greater capital
resources, research and development staffs, facilities, manufacturing and
marketing experience, distribution channels and human resources than Gene Logic.
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
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rapidly than Gene Logic 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 Gene Logic's competitors will not obtain patent protection
or other intellectual property rights that would limit Gene Logic's or its
strategic partners' ability to use Gene Logic's drug discovery technologies or
commercialize therapeutic or diagnostic products, which could have a material
adverse effect on Gene Logic's business, financial condition and results of
operations. Gene Logic also faces competition from these and other entities in
gaining access to cells, tissues and nucleic acid samples used in its discovery
programs.
Gene Logic 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 Gene Logic's strategic
partners is conducting multiple product development efforts within each disease
area which is the subject of its strategic alliance with Gene Logic. Generally,
Gene Logic'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 Gene Logic, 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. Gene Logic's
future success will depend in large part on its maintaining a competitive
position in the genomics field. Rapid technological development by Gene Logic or
others may result in products or technologies becoming obsolete before Gene
Logic recovers the expenses it incurs in connection with their development.
Products offered by Gene Logic 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 Gene Logic will be
able to make the enhancements to its technology necessary to compete
successfully with newly emerging technologies.
GOVERNMENT REGULATION
Gene Logic 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 Gene Logic'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 Gene Logic or its strategic partners, impose costly procedures upon
Gene Logic's and its partners' activities, diminish any competitive advantages
that Gene Logic or its partners may attain and adversely affect Gene Logic's
receipt of royalties. There can be no assurance that regulatory approval will be
obtained for any drugs or diagnostic products developed by Gene Logic 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 Gene Logic'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.
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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 a material adverse effect on Gene Logic's business, financial
condition 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 Gene Logic, 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 IND
has been submitted for any product candidate resulting from Gene Logic's
discovery programs, and no product candidate has been approved for
commercialization in the United States or elsewhere. Gene Logic intends to rely
on its strategic partners to file INDs and generally direct the regulatory
approval process. There can be no assurance that Gene Logic'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 Gene Logic's strategic partners
from marketing drugs or diagnostic products developed through Gene Logic's
research or limit the commercial use of such products and could have a material
adverse effect on Gene Logic's business, financial condition and results of
operations.
Gene Logic's research and development activities involve the controlled use
of certain biological and other hazardous materials, chemicals and various
radioactive materials. Gene Logic 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 Gene Logic 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, Gene Logic could be held liable for any
damages that result, and any liability could exceed the resources of Gene Logic.
Other than such laws and regulations governing the generation, use and disposal
of hazardous materials and wastes, and limiting workplace exposures to such
materials, Gene Logic does not believe its current and proposed activities are
subject to any specific government regulation other than regulations affecting
the operations of companies generally.
EMPLOYEES
As of June 30, 1998, Gene Logic had 114 full-time employees, 40 of whom
hold M.D., Ph.D. or D.Sc. degrees and 19 of whom hold other advanced degrees. Of
these, 81 were engaged in research and development, including bioinformatics,
and 33 were engaged in business development, finance and general administration.
None of Gene Logic's employees is represented by a labor union or covered by a
collective bargaining agreement. Gene Logic has not experienced any work
stoppages and considers its relations with its employees to be good. Gene
Logic'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. There is intense competition for such qualified personnel in the
areas of Gene Logic's activities and there can be no assurance that Gene Logic
will continue to attract and retain the personnel necessary for the development
of its business. Failure to attract and retain key personnel could have a
material adverse effect on Gene Logic's business, financial condition and
results of operations.
FACILITIES
Gene Logic's headquarters consist of approximately 50,000 square feet of
office and research laboratory space located at 708 Quince Orchard Road,
Gaithersburg, Maryland pursuant to a lease which expires in 2007. Gene Logic's
Bioinformatics System Division occupies approximately 4,900 square feet of
office space located at 2001 Center Street, Berkeley, California pursuant to a
lease which expires in 1999.
LEGAL PROCEEDINGS
Gene Logic is not a party to any material legal proceedings.
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GENE LOGIC'S MANAGEMENT AND EXECUTIVE COMPENSATION
DIRECTORS AND EXECUTIVE OFFICERS
The following table sets forth information as of June 30, 1998 regarding
the directors and executive officers of Gene Logic assuming the consummation of
the Merger:
<TABLE>
<CAPTION>
NAME AGE POSITION
---- --- --------
<S> <C> <C>
Alan G. Walton, Ph.D., D.Sc. ............. 62 Chairman of the Board of Directors
Michael J. Brennan, M.D., Ph.D. .......... 40 President, Chief Executive Officer and Director
Mark D. Gessler .......................... 36 Senior Vice President, Corporate Development and
Chief Financial Officer
Daniel R. Passeri, J.D. .................. 37 Senior Vice President, Technology and Program
Management
Gregory G. Lennon, Ph.D. ................. 41 Senior Vice President, Research and Development and
Chief Scientific Officer
Douglas Dolginow, M.D. ................... 44 Senior Vice President, Pharmacogenomics
Jules Blake, Ph.D. ....................... 73 Director
Jeffrey D. Sollender ..................... 38 Director
Charles L. Dimmler, III .................. 56 Director
G. Anthony Gorry, Ph.D. .................. 57 Director
</TABLE>
Alan G. Walton, Ph.D., D.Sc. Dr. Walton has served as Chairman of the
Board of Directors of Gene Logic 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. Dr. Brennan has served as President, Chief
Executive Officer and a director of Gene Logic 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.
Mark D. Gessler. Mr. Gessler has served as Senior Vice President,
Corporate Development and Chief Financial Officer of Gene Logic 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.
Daniel R. Passeri, J.D. Mr. Passeri has served as Senior Vice President,
Technology and Program Management of Gene Logic since January 1998. From March
1997 to December 1997, he was Gene Logic's Vice President, Business Development
and Intellectual Property. From March 1995 to March 1997, Mr. Passeri 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
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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.S. 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 to practice before the USPTO and in the State of
Maryland and has been an adjunct professor at George Washington University since
1995.
Gregory G. Lennon, Ph.D. Dr. Lennon has served as Gene Logic's Senior Vice
President, Research and Development and Chief Scientific Officer since June
1998. From September 1997 to June 1998, he was Gene Logic's Vice President,
Genomics Research. Prior to joining Gene Logic, Dr. Lennon was a senior
scientist of the Human Genome Center at Lawrence Livermore National Laboratory
from October 1991 to August 1997 and manager of the functional genomics research
portfolio for the Department of Energy's Joint Genome Institute from January
1997 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 advisor
to the National Cancer Institute of the National Institutes of Health.
Douglas Dolginow, M.D. Dr. Dolginow joined Gene Logic, contingent upon the
consummation of the Merger, as Senior Vice President, Pharmacogenomics in July
1998 in connection with the Merger. Dr. Dolginow served as President and Chief
Operating Officer of Oncormed from October 1993 and as a director of Oncormed
from May 1994 until joining Gene Logic. Dr. Dolginow was Vice President of
Regional Operations for Nichols Institute, a clinical laboratory company, from
May 1991 to October 1993. From 1983 to 1991, he served as medical director for
multiple clinical laboratories including Highland General Hospital, Oakland,
California and Mt. Zion Hospital, San Francisco, California. Since 1984, he has
been an active member of the Clinical Faculty at the University of California,
San Francisco. Dr. Dolginow received a M.D. from the University of Kansas.
Jules Blake, Ph.D. Dr. Blake has served as a director of Gene Logic 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.
Jeffrey D. Sollender. Mr. Sollender has served as a director of Gene Logic
since July 1997. Mr. Sollender is a founder of and advisor to Biotechvest L.P.,
a venture capital investment firm formed in 1993. From 1994 through December
1995, Mr. Sollender served as an advisor 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 received his MBA from the
University of Chicago Graduate School of Business.
Charles L. Dimmler III. Mr. Dimmler has served as a director of Gene Logic
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. Dr. Gorry, has served as a director of Gene Logic
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
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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.
BOARD COMMITTEES AND MEETINGS
During the fiscal year ended December 31, 1997 the Gene Logic Board held
seven meetings. The Gene Logic Board has an Audit Committee and a Compensation
Committee.
The Audit Committee meets with Gene Logic's independent auditors at least
annually to review the results of the annual audit and discuss the financial
statements; recommends to the Gene Logic Board the independent auditors to be
retained; and receives and considers the accountants' comments as to controls,
adequacy of staff and management performance and procedures in connection with
audit and financial controls. The Audit Committee is composed of two
non-employee directors: Dr. Blake and Mr. Dimmler. It met one time during such
fiscal year.
The Compensation Committee makes recommendations concerning salaries and
incentive compensation, awards stock options to employees and consultants under
Gene Logic's stock option plans and otherwise determines compensation levels and
performs such other functions regarding compensation as the Gene Logic Board may
delegate. The Compensation Committee is composed of three non-employee
directors: Dr. Walton, Dr. Blake and Mr. Dimmler. It met eight times during such
fiscal year.
During the fiscal year ended December 31, 1997, each Gene Logic Board
member attended 75% or more of the aggregate of the meetings of the Gene Logic
Board held during the period for which he was a director. Each Gene Logic Board
member serving on a committee attended 75% or more of the aggregate meetings of
such committee held during the period for which he was a committee member;
however, Dr. Blake was unable to attend the single Audit Committee meeting.
EXECUTIVE COMPENSATION
Compensation of Directors
Gene Logic's non-employee directors who are not affiliated with
stockholders of Gene Logic currently receive $12,000 per year and an additional
fee of $1,000 for each meeting they attend (exclusive of telephonic meetings).
All directors are reimbursed for certain expenses in connection with attendance
at Gene Logic Board and committee meetings.
Non-employee directors of Gene Logic also receive automatic grants of
options under Gene Logic's 1997 Non-employee Directors' Stock Option Plan (the
"Directors' Plan"). Only non-employee directors of Gene Logic are eligible to
receive options under the Directors' Plan. Options granted under the Directors'
Plan are intended by Gene Logic not to qualify as incentive stock options under
the Code.
Option grants under the Directors' Plan are non-discretionary. Pursuant to
the terms of the Directors' Plan, first-time non-employee directors of Gene
Logic, other than those currently in place, automatically receive a grant of
30,000 shares of Gene Logic Common Stock upon the date of his or her initial
appointment or election which vest on an annual basis over four years. Each
non-employee director who is re-elected at or after the Annual Meeting, and who
has continuously served as a non-employee director for the six month period
prior to the Annual Meeting automatically receives an option to purchase 7,500
shares of Gene Logic Common Stock which vest on the anniversary of the date of
the grant. The exercise price of options granted under the Directors' Plan is
100% of the fair market value of the Gene Logic Common Stock subject to the
option on the date of the option grant. Options granted under the Directors'
Plan following termination of the optionee's service to Gene Logic vest only as
to that number of shares as to which were exercisable as of the date of
termination of all such service. The term of options granted under the
Directors' Plan is ten years. In
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the event of a merger of Gene Logic with or into another corporation or a
consolidation, acquisition of assets or other change-in-control transaction
involving Gene Logic, the vesting of each option will accelerate and the option
will terminate if not exercised prior to the consummation of the transaction. No
options granted under the Director's Plan may be exercised after the expiration
of ten years from the date granted.
During the last fiscal year and prior to the adoption of the Directors'
Plan, Gene Logic granted options under Gene Logic's 1996 Stock Plan covering
15,000 shares to Dr. Blake and 30,000 shares to each of the other non-employee
directors of Gene Logic, Dr. Walton, Mr. Dimmler, Dr. Gorry and Mr. Sollender,
at an exercise price per share of $0.15. At the time of the grants, the Gene
Logic Board determined the fair market value of such Gene Logic Common Stock was
$0.15 per share. As of June 30, 1998, no options granted to non-employee
directors had been exercised.
COMPENSATION OF EXECUTIVE OFFICERS
SUMMARY OF COMPENSATION
The following table shows for the fiscal years ended December 31, 1997 and
1996, compensation awarded or paid to, or earned by, Gene Logic's Chief
Executive Officer and its other four most highly compensated executive officers
who earned more than $100,000 in the fiscal year ended December 31, 1997 (the
"Named Executive Officers"):
SUMMARY COMPENSATION TABLE
<TABLE>
<CAPTION>
LONG-TERM
COMPENSATION
AWARDS
------------
ANNUAL COMPENSATION SECURITIES
---------------------------------------------- UNDERLYING
OTHER ANNUAL OPTIONS
NAME AND PRINCIPAL POSITION YEAR SALARY($)(1) BONUS($) COMPENSATION($)(2) (#)
--------------------------- ---- ------------ -------- ------------------ ------------
<S> <C> <C> <C> <C> <C>
Michael J. Brennan, M.D., 1997 $207,292 $110,000(3) $ -- 498,962
Ph.D. ..........................
President, Chief Executive 1996 200,000 30,000(3) -- 245,000
Officer and Director
Mark D. Gessler................... 1997 187,917 45,000 54,287(4) 321,981
Senior Vice President, Corporate 1996 95,353 40,000 97,091 25,000
Development and Chief Financial
Officer
Eric M. Eastman, Ph.D. ........... 1997 160,000 20,000 62,268(5) 60,000
Vice President, Technology 1996 38,231 40,000 -- 75,000
Management
Daniel R. Passeri................. 1997 106,875 85,000(7) -- 127,709
Senior Vice President,
Technology and Program
Management(6)
Keith O. Elliston, Ph.D.(8)....... 1997 162,260 75,000 75,890 446,981
Former Senior Vice President and
Chief Scientific Officer
</TABLE>
- ---------------
(1) In accordance with the rules of 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 Gene Logic, 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) Except as otherwise noted, represents reimbursements made by Gene Logic for
relocation expenses.
(3) Includes an amount paid to a corporation of which Dr. Brennan is a
stockholder for service rendered by such corporation.
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(4) Represents a $50,000 Promissory Note forgiven upon effectiveness of the
initial public offering and $4,287 of accrued interest thereon.
(5) Includes $731 of interest imputed from Dr. Eastman's relocation loan.
(6) Mr. Passeri served as Vice President, Business Development and Intellectual
Property until becoming Senior Vice President, Technology and Program
Management in January 1998.
(7) Includes a $30,000 payment made by Gene Logic for Mr. Passeri's relocation
expenses.
(8) Dr. Elliston's employment with Gene Logic was terminated by Gene Logic in
May 1998. In connection with Dr. Elliston's termination, he received
$110,000 in severance payments.
STOCK OPTION GRANTS AND EXERCISES
Gene Logic adopted its 1996 Stock Plan in January 1996 and amended and
restated the 1996 Stock Plan in September 1997 as the 1997 Equity Incentive Plan
(the "Stock Plan"). Gene Logic grants options to its executive officers under
the Stock Plan. As of April 1, 1998, options to purchase a total of 2,776,777
shares were outstanding under the Stock Plan and options to purchase 2,969,197
shares remained available for grant thereunder.
The following tables show for the fiscal year ended December 31, 1997,
certain information regarding options granted to, exercised by, and held at year
end by, the Named Executive Officers:
OPTIONS GRANTS IN FISCAL YEAR 1997
<TABLE>
<CAPTION>
INDIVIDUAL GRANTS POTENTIAL REALIZABLE VALUE
--------------------------------------------------------- AT ASSUMED ANNUAL RATES
NUMBER OF % OF TOTAL OF STOCK PRICE
SECURITIES OPTIONS APPRECIATION FOR OPTION
UNDERLYING GRANTED TO EXERCISE OR TERM(4)
OPTIONS EMPLOYEES IN BASE PRICE EXPIRATION ---------------------------
NAME GRANTED(#)(1) FISCAL YEAR(2) ($/SH)(3) DATE 5%($) 10%($)
---- ------------- -------------- ----------- ---------- ------------ ------------
<S> <C> <C> <C> <C> <C> <C>
Michael J. Brennan, M.D.,
Ph.D. ....................... 150,000 6.6% $0.15 03/18/07 $1,932,174 $3,089,991
348,962 15.3 2.50 09/09/07 3,674,974 6,368,535
Mark D. Gessler................ 150,000 6.6 0.15 03/18/07 1,932,174 3,089,991
171,981 7.5 2.50 09/09/07 1,811,159 3,138,643
Eric M. Eastman, Ph.D. ........ 60,000 2.6 0.15 03/18/07 772,869 1,235,996
Daniel R. Passeri.............. 80,000 3.5 0.15 03/18/07 1,030,493 1,647,995
47,709 2.1 2.50 09/09/07 502,431 870,686
Keith O. Elliston, Ph.D.(5).... 250,000 11.0 0.15 03/18/07 3,220,289 5,149,985
196,981 8.6 2.50 09/09/07 2,074,438 3,594,891
</TABLE>
- ---------------
(1) Options have a maximum term of 10 years measured from the date of grant,
subject to earlier termination upon the optionee's cessation of service with
Gene Logic. The options generally vest on a monthly basis over a four-year
period. The options expiring in March 2007 accelerated upon certain
performance-based goals, including vesting of 80% of such options upon
completion of Gene Logic's initial public offering in November 1997 and the
remaining options 180 days thereafter.
(2) Based on options to purchase 2,281,881 shares granted to employees in fiscal
1997, including the Named Executive Officers.
(3) The exercise price is equal to the fair market value of the Common Stock on
the date of grant as determined by the Gene Logic Board on the date of
grant.
(4) The potential realizable value is calculated based on the term of the option
at its time of grant (10 years) and the fair market value per share of Gene
Logic's Common Stock as of December 31, 1997 of $8.00. It is calculated
assuming that the stock price on the date of grant appreciates at the
indicated annual rate, compounded annually for the entire term of the option
and that the option is exercised and sold on the last day of its term for
the appreciated stock price. These amounts represent certain assumed rates
of appreciation only, in accordance with the rules of the Commission, and do
not reflect Gene Logic's
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estimate or projection of the future stock price performance. Actual gains,
if any, are dependent on the actual future performance of Gene Logic's
Common Stock.
(5) Dr. Elliston's employment with Gene Logic was terminated by Gene Logic in
May 1998.
AGGREGATED OPTION EXERCISES IN FISCAL YEAR 1997 AND FISCAL YEAR-END OPTION
VALUES
<TABLE>
<CAPTION>
NUMBER OF SECURITIES
UNDERLYING VALUE OF UNEXERCISED IN-
UNEXERCISED OPTIONS THE-MONEY OPTIONS AT
SHARES VALUE AT FISCAL YEAR-END(#) FISCAL YEAR-END($)(2)
ACQUIRED ON REALIZED EXERCISABLE/ EXERCISABLE/
NAME EXERCISE(#) ($)(1) UNEXERCISABLE UNEXERCISABLE
---- ----------- -------- --------------------- ------------------------
<S> <C> <C> <C> <C>
Michael J. Brennan, M.D.,
Ph.D. .......................... 105,000 $114,750 145,540/393,422 $1,108,320/2,302,471
Mark D. Gessler................... -- -- 147,164/199,817 1,138,402/1,181,244
Eric M. Eastman, Ph.D. ........... -- -- 108,000/27,000 847,800/211,950
Daniel R. Passeri................. -- -- 65,986/61,723 513,323/377,077
Keith O. Elliston, Ph.D.(3)....... 30,000 4,500 178,206/238,775 1,379,633/1,430,763
</TABLE>
- ---------------
(1) Based on the fair market value per share of Gene Logic Common Stock (as
determined by the Gene Logic Board of Directors) at the date of exercise,
less the exercise price.
(2) Based on the fair market value per share of Gene Logic Common Stock ($8.00)
at December 31, 1997, less the exercise price, multiplied by the number of
shares underlying the option.
(3) Dr. Elliston's employment with Gene Logic was terminated by Gene Logic in
May 1998.
EMPLOYMENT AGREEMENTS
On December 1, 1995, Michael J. Brennan, the President, Chief Executive
Officer and a director and stockholder of Gene Logic, entered into an employment
agreement with Gene Logic. 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 Gene Logic's initial public offering and the remaining 20% 180
days thereafter. Upon termination of the agreement by Gene Logic without cause,
Dr. Brennan will receive severance pay in the amount equal to Dr. Brennan's
total combined annual base salary and performance bonus for the calendar year in
which the termination becomes effective.
On May 16, 1996, Mark D. Gessler, the Senior Vice President, Corporate
Development and Chief Financial Officer of Gene Logic and a stockholder of Gene
Logic, entered into an employment agreement with Gene Logic. 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 Gene Logic's initial public offering
and the remaining 20% 180 days thereafter. Upon termination of the agreement by
Gene Logic without cause, Mr. Gessler will receive severance pay in the amount
of one-half of his salary for the calendar year in which the termination becomes
effective.
In September 7, 1996, Eric M. Eastman, the Vice President, Technology
Management, entered into an employment agreement with Gene Logic. The employment
agreement has a four-year term and provides, among other things, for the payment
to Dr. Eastman 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 Gene Logic's initial public offering
and the remaining 20% 180 days thereafter. Upon termination of the agreement by
Gene Logic without cause, Dr. Eastman will receive severance pay in the amount
of three months of his then current salary.
On February 17, 1997, Daniel R. Passeri, the Senior Vice President,
Technology and Program Management, entered into an employment agreement with
Gene Logic. The employment agreement has a four-year term and provides, among
other things, for the payment to Mr. Passeri of annual bonuses and the
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acceleration of certain unvested options upon achievement of certain
performance-based goals, including vesting of 80% of such options upon
completion of Gene Logic's initial public offering and the remaining 20% 180
days thereafter. Upon termination of the agreement by Gene Logic without cause,
Mr. Passeri will receive severance pay in the amount of three months of his then
current salary.
On February 5, 1997, Keith Elliston, the Senior Vice President and Chief
Scientific Officer and a stockholder of Gene Logic, entered into an employment
agreement with Gene Logic. Dr. Elliston's employment with Gene Logic was
terminated by Gene Logic in May 1998. The employment agreement had a four-year
term and provided, among other things, for the payment to Dr. Elliston of annual
bonuses and the acceleration of certain unvested options under achievement of
certain performance-based goals, including vesting of 80% of such options upon
completion of Gene Logic's initial public offering and the remaining 20% 180
days thereafter. In connection with Dr. Elliston's termination by Gene Logic, he
received $110,000 in severance payments.
CERTAIN TRANSACTIONS
In July 1997, Gene Logic sold 4,444,443 shares of Series C Convertible
Preferred Stock ("Series C") for net proceeds of approximately $19.1 million and
issued warrants to purchase an additional 48,889 shares of Series C. All Gene
Logic preferred stock automatically converted into Gene Logic Common Stock upon
the closing of the initial public offering. The holdings of such Gene Logic
Common Stock (issued upon conversion of the Series C) by affiliates of Gene
Logic's Directors are described below.
<TABLE>
<CAPTION>
NUMBER OF SHARES OF
PURCHASER GENE LOGIC 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).............................. 182,222
Cross Atlantic Partners II K/S(2)........................... 88,889
Cross Atlantic Partners III K/S(2).......................... 173,334
Oxford Bioscience Partners (Adjunct) L.P.(3)................ 11,111
Oxford Bioscience Partners (Bermuda) Limited
Partnership(3)............................................ 27,717
Oxford Bioscience Partners L.P.(3).......................... 78,283
</TABLE>
- ---------------
(1) Affiliated with Jeffrey D. Sollender, a Director.
(2) Affiliated with Charles L. Dimmler III, a Director.
(3) Affiliated with Alan G. Walton, Ph.D., D.Sc., a Director.
In 1997, Gene Logic also paid an amount of $110,000 to a corporation of
which Dr. Brennan is a stockholder for service rendered by such corporation.
Gene Logic has granted options to certain of its directors and executive
officers. Gene Logic has entered into an Indemnity Agreement with certain of its
directors and executive officers, which provides, among other things, that Gene
Logic will indemnify such officers and directors under the circumstances
provided for therein, for expenses (including attorneys' fees), witness fees,
damages, judgments, fines and amounts paid in settlement and any other amounts
such director or executive officer may be required to pay in actions or
proceedings which such director or officer is or may be a party by reason of
such position, and otherwise to the full extent permitted under Delaware law and
the Gene Logic By-laws.
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SECURITY OWNERSHIP OF CERTAIN BENEFICIAL
OWNERS AND MANAGEMENT OF GENE LOGIC
The following table sets forth certain information regarding the ownership
of Gene Logic's Common Stock as of July 15, 1998 by: (i) each director, (ii)
each of the Named Executive Officers in the Summary Compensation Table herein
under the heading "Executive Compensation;" (iii) all directors and executive
officers of Gene Logic as a group; and (iv) all those known by Gene Logic to be
beneficial owners of more than five percent (5%) of Gene Logic Common Stock.
<TABLE>
<CAPTION>
BENEFICIAL OWNERSHIP(1)
-----------------------
NUMBER OF PERCENT OF
NAME SHARES TOTAL
- ---- --------- ----------
<S> <C> <C>
Charles L. Dimmler III(2)................................... 1,572,949 10.7%
Hambro Health International, Inc.
650 Madison Avenue, 21st Floor
New York, NY 10022
Alan G. Walton, Ph.D., D.Sc.(3)............................. 1,571,603 10.7
Oxford Bioscience Partners
315 Post Road West
Westport, CT 06880
Oxford Bioscience Partners(4)............................... 1,560,353 10.6
c/o Alan G. Walton, Ph.D., D.Sc.
315 Post Road West
Westport, CT 06880
Cross Atlantic Partners K/S(5).............................. 1,552,399 10.6
c/o Charles L. Dimmler III
Hambro Health International, Inc.
650 Madison Avenue, 21st Floor
New York, NY 10022
Michael J. Brennan, M.D., Ph.D.(6).......................... 617,700 4.2
Gene Logic Inc.
708 Quince Orchard Road
Gaithersburg, MD 20878
Mark D. Gessler(7).......................................... 311,279 2.1
Keith O. Elliston, Ph.D.(8)................................. 262,022 1.8
Eric M. Eastman, Ph.D....................................... 135,000 *
Daniel R. Passeri, J.D.(9).................................. 99,314 *
Jules Blake, Ph.D.(10)...................................... 17,625 *
G. Anthony Gorry, Ph.D.(11)................................. 10,937 *
Jeffrey D. Sollender(12).................................... 10,750 *
All directors and executive officers as a group (11 4,347,157 28.8
persons)(13)..............................................
</TABLE>
- ---------------
* Represents beneficial ownership of less than 1%.
(1) This table is based upon information supplied by officers, directors and
principal stockholders and Schedules 13D and 13G filed with the Commission.
Beneficial ownership is determined in accordance with the rules of the
Securities and Exchange 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 14,675,948 shares of Common
Stock outstanding as of July 15, 1998.
(2) 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
11,250 shares subject to options held by Mr. Dimmler exercisable within 60
days of July 15, 1998. Mr. Dimmler is the Chief Investment Officer of Cross
Atlantic Partners. Mr. Dimmler
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<PAGE> 117
disclaims beneficial ownership of the 1,552,399 shares held of record by
Cross Atlantic Partners K/S and related entities.
(3) Includes an aggregate of 1,510,353 shares and warrants to purchase an
aggregate of 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 11,250 shares subject to options held by Dr. Walton
exercisable within 60 days of July 15, 1998.
(4) 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.
(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 100,000 shares held of record by the Brennan Family Limited
Partnership and 72,700 shares subject to options held by Dr. Brennan
exercisable within 60 days of July 15, 1998.
(7) Includes 30,000 shares held of record by the Gessler Family Limited
Partnership, 450 shares held by Carmen Sauro and 35,829 shares subject to
options held by Mr. Gessler exercisable within 60 days of July 15, 1998.
Mr. Gessler disclaims beneficial ownership of the shares held by his
brother-in-law, Carmen Sauro.
(8) Includes 30,000 shares held of record by the Elliston Family Limited
Partnership.
(9) Includes 99,314 shares subject to options held by Mr. Passeri exercisable
within 60 days of July 15, 1998.
(10) Includes 17,625 shares subject to options held by Dr. Blake exercisable
within 60 days of July 15, 1998.
(11) Includes 10,937 shares subject to options held by Dr. Gorry exercisable
within 60 days of July 15, 1998.
(12) Includes 8,750 shares subject to options held by Mr. Sollender exercisable
within 60 days of July 15, 1998.
(13) See footnotes (2), (3), (6), (7) and (9) through (12) above.
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ONCORMED MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
This Prospectus/Joint Proxy Statement contains forward-looking statements
that involve risks and uncertainties, including, among others, statements as to
the benefits expected to be realized as a result of the Merger, future financial
performance of the combined company, the analysis performed by the financial
advisors to Gene Logic and Oncormed, the timing of availability of products and
services under development, the ability to commercialize products and services
developed under collaborations and alliances, the performance and utility of the
combined company's products and services, and the adequacy of capital resources.
The combined company's actual results may differ materially from those
anticipated in these forward-looking statements as a result of risks and
uncertainties, including those set forth in the section entitled "Risk Factors"
and elsewhere in this Prospectus/Joint Proxy Statement. Stockholders of each of
Gene Logic and Oncormed are urged to consider carefully the discussion of such
risks and uncertainties in determining whether or not to vote for the Merger
Proposal and are cautioned not to place undue reliance on the forward-looking
statements contained in this Prospectus/Joint Proxy Statement, which speak only
as of the date hereof.
OVERVIEW
Oncormed commenced operations in July 1993, has a limited operating history
and is a development stage company. Since its inception, Oncormed has been
engaged in research and development activities, organizational efforts and sales
and marketing activities, including the development of its services, the hiring
of its scientific and marketing staff and its initial marketing efforts.
Oncormed has incurred operating losses since its inception. As of June 30, 1998,
Oncormed's accumulated deficit was approximately $35.3 million. Oncormed's
losses have resulted principally from selling, general and administrative
expenses, laboratory operations and research and development expenses. Revenues
are principally derived from providing genetic testing and information services,
technology licensing associated with its proprietary information and software
licensing associated with its risk assessment service. Revenues are also derived
from grant contract work. Revenues from Oncormed's genetic testing and
information services and grant work are recognized as they are provided.
Revenues from technology licensing fees are recognized when the licensing
agreement has been executed provided all obligations have been met. Revenues
from technology licensing royalties are recognized when earned. Revenues from
its risk assessment service are recognized over the license period. Oncormed has
yet to generate any significant revenues and cannot anticipate when, or if, it
will be able to generate significant revenues in the future. Oncormed expects
its operating losses to continue as its sales and marketing efforts, research
and development programs and laboratory operations continue and increase.
Oncormed's ability to achieve profitability depends on its ability to
successfully market and sell its services. There can be no assurance when, or
if, Oncormed will become profitable. In July 1998, as part of the Merger and
pending consummation of the Merger, Gene Logic extended a $2.0 million line of
credit to Oncormed for working capital purposes which is secured by certain of
Oncormed's tissue biorepository assets. As of September 21, 1998, $1.5 million
had been extended to the Company under the Loan. All outstanding principal and
accrued interest on the Loan is due and payable on the earliest to occur of (i)
March 31, 1999, (ii) in the event the Merger is not consummated, that date upon
which Oncormed secures alternate financing of at least $2,000,000 on terms
satisfactory to Oncormed in its sole discretion, or (iii) the date on which
Oncormed sells or otherwise disposes of, all or substantially all of the assets
or business of Oncormed, or any liquidation, merger or other business
combination of Oncormed (other than the Merger). At August 7, 1998, Oncormed had
cash and cash equivalents of approximately $1.4 million. In the event the Merger
is not consummated, Oncormed will need to raise additional funds which may not
be available on a timely basis or on satisfactory terms. If additional funds are
raised by issuing equity securities, further dilution to existing stockholders
will result and future investors may be granted rights superior to those of
existing stockholders. In the event the Merger is not consummated, the
unavailability of adequate funds in the future would have a material adverse
effect on Oncormed's business, financial condition and results of operations and
raises substantial doubt about whether Oncormed can continue as a going concern.
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<PAGE> 119
RESULTS OF OPERATIONS
Six Months Ended June 30, 1998 Compared to Six Months Ended June 30, 1997
Revenues for the three months and six months ended June 30, 1998 were
$584,312 and $848,708 respectively, compared to $207,096 and $322,375 for the
same periods in 1997. The increase in revenues is primarily due to an upfront
licensing fee from Myriad, project management fees associated with a
collaboration and to a lesser extent genetic testing services. Oncormed is in
the development stage and cannot anticipate when, or if, it will be able to
generate any significant revenues.
Cost of sales -- direct was $169,933 and $366,778 for the three months and
six months ended June 30, 1998, respectively, compared to $110,680 and $164,646
for the same periods in 1997. Cost of sales -- direct includes costs for
supplies, direct labor, shipping, reference laboratory work, and royalties
(other than those under the Restated Technology License Agreement, dated June 6,
1994 between Oncormed and Oncor which was terminated on September 14, 1998 (as
amended, the "Oncor Agreement")) for testing services and computer hardware
costs associated with the Company's risk assessment services. The increase in
cost of sales -- direct reflected the corresponding increase in Oncormed's
revenues.
Laboratory operations expenses were $765,689 and $1,572,829 for the three
months and six months ended June 30, 1998, respectively, compared to $666,853
and $1,373,658 for the same periods in 1997. The increase in laboratory
operations expenses was primarily due to increased product licensing-related
fees and increased reference laboratory costs. Related party expenses incurred
during these periods consisted of technology license fees paid to Oncor and
laboratory equipment rental payments to Codon Pharmaceuticals, Inc. ("Codon") a
wholly owned subsidiary of Oncor.
Selling, general and administrative expenses were $1,743,023 and $3,729,035
for the three months and six months ended June 30, 1998, respectively, compared
to $1,363,197 and $2,688,018 for the same periods in 1997. General and
administrative expenses were $1,531,403 and $3,249,452 for the three months and
six months ended June 30, 1998, respectively, compared with $1,042,114 and
$2,039,633 for the three months and six months ended June 30, 1997,
respectively. The increase in general and administrative expenses was primarily
due to increased professional fees specifically legal fees associated with
patent issues and related litigation, and to a lesser extent the addition of
personnel and related costs. Selling expenses were $211,620 and $479,583 for the
three months and six months ended June 30, 1998, respectively, compared with
$321,083 and $648,385 for the three months and six months ended June 30, 1997,
respectively. The decrease in selling expenses was due to a decrease in
marketing costs, specifically in literature and direct mail and a reduction in
personnel associated with the Myriad agreement. Related party selling, general
and administrative expenses were $3,380 and $6,963 for the three months and six
months ended June 30, 1998, respectively. There were no related party selling,
general and administrative expenses for the three months and six months ended
June 30, 1997.
Research and development expenses were $159,570 and $332,543 for the three
months and six months ended June 30, 1998, respectively, compared to $196,545
and $422,161 for the same periods in 1997. The decrease in research and
development expenses was primarily due to the reduced need for outside
consultants on various projects. There were no related party expenses for the
three months and six months ended June 30, 1998. Related party expenses were
$1,039 for the three months and six months ended June 30, 1997, and consisted of
costs associated with consulting services.
There were no acquired in-process research and development projects for the
three months and six months ended June 30, 1998. Acquired in-process research
and development projects were $0 and approximately $1.5 million for the three
months and six months ended June 30, 1997, respectively. This one-time write off
of approximately $1.5 million was associated with licensing of technology under
a License, Services and Marketing Agreement with Incyte (the "Incyte License
Agreement").
Related party expenses will continue to decrease and remain nominal in the
future.
Interest income was $27,016 and $48,273 for the three months and six months
ended June 30, 1998, respectively, compared to $94,066 and $188,666 for the same
periods in 1997. The decrease in interest income was due to the decreased
amounts available for investment. Interest expense was $14,359 and $28,634 for
the
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<PAGE> 120
three months and six months ended June 30, 1998, respectively, compared to
$14,650 and $29,248 for the same periods in 1997.
For the reasons set forth above, net losses applicable to common
stockholders were $2,561,417 and $5,734,948 for the three months and six months
ended June 30, 1998, respectively, compared to $2,050,763 and $5,647,838 for the
same periods in 1997.
Year Ended December 31, 1997 Compared to Year Ended December 31, 1996
Total revenues for the year ended December 31, 1997 were approximately
$960,000, compared with approximately $627,000 for the year ended December 31,
1996. The increase was primarily attributable to an increase in genetic testing
services, a technology license fee associated with Oncormed's BRCA1 patent and
BRCA2 agreement and revenues associated with grant contract work. Revenues
associated with grants are not necessarily indicative of the revenues from
grants which may be recognized in the future. Oncormed's net accounts receivable
at December 31, 1997 was approximately $299,000 compared to approximately
$129,000 at December 31, 1996. At December 31, 1997, one customer represented
approximately 60% of Oncormed's net accounts receivable balance. As of February
28, 1997, that outstanding receivable was paid in full. At December 31, 1997,
approximately $11,000 of accounts receivable was related to billings made prior
to the actual provision of the related services and recognition of related
revenue. As of December 31, 1997, all amounts billed pursuant to such
arrangements have been included in deferred revenue. Oncormed is in the
development stage and cannot anticipate when, or if, it will generate any
significant revenues.
Cost of sales-direct was approximately $474,000 for the year ended December
31, 1997, compared to approximately $283,000 for the year ended December 31,
1996. Cost of sales-direct includes costs for supplies, direct labor, shipping,
reference laboratory work, consultant fees, royalties (other than those under
the license with Oncor which was terminated on September 14, 1998) for testing
services and computer hardware costs associated with Oncormed's risk assessment
service. The increase in cost of sales-direct reflected the corresponding
increase in Oncormed's revenues.
Laboratory operations expenses were approximately $3,426,000 for the year
ended December 31, 1997, compared with approximately $2,760,000 for the year
ended December 31, 1996. The increase was primarily attributable to a one-time
license fee for the BRCA2 service, to the hiring of additional personnel in the
laboratory for operations and to the initiation of certain of Oncormed's genetic
testing services. Related party expenses incurred during these periods consisted
of technology license fees paid to Oncor and the rental of laboratory equipment
from Codon. These related party expenses are expected to decrease as a
percentage of total laboratory operations expenses in the future. As sales of
Oncormed's services increase, a greater portion of the expenses associated with
laboratory operations will be included in cost of sales-direct.
Selling, general and administrative expenses were approximately $5,780,000
for the year ended December 31, 1997, compared with approximately $4,791,000 for
the year ended December 31, 1996. General and administrative expenses were
approximately $4,573,000 for the year ended December 31, 1997, compared with
approximately $3,563,000 for the year ended December 31, 1996. The increase in
general and administrative expenses was due to increased professional fees,
specifically in legal fees associated with patent issues and related litigation,
increased depreciation and amortization costs, and the addition of personnel and
related costs. Selling expenses were approximately $1,207,000 for the year ended
December 31, 1997, compared with approximately $1,228,000 for the year ended
December 31, 1996. Selling expenses remained constant between the periods. For
the year ended December 31, 1997, there were no related party selling, general
and administrative expenses as compared to approximately $4,000 for the
corresponding period in 1996. It is anticipated that related party selling,
general and administrative expenses will continue to be nominal in the future.
Oncormed anticipates that its selling, general and administrative expenses will
increase as it continues to market and sell its portfolio of services.
Research and development expenses were approximately $772,000 for the year
ended December 31, 1997, compared with approximately $709,000 for the year ended
December 31, 1996. The increase in research and development expenses was
primarily attributable to the hiring of additional personnel and the related
laboratory supply costs to work on new research and development projects.
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<PAGE> 121
Acquired in-process research and development projects were approximately
$1.5 million for the year ended December 31, 1997, compared with $0 for the year
ended December 31, 1996. A one-time write off of approximately $1.5 million
during the first quarter of 1997 was associated with licensing of technology
under the Incyte License Agreement.
Interest income was approximately $284,000 for the year ended December 31,
1997, compared with approximately $514,000 for the year ended December 31, 1996.
The decrease in interest income was due to the decreased amounts available for
investment. Oncormed's follow-on offering was completed in the first quarter of
1996. Interest expense was approximately $56,000 for the year ended December 31,
1997, compared with approximately $54,000 for the year ended December 31, 1996.
Net operating losses were approximately $10,746,000 for the year ended
December 31, 1997, compared with approximately $7,456,000 for the year ended
December 31, 1996. As discussed above, the increase was primarily attributable
to a one-time write off associated with the Incyte License Agreement, a one-time
license fee for the BRCA2 service and legal fees associated with patent work and
related litigation.
Year Ended December 31, 1996 Compared to Year Ended December 31, 1995
Total revenues for the year ended December 31, 1996 were approximately
$627,000, compared with approximately $311,000 for the year ended December 31,
1995. The increase was primarily attributable to a two-fold increase in
predisposition testing services, and a 1.7 fold increase in fees received for a
Company-sponsored educational conference. There was also an increase in revenues
associated with grants and risk assessment services. Oncormed received $6,000 in
revenues for certain experiments performed for Oncor for the year ended December
31, 1996, compared with $42,000 for the same period in 1995. Oncormed's net
accounts receivable at December 31, 1996 was approximately $129,000, compared to
$86,000 at year ended December 31, 1995. At December 31, 1996, approximately
$8,000 of accounts receivable was related to billings made prior to the actual
provision of the related services and recognition of related revenue. As of
December 31, 1996, all amounts billed pursuant to such arrangements have been
included in deferred revenue.
Cost of sales-direct was approximately $283,000 for the year ended December
31, 1996, compared to approximately $168,000 for the year ended December 31,
1995. Cost of sales-direct includes costs for supplies, direct labor, shipping,
royalties (other than those under the license agreement with Oncor) for testing
services, computer hardware costs associated with Oncormed's risk assessment
service and costs associated with its educational conference. The increase in
cost of sales-direct reflected the corresponding increase in Oncormed's
revenues.
Laboratory operations expenses were approximately $2,760,000 for the year
ended December 31, 1996, compared with approximately $2,259,000 for the year
ended December 31, 1995. The increase was primarily attributable to the hiring
of additional personnel in the laboratory for operations and to the initiation
of certain of Oncormed's genetic testing services. Related party expenses
incurred during these periods consisted of technology license fees paid to Oncor
and the rental of laboratory equipment from Codon.
Selling, general and administrative expenses were approximately $4,791,000
for the year ended December 31, 1996, compared with approximately $4,119,000 for
the year ended December 31, 1995. General and administrative expenses were
approximately $3,563,000 for the year ended December 31, 1996, compared with
approximately $2,884,000 for the year ended December 31, 1995. The increase in
general and administrative expenses was due to increased professional fees,
specifically in legal fees associated with patent, trademark and personnel
issues, increased depreciation and amortization costs, and the addition of
personnel and related costs. Selling expenses were approximately $1,228,000 for
the year ended December 31, 1996, compared with approximately $1,235,000 for the
year ended December 31, 1995. Selling expenses remained constant between the
periods. For the year ended December 31, 1996, related party selling, general
and administrative expenses decreased to approximately $4,000 as compared to
approximately $247,000 for the corresponding period in 1995. As Oncormed
completed its initial public offering in late 1994, various functions and
services previously performed by Oncor were assumed by Oncormed during late 1994
and early 1995.
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Research and development expenses were approximately $709,000 for the year
ended December 31, 1996, compared with approximately $452,000 for the year ended
December 31, 1995. The increase in research and development expenses was
primarily attributable to the hiring of additional personnel to work on new
research and development projects.
Interest income was approximately $514,000 for the year ended December 31,
1996, compared with approximately $228,000 for the year ended December 31, 1995.
The increase in interest income was due to the increased amounts available for
investment from Oncormed's follow-on offering completed in the first quarter of
1996. Interest expense was approximately $54,000 for the year ended December 31,
1996, compared with $53,000 for the year ended December 31, 1995.
For the reasons set forth above, net operating losses were approximately
$7,456,000 for the year ended December 31, 1996, compared with approximately
$6,511,000 for the year ended December 31, 1995.
LIQUIDITY AND CAPITAL RESOURCES
Cash expenditures have exceeded revenues since Oncormed's inception.
Oncormed has incurred cumulative losses since its inception and, as of June 30,
1998, had an accumulated deficit of approximately $35.3 million. Oncormed has
yet to generate any significant revenues and cannot anticipate when, or if, it
will be able to generate significant revenues in the future. Oncormed's
operations have historically been funded primarily through private placements
and public offerings of equity securities. In February 1998, Oncormed completed
a $3.3 million private placement of equity securities, resulting in net proceeds
of approximately $2.8 million to Oncormed. In July 1998, as part of the Merger
and pending consummation of the Merger, Gene Logic extended a $2.0 million line
of credit to Oncormed for working capital purposes which is secured by certain
of Oncormed's tissue biorepository assets. As of September 21, 1998, $1.5
million had been extended to the Company under the Loan. All outstanding
principal and accrued interest on the loan is due and payable on the earliest to
occur of (i) March 31, 1999, (ii) in the event the Merger is not consummated,
that date upon which Oncormed secures alternate financing of at least $2,000,000
on terms satisfactory to Oncormed in its sole discretion, or (iii) the date on
which Oncormed sells or otherwise disposes of, all or substantially all of the
assets or business of Oncormed, or any liquidation, merger or other business
combination of Oncormed (other than the Merger). At August 7, 1998, Oncormed had
cash and cash equivalents of approximately $1.4 million. In the event the Merger
is not consummated, Oncormed will need to raise additional funds which may not
be available on a timely basis or on satisfactory terms. The unavailability of
adequate funds in the future would have a material adverse effect on Oncormed's
business, financial condition and results of operations and raises substantial
doubt about whether Oncormed can continue as a going concern. Oncormed expects
its operating losses to continue as its sales and marketing efforts, research
and development programs and laboratory operations continue and increase.
Oncormed also intends to make additional laboratory equipment purchases and
other capital expenditures in the future, although currently it has no specific
material commitments to do so and decisions concerning such purchases and other
capital expenditures, if the merger is consummated, will be made by Gene Logic.
Oncormed's ability to achieve profitability depends on its ability to
successfully market and sell its services. There can be no assurance when, or
if, Oncormed will become profitable.
Cash used in operating activities was approximately $3.6 million for the
six months ended June 30, 1998 compared with approximately $4.3 million for the
same period in 1997. The decrease was primarily attributable to the prepayment
received from Incyte during the first quarter of 1998. Cash used in operating
activities was $8.4 million for the year ended December 31, 1997 compared with
$7.0 million for the year ended December 31, 1996. The increase was attributable
to expanded laboratory operations to perform certain testing services and
additional general and administrative costs including professional expenses and
personnel.
In February 1997, as modified in November 1997, Oncormed and Oncor agreed
to certain changes to the Oncor Agreement pursuant to which Oncor is providing
Oncormed with an exclusive worldwide license to certain of Oncor's existing
human genome technologies and a non-exclusive worldwide license to certain of
Oncor's existing human genome technologies, and any future improvements thereto.
The Oncor Agreement was terminated on September 14, 1998.
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Under the terms of the Oncor Agreement, Oncormed was obligated to make
payments on a quarterly basis to Oncor equal to a range of 4% to 2% of
Oncormed's annual net sales. During the period from April 1, 1997 to March 31,
1998, Oncormed was obligated to pay Oncor a minimum amount equal to $50,000 per
quarter. During the period from April 1, 1998 to September 14, 1998, Oncormed
was obligated to pay Oncor a minimum amount equal to $25,000 per quarter.
In June 1994, Oncormed converted $715,751 owed to Oncor for license fees
previously incurred and for prior services rendered into a Convertible
Subordinated Promissory Note (the "Note"), which principal is due in June 1999.
Upon consummation of the Merger and in connection with the termination of
certain license agreements between Oncor and Oncormed, the Note will be
cancelled upon payment to Oncor of the aggregate amount of $500,000, $250,000 of
which Oncormed paid to Oncor on September 14, 1998. Notwithstanding the
foregoing, if such Merger is not consummated by December 31, 1998, the remaining
principal due and owing to Oncor under the Oncormed Note shall be $357,875.50,
which amount shall be repaid to Oncor in accordance with the terms of the
Oncormed Note.
Under its license agreement with Hereditary Cancer Institute ("HCI") and
Creighton University, Oncormed is obligated to pay an annual sponsorship fee of
$250,000, in quarterly installments, which is reduced by a percentage of the
amounts paid under a related services agreement.
Cash provided by investing activities was $1.4 million for the six months
ended June 30, 1998 compared to cash used in investing activities of $760,210
for the same period in 1997. The increase in cash provided was due to the
reduction in purchases of short-term investments during the six months ended
June 30, 1998 as compared to the same period in 1997. Cash used in investing
activities was approximately $22,000 for the year ended December 31, 1997
compared to approximately $1,943,000 for the year ended December 31, 1996. The
decrease was due to the redemption of short term investments originally
purchased in 1996.
Cash provided by financing activities was approximately $2.9 million for
the six months ended June 30, 1998 compared with approximately $2.8 million for
the same period in 1997. In the first quarter of 1998, Oncormed entered into the
Preferred Stock Purchase Agreement totalling approximately $3.3 million. In the
first quarter of 1997, as part of an agreement, Oncormed issued Common Stock to
Incyte. Cash provided by financing activities was $2.8 million for the year
ended December 31, 1997 compared with $14.3 million for the year ended December
31, 1996. In 1997, Oncormed completed a $3 million private placement of Oncormed
Common Stock. See "Oncormed Business -- Collaborative Relationships -- Incyte
Pharmaceuticals, Inc."
Minimum payments due under lease commitments and various research, license
and consulting agreements, excluding the license agreement with Oncor, will be
approximately $317,000 through 1998.
In January 1998, Oncormed and CHLA entered into the "CHLA Agreement whereby
CHLA agreed to provide resources and personnel to act as a biorepository site
for Oncormed's library of tissue samples. The CHLA Agreement expires on January
29, 2001, unless modified by written amendment, renewal or extension or earlier
terminated in accordance with its terms. Oncormed has agreed to pay for CHLA's
costs incurred in the performance of the scope of work, as described in the CHLA
Agreement. In March 1998, Oncormed and CHLA agreed to certain amendments to the
CHLA Agreement. Dr. Triche, Oncormed's CEO and Chairman of the Oncormed Board,
is the Pathologist-in-Chief for CHLA.
Pursuant to the Incyte License Agreement, Oncormed and Incyte have formed a
collaboration in clinical genomics. Oncormed has agreed to perform certain
specified clinical genomic services relating to the creation of a tissue
repository and the performance of a gene functional studies program. Incyte has
agreed to purchase certain collaborative services during each year of the term
of the Incyte License Agreement, which expires on February 25, 2000 (the
"Initial Term"). In addition, under the terms of the Incyte License Agreement,
Incyte licensed to Oncormed certain gel-based sequencing technology
improvements. Incyte intends to terminate such license upon the consummation of
the Merger. In consideration for the grant of the license and $3,000,000 in
cash, Oncormed issued to Incyte (i) 773,588 shares of Oncormed Common Stock, and
(ii) a warrant to purchase up to an aggregate of 10% of Oncormed Common Stock.
In connection with the Incyte License Agreement, Oncormed issued a warrant to
purchase up to an aggregate of 10% of the Oncormed Common Stock issued and
outstanding on the date of the exercise of the warrant. Incyte has agreed that,
for
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purposes of determining the number of shares of Gene Logic Common Stock issuable
upon exercise of the warrant, that the number of shares of Oncormed Common Stock
issuable upon exercise shall be equal to 788,730. The warrant is exerciseable
until February 25, 2000 at an exercise price per share equal to the greater of
110% of the fair market value per share of Oncormed Common Stock on the trading
day prior to the date of exercise and (i) $9.00 per share (if the warrant is
exercised after February 25, 1998 but on or prior to February 25, 1999), or (ii)
$13.50 per share (if the warrant is exercised after February 25, 1999 but on or
prior to February 25, 2000). Following the Merger, based on the Assumed Exchange
Ratio, an aggregate of approximately 366,443 shares of Gene Logic Common Stock
will be issuable upon the exercise of such warrant at an exercise price equal to
the greater of 110% of the fair market value per share of Gene Logic Common
Stock on the trading day prior to the date of exercise and (i) $19.37 per share
(if the warrant is exercised on or prior to February 27, 1999), or (ii) $29.06
per share (if the warrant is exercised after February 25, 1999 but on or prior
to February 25, 2000). Notwithstanding the foregoing, Incyte has the option to
fix the exercise price per share during each of the aforementioned periods;
provided, however, that in no event shall the exercise price per share during
each of the aforementioned periods be less than $9.00 or $13.50 per share of
Oncormed Common Stock, respectively ($19.37 or $29.06 per share of Gene Logic
Common Stock, based on the Assumed Exchange Ratio). Further, Oncormed has also
agreed to issue to Incyte, under certain circumstances, up to an additional
aggregate of approximately 90,719 shares of Oncormed Common Stock (42,148 shares
of Gene Logic Common Stock based on the Assumed Exchange Ratio). As of June 30,
1998, 6,312 additional shares of Oncormed Common Stock had been issued to
Incyte.
Pursuant to a License Agreement (the "BRCA2 Agreement"), dated July 7,
1997, by and among Oncormed, Cancer Research Campaign Technology Limited
("CRCT") and Duke University ("Duke"), CRCT and Duke have granted Oncormed an
exclusive, worldwide royalty-bearing license to certain patents and patent
applications relating to the BRCA2 gene and related discoveries (the "BRCA2
Technology") for the purpose of providing diagnostic services, diagnostic
products and research products relating thereto. In consideration of the grant
of the license, Oncormed has paid CRCT an up-front fee. Contemporaneously,
Oncormed granted back to CRCT and Duke certain limited rights to use the BRCA2
Technology to provide diagnostic services to any UK National Health Service
Hospital and to patients affiliated with Duke, respectively. Unless terminated
earlier in accordance with its terms, the BRCA2 Agreement expires, on a
country-by-country basis, on the date of expiration of the last to expire BRCA2
patent in such country or, if no BRCA2 patent is granted in a given country, ten
(10) years after the first commercial provision of diagnostic services or
diagnostic products in such country.
NEW ACCOUNTING PRONOUNCEMENTS
In June 1997, the FASB issued SFAS No. 130, "Reporting Comprehensive
Income" ("SFAS No. 130"). SFAS No. 130 established standards for the reporting
and display of comprehensive income and its components in the financial
statements. SFAS No. 130 is effective for fiscal years beginning after December
15, 1997. Reclassification of financial statements for earlier periods provided
for comparative purposes is required. Oncormed has adopted SFAS No. 130 and has
concluded that there was no impact.
Also in June, 1997, the FASB issued SFAS No. 131, "Disclosures about Segments of
an Enterprise and Related Information" ("SFAS No. 131"). SFAS No. 131
established standards for the way that public business enterprises report
information about operating segments in annual financial statements and requires
that those enterprises report selected information about operating segments in
interim financial reports issued to stockholders. It also establishes standards
for related disclosures about products and services, geographic areas, and major
customers. SFAS No. 131 is effective for Oncormed's 1998 year-end financial
statements. Financial statement disclosures for prior periods are required to be
restated. Management is in the process of determining the financial statement
impact of the application of SFAS No. 131.
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ONCORMED BUSINESS
This Prospectus/Joint Proxy Statement contains forward-looking statements
that involve risks and uncertainties, including, among others, statements as to
the benefits expected to be realized as a result of the Merger, future financial
performance of the combined company, the analysis performed by the financial
advisors to Gene Logic and Oncormed, the timing of availability of products and
services under development, the ability to commercialize products and services
developed under collaborations and alliances, the performance and utility of the
combined company's products and services, and the adequacy of capital resources.
The combined company's actual results may differ materially from those
anticipated in these forward-looking statements as a result of risks and
uncertainties, including those set forth in the section entitled "Risk Factors"
and elsewhere in this Prospectus/Joint Proxy Statement. Stockholders of each of
Gene Logic and Oncormed are urged to consider carefully the discussion of such
risks and uncertainties in determining whether or not to vote for the Merger
Proposal and are cautioned not to place undue reliance on the forward-looking
statements contained in this Prospectus/Joint Proxy Statement, which speak only
as of the date hereof.
OVERVIEW
Oncormed was incorporated on July 12, 1993 in the State of Delaware.
Oncormed is a genomics company that characterizes newly discovered genes to
establish their medical relevance and provides molecular profiling of patients
for pharmacogenomic and therapeutic purposes. Over the past year, Oncormed has
entered into collaborations with leading pharmaceutical, biotechnology, and
genomics companies to facilitate the commercialization of such partners'
products.
GENE CHARACTERIZATION
Oncormed is developing a gene characterization program that combines its
proprietary tools and methodologies with its clinical expertise in order to
fully characterize newly discovered genes. Gene characterization consists of the
following steps: (i) determining which gene targets to characterize; (ii)
determining a frequently-occurring sequence ("consensus sequence"); (iii)
identifying disease-causing mutations and modifiers of gene function; and (iv)
identifying disease-related genetic pathways.
Determine which Gene Targets to Characterize. The gene characterization
process begins with tissue-specific expression analysis of gene targets, that
is, the identification of the tissues in the body that express a targeted gene
under different clinical and therapeutic conditions. These targets may be gene
fragments, such as from an EST database, or they may be partial or full length
genes whose sequence, size, and function is not known. The specificity of the
gene's expression determines the gene's viability as a target for diagnostic or
therapeutic development. Only after a gene is determined to cause a particular
disease or modify a therapeutic effect does it become a target for
pharmaceutical and diagnostic development.
To determine which gene targets to characterize and to determine the full
gene sequence of those gene targets of interest, Oncormed utilizes its
proprietary pattern recognition methodology ("Recognizer"), its biorepository of
tissue samples and associated clinical database, and a sophisticated
high-fidelity, high-throughput sequencing facility and chip technologies. In
addition, Company scientists have extensive experience using proprietary EST
databases including both Human Genome Science's database and Incyte's LifeSeq
database as well as public EST databases.
Consensus Sequence Discovery. The next step in the gene characterization
process is the determination of the normal sequence(s) of the disease-causing
gene. A normal sequence that occurs frequently within a population is referred
to as a "consensus sequence". This is similar to the recognized variations of
"normal" that lead to the common ABO blood groups in human populations.
Determining the consensus sequence(s) for a given population is essential to
successful therapeutic and diagnostic development. For example, in order to
develop an effective gene therapy in which a defective protein is either
replaced with, or restored to, the normal protein, a consensus sequence that
produces the normal protein is a potential starting point. For diagnostics, a
consensus sequence provides a benchmark for comparison when testing patient
samples.
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Oncormed has developed a proprietary methodology to determine the consensus
sequence(s) of a disease-causing gene.
Genetic Mutation Determination. After determining the consensus sequence
for a gene, the next step is to determine the mutations within the gene that are
associated with disease and modification of therapeutic response. Utilizing a
proprietary mutation methodology, Oncormed is able to identify the entire range
of mutations of the disease-causing gene that could lead to the development of a
disease. Upon identifying the range of mutations, Oncormed utilizes high
fidelity sequencing, mutation detection technologies and chip technologies to
single out those mutations that result in disease or modified therapeutic
response. Mutations identified in diseased tissues are then compared against
non-diseased tissues to further validate disease-causing mutations. Oncormed
intends to commence development of functional assays with associated chemistries
to scan large numbers of mutations in areas of the protein to quickly identify
disease-causing mutations. Oncormed has filed several patent applications
relating to its genetic mutation discoveries and methodologies.
Gene Pathway Identification. Although single gene targets are important,
to fully understand a specific disease it is essential to identify patterns of
expression for the interaction of multiple genes, otherwise known as "genetic
pathways." Understanding the genetic pathways as they relate to a disease state
allows for the development of multiple therapeutic interventions. Oncormed is
developing an expertise to determine patterns of interrelated gene expression
using its patented Recognizer methodology. In addition, methodologies and
technologies such as those available to Oncormed through its collaboration with
Affymetrix for gene expression chips and gene expression databasing, combined
with Oncormed's tissue sample biorepository, provide Oncormed with the ability
to further perform pathway analysis.
GENE DISCOVERY
As part of the process, Oncormed will also conduct gene discovery efforts
through pathway analysis of novel genes and ESTs using a variety of methods
including chip technologies, differential display and library subtraction.
MOLECULAR PROFILING
Patients diagnosed with seemingly similar diseases using conventional
methods often have different outcomes and experience varying side effects with
respect to the same therapeutic intervention. One important source of this
variation is the individual patient's genetic makeup, or genotype. Molecular
profiling refers to the study and prediction of how patients are likely to
respond to a drug based on their genotype. Oncormed uses its molecular profiling
(i) to help pharmaceutical companies successfully identify appropriate clinical
trial candidates, (ii) to stratify clinical trial participants to ascertain the
molecular basis of varying treatment responsiveness, and (iii) to conduct
post-therapy monitoring.
Oncormed believes that molecular profiling may enable pharmaceutical
companies to accelerate the time required for drug evaluation and registration,
thereby reducing development costs and improving the likelihood of success of
new drugs in clinical trials. Oncormed also believes that this information will
become increasingly important to the FDA in reviewing and approving new drugs,
and to physicians in treating patients.
Oncormed has a proven track record in rapidly translating genomic
discoveries into molecular profiles for use in patient management and
therapeutic development. Molecular profiles can vary from analysis of a single
gene to analysis of thousands of genes to determine why some patients respond to
one drug and not another, why some patients die of their disease while others
survive, or to determine if a disease has been successfully treated or is going
to recur. Molecular profiles can give information on prognosis, susceptibility,
and early detection, and may predict drug responsiveness.
p53 Profiling. Recent clinical research has indicated that p53 gene
mutations can be predictive of both patient survival and response to therapy.
Oncormed has established extensive expertise in pharmacogenomics through its
work on the p53 tumor suppressor gene. Defective in over half of all major
cancers, p53 is the focus
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of several gene therapy trials. Since studies have demonstrated that p53 status
causes differing responses by cancer patients to traditional interventions, such
as chemotherapy and radiation therapy, a patient's p53 status is a
differentiating variable in a growing number of cancer-related clinical trials.
Oncormed currently provides p53 profiling to several entities, including
Rhone-Poulenc and Schering-Plough.
Ras Profiling. The ras proto-oncogene is activated by mutation in
approximately 30% of all human tumors. Clinically relevant mutations are present
in codons 12, 13, and 61 of the K-, H-, and NRAS genes; resulting in potential
tumor development. Identification of RAS gene mutations is useful both for
diagnostic and prognostic purposes. Pharmacogenetic studies of RAS status may
also be relevant to the identification of novel gene targets for
chemotherapeutic intervention. Oncormed currently provides RAS profiling to
several entities, including Merck.
Oncormed has developed a screening panel, utilizing a high-throughput DNA
sequencing platform to identify all clinically significant RAS mutations.
Susceptibility Testing. In May, Oncormed licensed its breast cancer
susceptibility services to Myriad. In addition, Oncormed intends to divest fully
its other susceptibility services to focus fully on pharmaceutical programs.
TECHNOLOGY PLATFORM
Oncormed has developed, and is commercializing, a set of proprietary tools
and methodologies designed to characterize genes.
Pattern Recognition Methodology (the "Recognizer"). In July 1997, Oncormed
was issued a patent for a novel bioinformatics method which can be used as an
analytical tool in genomics discovery. The Recognizer uses artificial
intelligence to identify patterns in large data sets and is distinct from other
approaches to pattern recognition, such as neural networks and traditional data
mining techniques. Unlike the latter, which rely on potentially subjective human
opinion to determine which cases in a database represent a particular pattern,
the Recognizer is entirely data driven. Oncormed believes the Recognizer can be
used in a variety of applications including the mining of gene expression
databases to identify genes and gene pathways that will be of therapeutic and
diagnostic importance.
High Throughput/High Fidelity Sequencing. Oncormed utilizes automated,
gel-based DNA sequencing for certain of its molecular profiling programs. Under
Oncormed's collaboration with Incyte, Incyte licensed to Oncormed certain
gel-based sequencing technology improvements. Incyte intends to terminate such
license upon the consummation of the Merger. The combined company expects that
this technology will be replaced on a timely basis by existing technologies
currently available through commercial vendors.
Biorepository. Oncormed's genomics biorepository, consisting of thousands
of well-characterized, high quality tissue samples and associated clinical data
(the "Biorepository"), is an important component of Oncormed's gene
characterization program. As part of Oncormed's tissue-specific expression
analysis, disease correlation, and gene pathway identification efforts, the
Biorepository provides a database for comparison of newly-discovered genetic
information with known tissue samples and related clinical data. Oncormed
believes that the ability to identify the specific molecular changes that occur
at different points in the disease pathway will lead to a better understanding
of the disease process itself and will identify markers which potentially can be
used for the improved management of disease. In connection with the Loan,
Oncormed has granted Gene Logic a security interest in certain tissue
biorepository assets.
HCI Database and DNA Library. Through an exclusive, worldwide license,
Oncormed has commercialization rights to HCI's extensive cancer family history
database, which includes over 125,000 individuals. Oncormed also has
commercialization rights to HCI's DNA library, which includes more than 2,000
immortalized blood cell lines. The HCI database and DNA library have been
involved in many cancer gene discoveries. Oncormed believes that the HCI
database and DNA library may help to facilitate additional new cancer gene
discovery and support the correlation of gene mutations with cancer expression,
prognosis and treatment effectiveness.
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DNA GeneChip Technology. In September 1996, Oncormed entered into an
initial collaboration with Affymetrix to co-develop and validate diagnostic
services using the Affymetrix GeneChip system for analysis of genes associated
with cancer, beginning with p53. The GeneChip system is designed to provide
rapid genetic analysis using miniaturized, high-density arrays of DNA probes, or
"chips," and proprietary software to analyze and manage genetic information. The
GeneChip is a glass chip onto which an array of tens of thousands of short DNA
fragments or probes has been simultaneously synthesized. If the DNA in a sample
fragment finds its complement with the DNA on the chip, it binds and a signal is
detected and read by an automated reader.
In August 1997, Affymetrix began selling p53 GeneChip systems for research
purposes and Oncormed introduced a CLIA-certified GeneChip-based p53 assay as
part of its pharmacogenomics and clinical diagnostic services at the end of the
first half of 1998. In October 1997, Oncormed and Affymetrix expanded their
collaboration to include the co-development of a BRCA1 and BRCA2 GeneChip
system.
Oncormed utilizes the Affymetrix gene expression microarrays in its
tissue-specific expression analysis, disease correlation, and gene pathway
identification programs. Affymetrix supplies Oncormed with GeneChip probe arrays
that will simultaneously monitor the expression of up to 250 genes associated
with cancer in patient tumor samples. Using these probe arrays, Oncormed expects
to identify patterns of expression that correlate with particular disease
outcomes or suggest particular courses of treatment and develop additional
intellectual property. Oncormed is working with Affymetrix to further enhance
its GeneChip technology to increase the utility of the GeneChip technology for
gene characterization.
Gene Expression Database. In March 1998, Oncormed and Affymetrix expanded
the collaboration to include the co-development of a gene expression database to
be used by third parties as a tool in drug development. In addition to the
database collaboration, Oncormed may provide GeneChip expression analysis
services to third parties with a royalty to Affymetrix.
Additional Programs. Oncormed has established and continues to evaluate
its comprehensive technology platform of high throughput/high fidelity gene
sequencing and various DNA amplification, gene screening and mutation detection
technologies. In addition to the introduction of the p53 GeneChip system in the
first half of 1998, Oncormed has acquired sublicenses, exclusive in certain
fields of use, through the Oncor Agreement, for certain proprietary technologies
which may be applied in molecular profiling, including a functional gene assay
and microsatellite instability technology. The Oncor Agreement was terminated on
September 14, 1998.
Functional Gene Assay. A difficulty confronting the use of various genetic
mutation detection technologies in the clinical setting is determining whether a
specific mutation is biologically significant. Some mutations do not affect the
function of the proteins produced by the gene and thus have no known biological
or clinical relevance. However, genetic mutations that affect function can cause
disease. Applying functional gene assay technology enables Oncormed to detect
p53 mutations.
COLLABORATIVE RELATIONSHIPS
Incyte Pharmaceuticals, Inc.
Pursuant to the Incyte License Agreement, Oncormed and Incyte have formed a
collaboration in clinical genomics. The term of the Incyte License Agreement
expires on February 25, 2000 (the "Initial Term") unless extended by mutual
agreement or earlier terminated in accordance with its terms. Oncormed has
agreed to perform certain genomic assays relating to the creation of a tissue
repository and to the performance of a gene functional studies program.
In addition, under the terms of the Incyte License Agreement, Incyte
licensed to Oncormed certain gel-based sequencing technology improvements.
Incyte intends to terminate such license upon consummation of the Merger. The
combined company expects that this technology will be replaced on a timely basis
by existing technologies currently available through commercial vendors.
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Under the Incyte License Agreement, Oncormed is providing tissues and
associated clinical data to Incyte for sequencing and entry into Incyte's
proprietary databases. The information entered into Incyte's databases will be
owned by Incyte. Gene Logic and Incyte have agreed that Incyte will terminate
the Incyte License Agreement in its entirety in connection with the Merger,
unless Gene Logic agrees to provide Incyte with human tissue samples in
accordance with the Incyte License Agreement or Gene Logic and Incyte agree to
amend the Incyte License Agreement on mutually acceptable terms.
Affymetrix, Inc.
In September 1996, Oncormed entered into an agreement with Affymetrix to
collaborate in the development and validation of gene assays using the
Affymetrix GeneChip system. The GeneChip system is designed to provide rapid
genetic analysis using miniaturized, high-density arrays of DNA probes, or
"chips", and proprietary software to analyze and manage genetic information. The
GeneChip is a glass chip onto which an array of tens of thousands of short DNA
fragments or probes has been simultaneously synthesized. If the DNA in a sample
fragment finds its complement with the DNA on the chip, it binds and a signal is
detected and read by an automated reader. Oncormed has introduced the first
CLIA-certified GeneChip assay for the p53 gene as part of its molecular
profiling platform.
In October 1997, Oncormed expanded its collaboration with Affymetrix. Under
the new agreement, the companies will co-develop a GeneChip system for BRCA1 and
BRCA2 genotyping. Oncormed will design and validate the BRCA1 and BRCA2 GeneChip
array which will be manufactured by Affymetrix. Oncormed will own intellectual
property related to the BRCA1/BRCA2 assays with certain rights to Affymetrix.
Upon successful completion, Affymetrix can sell the BRCA1/BRCA2 GeneChip arrays.
In return, Oncormed will receive royalties on all BRCA1 and BRCA2 array sales.
In addition, Affymetrix will supply Oncormed with GeneChip probe arrays that
will simultaneously monitor the expression of up to 250 genes associated with
cancer in patient tumor samples. These arrays are expected to identify patterns
of expression that correlate with particular disease outcomes or suggest
particular courses of treatment, and establish the utility of gene expression
arrays as a cancer disease management tool. The initial term of the new
agreement is three years.
In March 1998, Oncormed and Affymetrix expanded the collaboration to
include the co-development of a gene expression database to be used by third
parties as a tool in drug development. Affymetrix will design and supply custom
and standard expression monitoring GeneChip probe arrays and related technology.
Oncormed will contribute tissue samples and apply its expertise in tissue
pathology and molecular genetics to generate high resolution gene expression
data. Affymetrix will be responsible for marketing the database, with net
revenues from subscriptions to be shared equally between the parties. In
addition to the database collaboration, Oncormed may utilize GeneChip-based
expression assays in collaboration with other third parties with a royalty to
Affymetrix. The term of the new collaborative project has not yet been defined.
ZENECA Diagnostics.
During August 1996, Oncormed and ZENECA Limited, acting through ZENECA
Diagnostics, entered into a five-year Collaboration Agreement under which ZENECA
Diagnostics will supply Oncormed with proprietary cancer reagents based on the
patented ZENECA ARMS technology. The agreement automatically renews for
successive twelve-month periods unless terminated by either party. Use of ZENECA
Diagnostics reagents will enable Oncormed to develop and provide enhanced
pharmacogenomic testing in the cancer field. During mid-1997, Oncormed and
ZENECA Diagnostics successfully completed the first application of the ARMS
technology to detect mutations associated with breast/ovarian cancer.
LICENSING RELATIONSHIPS
Oncor, Inc.
Pursuant to the Oncor Agreement, Oncor provided Oncormed with an exclusive
worldwide license to certain of Oncor's existing human genome technologies and a
non-exclusive worldwide license to certain of Oncor's existing human genome
technologies, and any future improvements thereto. Oncor and Oncormed
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terminated the Oncor Agreement, and all rights and obligations thereunder
pursuant to that certain Termination Agreement, dated September 14, 1998.
The Hereditary Cancer Institute.
HCI, located at the Creighton University School of Medicine, Omaha,
Nebraska, and headed by Henry T. Lynch, M.D., is a world-renowned research
institute specializing in the study of familial and inherited cancer. Oncormed,
HCI and Creighton University are parties to an agreement pursuant to which
Oncormed has exclusive worldwide commercialization rights to HCI's DNA library
and its familial cancer database. With the use of the Recognizer, Oncormed has
identified several new patterns of hereditary cancer in the HCI familial cancer
database.
Under its license agreement with HCI and Creighton University, Oncormed is
obligated to pay an annual sponsorship fee of $250,000, in quarterly
installments, that is offset by a percentage of the amounts paid under a related
services agreement. In addition, under the license agreement, Oncormed is
required to pay a royalty on net sales of products and services which make use
of the HCI database, other than Oncormed's risk assessment service, and on
license income derived from sublicenses to third parties of Oncormed's rights to
the HCI database. As part of its relationship with HCI, Oncormed also will share
with HCI any revenues from the commercialization of products or services based
upon samples contained in the HCI DNA library. The DNA library, which houses DNA
samples collected from families at high risk of inherited cancer, provides a
reservoir of biological material which is potentially important for new gene
discoveries. The HCI license agreement terminates in December 2000, subject to
earlier termination upon one years' notice, and is automatically renewable for
additional two-year periods.
Cancer Research Campaign Technology Limited and Duke University.
Pursuant to a License Agreement, in July 1997, Oncormed entered into an
exclusive, worldwide royalty bearing license with CRCT and Duke for the BRCA2
Technology for the purpose of providing diagnostic services, diagnostic products
and research products relating thereto. In consideration of the grant of the
license, Oncormed has paid CRCT an up-front fee and will make certain future
payments. Oncormed has the right to sublicense the BRCA2 Technology. In
addition, Oncormed will share in a portion of the revenues generated from any
therapeutic licensing. Contemporaneously, Oncormed granted back to CRCT and Duke
certain limited rights to use the BRCA2 Technology to provide diagnostic
services to any UK National Health Service Hospital and to patients affiliated
with Duke, respectively. Unless terminated earlier in accordance with its terms,
the BRCA2 Agreement expires, on a country-by-country basis, on the date of
expiration of the last to expire BRCA2 patent in such country or, if no BRCA2
patent is granted in a given country, ten (10) years after the first commercial
provision of diagnostic services or diagnostic products in such country.
The Regents of the University of California.
Oncormed entered into a license agreement, effective August 8, 1996, with
the Regents of the University of California for the use of certain genetic
markers for breast and ovarian cancer. Under the agreement, Oncormed is
obligated to pay royalties for the use of the technology as clinical laboratory
services are performed. Royalty payments are payable quarterly, 60 days after
the end of each quarter.
Myriad Genetics, Inc.
In May 1998, Oncormed granted to Myriad exclusive rights to all current and
pending Oncormed patents in the field of BRCA1 and BRCA2 for reference lab
testing in consideration for certain payments and royalties payable to Oncormed
as part of the settlement of all outstanding litigation between the parties.
Both parties will retain diagnostic product and therapeutic rights in their
respective patents.
Other Licensing Arrangements
Oncormed also entered into a license agreement for the use of certain genes
and genetic mutations associated with hereditary nonpolyposis colon cancer with
the Dana-Farber Cancer Institute, Inc., the State of Oregon, the University of
Vermont, and Yale University in June 1994. Royalty payments on sales of services
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using technology or patents covered by the agreement are payable quarterly with
an alternative minimum payment of $7,500 due on January 1 of each year.
Oncormed entered into a license agreement for the use of certain polymerase
chain reaction technology in the performance of human in vitro clinical
laboratory services with Roche Molecular Systems, Inc. Under the agreement,
Oncormed is obligated to pay royalties for the use of the technology as clinical
laboratory services are performed. Royalty payments are payable semi-annually,
60 days after the end of each six month period.
HUMAN RESOURCES
Oncormed had 54 employees at June 30, 1998, including two employees in
sales and marketing, 29 in laboratory operations and genetic services, 15
employees in administration and eight employees in research and development.
None of Oncormed's employees is represented by a labor union. Oncormed has
experienced no work stoppages and believes that its relations with its employees
are good.
ONCORMED PREFERRED STOCK
Pursuant to the Oncormed Preferred Stock Purchase Agreement, an aggregate
of 333 shares of Oncormed Preferred Stock was issued to the Preferred Holders.
Pursuant to agreements, dated July 6, 1998, by and between Oncormed and the
Preferred Holders, the Preferred Holders have agreed to vote any shares
beneficially owned by them on the Record Date in favor of the Merger and related
transactions, have agreed to convert their respective Oncormed Preferred Stock
into shares of Oncormed Common Stock on or prior to the Effective Date, and have
waived certain other rights in connection with the Oncormed Preferred Stock.
Pursuant to the Oncormed Preferred Stock Purchase Agreement, the Preferred
Holders received Preferred Warrants to purchase an aggregate of 166,666 shares
of Oncormed Common Stock at an exercise price of $8.54 per share. Following the
Merger, an aggregate of approximately 77,431 shares of Gene Logic Common Stock
will be issuable upon exercise of the Preferred Warrants (at an exercise price
of $18.38 per share), based on the Assumed Exchange Ratio. The Preferred
Warrants expire on February 27, 2001.
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DESCRIPTION OF CAPITAL STOCK
DESCRIPTION OF GENE LOGIC CAPITAL STOCK
The authorized capital stock of Gene Logic consists of 60,000,000 shares of
Gene Logic Common Stock, and 10,000,000 shares of Preferred Stock, $0.01 par
value ("Gene Logic Preferred Stock").
Gene Logic Common Stock. As of the Record Date, there were approximately
14,788,445 shares of Gene Logic Common Stock outstanding held of record by
approximately 123 stockholders. Gene Logic Common Stock is listed on the Nasdaq
NMS under the symbol "GLGC." The holders of Gene Logic 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 Gene Logic
Preferred Stock, holders of Gene Logic Common Stock are entitled to receive
ratably such dividends as may be declared by the Gene Logic Board of Directors
out of funds legally available therefor. In the event of a liquidation,
dissolution or winding up of Gene Logic, holders of Gene Logic Common Stock are
entitled to share ratably in all assets remaining after payment of liabilities
and the liquidation preferences of any outstanding shares of Gene Logic
Preferred Stock. Holders of Gene Logic Common Stock have no preemptive,
conversion, subscription or other rights. There are no redemption or sinking
fund provisions applicable to the Gene Logic Common Stock. All outstanding
shares of Gene Logic Common Stock are, and all shares of Gene Logic Common Stock
to be outstanding upon consummation of the Merger will be, fully paid and
nonassessable.
Gene Logic Preferred Stock. Gene Logic has 10,000,000 shares of Gene Logic
Preferred Stock authorized and no shares are outstanding. The Gene Logic Board
has the authority, without further action by stockholders, to issue up to
10,000,000 shares of Gene Logic Preferred Stock in one or more series and to fix
the rights, preferences, privileges, qualifications and restrictions granted to
or imposed upon such Gene Logic 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 Gene Logic Common Stock.
Warrants. As of the Record Date, there were warrants outstanding to
purchase an aggregate of 93,687 shares of the Gene Logic Common Stock at a
weighted average exercise price of $1.88 per share. In August 1995, Gene Logic
issued warrants to purchase an aggregate of 50,000 shares of Gene Logic 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, Gene Logic issued a
warrant to purchase 25,758 shares of Gene Logic 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 Gene Logic draws down on the loan.
Pursuant to such provision, in September 1997 Gene Logic issued an additional
warrant to purchase 4,293 shares of Gene Logic 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, Gene Logic
issued a warrant to purchase 13,636 shares of Gene Logic Common Stock at an
exercise price of $2.20 per share. Such warrant expires in November 2002.
As a result of the Merger, Gene Logic will assume warrants to purchase
approximately 1,088,896 shares of Oncormed Common Stock, described in this
section, outstanding as of the close of business on the Record Date. Pursuant to
the Oncormed Preferred Stock Purchase Agreement, the Preferred Holders received
Preferred Warrants to purchase an aggregate of 166,666 shares of Oncormed Common
Stock at an exercise price of $8.54 per share. Following the Merger, an
aggregate of approximately 77,431 shares of Gene Logic Common Stock will be
issuable upon exercise of the Preferred Warrants (at an exercise price of $18.38
per share), based on the Assumed Exchange Ratio. The Preferred Warrants expire
on February 27, 2001. In connection with a license agreement with Incyte,
Oncormed issued to Incyte a warrant to purchase up to an aggregate of 10% of the
Oncormed Common Stock issued and outstanding on the date of the exercise of the
warrant. Incyte has agreed that, for purposes of determining the number of
shares of Gene Logic Common Stock issuable upon exercise of the warrant, that
the number of shares of Oncormed Common Stock issuable upon exercise of the
warrant shall equal 788,730. The warrant is exercisable until February 25, 2000
at an exercise price per share equal to the greater of 110% of the fair market
value per share of Oncormed Common
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Stock on the trading day prior to the date of exercise and (i) $9.00 per share
(if the warrant is exercised after February 25, 1998 but on or prior to February
25, 1999), or (ii) $13.50 per share (if the warrant is exercised after February
25, 1999 but on or prior to February 25, 2000). Following the Merger, based on
the Assumed Exchange Ratio, an aggregate of approximately 366,443 shares of Gene
Logic Common Stock will be issuable upon the exercise of such warrant at an
exercise price equal to the greater of 110% of the fair market value per share
of Gene Logic Common Stock on the trading day prior to the date of exercise and
(i) $19.37 per share (if the warrant is exercised on or prior to February 25,
1999), or (ii) $29.06 per share (if the warrant is exercised after February 25,
1999 but on or prior to February 25, 2000). Notwithstanding the foregoing,
Incyte has the option to fix the exercise price per share during each of the
aforementioned periods; provided, however, that in no event shall the exercise
price per share during each of the aforementioned periods be less than $9.00 or
$13.50 per share of Oncormed Common Stock, respectively ($19.37 or $29.06 per
share of Gene Logic Common Stock, based on the Assumed Exchange Ratio). Further,
Oncormed has also agreed to issue to Incyte, under certain circumstances, up to
an additional aggregate of approximately 90,719 shares of Oncormed Common Stock
(42,148 shares of Gene Logic Common Stock, based on the Assumed Exchange Ratio).
Oncormed also has Underwriter Warrants outstanding to purchase an aggregate of
133,500 shares of Oncormed Common Stock at an exercise price of $6.90 per share
(subject to adjustment in certain circumstances). The Underwriter Warrants
expire on September 27, 1999. Following the Merger, an aggregate of
approximately 62,024 shares of Gene Logic Common Stock will be issuable upon
exercise of the Underwriter Warrants at an exercise price of $14.85 per share,
based on the Assumed Exchange Ratio. See "The Merger and Related
Transactions -- Merger Consideration; Conversion of Shares -- Treatment of
Oncormed Warrants."
Registration Rights. At the time of Gene Logic's initial public offering,
the holders of 9,281,185 shares of Gene Logic Common Stock and the holders of
warrants to purchase 30,051 shares of Gene Logic Common Stock were 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 Gene Logic proposes to register any of its
securities under the Securities Act (with certain exceptions, including a
registration statement on Form S-4), 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. The holders may also require Gene Logic
to file a registration statement under the Securities Act with respect to their
shares on two occasions, and Gene Logic is required to use its best efforts to
effect such registration. Furthermore, the holders may require Gene Logic to
register their shares on Form S-3 when such form becomes available to Gene
Logic. Generally, Gene Logic 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.
Gene Logic Transfer Agent and Registrar. The Transfer Agent and Registrar
for the Gene Logic Common Stock is ChaseMellon Shareholder Services.
COMPARISON OF RIGHTS OF HOLDERS OF GENE LOGIC
COMMON STOCK AND HOLDERS OF ONCORMED COMMON STOCK
The rights of Gene Logic stockholders are governed by the Gene Logic
Certificate, the Gene Logic By-laws and the DGCL. The rights of Oncormed
stockholders are governed by the Oncormed Certificate, the Oncormed By-laws and
the DGCL. Upon consummation of the Merger, the holders of Oncormed Common Stock
will become holders of Gene Logic Common Stock. There are certain material
differences between the rights and privileges of the holders of Oncormed Common
Stock and the holders of Gene Logic Common Stock.
Percentage Ownership of Voting Stock. Upon completion of the Merger, the
percentage ownership of Gene Logic by each former Oncormed stockholder will be
substantially less than such stockholder's current
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percentage ownership of Oncormed. Accordingly, former Oncormed stockholders will
have a significantly smaller voting influence over the affairs of Gene Logic
than they currently have over the affairs of Oncormed.
Amendment of By-laws. Under the DGCL, by-laws may be amended by
stockholders entitled to vote; however, a corporation may confer the power to
amend by-laws upon the directors. The fact that such power has been so conferred
upon the directors does not divest the stockholders of their power to amend the
by-laws. The Gene Logic Certificate states that the Gene Logic By-laws may be
altered or amended or new by-laws adopted by the affirmative vote of at least
66 2/3% of the outstanding stock entitled to vote thereon or by the Gene Logic
Board. Under the Oncormed Certificate and Oncormed By-laws, the Oncormed By-laws
may be altered, amended or repealed or new by-laws adopted by the affirmative
vote of the holders of a majority of the shares of the outstanding stock
entitled to vote thereon or by the Oncormed Board.
Amendment of the Gene Logic Certificate and the Oncormed Certificate. The
DGCL provides that approval of a majority of the outstanding stock entitled to
vote thereon is required to amend a certificate of incorporation. The Gene Logic
Certificate provides that an amendment of certain provisions must be approved by
the affirmative vote of at least 66 2/3% of all of the outstanding stock
entitled to vote thereon. The Oncormed Certificate contains no such provision.
Power to Call Special Meetings of Stockholders. According to the Gene
Logic By-laws, a special meeting of the Gene Logic stockholders may be called
only by the Chairman of the Gene Logic Board, the President of Gene Logic or by
the Gene Logic Board pursuant to a resolution adopted by a majority of the total
number of authorized directors. The Oncormed By-laws provide that a special
meeting of the Oncormed stockholders may be called by the Oncormed Board, or by
the Chairman of the Oncormed Board, the President or the Secretary. A special
meeting of the Oncormed stockholders may be called by the Secretary only upon
the written request of the holders of shares entitled to vote not less than 10%
of all of the shares entitled to vote at the meeting.
Action by Written Consent of Stockholders. Under the DGCL, unless
otherwise provided in the certificate of incorporation, any action which may be
taken at a meeting of stockholders may be taken without a meeting and without
prior notice if written consents setting forth the action so taken are 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 stock entitled to vote thereon were present and voted. However, the
Gene Logic Certificate provides that no action may be taken by the stockholders
by written consent. The Oncormed Certificate contains no such provision.
Classification of Board of Directors. The DGCL permits, but does not
require, a classified board of directors, divided into as many as three classes
with staggered terms under which one-half or one-third of the directors are
elected for terms of two or three years, respectively. The Gene Logic
Certificate provides for a classified board of directors whereby the directors
are separated into three classes with each class serving for a three-year term.
The Oncormed Certificate contains no such provision.
Size of the Board of Directors. The DGCL provides that the board of
directors of a Delaware corporation must consist of one or more members. The
number of directors, may be fixed by, or in the manner provided in, the
corporation's by-laws unless the certificate of incorporation fixes the number
of directors. The Gene Logic Certificate requires that the number of directors
shall be fixed by one or more resolutions approved by the Gene Logic Board. The
number of directors of Gene Logic is currently fixed at six. The Oncormed
By-laws provide that the number of directors shall be determined by resolution
of the Oncormed Board or by resolution of the stockholders.
Removal of Directors. Under the DGCL, a director of a corporation with a
classified board of directors may be removed only for cause, unless the
certificate of incorporation otherwise provides. The Gene Logic Certificate and
the Gene Logic By-laws provide that, subject to the rights of any holders of any
series of Preferred Stock, no director shall be removed without cause. The Gene
Logic Certificate and Gene Logic By-laws further provide that, subject to any
limitations imposed by law, a director may be removed from office with cause by
the affirmative vote of the holders of a majority of the voting power of all of
the outstanding stock entitled to vote thereon. The Oncormed By-laws provide
that any director may be removed, with or
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without cause, by the affirmative vote of 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 the affirmative vote of the holders of a majority
of the outstanding shares of such class or series.
Filling Vacancies in the Board of Directors. Under the DGCL, vacancies may
be filled by a majority of the directors then in office (even though less than a
quorum) unless otherwise provided in the certificate of incorporation or the
by-laws. The Gene Logic By-laws provide that, subject to the rights of the
holders of any series of Preferred Stock, any vacancies on the Gene Logic Board
resulting from death, resignation, disqualification, removal or other causes and
any newly created directorships resulting from any increase in the number of
directors, shall, unless the Gene Logic Board determines that such vacancy may
be filled by the stockholders, be filled only by the affirmative vote of a
majority of the directors then in office, even though less than a quorum of the
Gene Logic Board. The Oncormed By-laws provide that any vacancy may be filled
either by the Oncormed stockholders or by a majority of the directors then in
office, even if less than a quorum, or by a sole remaining director of the
Oncormed Board.
Stock Exchange Rules. The Oncormed Common Stock is currently listed on the
AMEX and will cease to trade on the AMEX upon consummation of the Merger. The
Gene Logic Common Stock is traded on the Nasdaq NMS. There are material
differences between the corporate governance rules of the Nasdaq NMS and the
AMEX.
EXPERTS
The financial statements of Gene Logic Inc. as of December 31, 1997 and
1996 and for each of the years in the three-year period ended December 31, 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 herein in
reliance upon the authority of said firm as experts in giving said reports.
The audited financial statements of Oncormed, Inc. as of December 31, 1997
and 1996 and for each of the years in the three-year period ended December 31,
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 herein in
reliance upon the authority of said firm as experts in giving said reports.
LEGAL MATTERS
The validity of the shares of Common Stock offered hereby and certain
federal income tax matters relating to the Merger will be passed upon for Gene
Logic by Cooley Godward LLP, San Diego, California. Certain federal income tax
matters relating to the Merger will be passed upon for Oncormed by Brobeck,
Phleger & Harrison LLP, New York, New York.
REPRESENTATIVES OF INDEPENDENT AUDITORS
Representatives of Arthur Andersen LLP expect to be present at the Gene
Logic Special Meeting and at the Oncormed Special Meeting. While such
representatives have stated that they do not plan to make a statement at such
meeting, they will be available to respond to appropriate questions from
stockholders in attendance.
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INDEX TO FINANCIAL STATEMENTS
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
GENE LOGIC INC.
Report of Independent Public Accountants.................. F-2
Balance Sheets as of December 31, 1997 and 1996........... F-3
Statements of Operations for the years ended December 31,
1997, 1996 and 1995.................................... F-4
Statements of Stockholders' Equity for the years ended
December 31, 1997, 1996 and 1995....................... F-5
Statements of Cash Flows for the years ended December 31,
1997, 1996 and 1995.................................... F-6
Notes to Financial Statements............................. F-7
Unaudited Balance Sheets as of June 30, 1998 and December
31, 1997............................................... F-18
Unaudited Statements of Operations for the six months
ended June 30, 1998 and 1997........................... F-19
Unaudited Statements of Cash Flows for the six months
ended June 30, 1998 and 1997........................... F-20
Notes to Financial Statements............................. F-21
ONCORMED, INC.
Report of Independent Public Accountants.................. F-25
Balance Sheets as of December 31, 1997 and 1996........... F-26
Statements of Operations for the years ended December 31,
1997, 1996, and 1995 and for the period from Inception
(July 12, 1993) through December 31, 1997.............. F-27
Statements of Stockholders' Equity for the period from
Inception (July 12, 1993) through December 31, 1993,
and for the years ended December 31, 1994, 1995, 1996
and 1997............................................... F-28
Statements of Cash Flows for the years ended December 31,
1997, 1996 and 1995 and for the period from Inception
(July 12, 1993) through December 31, 1997.............. F-29
Notes to Financial Statements............................. F-30
Unaudited Balance Sheets as of June 30, 1998 and December
31, 1997............................................... F-45
Unaudited Statements of Operations for the six months
ended June 30, 1998 and 1997 and for the period from
Inception (July 12, 1993) through June 30, 1998........ F-46
Unaudited Statements of Cash Flows for the six months
ended June 30, 1998 and 1997 and for the period from
Inception (July 12, 1993) through June 30, 1998........ F-47
Notes to Financial Statements............................. F-48
</TABLE>
F-1
<PAGE> 137
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, 1997 and 1996, and the related
statements of operations, stockholders' equity and cash flows for the years
ended December 31, 1997, 1996 and 1995. 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, 1997 and 1996, and the results of its operations and its cash flows
for the years ended December 31, 1997, 1996 and 1995, in conformity with
generally accepted accounting principles.
/s/ ARTHUR ANDERSEN LLP
Baltimore, Maryland
February 20, 1998
(except with respect to the acquisition
described in Note 15, as to which
the date is July 6, 1998)
F-2
<PAGE> 138
GENE LOGIC INC.
BALANCE SHEETS
AS OF DECEMBER 31, 1997 AND 1996
<TABLE>
<CAPTION>
1997 1996
------------ -----------
<S> <C> <C>
ASSETS
Current Assets:
Cash and cash equivalents................................. $ 46,521,732 $ 1,137,130
Marketable securities available for sale.................. 99,054 4,534,353
Due from strategic partner................................ 1,000,000 --
Prepaid expenses.......................................... 481,382 37,424
Other current assets...................................... 890,120 67,078
------------ -----------
Total Current Assets............................... 48,992,288 5,775,985
Property and Equipment, net................................. 4,210,513 1,757,240
Notes Receivable from Employees............................. -- 102,896
Intangibles and Other Assets, net........................... 769,349 182,931
------------ -----------
Total Assets....................................... $ 53,972,150 $ 7,819,052
============ ===========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current Liabilities:
Accounts payable.......................................... $ 181,269 $ 91,074
Accrued expenses.......................................... 1,370,887 997,710
Current portion of capital lease obligation............... 115,005 106,195
Current portion of long-term debt......................... 433,701 --
Deferred revenue.......................................... 4,436,147 --
------------ -----------
Total Current Liabilities.......................... 6,537,009 1,194,979
Capital Lease Obligation.................................... 224,694 339,699
Long-Term Debt.............................................. 777,155 --
Other Noncurrent Liabilities................................ 365,832 --
------------ -----------
Total Liabilities.................................. 7,904,690 1,534,678
------------ -----------
Commitments and Contingencies
Series A Convertible Preferred Stock, $.01 par value;
333,333 shares authorized; 0 and 333,333 shares issued and
outstanding as of December 31, 1997 and 1996,
respectively; liquidation preference of $1.50 per share... -- 500,000
Series A-1 Convertible Preferred Stock, $.01 par value;
462,500 shares authorized; 0 and 412,500 shares issued and
outstanding as of December 31, 1997 and 1996,
respectively; liquidation preference of $1.60 per share... -- 653,722
Series B Convertible Preferred Stock, $.01 par value;
4,154,167 shares authorized; 0 and 4,090,909 shares issued
and outstanding as of December 31, 1997 and 1996,
respectively; liquidation preference of $2.20 per share... -- 9,317,611
Series C Convertible Preferred Stock, $.01 par value;
4,600,000 shares authorized; 0 shares issued and
outstanding as of December 31, 1997 and 1996; liquidation
preference of $4.50 per share............................. -- --
Stockholders' Equity:
Common stock, $.01 par value; 60,000,000 shares
authorized; and 13,899,250 and 692,733 shares issued and
outstanding as of December 31, 1997 and 1996,
respectively............................................ 138,993 6,927
Preferred stock, $.01 par value; 10,000,000 shares
authorized; no shares issued and outstanding as of
December 31, 1997 and 1996.............................. -- --
Additional paid-in capital................................ 64,881,819 13,450
Deferred compensation on stock options, net............... (6,277,529) --
Unrealized loss on marketable securities.................. (1,536) (13,215)
Accumulated deficit....................................... (12,674,287) (4,194,121)
------------ -----------
Total Stockholders' Equity......................... 46,067,460 (4,186,959)
------------ -----------
Total Liabilities and Stockholders' Equity......... $ 53,972,150 $ 7,819,052
============ ===========
</TABLE>
The accompanying notes are an integral part of these balance sheets.
F-3
<PAGE> 139
GENE LOGIC INC.
STATEMENTS OF OPERATIONS
FOR THE YEARS ENDED DECEMBER 31, 1997, 1996 AND 1995
<TABLE>
<CAPTION>
1997 1996 1995
----------- ----------- ---------
<S> <C> <C> <C>
Revenues............................................. $ 2,047,187 $ -- $ --
Expenses:
Research and development........................... 6,060,721 1,741,469 485,688
General and administrative......................... 3,825,834 1,344,961 258,491
----------- ----------- ---------
Total expenses.................................. 9,886,555 3,086,430 744,179
----------- ----------- ---------
Loss from operations.......................... (7,839,368) (3,086,430) (744,179)
Interest Income, net................................. 745,375 221,302 --
----------- ----------- ---------
Loss before income tax expense................ (7,093,993) (2,865,128) (744,179)
Income Tax Expense................................... 100,000 -- --
----------- ----------- ---------
Net loss...................................... (7,193,993) (2,865,128) (744,179)
Accretion of Mandatory Redemption Value of Preferred
Stock.............................................. 1,286,173 493,513 897
----------- ----------- ---------
Net loss attributable to common
stockholders............................... $(8,480,166) $(3,358,641) $(745,076)
=========== =========== =========
Basic and Diluted Net Loss Per Common Share.......... $ (3.97) $ (5.87) $ (3.48)
=========== =========== =========
Shares Used in Computing Basic and Diluted Net Loss
Per Common Share................................... 2,137,688 572,337 214,274
=========== =========== =========
Pro Forma Net Loss Per Common Share.................. $ (0.90) $ (0.72)
=========== ===========
Shares Used in Computing Pro Forma Net Loss Per
Common Share....................................... 8,004,258 3,987,098
=========== ===========
</TABLE>
The accompanying notes are an integral part of these statements.
F-4
<PAGE> 140
GENE LOGIC INC.
STATEMENTS OF STOCKHOLDERS' EQUITY
FOR THE YEARS ENDED DECEMBER 31, 1997, 1996 AND 1995
<TABLE>
<CAPTION>
STOCKHOLDERS' EQUITY
--------------------------------------------------
PREFERRED STOCK COMMON STOCK
------------------------- --------------------- ADDITIONAL
NUMBER OF NUMBER OF PAR PAID-IN DEFERRED
SHARES AMOUNT SHARES VALUE CAPITAL COMPENSATION
---------- ------------ ---------- -------- ----------- ------------
<S> <C> <C> <C> <C> <C> <C>
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.... -- -- -- -- -- --
Net Loss........................ -- -- -- -- -- --
---------- ------------ ---------- -------- ----------- -----------
Balance at December 31, 1996...... 4,836,742 10,471,333 692,733 6,927 13,450 --
Issuance of Series C Convertible
Preferred Stock, net of
issuance costs................ 4,444,443 19,117,260 -- -- -- --
Cancellation of common stock.... -- -- (55,000) (550) (7,700) --
Issuance of common stock in
connection with exercise of
stock options................. -- -- 152,943 1,530 21,518 --
Issuance of common stock........ -- -- 425,000 4,250 3,003,250 --
Issuance of warrants............ -- -- -- -- 42,563 --
Accretion of mandatory
redemption value of preferred
stock......................... -- 1,286,173 -- -- -- --
Conversion of preferred stock to
common stock in connection
with initial public
offering...................... (9,281,185) (30,874,766) 9,281,185 92,812 30,781,954 --
Issuance of common stock in
connection with initial public
offering, net of issuance
costs......................... -- -- 3,347,000 33,470 23,910,909 --
Issuance of common stock in
connection with exercise of
warrants...................... -- -- 55,389 554 219,447 --
Net change in unrealized losses
from marketable securities.... -- -- -- -- -- --
Deferred compensation from stock
options....................... -- -- -- -- 6,896,428 (6,896,428)
Amortization of deferred
compensation.................. -- -- -- -- -- 618,899
Net Loss........................ -- -- -- -- -- --
---------- ------------ ---------- -------- ----------- -----------
Balance at December 31, 1997...... -- $ -- 13,899,250 $138,993 $64,881,819 $(6,277,529)
========== ============ ========== ======== =========== ===========
<CAPTION>
STOCKHOLDERS' EQUITY
-------------------------
UNREALIZED
LOSSES ON
MARKETABLE ACCUMULATED
SECURITIES DEFICIT
---------- ------------
<S> <C> <C>
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.... (13,215) --
Net Loss........................ -- (2,865,128)
-------- ------------
Balance at December 31, 1996...... (13,215) (4,194,121)
Issuance of Series C Convertible
Preferred Stock, net of
issuance costs................ -- --
Cancellation of common stock.... -- --
Issuance of common stock in
connection with exercise of
stock options................. -- --
Issuance of common stock........ -- --
Issuance of warrants............ -- --
Accretion of mandatory
redemption value of preferred
stock......................... -- (1,286,173)
Conversion of preferred stock to
common stock in connection
with initial public
offering...................... -- --
Issuance of common stock in
connection with initial public
offering, net of issuance
costs......................... -- --
Issuance of common stock in
connection with exercise of
warrants...................... -- --
Net change in unrealized losses
from marketable securities.... 11,679 --
Deferred compensation from stock
options....................... -- --
Amortization of deferred
compensation.................. -- --
Net Loss........................ -- (7,193,993)
-------- ------------
Balance at December 31, 1997...... $ (1,536) $(12,674,287)
======== ============
</TABLE>
The accompanying notes are an integral part of these statements.
F-5
<PAGE> 141
GENE LOGIC INC.
STATEMENTS OF CASH FLOWS
FOR THE YEARS ENDED DECEMBER 31, 1997, 1996 AND 1995
<TABLE>
<CAPTION>
1997 1996 1995
----------- ----------- ---------
<S> <C> <C> <C>
Cash Flows From Operating Activities:
Net loss........................................... $(7,193,993) $(2,865,128) $(744,179)
Adjustments to reconcile net loss to net cash flows
from operating activities:
Depreciation and amortization................... 631,682 67,602 1,395
Write-off of deferred financing fee............. -- 2,500 --
Cancellation of notes receivable................ 94,646 -- --
Amount due under research agreement............. 47,500 -- --
Amortization of deferred compensation........... 618,899 -- --
Changes in operating assets and liabilities:
Due from strategic partner...................... (1,000,000) -- --
Prepaid expenses................................ (443,958) (37,424) 11,445
Other current assets............................ (823,052) (65,978) (100)
Intangibles and other assets.................... (642,504) (125,810) (63,139)
Accounts payable................................ 90,195 73,780 17,294
Accrued expenses................................ 373,177 911,461 86,249
Deferred revenue................................ 4,436,147 -- --
Other noncurrent liabilities.................... 408,395 -- --
----------- ----------- ---------
Net Cash Flows From Operating Activities... (3,402,866) (2,038,997) (691,035)
----------- ----------- ---------
Cash Flows From Investing Activities:
Purchases of property and equipment................ (3,068,868) (1,339,207) (12,366)
Increase in notes receivable from employees........ -- (102,896) --
Purchase of marketable securities available for
sale............................................ -- (4,547,568) --
Proceeds from sale and maturity of marketable
securities available for sale................... 4,446,978 -- --
----------- ----------- ---------
Net Cash Flows From Investing Activities... 1,378,110 (5,989,671) (12,366)
----------- ----------- ---------
Cash Flows From Financing Activities:
Proceeds from issuance of common stock............. 30,019,049 17,577 1,800
Proceeds from issuance of preferred stock.......... 20,000,000 9,000,000 760,000
Payments for stock issuance costs.................. (3,714,352) (175,005) (8,072)
Proceeds from equipment loan....................... 1,084,362 -- --
Proceeds from financing agreement.................. 281,325 -- --
Repayments of capital lease obligation and
equipment loan.................................. (261,026) (25,252) --
----------- ----------- ---------
Net Cash Flows From Financing Activities... 47,409,358 8,817,320 753,728
----------- ----------- ---------
Net Increase in Cash and Cash Equivalents............ 45,384,602 788,652 50,327
Cash and Cash Equivalents, beginning of period....... 1,137,130 348,478 298,151
----------- ----------- ---------
Cash and Cash Equivalents, end of period............. $46,521,732 $ 1,137,130 $ 348,478
=========== =========== =========
Supplemental Disclosure:
Interest expense paid.............................. $ 97,048 $ 9,024 $ --
=========== =========== =========
Non-Cash Transactions:
Equipment acquired under capital lease............. $ -- $ 471,146 $ --
=========== =========== =========
Issuance of warrants to lessor..................... $ 42,563 $ -- $ --
=========== =========== =========
</TABLE>
The accompanying notes are an integral part of these statements.
F-6
<PAGE> 142
GENE LOGIC INC.
NOTES TO FINANCIAL STATEMENTS
DECEMBER 31, 1997, 1996 AND 1995
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.
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.
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, 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.
In June 1997, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards No. 131, "Disclosure About Segments of an
Enterprise and Related Information", which establishes standards for reporting
information about operating segments in annual and interim financial statements
issued to shareholders. This statement also establishes standards for related
disclosures about products and services, geographic areas and major customers.
The Company plans to adopt this statement in 1998.
F-7
<PAGE> 143
GENE LOGIC INC.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1997, 1996 AND 1995
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, 1997 and 1996, are comprised of:
<TABLE>
<CAPTION>
1997 1996
----------- ----------
<S> <C> <C>
Cash............................................... $ 148,982 $ 117,407
Corporate commercial paper......................... 46,372,750 --
Money market mutual fund........................... -- 1,019,723
----------- ----------
$46,521,732 $1,137,130
=========== ==========
</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
approximately five to seventeen years. Accumulated amortization relating to
other assets was $19,610 and $3,518 as of December 31, 1997 and 1996,
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.
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.
F-8
<PAGE> 144
GENE LOGIC INC.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1997, 1996 AND 1995
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
option 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 automatically converted to common stock upon
completion of the Company's initial public offering (the "IPO") 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 antidilutive.
NOTE 2. MARKETABLE SECURITIES:
The following is a summary of the Company's investment portfolio as of
December 31, 1997 and 1996:
<TABLE>
<CAPTION>
GROSS
AMORTIZED UNREALIZED
COST LOSSES FAIR VALUE
---------- ---------- ----------
<S> <C> <C> <C>
December 31, 1997
Unit Investment Trust................. $ 100,590 $ (1,536) $ 99,054
Government Securities................. -- -- --
---------- -------- ----------
Total......................... $ 100,590 $ (1,536) $ 99,054
========== ======== ==========
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
========== ======== ==========
</TABLE>
F-9
<PAGE> 145
GENE LOGIC INC.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1997, 1996 AND 1995
All marketable securities mature within one year or have no stated
maturity. As of December 31, 1997 and 1996, 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 year ended
December 31, 1997, a portion of the Unit Investment Trust was sold for total
proceeds of $2,407,071 resulting in realized losses of $11,679.
NOTE 3. PROPERTY AND EQUIPMENT:
Property and equipment includes the following as of December 31, 1997 and
1996:
<TABLE>
<CAPTION>
1997 1996
---------- ----------
<S> <C> <C>
Furniture and fixtures.............................. $ 190,787 $ 105,061
Computers and office equipment...................... 2,096,015 276,912
Lab equipment....................................... 1,765,756 932,479
Lab equipment under capital lease................... 471,146 471,146
Leasehold improvements.............................. 367,883 37,121
---------- ----------
4,891,587 1,822,719
Less: Accumulated depreciation...................... (681,074) (65,479)
---------- ----------
Property and Equipment, net......................... $4,210,513 $1,757,240
========== ==========
</TABLE>
Depreciation expense was $615,595, $64,779 and $700 for the years ended
December 31, 1997, 1996 and 1995, respectively.
NOTE 4. ACCRUED EXPENSES:
Accrued expenses consists of the following as of December 31, 1997 and
1996:
<TABLE>
<CAPTION>
1997 1996
---------- --------
<S> <C> <C>
Property additions................................... $ 782,732 $877,962
Professional fees.................................... 418,596 56,039
Payroll taxes and benefits........................... 133,730 63,709
Consulting........................................... 35,829 --
---------- --------
Total...................................... $1,370,887 $997,710
========== ========
</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 4 1/2-year 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. 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. Under the
alliance, approximately $1,167,000 has been recognized as revenue during the
year ended
F-10
<PAGE> 146
GENE LOGIC INC.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1997, 1996 AND 1995
December 31, 1997. 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 5-year strategic alliance
with Japan Tobacco Inc. ("Japan Tobacco") for the 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 and database access fees and
research funding will 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. 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(TM) Normal database, and the Company intends to use its
Flow-thru Chip(TM) 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. During the year ended December 31, 1997, the
Company has recognized approximately $878,000 of revenue under the alliance. In
addition, Japan Tobacco also made a $3.0 million investment in common stock of
the Company at the IPO. 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.
During December 1997, the Company entered into a 3-year strategic alliance
with N.V. Organon ("Organon"), a pharmaceutical business unit of Akzo Nobel NV,
for the discovery of drug targets. Payments by Organon to the Company in the
form of committed database access fees and research funding will total a minimum
of $12.5 million if the research program continues for its full term and the
Company performs its research obligations under the agreement. As part of the
alliance and during the research term of the alliance agreement, the Company
granted Organon a non-exclusive license to the Gene Express(TM) Normal database.
Organon will be obligated to make additional payments to the Company for the
achievement of specified target discovery and related product development
milestones. Organon will also pay the Company royalties on worldwide net sales
of all products that may result from targets discovered pursuant to the
alliance.
Under the terms of the strategic alliance agreements, payments for
technology and database access fees and research and development support are
recognized as revenue ratably over the period for which the payment is made.
Payments related to the achievement of certain milestones are recognized as
revenue when the milestones are achieved.
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 three such
alliances 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.
F-11
<PAGE> 147
GENE LOGIC INC.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1997, 1996 AND 1995
NOTE 7. INCOME TAXES:
The actual income tax expense for the years ended December 31, 1997, 1996
and 1995, 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>
1997 1996 1995
----------- ----------- ---------
<S> <C> <C> <C>
Tax benefit at federal statutory rate........ $(2,411,958) $ (977,518) $(253,021)
State income taxes, net of federal income tax
effect..................................... (326,324) (132,827) (34,381)
Other........................................ 1,871 (49,813) 9,799
Increase in valuation allowance.............. 2,836,411 1,160,158 277,603
----------- ----------- ---------
Income tax expense........................... $ 100,000 $ -- $ --
=========== =========== =========
</TABLE>
The tax effect of cumulative temporary differences at December 31, 1997,
1996 and 1995, follows:
<TABLE>
<CAPTION>
1997 1996 1995
----------- ----------- ---------
<S> <C> <C> <C>
Deferred Tax Assets:
Japanese withholding....................... $ 100,000 $ -- $ --
Tax carryforwards.......................... 4,065,913 1,128,927 --
Start-up costs............................. 312,443 403,889 316,937
Accrued vacation........................... 38,892 7,457 --
----------- ----------- ---------
4,517,248 1,540,273 316,937
Less: Valuation allowance.................. (4,313,506) (1,477,095) (316,937)
----------- ----------- ---------
Net deferred tax asset.................. $ 203,742 $ 63,178 $ --
=========== =========== =========
Deferred Tax Liabilities:
Depreciation............................... $ 117,984 $ 51,380 $ --
Prepaid expenses........................... 44,745 2,046 --
Capital lease.............................. 41,013 9,752 --
----------- ----------- ---------
Net deferred tax liabilities............ $ 203,742 $ 63,178 $ --
=========== =========== =========
</TABLE>
Net operating loss carryforwards for income tax purposes are approximately
$10,384,000, as of December 31, 1997. The Company also has research and
development tax credit carryforwards of approximately $279,000 as of December
31, 1997. The carryforwards, if not utilized, will expire in increments through
2012. 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 December 31, 1997, consists of the following:
<TABLE>
<S> <C>
Equipment loan.............................................. $ 929,531
Note payable................................................ 281,325
----------
1,210,856
Less: Current portion....................................... (433,701)
----------
Total long-term debt........................................ $ 777,155
==========
</TABLE>
F-12
<PAGE> 148
GENE LOGIC INC.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1997, 1996 AND 1995
As of December 31, 1997, principal payments on long-term debt for the
following years are as follows:
<TABLE>
<S> <C>
Year ending December 31,
1998...................................................... $ 433,701
1999...................................................... 371,730
2000...................................................... 299,480
2001...................................................... 105,945
----------
$1,210,856
==========
</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.
In December 1997, the Company entered into a note payable to finance the
purchase of directors and officers' insurance. The note bears interest at 8.0%
and is due in regular monthly installments of $16,747 through June 1999.
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 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 expire August 2005.
During 1996, the Company sold 4,090,909 shares of Series B stock for $9.0
million.
During July 1997, the Company sold 4,444,443 shares of Series C stock for
net proceeds of approximately $19.1 million. The Company also issued a warrant
for an additional 48,889 shares of Series C stock at an exercise price of $4.50.
At the time of issuance, the fair value of this warrant, approximately $118,000,
was recorded as Series C stock on the Company's balance sheet. The fair value of
this warrant was calculated using the Black-Scholes option pricing model using
the same assumptions used for options granted during the period (see Note 13).
This warrant was exercised by the warrantholder concurrent with the Company's
IPO.
All outstanding shares of preferred stock were converted to common stock in
conjunction with the Company's IPO on a one-to-one basis.
NOTE 10. STOCKHOLDERS' EQUITY:
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).
During November 1997, the Company completed an IPO of 3,000,000 shares of
common stock at a price of $8 per share. In December 1997, the underwriters
exercised their over-allotment option on an additional
F-13
<PAGE> 149
GENE LOGIC INC.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1997, 1996 AND 1995
347,000 shares. Net proceeds of the IPO (not including the concurrent Japan
Tobacco investment described in Note 6), after underwriting commissions and
expenses, were approximately $23,944,000. Concurrent with the IPO, a note
receivable of $50,000 plus interest from an officer of the Company was forgiven,
the vesting of certain options was accelerated and the authorized capital stock
of the Company was increased to 60,000,000 shares of common stock and 10,000,000
shares of preferred stock.
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 terminated this lease in February 1998 once the
relocation to the new facility was 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. Rent expense on
the lease is being recognized on a straight-line basis over its term. The lease
also requires the Company to pay for building operating costs. In addition to
future minimum lease payments, the Company 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 warrant, approximately $43,000, is being
recorded as rent expense over the term of the lease. The fair value of the
warrant was calculated using the Black-Scholes option pricing model using the
same assumptions used for options granted during the period (see Note 13). This
warrant was exercised by the lessor concurrent with the Company's IPO.
Future minimum lease payments on these operating leases as of December 31,
1997, are as follows:
<TABLE>
<S> <C>
Year ending December 31,
1998...................................................... $ 1,183,110
1999...................................................... 1,169,516
2000...................................................... 1,138,572
2001...................................................... 1,172,729
2002...................................................... 1,207,912
2003 and thereafter....................................... 6,485,463
-----------
$12,357,302
===========
</TABLE>
Rent expense for the years ended December 31, 1997, 1996 and 1995, was
$492,559, $238,930 and $0, respectively.
Capital Lease
During 1996, the Company entered into a capital lease to purchase equipment
for $471,146. Accumulated amortization for this equipment was $147,239 and
$29,447 at December 31, 1997 and 1996, respectively.
F-14
<PAGE> 150
GENE LOGIC INC.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1997, 1996 AND 1995
Payments during the years ended December 31, 1997 and 1996, totaled $106,195 and
$25,252, respectively. Future minimum lease payments as of December 31, 1997,
are as follows:
<TABLE>
<S> <C>
Year ending December 31,
1998...................................................... $137,104
1999...................................................... 137,104
2000...................................................... 102,827
--------
Total minimum lease payments...................... 377,035
Less: Amounts representing imputed interest................. (37,336)
--------
Present value of net minimum payments..................... 339,699
Less: Current portion....................................... (115,005)
--------
Noncurrent portion of capital lease obligation.............. $224,694
========
</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 date of the Company's IPO (see Note 10).
Contingencies
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 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 December 31, 1997.
NOTE 13. STOCK BASED COMPENSATION:
During 1996, the Company instituted a stock plan (the "Stock Plan"), which
was amended and restated in 1997, whereby the Company's compensation committee
(the Committee), at its discretion, can grant options, award stock or provide
opportunities to make direct purchase of stock to employees, officers, directors
and consultants of the company and related corporations. The Stock Plan is
authorized to grant options of up to 6,100,000 shares of common stock. During
1997, the Company adopted a Directors' Stock Plan (the "Directors' Plan") to
provide for granting of options to non-employee directors of the Company. The
Directors' Plan is administered by the Committee and is authorized to grant
options of up to 125,000 shares of common stock. No options have been granted
under the Directors' Plan. 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. During 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 allows
employees to purchase common stock of the Company, through payroll deductions of
up to a maximum of 15% of their salary, at 85% of the closing price of the
shares at the time of purchase. No shares were issued to employees at December
31, 1997.
F-15
<PAGE> 151
GENE LOGIC INC.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1997, 1996 AND 1995
The following is a rollforward of option activity for the years ended
December 31, 1997 and 1996:
<TABLE>
<CAPTION>
1997 1996
---------------------- ----------------------
WEIGHTED WEIGHTED
AVERAGE AVERAGE
EXERCISE EXERCISE
SHARES PRICE SHARES PRICE
---------- -------- ---------- --------
<S> <C> <C> <C> <C>
Outstanding, beginning of period....... 424,000 $0.15 -- $ --
Granted.............................. 2,281,881 1.31 524,000 0.12
Exercised............................ (152,943) 0.15 (100,000) 0.01
Canceled............................. (55,578) 0.15 -- --
---------- ----------
Outstanding, end of period............. 2,497,360 1.21 424,000 0.15
========== ==========
Exercisable, end of period............. 859,315 0.35 77,710 0.15
========== ==========
Weighted average fair value of options
granted.............................. $ 3.22 $ 0.05
========== ==========
Available for grant at year end........ 3,249,697 1,376,000
========== ==========
</TABLE>
During the year ended December 31, 1997, the Company granted options with
exercise prices below fair value. The Company has recorded deferred compensation
of $6,896,428 at December 31, 1997, and compensation expense of $618,899 for the
year then ended related to these options.
The following table provides further information on options granted with
exercise prices below fair value, compared to options granted with exercise
prices equal to fair value for the year ended December 31, 1997:
<TABLE>
<CAPTION>
WEIGHTED
AVERAGE
WEIGHTED WEIGHTED FAIR VALUE
AVERAGE AVERAGE OF COMMON
EXERCISE OPTION STOCK ON
SHARES PRICE FAIR VALUE GRANT DATE
--------- -------- ---------- ----------
<S> <C> <C> <C> <C>
Options whose exercise price equals the
fair value of the stock on the grant
date.................................. 53,000 $5.27 $2.36 $5.27
Options whose exercise price is less
than the fair value of the stock on
the grant date........................ 2,228,881 1.22 3.24 4.31
</TABLE>
The following table summarizes information about stock options outstanding
at December 31, 1997:
<TABLE>
<CAPTION>
OPTIONS OUTSTANDING
------------------------------------------ OPTIONS EXERCISABLE
WEIGHTED --------------------------
NUMBER AVERAGE WEIGHTED NUMBER WEIGHTED
OUTSTANDING AT REMAINING AVERAGE EXERCISABLE AT AVERAGE
RANGE OF EXERCISE DECEMBER 31, CONTRACTUAL EXERCISE DECEMBER 31, EXERCISE
PRICES 1997 LIFE PRICE 1997 PRICE
----------------- -------------- ------------ -------- -------------- --------
<S> <C> <C> <C> <C> <C>
$0.15 - $0.99................... 1,203,979 9.1 Years $0.16 728,363 $0.15
$1.00 - $2.50................... 1,204,381 9.7 Years $1.95 126,778 $1.38
$2.51 - $8.38................... 89,000 9.8 Years $5.31 4,174 $4.30
</TABLE>
During 1996, an officer of the Company purchased 100,000 shares of common
stock for $0.15 per share under the Plan.
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
F-16
<PAGE> 152
GENE LOGIC INC.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1997, 1996 AND 1995
Company's net loss and loss per common share would have been changed to the pro
forma amounts for the years ended December 31, 1997, 1996 and 1995 as indicated
below:
<TABLE>
<CAPTION>
1997 1996 1995
----------- ----------- ---------
<S> <C> <C> <C>
Net loss:
As reported................................ $(7,193,993) $(2,865,128) $(744,179)
Pro forma.................................. (7,243,486) (2,873,805) (744,179)
Net loss per common share:
As reported................................ $ (3.97) $ (5.87) $ (3.48)
Pro forma.................................. (3.99) (5.88) (3.48)
</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 5.86%
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 was forgiven concurrent
with the Company's IPO (see Note 10).
NOTE 15. SUBSEQUENT EVENTS:
On July 6, 1998, the Company, the Company's new wholly owned subsidiary,
Gene Logic Acquisition Corp. (the "Merger Sub") and Oncormed, Inc. ("Oncormed")
entered into an Agreement and Plan of Merger Reorganization (the "Merger
Agreement") whereby Oncormed will merge with and into Merger Sub (the "Merger").
Upon consummation of the Merger, Oncormed will cease to exist and Merger Sub
will be the surviving corporation. In the Merger, the Company will issue an
aggregate of 4,849,815 shares of the Company's Common Stock to Oncormed
stockholders (the "Total Merger Shares"); provided, however, that in the event
the average closing price of the Company's Common Stock as reported on the
Nasdaq National Market System for the fifteen trading days ending the second day
prior to the Company's special meeting of stockholders (the "Closing Price") is
more than $7.88 per share, then the Total Merger Shares shall be reduced to a
number of shares of the Company's Common Stock equal to $38,204,420 divided by
the Closing Price. Oncormed may terminate the Merger Agreement if the Closing
Price of the Company's Common Stock is less than $6.34 per share.
In connection with the Merger, the Company and Oncormed have entered into
the Loan Agreement whereby the Company has agreed to make available to Oncormed
through February 28, 1999, a credit facility of up to $2,000,000 to be used by
Oncormed for working capital purposes. Interest on all amounts outstanding under
the Loan shall accrue daily at the per annum rate that Citibank N.A. has
announced as its prime lending rate. Advances under the Loan shall not exceed
$500,000 per month. All outstanding principal and accrued interest on the Loan
is due and payable upon the earliest to occur of (i) March 31, 1999; (ii) in the
event the Merger is not consummated, that date upon which Oncormed secures
alternate financing of at least $2,000,000 on terms satisfactory to Oncormed in
its sole discretion; or (iii) the date on which Oncormed sells or otherwise
disposes of all or substantially all of the assets or business of Oncormed, or
any liquidation, merger or other business combination of Oncormed (other than
the Merger). If any of the Merger Agreement, Loan Agreement or the License
Agreement is terminated, Gene Logic will not be obligated to make any further
advances to Oncormed under the Loan. All amounts outstanding under the Loan are
secured by certain of Oncormed's tissue biorepository assets.
F-17
<PAGE> 153
GENE LOGIC INC.
BALANCE SHEETS
(IN THOUSANDS, EXCEPT SHARE AMOUNTS)
<TABLE>
<CAPTION>
JUNE 30, DECEMBER 31,
1998 1997
----------- ------------
(UNAUDITED)
<S> <C> <C>
ASSETS
Current Assets:
Cash and cash equivalents................................. $ 35,849 $ 46,522
Marketable securities available for sale.................. 4,288 99
Due from strategic partner................................ 2,357 1,000
Prepaid expenses.......................................... 510 481
Other current assets...................................... 1,318 890
-------- --------
Total Current Assets.............................. 44,322 48,992
Property and Equipment, net................................. 8,341 4,211
Intangible and Other Assets, net............................ 1,037 769
-------- --------
Total Assets...................................... $ 53,700 $ 53,972
======== ========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current Liabilities:
Accounts payable.......................................... $ 746 $ 181
Accrued expenses.......................................... 1,828 1,371
Current portion of capital lease obligation............... 120 115
Current portion of long-term debt......................... 1,117 434
Deferred revenue.......................................... 2,417 4,436
-------- --------
Total Current Liabilities......................... 6,228 6,537
Capital Lease Obligation.................................... 164 225
Long-Term Debt.............................................. 3,381 777
Other Noncurrent Liabilities................................ 425 366
-------- --------
Total Liabilities................................. 10,198 7,905
-------- --------
Stockholders' Equity:
Common Stock, $.01 par value; 60,000,000 shares
authorized; 14,669,844 and 13,899,250 shares issued and
outstanding as of June 30, 1998 and December 31, 1997,
respectively........................................... 147 139
Preferred Stock, $.01 par value; 10,000,000 shares
authorized; no shares issued and outstanding as of June
30, 1998 and December 31, 1997......................... -- --
Additional paid-in capital................................ 64,343 64,882
Deferred compensation on stock options, net............... (4,735) (6,278)
Unrealized loss on marketable securities.................. (10) (2)
Accumulated deficit....................................... (16,243) (12,674)
-------- --------
Total Stockholders' Equity........................ 43,502 46,067
-------- --------
Total Liabilities and Stockholders' Equity........ $ 53,700 $ 53,972
======== ========
</TABLE>
See accompanying notes.
F-18
<PAGE> 154
GENE LOGIC INC.
STATEMENTS OF OPERATIONS
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
(UNAUDITED)
<TABLE>
<CAPTION>
SIX MONTHS ENDED
JUNE 30,
------------------
1998 1997
------- -------
<S> <C> <C>
Revenues.................................................... $ 5,875 $ 167
Expenses:
Research and development.................................. 7,144 1,837
General and administrative................................ 3,318 1,236
------- -------
Total expenses.................................... 10,462 3,073
------- -------
Loss from operations............................ (4,587) (2,906)
Interest income, net........................................ 1,099 91
Other expense............................................... (80) --
------- -------
Loss before income tax expense.................... (3,568) (2,815)
Income tax expense.......................................... -- --
------- -------
Net loss.......................................... (3,568) (2,815)
Accretion of mandatory redemption of Preferred Stock........ -- 368
------- -------
Net loss attributable to common stockholders...... $(3,568) $(3,183)
======= =======
Basic and Diluted Net Loss Per Common Share................. $ (0.25) $ (4.99)
======= =======
Shares Used In Computing Basic and Diluted Net Loss Per
Common Share.............................................. 14,060 638
======= =======
Pro Forma Net Loss Per Common Share......................... $ (0.51)
=======
Shares Used in Computing Pro Forma Net Loss Per
Common Share.............................................. 5,474
=======
</TABLE>
See accompanying notes.
F-19
<PAGE> 155
GENE LOGIC INC.
STATEMENTS OF CASH FLOWS
(IN THOUSANDS)
(UNAUDITED)
<TABLE>
<CAPTION>
SIX MONTHS ENDED
JUNE 30,
-------------------
1998 1997
-------- -------
<S> <C> <C>
Cash Flows From Operating Activities:
Net loss.................................................. $ (3,568) $(2,815)
Adjustments to reconcile net loss to net cash flows from
operating activities:
Depreciation and amortization............................. 692 224
Cancellation of note receivable........................... -- 43
Amortization of deferred compensation..................... 828 5
Loss on disposal of property and equipment................ 81 --
Changes in operating assets and liabilities:
Due from strategic partner................................ (1,357) --
Prepaid expenses.......................................... (29) (317)
Other current assets...................................... (427) 52
Intangibles and other assets.............................. (312) (201)
Accounts payable.......................................... 565 47
Accrued expenses.......................................... 458 (675)
Deferred revenue.......................................... (2,019) 2,833
Other noncurrent liabilities.............................. 59 --
-------- -------
Net Cash Flows From Operating Activities.......... (5,029) (804)
-------- -------
Cash Flows From Investing Activities:
Purchases of property and equipment....................... (4,859) (762)
Increase in notes receivable from employees............... -- (13)
Purchase of marketable securities available for sale...... (4,198) --
Proceeds from sale and maturity of marketable securities
available for sale..................................... -- 4,347
-------- -------
Net Cash Flows From Investing Activities.......... (9,057) 3,572
-------- -------
Cash Flows From Financing Activities:
Proceeds from issuance of common stock.................... 183 --
Proceeds from equipment loans............................. 3,577 1,084
Repayments of financing agreement......................... (90) --
Repayments of capital lease obligation and equipment
loans.................................................. (257) (90)
-------- -------
Net Cash Flows From Financing Activities.......... 3,413 994
-------- -------
Net (Decrease) Increase in Cash and Cash Equivalents........ (10,673) 3,762
Cash and Cash Equivalents, beginning of period.............. 46,522 1,137
-------- -------
Cash and Cash Equivalents, end of period.................... $ 35,849 $ 4,899
======== =======
Supplemental Disclosure:
Interest expense paid..................................... $ 63 $ 32
======== =======
</TABLE>
See accompanying notes.
F-20
<PAGE> 156
GENE LOGIC INC.
NOTES TO FINANCIAL STATEMENTS
JUNE 30, 1998
(UNAUDITED)
NOTE 1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Basis of Presentation
The accompanying unaudited financial statements have been prepared in
accordance with generally accepted accounting principles for interim financial
information and with the instructions to Form 10-Q and Article 10 of Regulation
S-X. The balance sheet as of June 30, 1998, statements of operations for the six
months ended June 30, 1998 and 1997 and the statements of cash flows for the six
months ended June 30, 1998 and 1997 are unaudited, but include all adjustments
(consisting of normal recurring adjustments) which the Company considers
necessary for a fair presentation of the financial position, operating results
and cash flows for the periods presented. Although the Company believes that the
disclosures in these financial statements are adequate to make the information
presented not misleading, certain information and footnote information normally
included in financial statements prepared in accordance with generally accepted
accounting principles have been condensed or omitted pursuant to the rules and
regulations of the Securities and Exchange Commission.
Results for any interim period are not necessarily indicative of results
for any future interim period or for the entire year. The accompanying financial
statements should be read in conjunction with the financial statements and notes
thereto included in the Company's Annual Report on Form 10-K for the year ended
December 31, 1997 filed with the Securities and Exchange Commission.
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 and fully
diluted earnings per share ("EPS") with a presentation of basic and diluted 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. EPS for the six months ended June 30, 1997 has been restated
in accordance with SFAS 128.
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. Once adopted, it
requires reclassification adjustments and changes in presentation for all prior
periods shown. The impact of the adoption of SFAS No. 130 on the Company was not
material.
In June 1997, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards No. 131, "Disclosure About Segments of an
Enterprise and Related Information", which establishes standards for reporting
information about operating segments in annual and interim financial statements
issued to shareholders. This statement also establishes standards for related
disclosures about products and services, geographic areas and major customers.
The Company plans to adopt this statement in 1998.
F-21
<PAGE> 157
GENE LOGIC INC.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
JUNE 30, 1998
(UNAUDITED)
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. As of June 30, 1998
and 1997, all of the Company's investments were classified as current as the
Company may not hold investments until maturity in order to take advantage of
market conditions.
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. Nonrefundable signing fees which are not contingent upon future
performance under the terms of the agreement are recognized as revenue upon
execution of such agreement. Revenue is deferred for fees received before they
are earned. Revenues related to the achievement of certain milestones are
recognized when earned.
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 automatically converted to common stock upon
completion of the Company's initial public offering (the "IPO") 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 antidilutive.
NOTE 2. STRATEGIC ALLIANCES
In June 1998, the Company and Hoechst Schering AgrEvo GmbH ("AgrEvo")
entered into a 3-year strategic alliance for discovery of genes for the
development of crop protection and crop improvement products. The initial
research term may be extended for up to 5 additional years. Payments by AgrEvo
to the Company in the form of committed signing fees, technology and database
access fees and research funding total a minimum of $45 million if the research
program continues for its full expanded term and the Company performs its
research obligations under the agreement. Under the alliance, approximately $1.5
million, $1.0 million of which is payable pursuant to a promissory note due in
January 1999, has been recognized as revenue as a signing fee under the terms of
the agreement during the six months ended June 30, 1998. Such signing fee was
made in consideration of initial access to the technology and other rights under
the agreement. AgrEvo will be obligated to make additional payments to the
Company for the achievement of specified target discovery and related
agricultural product development milestones. AgrEvo will also pay the Company
royalties on worldwide net sales of all agricultural products that may result
from targets discovered pursuant to the alliance.
In June 1998, the Company and the Wyeth-Ayerst Research Division of
American Home Products Corporation ("Wyeth-Ayerst") entered into a
pharmacogenomics strategic alliance in the field of preclinical toxicology. The
Company and Wyeth-Ayerst will collaborate, using the Company's proprietary gene
expression and bioinformatics technologies and Wyeth-Ayerst's expertise in
toxicology, to develop a database of gene expression profiles predictive of
different classes of drug toxicity. Wyeth-Ayerst will have the right to use
information and inventions resulting from the alliance to perform toxicology
studies in connection with its internal drug discovery and development
activities. The Company may non-exclusively license databases, Flow-thru Chips
and other products developed under the alliance to third party customers.
F-22
<PAGE> 158
GENE LOGIC INC.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
JUNE 30, 1998
(UNAUDITED)
In May 1998, the Company granted to SmithKline Beecham ("SmithKline") a
license to the Company's Object Protocol Model ("OPM") based bioinformatics
system and software tools. Under the agreement, the Company and SmithKline have
agreed to use OPM to develop a series of customized databases and servers to
integrate a range of public and proprietary data sources into SmithKline's data
mining process. The Company retains the right to license software and products
developed under the agreement to third party customers. Under the agreement the
Company will receive software license fees and will be entitled to research
funding for its portion of the collaborative development program.
NOTE 3. LONG-TERM DEBT
In June 1998, the Company and Oxford Venture Leasing, LLC ("Oxford
Leasing") entered into a Master Loan and Security Agreement (the "Oxford Loan")
for the financing of laboratory, computer and office equipment. Under the Oxford
Loan, the Company may borrow up to $5.0 million through June 1999. In addition,
the Company entered into a promissory note with Oxford Leasing (the "Promissory
Note") in the amount of approximately $3.6 million relating to its initial
equipment schedule. The Promissory Note bears interest at 8.8% and is payable in
48 equal monthly installments including a 15% balloon payment at the end of the
initial term. The Company granted Oxford Leasing a security interest,
collateralized by all the equipment and fixtures acquired under the Oxford Loan.
Simultaneous with entering into the Oxford Loan, the Promissory Note was
assigned by Oxford Leasing to Phoenixcor, Inc.
NOTE 4. STOCKHOLDERS' EQUITY
During July 1997, the Company sold 4,444,443 shares of Series C Convertible
Preferred Stock in a private placement for net proceeds of approximately $19.1
million. During November 1997, the Company completed an IPO of 3,347,000 shares
of Common Stock (including exercise of the underwriters' over-allotment option)
at $8.00 per share, generating net proceeds of approximately $23.9 million. In
conjunction with the Company's IPO, all outstanding shares of preferred stock
were converted to common stock on a one-to-one basis.
The Company continues to apply the provisions of Accounting Principles
Board Opinion No. 25, "Accounting for Stock Issued to Employees", and related
interpretations for its stock option plans. As such, the Company has recorded
the activity relating to deferred compensation on stock options for the six
months ended June 30, 1998 as follows:
<TABLE>
<CAPTION>
DEFERRED
COMPENSATION
------------
<S> <C>
Balance at December 31, 1997................................ $(6,278)
Amortization of deferred compensation....................... 828
Write-off of forfeited stock options........................ 715
-------
Balance at June 30, 1998.................................... $(4,735)
=======
</TABLE>
NOTE 5. SUBSEQUENT EVENTS
On July 6, 1998, the Company, the Company's new wholly owned subsidiary,
Gene Logic Acquisition Corp. (the "Merger Sub") and Oncormed, Inc. ("Oncormed")
entered into an Agreement and Plan of Merger and Reorganization (the "Merger
Agreement") whereby Oncormed will merge with and into Merger Sub (the "Merger").
The Merger is subject to the approval of the holders of a majority of the shares
of the Company and Oncormed. Upon consummation of the Merger, the Company will
issue up to an aggregate of 4,849,815 shares of the Company's Common Stock to
Oncormed stockholders (the "Total Merger Shares");
F-23
<PAGE> 159
GENE LOGIC INC.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
JUNE 30, 1998
(UNAUDITED)
provided, however, that in the event the average closing price of the Company's
Common Stock as reported on the Nasdaq National Market System for the fifteen
trading days ending the second day prior to the Company's special meeting of
stockholders (the "Closing Price") is more than $7.88 per share, then the Total
Merger Shares shall be reduced to a number of shares of the Company's Common
Stock equal to $38,204,420 divided by the Closing Price. Oncormed may terminate
the Merger Agreement if the Closing Price of the Company's Common Stock is less
than $6.34 per share.
In connection with the Merger, the Company and Oncormed have entered into a
loan agreement (the "Loan Agreement") dated July 6, 1998 whereby the Company has
agreed to make available to Oncormed through February 28, 1999, a credit
facility of up to $2,000,000 (the "Loan") to be used by Oncormed for working
capital purposes. Interest on all amounts outstanding under the Loan shall
accrue daily at the per annum rate that Citibank N.A. has announced as its prime
lending rate. Advances under the Loan shall not exceed $500,000 per month. All
outstanding principal and accrued interest on the Loan is due and payable upon
the earliest to occur of (i) March 31, 1999; (ii) in the event the Merger is not
consummated, that date upon which Oncormed secures alternate financing of at
least $2,000,000 on terms satisfactory to Oncormed in its sole discretion; or
(iii) the date on which Oncormed sells or otherwise disposes of all or
substantially all of the assets or business of Oncormed, or any liquidation,
merger or other business combination of Oncormed (other than the Merger). If any
of the Merger Agreement, Loan Agreement or the license agreement (entered into
in accordance with the Merger and the Loan whereby Oncormed has granted the
Company non-exclusive access until March 31, 1999 to Oncormed's tissue
biorespository for the purpose of selecting tissue samples for further analysis)
is terminated, the Company will not be obligated to make any further advances to
Oncormed under the Loan. All amounts outstanding under the Loan are secured by
certain of Oncormed's tissue biorespository assets.
F-24
<PAGE> 160
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
To Oncormed, Inc.:
We have audited the accompanying balance sheets of Oncormed, Inc. (a
Delaware corporation in the development stage) as of December 31, 1997 and 1996,
and the related statements of operations, stockholders' equity and cash flows
for the years ended December 31, 1997, 1996 and 1995, and for the period from
inception (July 12, 1993) to December 31, 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 Oncormed, Inc. as of
December 31, 1997 and 1996, and the results of its operations and its cash flows
for the years ended December 31, 1997, 1996 and 1995 and for the period from
inception to December 31, 1997, in conformity with generally accepted accounting
principles.
The accompanying financial statements have been prepared assuming that the
Company will continue as a going concern. As discussed in Note 1 to the
financial statements, the Company has incurred significant losses and will
require additional financing to continue operations. These factors raise
substantial doubt about its ability to continue as a going concern. Management's
plans in regard to these matters are also described in Note 1. The financial
statements do not include any adjustments that might result from the outcome of
this uncertainty.
ARTHUR ANDERSEN LLP
Washington, D.C.
February 20, 1998
(except with respect to the acquisition
described in Note 10, as to
which the date is July 6, 1998, and
to the settlement described in Note 11,
as to which the date is May 18, 1998)
F-25
<PAGE> 161
ONCORMED, INC.
(A DEVELOPMENT STAGE COMPANY)
BALANCE SHEETS
<TABLE>
<CAPTION>
AS OF AS OF
DECEMBER 31, DECEMBER 31,
1997 1996
------------ ------------
<S> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents................................. $ 439,618 $ 6,031,809
Short term investments.................................... 1,038,933 1,466,871
Accounts receivable, net of allowance for doubtful
accounts of $42,000 and $32,000 at 12/31/97 and
12/31/96, respectively................................. 298,538 129,366
Other current assets...................................... 275,274 306,078
------------ ------------
Total current assets.............................. 2,052,363 7,934,124
------------ ------------
Non-current assets:
Property and equipment, net............................... 1,067,303 1,179,851
Deferred offering costs................................... 56,949 --
------------ ------------
Total non-current assets.......................... 1,124,252 1,179,851
------------ ------------
TOTAL ASSETS........................................... $ 3,176,615 $ 9,113,975
============ ============
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable.......................................... $ 761,169 $ 680,575
Accrued expenses and other liabilities.................... 859,390 593,037
Payable to Oncor, Inc..................................... 82,552 124,730
Deferred revenue.......................................... 72,347 46,420
------------ ------------
Total current liabilities......................... 1,775,458 1,444,762
------------ ------------
Non-current liabilities:
Note payable to Oncor, Inc................................ 715,751 715,751
Deferred revenue.......................................... 8,596 3,583
------------ ------------
Total non-current liabilities..................... 724,347 719,334
------------ ------------
TOTAL LIABILITIES...................................... 2,499,805 2,164,096
------------ ------------
Commitments and Contingencies (Notes 1, 3 and 6)
Stockholders' Equity:
Preferred stock, $.01 par value, 2,000,000 shares
authorized, none outstanding........................... -- --
Common stock, $.01 par value, 40,000,000 shares
authorized, 7,876,423, and 6,991,108 shares issued and
outstanding as of 12/31/97 and 12/31/96,
respectively........................................... 78,764 69,911
Additional paid-in capital................................ 30,234,082 25,741,842
Deferred compensation..................................... (103,462) (75,629)
Deficit accumulated during the development stage.......... (29,532,574) (18,786,245)
------------ ------------
TOTAL STOCKHOLDERS' EQUITY............................. 676,810 6,949,879
------------ ------------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY............. $ 3,176,615 $ 9,113,975
============ ============
</TABLE>
The accompanying notes are an integral part of these balance sheets.
F-26
<PAGE> 162
ONCORMED, INC.
(A DEVELOPMENT STAGE COMPANY)
STATEMENTS OF OPERATIONS
<TABLE>
<CAPTION>
PERIOD FROM
INCEPTION
(JULY 12, 1993)
FOR THE YEARS ENDED DECEMBER 31, THROUGH
---------------------------------------- DECEMBER 31,
1997 1996 1995 1997
------------ ----------- ----------- ----------------
<S> <C> <C> <C> <C>
REVENUES............................... $ 959,645 $ 627,390 $ 311,387 $ 1,932,725
OPERATING EXPENSES:
Cost of sales -- direct.............. 474,172 283,082 167,568 935,976
Laboratory operations................ 3,426,093 2,759,656 2,259,136 9,788,125
Selling, general and
administrative.................... 5,779,874 4,791,029 4,119,221 17,509,846
Research and development............. 772,446 709,340 451,596 2,732,454
Acquired in-process research and
development projects.............. 1,481,148 -- -- 1,481,148
------------ ----------- ----------- ------------
Total expenses............... 11,933,733 8,543,107 6,997,521 32,447,549
------------ ----------- ----------- ------------
OPERATING LOSS......................... (10,974,088) (7,915,717) (6,686,134) (30,514,824)
Interest income........................ 284,068 514,205 228,470 1,174,282
Interest expense....................... (56,309) (54,461) (52,883) (192,032)
------------ ----------- ----------- ------------
NET LOSS............................... $(10,746,329) $(7,455,973) $(6,510,547) $(29,532,574)
============ =========== =========== ============
BASIC AND DILUTED NET LOSS PER SHARE... $ (1.39) $ (1.10) $ (1.32) $ (5.31)
============ =========== =========== ============
SHARES USED IN COMPUTING NET LOSS PER
SHARE................................ 7,709,301 6,805,083 4,947,991 5,557,433
============ =========== =========== ============
</TABLE>
The accompanying notes are an integral part of these statements.
F-27
<PAGE> 163
ONCORMED, INC.
(A DEVELOPMENT STAGE COMPANY)
STATEMENTS OF STOCKHOLDERS' EQUITY
<TABLE>
<CAPTION>
SERIES A
CONVERTIBLE
PREFERRED STOCK COMMON STOCK STOCK COMMON ADDITIONAL
----------------------- ------------------- SUBSCRIPTION STOCK PAID-IN
SHARES AMOUNT SHARES AMOUNT RECEIVABLE WARRANTS CAPITAL
---------- ---------- --------- ------- ------------ -------- ------------
<S> <C> <C> <C> <C> <C> <C> <C>
INCEPTION, July 12, 1993.............. -- $ -- -- $ -- $ -- -- $ --
Sale of Common Stock at $0.50 per
share, July & Sept. 1993........... -- -- 2,250,000 22,500 (125,000) -- 1,102,500
Issuance of Common Stock in exchange
for software and technology at
$0.50 per share, Sept. 1993........ -- -- 110,000 1,100 -- -- 53,900
Exercise of stock options for cash at
$0.50 per share, Nov. 1993......... -- -- 50,000 500 -- -- 24,500
Cash received in payment of stock
subs., Nov. and Dec. 1993.......... -- -- -- -- 100,000 -- --
Sale of Series A Convertible
Preferred Stock at $3.00 per share,
Dec. 1993 (net of expenses)........ 1,000,000 2,990,439 -- -- -- -- --
Net loss.............................. -- -- -- -- -- -- --
---------- ---------- --------- ------- --------- ------- ------------
BALANCE, December 31, 1993............ 1,000,000 $2,990,439 2,410,000 $24,100 $ (25,000) -- $ 1,180,900
Cash received in payment of stock
subs., Feb. 1994................... -- -- -- -- 25,000 -- --
Sale of Common Stock from IPO on Oct.
5, 1994, at $6.00 per share, net of
expenses........................... -- -- 1,335,000 13,350 -- -- 6,317,903
Issuance of Common Stock Warrants in
connection with IPO on Oct. 5, 1994
exercisable at $6.90 per share..... -- -- -- -- -- 133,500 100
Conversion of Series A Convertible
Preferred Stock to Common Stock due
to IPO............................. (1,000,000) (2,990,439) 1,000,000 10,000 -- -- 2,980,439
Sale of Common Stock from IPO --
Over-allotment, on Nov. 4, 1994 at
$6.00 per share, net of expenses... -- -- 200,250 2,003 -- -- 1,049,309
Compensation element of stock option
grants............................. -- -- -- -- -- -- 256,500
Amortization of deferred comp......... -- -- -- -- -- -- (4,686)
Net loss.............................. -- -- -- -- -- -- --
---------- ---------- --------- ------- --------- ------- ------------
BALANCE, December 31, 1994............ -- $ -- 4,945,250 $49,453 $ -- 133,500 $ 11,780,465
Exercise of stock options for cash at
$0.50 per share.................... -- -- 4,800 48 -- -- 2,352
Amortization of deferred comp........ -- -- -- -- -- -- --
Net Loss.............................. -- -- -- -- -- -- --
---------- ---------- --------- ------- --------- ------- ------------
BALANCE, December 31, 1995............ -- $ -- 4,950,050 $49,501 $ -- 133,500 $ 11,782,817
Sale of Common Stock from public
offering on February 2, 1996, net
of expenses........................ -- -- 2,000,000 20,000 -- -- 13,892,825
Exercise of stock options for cash at
a range of $0.50-$6.00 per share... -- -- 41,058 410 -- -- 38,369
Compensation element of non-employee
stock option grants................ -- -- -- -- -- -- 27,831
Amortization of non-employee stock
option grants and def comp......... -- -- -- -- -- -- --
Net Loss............................. -- -- -- -- -- -- --
---------- ---------- --------- ------- --------- ------- ------------
BALANCE, December 31, 1996............ -- $ -- 6,991,108 $69,911 -- 133,500 $ 25,741,842
Sale of Common Stock from private
placement on February 25, 1997..... -- -- 779,323 7,793 -- -- 4,203,902
Exercise of stock options for cash at
a range of $0.50 -- $5.00 per
share.............................. -- -- 94,200 942 -- -- 96,471
Sale of Common Stock from employee
stock purchase plan at $3.825 per
share on Jan. 31, 1997 and $4.83 on
Jul. 31, 1997...................... -- -- 11,792 118 -- -- 48,512
Compensation element of non-employee
stock option grants................ -- -- -- -- -- -- 143,355
Amortization of non-employee stock
options and def. comp.............. -- -- -- -- -- -- --
Net Loss............................. -- -- -- -- -- -- --
---------- ---------- --------- ------- --------- ------- ------------
BALANCE, December 31, 1997............ -- $ -- 7,876,423 $78,764 $ -- 133,500 $ 30,234,082
========== ========== ========= ======= ========= ======= ============
<CAPTION>
DEFICIT
ACCUMULATED
DURING THE
DEFERRED DEVELOPMENT
COMPENSATION STAGE TOTAL
------------ ------------- ------------
<S> <C> <C> <C>
INCEPTION, July 12, 1993.............. $ -- $ -- $ --
Sale of Common Stock at $0.50 per
share, July & Sept. 1993........... -- -- 1,000,000
Issuance of Common Stock in exchange
for software and technology at
$0.50 per share, Sept. 1993........ -- -- 55,000
Exercise of stock options for cash at
$0.50 per share, Nov. 1993......... -- -- 25,000
Cash received in payment of stock
subs., Nov. and Dec. 1993.......... -- -- 100,000
Sale of Series A Convertible
Preferred Stock at $3.00 per share,
Dec. 1993 (net of expenses)........ -- -- 2,990,439
Net loss.............................. -- (838,352) (838,352)
--------- ------------- ------------
BALANCE, December 31, 1993............ $ -- $ (838,352) $ 3,332,087
Cash received in payment of stock
subs., Feb. 1994................... -- -- 25,000
Sale of Common Stock from IPO on Oct.
5, 1994, at $6.00 per share, net of
expenses........................... -- -- 6,331,253
Issuance of Common Stock Warrants in
connection with IPO on Oct. 5, 1994
exercisable at $6.90 per share..... -- -- 100
Conversion of Series A Convertible
Preferred Stock to Common Stock due
to IPO............................. -- -- --
Sale of Common Stock from IPO --
Over-allotment, on Nov. 4, 1994 at
$6.00 per share, net of expenses... -- -- 1,051,312
Compensation element of stock option
grants............................. (256,500) -- --
Amortization of deferred comp......... 86,333 -- 81,647
Net loss.............................. -- (3,981,373) (3,981,373)
--------- ------------- ------------
BALANCE, December 31, 1994............ $(170,167) $ (4,819,725) $ 6,840,026
Exercise of stock options for cash at
$0.50 per share.................... -- -- 2,400
Amortization of deferred comp........ 61,928 -- 61,928
Net Loss.............................. -- (6,510,547) (6,510,547)
--------- ------------- ------------
BALANCE, December 31, 1995............ $(108,239) $ (11,330,272) $ 393,807
Sale of Common Stock from public
offering on February 2, 1996, net
of expenses........................ -- -- 13,912,825
Exercise of stock options for cash at
a range of $0.50-$6.00 per share... -- -- 38,779
Compensation element of non-employee
stock option grants................ (27,831) -- --
Amortization of non-employee stock
option grants and def comp......... 60,441 -- 60,441
Net Loss............................. -- (7,455,973) (7,455,973)
--------- ------------- ------------
BALANCE, December 31, 1996............ $ (75,629) $ (18,786,245) $ 6,949,879
Sale of Common Stock from private
placement on February 25, 1997..... -- -- 4,211,695
Exercise of stock options for cash at
a range of $0.50 -- $5.00 per
share.............................. -- -- 97,413
Sale of Common Stock from employee
stock purchase plan at $3.825 per
share on Jan. 31, 1997 and $4.83 on
Jul. 31, 1997...................... -- -- 48,630
Compensation element of non-employee
stock option grants................ (143,355) -- --
Amortization of non-employee stock
options and def. comp.............. 115,522 -- 115,522
Net Loss............................. -- (10,746,329) (10,746,329)
--------- ------------- ------------
BALANCE, December 31, 1997............ $(103,462) $ (29,532,574) $ 676,810
========= ============= ============
</TABLE>
The accompanying notes are an integral part of these statements.
F-28
<PAGE> 164
ONCORMED, INC.
(A DEVELOPMENT STAGE COMPANY)
STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
PERIOD FROM
INCEPTION
(JULY 12, 1993)
FOR THE YEARS ENDED DECEMBER 31, THROUGH
---------------------------------------- DECEMBER 31,
1997 1996 1995 1997
------------ ----------- ----------- ---------------
<S> <C> <C> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net loss......................................... $(10,746,329) $(7,455,973) $(6,510,547) $(29,532,574)
Adjustments to reconcile net loss to net cash
used in operating activities
Depreciation and amortization.................... 562,611 517,435 365,080 1,606,058
Amortization of deferred compensation and non-
employee stock options........................ 115,522 60,441 61,928 319,538
Acquired in-process research and development
costs......................................... 1,481,148 -- -- 1,481,148
Changes in operating assets and liabilities:
Accounts receivable........................... (169,172) (43,212) (83,979) (298,538)
Other assets.................................. 30,804 (179,954) 71,853 (275,274)
Accounts payable.............................. 80,594 557,132 52,336 761,169
Accrued expenses and other liabilities........ 266,353 (296,015) 322,449 859,390
Deferred revenue.............................. 30,940 (141,909) 158,193 80,943
Payable to Oncor, Inc......................... (42,178) (13,179) (7,068) 82,552
------------ ----------- ----------- ------------
Net cash used in operating activities......... (8,389,707) (6,995,234) (5,569,755) (24,915,588)
------------ ----------- ----------- ------------
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchases of property and equipment.............. (450,063) (476,350) (675,996) (2,618,362)
Net redemptions/(purchases) of short-term
investments................................... 427,938 (1,466,871) -- (1,038,933)
------------ ----------- ----------- ------------
Net cash used in investing activities............ (22,125) (1,943,221) (675,996) (3,657,295)
------------ ----------- ----------- ------------
CASH FLOWS FROM FINANCING ACTIVITIES:
Net proceeds from sale of common stock........... 2,779,177 13,912,825 -- 25,199,667
Net proceeds from sale of preferred stock........ -- -- -- 2,990,439
Net proceeds from exercise of stock options...... 97,413 38,780 2,400 163,593
Net proceeds from Note payable to Oncor, Inc..... -- -- -- 715,751
Deferred offering costs.......................... (56,949) 299,815 (299,815) (56,949)
------------ ----------- ----------- ------------
Net cash provided by (used in) financing
activities.................................... 2,819,641 14,251,420 (297,415) 29,012,501
------------ ----------- ----------- ------------
NET (DECREASE) INCREASE IN CASH AND CASH
EQUIVALENTS...................................... (5,592,191) 5,312,965 (6,543,166) 439,618
CASH AND CASH EQUIVALENTS, beginning of period..... 6,031,809 718,844 7,262,010 --
------------ ----------- ----------- ------------
CASH AND CASH EQUIVALENTS, end of period........... $ 439,618 $ 6,031,809 $ 718,844 $ 439,618
============ =========== =========== ============
SUPPLEMENTAL DISCLOSURE OF NONCASH INVESTING AND
FINANCING ACTIVITIES:
Issuance of common stock in exchange for software
and technology................................ $ -- $ -- $ -- $ 55,000
============ =========== =========== ============
Issuance of common stock in exchange for stock
subscription receivable....................... $ -- $ -- $ -- $ 25,000
============ =========== =========== ============
Issuance of common stock and warrants in exchange
for research and development projects
in-process.................................... $ 1,481,148 $ -- $ -- $ 1,481,148
============ =========== =========== ============
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION:
Cash paid during the period for interest......... $ 56,309 $ 54,461 $ 52,883 $ 192,032
============ =========== =========== ============
</TABLE>
The accompanying notes are an integral part of these statements.
F-29
<PAGE> 165
ONCORMED, INC.
(A DEVELOPMENT STAGE COMPANY)
NOTES TO FINANCIAL STATEMENTS
AS OF DECEMBER 31, 1997, 1996 AND 1995,
AND FOR THE PERIOD FROM INCEPTION (JULY 12, 1993) THROUGH DECEMBER 31, 1997
1. BUSINESS DESCRIPTION:
Oncormed, Inc. (the "Company"), was incorporated on July 12, 1993, in the
State of Delaware as a subsidiary of Oncor, Inc. ("Oncor"). As of December 31,
1997, Oncor's ownership of the Company's outstanding common stock was
approximately 25.4 percent. The Company is a genomics services company that
characterizes newly discovered genes to establish their medical relevance and
provides molecular profiling of patients for pharmacogenomic and therapeutic
purposes. The Company is in the development stage and has a limited operating
history, has incurred operating losses since its inception and expects losses to
continue and increase. Since its inception, the Company has been engaged in
research and development activities, organizational efforts, and sales and
marketing activities including the development of its services, the hiring of
its scientific and marketing staff and its initial sales and marketing efforts.
The Company's services are currently offered principally in the United States.
There can be no assurance that the Company will be successful in the development
or commercialization of its services.
The Company has incurred cumulative losses since its inception and, as of
December 31, 1997, had an accumulated deficit of approximately $29.5 million.
The Company has yet to generate any significant revenues and cannot anticipate
when, or if, it will be able to generate significant revenues in the future. The
Company expects that its operating losses will continue as its sales and
marketing efforts, research and development programs and laboratory operations
continue and increase. At March 23, 1998, the Company had cash, cash equivalents
and short-term investments of approximately $2.1 million. Currently, the Company
expends from $800,000 to $1,000,000 per month and will need to raise additional
funds in the second quarter of 1998 to continue the Company's operations, which
raises substantial doubt about whether the Company can continue as a going
concern. The Company is currently actively pursuing potential sources of
financing including private financings or a collaborative agreement or other
arrangements with corporate partners. There can be no assurance that any
additional financing will be available or, if available, will be on terms
acceptable to the Company. The unavailability of adequate funds in the future
would have a material adverse effect on the Company's business, financial
condition and results of operations and raises substantial doubt about whether
the Company can continue as a going concern. The financial statements do not
include any adjustments that might result if the Company is unable to continue
as a going concern.
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES:
Use of Estimates
The preparation of these financial statements required the use of certain
estimates by management in determining the entity's assets, liabilities, revenue
and expenses. Actual results may vary from these estimates.
Cash Equivalents and Short Term Investments
All highly liquid investments with a maturity of three months or less at
the date of purchase are considered to be cash equivalents; investments with
maturities between three and twelve months are considered to be short term
investments. The Company invests its excess funds in commercial paper with
banks, money market instruments in U.S. treasury and investment grade
securities, and overnight reverse repurchase agreements collateralized by U.S.
treasury and investment grade securities. Short term investments are stated at
cost, which approximates market.
As of December 31, 1997, the Company had invested approximately $402,000 in
overnight repurchase agreements. The underlying collateral consists of U.S.
government securities and U.S. government agency securities. Generally, the
maturity date of the Company's repurchase agreements is the next business day.
Due
F-30
<PAGE> 166
ONCORMED, INC.
(A DEVELOPMENT STAGE COMPANY)
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
AS OF DECEMBER 31, 1997, 1996 AND 1995,
AND FOR THE PERIOD FROM INCEPTION (JULY 12, 1993) THROUGH DECEMBER 31, 1997
to the short-term nature of the agreements, the Company does not take possession
of the securities, which are instead held at the Company's bank from which it
purchases the securities. The carrying value of the agreements approximates fair
value because of the short maturity of the investments. As a result, the Company
believes that it is not exposed to any significant risk under its overnight
repurchase agreements.
Impairment of Long-Lived Assets
The Company complies with SFAS No. 121, Accounting for the Impairment of
Long-Lived Assets and for Long-Lived Assets to Be Disposed of. The Company
reviews its long-lived assets, principally property, plant and equipment, for
impairment whenever events or changes in circumstances indicate that the
carrying amount of the assets may not be fully recoverable. To determine
recoverability of its long-lived assets, the Company evaluates the probability
that future undiscounted net cash flows will be less than the carrying amount of
the assets. Impairment is measured at fair value.
Other Current Assets
Included in other current assets as of December 31, 1997 is approximately
$180,000 for prepaid insurance.
Property and Equipment
Property and equipment are recorded at cost. Depreciation and amortization
expense is calculated using the straight-line method over estimated useful lives
of three to five years. Leasehold improvements are amortized over the shorter of
the lease terms or useful lives.
Property and equipment consist of the following:
<TABLE>
<CAPTION>
AS OF DECEMBER 31,
-------------------------
1997 1996
---------- -----------
<S> <C> <C>
Laboratory equipment............................... $1,048,174 $ 756,495
Computer equipment................................. 483,659 409,560
Computer software.................................. 364,164 335,160
Furniture/office equipment......................... 461,455 428,716
Leasehold improvements............................. 315,909 293,368
---------- -----------
2,673,361 2,223,299
Less-accumulated depreciation and amortization..... (1,606,058) (1,043,448)
---------- -----------
Property and equipment, net........................ $1,067,303 $ 1,179,851
========== ===========
</TABLE>
F-31
<PAGE> 167
ONCORMED, INC.
(A DEVELOPMENT STAGE COMPANY)
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
AS OF DECEMBER 31, 1997, 1996 AND 1995,
AND FOR THE PERIOD FROM INCEPTION (JULY 12, 1993) THROUGH DECEMBER 31, 1997
Accrued Expenses and Other Liabilities
Accrued expenses and other liabilities consist of the following:
<TABLE>
<CAPTION>
AS OF DECEMBER 31,
--------------------
1997 1996
-------- --------
<S> <C> <C>
Payroll and related expenses........................... $255,291 $318,408
Insurance.............................................. 136,448 130,406
Professional/legal fees................................ 400,696 58,868
Marketing/operations costs............................. 40,304 48,385
Other.................................................. 26,651 36,970
-------- --------
Total accrued expenses and other
liabilities................................ $859,390 $593,037
======== ========
</TABLE>
Income Taxes
The Company accounts for income taxes in accordance with Statement of
Financial Accounting Standards No. 109, Accounting for Income Taxes ("SFAS
No.109"). The Company has incurred losses for both financial and income tax
reporting purposes since inception. Accordingly, no provision or benefit for
income taxes has been recorded in the accompanying financial statements.
The components of the Company's deferred tax assets are as follows:
<TABLE>
<CAPTION>
AS OF DECEMBER 31,
-------------------------
1997 1996
----------- ----------
<S> <C> <C>
Net operating loss and credit carry forwards....... $10,710,000 $7,330,000
Total other........................................ 946,000 181,000
----------- ----------
Total deferred tax assets.......................... 11,656,000 7,511,000
Less-total deferred tax liabilities................ (155,000) (112,000)
----------- ----------
Net deferred tax asset............................. 11,501,000 7,399,000
Less-valuation reserve............................. (11,501,000) (7,399,000)
----------- ----------
Deferred tax asset, net of valuation reserve....... $ -- $ --
=========== ==========
</TABLE>
SFAS No. 109 requires that the benefit of deferred tax assets be recorded
to the extent that management assesses the realization of such deferred tax
assets to be "more likely than not." As of December 31, 1997 and 1996, a
valuation reserve was recorded against the Company's entire deferred tax asset
due to the uncertainty of realization.
At December 31, 1997, the Company had net operating loss ("NOL")
carry-forwards of approximately $28.0 million available to offset future taxable
income. The Company also has research and development tax credits of
approximately $48,000 available to reduce future Federal income tax. A portion
of the NOL carry-forwards and research and development tax credit carry-forwards
are subject to a limitation due to the change in ownership which occurred on the
date of the Company's initial public offering. Due to the ownership change which
occurred, the amount of the net operating loss carry-forward and research and
development tax credit carry-forward which can be utilized on an annual basis
will be subject to limitations; however, the Company believes the entire net
operating loss carry-forward will be available to be utilized during the carry-
forward period. The tax NOL and research and development tax credits may be used
through 2012, but begin to expire in 2008. Despite the NOL and research and
development credit carry-forwards, the Company may have an income tax liability
in future years due to the application of the alternative minimum tax rules. The
F-32
<PAGE> 168
ONCORMED, INC.
(A DEVELOPMENT STAGE COMPANY)
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
AS OF DECEMBER 31, 1997, 1996 AND 1995,
AND FOR THE PERIOD FROM INCEPTION (JULY 12, 1993) THROUGH DECEMBER 31, 1997
utilization of these tax NOL and research and development credit carry-forwards
is subject to statutory limitation regarding subsequent changes in ownership.
Revenue Recognition
Revenues are principally derived from providing genetic testing and
information services, technology licensing fees and royalties associated with
its proprietary information and software licensing associated with its risk
assessment service. Revenues are also derived from grant contract work. Revenues
from the Company's genetic testing and information services and grant work are
recognized as they are provided. Revenues from technology licensing fees are
recognized when the licensing agreement has been executed. Revenues from
technology licensing royalties are recognized when earned. Revenues from its
risk assessment service are recognized over the license period. During 1997, one
customer accounted for approximately 19% of the Company's revenue. At December
31, 1997, one customer represented approximately 60% of the Company's net
accounts receivable balance. As of February 28, 1998, that outstanding
receivable was paid in full.
Research and Development Costs
Research and development costs are charged to expense as incurred.
Net Loss Per Common Share
In March 1997, the Financial Accounting Standards Board ("FASB") issued
SFAS No. 128, "Earnings Per Share." SFAS No. 128 is effective for the financial
statements issued for period ending after December 15, 1997. The Company has
implemented SFAS No. 128 for 1997. SFAS No. 128 requires dual presentation of
basic and diluted earnings per share. Basic loss per share includes no dilution
and is computed by dividing net loss available to common stockholders by
weighted average number of common shares outstanding for the period. Diluted
loss per share includes the potential dilution that could occur if securities or
other contracts to issue common stock were exercised or converted into common
stock. Options and convertible securities that were outstanding at December 31,
1997, were not included in the computation of diluted loss per share as their
effect would be anti-dilutive. As a result, the basic and diluted loss per share
amounts are identical.
In February 1998, the Securities and Exchange Commission issued Staff
Accounting Bulletin ("SAB") No. 98 on computations of earnings per share. SAB 98
replaces SAB 83 which previously required that all issuances of common stock,
options and warrants issued within one year of an initial public offering be
included in the calculation of earnings per share as if outstanding for all
periods presented. Under SAB 98, only issuances of common stock, options and
warrants issued for nominal consideration in periods preceding an initial public
offering are required to be included in the calculation of earnings per share as
if they were outstanding for all periods presented. In the periods preceding the
Company's initial public offering the Company had no nominal issuances of common
stock, options or warrants.
Earnings per share for the inception to date period presented which
includes the periods preceding the Company's initial public offering has been
restated to comply with SAB 98.
Reclassification
Certain 1995 and 1996 balances have been reclassified to conform with 1997
financial statement presentation.
F-33
<PAGE> 169
ONCORMED, INC.
(A DEVELOPMENT STAGE COMPANY)
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
AS OF DECEMBER 31, 1997, 1996 AND 1995,
AND FOR THE PERIOD FROM INCEPTION (JULY 12, 1993) THROUGH DECEMBER 31, 1997
3. RELATED-PARTY TRANSACTIONS:
License Agreement
Previously, under the license agreement with Oncor, the Company was
obligated to pay royalties on a semi-annual basis to Oncor for Oncor
technologies existing as of the date of the Oncor Agreement, equal to the
greater of (i) six percent of the Company's net sales revenues resulting from
services based on Oncor's technologies, subject to certain adjustments, or (ii)
$100,000. In February 1997, the Company and Oncor agreed to certain changes to
the license agreement with Oncor (as amended and modified, the "Oncor
Agreement"). Fees payable to Oncor under the license agreement with Oncor and
the Oncor Agreement of approximately $200,000, $200,000, $200,000 and $892,000
are included in laboratory operations expense for the years ended December 31,
1997, 1996 and 1995, and the period from inception (July 12, 1993) to December
31, 1997, respectively.
Pursuant to the Oncor Agreement, Oncor is providing the Company with an
exclusive worldwide license to certain of Oncor's existing human genome
technologies that are useful for purposes of development and commercialization
of certain of the Company's services, including: (i) testing, detection and/or
analysis of cancer-predisposing genes; (ii) genetic assessment of risk of an
individual to develop cancer; and (iii) testing and analysis for the purposes of
cancer management. In addition, Oncor is providing the Company with a non-
exclusive worldwide license to certain of Oncor's existing human genome
technologies, and any future improvements thereto, to be used by the Company in
the provision of services direct to third parties other than those to whom
services are provided pursuant to the exclusive license. The Company does not
have the right to sublicense any Oncor technologies licensed to it by Oncor
without Oncor's prior written consent. Technologies sublicensed to the Company
by Oncor include technologies covered by the collaborative licensing and
research agreements between Oncor and each of The Johns Hopkins University and
the Massachusetts General Hospital. The term of the Oncor Agreement shall expire
in June 2004 unless earlier terminated in accordance with its terms. Further, in
the event of a change of control of Oncor, the acquiring party shall have the
option to either maintain the Oncor Agreement or to terminate the Oncor
Agreement. In the event that the acquirer terminates the Oncor Agreement, both
the exclusive license and the non-exclusive license shall remain in full force
and effect under rates to be determined.
Under the terms of the Oncor Agreement, the Company is obligated to make
payments on a quarterly basis to Oncor equal to a range of four percent (4%) to
two percent (2%) of the Company's annual net sales. During the period from April
1, 1997 to March 31, 1998, the Company is obligated to pay Oncor a minimum
amount equal to $50,000 per quarter. During the period from April 1, 1998 to
March 31, 1999, the Company is obligated to pay Oncor a minimum amount equal to
$25,000 per quarter. Thereafter, there shall be no minimum payment required to
be made by the Company to Oncor in connection with the agreement.
In addition, subject to certain third-party contractual limitations, prior
to the license or disposition (whether by assignment, transfer or license) to a
third party by the Company or Oncor of their respective technologies, the
non-offering party shall have a right of first offer with respect to such
technologies. If the non-offering party accepts the offer, the Company and Oncor
shall negotiate in good faith the terms and conditions of any such license or
acquisition agreement.
Oncor has the primary right and obligation to obtain, maintain and enforce
proprietary rights in relation to all its own technologies and any improvements
to such technologies assigned to Oncor by the Company. The Company has the
primary right and obligation to obtain, maintain and enforce proprietary rights
in relation to all its own technologies.
F-34
<PAGE> 170
ONCORMED, INC.
(A DEVELOPMENT STAGE COMPANY)
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
AS OF DECEMBER 31, 1997, 1996 AND 1995,
AND FOR THE PERIOD FROM INCEPTION (JULY 12, 1993) THROUGH DECEMBER 31, 1997
During the second quarter of 1995, the Company finalized a services
agreement with Oncor and Codon Pharmaceuticals, Inc. ("Codon", a subsidiary of
Oncor), whereby the Company agreed to pay for laboratory supplies and equipment
provided by Oncor and Codon ("Services Agreement"). The Services Agreement also
provides that the Company will perform certain experiments for Oncor at
specified rates.
Related party revenues and expenses are as follows:
<TABLE>
<CAPTION>
PERIOD FROM
INCEPTION
(JULY 12, 1993)
FOR THE YEARS ENDED DECEMBER 31, THROUGH
-------------------------------- DECEMBER 31,
1997 1996 1995 1997
-------- -------- -------- ---------------
<S> <C> <C> <C> <C>
Sales to related party...................... $ 3,941 $ 5,700 $ 42,180 $ 51,821
Operating Expenses to related party:
Laboratory operations..................... 272,000 272,610 200,000 1,036,610
Selling, general and administrative....... -- 4,394 247,000 977,896
Research and development.................. 2,803 71,784 -- 173,085
</TABLE>
All of the related party revenues for the year ended December 31, 1997 were
for testing services performed for Oncor. Of the related party expenses for the
year ended December 31, 1997, $72,000 in laboratory operations was for equipment
rental from Codon, a subsidiary of Oncor. As of December 31, 1997, the total
amount owed to Oncor by the Company under the above agreements and for other
services excluding the Oncor License was approximately $32,000.
Promissory Note with Oncor, Inc.
In June 1994, the Company converted $715,751 owed to Oncor for license fees
previously incurred and for prior services rendered into a Convertible
Subordinated Promissory Note (the "Convertible Note"), which principal is due in
June 1999. The Convertible Note bears interest at seven percent and is
convertible into common stock at the holder's option at a conversion price of
$20 per share of common stock. Interest expense recorded by the Company relating
to the Convertible Note was $50,798 for the year ended December 31, 1997. The
fair value of the Convertible Note is not materially different from the carrying
value.
4. DEFERRED REVENUES:
Deferred revenues totaling approximately $81,000 and $50,000 as of December
31, 1997 and 1996, respectively, consisted of prepaid amounts related to
laboratory testing and prepaid fees related to various risk assessment service
agreements.
5. STOCKHOLDERS' EQUITY:
Preferred Stock
The Company is authorized to issue up to 2,000,000 shares of preferred
stock. In December 1993, the Company completed a private placement of 1,000,000
shares of Series A Convertible Preferred Stock for $3,000,000. Concurrent with
the initial public offering, each share of Series A Convertible Preferred Stock
was converted into common stock on a one for one basis. On February 27, 1998,
the Company completed a $3 million equity financing through a private placement
of 6% Series A convertible preferred stock to certain investors. The preferred
stock is convertible into the Company's common stock at a conversion price to be
determined based on either the closing bid price of the Common Stock as of
February 26, 1998, or the closing
F-35
<PAGE> 171
ONCORMED, INC.
(A DEVELOPMENT STAGE COMPANY)
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
AS OF DECEMBER 31, 1997, 1996 AND 1995,
AND FOR THE PERIOD FROM INCEPTION (JULY 12, 1993) THROUGH DECEMBER 31, 1997
bid price of the Company's Common Stock at the time of such conversion. The
convertible preferred stock may be redeemed at the option of the investors in
certain circumstances. In addition, in connection with the transaction, the
Company has issued to the investors warrants to purchase shares of common stock.
Subject to certain conditions, the Company and the investors each have the right
to increase the aggregate amount of the equity financing by an additional $3
million (for aggregate investment of $6 million). On March 5, 1998, the Company
filed a Form 8-K in connection with this transaction.
Common Stock
On October 25, 1995, the Board approved and on November 27, 1995, the
stockholders approved an increase in authorized common stock from 10,000,000
shares to 40,000,000 shares.
On February 2, 1996, the Company completed the sale of 2,000,000 shares of
common stock in a public offering ("Offering") resulting in gross proceeds to
the Company of approximately $15.5 million. Net proceeds to the Company for the
Offering, after transaction costs, were approximately $13.9 million.
On February 25, 1997, in consideration for the grant of the license and
$3,000,000 in cash, the Company issued to Incyte 773,588 shares of the Company's
Common Stock and a warrant to purchase up to an aggregate of 10% of the
Company's Common Stock issued and outstanding on the date of such warrant's
exercise. As a result of this transaction, Oncor's ownership of the Company's
outstanding common stock was reduced from approximately 29 percent to
approximately 25.4 percent. See Footnote 7 -- Agreements.
Warrants
Concurrent with the initial public offering, the Company issued warrants to
the underwriter to purchase an aggregate of 133,500 shares of common stock at
$6.90 per share. The warrants are exercisable from September 27, 1996 to
September 26, 1999.
As part of a license, services and marketing agreement with Incyte
Pharmaceuticals, Inc., the Company issued a warrant to Incyte to purchase up to
an aggregate of ten percent of the Company's common stock. See Footnote
7 -- Agreements.
As part of the Series A convertible preferred stock transaction, the
investors received warrants to purchase an aggregate of 166,666 shares of the
Company's Common Stock at an exercise price of $8.54 per share. These warrants
expire on February 27, 2001.
Stock Purchase Plan
On April 19, 1996, the Board approved and on June 12, 1996, the
stockholders approved the adoption of the Company's Employee Stock Purchase Plan
to provide all eligible employees, who have completed ninety days of service, an
opportunity to purchase shares of its common stock through payroll deductions.
Each purchase period has a duration of six (6) months. Purchase periods run from
the first business day in August to the last business day in January and from
the first business day in February to the last business day in July. The
purchase price is the lower of 85% of the fair market value of the stock on the
first or last day of the purchase period. The aggregate number of shares
purchased by an employee may not exceed 750 shares per purchase period (subject
to periodic adjustments and limitations imposed by the Internal Revenue Code).
A total of 200,000 shares are available for purchase under the plan. There
were approximately 12,000 shares issued under the plan during fiscal 1997. On
January 30, 1998, approximately 3,000 shares of common stock were issued under
the plan.
F-36
<PAGE> 172
ONCORMED, INC.
(A DEVELOPMENT STAGE COMPANY)
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
AS OF DECEMBER 31, 1997, 1996 AND 1995,
AND FOR THE PERIOD FROM INCEPTION (JULY 12, 1993) THROUGH DECEMBER 31, 1997
Stock Option Plan
The Board of Directors of the Company approved a restated stock option
plan, under which 1,500,000 shares of the Company's common stock were originally
reserved for issuance. On October 25, 1995, the Board approved and on November
27, 1995, the stockholders approved the increase of shares authorized for
issuance from 1,500,000 shares to 2,250,000 shares. The Company's options
generally vest over three to five years and terminate in ten years after the
date of grant. The Company adopted the disclosure requirements of SFAS No. 123,
Accounting for Stock-Based Compensation, effective for the Company's December
31, 1996 financial statements. The Company applies APB Opinion No. 25 and
related Interpretations in accounting for its stock based plans. Accordingly,
compensation cost has been recognized for its stock plans based on the intrinsic
value of the stock option at date of grant (i.e. the difference between the
exercise price and the fair market value of the Company's common stock). Had
compensation expense been recorded for the Company's stock-based compensation
plan based on the fair market value of the Company's common stock at the grant
dates for stock option awards under the plan consistent with the method of SFAS
No. 123, the Company's net loss and net loss per share would have been increased
to the pro forma amounts indicated below.
<TABLE>
<CAPTION>
1997 1996 1995
------------ ----------- -----------
<S> <C> <C> <C>
Net loss, as reported...................... $(10,746,329) $(7,455,973) $(6,510,547)
Net loss, pro forma........................ $(11,045,253) $(7,604,319) $(6,548,304)
Net loss per share, as reported............ $ (1.39) $ (1.10) $ (1.32)
Net loss per share, pro forma.............. $ (1.43) $ (1.12) $ (1.12)
</TABLE>
The fair value of each option is estimated on the date of grant using the
Black-Scholes option-pricing model with the following assumptions used for
grants in 1995, 1996 and 1997, respectively: no dividend yield, expected
volatility of 30%, 30% and 52.1%, risk-free interest rate of 6.04%, 6.12% and
5.84%, and expected life of five years, five years and ten years. Because the
SFAS No. 123 method of accounting has not been applied to options granted prior
to January 1, 1995, per the rules, the resulting pro forma compensation cost may
not be representative of that to be expected in future years.
F-37
<PAGE> 173
ONCORMED, INC.
(A DEVELOPMENT STAGE COMPANY)
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
AS OF DECEMBER 31, 1997, 1996 AND 1995,
AND FOR THE PERIOD FROM INCEPTION (JULY 12, 1993) THROUGH DECEMBER 31, 1997
A summary of stock option activity is as follows:
<TABLE>
<CAPTION>
NUMBER WTD AVERAGE
OF SHARES EXERCISE PRICE
--------- --------------
<S> <C> <C>
Options outstanding at December 31, 1993.................... 405,000 $0.50
Granted................................................... 909,500 $2.87
Exercised................................................. -- --
Canceled.................................................. (14,500) $1.83
--------- -----
Options outstanding at December 31, 1994.................... 1,300,000 $2.14
Granted................................................... 158,500 $8.11
Exercised................................................. (4,800) $0.50
Canceled.................................................. (14,200) $5.72
--------- -----
Options outstanding at December 31, 1995.................... 1,439,500 $2.77
Granted................................................... 283,000 $5.29
Exercised................................................. (41,058) $0.94
Canceled.................................................. (139,200) $6.75
--------- -----
Options outstanding at December 31, 1996.................... 1,542,242 $2.92
Granted................................................... 190,500 $6.05
Exercised................................................. (94,200) $1.03
Canceled.................................................. (52,500) $7.98
--------- -----
Options outstanding at December 31, 1997.................... 1,586,042 $3.24
========= =====
</TABLE>
The number of options exercisable as of December 31, 1997, 1996, 1995 and
1994 was 1,147,959, 1,001,193, 641,306, and 263,493, respectively, with weighted
average exercise prices of $2.70, $2.36, $2.07 and $1.41, respectively.
The outstanding options at December 31, 1997 have exercise prices between
$0.50 and $10.125 with a weighted average exercise price of $3.24 and a weighted
average remaining contractual life of 6.9 years. The options exercisable at
December 31, 1997 have exercise prices between $0.50 and $10.125. On July 29,
1997, the Company offered to reprice options for all employees, other than
officers and directors, to the fair market value at that date of $5.375 per
share. The number of options would remain the same. However, there would be a
new four year vesting schedule starting on July 29, 1997. The number of options
repriced was 40,500. The number of options available for future grants as of
December 31, 1997 was 473,900.
Included in the grants described above for the years ended December 31,
1997 and 1996, are options to purchase 39,360 and 18,000 shares granted to
non-employees, respectively. Pursuant to SFAS No. 123, the Company accounts for
these options using a fair value method, with the fair value of these options
determined at the date of issuance. For these options, the Company recorded
approximately $78,700 and $6,400 in expenses and approximately $64,700 and
$21,400 in deferred compensation for the years ending December 31, 1997 and
1996, respectively.
Compensation expense for employees is recognized for the difference between
the exercise price of the options granted and the fair market value of the
Company's common stock. Total deferred compensation of $256,500 was recorded in
1994. This amount was adjusted by $4,686 due to the cancellation of options.
Compensation expense of $36,852, $54,037, and $61,928 has been recognized for
the years ended December 31, 1997, 1996 and 1995, respectively.
F-38
<PAGE> 174
ONCORMED, INC.
(A DEVELOPMENT STAGE COMPANY)
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
AS OF DECEMBER 31, 1997, 1996 AND 1995,
AND FOR THE PERIOD FROM INCEPTION (JULY 12, 1993) THROUGH DECEMBER 31, 1997
6. COMMITMENTS:
Lease Commitments and Rental Expense
The Company leases office space under operating lease agreements which
expire at various dates through 2001. The Company intends to renew its primary
lease, which expires in November 1998. The lease payments below do not reflect
the intended lease renewal. Minimum future annual lease payments under these
lease agreements as of December 31, 1997, are as follows:
<TABLE>
<CAPTION>
FOR THE YEAR ENDING
DECEMBER 31, AMOUNT
------------------- --------
<S> <C>
1998............................................... $194,000
1999............................................... 48,000
2000............................................... 50,000
2001............................................... 48,000
--------
Total.............................................. $340,000
========
</TABLE>
Total rent expense approximated $177,000, $177,000, $180,000, and $640,000
for the years ended December 31, 1997, 1996 and 1995 and the period from
inception (July 12, 1993) to December 31, 1997, respectively.
Licensing and Research Agreements
In addition to the Oncor License discussed in Note 3, the Company has
entered into several licensing, consulting and clinical study agreements. The
terms of significant agreements are as follows:
Incyte Pharmaceuticals, Inc. -- In February 1997, the Company entered into
a license, services and marketing agreement with Incyte Pharmaceuticals, Inc. to
form a broad-based collaboration in clinical genomics designed to create an
integrated genomics and sequence-based mutation analysis capability for the two
companies. As part of the agreement, the Company licenses certain technologies
at agreed upon rates. The term of the agreement expires on February 25, 2000
unless extended by mutual agreement or earlier terminated in accordance with its
terms.
Hereditary Cancer Institute -- In September 1993, the Company entered into
a licensing and marketing agreement with The Hereditary Cancer Institute ("HCI")
and the Creighton University School of Medicine, which included access to HCI's
familial cancer database, software and physician consulting services. In July
1995, the Company extended for five years the license agreement, expanded the
scope of the license agreement to include commercialization rights to HCI's DNA
library, and entered into a services agreement for the provision by HCI of
genetic history reports. Under the extended license agreement, the Company
continues to pay an annual sponsorship fee of $250,000, in quarterly
installments which is offset by a percentage of the amounts paid under the
services agreement. In addition, under the extended license agreement, the
Company is required to pay a royalty on net sales of products and services which
make use of the HCI database, other than genetic history reports, and on license
income derived from sublicenses to third parties of the Company's rights to the
HCI database.
ZENECA Diagnostics -- In August 1996, the Company and ZENECA Limited,
acting through ZENECA Diagnostics, entered into a five-year collaboration
agreement under which ZENECA Diagnostics will supply the Company with
proprietary cancer reagents based on patented ZENECA ARMS technology for use by
the Company's advanced cancer genetic testing laboratory in the U.S. The
agreement automatically
F-39
<PAGE> 175
ONCORMED, INC.
(A DEVELOPMENT STAGE COMPANY)
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
AS OF DECEMBER 31, 1997, 1996 AND 1995,
AND FOR THE PERIOD FROM INCEPTION (JULY 12, 1993) THROUGH DECEMBER 31, 1997
renews for successive twelve-month periods unless terminated by either party.
During mid-1997, the Company and ZENECA Diagnostics successfully completed the
first application of the ARMS technology to detect mutations associated with
breast/ovarian cancer.
The Regents of the University of California -- The Company entered into a
license agreement, effective August 8, 1996, with the Regents of the University
of California for the use of certain genetic markers for breast and ovarian
cancer. Under the agreement, the Company is obligated to pay royalties for the
use of the technology as clinical laboratory services are performed. Royalty
payments are payable semi-annually, 60 days after the end of each six month
period.
Cancer Research Campaign Technology Limited and Duke -- Pursuant to a
License Agreement (the "BRCA2 Agreement"), dated July 7, 1997, by and among the
Company, Cancer Research Campaign Technology Limited ("CRCT") and Duke
University ("Duke"), CRCT and Duke have granted the Company an exclusive,
worldwide royalty-bearing license to certain patents and patent applications
relating to the BRCA2 gene and related discoveries (the "BRCA2 Technology") for
the purpose of providing diagnostic services, diagnostic products and research
products relating thereto. In consideration of the grant of the license, the
Company has paid CRCT an up-front fee. Contemporaneously, the Company granted
back to CRCT and Duke certain limited rights to use the BRCA2 Technology to
provide diagnostic services to any UK National Health Service Hospital and to
patients affiliated with Duke, respectively. Unless terminated earlier in
accordance with its terms, the BRCA2 Agreement expires, on a country-by-country
basis, on the date of expiration of the last to expire BRCA2 patent in such
country or, if no BRCA2 patent is granted in a given country, ten (10) years
after the first commercial provision of diagnostic services or diagnostic
products in such country. In addition, the Company will share in a portion of
the revenues generated from any therapeutic licensing. Royalty payments are
payable quarterly, 40 business days after the end of each quarter.
Minimum payments due under these and other agreements, excluding the Oncor
License, as of December 31, 1997, are as follows:
<TABLE>
<CAPTION>
FOR THE YEAR ENDING
DECEMBER 31, AMOUNT
- --------------------------------------------------------- ----------
<S> <C>
1998............................................... $ 704,000
1999............................................... 448,000
2000............................................... 329,000
2001............................................... 7,500
2002............................................... 7,500
----------
$1,496,000
==========
</TABLE>
7. AGREEMENTS:
Pursuant to a License, Services and Marketing Agreement (the "Incyte
Agreement"), dated February 25, 1997, the Company and Incyte Pharmaceuticals,
Inc., a Delaware corporation ("Incyte"), formed a collaboration in clinical
genomics. The term of the Incyte Agreement expires on February 25, 2000 (the
"Initial Term") unless extended by mutual agreement or earlier terminated in
accordance with its terms.
The Company has agreed to perform certain specified clinical genomic
services relating to the creation of a tissue repository and the performance of
a gene functional studies program (the "Collaborative Services"). Incyte has
agreed to purchase a specified minimum of Collaborative Services during each
year of the Initial Term. In addition, under the terms of the Incyte Agreement,
the Company obtained a non-exclusive, royalty-bearing license (without the right
to sublicense) to use Incyte's high-throughput sequencing technology for use in
the Company's clinical diagnostic services for a period ending five (5) years
following termination of the
F-40
<PAGE> 176
ONCORMED, INC.
(A DEVELOPMENT STAGE COMPANY)
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
AS OF DECEMBER 31, 1997, 1996 AND 1995,
AND FOR THE PERIOD FROM INCEPTION (JULY 12, 1993) THROUGH DECEMBER 31, 1997
Incyte Agreement, subject to certain limitations. In consideration for the grant
of the license and $3,000,000 in cash, the Company issued to Incyte (i) 773,588
shares of the Company's Common Stock, and (ii) a warrant to purchase up to an
aggregate of 10% of the Company's Common Stock issued and outstanding on the
date of such warrant's exercise. The warrant is exercisable until February 25,
2000 at an exercise price per share equal to the greater of 110% of the fair
market value per share of Common Stock on the trading day prior to the date of
exercise or (i) $8.00 per share (if the warrant is exercised on or prior to
February 25, 1998), (ii) $9.00 per share (if the warrant is exercised after
February 25, 1998, but on or prior to February 25, 1999), or (iii) $13.50 per
share (if the warrant is exercised after February 25, 1999, but on or prior to
February 25, 2000). Notwithstanding the foregoing sentence, Incyte has the
option to fix the exercise price per share during each of aforementioned
periods; provided, however, that in no event shall the exercise price per share
during each of the aforementioned periods be less than $8.00, $9.00 or $13.50
per share, respectively. The Company has also agreed to issue to Incyte, under
certain circumstances, up to an additional aggregate of 130,726 shares of the
Company's Common Stock. Pursuant to the terms of an Investor's Rights Agreement
between the Company and Incyte, Incyte was granted certain registration and
other stockholder rights.
The Company issued certain of the shares to Incyte in consideration for
current and future technologies to further enhance the efficiencies of the
laboratory. The technologies are in development and approximately $1.5 million
was allocated to research and development projects in-process and expensed in
the first quarter of 1997.
Affymetrix, Inc. -- In September 1996, the Company entered into an
agreement with Affymetrix, Inc. ("Affymetrix") to collaborate in the development
and clinical validation of genetic testing services using the Affymetrix
GeneChip system for analysis of genes associated with cancer beginning with the
p53 gene. In October 1997, the Company expanded its collaboration with
Affymetrix. Under the new agreement, the companies will co-develop a GeneChip
system for BRCA1 and BRCA2 genotyping.
The Company will design and validate the BRCA1 and BRCA2 GeneChip array
which will be manufactured by Affymetrix. The Company will receive royalties on
all BRCA1 and BRCA2 array sales. The initial term of the new agreement is three
years.
8. RETIREMENT PLAN:
The Company sponsors a 401(k) defined contribution plan ("401(k) Plan") in
which all regular employees who have attained age 21 may participate. Because
the 401(k) Plan does not currently provide for Company contributions, no related
expense has been recorded since inception.
9. SUBSEQUENT EVENTS:
In January 1998, the Company and Children's Hospital Los Angeles ("CHLA")
entered into an agreement (the "CHLA Agreement") whereby CHLA agreed to provide
resources and personnel to act as a biorepository site for the Company's library
of tissue samples. The CHLA Agreement expires on January 29, 2001, unless
modified by written amendment, renewal or extension or earlier terminated in
accordance with its terms. The Company has agreed to pay for all of CHLA's costs
incurred in the performance of the scope of work, as described in the CHLA
Agreement.
On February 27, 1998, the Company completed a $3 million equity financing
through a private placement of 6% Series A convertible preferred stock to
certain investors. The preferred stock is convertible into the Company's common
stock at a conversion price to be determined based on either the closing bid
price of the Common Stock as of February 26, 1998, or the closing bid price of
the Company's Common Stock at the time of such conversion. The convertible
preferred stock may be redeemed at the option of the investors in certain
circumstances. In addition, in connection with the transaction, the Company has
issued to the investors warrants to purchase shares of common stock. Subject to
certain conditions, the Company and the investors
F-41
<PAGE> 177
ONCORMED, INC.
(A DEVELOPMENT STAGE COMPANY)
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
AS OF DECEMBER 31, 1997, 1996 AND 1995,
AND FOR THE PERIOD FROM INCEPTION (JULY 12, 1993) THROUGH DECEMBER 31, 1997
each have the right to increase the aggregate amount of the equity financing by
an additional $3 million (for an aggregate investment of $6 million). On March
5, 1998, the Company filed a Form 8-K in connection with this transaction.
On March 6, 1998, Incyte exercised its pro rata share and purchased Thirty
Three (33) shares of the 6% Series A convertible preferred stock for an
aggregate of $330,000.
10. GENE LOGIC INC. ACQUISITION:
On July 6, 1998, the Company, Gene Logic Inc. and Gene Logic Acquisition
Corp. entered into a definitive Agreement and Plan of Merger and Reorganization
(the "Merger Agreement") whereby the Company will merge with and into Gene Logic
Acquisition Corp. (the "Merger"). Upon consummation of the Merger, the Company
will cease to exist. As part of the Merger, Gene Logic Inc. has extended to the
Company a $2.0 million line of credit secured by certain assets for working
capital purposes until the Merger is consummated. Advances under the loan shall
not exceed $500,000 per month. Interest accrues daily at a per annum rate that
Citibank N.A. has announced as its prime lending rate. In the event the Merger
is not consummated, the line of credit will be cancelled and amounts outstanding
will become due on March 31, 1999. If the Merger is not consummated, the Company
will need to raise additional funds which may or may not be available on a
timely basis or on satisfactory terms which continues to raise substantial doubt
whether the Company can continue as a going concern.
In connection with the Merger, the Company's Series A Preferred
Shareholders waived their cash redemption rights and rights to any additional
financings under a Series B Convertible Preferred Stock arrangement.
11. MYRIAD GENETICS SETTLEMENT:
On May 18, 1998, Myriad Genetics, Inc. ("Myriad") and the Company settled
all outstanding lawsuits between the parties. As part of the settlement, the
Company granted to Myriad exclusive rights to all current and pending Company
patents in the field of BRCA1 and BRCA2 for reference lab testing in
consideration for certain payments and royalties payable to the Company. Both
parties will retain diagnostic product and therapeutic rights in their
respective patents.
F-42
<PAGE> 178
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
To Oncormed, Inc.:
We have audited, in accordance with generally accepted auditing standards, the
financial statements of Oncormed, Inc. (a Delaware corporation in the
development stage), included in this Form S-4 and have issued our report thereon
dated February 20, 1998 (except with respect to the acquisition described in
Note 10, as to which the date is July 6, 1998, and to the settlement described
in Note 11, as to which the date is May 18, 1998). Our audits were made for the
purpose of forming an opinion on the basic financial statements taken as a
whole. The schedule listed in the index to the financial statements is the
responsibility of the Company's management and is presented for purposes of
complying with the Securities and Exchange Commission's rules and is not part of
the basic financial statements. This schedule has been subjected to the auditing
procedures applied in the audits of the basic financial statements and, in our
opinion, fairly states, in all material respects, the financial data required to
be set forth therein, in relation to the basic financial statements taken as a
whole.
ARTHUR ANDERSEN LLP
Washington, D.C.
February 20, 1998
F-43
<PAGE> 179
SCHEDULE II -- VALUATION AND QUALIFYING ACCOUNTS
<TABLE>
<CAPTION>
BALANCE AT CHARGED BALANCE
BEGINNING TO COSTS AT END
DESCRIPTION OF PERIOD AND EXPENSES WRITE-OFF OF PERIOD
- ----------- ---------- ------------ --------- ---------
<S> <C> <C> <C> <C>
DECEMBER 31, 1993
Allowance for doubtful accounts................. $ -- $ -- $ -- $ --
DECEMBER 31, 1994
Allowance for doubtful accounts................. -- -- -- --
DECEMBER 31, 1995
Allowance for doubtful accounts................. -- 7,000 -- 7,000
DECEMBER 31, 1996
Allowance for doubtful accounts................. 7,000 28,000 3,000 32,000
DECEMBER 31, 1997
Allowance for doubtful accounts................. 32,000 23,000 13,000 42,000
</TABLE>
F-44
<PAGE> 180
ONCORMED, INC.
(A DEVELOPMENT STAGE COMPANY)
BALANCE SHEETS
<TABLE>
<CAPTION>
AS OF AS OF
JUNE 30, DECEMBER 31,
1998 1997
------------ ------------
(UNAUDITED)
<S> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents................................. $ 1,178,007 $ 439,618
Short term investments.................................... -- 1,038,933
Accounts receivable, net allowance for doubtful accounts
of $45,000 and $42,000................................. 180,677 298,538
Other current assets...................................... 135,551 275,274
------------ ------------
Total current assets.............................. 1,494,235 2,052,363
------------ ------------
Non-current assets:
Property and equipment, net............................... 975,594 1,067,303
Deferred offering costs................................... -- 56,949
------------ ------------
Total non-current assets.......................... 975,594 1,124,252
------------ ------------
TOTAL ASSETS........................................... $ 2,469,829 $ 3,176,615
============ ============
LIABILITIES AND STOCKHOLDERS' EQUITY (DEFICIT)
Current liabilities:
Accounts payable.......................................... $ 837,968 $ 761,169
Accrued expenses and other liabilities.................... 699,751 859,390
Payable to Oncor, Inc..................................... 187,341 82,552
Note payable to Oncor Finance, Inc. ...................... 715,751 --
Deferred revenue.......................................... 1,078,129 72,347
------------ ------------
Total current liabilities......................... 3,518,940 1,775,458
------------ ------------
Non-current liabilities:
Note payable to Oncor Finance, Inc........................ -- 715,751
Deferred revenue.......................................... 3,687 8,596
------------ ------------
Total non-current liabilities..................... 3,687 724,347
------------ ------------
TOTAL LIABILITIES...................................... 3,522,627 2,499,805
------------ ------------
Commitments and Contingencies (Notes 1 and 6)
Stockholders' Equity:
Series A preferred stock, $.01 par value, 2,000,000
shares authorized, 333 and 0 shares issued and
outstanding........................................... 3,719,161 --
Common stock, $.01 par value, 40,000,000 shares,
authorized, 7,887,300 and 7,876,423 shares issued and
outstanding............................................ 78,873 78,764
Additional paid-in capital................................ 30,492,544 30,234,082
Deferred compensation..................................... (75,854) (103,462)
Deficit accumulated during the development stage.......... (35,267,522) (29,532,574)
------------ ------------
TOTAL STOCKHOLDERS' EQUITY (DEFICIT)................... (1,052,798) 676,810
------------ ------------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY (DEFICIT)... $ 2,469,829 $ 3,176,615
============ ============
</TABLE>
The accompanying notes are an integral part of these balance sheets.
F-45
<PAGE> 181
ONCORMED, INC.
(A DEVELOPMENT STAGE COMPANY)
STATEMENTS OF OPERATIONS
(UNAUDITED)
<TABLE>
<CAPTION>
PERIOD FROM
INCEPTION
SIX MONTHS ENDED JUNE 30, (JULY 12, 1993)
-------------------------- THROUGH JUNE 30,
1998 1997 1998
----------- ----------- -----------------
<S> <C> <C> <C>
REVENUES........................................ $ 848,708 $ 322,375 $ 2,781,433
OPERATING EXPENSES:
Cost of sales -- direct....................... 366,778 164,646 1,302,754
Laboratory operations......................... 1,572,829 1,373,658 11,360,954
Selling, general and administrative........... 3,729,035 2,688,018 21,238,881
Research and development...................... 332,543 422,161 3,064,997
Acquired in-process research and development
projects................................... -- 1,481,148 1,481,148
----------- ----------- ------------
Total expenses........................ 6,001,185 6,129,631 38,448,734
----------- ----------- ------------
OPERATING LOSS.................................. (5,152,477) (5,807,256) (35,667,301)
Interest income................................. 48,273 188,666 1,222,555
Interest expense................................ (28,634) (29,248) (220,666)
Gain on transfer of service line assets......... 525,000 -- 525,000
----------- ----------- ------------
NET LOSS........................................ $(4,607,838) $(5,647,838) $(34,140,412)
----------- ----------- ------------
Dividend and accretion embedded in conversion of
Series A Convertible Preferred Stock.......... (1,127,110) -- (1,127,110)
----------- ----------- ------------
Net loss per share applicable to common stock... $(5,734,948) $(5,647,838) $(35,267,522)
=========== =========== ============
BASIC AND DILUTED NET LOSS PER SHARE
(unaudited)................................... $ (0.73) $ (0.75) $ (5.88)
=========== =========== ============
SHARES USED IN COMPUTING NET LOSS PER SHARE
(unaudited)................................... 7,882,728 7,567,360 5,997,245
=========== =========== ============
</TABLE>
The accompanying notes are an integral part of these statements.
F-46
<PAGE> 182
ONCORMED, INC.
(A DEVELOPMENT STAGE COMPANY)
STATEMENTS OF CASH FLOW
(UNAUDITED)
<TABLE>
<CAPTION>
PERIOD FROM
SIX MONTHS ENDED INCEPTION
JUNE 30, (JULY 12, 1993)
------------------------- THROUGH JUNE 30,
1998 1997 1998
----------- ----------- -----------------
<S> <C> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net loss.......................................... $(4,607,838) $(5,647,838) $(34,140,412)
Adjustments to reconcile net loss to net cash used
in operating activities --
Depreciation and amortization.................. 272,290 269,375 1,878,348
Amortization of deferred compensation.......... 25,196 18,426 344,734
Gain on sale of service line assets............ (525,000) -- (525,000)
Acquired in-process research and development
costs........................................ -- 1,481,148 1,481,148
Changes in operating assets and liabilities:
Accounts receivable............................ 117,861 (17,647) (180,677)
Other assets................................... 139,723 203,036 (135,551)
Accounts payable............................... 76,799 (484,615) 837,968
Accrued expenses and other liabilities......... (159,639) (120,575) 699,751
Deferred revenue............................... 1,000,873 20,717 1,081,816
Payable to Oncor, Inc.......................... 104,789 20,004 187,341
----------- ----------- ------------
Net cash used in operating activities.......... (3,554,946) (4,257,969) (28,470,534)
----------- ----------- ------------
CASH FLOWS FROM INVESTING ACTIVITIES:
Proceeds from sale of service line assets......... 525,000 -- 525,000
Purchase of property and equipment................ (180,581) (263,133) (2,798,943)
Redemptions of short-term investments............. 1,038,933 3,392,387 6,784,528
Purchases of short-term investments............... -- (3,889,464) (6,784,528)
----------- ----------- ------------
Net cash provided by (used in) investing
activities................................... 1,383,352 (760,210) (2,273,943)
----------- ----------- ------------
CASH FLOWS FROM FINANCING ACTIVITIES:
Net proceeds from sale of common stock............ 16,464 2,830,436 25,216,131
Net proceeds from sale of preferred stock......... 2,828,883 -- 5,819,322
Net proceeds from exercise of stock options....... 7,687 -- 171,280
Net proceeds from Note payable to Oncor Finance,
Inc. .......................................... -- -- 715,751
Decrease in deferred offering costs............... 56,949 -- --
----------- ----------- ------------
Net cash provided by financing activities...... 2,909,983 2,830,436 31,922,484
----------- ----------- ------------
NET INCREASE (DECREASE) IN CASH AND CASH
EQUIVALENTS....................................... 738,389 (2,187,743) 1,178,007
CASH AND CASH EQUIVALENTS, beginning of period...... 439,618 6,031,809 --
----------- ----------- ------------
CASH AND CASH EQUIVALENTS, end of period............ $ 1,178,007 $ 3,844,066 $ 1,178,007
=========== =========== ============
SUPPLEMENTAL DISCLOSURE OF NONCASH INVESTING AND
FINANCING ACTIVITIES
Issuance of common stock in exchange for software
and technology................................. $ -- $ -- $ 55,000
=========== =========== ============
Issuance of common stock in exchange for stock
subscription receivable........................ $ -- $ -- $ 25,000
=========== =========== ============
Issuance of common stock and warrants in exchange
for research and development projects
in-process..................................... $ -- $ 1,481,148 $ 1,481,148
=========== =========== ============
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION:
Cash paid during the period for interest.......... $ 28,634 $ 29,248 $ 220,666
=========== =========== ============
</TABLE>
F-47
<PAGE> 183
ONCORMED, INC.
(A DEVELOPMENT STAGE COMPANY)
NOTES TO FINANCIAL STATEMENTS
AS OF JUNE 30, 1998
(UNAUDITED)
1. BUSINESS DESCRIPTION:
Oncormed, Inc. (the "Company"), was incorporated on July 12, 1993, in the
State of Delaware. The Company is a genomics services company that characterizes
newly discovered genes to establish their medical relevance and provides
molecular profiling of patients for pharmacogenomic and therapeutic purposes.
The Company is in the development stage and has a limited operating history, has
incurred operating losses since its inception and expects losses to continue and
increase. Since its inception, the Company has been engaged in research and
development activities, organizational efforts, and sales and marketing
activities including the development of its services, the hiring of its
scientific and marketing staff and its initial sales and marketing efforts. The
Company's services are currently offered principally in the United States. There
can be no assurance that the Company will be successful in the development or
commercialization of its services.
The Company has incurred cumulative losses since its inception and, as of
June 30, 1998, had an accumulated deficit of approximately $35.3 million. The
Company has yet to generate any significant revenues and cannot anticipate when,
or if, it will be able to generate significant revenues in the future. The
Company expects that its operating losses will continue as its sales and
marketing efforts, research and development programs and laboratory operations
continue and increase. At August 7, 1998, the Company had cash and cash
equivalents of approximately $1.4 million. In the event the Merger is not
consummated, the Company will need to raise additional funds which might not be
available on a timely basis or on satisfactory terms. The unavailability of
adequate funds in the future would have a material adverse effect on the
Company's business, financial condition and results of operations and raises
substantial doubt about whether the Company can continue as a going concern. The
financial statements do not include any adjustments that might result if the
Company is unable to continue as a going concern.
2. SIGNIFICANT ACCOUNTING POLICIES:
Use of Estimates
The preparation of these financial statements required the use of certain
estimates by management in determining the entity's assets, liabilities,
revenues and expenses. Actual results could differ from those estimates.
Cash and Cash Equivalents
All highly liquid investments with a maturity of three months or less at
the date of purchase are considered to be cash equivalents; investments with
maturities between three and twelve months are considered to be short term
investments. The Company invests its excess funds in commercial paper with
banks, money market instruments in U.S. treasury and investment grade
securities, and overnight reverse repurchase agreements collateralized by U.S.
treasury and investment grade securities. Short term investments are stated at
cost, which approximates market.
Revenue Recognition
Revenues are principally derived from providing genetic testing and
information services, technology licensing fees and royalties associated with
its proprietary information and software licensing associated with its risk
assessment service. Revenues are also derived from grant contract work. Revenues
from the Company's genetic testing and information services and grant work are
recognized as they are provided. Revenues from technology licensing fees are
recognized when the licensing agreement has been executed.
F-48
<PAGE> 184
ONCORMED, INC.
(A DEVELOPMENT STAGE COMPANY)
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
Revenues from technology licensing royalties are recognized when earned.
Revenues from its risk assessment service are recognized over the license
period.
Net Loss Per Common Share
In March 1997, the Financial Accounting Standards Board ("FASB") issued
SFAS No. 128, "Earnings Per Share." SFAS No. 128 is effective for the financial
statements issued for period ending after December 15, 1997. The Company
implemented SFAS No. 128 in 1997. SFAS No. 128 requires dual presentation of
basic and diluted earnings per share. Basic loss per share includes no dilution
and is computed by dividing net loss available to common stockholders by
weighted average number of common shares outstanding for the period. Diluted
loss per share includes the potential dilution that could occur if securities or
other contracts to issue common stock were exercised or converted into common
stock. Options and convertible securities that were outstanding at June 30,
1998, were not included in the computation of diluted loss per share as their
effect would be anti-dilutive. As a result, the basic and diluted loss per share
amounts are identical.
In February 1998, the Securities and Exchange Commission issued Staff
Accounting Bulletin ("SAB") No. 98 on computations of earnings per share. SAB 98
replaces SAB 83 which previously required that all issuances of common stock,
options and warrants issued within one year of an initial public offering be
included in the calculation of earnings per share as if outstanding for all
periods presented. Under SAB 98, only issuances of common stock, options and
warrants issued for nominal consideration in periods preceding an initial public
offering are required to be included in the calculation of earnings per share as
if they were outstanding for all periods presented. In the periods preceding the
Company's initial public offering the Company had no issuances of common stock,
options or warrants for nominal consideration.
Earnings per share for the inception to date period presented which
includes the periods preceding the Company's initial public offering has been
restated to comply with SAB 98.
Reclassification
Certain 1997 balances have been reclassified to conform with 1998 financial
statement presentation.
3. RELATED-PARTY TRANSACTIONS:
As of June 30, 1998, Oncor Inc.'s ("Oncor") ownership of the Company's
outstanding common stock was approximately 25.4 percent (excluding the
conversion of the Series A convertible preferred stock).
License Agreement
In February 1997, as modified in November 1997, the Company and Oncor
agreed to certain changes to an agreement with Oncor regarding sublicenses for
certain proprietary technology (the "Oncor Agreement"). Pursuant to the Oncor
Agreement, Oncor is providing the Company with an exclusive worldwide license to
certain of Oncor's existing human genome technologies and a non-exclusive
worldwide license to certain of Oncor's other existing human genome
technologies, and any future improvements thereto.
Under the terms of the Oncor Agreement, the Company is obligated to make
payments on a quarterly basis to Oncor equal to a range of four percent (4%) to
two percent (2%) of the Company's annual net sales. During the period from April
1, 1997 to March 31, 1998, the Company was obligated to pay Oncor a minimum
amount equal to $50,000 per quarter. During the period from April 1, 1998 to
March 31, 1999, the Company is obligated to pay Oncor a minimum amount equal to
$25,000 per quarter. Thereafter, there shall be no minimum payment required to
be made by the Company to Oncor in connection with the agreement. In
F-49
<PAGE> 185
ONCORMED, INC.
(A DEVELOPMENT STAGE COMPANY)
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
connection with the Merger, Gene Logic has the option to either maintain the
Oncor Agreement or terminate the Oncor Agreement. In the event Gene Logic
terminates the Oncor Agreement, both the exclusive license and the non-exclusive
license remain in full force and effect under rates to be determined.
Services Agreements with Oncor, Inc. and Affiliates
As of June 30, 1998, the Company owed Oncor and Codon Pharmaceuticals, Inc.
("Codon", a subsidiary of Oncor) $187,341 for charges which include fees payable
under the Oncor License, consulting and equipment. In addition, in June 1994 the
Company converted $715,751 owed to Oncor for license fees previously incurred
and for prior services rendered into a Convertible Subordinated Promissory Note
(the "Note"), which principal is due in June 1999. The Note bears interest at 7
percent and is convertible into common stock at Oncor's option at a conversion
price of $20 per share of common stock. During the fourth quarter of 1994, Oncor
assigned the Note to its wholly-owned subsidiary Oncor Finance, Inc. Interest
expense recorded by the Company relating to the Note was $12,665 for the three
months ended June 30, 1998. The Note will be assumed by Gene Logic upon
consummation of the Merger.
Related party revenues and expenses are as follows:
<TABLE>
<CAPTION>
PERIOD FROM
INCEPTION
SIX MONTHS ENDED (JULY 12, 1993)
JUNE 30, THROUGH
------------------- JUNE 30,
1998 1997 1998
------- -------- ---------------
<S> <C> <C> <C>
Sales to related party........................... $ -- $ -- $ 51,821
Operating expenses to related party:
Laboratory operations.......................... 96,886 136,000 1,133,496
Selling, general and administrative............ 6,963 -- 984,859
Research and development....................... -- 1,039 173,085
</TABLE>
Of the related party expenses for the three months ended June 30, 1998,
laboratory operations consisted of approximately $6,000 for equipment rental
from Codon and $25,000 associated with the Oncor Agreement and selling, general
and administrative was for occupancy costs.
4. DEFERRED REVENUES:
Deferred revenues consist of a prepaid amount of $1 million related to the
Incyte collaboration, prepaid amounts related to laboratory testing and prepaid
fees related to various risk assessment service agreements.
5. STOCKHOLDERS' EQUITY:
Stock Option Plan
As of June 30, 1998, 2,250,000 shares of the Company's common stock had
been reserved for issuance, of which options to purchase 2,030,500 shares had
been granted. After giving effect to the cancellation of stock options, shares
available for issuance were 471,650 as of June 30, 1998. Compensation expense
for employees is recognized for the difference between the exercise price of the
options granted and the fair market value of the Company's common stock.
Compensation expense of $3,175, $9,213, and $245,814 has been recognized for the
three months ended June 30, 1998 and 1997 and for the period from inception
(July 12, 1993) to June 30, 1998, respectively.
F-50
<PAGE> 186
ONCORMED, INC.
(A DEVELOPMENT STAGE COMPANY)
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
Series A Convertible Preferred Stock
Pursuant to a Convertible Preferred Stock Purchase Agreement (the "Stock
Purchase Agreement") an aggregate of 333 shares of the Company's Series A
Preferred Stock was issued to the Preferred Holders. Pursuant to agreements,
dated July 6, 1998, by and between the Company and certain investors (the
"Preferred Holders"), the Preferred Holders have agreed to vote any shares
beneficially owned by them on the record date of the Merger in favor of the
Merger and related transactions, have agreed to convert their respective Series
A Preferred Stock into shares of the Company's Common Stock on or prior to the
effective date of the merger, and have waived certain other rights in connection
with the Company's Series A Preferred Stock. In addition, the Preferred Holders
waived their rights to additional financings under a Series B Convertible
Preferred Stock arrangement. Pursuant to the Company's Preferred Stock Purchase
Agreement, the Preferred Holders received Series A Warrants to purchase an
aggregate of 166,666 shares of the Company's Common Stock at an exercise price
of $8.54 per share. The Series A Warrants expire on February 27, 2001.
Approximately $237,000 of the net proceeds was allocated to the value of the
warrants.
The Company recognizes the difference between the conversion price and the
quoted market price as a dividend which is being recorded over the expected
conversion period. Approximately $353,000 was recorded in the second quarter of
1998.
Dividends in the amount of six percent (6%) per annum will be due quarterly
on the shares of Series A Preferred Stock. The Company may pay such dividends
either in cash or through the issuance of shares of Common Stock. Dividends of
$49,813 were recorded in the second quarter of 1998.
The difference between the carrying amount of the preferred stock and the
redemption amount is being accreted over the period from issuance to expected
conversion.
In connection with the purchase of the Series A Preferred Stock, the
Company and the Preferred Holders entered into a Registration Rights Agreement
Pursuant to the Registration Rights Agreement, the Company filed a registration
statement. Such registration statement was declared effective on April 23, 1998.
6. AGREEMENTS:
On May 18, 1998, the Company and Myriad Genetics, Inc. ("Myriad") settled
all outstanding lawsuits between the parties. As part of the settlement, the
Company granted to Myriad exclusive rights to all current and pending Company
patents in the field of BRCA1 and BRCA2 for reference lab testing in
consideration for certain licensing fees and royalties payable to the Company.
Both parties will retain diagnostic product and therapeutic rights in their
respective patents. Also, as part of this agreement, the Company recorded a
$525,000 gain related to the sale of the breast cancer testing service, which
includes certain customer lists, databases and other intangible assets.
On July 6, 1998, the Company, Gene Logic Inc. and Gene Logic Acquisition
Corp. entered into a definitive Agreement and Plan of Merger and Reorganization
(the "Merger Agreement") whereby the Company will merge with and into Gene Logic
Acquisition Corp. (the "Merger"). Upon consummation of the Merger, the Company
will cease to exist. As part of the proposed Merger, Gene Logic Inc. has
extended to the Company a $2.0 million line of credit (the "Loan") secured by
certain assets for working capital purposes until the Merger is consummated.
Advances under the Loan shall not exceed $500,000 per month. Interest accrues
daily at a per annum rate that Citibank N.A. has announced as its prime lending
rate. As of August 7, 1998, $1 million had been extended to the Company under
the Loan. All outstanding principal and accrued interest on the Loan is due and
payable upon the earliest to occur of (i) March 31, 1999, (ii) in the event the
Merger is not consummated, that date upon which the Company secures alternate
financing of at least $2,000,000 on terms satisfactory to the Company at its
sole discretion, or (iii) the date on which the Company sells or otherwise
disposes of, all or substantially all of the assets or business of the Company,
or any liquidation, merger or other business combination of the Company (other
than the Merger).
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APPENDIX A
AGREEMENT
AND PLAN OF MERGER AND REORGANIZATION
AMONG
GENE LOGIC INC.,
GENE LOGIC ACQUISITION CORP.
AND
ONCORMED, INC.
------------------------
JULY 6, 1998
------------------------
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TABLE OF CONTENTS
<TABLE>
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ARTICLE 1 DESCRIPTION OF TRANSACTION.................................. 1
1.1 Merger of the Company into Merger Sub....................... 1
1.2 Effect of the Merger........................................ 1
1.3 Closing; Effective Time..................................... 1
1.4 Certificate of Incorporation and Bylaws; Directors and
Officers.................................................... 2
1.5 Conversion of Shares........................................ 2
1.6 Closing of the Company's Transfer Books..................... 3
1.7 Exchange of Company Stock Certificates...................... 4
1.8 Stock Options............................................... 5
1.9 Warrants.................................................... 5
1.10 Stock Subject to Conditions................................. 6
1.11 Tax Consequences............................................ 6
1.12 Accounting Consequences..................................... 6
1.13 Further Action.............................................. 6
ARTICLE 2 REPRESENTATIONS AND WARRANTIES OF THE COMPANY............... 6
2.1 Organization; Subsidiaries; Capitalization.................. 6
2.2 SEC Filings; Financial Statements........................... 8
2.3 Absence of Certain Changes or Events........................ 9
2.4 Tax Matters................................................. 9
2.5 Proprietary Assets.......................................... 10
2.6 Contracts................................................... 11
2.7 Employees; Benefit Plans.................................... 13
2.8 Litigation.................................................. 14
2.9 Properties.................................................. 14
2.10 Environmental Matters....................................... 14
2.11 Compliance with Legal Requirements.......................... 15
2.12 Transactions with Affiliates................................ 15
2.13 Vote Required............................................... 15
2.14 Company Action.............................................. 15
2.15 Fairness Opinion............................................ 16
2.16 Financial Advisor........................................... 16
2.17 Enforceability.............................................. 16
2.18 Governmental Consents; No Conflicts......................... 16
2.19 Title to Assets............................................. 17
2.20 Company Preferred Stock Conversion.......................... 17
2.21 No Existing Discussions..................................... 17
2.22 Stock Options............................................... 17
2.23 Waiver...................................................... 17
2.24 Disclosure.................................................. 17
ARTICLE 3 REPRESENTATIONS AND WARRANTIES OF PARENT AND MERGER SUB..... 18
3.1 Organization................................................ 18
3.2 SEC Filings; Financial Statements........................... 20
3.3 Absence of Certain Changes or Events........................ 20
3.4 Tax Matters................................................. 21
3.5 Litigation.................................................. 21
</TABLE>
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3.6 Compliance with Legal Requirements.......................... 22
3.7 Valid Issuance.............................................. 22
3.8 Vote Required............................................... 22
3.9 Parent Action............................................... 22
3.10 Fairness Opinion............................................ 22
3.11 Financial Advisor........................................... 22
3.12 Enforceability.............................................. 22
3.13 Governmental Consent; No Conflicts.......................... 23
3.14 Disclosure.................................................. 23
3.15 Interim Operations of Merger Sub............................ 24
3.16 Parent Contracts............................................ 24
ARTICLE 4 COVENANTS; ADDITIONAL AGREEMENTS............................ 25
4.1 Parent Access and Investigation............................. 25
4.2 Company Access and Investigation............................ 25
4.3 Confidentiality............................................. 25
4.4 Conduct of the Company's Business........................... 25
4.5 Conduct by Parent........................................... 28
4.6 Notification................................................ 28
4.7 No Shop..................................................... 28
4.8 Registration Statement; Prospectus/Joint Proxy Statement.... 29
4.9 Company Stockholders' Meeting............................... 30
4.10 Parent Stockholders' Meeting................................ 31
4.11 Regulatory Approvals........................................ 32
4.12 Additional Agreements....................................... 32
4.13 Disclosure.................................................. 33
4.14 Letter of the Company's Accountants......................... 33
4.15 Company Affiliate Agreements................................ 33
4.16 Tax Matters................................................. 33
4.17 Employment or Consulting Agreement and Noncompetition
Agreement................................................... 33
4.18 Employee Benefits........................................... 33
4.19 Indemnification............................................. 34
4.20 Nasdaq Listing.............................................. 35
4.21 Blue Sky Laws............................................... 35
4.22 Resignation of Officers and Directors....................... 35
ARTICLE 5 CONDITIONS PRECEDENT TO OBLIGATIONS OF PARENT AND MERGER
SUB......................................................... 35
5.1 Representations and Warranties Accurate..................... 35
5.2 Compliance With Covenants................................... 36
5.3 No Material Adverse Effect.................................. 36
5.4 Effectiveness of Registration Statement..................... 36
5.5 Company Stockholder Approval................................ 36
5.6 Parent Stockholder Approval................................. 36
5.7 Agreements and Documents.................................... 36
5.8 Absence of Restraint........................................ 37
5.9 No Governmental Litigation.................................. 37
5.10 Other Required Consents and Approvals....................... 37
5.11 Stock Options............................................... 37
ARTICLE 6 CONDITIONS PRECEDENT TO THE COMPANY'S OBLIGATIONS........... 37
</TABLE>
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<TABLE>
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<C> <S> <C>
6.1 Representations and Warranties Accurate..................... 38
6.2 Compliance With Covenants................................... 38
6.3 No Material Adverse Effect.................................. 38
6.4 Effectiveness of Registration Statement..................... 38
6.5 Company Stockholder Approval................................ 38
6.6 Parent Stockholder Approval................................. 38
6.7 Agreements and Documents.................................... 38
6.8 Absence of Restraint........................................ 39
6.9 Listing..................................................... 39
6.10 Closing Price............................................... 39
6.11 No Governmental Litigation.................................. 39
ARTICLE 7 TERMINATION OF AGREEMENT.................................... 39
7.1 Termination................................................. 39
7.2 Effect of Termination....................................... 41
7.3 Fees and Expenses........................................... 41
ARTICLE 8 MISCELLANEOUS............................................... 41
8.1 Amendment................................................... 41
8.2 Waiver...................................................... 41
8.3 No Survival of Representations and Warranties............... 42
8.4 Entire Agreement; Counterparts.............................. 42
8.5 Applicable Law; Jurisdiction................................ 42
8.6 Assignability............................................... 42
8.7 Notices..................................................... 42
8.8 Cooperation................................................. 43
8.9 Construction................................................ 44
</TABLE>
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EXHIBITS
<TABLE>
<S> <C>
Exhibit A Certain Definitions
Exhibit B [reserved]
Exhibit C Directors and Officers of Surviving Corporation
Exhibit D Form of Stock Option Agreement
Exhibit E Form of Company Proprietary Information and Assignment
Agreement
Exhibit F Form of Company Affiliate Agreement
Exhibit G List of Persons to Enter into Employment or Consulting and
Noncompetition Agreement
</TABLE>
<PAGE> 192
AGREEMENT AND PLAN OF MERGER AND REORGANIZATION
THIS AGREEMENT AND PLAN OF MERGER AND REORGANIZATION ("Agreement") is made
and entered into as of July 6, 1998, by and among GENE LOGIC INC., a Delaware
corporation ("Parent"); GENE LOGIC ACQUISITION CORP., a Delaware corporation and
a wholly-owned subsidiary of Parent ("Merger Sub"); and ONCORMED, INC., a
Delaware corporation (the "Company"). Certain capitalized terms used in this
Agreement are defined in Exhibit A.
RECITALS
A. Parent, Merger Sub and the Company intend to effect a merger of the
Company with and into Merger Sub (the "Merger") in accordance with this
Agreement and the Delaware General Corporation Law (the "DGCL"). Upon
consummation of the Merger, the Company will cease to exist, and Merger Sub will
remain a wholly-owned subsidiary of Parent.
B. This Agreement and the Merger have been unanimously approved by the
respective Boards of Directors of Parent, Merger Sub and the Company.
C. Pursuant to the Merger, among other things, the outstanding shares of
Common Stock of the Company will be converted into shares of Common Stock of the
Parent at the rate provided herein.
D. It is intended that the Merger qualify as a tax-free reorganization
within the meaning of Section 368(a) of the Internal Revenue Code of 1986, as
amended (the "Code"). For financial reporting purposes, it is intended that the
Merger be accounted for as a "purchase."
AGREEMENT
Parent, Merger Sub and the Company, in consideration of the foregoing and
the mutual covenants and agreements herein contained, and intending to be
legally bound, agree as follows:
ARTICLE 1
DESCRIPTION OF TRANSACTION
1.1 MERGER OF THE COMPANY INTO MERGER SUB. Upon the terms and subject to
the conditions set forth in this Agreement, at the Effective Time (as defined in
Section 1.3), the Company shall be merged with and into Merger Sub and the
separate existence of the Company shall cease. Merger Sub will be the surviving
corporation in the Merger (the "Surviving Corporation") and a wholly-owned
subsidiary of Parent.
1.2 EFFECT OF THE MERGER. The Merger shall have the effects set forth in
this Agreement and in the applicable provisions of the DGCL.
1.3 CLOSING; EFFECTIVE TIME. The consummation of the transactions
contemplated by this Agreement (the "Closing") shall take place at the offices
of Cooley Godward LLP, 4365 Executive Drive, Suite 1100, San Diego, California
92121, on the second business day following the date as of which each of the
conditions set forth in Articles 5 and 6 has been fulfilled or waived or on such
other date as may be mutually agreed upon by Parent and the Company (the
"Closing Date"). Contemporaneously with or as soon as practicable after the
Closing, a properly executed certificate of merger conforming to the
requirements of the DGCL (the "Certificate of Merger") shall be filed with the
office of the Secretary of State of the State of Delaware. The Merger shall
become effective at the time the Certificate of Merger is filed with the office
of the Secretary of State of the State of Delaware or at such later time as may
be specified in the Certificate of Merger (the "Effective Time"), which shall be
no later than the second business day following the date on which each of the
conditions set forth in Articles 5 and 6 has been fulfilled or waived or on such
other date as may be mutually agreed upon by Parent and the Company.
1.4 CERTIFICATE OF INCORPORATION AND BYLAWS; DIRECTORS AND OFFICERS. The
Certificate of Incorporation of Merger Sub shall be the Certificate of
Incorporation of the Surviving Corporation as of the Effective Time.
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The Bylaws of Merger Sub as in effect immediately prior to the Effective Time
shall be the Bylaws of the Surviving Corporation as of the Effective Time. The
directors and officers of the Surviving Corporation immediately after the
Effective Time shall be the respective individuals set forth on Exhibit C.
1.5 CONVERSION OF SHARES.
(a) At the Effective Time, by virtue of the Merger (and without any action
on the part of Parent, Merger Sub, the Company or any stockholder of the Company
(the "Company Stockholders")):
(i) each share of the common stock, $.01 par value per share, of the
Company ("Company Common Stock") and each share of the 6% Series A
Convertible Preferred Stock, $.01 par value per share, of the Company
("Company Preferred Stock") then held by the Company or any subsidiary of
the Company (or held in the Company's treasury) shall be canceled and
retired and shall cease to exist, and no consideration shall be delivered
in exchange therefor;
(ii) each share of Company Common Stock and Company Preferred Stock
then held by Parent or Merger Sub shall be canceled and retired and shall
cease to exist, and no consideration shall be delivered in exchange
therefor;
(iii) except as provided in clauses (i) and (ii) above and subject to
Sections 1.5(c) and 1.5(d), each share of Company Common Stock then
outstanding shall be converted into the right to receive (A) one share of
the common stock, $.01 par value per share, of Parent ("Parent Common
Stock"), multiplied by (B) the Exchange Ratio (as defined in Section
1.5(b)(ii)); and
(iv) each share of the common stock, par value $.01 per share, of
Merger Sub then outstanding shall remain outstanding.
(b) For purposes of this Agreement:
(i) The term "Total Merger Shares" shall mean the whole number of
shares of Parent Common Stock equal to (A) $33,221,235, divided by (B)
$6.85, which shall initially equal 4,849,815; provided, however, that in
the event the average closing price of the Parent's Common Stock as
reported on the Nasdaq National Market System (the "Nasdaq NMS") for the
fifteen (15) trading days ending the second day prior to the day of the
Parent Stockholders' Meeting (as defined in Section 4.10(a)) called for the
purpose of approving the Merger (the "Closing Price") is more than $7.88,
then Total Merger Shares shall equal (x) $38,204,420, divided by (y) the
Closing Price.
(ii) The term "Exchange Ratio" shall mean a fraction (as may be
adjusted in accordance with Section 1.5(c)) equal to (A) the Total Merger
Shares divided by (B) the number of Outstanding Shares (as defined in
Section 1.5(b)(iii)) outstanding immediately prior to the Effective Time.
(iii) The term "Outstanding Shares" shall mean, at the Effective Time,
the sum of (A) the total number of outstanding shares of Company Common
Stock, and (B) the total number of shares of Company Common Stock into
which all outstanding Company Preferred Stock is then convertible in
accordance with the Company Certificate of Incorporation.
(c) If, between the date of this Agreement and the Effective Time, the
outstanding shares of Company Common Stock, Company Preferred Stock or Parent
Common Stock are changed into a different number or class of shares by reason of
any stock, cash or property dividend or distribution, stock split, reverse stock
split, reclassification, recapitalization, or similar transaction, then the
Exchange Ratio shall be appropriately adjusted.
(d) No fractional shares of Parent Common Stock shall be issued in
connection with the Merger, and no certificates or scrip for any such fractional
shares shall be issued. In lieu of such fractional shares, any holder of Company
Common Stock or Company Preferred Stock who would otherwise be entitled to
receive a fraction of a share of Parent Common Stock (after aggregating all
fractional shares of Parent Common Stock issuable to such holder) shall, upon
surrender of such holder's Company Stock Certificate(s) (as defined in Section
1.6), be paid in cash the dollar amount (rounded to the nearest whole cent),
without interest, determined by multiplying such fraction by the closing sales
price of a share of Parent Common Stock as
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quoted on the Nasdaq NMS on the Closing Date (and if such day is not a trading
day, then the trading day immediately preceding the Closing Date).
1.6 CLOSING OF THE COMPANY'S TRANSFER BOOKS. At the Effective Time (a)
all shares of Company Common Stock and Company Preferred Stock outstanding
immediately prior to the Effective Time shall automatically be canceled and
retired and shall cease to exist, and holders of certificates representing
shares of Company Common Stock or Company Preferred Stock shall cease to have
any rights as stockholders of the Company; and (b) the stock transfer books of
the Company shall be closed with respect to all shares of Company Common Stock
and Company Preferred Stock outstanding immediately prior to the Effective Time.
No further transfer of any such shares of Company Common Stock or Company
Preferred Stock shall be made on such stock transfer books after the Effective
Time. If, after the Effective Time, a valid certificate previously representing
any of such shares of Company Common Stock or Company Preferred Stock (a
"Company Stock Certificate") is presented to the Exchange Agent (as defined in
1.7(a)) or to the Surviving Corporation or Parent, such Company Stock
Certificate shall be canceled and exchanged as provided in Section 1.7.
1.7 EXCHANGE OF COMPANY STOCK CERTIFICATES.
(a) Prior to the Closing Date, Parent shall select ChaseMellon Shareholder
Services or another reputable bank or trust company to act as exchange agent in
the Merger (the "Exchange Agent"). Promptly after the Effective Time, Parent
shall deposit with the Exchange Agent (i) certificates representing the number
of shares of Parent Common Stock to be issued to the Company Stockholders in the
Merger and (ii) cash sufficient to make payments in lieu of fractional shares in
accordance with Section 1.5(d). The shares of Parent Common Stock and cash
amounts so deposited with the Exchange Agent, together with any dividends or
distributions received by the Exchange Agent with respect to such shares, are
referred to collectively herein as the "Exchange Fund."
(b) As soon as practicable after the Effective Time, the Exchange Agent
will mail to the registered holders of Company Stock Certificates (i) a letter
of transmittal in customary form and containing such provisions as Parent may
reasonably specify (including a provision confirming that delivery of Company
Stock Certificates shall be effected, and risk of loss and title to Company
Stock Certificates shall pass, only upon delivery of such Company Stock
Certificates to the Exchange Agent), and (ii) instructions for use in effecting
the surrender of Company Stock Certificates in exchange for certificates
representing Parent Common Stock. Subject to Section 1.5(d), upon surrender of a
Company Stock Certificate to the Exchange Agent for exchange, together with a
duly executed letter of transmittal and such other documents as may be
reasonably required by the Exchange Agent, (i) the holder of such Company Stock
Certificate shall be entitled to receive in exchange therefor a certificate
representing the number of whole shares of Parent Common Stock that such holder
has the right to receive pursuant to the provisions of this Article 1, and (ii)
the Company Stock Certificate so surrendered shall be canceled. Until
surrendered as contemplated by this Section 1.7, each Company Stock Certificate
shall be deemed, from and after the Effective Time, to represent only the right
to receive upon such surrender a certificate representing shares of Parent
Common Stock (and cash in lieu of any fractional share of Parent Common Stock)
as contemplated by this Article 1. If any Company Stock Certificate shall have
been lost, stolen or destroyed, Parent may, in its discretion and as a condition
precedent to the issuance of any certificate representing Parent Common Stock,
require the owner of such lost, stolen or destroyed Company Stock Certificate to
provide an appropriate affidavit and to deliver a bond (in such sum as Parent
may reasonably direct) as indemnity against any claim that may be made against
the Exchange Agent, Parent or the Surviving Corporation with respect to such
Company Stock Certificate.
(c) No dividends or other distributions declared or made with respect to
Parent Common Stock with a record date after the Effective Time shall be paid to
the holder of any unsurrendered Company Stock Certificate with respect to the
shares of Parent Common Stock represented thereby, and no cash payment in lieu
of any fractional share shall be paid to any such holder, until such holder
surrenders such Company Stock Certificate in accordance with this Section 1.7
(at which time such holder shall be entitled to receive all such dividends and
distributions and such cash payment).
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(d) Any portion of the Exchange Fund that remains undistributed to former
stockholders of the Company as of the date 270 days after the Effective Time
shall be delivered to Parent upon demand, and any holders of Company Common
Stock who have not theretofore surrendered their Company Stock Certificates in
accordance with this Section 1.7 shall thereafter look only to Parent for
payment of their claims for Parent Common Stock, cash in lieu of fractional
shares of Parent Common Stock and any dividends or distributions with respect to
Parent Common Stock.
(e) Neither Parent nor the Surviving Corporation shall be liable to any
holder or former holder of shares of Company Common Stock, Company Preferred
Stock or Parent Common Stock with respect to any shares (or dividends or
distributions with respect thereto) or cash amounts comprising the Exchange Fund
which are delivered to a public official pursuant to any applicable abandoned
property, escheat or similar law.
1.8 STOCK OPTIONS. Parent shall not assume any option to purchase capital
stock of the Company outstanding at the Effective Time under any stock option
plan or agreement of the Company. The Company has delivered to Parent a list of
all options to purchase capital stock of the Company outstanding under stock
option plans and agreements of the Company (the "Company Options"). Under the
terms (as in effect as of the date hereof) of each stock option plan under which
any Company Option was issued and each stock option agreement by which any
Company Option is evidenced, as applicable, in connection with the Merger, all
outstanding Company Options shall automatically accelerate and become fully
exercisable for all of the shares of Company Common Stock subject to such
Company Options and, to the extent such Company Options are not exercised prior
to the Effective Time, shall terminate and cease to remain outstanding
immediately after the Effective Time. The Company shall take all action that may
reasonably be necessary (under the stock option plans pursuant to which Company
Options are outstanding and otherwise) to effectuate the provisions of this
Section 1.8.
1.9 WARRANTS. At the Effective Time, Parent shall assume each warrant to
purchase Company Common Stock then outstanding as set forth on a list delivered
to Parent (the "Company Warrants") in accordance with the terms (as in effect as
of the date hereof) of such Company Warrants. From and after the Effective Time,
(a) each Company Warrant assumed by Parent may be exercised solely for shares of
Parent Common Stock, (b) the number of shares of Parent Common Stock subject to
each Company Warrant shall be equal to the number of shares of Company Common
Stock subject to such Company Warrant immediately prior to the Effective Time
multiplied by the Exchange Ratio, rounding down to the nearest whole share (with
cash, less the applicable exercise price, being payable for any fraction of a
share), (c) the per share exercise price under each such Company Warrant shall
be equal to the per share exercise price under such Company Warrant divided by
the Exchange Ratio, rounding up to the nearest cent and (d) any restriction on
the exercise of any Company Warrant shall continue in full force and effect and
the term, exercisability and other provisions of such Company Warrant shall
otherwise remain unchanged. The Company shall take all action that may be
necessary (under the Company Warrants and otherwise) to effectuate the
provisions of this Section 1.9 and to ensure that, from and after the Effective
Time, holders of Company Warrants have no rights with respect thereto other than
those specifically provided herein.
1.10 STOCK SUBJECT TO CONDITIONS. If any shares of Company Common Stock
or Company Preferred Stock outstanding immediately prior to the Effective Time
are unvested or are subject to a repurchase option, risk of forfeiture or other
condition under any applicable stock purchase agreement, restriction agreement
or other agreement with the Company, then (unless such condition terminates by
virtue of the Merger pursuant to the express terms of such agreement) the shares
of Parent Common Stock issued in exchange for such shares of Company Common
Stock or Company Preferred Stock will also be unvested or subject to the same
repurchase option, risk of forfeiture or other condition, and the certificates
evidencing such shares of Parent Common Stock may accordingly be marked with
appropriate legends.
1.11 TAX CONSEQUENCES. For federal income tax purposes, the Merger is
intended to constitute a tax-free reorganization within the meaning of Section
368(a) of the Code. The parties to this Agreement intend this Agreement to be
treated as a "plan of reorganization" within the meaning of Sections 1.368-2(g)
and 1.368-3(a) of the United States Treasury Regulations.
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1.12 ACCOUNTING CONSEQUENCES. For financial reporting purposes, the
Merger is intended to be accounted for as a "purchase."
1.13 FURTHER ACTION. If at any time after the Effective Time any further
action is determined by Parent to be reasonably necessary or desirable to carry
out the purposes of this Agreement or to vest the Surviving Corporation with the
full right, title and possession of and to all assets, property, rights,
privileges, immunities, powers and franchises of Merger Sub and the Company, the
officers and directors of the Surviving Corporation shall be fully authorized
(in the name of Merger Sub, in the name of the Company and otherwise) to take
such action.
ARTICLE 2
REPRESENTATIONS AND WARRANTIES OF THE COMPANY
The Company represents and warrants to Parent and Merger Sub that, except
as set forth in the disclosure schedule delivered by the Company to Parent dated
and signed as of the date of this Agreement by the President of the Company (the
"Company Disclosure Schedule"):
2.1 ORGANIZATION; SUBSIDIARIES; CAPITALIZATION.
(a) The Company is a corporation duly organized, validly existing and in
good standing under the laws of the State of Delaware. The Company has all
requisite corporate power and authority to (i) own and use its assets in the
manner in which its assets are currently owned and used, (ii) to carry on its
business as presently conducted, and (iii) to perform all of its obligations
under all Company Contracts. The Company does not own or hold, directly or
indirectly, any debt or equity securities of, or have any other interest in, any
Entity, and the Company has not entered into any Contract or otherwise become
obligated to acquire any such interest.
(b) The Company is qualified to do business as a foreign corporation and is
in good standing under the laws of all jurisdictions where the nature of its
business requires such qualification and where the failure to be so qualified
would have a Material Adverse Effect on the Company.
(c) As of the date of this Agreement, the authorized capital stock of the
Company consists of: 40,000,000 shares of Company Common Stock, par value $.01
per share, of which, 7,887,300 shares are issued and outstanding; and 2,000,000
shares of preferred stock, par value $.01 per share, of which 333 shares have
been designated as 6% Series A Convertible Preferred Stock, 333 of which are
issued and outstanding. All the issued and outstanding shares of Company Common
Stock and Company Preferred Stock are validly issued, fully paid and
nonassessable and were issued in compliance with all state and federal
securities laws and all requirements set forth in applicable Contracts. None of
the outstanding shares of Company Common Stock or Company Preferred Stock is
entitled or subject to (i) any preemptive right, right of participation, right
of maintenance or any similar right, or (ii) any right of first refusal in favor
of any Person. There is no Company Contract relating to the voting or
registration of, or restricting any Person from purchasing, selling, pledging or
otherwise disposing of (or granting any option or similar right with respect
to), any shares of Company Common Stock or Company Preferred Stock.
(d) As of the date of this Agreement, the Company has outstanding Company
Options to purchase a total of 1,581,042 shares of Company Common Stock (minus
any Company Options exercised on the date hereof), and outstanding Company
Warrants to purchase a total of 1,088,896 shares of Company Common Stock (minus
any Company Warrants exercised on the date hereof). Part 2.1(d) of the Company
Disclosure Schedule sets forth, as of the date of this Agreement, with respect
to the Company Options: (i) the name of each optionee; (ii) the number of shares
of Company Common Stock subject to each Company Option; (iii) the date of grant;
(iv) the exercise price; (v) the applicable vesting schedule(s); and (vi) the
particular plan, if any, pursuant to which such Company Option was granted. Part
2.1(d) of the Company Disclosure Schedule sets forth, as of the date of this
Agreement, each option plan and agreement under which the Company Options have
been granted, and the Company has delivered to Parent complete and accurate
copies of all such plans. Part 2.1(d) of the Company Disclosure Schedule sets
forth, as of the date of this Agreement,
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with respect to the Company Warrants: (i) the number of shares of Company Common
Stock issuable upon exercise; (ii) the exercise price per share; and (iii) the
expiration date of each Company Warrant. All outstanding Company Options have
been issued under and are evidenced by a stock option agreement identical to
that form of stock option agreement attached hereto as Exhibit D, except with
respect solely to the name of the optionee, the grant date, the number of shares
subject to the Company Option, the vesting schedule and the exercise price.
(e) Except as set forth above, as of the date of this Agreement, (i) there
are no shares of capital stock of the Company authorized, issued or outstanding,
(ii) there are no outstanding subscriptions, options, warrants, stock
appreciation right plans, calls, rights, convertible securities, stockholder
rights plans (or similar plans commonly referred to as "poison pills") or other
agreements or commitments of any character relating to issued or unissued
capital stock or other securities of the Company, or obligating the Company or,
to the Company's knowledge, any other Person, to issue, transfer or sell any
shares of the capital stock or other securities of the Company, (iii) there are
no other outstanding securities convertible into, exchangeable for or evidencing
the right to subscribe for any shares of the capital stock or other securities
of the Company, and (iv) there is no condition or circumstance that may give
rise to or provide a basis for the assertion of a claim by any Person to the
effect that such Person is entitled to acquire or receive any shares of capital
stock or other securities of the Company.
(f) The Company does not own any Parent Common Stock.
(g) Complete and accurate copies of the Certificate of Incorporation,
including any Certificate of Designation (collectively the "Company Certificate
of Incorporation") and Bylaws (or comparable charter documents), each as amended
to date, of the Company are filed as exhibits to the Company SEC Documents (as
defined in Section 2.2(a)) and have been delivered to Parent.
2.2 SEC FILINGS; FINANCIAL STATEMENTS.
(a) The Company has delivered to Parent a complete and accurate copy of
each report, schedule, registration statement and definitive proxy statement
filed by the Company with the Securities and Exchange Commission ("SEC") on or
after December 31, 1995 (the "Company SEC Documents"), which are all the forms,
reports and documents required to be filed by the Company with the SEC since
December 31, 1995. As of the time it was filed with the SEC (or, if amended or
superseded by a filing prior to the date of this Agreement, then on the date of
such filing): (i) each of the Company SEC Documents complied in all material
respects with the published requirements of the Securities Act or the Exchange
Act, as the case may be, and (ii) none of the Company SEC Documents contained
any untrue statement of a material fact or omitted to state a material fact
required to be stated therein or necessary in order to make the statements
therein, in light of the circumstances under which they were made, not
misleading.
(b) Each of the financial statements (including, in each case, any related
notes thereto) contained in the Company SEC Documents and the set of the
Company's unaudited interim financial statements as of and for the three-month
period ended March 31, 1998 including the Company's unaudited balance sheet as
of March 31, 1998 (the "March 1998 Balance Sheet") that are attached to the
Company Disclosure Schedule (collectively, the "Company Financial Statements")
(i) complied as to form in all material respects with the published rules and
regulations of the SEC applicable thereto, (ii) was prepared in accordance with
GAAP applied on a consistent basis throughout the periods involved (except as
may be indicated in the notes thereto and except that the unaudited interim
financial statements included in the Company Financial Statements are subject to
normal year-end audit adjustments which were not or are not expected to be
material in amount and do not contain footnotes), and (iii) fairly presented the
financial position of the Company as at the respective dates thereof and the
results of its operations and cash flows for the periods indicated.
(c) The unaudited bi-weekly financial statements to be delivered to Parent
pursuant to Section 4.4(a)(v) will be prepared in a manner consistent with the
basis on which the Company Financial Statements were prepared and will fairly
present the financial position of the Company as at the respective dates thereof
and the results of operations and cash flows of the Company for the periods
indicated, except
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that the unaudited bi-weekly financial statements will be subject to normal
year-end audit adjustments and will not contain footnotes.
(d) The Company has previously furnished to Parent a complete and accurate
copy of any amendments or modifications that have not yet been filed with the
SEC to agreements, documents or other instruments that have been filed by the
Company with the SEC pursuant to the Securities Act or the Exchange Act.
(e) The Company has no Liabilities, except for (i) any Liabilities which
are set forth in the March 1998 Balance Sheet or disclosed in the notes included
in the Company Financial Statements, (ii) any Liabilities which were incurred
after March 31, 1998 in the ordinary course of business consistent with past
practice and do not exceed in the aggregate $50,000, or (iii) other Liabilities
which, individually or in the aggregate, have not had and would not reasonably
be expected to have a Material Adverse Effect on the Company.
2.3 ABSENCE OF CERTAIN CHANGES OR EVENTS. Since December 31, 1997, there
has not been (a) any change, or any development or combination of changes or
developments that has had or would reasonably be expected to have a Material
Adverse Effect on the Company, (b) any damage, destruction or loss of any of the
assets of the Company, whether or not covered by insurance, that has had or
would reasonably be expected to have a Material Adverse Effect on the Company,
(c) any transaction, commitment, dispute or other event or condition (financial
or otherwise) of any character (whether or not in the ordinary course of
business) which would be prohibited by Section 4.4(b)(ii), (vi), (viii), (ix),
(x), (xi), (xii) or (xvi) if it were to occur or be effected between the date of
this Agreement and the Effective Time or (d) any declaration, accrual, set aside
or payment of any dividend or distribution by the Company.
2.4 TAX MATTERS.
(a) All Tax Returns required to be filed by or on behalf of the Company
with any Governmental Authority on or before the Closing Date (i) have been or
will be filed on or before the applicable due date (including any extensions of
such due date that expire prior to the Closing Date), and (ii) have been, or
will be when filed, prepared in all material respects in compliance with all
applicable Legal Requirements. All amounts shown on the Company's Tax Returns to
be due on or before the Closing Date have been or will be paid on or before the
Closing Date except for amounts which, individually or in the aggregate, could
not reasonably be expected to have a Material Adverse Effect on the Company.
(b) To the knowledge of the Company, the Company Financial Statements and
the financial statements to be delivered to the Company pursuant to Section
4.4(a)(v) fully accrue all Taxes with respect to all periods through the dates
thereof in accordance with generally accepted accounting principles. The Company
will establish, in the ordinary course of business and consistent with its past
practices, reserves reasonably adequate for the payment of all Taxes through the
Closing Date, except for amounts which, individually or in the aggregate, could
not reasonably be expected to have a Material Adverse Effect on the Company.
(c) No claim or Legal Proceeding is pending or, to the knowledge of the
Company, has been threatened against or with respect to the Company in respect
of any Tax. There are no unsatisfied liabilities for material Taxes (including
liabilities for interest, additions to tax and penalties thereon and related
expenses) with respect to any notice of deficiency or similar document received
by the Company with respect to any material Tax (other than liabilities for
Taxes asserted under any such notice of deficiency or similar document which are
being contested in good faith by the Company and with respect to which adequate
reserves for payment have been established). There are no liens for material
Taxes upon any of the assets of the Company except liens for current Taxes not
yet due and payable. The Company has not entered into or become bound by any
agreement or consent pursuant to Section 341(f) of the Code. The Company has not
been, and will not be, required to include any adjustment in taxable income for
any tax period (or portion thereof) pursuant to Section 481 or 263A of the Code
or any comparable provision under state or foreign Tax laws as a result of
transactions or events occurring, or accounting methods employed, prior to the
Closing.
(d) To the knowledge of the Company, there is no agreement, plan,
arrangement or other Contract covering any employee or independent contractor or
former employee or independent contractor of the Company that, considered
individually or considered collectively with any other such Contracts, will, or
could reasonably be expected to, give rise directly or indirectly to the payment
of any amount that would not be
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deductible pursuant to Section 280G or Section 162 of the Code. The Company is
not a party to or bound by any tax indemnity agreement, tax sharing agreement,
tax allocation agreement or similar Contract.
2.5 PROPRIETARY ASSETS.
(a) The Company owns, or licenses or otherwise possess legally enforceable
rights to use, all Proprietary Assets that are owned by the Company, or licensed
to or otherwise used in the Company's business as currently conducted (the
"Company Proprietary Assets"), except to the extent that the failure to have
such rights has not had, and would not reasonably be expected to have, a
Material Adverse Effect on the Company.
(b) Part 2.5(b) of the Company Disclosure Schedule lists (i) all patents
and patent applications and all registered and unregistered trademarks, trade
names, service marks and copyrights, and all applications with respect therefor,
included in the Company Proprietary Assets, including the jurisdictions in which
each such Company Proprietary Asset has been issued or registered or in which
any application for such issuance and registration has been filed, (ii) all
licenses, sublicenses and other agreements to which the Company is a party and
pursuant to which any Person is authorized to use any Company Proprietary Asset,
(iii) all licenses, sublicenses and other agreements to which the Company is a
party and pursuant to which it is authorized to use any Proprietary Asset held
or used by a third party (other than "shrink wrap" licenses with respect to
commercially available software programs costing less than $10,000) ("Third
Party Proprietary Assets"), and (iv) a description of any Company Proprietary
Asset not disclosed under clauses (i), (ii) and (iii) above.
(c) To the Company's knowledge, there is no unauthorized use, disclosure,
infringement or misappropriation of any Company Proprietary Asset, or any Third
Party Proprietary Asset to the extent licensed by or through the Company by any
third party, including any employee or former employee of the Company, except
such as would not have a Material Adverse Effect on the Company. The Company has
not entered into any agreement to indemnify any other Person against any charge
of infringement of any Company Proprietary Asset.
(d) The Company is not, and will not be as a result of the execution and
delivery of this Agreement or the performance of its obligations under this
Agreement, in breach of any license, sublicense or other agreement relating to
any Company Proprietary Asset or Third Party Proprietary Asset, except for such
breaches that would not have a Material Adverse Effect on the Company.
(e) All patents, registered trademarks, registered service marks or
copyright registrations owned by the Company are valid and subsisting. Except
for actions which would not reasonably be expected to have a Material Adverse
Effect on the Company, the Company (i) is not a party to any Legal Proceeding
which involves a claim of infringement of any Third Party Proprietary Asset and
(ii) has not brought any Legal Proceeding for infringement of any Company
Proprietary Asset or breach of any license or agreement involving a Company
Proprietary Asset against any third party, which action is continuing. To the
Company's knowledge, the manufacture, marketing, licensing or sale of any
Company Proprietary Asset or products does not infringe any Third Party
Proprietary Asset.
(f) The Company has secured agreements with all consultants and employees
who prior to the date of this Agreement contributed to the creation or
development of any Company Proprietary Asset of the rights to such contributions
that the Company does not already own by operation of law in the form attached
hereto as Exhibit E.
(g) The Company has taken all reasonable and appropriate steps to protect
and preserve the confidentiality of all Company Proprietary Assets not otherwise
protected by patents, patent applications or copyrights ("Confidential
Information"). All use, disclosure or appropriation of Confidential Information
owned by the Company by or to any third party has been pursuant to the terms of
a written agreement between the Company and such third party, and all use,
disclosure or appropriation of Confidential Information not owned by the Company
has been pursuant to the terms of a written agreement between the Company and
the owner of such Confidential Information, or is otherwise lawful.
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2.6 CONTRACTS.
(a) Except as identified as an exhibit to the Company's Annual Report on
Form 10-K for the year ended December 31, 1997 or as an exhibit to the Company's
Quarterly Report on Form 10-Q for the quarter ended March 31, 1998, the Company
is not a party to, or bound by, any Material Company Contract. For purposes of
this Agreement, a "Material Company Contract" shall be deemed to be any Contract
filed as an exhibit to the Company's Annual Report on Form 10-K for the year
ended December 31, 1997 or as an exhibit to the Company's Quarterly Report on
Form 10-Q for the quarter ended March 31, 1998, and any Contract:
(i) relating to the employment or engagement of, or the performance of
services by, any employee, consultant or independent contractor in excess
of $75,000 per year;
(ii) restricting in any manner the Company's right or ability to (A)
compete with any other Person, (B) acquire or transfer any product,
technology or other asset from or to any other Person, or (C) develop or
distribute any Company Proprietary Asset;
(iii) that (A) provides for the receipt or expenditure by the Company
of cash or other consideration in excess of $25,000; (B) relates to the
performance of services by or on behalf of the Company having a value in
excess of $25,000; (C) was entered into outside the ordinary course of
business; or (D) is material and cannot be terminated by the Company
without penalty with 30 days notice or less;
(iv) relating to the acquisition, issuance or transfer of any
securities;
(v) creating or relating to the creation of any Encumbrance with
respect to any of the Company Proprietary Assets or other assets having a
value in excess of $25,000;
(vi) involving or incorporating any guaranty, pledge, performance,
completion bond, indemnity or contribution or surety arrangement; or
(vii) creating or relating to any partnership, joint venture, research
or development collaboration, license agreement, or any other Contract by
which the Company is obligated or has the right to share any revenues,
profits, losses, costs or Liabilities.
(b) Except as would not, individually or in the aggregate, have a Material
Adverse Effect on the Company, all Material Company Contracts are in full force
and effect and are enforceable against the Company and, to the Company's
knowledge, are enforceable against the other parties thereto, except as
enforcement thereof may be limited by bankruptcy, insolvency, reorganization,
moratorium and other laws of general application affecting enforcement of
creditors' rights generally, as limited by laws relating to the availability of
specific performance, injunctive relief, or by general equitable principles, and
to the extent any indemnification or contribution provisions thereof may be
limited by applicable federal or state securities laws. The Company has not
breached, nor has the Company received in writing any claim or threat that it
has breached, in any material respect, and no default has occurred under any of
the Material Company Contracts and, to the Company's knowledge, (i) none of the
other contracting parties has violated or breached, and no default has occurred
under any of the Material Company Contracts, and (ii) other than the
transactions contemplated hereby, no event has occurred, and no circumstance or
condition exists which with the giving of notice or the lapse of time, or both,
will, or could reasonably be expected to, result in a violation, breach or
default under any Material Company Contract or give any Person the right to
cancel, terminate or modify any Material Company Contract. To the Company's
knowledge, the Company's relationship with each other party under a Material
Company Contract, including, without limitation, Rhone-Poulenc Rorer,
Schering-Plough, Merck and Onyx Pharmaceuticals, Inc., is good. To the Company's
knowledge, no party to a Material Company Contract currently in effect has given
notice to the Company of intent to terminate such Material Company Contract in a
way that would have a Material Adverse Effect on the Company. The Company has
provided to Parent or Parent's counsel true and complete copies of each of the
Material Company Contracts. Consummation of the transactions contemplated by
this Agreement and each other agreement to be entered into by the Company in
connection herewith will not (and will not give any Person a right to) cancel,
terminate or modify any material rights of, or accelerate or increase any
material obligation of, the Company under any Material Company Contract.
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(c) The Company possesses all material Governmental Authorizations which
are required in order to operate its business as presently conducted, and the
Company is in compliance in all material respects with all such Governmental
Authorizations. Each such Governmental Authorization is identified in Part
2.6(c) of the Company Disclosure Schedule. Each such Governmental Authorization
is valid and in full force and effect and will remain so until consummation of
the transactions contemplated by this Agreement, except where the failure to
comply would not have a Material Adverse Effect on the Company.
(d) Part 2.6(d) of the Company Disclosure Schedule sets forth a list of all
claims made or, to the Company's knowledge, threatened against the Company under
each Material Company Contract presently or heretofore in effect to the extent
such claims, individually or in the aggregate, have had or would reasonably be
expected to have a Material Adverse Effect on the Company.
2.7 EMPLOYEES; BENEFIT PLANS.
(a) Part 2.7(a) of the Company Disclosure Schedule identifies each bonus,
deferred compensation, incentive compensation, stock purchase, stock option,
severance or termination pay, medical, life, disability or other insurance,
supplemental unemployment benefits, profit-sharing, pension or retirement plan,
program or agreement sponsored, maintained, contributed to or required to be
contributed to by the Company for the benefit of any current or former employee,
consultant, officer or director of the Company (other than those plans, programs
and agreements disclosed in the Company SEC Documents and other than the
Company's 401(k) profit sharing plan).
(b) Except as set forth in Part 2.7(a) of the Company Disclosure Schedule
(and except for the Company's 401(k) profit sharing plan), the Company does not
maintain, sponsor or contribute to, and has not at any time in the past
maintained, sponsored or contributed to, any employee pension benefit plan (as
defined in Section 3(2) of the Employee Retirement Income Security Act of 1974,
as amended ("ERISA"), whether or not excluded from coverage under specific
Titles or Merger Subtitles of ERISA) for the benefit of employees or former
employees of the Company.
(c) Each of the plans intended to be qualified under Section 401(a) of the
Code has received a favorable determination from the Internal Revenue Service,
and the Company is not aware of any reason why any such determination letter
should be revoked.
(d) Except as disclosed in the Company SEC Documents, neither the
execution, delivery or performance of this Agreement, nor the consummation of
the Merger or any of the other transactions contemplated by this Agreement, will
result in any payment (including any bonus, golden parachute or severance
payment) to any current or former employee or director of the Company (whether
or not under any plan), or materially increase the benefits payable under any
plan, or result in any acceleration of the time of payment or vesting of any
such benefits.
(e) The Company is in compliance with all applicable Legal Requirements and
Contracts relating to employment, employment practices, wages, bonuses and terms
and conditions of employment, including employee compensation matters, except
where the failure to be in compliance would not have a Material Adverse Effect
on the Company.
2.8 LITIGATION. There is no Legal Proceeding pending or, to the Company's
knowledge, threatened by or before any court or Governmental Authority that
involves the Company or any of the assets owned or used by the Company. The
Company is not a party to any decree, order, writ, injunction, judgment or
arbitration award (or agreement entered into in any Legal Proceeding) with
respect to its properties, assets, personnel or business activities.
2.9 PROPERTIES.
(a) Part 2.9(a) of the Company Disclosure Schedule sets forth each lease of
real and personal property to which the Company is a party (the "Leases"). The
Company has previously delivered to Parent complete and accurate copies of all
the Leases. Each of the Leases is valid, binding and enforceable in accordance
with its terms, except as enforcement thereof may be limited by bankruptcy,
insolvency, reorganization, moratorium and other laws of general application
affecting enforcement of creditors' rights generally, as limited by
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laws relating to the availability of specific performance, injunctive relief, or
by general equitable principles, and to the extent any indemnification or
contribution provisions thereof may be limited by applicable federal or state
securities laws. The Company has not breached, nor has the Company received in
writing any claim or threat that it has breached, in any material respect, and
no default has occurred under any of the Leases and, to the Company's knowledge,
(i) none of the other contracting parties has violated or breached, and no
default has occurred under any of the Leases, and (ii) other than the
transactions contemplated hereby, no event has occurred, and no circumstance or
condition exists which with the giving of notice or the lapse of time, or both,
will, or could reasonably be expected to, result in a violation, breach or
default under any of the Leases or give any Person the right to cancel,
terminate or modify any of the Leases. The Company does not own any real
property.
(b) The Company has, and at all times since June 1, 1995, has continuously
had, in effect fire, casualty, property, comprehensive general liability
including product/completed operations and contractual liability coverage, and
directors and officers insurance policies, with extended coverage (subject to
deductibles), sufficient to allow the Company to replace any of its properties
that might be damaged or destroyed, and reasonably adequate to protect it and
its financial condition against the risks involved in the business conducted by
it. Part 2.9(b) of the Company Disclosure Schedule lists all such policies. The
Company has not done anything by way of action or inaction which might
invalidate any of such policies in whole or in part and the Company has not
received any notice or other indication that any such policies would be
cancelled or that any such policies were no longer in full force or effect or
that the issuer of any policy is not willing or able to perform its obligations
thereunder.
2.10 ENVIRONMENTAL MATTERS. To the knowledge of the Company, no current
or prior owner of any property leased or controlled by the Company has received
any notice (in writing or otherwise), whether from a Governmental Authority,
citizens group, employee or otherwise, that alleges that such current or prior
owner or the Company is not in compliance with any Environmental Law. To the
knowledge of the Company, all property that is leased to, controlled by or used
by the Company, and all surface water, groundwater and soil associated with or
adjacent to such property is in clean and healthful condition and is free of any
material environmental contamination of any nature. For purposes of this Section
2.10: (i) "Environmental Law" means any federal, state, local or foreign Legal
Requirement relating to pollution or protection of human health or the
environment (including ambient air, surface water, ground water, land surface or
subsurface strata), including any law or regulation relating to emissions,
discharges, releases or threatened releases of Materials of Environmental
Concern, or otherwise relating to the manufacture, processing, distribution,
use, treatment, storage, disposal, transport or handling of Materials of
Environmental Concern; and (ii) "Materials of Environmental Concern" include
chemicals, pollutants, contaminants, wastes, toxic substances, petroleum and
petroleum products and any other substance that is now or hereafter regulated by
any Environmental Law or that is otherwise a danger to health, reproduction or
the environment.
2.11 COMPLIANCE WITH LEGAL REQUIREMENTS. The Company is, and has at all
times since December 31, 1995 been, in compliance with all applicable Legal
Requirements, except where the failure to comply with such Legal Requirements
has not had and would not reasonably be expected to have a Material Adverse
Effect on the Company.
2.12 TRANSACTIONS WITH AFFILIATES. Except as set forth in the Company SEC
Documents, since the date of the Company's last proxy statement filed with the
SEC, no event has occurred that would be required to be reported by the Company
pursuant to Item 404 of Regulation S-K promulgated by the SEC. Part 2.12 of the
Company Disclosure Schedule identifies each person who is an "affiliate," as
that term is used in paragraphs (c) and (d) of Rule 145 under the Securities
Act, of the Company ("Company Affiliates"), as of the date of this Agreement.
2.13 VOTE REQUIRED. The affirmative vote of the holders of a majority of
the shares of Company Common Stock and the affirmative vote of the holders of
shares of the Company Preferred Stock (calculated on an as-converted basis),
voting as separate classes, outstanding on the record date for the Company
Stockholders' Meeting (the "Required Company Stockholder Vote") are the only
votes of the holders of any
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class or series of the Company's capital stock necessary to adopt and approve
this Agreement, the Merger and the other transactions contemplated by this
Agreement.
2.14 COMPANY ACTION. The Board of Directors of the Company (at a meeting
duly called and held) has (a) unanimously determined that the Merger is in the
best interests of the Company and its stockholders, (b) unanimously approved
this Agreement and the Merger in accordance with the provisions of Section 251
of the DGCL, (c) unanimously recommended the adoption and approval of this
Agreement and the Merger by the stockholders of the Company and directed that
the Merger be submitted for consideration by the Company's stockholders at the
Company Stockholders' Meeting, (d) taken all necessary steps to render Section
203 of the DGCL inapplicable to the Merger and the other transactions
contemplated by this Agreement and (e) adopted a resolution having the effect of
causing the Company not to be subject, to the extent permitted by applicable
law, to any state takeover law that may purport to be applicable to the Merger
and the other transactions contemplated by this Agreement.
2.15 FAIRNESS OPINION. The Company's Board of Directors has received the
written opinion of Hambrecht & Quist, financial advisor to the Company, dated
the date of this Agreement, to the effect that the consideration to be received
by the Company Stockholders is fair to the Company Stockholders from a financial
point of view and such written opinion has not been withdrawn or otherwise
modified by Hambrecht & Quist. The Company has furnished an accurate and
complete copy of said written opinion to Parent.
2.16 FINANCIAL ADVISOR. The Company represents and warrants that, except
for Hambrecht & Quist, no broker, finder or investment banker is entitled to any
brokerage, finder's or other fee or commission in connection with the Merger or
any of the other transactions contemplated by this Agreement based on
arrangements made by or on behalf of the Company. A copy of the Company's
agreement with Hambrecht & Quist has been delivered to Parent.
2.17 ENFORCEABILITY. The Company has all requisite corporate power and
authority to execute, deliver and, subject to obtaining requisite stockholder
approval, to perform its obligations under this Agreement and all other
agreements, documents and instruments contemplated hereby to which it is or will
become a party. The execution and delivery of this Agreement and the other
agreements, documents and instruments contemplated hereby have been duly and
validly authorized by the Board of Directors of the Company, and no other
corporate proceedings on the part of the Company are necessary for the Company
to authorize any of such agreements, documents or instruments and no such
corporate proceedings (other than the approval of the Company Stockholders) are
necessary to enable the Company to consummate the Merger or any of the other
transactions contemplated by this Agreement. All agreements, documents and
instruments to be executed in connection with the Merger (a) have been (or will
be) duly executed and delivered by duly authorized officers of the Company and
(b) constitute (or, when executed by the Company, will constitute) legal, valid
and binding obligations of the Company enforceable against it in accordance with
their terms, except as enforcement may be limited by bankruptcy, insolvency,
reorganization, moratorium and other laws of general application affecting
enforcement of creditors' rights generally, as limited by laws relating to the
availability of specific performance, injunctive relief, or by general equitable
principles, and to the extent any indemnification or contribution provisions
thereof may be limited by applicable federal or state securities laws.
2.18 GOVERNMENTAL CONSENTS; NO CONFLICTS. Except as may be required by
the Exchange Act, the Securities Act, state securities or blue sky laws, the
DGCL, and the NASD bylaws and the rules and regulations of the American Stock
Exchange (as they relate to the S-4 Registration Statement and the
Prospectus/Joint Proxy Statement), there is no requirement applicable to the
Company to make any filing with, or to obtain any permit, authorization, or
Consent of, any Governmental Authority as a condition to the consummation of the
Merger or any of the other transactions contemplated by this Agreement. Neither
the execution and delivery of this Agreement and the other agreements, documents
and instruments contemplated hereby by the Company nor the consummation by the
Company of the Merger or any of the other transactions contemplated by this
Agreement will (a) violate the Certificate of Incorporation or Bylaws of the
Company, (b) result in a default (or with notice or lapse of time or both would
result in a default) under, or materially impair the rights of the Company or
materially alter the rights or obligations of any third party under, or require
the Company to make any material payment or become subject to any material
liability to any third
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party under, or give rise to any right of termination, amendment, cancellation,
acceleration, repurchase, put or call under, any of the terms, conditions or
provisions of any Material Company Contract, (c) result in the creation of any
material (individually or in the aggregate) Encumbrance on any of the assets of
the Company or (d) conflict with or violate any law, statute, rule, regulation,
judgment, order, writ, injunction, decree or arbitration award applicable to the
Company or any of its assets, which conflict or violation has had or would
reasonably be expected to have a Material Adverse Effect on the Company.
2.19 TITLE TO ASSETS. The Company owns, and has good, valid and
marketable title to, or, in the case of leased assets, valid leasehold interests
in, all assets reflected on the March 1998 Balance Sheet. All of said assets are
owned or leased by the Company free and clear of any Encumbrances, except for
(a) any lien for current taxes not yet due and payable, (b) minor liens that
have arisen in the ordinary course of business and that do not (individually or
in the aggregate) materially detract from the value of the assets subject
thereto or would not have a Material Adverse Effect on the Company, (c) liens
described in Part 2.19 of the Company Disclosure Schedule, and (d) Liabilities
reflected in the March 1998 Balance Sheet.
2.20 COMPANY PREFERRED STOCK CONVERSION. Each share of the Company
Preferred Stock is convertible in accordance with the Company Certificate of
Incorporation and each of the holders of Company Preferred Stock has entered
into an agreement with the Company confirming such conversion.
2.21 NO EXISTING DISCUSSIONS. On the date hereof, neither the Company,
nor any Representative of the Company, is engaged, directly or indirectly, in
any discussions or negotiations with any other Person relating to any
Acquisition Proposal.
2.22 STOCK OPTIONS. Under the terms (as in effect as of the date hereof)
of each stock option agreement by which any Company Option is evidenced, in
connection with the Merger, all outstanding Company Options shall automatically
accelerate and become fully exercisable for all of the shares of Company Common
Stock subject to such Company Options and, to the extent such Company Options
are not exercised prior to the Effective Time, shall terminate and cease to
remain outstanding immediately after the Effective Time.
2.23 WAIVER. The holders of the Company Preferred Stock have waived their
right to purchase shares of 6% Series B Convertible Preferred Stock of the
Company and their right to require the Company to redeem any of the outstanding
shares of Company Preferred Stock.
2.24 DISCLOSURE.
(a) The copies of all documents furnished by the Company pursuant to the
terms of this Agreement are complete and accurate copies of the original, as
such documents may have been amended to date.
(b) The Company has timely filed all required forms, reports and documents
required to be filed with the SEC and the American Stock Exchange.
(c) None of the representations and warranties of the Company contained in
Article 2 of this Agreement or in any other Article of this Agreement or the
information disclosed in the Company Disclosure Schedule contains any untrue
statement of a material fact or omits to state any material fact required to be
stated therein or necessary in order to make the statements therein, in light of
the circumstances under which they are made, not misleading.
(d) None of the information supplied or to be supplied by the Company for
inclusion or incorporation by reference in the Form S-4 registration statement
to be filed with the SEC by Parent in connection with the issuance of the Merger
Shares (the "S-4 Registration Statement") will, at the time the S-4 Registration
Statement is filed with the SEC or at the time the S-4 Registration Statement
becomes effective under the Securities Act, contain any untrue statement of a
material fact or omit to state any material fact required to be stated therein
or necessary in order to make the statements therein, in light of the
circumstances under which they are made, not misleading. None of the information
supplied or to be supplied by the Company for inclusion or incorporation by
reference in the Prospectus/Joint Proxy Statement, will, at the time the
Prospectus/Joint Proxy Statement is mailed to the stockholders of the Company or
the stockholders of Parent, at the time of the Company Stockholders' Meeting or
the Parent Stockholders' Meeting and as of the
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Effective Time, contain any untrue statement of a material fact or omit to state
any material fact required to be stated therein or necessary in order to make
the statements therein, in light of the circumstances under which they are made,
not misleading. Notwithstanding the foregoing, no representation or warranty is
made by the Company with respect to statements made about the Parent or Merger
Sub or based on information supplied by Parent or Merger Sub or any of their
representatives which is contained in the S-4 Registration Statement or the
Prospectus/Joint Proxy Statement. The Prospectus/Joint Proxy Statement will
comply as to form in all material respects with the provisions of the Exchange
Act and the rules and regulations promulgated by the SEC thereunder.
ARTICLE 3
REPRESENTATIONS AND WARRANTIES OF PARENT AND MERGER SUB
Parent and Merger Sub represent and warrant to the Company that, except as
set forth in the Parent SEC Documents filed prior to the date of this Agreement
or in the disclosure schedules delivered by Parent to the Company dated and
signed as of that date of this Agreement by an executive officer of Parent
(collectively, the "Parent Disclosure Schedule"):
3.1 ORGANIZATION.
(a) Each of Parent and Merger Sub is a corporation duly organized, validly
existing and in good standing under the laws of the State of Delaware. Each of
Parent and Merger Sub has all requisite corporate power and authority to (i) own
and use its assets in the manner in which its assets are currently owned and
used, and (ii) to carry on its business as presently conducted. Except for
Merger Sub, Parent has no subsidiaries.
(b) Each of Parent and Merger Sub is qualified to do business as a foreign
corporation and is in good standing under the laws of all jurisdictions where
the nature of its business requires such qualification and where the failure to
be so qualified would have a Material Adverse Effect on Parent or Merger Sub.
(c) As of the date of this Agreement, the authorized capital stock of
Parent consists of: 60,000,000 shares of Parent Common Stock, $.01 par value,
14,669,844 shares of which are issued and outstanding; and 10,000,000 shares of
Preferred Stock, par value $.01 per share, none of which are issued and
outstanding. As of the date of this Agreement, Parent had outstanding options to
purchase a total of 2,135,821 shares of Parent Common Stock (minus any Parent
Options exercised on the date hereof) under the 1997 Equity Incentive Plan and
2,840,642 shares of Parent Common Stock are reserved for future grant under the
1997 Equity Incentive Plan. As of the date of this Agreement, warrants to
purchase 93,687 shares of Parent Common Stock (minus any Parent Warrants
exercised on the date hereof) were outstanding. Except as set forth above and
except for 125,000 shares of Parent Common Stock reserved for issuance pursuant
to Parent's Non-employee Directors' Stock Option Plan, 7,500 of which are issued
and outstanding, and 250,000 shares of Parent Common Stock reserved for issuance
pursuant to Parent's Employee Stock Purchase Plan, no shares of which have been
issued and are outstanding and 250,000 shares of which remain available for
purchase, there are no shares of capital stock of Parent authorized, issued or
outstanding or any outstanding subscriptions, options, warrants, stock
appreciation rights, calls, rights, convertible securities or other securities
convertible into, exchangeable for, or evidencing the right to subscriber for,
any shares of capital stock of Parent. All the issued and outstanding shares of
Parent Common Stock are validly issued, fully paid and nonassessable. None of
the outstanding shares of Parent Common Stock is entitled or subject to (i) any
preemptive right, right of participation, right of maintenance or any similar
right, or (ii) any right of first refusal in favor of any Person.
(d) As of the date of this Agreement, the authorized capital stock of
Merger Sub consists of 10,000 shares of Common Stock, par value $.01 per share,
100 of which are issued and outstanding and are held beneficially and of record
by Parent.
(e) Except as set forth above, as of the date of this Agreement, (i) there
are no shares of capital stock of Parent authorized, issued or outstanding, (ii)
there are no outstanding subscriptions, options, warrants, stock appreciation
right plans, calls, rights, convertible securities, stockholder rights plans (or
similar plans commonly referred to as "poison pills") or other agreements or
commitments of any character relating to
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issued or unissued capital stock or other securities of Parent, or obligating
Parent or, to Parent's knowledge, any other Person, to issue, transfer or sell
any shares of the capital stock or other securities of Parent, (iii) there are
no other outstanding securities convertible into, exchangeable for or evidencing
the right to subscribe for any shares of the capital stock or other securities
of Parent, and (iv) there is no condition or circumstance that may give rise to
or provide a basis for the assertion of a claim by any Person to the effect that
such Person is entitled to acquire or receive any shares of capital stock or
other securities of Parent.
(f) Complete and accurate copies of the Certificate of Incorporation and
Bylaws of Parent, and Parent's 1997 Equity Incentive Plan, 1997 Non-employee
Directors' Stock Option Plan and Employee Stock Purchase Plan, each as amended
to date, are filed as exhibits to the Parent SEC Documents (as defined in
Section 3.2(a)) and have been delivered to the Company. Complete and accurate
copies of the Certificate of Incorporation and Bylaws of Merger Sub have been
delivered to the Company.
3.2 SEC FILINGS; FINANCIAL STATEMENTS.
(a) Parent has made available to the Company a complete and accurate copy
of each report, schedule, registration statement and definitive proxy statement
filed by Parent with the SEC on or after November 21, 1997 (the "Parent SEC
Documents"), which are all the forms, reports and documents required to be filed
by Parent with the SEC since November 21, 1997, the date of Parent's initial
public offering of its Common Stock. As of the time it was filed with the SEC
(or if amended or superseded by a filing prior to the date of this Agreement,
then on the date of such filing): (i) each of the Parent SEC Documents complied
in all material respects with the published requirements of the Securities Act
or the Exchange Act, as the case may be; and (ii) none of the Parent SEC
Documents contained any untrue statement of a material fact or omitted to state
a material fact required to be stated therein or necessary in order to make the
statements therein, in light of the circumstances under which they were made,
not misleading.
(b) Each of the financial statements (including, in each case, any related
notes thereto) contained in the Parent SEC Documents (i) complied as to form in
all material respects with the published rules and regulations of the SEC
applicable thereto, (ii) was prepared in accordance with GAAP applied on a
consistent basis throughout the periods involved (except as may be indicated in
the notes thereto and except that the unaudited interim financial statements are
subject to normal year-end audit adjustments which were not, or are not,
expected to be material in amount and do not contain footnotes), and (iii)
fairly presented the financial position of Parent as at the respective dates
thereof and the results of operations and cash flows for the periods indicated.
(c) Parent has previously furnished to the Company a complete and correct
copy of any amendments or modifications that have not yet been filed with the
SEC but that are required to be filed to agreements, documents or other
instruments which previously had been filed by Parent with the SEC pursuant to
the Securities Act or the Exchange Act.
(d) Parent has no Liabilities, except for (i) any Liabilities set forth in
Parent's unaudited financial statements (including the notes thereto) filed with
the SEC as part of Parent's quarterly report on Form 10-Q for the quarter ended
March 31, 1998, (ii) any Liabilities which were incurred after March 31, 1998 in
the ordinary course of business consistent with past practice, or (iii) other
Liabilities which, individually or in the aggregate, have not had and would not
reasonably be expected to have a Material Adverse Effect on Parent.
3.3 ABSENCE OF CERTAIN CHANGES OR EVENTS. Since December 31, 1997, there
has not been (a) any change, or any development or combination of developments
that has had or would reasonably be expected to have a Material Adverse Effect
on Parent, (b) any damage, destruction or loss, whether or not covered by
insurance which has had or would reasonably be expected to have a Material
Adverse Effect on Parent and (c) any declaration, accrual, set aside or payments
of any dividend or distribution by Parent.
3.4 TAX MATTERS.
(a) All Tax Returns required to be filed by or on behalf of Parent with any
Governmental Authority on or before the Closing Date (i) have been or will be
filed on or before the applicable due date (including any extensions of such due
date that expire prior to the Closing Date), and (ii) have been, or will be when
filed,
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prepared in all material respects in compliance with all applicable Legal
Requirements. All amounts shown on Parent's Tax Returns to be due on or before
the Closing Date have been or will be paid on or before the Closing Date except
for amounts which, individually or in the aggregate, could not reasonably be
expected to have a Material Adverse Effect on Parent.
(b) To the knowledge of Parent, the Parent Financial Statements fully
accrue all Taxes with respect to all periods through the dates thereof in
accordance with generally accepted accounting principles. Parent will establish,
in the ordinary course of business and consistent with its past practices,
reserves reasonably adequate for the payment of all Taxes through the Closing
Date, except for amounts which, individually or in the aggregate, could not
reasonably be expected to have a Material Adverse Effect on Parent.
(c) No claim or Legal Proceeding is pending or, to the knowledge of Parent,
has been threatened against or with respect to Parent in respect of any Tax.
There are no unsatisfied liabilities for material Taxes (including liabilities
for interest, additions to tax and penalties thereon and related expenses) with
respect to any notice of deficiency or similar document received by Parent with
respect to any material Tax (other than liabilities for Taxes asserted under any
such notice of deficiency or similar document which are being contested in good
faith by Parent and with respect to which adequate reserves for payment have
been established). There are no liens for material Taxes upon any of the assets
of Parent except liens for current Taxes not yet due and payable. Parent has not
entered into or become bound by any agreement or consent pursuant to Section
341(f) of the Code. Parent has not been, and will not be, required to include
any adjustment in taxable income for any tax period (or portion thereof)
pursuant to Section 481 or 263A of the Code or any comparable provision under
state or foreign Tax laws as a result of transactions or events occurring, or
accounting methods employed, prior to the Closing.
(d) To the knowledge of Parent, there is no agreement, plan, arrangement or
other Contract covering any employee or independent contractor or former
employee or independent contractor of Parent that, considered individually or
considered collectively with any other such Contracts, will, or could reasonably
be expected to, give rise directly or indirectly to the payment of any amount
that would not be deductible pursuant to Section 280G or Section 162 of the
Code. Parent is not a party to or bound by any tax indemnity agreement, tax
sharing agreement, tax allocation agreement or similar Contract.
3.5 LITIGATION. There is no Legal Proceeding pending or threatened by or
before any court or Governmental Authority that involves Parent or any of the
assets owned or used by Parent. Parent is not a party, as of the date of this
Agreement, to any decree, order or arbitration award (or agreement entered into
in any Legal Proceeding with any Governmental Authority) with respect to its
property, assets, personnel or business activities.
3.6 COMPLIANCE WITH LEGAL REQUIREMENTS. Parent is, and has at all times
since December 31, 1995 been, in compliance with all applicable Legal
Requirements, except where the failure to comply with such Legal Requirements
has not had and would not reasonably be expected to have a Material Adverse
Effect on Parent.
3.7 VALID ISSUANCE. The shares of Parent Common Stock to be issued to the
Company Stockholders in the Merger, when issued by Parent pursuant to the terms
of this Agreement, will be duly authorized, validly issued, fully paid and
nonassessable, will be issued in compliance with applicable federal and state
securities laws and will be issued free and clear of any lien, pledge, security
interest, encumbrance, claim or equitable interest, and no preemptive right,
right of first refusal, registration right or other similar right of
stockholders exists with respect to such shares or the issuance thereof or the
inclusion thereof in the S-4 Registration Statement.
3.8 VOTE REQUIRED. The affirmative vote of the holders of a majority of
the shares of Parent Common Stock outstanding on the record date for the Parent
Stockholders' Meeting (the "Required Parent Stockholder Vote") is the only vote
of the holders of any class or series of Parent's capital stock necessary to
adopt and approve this Agreement, the Merger and the transactions contemplated
by this Agreement.
3.9 PARENT ACTION. The Board of Directors of Parent (at a meeting duly
called and held) has (a) unanimously determined that the Merger is in the best
interests of Parent and its stockholders,
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(b) unanimously approved this Agreement and the Merger in accordance with the
provisions of Section 251 of the DGCL, (c) unanimously recommended the adoption
and approval of this Agreement and the Merger by the stockholders of Parent and
directed that the Merger be submitted for consideration by Parent's stockholders
at the Parent Stockholders' Meeting, and (d) taken all necessary steps to render
Section 203 of the DGCL inapplicable to the Merger and the other transactions
contemplated by this Agreement.
3.10 FAIRNESS OPINION. Parent's Board of Directors has received the
written opinion of Furman Selz LLC, financial advisor to Parent, dated the date
of this Agreement, to the effect that the Merger is fair to Parent from a
financial point of view and such written opinion has not been withdrawn or
otherwise modified by Furman Selz LLC. Parent has furnished an accurate and
complete copy of said written opinion to the Company.
3.11 FINANCIAL ADVISOR. Parent represents and warrants that, except for
Furman Selz LLC, no broker, finder or investment banker is entitled to any
brokerage, finder's or other fee or commission in connection with the Merger or
any of the other transactions contemplated by this Agreement.
3.12 ENFORCEABILITY. Each of Parent and Merger Sub has all requisite
corporate power and authority to execute, deliver and, subject to obtaining
requisite stockholder approval, to perform its obligations under this Agreement
and all other agreements, documents and instruments contemplated hereby to which
it is or will become a party. The execution and delivery of this Agreement and
the other agreements, documents and instruments contemplated hereby have been
duly and validly authorized by the Board of Directors of Parent and Merger Sub
and no other corporate proceedings on the part of Parent or Merger Sub are
necessary for Parent or Merger Sub to authorize any of such agreements,
documents or instruments and no such corporate proceedings (other than the
approval of Parent's stockholders) are necessary to enable Parent or Merger Sub
to consummate the Merger or any of the other transactions contemplated by this
Agreement. All agreements, documents and instruments to be executed in
connection with the Merger (a) have been (or will be) duly executed and
delivered by duly authorized officers of Parent and Merger Sub and (b)
constitute (or, when executed by Parent and Merger Sub, will constitute) legal,
valid and binding obligations of Parent and Merger Sub enforceable against it in
accordance with their terms, except as enforcement thereof may be limited by
bankruptcy, insolvency, reorganization, moratorium and other laws of general
application affecting enforcement of creditors' rights generally, as limited by
laws relating to the availability of specific performance, injunctive relief, or
by general equitable principles, and to the extent any indemnification or
contribution provisions thereof may be limited by applicable federal or state
securities laws.
3.13 GOVERNMENTAL CONSENT; NO CONFLICTS. Except as may be required by the
Exchange Act, the Securities Act, state securities or blue sky laws, the DGCL,
and the NASD bylaws (as they relate to the S-4 Registration Statement and the
Prospectus/Joint Proxy Statement), there is no requirement applicable to Parent
or Merger Sub to make any filing with, or to obtain any permit, authorization,
or Consent of, any Governmental Authority as a condition to the consummation by
Parent and Merger Sub of the Merger. Neither the execution and delivery of this
Agreement and the other agreements, documents and instruments contemplated
hereby by Parent or Merger Sub nor the consummation by Parent or Merger Sub of
the Merger or any of the other transactions contemplated by this Agreement will
(a) violate the Certificate of Incorporation or Bylaws of Parent or the
Certificate of Incorporation or Bylaws of Merger Sub, (b) result in a default
(or with notice or lapse of time would result in a default) under, or materially
impair the rights of Parent or Merger Sub or materially alter the rights or
obligations of any third party under, or require Parent or Merger Sub to make
any material payment or become subject to any material liability to any third
party under, or give rise to any right of termination, amendment, cancellation,
acceleration, repurchase, put or call under, any of the terms, conditions or
provisions of any material note, bond, mortgage, indenture, license agreement,
lease or other contract, instrument or obligation to which Parent or Merger Sub
is a party or by which Parent or Merger Sub or any of their respective assets
may be bound, (c) result in the creation of any material (individually or in the
aggregate) Encumbrance on any of the assets of Parent or Merger Sub or (d)
conflict with or violate any law, statute, rule, regulation, judgment, order,
writ, injunction, decree or arbitration award applicable to Parent or Merger Sub
or any of their respective assets, which conflict or violation has had or would
reasonably be expected to have a Material Adverse Effect on Parent or Merger
Sub.
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3.14 DISCLOSURE.
(a) The copies of all documents furnished by Parent pursuant to the terms
of this Agreement are complete and accurate copies of the original, as such
documents may have been amended to date.
(b) Parent has timely filed all required forms, reports and documents
required to be filed with the SEC and the NASD.
(c) None of the representations and warranties of Parent or Merger Sub
contained in Article 3 of this Agreement or in any other Article of this
Agreement or the information disclosed in the Parent Disclosure Schedule
contains any untrue statement of a material fact or omits to state any material
fact required to be stated therein or necessary in order to make the statements
therein, in light of the circumstances under which they are made, not
misleading.
(d) None of the information supplied or to be supplied by Parent for
inclusion or incorporation by reference in the S-4 Registration Statement will,
at the time the S-4 Registration Statement is filed with the SEC or at the time
the S-4 Registration Statement becomes effective under the Securities Act,
contain any untrue statement of a material fact or omit to state any material
fact required to be stated therein or necessary in order to make the statements
therein, in light of the circumstances under which they are made, not
misleading. None of the information supplied or to be supplied by Parent for
inclusion or incorporation by reference in the Prospectus/Joint Proxy Statement
will, at the dates mailed to the stockholders of Parent or the stockholders of
the Company, at the time of the Parent Stockholders' Meeting or the Company
Stockholders' Meeting and as of the Effective Time, contain any untrue statement
of a material fact or omit to state any material fact required to be stated
therein or necessary in order to make the statements therein, in light of the
circumstances under which they are made, not misleading. Notwithstanding the
foregoing, no representation or warranty is made by Parent or Merger Sub with
respect to statements made about the Company or based on information supplied by
the Company or any of its Representatives which is contained in the S-4
Registration Statement or the Prospectus/Joint Proxy Statement. The
Prospectus/Joint Proxy Statement will comply as to form in all material respects
with the provisions of the Exchange Act and the rules and regulations
promulgated by the SEC thereunder.
3.15 INTERIM OPERATIONS OF MERGER SUB. Merger Sub has been formed solely
for the purpose of engaging in the transactions contemplated by this Agreement
and has not engaged in any business activities or conducted any operations other
than in connection with the transactions contemplated hereby.
3.16 PARENT CONTRACTS. Except as would not, individually or in the
aggregate, have a Material Adverse Effect on Parent, the contracts between
Parent and each of Japan Tobacco Inc., Procter & Gamble Pharmaceuticals, Inc.
and N.V. Organon (collectively, the "Material Parent Contracts") are each in
full force and effect and are enforceable against Parent and, to Parent's
knowledge, are enforceable against the other parties thereto, except as
enforcement thereof may be limited by bankruptcy, insolvency, reorganization,
moratorium and other laws of general application affecting enforcement of
creditors' rights generally, as limited by laws relating to the availability of
specific performance, injunctive relief, or by general equitable principles, and
to the extent any indemnification or contribution provisions thereof may be
limited by applicable federal or state securities laws. Parent has not breached,
nor has Parent received in writing any claim or threat that it has breached, in
any material respect, and no default has occurred under any of the Material
Parent Contracts and, to Parent's knowledge, (i) none of the other contracting
parties has violated or breached, and no default has occurred under any of the
Material Parent Contracts, and (ii) other than the transactions contemplated
hereby, no event has occurred, and no circumstance or condition exists which
with the giving of notice or the lapse of time, or both, will, or could
reasonably be expected to, result in a violation, breach or default under any
Material Parent Contract or give any Person the right to cancel, terminate or
modify any Material Parent Contract. To Parent's knowledge, Parent's
relationship with each other party under a Material Parent Contract is good. To
Parent's knowledge, no party to a Material Parent Contract currently in effect
has given notice to Parent of intent to terminate such Material Parent Contract
in a way that would have a Material Adverse Effect on Parent.
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ARTICLE 4
COVENANTS; ADDITIONAL AGREEMENTS
4.1 PARENT ACCESS AND INVESTIGATION. During the period from the date of
this Agreement through the Effective Time (the "Pre-Closing Period"), the
Company shall, and shall cause its Representatives to: (a) provide Parent and
Parent's Representatives with reasonable access during normal business hours to
the Company's Representatives, personnel and assets and to all existing books,
records, Tax Returns, work papers and other documents and information relating
to the Company; and (b) provide Parent and Parent's Representatives with such
copies of the existing books, records, Tax Returns, work papers and other
documents and information relating to the Company, and with such additional
financial, operating and other data and information regarding the Company as
Parent may reasonably request.
4.2 COMPANY ACCESS AND INVESTIGATION. During the Pre-Closing Period,
Parent shall, and shall cause its Representatives to: (a) provide the Company
and the Company's Representatives with reasonable access during normal business
hours to Parent's and its Representatives', personnel and assets and to all
existing books, records, Tax Returns, work papers and other documents and
information relating to Parent; and (b) provide the Company and the Company's
Representatives with such copies of the existing books, records, Tax Returns,
work papers and other documents and information relating to Parent, and with
such additional financial, operating and other data and information regarding
Parent, as the Company may reasonably request.
4.3 CONFIDENTIALITY. The parties acknowledge that Parent and the Company
have previously executed Confidentiality Agreements (the "Confidentiality
Agreements"), which Confidentiality Agreements shall continue in full force and
effect in accordance with their respective terms and which Confidentiality
Agreements shall be applicable to any information obtained pursuant to this
Article 4.
4.4 CONDUCT OF THE COMPANY'S BUSINESS.
(a) During the Pre-Closing Period, the Company shall: (i) conduct its
business and operations (A) in the ordinary course and consistent with past
practices and (B) in compliance in all material respects with all applicable
Legal Requirements and the requirements of all Material Company Contracts,
except to the extent that the failure to be in compliance would not have a
Material Adverse Effect on the Company; (ii) use reasonable efforts to preserve
intact its current business organization, keep available the services of its
current officers and employees and maintain its relations and goodwill with all
suppliers, landlords, creditors, collaborators, joint venture partners,
licensors, licensees, employees and other Persons having business relationships
with the Company; (iii) keep in full force all insurance policies to which it is
a party as of the date of this Agreement; (iv) use reasonable efforts to provide
all notices, assurances and support required by any Company Contract relating to
any material Company Proprietary Asset in order to ensure that no condition
under such Company Contract occurs which could result in, or could increase the
likelihood of any transfer or disclosure of any material Company Proprietary
Asset; (v) provide to Parent bi-weekly updates of the Company's financial
position in an amount of detail reasonably satisfactory to Parent, and (vi) to
the extent requested by Parent, cause its officers to report regularly to Parent
concerning the status of the Company's business including any corporate
partnership discussions or other discussions with respect to any collaborations
between the Company and third parties, and will provide regular status reports
of such discussions.
(b) During the Pre-Closing Period, the Company shall not, without Parent's
prior written consent:
(i) declare, accrue, set aside or pay any dividend or make any other
distribution in respect of any capital stock (other than any dividend
required to be paid pursuant to the terms of the Company Certificate of
Incorporation on the Company Preferred Stock);
(ii) repurchase, redeem or otherwise acquire any capital stock or
other securities of the Company (other than any redemption of Company
Preferred Stock in accordance with the Company Certificate of
Incorporation);
(iii) sell, issue, grant or authorize the grant of any shares of
capital stock of the Company or any securities convertible into, or rights,
warrants or options to acquire, any such shares of capital stock or
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other convertible securities (except that the Company may issue Company
Common Stock upon the exercise of Company Options and Company Warrants
outstanding on the date of this Agreement in accordance with their present
terms);
(iv) amend or waive any of its rights under, or accelerate the vesting
under, any provision of any of the Company's stock option plans, any
provision of any agreement evidencing any outstanding stock option or any
restricted stock purchase agreement, or otherwise modify any of the terms
of any of the Company's stock option or other employee benefit plans or any
outstanding option, warrant or other equity security of the Company;
(v) amend the Company Certificate of Incorporation or Bylaws, adopt
any stock purchase rights plan (or "poison pill") or effect or become a
party to any merger, consolidation, share exchange, business combination,
recapitalization, reclassification of shares, stock split, reverse stock
split or similar transaction;
(vi) acquire (by purchasing any material portion of the capital stock
or assets of or by any other means) any business or any Entity or division
thereof;
(vii) form any subsidiary or acquire any equity interest or other
interest in any other Entity;
(viii) acquire, lease or license any right or other asset from any
other Person or sell or otherwise dispose of, or lease or license, any
right or other asset to any other Person (except, in each case, for
immaterial assets acquired, leased, licensed or disposed of by the Company
in the ordinary course of business and consistent with past practices), or
waive any material provision;
(ix) except pursuant to lines of credit (including that certain
$2,000,000 line of credit evidenced by that certain Loan Agreement between
Parent and the Company) and subject to credit limits in effect prior to the
date of this Agreement in amounts not to exceed in the aggregate $10,000,
incur any indebtedness for borrowed money, or issue or sell any debt
securities or guarantee, endorse or otherwise become responsible for any
obligation of any other Person;
(x) make any loan or advance to any Person, other than travel and
similar advances to employees in the ordinary course of business consistent
with past practice;
(xi) prepay any material claim, Liability or obligation, or pay,
discharge or satisfy any material unliquidated or contingent Liability;
(xii) enter into or amend any employment agreement, severance
agreement, special pay arrangement with respect to termination of
employment or other similar arrangement or agreement with any director,
officer or employee of the Company, or establish, adopt or amend any
employee benefit plan;
(xiii) pay any bonus or make any profit-sharing or similar payment or
change any compensation payable or to become payable to any of its
directors, officers or employees (other than any adjustment to the salary
of any non-exempt and exempt employee that is made in the ordinary course
of business consistent with past practice or bonuses payable in accordance
with existing bonus obligations or plans);
(xiv) change any of the Company's methods of accounting or accounting
practices in any material respect;
(xv) except in the ordinary course of business consistent with past
practice, enter into any material Contract or amend or terminate, or waive
any material provision under, any Material Company Contract;
(xvi) make any capital expenditure in excess of $25,000;
(xvii) make or fail to make any material election concerning the term,
scope or termination of any real property Lease, or waive any material
provision of any such Lease or enter into any new real property lease;
(xviii) commence, settle or compromise any Legal Proceeding;
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(xix) engage in any transaction with any stockholder, director,
officer or employee other than in the ordinary course of business
consistent with past practice;
(xx) enter into any material transaction or take any other material
action outside the ordinary course of business or inconsistent with past
practice; or
(xxi) authorize or propose, or enter into any Contract contemplating,
any of the items or actions set forth in clauses (i) through (xx) above.
4.5 CONDUCT BY PARENT. During the Pre-Closing Period, Parent shall not,
without the prior written consent of the Company (i) declare, accrue, set aside
or pay any dividend or any other distribution in respect of any shares of its
capital stock, (ii) repurchase, redeem or otherwise reacquire any shares of its
capital stock or other securities, or (iii) amend or permit the adoption of any
amendments to its Certificate of Incorporation or bylaws in a manner that would
materially adversely affect the terms and provisions of the Parent Common Stock,
or (iv) take, or agree in writing or otherwise to take, any of the foregoing
actions.
4.6 NOTIFICATION. During the Pre-Closing Period, each party hereto shall
promptly notify the other party in writing of: (i) the discovery by such party
of any event, condition, fact or circumstance that occurred or existed on or
prior to the date of this Agreement and that caused or constitutes a material
inaccuracy in any representation or warranty made by such party in this
Agreement; (ii) any event, condition, fact or circumstance that occurs, arises
or exists after the date of this Agreement and that would cause or constitute a
material inaccuracy in any representation or warranty made by such party in this
Agreement if (A) such representation or warranty had been made as of the time of
the occurrence, existence or discovery of such event, condition, fact or
circumstance, or (B) such event, condition, fact or circumstance had occurred,
arisen or existed on or prior to the date of this Agreement; (iii) any material
breach of any covenant or obligation of such party; and (iv) any event,
condition, fact or circumstance that would make the timely satisfaction of any
of the conditions set forth in Article 5 or Article 6 impossible or unlikely or
that has had or could reasonably be expected to have a Material Adverse Effect
on any of the parties. No notification given by any party pursuant to this
Section 4.6 shall limit or otherwise affect any of the representations,
warranties, covenants or obligations of such party contained in this Agreement.
4.7 NO SHOP.
(a) During the Pre-Closing Period, the Company shall not permit any
Representative of the Company to, (i) solicit, initiate, or encourage the
making, submission or announcement of any Acquisition Proposal, (ii) furnish any
information regarding the Company to any Person in connection with or in
response to an Acquisition Proposal, (iii) engage in discussions or negotiations
with any Person with respect to any Acquisition Proposal, (iv) subject to
Section 4.9(c), approve, endorse or recommend any Acquisition Proposal or (v)
enter into any letter of intent or similar document or any Contract
contemplating or otherwise relating to any Acquisition Transaction; provided,
however, that: (A) nothing herein shall prohibit the Company's Board of
Directors from disclosing to the Company Stockholders a position with respect to
a tender offer pursuant to Rules 14d-9 and 14e-2 promulgated under the Exchange
Act; (B) nothing herein shall prohibit the Company's Board of Directors from
making any disclosure to the Company Stockholders, if, in the good faith
judgment of the Board of Directors of the Company after consultation with its
outside legal counsel, failure to so disclose would be inconsistent with
applicable laws; and (C) the Company shall not be prohibited by this Section 4.7
from (x) furnishing nonpublic information regarding the Company to any Person in
response to an Acquisition Proposal that is submitted by such Person (and not
withdrawn), or (y) entering into discussions with any Person in response to a
Superior Offer that is submitted by such Person (and not withdrawn) if, in
either such case: (1) neither the Company nor any Representative of the Company
shall have violated any of the restrictions set forth in this Section 4.7, (2)
the Board of Directors of the Company believes in good faith, after consultation
with its outside legal counsel, that such action is required in order for the
Board of Directors of the Company to avoid a substantial risk of liability with
respect to its fiduciary obligations to the Company's stockholders under
applicable law, (3) prior to furnishing any such nonpublic information to, or
entering into discussions with, such Person, the Company gives Parent written
notice of the identity of such Person and of the Company's intention to furnish
nonpublic information to, or enter into discussions with, such Person, and the
Company receives from such Person an executed
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confidentiality agreement containing limitations no less restrictive than the
limitations imposed on Parent pursuant to that certain Mutual Non-Disclosure
Agreement dated as of January 27, 1998 between Parent and the Company, and (4)
contemporaneously furnishing any such nonpublic information to such Person, the
Company furnishes such nonpublic information to Parent (to the extent such
nonpublic information has not been previously furnished by the Company to
Parent). Without limiting the generality of the foregoing, the Company
acknowledges and agrees that any violation of any of the restrictions set forth
in the preceding sentence by any Representative of the Company, whether or not
such Representative is purporting to act on behalf of the Company, shall be
deemed to constitute a breach of this Section 4.7 by the Company; provided,
however, that this sentence shall not limit the rights of any Representative who
is a stockholder of the Company to freely vote his stock and to exercise all of
his rights as a stockholder of the Company, subject to any contractual
restrictions that may apply.
(b) The Company shall promptly advise Parent orally and in writing of the
receipt of any Acquisition Proposal (including the identity of the Person making
or submitting such Acquisition Proposal and the terms thereof) that is made or
submitted by any Person during the Pre-Closing Period or any inquiry relating to
an Acquisition Proposal prior to the Effective Time.
(c) Subject to Section 4.7(a), the Company shall immediately cease and
cause to be terminated any discussions or negotiations with any parties existing
as of the date of this Agreement and that relate to any Acquisition Proposal.
4.8 REGISTRATION STATEMENT; PROSPECTUS/JOINT PROXY STATEMENT.
(a) As promptly as practicable after the date of this Agreement, the
Company and Parent shall prepare and cause to be filed with the SEC the
Prospectus/Joint Proxy Statement and Parent shall prepare and cause to be filed
with the SEC the S-4 Registration Statement (in which the Prospectus/Joint Proxy
Statement will be included as a prospectus) and any other documents required by
the Securities Act or Exchange Act to be filed in connection with the Merger;
provided, however, that notwithstanding anything to the contrary contained in
this Section 4.8(a), if (and to the extent) Parent and the Company so elect: (i)
the Prospectus/ Joint Proxy Statement shall initially be filed with the SEC on a
confidential basis as a proxy statement of the Company and Parent under Section
14 of the Exchange Act (and not as a registration statement of Parent); (ii)
until it is reasonably likely that the SEC will declare the S-4 Registration
Statement (in which the Prospectus/Joint Proxy Statement will be included as a
prospectus) effective under the Securities Act, all amendments to the
Prospectus/Joint Proxy Statement shall be filed with the SEC on a confidential
basis as amendments to the proxy statement of the Company and Parent under
Section 14 of the Exchange Act; and (iii) Parent shall not be obligated to file
the S-4 Registration Statement (in which the Prospectus/Joint Proxy Statement
will be included as a prospectus) with the SEC until it is reasonably likely
that the SEC will promptly declare the S-4 Registration Statement effective
under the Securities Act. Each of Parent and the Company shall use reasonable
efforts to (A) cause the S-4 Registration Statement to comply with the rules and
regulations promulgated by the SEC, (B) respond promptly to any comments of the
SEC or its staff, (C) have the S-4 Registration Statement declared effective
under the Securities Act as promptly as practicable after such filing, and (D)
cause the Prospectus/Joint Proxy Statement to be mailed to their respective
stockholders as promptly as practicable after the S-4 Registration Statement is
declared effective under the Securities Act. The Company shall promptly furnish
to Parent all information concerning the Company, its subsidiaries and its
stockholders as may be required or reasonably requested in connection with any
action contemplated by this Section 4.8(a). Each of Parent and the Company shall
(1) notify the other promptly of the receipt of any comments from the SEC or its
staff and of any request by the SEC or its staff for amendments or supplements
to the S-4 Registration Statement or the Prospectus/Joint Proxy Statement or for
additional information and (2) shall supply the other with copies of all
correspondence with the SEC or its staff with respect to the S-4 Registration
Statement or the Prospectus/Joint Proxy Statement. Neither Parent nor the
Company shall file any amendment or supplement to the S-4 Registration Statement
or the Prospectus/Joint Proxy Statement to which the other shall have reasonably
objected. Whenever any event occurs that should be set forth in an amendment or
supplement to the S-4 Registration Statement or the Prospectus/Joint Proxy
Statement, Parent or the Company, as the case may be, shall promptly inform the
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other of such occurrence and shall cooperate in filing with the SEC or its
staff, and, if appropriate, mailing to stockholders of Parent and the Company,
such amendment or supplement.
(b) Prior to the Effective Time, Parent shall use reasonable efforts to
obtain all regulatory approvals needed to ensure that the shares of Parent
Common Stock to be issued to the Company Stockholders in the Merger (i) will be
qualified under the securities or "blue sky" law of every jurisdiction of the
United States in which any registered stockholder of the Company has an address
of record on the record date for determining the stockholders entitled to notice
of and to vote on the Merger; provided, however, that Parent shall not be
required to qualify to do business as a foreign corporation in any jurisdiction
in which it is not now qualified or to file a general consent to service of
process in any jurisdiction, and (ii) will be approved for listing (subject to
notice of issuance) at the Effective Time on the Nasdaq NMS.
4.9 COMPANY STOCKHOLDERS' MEETING.
(a) The Company shall take all action reasonably necessary under all
applicable Legal Requirements to call, give notice of, convene and hold a
meeting of the holders of Company Common Stock and Company Preferred Stock to
consider, act upon and vote upon the adoption and approval of this Agreement and
the approval of the Merger (the "Company Stockholders' Meeting"). The Company
Stockholders' Meeting will be held as promptly as practicable and in any event
within 45 days after the S-4 Registration Statement is declared effective under
the Securities Act. The Company will use reasonable efforts to ensure that,
within 45 days after the S-4 Registration Statement is declared effective under
the Securities Act, the Company Stockholders' Meeting is called, noticed,
convened, held and conducted, and that all proxies solicited in connection with
the Company Stockholders' Meeting are solicited, in compliance with all
applicable Legal Requirements. Notwithstanding anything to the contrary
contained in this Agreement, the Company may adjourn or postpone the Company
Stockholders' Meeting to the extent necessary to ensure that any necessary
supplement or amendment to the Prospectus/Proxy Statement is provided to the
Company Stockholders in advance of a vote on the Merger and this Agreement, or,
if as of the time for which the Company Stockholders' Meeting is originally
scheduled (as set forth in the Prospectus/Proxy Statement) there are
insufficient shares of Company Common Stock represented (either in person or by
proxy) to constitute a quorum necessary to conduct the business of the Company
Stockholders' Meeting. The Company will use reasonable efforts to hold the
Company Stockholders' Meeting as soon as possible. The Company's obligation to
call, give notice of, convene and hold the Company Stockholders' Meeting in
accordance with this Section 4.9(a) shall not be limited or otherwise affected
by the commencement, disclosure, announcement or submission of any Superior
Offer or other Acquisition Proposal, or by any withdrawal, amendment or
modification of the recommendation of the Board of Directors of the Company with
respect to the Merger.
(b) Subject to Section 4.9(c): (i) the Board of Directors of the Company
shall recommend that the Company Stockholders vote in favor of and adopt and
approve this Agreement and approve the Merger at the Company Stockholders'
Meeting; (ii) the Prospectus/Proxy Statement shall include a statement to the
effect that the Board of Directors of the Company has recommended that the
Company Stockholders vote in favor of and adopt and approve this Agreement and
approve the Merger at the Company Stockholders' Meeting; and (iii) neither the
Board of Directors of the Company nor any committee thereof shall withdraw,
amend or modify, or propose or resolve to withdraw, amend or modify, in a manner
adverse to Parent, the recommendation of the Board of Directors of the Company
that the Company Stockholders vote in favor of and adopt and approve this
Agreement and approve the Merger.
(c) Nothing in this Agreement shall prevent the Board of Directors of the
Company from withholding, withdrawing, amending or modifying its recommendation
in favor of the Merger and amending the Prospectus/Proxy Statement at any time
prior to the adoption and approval of this Agreement by the Required Company
Stockholder Vote if (i) a Superior Offer is made to the Company and is not
withdrawn, (ii) neither the Company nor any of its Representatives shall have
violated any of the restrictions set forth in Section 4.7, and (iii) the Board
of Directors of the Company concludes in good faith, after consultation with its
outside counsel, that, in light of such Superior Offer, the withdrawal,
amendment or modification of such recommendation is required in order for the
Board of Directors of the Company to avoid a substantial risk of liability with
respect to its fiduciary obligations to the Company Stockholders under
applicable law. Nothing
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contained in this Section 4.9 shall limit the Company's obligation to call, give
notice of, convene and hold the Company Stockholders' Meeting (regardless of
whether the recommendation of the Board of Directors of the Company shall have
been withdrawn, amended or modified).
4.10 PARENT STOCKHOLDERS' MEETING.
(a) Parent shall take all action reasonably necessary under all applicable
Legal Requirements to call, give notice of, convene and hold a meeting of the
holders of Parent Common Stock to consider, act upon and vote upon the adoption
and approval of this Agreement and the approval of the Merger (the "Parent
Stockholders' Meeting"). The Parent Stockholders' Meeting will be held as
promptly as practicable and in any event within 45 days after the S-4
Registration Statement is declared effective under the Securities Act. Parent
will use reasonable efforts to ensure that, within 45 days after the S-4
Registration Statement is declared effective under the Securities Act, the
Parent Stockholders' Meeting is called, noticed, convened, held and conducted,
and that all proxies solicited in connection with the Parent Stockholders'
Meeting are solicited, in compliance with all applicable Legal Requirements.
Notwithstanding anything to the contrary contained in this Agreement, Parent may
adjourn or postpone the Parent Stockholders' Meeting to the extent necessary to
ensure that any necessary supplement or amendment to the Prospectus/Proxy
Statement is provided to the Parent Stockholders in advance of a vote on the
Merger and this Agreement, or, if as of the time for which the Parent
Stockholders' Meeting is originally scheduled (as set forth in the
Prospectus/Proxy Statement) there are insufficient shares of Parent Common Stock
represented (either in person or by proxy) to constitute a quorum necessary to
conduct the business of the Parent Stockholders' Meeting. Parent will use
reasonable efforts to hold the Parent Stockholders' Meeting as soon as possible.
(b) (i) The Board of Directors of Parent shall recommend that the Parent's
stockholders vote in favor of and adopt and approve this Agreement and approve
the Merger at the Parent Stockholders' Meeting; (ii) the Prospectus/Joint Proxy
Statement shall include a statement to the effect that the Board of Directors of
Parent has recommended that the Parent's stockholders vote in favor of and adopt
and approve this Agreement and approve the Merger at the Parent Stockholders'
Meeting; and (iii) neither the Board of Directors of Parent nor any committee
thereof shall withdraw, amend or modify, or propose or resolve to withdraw,
amend or modify, in a manner adverse to the Company, the recommendation of the
Board of Directors of Parent that the Parent's stockholders vote in favor of and
adopt and approve this Agreement and approve the Merger.
4.11 REGULATORY APPROVALS. The Company and Parent shall use reasonable
efforts to file as soon as practicable after the date of this Agreement all
notices, reports and other documents required by law to be filed with any
Governmental Authority with respect to the Merger and the other transactions
contemplated by this Agreement and to submit promptly any additional information
requested by any such Governmental Authority. The Company and Parent shall (i)
give each other prompt notice of the commencement of any Legal Proceeding by or
before any court on Governmental Authority with respect to the Merger or any of
the transactions contemplated by this Agreement, and (ii) keep each other
informed as to the status of any such Legal Proceeding.
4.12 ADDITIONAL AGREEMENTS.
(a) Parent and the Company shall use reasonable efforts to take, or cause
to be taken, all actions necessary to consummate the Merger and make effective
the other transactions contemplated by this Agreement. Without limiting the
generality of the foregoing, each party to this Agreement (i) shall make all
filings (if any) and give all notices (if any) required to be made and given by
such party in connection with the Merger and the other transactions contemplated
by this Agreement, (ii) shall use reasonable efforts to obtain each Consent (if
any) required to be obtained (pursuant to any applicable Legal Requirement or
Contract, or otherwise) by such party in connection with the Merger or any of
the other transactions contemplated by this Agreement, and (iii) shall use
reasonable efforts to lift any restraint, injunction or other legal bar to the
Merger. Each of Parent and the Company shall promptly deliver to the other a
copy of each such filing made, each such notice given and each such Consent
obtained by Parent or the Company, as the case may be, during the Pre-Closing
Period.
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(b) The Company will use reasonable efforts to resolve all Legal
Proceedings against the Company in a manner reasonably acceptable to Parent.
4.13 DISCLOSURE. Except as otherwise required by applicable law, Parent
and the Company shall keep confidential the existence, status and terms of the
negotiations and agreements regarding the Merger. Parent and the Company shall
consult with each other before issuing any press release or otherwise making any
public statements with respect to the Merger or any of the other Transactions.
Without limiting the generality of the foregoing, neither party shall permit any
of its Representatives to, make any disclosure regarding the Merger or any of
the other transactions contemplated by this Agreement unless (a) the other party
shall have approved such disclosure, or (b) such party shall have determined
after consultation with its outside legal counsel that such disclosure is
required by applicable law.
4.14 LETTER OF THE COMPANY'S ACCOUNTANTS. The Company shall cause to be
delivered to Parent a letter of Arthur Andersen LLP, dated no more than two
business days before the date on which the S-4 Registration Statement becomes
effective (and reasonably satisfactory in form and substance to Parent), that is
customary in scope and substance for letters delivered by independent
accountants in connection with the registration statements similar to the S-4
Registration Statement.
4.15 COMPANY AFFILIATE AGREEMENTS. The Company shall use reasonable
efforts to cause each Person who becomes a Company Affiliate after the date of
this Agreement to execute and deliver to Parent, on or prior to the Effective
Time, an affiliate agreement in the form of Exhibit F attached hereto (the
"Company Affiliate Agreement").
4.16 TAX MATTERS. At or prior to the Closing, Parent and the Company
shall execute and deliver to Parent's counsel and to the Company's counsel tax
representation letters in customary form. Parent and the Company shall use
reasonable efforts prior to the Effective Time to cause the Merger to qualify as
a tax free reorganization under Section 368(a)(1) of the Code.
4.17 EMPLOYMENT OR CONSULTING AGREEMENT AND NONCOMPETITION AGREEMENT. The
Company shall use reasonable efforts to cause to be executed and delivered to
Parent employment agreements or consulting agreements, as applicable, between
Parent and those Persons identified on Exhibit G.
4.18 EMPLOYEE BENEFITS. Parent intends to maintain or cause the Surviving
Corporation to maintain employee benefit plans (as defined in Section 3(3) of
ERISA) for the benefit of employees of the Company which are substantially
similar to those benefits provided for Parent's employees, including, without
limitation, any of the following benefit plans maintained by Parent:
medical/dental/vision care, life insurance, disability income, sick pay, holiday
and vacation pay, 401(k) plan coverage, Section 125 benefit arrangements, bonus
profit-sharing or other incentive plans, pension or retirement programs,
dependent care assistance, severance benefits, and employee stock option and
stock purchase plans, to the extent the Company employees meet the eligibility
requirements for each such plan or program. To the extent permitted and
commercially practicable under applicable plans and laws, Parent intends that
the Company's employees (i) shall be given credit, for purposes of any service
requirements for participation, for their period of service with the Company
prior to the Closing Date, and (ii) shall also, with respect to any Parent plans
or programs which have co-payment, deductible or other co-insurance features,
receive credit for any amounts such employees have paid to date in 1998 in
co-payments, deductibles or co-insurance under comparable programs maintained by
Company prior to the date hereof. In addition, Parent intends that, to the
extent permitted and commercially practicable under the Company's medical/health
plans, no Company employee who participates in any medical/health plan of
Company at the Closing date shall be denied coverage under Parent's
medical/health plan by reason of any pre-existing condition exclusions.
4.19 INDEMNIFICATION.
(a) From and after the Effective Time, Parent will, or Parent will cause
the Surviving Corporation to, fulfill and honor in all respects the obligations
of the Company pursuant to any indemnification agreements between the Company
and its directors and officers as of the date hereof (the "Indemnified Parties")
and any indemnification provisions under the Certificate of Incorporation and
Bylaws of the Surviving Corporation will contain provisions with respect to
exculpation and indemnification that are at least as favorable to the
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Indemnified Parties as those contained in the Certificate of Incorporation and
Bylaws of the Company as in effect on the date hereof, which provisions will not
be amended, repealed or otherwise modified for a period of six years from the
Effective Time in any manner that would adversely affect the rights thereunder
of individuals who, immediately prior to the Effective Time, were directors,
officers, employees or agents of the Company, unless such modification is
required by law.
(b) From the Effective Time until the sixth anniversary thereof, Parent
shall, or Parent shall cause the Surviving Corporation to, maintain in effect,
for the benefit of the current directors and officers of the Company with
respect to acts or omissions occurring prior to the Effective Time, the existing
policy of directors' and officers' liability insurance maintained by the Company
as of the date of this Agreement (the "Existing Policy"); provided, however,
that (i) Parent or the Surviving Corporation may substitute for the Existing
Policy a policy or policies of comparable coverage, and (ii) neither Parent nor
the Surviving Corporation shall be required to pay an annual premium for the
Existing Policy (or for any substitute policies) in excess of the amount of the
last annual premium paid by the Company prior to the date of this Agreement for
the Existing Policy, which amount was $119,500 (the "Past Premium Amount"). In
the event any future annual premium for the Existing Policy (any substitute
policies) exceeds the Past Premium Amount, Parent or the Surviving Corporation
shall be entitled to reduce the amount of coverage of the Existing Policy (or
any substitute policies) to the amount of coverage that can be obtained for a
premium equal to the Past Premium Amount.
(c) This Section 4.19 shall survive the consummation of the Merger, is
intended to be for the benefit of, and enforceable by, each person entitled to
indemnification pursuant hereto and each such person's or entity's heirs and
representatives, and shall be binding on all successors and assigns of Parent
and the Surviving Corporation.
4.20 NASDAQ LISTING. Parent agrees to authorize for listing on Nasdaq the
shares of Parent Common Stock issuable, and those required to be reserved for
issuance, in connection with the Merger, upon official notice of issuance.
4.21 BLUE SKY LAWS. Parent shall take such steps as may be reasonably
necessary to comply with the securities and blue sky laws of all jurisdictions
which are applicable to the issuance of Parent Common Stock pursuant hereto. The
Company shall use its reasonable efforts to assist Parent as may be necessary to
comply with the securities and blue sky laws of all jurisdictions which are
applicable in connection with the issuance of Parent Common Stock pursuant
hereto.
4.22 RESIGNATION OF OFFICERS AND DIRECTORS. The Company shall use
reasonable efforts to obtain and deliver to Parent prior to the Closing the
written resignation of each officer and director of the Company.
ARTICLE 5
CONDITIONS PRECEDENT TO OBLIGATIONS OF PARENT AND MERGER SUB
The obligations of Parent and Merger Sub to effect the Merger and otherwise
consummate the transactions contemplated by this Agreement are subject to the
fulfillment, at or prior to the Closing, of each of the following conditions:
5.1 REPRESENTATIONS AND WARRANTIES ACCURATE.
(a) Without limiting the effect or independence of the conditions set forth
in Sections 5.1(b) and 5.1(c), the representations and warranties of the Company
contained in Sections 2.1(c), 2.1(d) and 2.1(e) shall have been accurate in all
respects as of the date of this Agreement (it being understood that for purposes
of determining the accuracy of the representations and warranties of the Company
contained in Sections 2.1(c), 2.1(d) and 2.1(e) with respect to the
fully-diluted capitalization of the Company (A) such representations and
warranties shall be deemed to have been accurate as long as the actual
fully-diluted capitalization of the Company does not exceed the fully-diluted
capitalization of the Company as represented in Sections 2.1(c), 2.1(d) and
2.1(e) by more than 15,000 shares of Company Common Stock, (B) changes in the
number of outstanding shares of Company Common Stock resulting solely from the
conversion of the
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Company Preferred Stock shall be disregarded and (C) any update of or
modification to the Company Disclosure Schedule made or purported to have been
made after the date of this Agreement shall be disregarded).
(b) Without limiting the effect or independence of the conditions set forth
in Sections 5.1(a) and 5.1(c), the representations and warranties of the Company
contained in this Agreement (other than the representations and warranties of
the Company contained in Sections 2.1(c), 2.1(d) and 2.1(e)) shall have been
accurate in all respects as of the date of this Agreement (it being understood
that, for purposes of determining the accuracy of such representations and
warranties any inaccuracies that, in the aggregate, do not have a Material
Adverse Effect on the Company shall be disregarded and (ii) any update of or
modification to the Company Disclosure Schedule made or purported to have been
made after the date of this Agreement shall be disregarded).
(c) Without limiting the effect or independence of the conditions set forth
in Sections 5.1(a) and 5.1(b), the representations and warranties of the Company
contained in this Agreement (except for any representation or warranty that
refers specifically to "the date of this Agreement" or to any specific date or
period prior to the date of this Agreement) shall be accurate in all respects as
of the Closing Date as if made on and as of the Closing Date (it being
understood that, for purposes of determining the accuracy of such
representations and warranties as of the Closing Date: (i) any inaccuracies
that, in the aggregate, do not have a Material Adverse Effect on the Company
shall be disregarded and (ii) any update of or modification to the Company
Disclosure Schedule made or purported to have been made after the date of this
Agreement shall be disregarded).
5.2 COMPLIANCE WITH COVENANTS. The Company shall have complied with and
performed in all material respects each covenant contained in this Agreement
that is required to be complied with or performed by the Company on or prior to
the Closing Date.
5.3 NO MATERIAL ADVERSE EFFECT. There shall have been no change in the
Company's business, capitalization, operations or financial condition since the
date of this Agreement which has had or would reasonably be expected to have a
Material Adverse Effect on the Company.
5.4 EFFECTIVENESS OF REGISTRATION STATEMENT. The S-4 Registration
Statement shall have become effective in accordance with the provisions of the
Securities Act, and no stop order shall have been issued by the SEC with respect
to the S-4 Registration Statement.
5.5 COMPANY STOCKHOLDER APPROVAL. This Agreement and the Merger shall
have been adopted and approved by the Required Company Stockholder Vote.
5.6 PARENT STOCKHOLDER APPROVAL. This Agreement and the Merger shall have
been adopted and approved by the Required Parent Stockholder Vote.
5.7 AGREEMENTS AND DOCUMENTS. Parent shall have received the following
agreements and documents, each of which shall be in full force and effect:
(a) A letter from Arthur Andersen LLP, dated as of the Closing Date
and addressed to Parent, reasonably satisfactory in form and substance to
Parent, updating the letter referred to in Section 4.14;
(b) A Company Affiliate Agreement in the form of Exhibit F executed by
each Company Affiliate as of the Closing Date, or who was a Company
Affiliate on the date on which the Company Stockholders' Meeting was held
or on the date 30 days prior to the Closing;
(c) An employment or consulting agreement and noncompetition agreement
with Parent executed by each Person identified on Exhibit G;
(d) A legal opinion of Cooley Godward LLP, outside counsel to Parent,
dated as of the Closing Date and addressed to Parent, to the effect that
the Merger will constitute a reorganization within the meaning of Section
368(a) of the Code (it being understood that, in rendering such opinion,
such outside counsel may rely upon the tax representation letters referred
to in Section 4.16);
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(e) The written resignations of all officers and directors of the
Company; and
(f) A certificate of the Chief Executive Officer of the Company
evidencing compliance with the conditions set forth in Sections 5.1, 5.2,
5.3 and 5.5.
5.8 ABSENCE OF RESTRAINT. No order to restrain, enjoin or otherwise
prevent the consummation of the Merger or any of the other transactions
contemplated by this Agreement shall have been entered by any court or
Governmental Authority, and there shall not be any Legal Requirement enacted or
deemed applicable to the Merger that makes the consummation of the Merger
illegal.
5.9 NO GOVERNMENTAL LITIGATION. There shall not be pending or threatened
any Legal Proceeding in which a Governmental Authority is or is threatened to
become a party: (a) challenging or seeking to restrain or prohibit the
consummation of the Merger or any of the other transactions contemplated by this
Agreement; (b) relating to the Merger and seeking to obtain from Parent or any
of its subsidiaries or from the Company any damages that may be material to
Parent or the Company; (c) seeking to prohibit or limit in any material respect
Parent's ability to vote, receive dividends with respect to or otherwise
exercise ownership rights with respect to the stock of the Surviving
Corporation; or (d) which would materially and adversely affect the right of
Parent, the Surviving Corporation or any subsidiary of Parent to own the assets
or operate the business of the Company.
5.10 OTHER REQUIRED CONSENTS AND APPROVALS. All Consents required to be
obtained in connection with the Merger and the other transactions contemplated
by this Agreement shall have been obtained and shall be in full force and effect
(except where the failure to obtain such Consents has not had, and would not
reasonably be expected to have, a Material Adverse Effect on Parent or the
Company.
5.11 STOCK OPTIONS. All outstanding Company Options not exercised prior
to the Effective Time shall have terminated and ceased to remain outstanding.
ARTICLE 6
CONDITIONS PRECEDENT TO THE COMPANY'S OBLIGATIONS
The obligations of the Company to effect the Merger and otherwise
consummate the transactions contemplated by this Agreement are subject to the
fulfillment, at or prior to the Closing, of each of the following conditions:
6.1 REPRESENTATIONS AND WARRANTIES ACCURATE.
(a) Without limiting the effect or independence of the condition set forth
in Section 6.1(b), the representations and warranties of Parent and Merger Sub
contained in this Agreement shall have been accurate in all respects as of the
date of this Agreement (it being understood that, for purposes of determining
the accuracy of such representations and warranties any inaccuracies that, in
the aggregate, do not have a Material Adverse Effect on Parent shall be
disregarded).
(b) Without limiting the effect or independence of the condition set forth
in Section 6.1(a), the representations and warranties of Parent and Merger Sub
contained in this Agreement (except for any representation or warranty that
refers specifically to "the date of this Agreement" or to any specific date or
period prior to the date of this Agreement) shall be accurate in all respects as
of the Closing Date as if made on and as of the Closing Date (it being
understood that, for purposes of determining the accuracy of such
representations and warranties as of the Closing Date any inaccuracies that, in
the aggregate, do not have a Material Adverse Effect on Parent shall be
disregarded.
6.2 COMPLIANCE WITH COVENANTS. Parent and Merger Sub shall have complied
with and performed in all material respects each covenant contained in this
Agreement that is required to be complied with or performed by Parent and Merger
Sub on or prior to the Closing Date.
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6.3 NO MATERIAL ADVERSE EFFECT. There shall have been no change in
Parent's business, capitalization, operations or financial condition since the
date of this Agreement which has had or would reasonably be expected to have a
Material Adverse Effect on Parent.
6.4 EFFECTIVENESS OF REGISTRATION STATEMENT. The S-4 Registration
Statement shall have become effective in accordance with the provisions of the
Securities Act, and no stop order shall have been issued by the SEC with respect
to the S-4 Registration Statement.
6.5 COMPANY STOCKHOLDER APPROVAL. This Agreement and the Merger shall
have been adopted and approved by the Required Company Stockholder Vote.
6.6 PARENT STOCKHOLDER APPROVAL. This Agreement and the Merger shall have
been adopted and approved by the Required Parent Stockholder Vote.
6.7 AGREEMENTS AND DOCUMENTS. The Company shall have received the
following agreements and documents, each of which shall be in full force and
effect:
(a) A legal opinion of Brobeck, Phleger & Harrison LLP, counsel to the
Company, dated as of the Closing Date and addressed to the Company, to the
effect that the Merger will constitute a reorganization within the meaning
of Section 368(a) of the Code (it being understood that, in rendering such
opinion, such outside counsel may rely upon the tax representation letters
referred to in Section 4.16); and
(b) A certificate of the Chief Executive Officer of Parent evidencing
compliance with the conditions set forth in Sections 6.1, 6.2, 6.3 and 6.6.
6.8 ABSENCE OF RESTRAINT. No order to restrain, enjoin or otherwise
prevent the consummation of the Merger or any of the other transactions
contemplated by this Agreement shall have been entered by any court or
Governmental Authority and there shall not be any Legal Requirement enacted or
deemed applicable to the Merger that makes the consummation of the Merger
illegal.
6.9 LISTING. The shares of Parent Common Stock to be issued to the
Company Stockholders in the Merger shall have been approved for quotation on the
Nasdaq NMS upon official notice of issuance thereof.
6.10 CLOSING PRICE. The Closing Price of Parent Common Stock shall be
more than $6.34.
6.11 NO GOVERNMENTAL LITIGATION. There shall not be pending or threatened
any Legal Proceeding in which a Governmental Authority is or is threatened to
become a party: (a) challenging or seeking to restrain or prohibit the
consummation of the Merger or any of the other transactions contemplated by this
Agreement; (b) relating to the Merger and seeking to obtain from Parent or any
of its subsidiaries any damages that may be material to Parent; (c) seeking to
prohibit or limit in any material respect Parent's ability to vote, receive
dividends with respect to or otherwise exercise ownership rights with respect to
the stock of the Surviving Corporation; or (d) which would materially and
adversely affect the right of Parent, the Surviving Corporation or any
subsidiary of Parent to own the assets or operate the business of the Company.
ARTICLE 7
TERMINATION OF AGREEMENT
7.1 TERMINATION. This Agreement may be terminated prior to the Effective
Time, whether before or after approval of the Merger by the Company
Stockholders:
(a) by mutual written consent of Parent and the Company;
(b) by either Parent or the Company if the Merger shall not have been
consummated by December 31, 1998 (unless the failure to consummate the
Merger is attributable to a failure on the part of the party seeking to
terminate this Agreement to perform any material obligation required to be
performed by such party at or prior to the Effective Time);
(c) by the Company if the Closing Price of Parent Common Stock is less
than $6.34;
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(d) by either Parent or the Company if a court of competent
jurisdiction or Governmental Authority shall have issued a final and
nonappealable order, decree or ruling, or shall have taken any other
action, having the effect of permanently restraining, enjoining or
otherwise prohibiting the Merger;
(e) by either Parent or the Company if (i) the Company Stockholders'
Meeting shall have been held, and (ii) this Agreement and the Merger shall
not have been adopted and approved at such meeting by the Required Company
Stockholder Vote; provided, however, that the Company shall not be
permitted to terminate this Agreement pursuant to this Section 7.1(e) if
the failure of the Company Stockholders to adopt and approve this Agreement
and approve the Merger at the Company Stockholders' Meeting is attributable
to a failure on the part of the Company to perform any material obligation
required to have been performed by the Company under this Agreement; and
provided further, that the Company may so terminate this Agreement only
following its compliance with Sections 7.3(b) and (c);
(f) by either Parent or the Company if (i) the Parent Stockholders'
Meeting shall have been held, and (ii) this Agreement and the Merger shall
not have been adopted or approved at such meeting by the Required Parent
Stockholder Vote; provided, however, that Parent shall not be permitted to
terminate this Agreement pursuant to this Section 7.1(f) if the failure of
the Parent Stockholders to adopt and approve this Agreement and approve the
Merger at the Parent Stockholders' Meeting is attributable to a failure on
the part of Parent to perform any material obligation required to have been
performed by Parent under this Agreement;
(g) by Parent (at any time prior to the adoption and approval of this
Agreement and the Merger by the Required Company Stockholder Vote) if a
Triggering Event shall have occurred;
(h) by Parent, following a breach of any covenant or agreement of the
Company contained in this Agreement, or if any representation or warranty
of the Company contained in this Agreement shall be or shall have become
inaccurate, in either case such that any of the conditions set forth in
Sections 5.1(a), 5.1(b), 5.1(c) and 5.2 would not be satisfied as of the
time of such breach or as of the time such representation or warranty was
or shall have become inaccurate; provided, however, that: (A) if such
breach or inaccuracy is curable by the Company, then Parent may not
terminate this Agreement under this Section 7.1(h) with respect to a
particular breach or inaccuracy prior to or during the 30-day period
commencing upon delivery by Parent of written notice to the Company of such
breach or inaccuracy, provided that the Company continues to exercise all
reasonable efforts to cure such breach or inaccuracy; and (B) the right to
terminate this Agreement under this Section 7.1(h) shall not be available
to Parent if Parent shall have committed a material uncured breach of this
Agreement; or
(i) by the Company, following a breach of any covenant or agreement of
Parent contained in this Agreement, or if any representation or warranty of
Parent contained in this Agreement shall be or shall have become
inaccurate, in either case such that any of the conditions set forth in
Sections 6.1(a), 6.1(b) and 6.2 would not be satisfied as of the time of
such breach or as of the time such representation or warranty was or shall
have become inaccurate; provided, however, that: (A) if such breach or
inaccuracy is curable by Parent, then the Company may not terminate this
Agreement under this Section 7.1(i) with respect to a particular breach or
inaccuracy prior to or during the 30-day period commencing upon delivery by
the Company of written notice to Parent of such breach or inaccuracy,
provided Parent continues to exercise reasonable efforts to cure such
breach or inaccuracy; and (B) the right to terminate this Agreement under
this Section 7.1(i) shall not be available to the Company if the Company
shall have committed a material uncured breach of this Agreement.
7.2 EFFECT OF TERMINATION. In the event of the termination of this
Agreement as provided in Section 7.1, this Agreement shall be of no further
force or effect; provided, however, that (i) this Section 7.2, Section 7.3 and
Article 8 shall survive the termination of this Agreement and shall remain in
full force and effect and, (ii) subject to Section 7.3(b) below, the termination
of this Agreement shall not relieve any party from any liability for any breach
of this Agreement.
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7.3 FEES AND EXPENSES.
(a) Except as set forth in this Section 7.3, all fees and expenses incurred
in connection with this Agreement and the transactions contemplated by this
Agreement shall be paid by the party incurring such expenses, whether or not the
Merger is consummated; provided, however, that Parent and the Company shall
share equally all fees and expenses, other than attorneys' and accountants'
fees, incurred in connection with the printing and filing of the S-4
Registration Statement and the Prospectus/Joint Proxy Statement and any
amendments or supplements thereto with the SEC.
(b) In consideration of the substantial time, expense and forgoing of other
opportunities that the Parent has invested in the transactions contemplated
hereby, if this Agreement is terminated by either Parent or the Company pursuant
to Section 7.1(e) or if this Agreement is terminated by Parent pursuant to
Section 7.1(g), then the Company shall pay to Parent a nonrefundable fee, in
cash, of $1,000,000 (the "Break-Up Fee");
(c) In the case of termination of this Agreement pursuant to Section
7.1(e), the Break-Up Fee shall be paid within one business day after such
termination. In the case of termination of this Agreement pursuant to Section
7.1(g), the Break-Up Fee shall be paid within one business day after such
termination.
ARTICLE 8
MISCELLANEOUS
8.1 AMENDMENT. This Agreement may be amended with the approval of the
respective Boards of Directors of the Company and Parent at any time before or
after approval of this Agreement by the Company Stockholders; provided, however,
that after any such stockholder approval, no amendment shall be made except as
permitted by applicable law. This Agreement may not be amended except by an
instrument in writing signed on behalf of each of the parties hereto.
8.2 WAIVER.
(a) No failure on the part of any party to exercise any power, right,
privilege or remedy under this Agreement, and no delay on the part of any party
in exercising any power, right, privilege or remedy under this Agreement, shall
operate as a waiver of such power, right, privilege or remedy; and no single or
partial exercise of any such power, right, privilege or remedy shall preclude
any other or further exercise thereof or of any other power, right, privilege or
remedy.
(b) No party shall be deemed to have waived any claim arising out of this
Agreement, or any power, right, privilege or remedy under this Agreement, unless
the waiver of such claim, power, right, privilege or remedy is expressly set
forth in a written instrument duly executed and delivered on behalf of such
party; and any such waiver shall not be applicable or have any effect except in
the specific instance in which it is given.
8.3 NO SURVIVAL OF REPRESENTATIONS AND WARRANTIES. None of the
representations and warranties contained in this Agreement or in any instrument
delivered pursuant to this Agreement shall survive the Merger.
8.4 ENTIRE AGREEMENT; COUNTERPARTS. This Agreement and the other
agreements referred to herein and in that certain Mutual Non-Disclosure
Agreement dated January 27, 1998 between Parent and the Company constitute the
entire agreement and supersede all prior agreements and understandings, both
written and oral, among or between any of the parties with respect to the
subject matter hereof. This Agreement may be executed in several counterparts,
each of which shall be deemed an original and all of which shall constitute one
and the same instrument.
8.5 APPLICABLE LAW; JURISDICTION. This Agreement is made under, and shall
be construed and enforced in accordance with, the laws of the State of Delaware
applicable to agreements made and to be performed solely therein, without giving
effect to principles of conflicts of law. In any action between or among any of
the parties, whether arising out of this Agreement or otherwise: (a) each of the
parties irrevocably and unconditionally consents and submits to the exclusive
jurisdiction and venue of the state and federal courts located in Maryland; (b)
if any such action is commenced in a state court, then, subject to applicable
law, no
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party shall object to the removal of such action to any federal court located in
Montgomery County, Maryland; (c) each of the parties irrevocably waives the
right to trial by jury; and (d) each of the parties irrevocably consents to
service of process by first class certified mail, return receipt requested,
postage prepaid, to the address at which such party is to receive notice in
accordance with Section 8.7.
8.6 ASSIGNABILITY. This Agreement shall be binding upon, and shall be
enforceable by and inure solely to the benefit of, the parties hereto and their
respective successors; provided, however, that neither this Agreement nor any of
the rights or obligations of the Company, Parent or Merger Sub hereunder may be
assigned by any party without the prior written consent of the other parties
hereto, and any attempted assignment without such consent shall be void and of
no effect. Nothing in this Agreement, express or implied, is intended to or
shall confer upon any Person any right, benefit or remedy of any nature
whatsoever under or by reason of this Agreement, except as specifically provided
in Section 4.19.
8.7 NOTICES. All notices and other communications required or permitted
to be delivered to any party pursuant to this Agreement shall be in writing and
shall be deemed properly given if delivered personally, by facsimile, sent by
nationally-recognized, overnight courier or mailed by registered or certified
mail (postage prepaid, return receipt requested) to the parties at the following
addresses (or at such other address for a party as shall be specified by like
notice):
To Parent or Merger Sub:
Gene Logic Inc.
708 Quince Orchard Road
Gaithersburg, MD 20878
Attention: President and Chief Executive Officer
Telephone: (301) 987-1700
Fax: (301) 987-1701
with a copy to:
Cooley Godward LLP
4365 Executive Drive, Suite 1100
San Diego, CA 92109
Attention: Frederick T. Muto, Esq.
Telephone: (619) 550-6000
Fax: (619) 453-3555
To the Company:
Oncormed, Inc.
205 Perry Parkway
Gaithersburg, MD 20877
Attention: Chief Executive Officer
Telephone: (301) 208-1888
Fax: (301) 926-6329
with a copy to:
Brobeck, Phleger & Harrison LLP
1633 Broadway, 47th Floor
New York, NY 10019
Attention: Alexander D. Lynch, Esq.
Telephone: (212) 581-1600
Fax: (212) 586-7878
All such notices and other communications shall be deemed to have been received
(a) in the case of personal delivery, on the date of such delivery, (b) in the
case of a facsimile, when the party receiving such facsimile shall have
confirmed receipt of the communication, (c) in the case of delivery by
nationally-recognized,
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overnight courier, on the Business Day following dispatch and (d) in the case of
registered or certified mail, on the fifth Business Day following such mailing.
8.8 COOPERATION. Each of the Company and Parent agrees to cooperate fully
with the other and to execute and deliver such further documents, certificates,
agreements and instruments and to take such other actions as may be reasonably
requested by the other to evidence or reflect the transactions contemplated
hereby and to carry out the intent and purposes of this Agreement.
8.9 CONSTRUCTION. The parties hereto agree that any rule of construction
to the effect that ambiguities are to be resolved against the drafting party
shall not be applied in the construction or interpretation of this Agreement.
Except as otherwise indicated, all references in this Agreement to "Articles,"
"Sections" and "Exhibits" are intended to refer to Articles and Sections of this
Agreement and Exhibits to this Agreement. The titles and captions of the
Articles and Sections of this Agreement are included for convenience of
reference only and shall have no effect on the construction or meaning of this
Agreement. As used in this Agreement, the words "include" and "including," and
variations thereof, shall not be deemed to be terms of limitation, but rather
shall be deemed to be followed by the words "without limitation."
[THIS SPACE INTENTIONALLY LEFT BLANK]
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IN WITNESS WHEREOF, the parties hereby have executed this Agreement and
Plan of Reorganization as of the date first above written.
GENE LOGIC INC.
By:
------------------------------------
Michael J. Brennan, M.D., Ph.D.
Title: President and Chief Executive
Officer
GENE LOGIC ACQUISITION CORP.
By:
------------------------------------
Michael J. Brennan, M.D., Ph.D.
Title: President and Chief Executive
Officer
ONCORMED, INC.
--------------------------------------
By:
--------------------------------------
Title:
--------------------------------------
<PAGE> 226
EXHIBIT A
CERTAIN DEFINITIONS
For purposes of the Agreement (including this Exhibit A):
Acquisition Proposal. "Acquisition Proposal" shall mean any offer,
proposal or inquiry (other than an offer, proposal or inquiry by Parent)
contemplating or otherwise relating to any Acquisition Transaction.
Acquisition Transaction. "Acquisition Transaction" shall mean any
transaction or series of related transactions involving:
(a) any merger, consolidation, share exchange, business combination,
issuance of securities, acquisition of securities, tender offer, exchange
offer or other similar transaction (i) in which the Company is a
constituent corporation, (ii) in which a Person or "group" (as defined in
the Exchange Act and the rules promulgated thereunder) of Persons directly
or indirectly acquires the Company or more than 50% of the Company's
business or directly or indirectly acquires beneficial or record ownership
of securities representing more than 50% of the outstanding securities of
any class of voting securities of the Company, or (iii) in which the
Company issues securities representing more than 50% of the outstanding
securities of any class of voting securities of the Company; or
(b) any sale, lease (other than in the ordinary course of business),
exchange, transfer, license (other than in the ordinary course of
business), acquisition or disposition of more than 50% of the assets of the
Company, or any liquidation or dissolution of the Company.
Agreement. "Agreement" shall mean the Agreement and Plan of Merger and
Reorganization to which this Exhibit A is attached, as it may be amended from
time to time.
Break-up Fee. "Break-up Fee" shall have the meaning set forth in Section
7.3(b).
Certificate of Merger. "Certificate of Merger" shall have the meaning set
forth in Section 1.3.
Closing. "Closing" shall have the meaning set forth in Section 1.3.
Closing Date. "Closing Date" shall have the meaning set forth in Section
1.3.
Closing Price. "Closing Price" shall have the meaning set forth in Section
1.5(b)(i).
Code. "Code" shall have the meaning set forth in the recitals.
Company. "Company" shall have the meaning set forth in the preamble.
Company Affiliates. "Company Affiliates" shall have the meaning set forth
in Section 2.12.
Company Affiliate Agreement. "Company Affiliate Agreement" shall have the
meaning set forth in Section 4.15.
Company Certificate of Incorporation. "Company Certificate of
Incorporation" shall have the meaning set forth in Section 2.1(g).
Company Common Stock. "Company Common Stock" shall have the meaning set
forth in Section 1.5(a)(i).
Company Contract. "Company Contract" shall mean any Contract: (a) to which
the Company is a party; (b) by which the Company or any of its assets is or may
become bound or under which the Company has, or may become subject to, any
obligation; or (c) under which the Company has or may acquire any right or
interest.
Company Disclosure Schedule. "Company Disclosure Schedule" shall have the
meaning set forth in the preamble to Article 2.
Company Financial Statements. "Company Financial Statements" shall have
the meaning set forth in Section 2.2(b).
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Company Options. "Company Options" shall have the meaning set forth in
Section 1.8.
Company Preferred Stock. "Company Preferred Stock" shall have the meaning
set forth in Section 1.5(a)(i).
Company Proprietary Assets. "Company Proprietary Assets" shall have the
meaning set forth in Section 2.5(a).
Company SEC Documents. "Company SEC Documents" shall have the meaning set
forth in Section 2.2(a).
Company Stock Certificate. "Company Stock Certificate" shall have the
meaning set forth in Section 1.6.
Company Stockholders. "Company Stockholders" shall have the meaning set
forth in Section 1.5(a).
Company Stockholders' Meeting. "Company Stockholders' Meeting" shall have
the meaning set forth in Section 4.9(a).
Company Warrants. "Company Warrants" shall have the meaning set forth in
Section 1.9.
Confidential Information. "Confidential Information" shall have the
meaning set forth in Section 2.5(g).
Consent. "Consent" shall mean any approval, consent, ratification,
permission, waiver or authorization (including any Governmental Authorization).
Contract. "Contract" shall mean any written, oral or other agreement,
contract, subcontract, lease, understanding, instrument, note, option, warranty,
purchase order, license, sublicense or legally binding commitment or undertaking
of any nature.
DGCL. "DGCL" shall have the meaning set forth in Section 1.2.
Effective Time. "Effective Time" shall have the meaning set forth in
Section 1.3.
Encumbrance. "Encumbrance" shall mean any lien, pledge, hypothecation,
charge, mortgage, security interest, encumbrance, claim, infringement,
interference, option, right of first refusal, preemptive right, community
property interest or restriction of any nature (including any restriction on the
voting of any security, any restriction on the transfer of any security or other
asset, any restriction on the receipt of any income derived from any asset, any
restriction on the use of any asset and any restriction on the possession,
exercise or transfer of any other attribute of ownership of any asset).
Entity. "Entity" shall mean any corporation (including any non-profit
corporation), general partnership, limited partnership, limited liability
partnership, joint venture, estate, trust, company (including any limited
liability company or joint stock company), firm or other enterprise,
association, organization or entity.
Environmental Law. "Environmental Law" shall have the meaning set forth in
Section 2.10.
ERISA. "ERISA" shall have the meaning set forth in Section 2.7(b).
Exchange Act. "Exchange Act" shall mean the Securities Exchange Act of
1934, as amended.
Exchange Agent. "Exchange Agent" shall have the meaning set forth in
Section 1.7(a).
Exchange Fund. "Exchange Fund" shall have the meaning set forth in Section
1.7(a).
Exchange Ratio. "Exchange Ratio" shall have the meaning set forth in
Section 1.5(b)(ii).
Existing Policy. "Existing Policy" shall have the meaning set forth in
Section 4.19(b).
GAAP. "GAAP" shall mean generally accepted accounting principles.
Governmental Authorization. "Governmental Authorization" shall mean any:
(a) permit, license, certificate, franchise, permission, clearance,
registration, qualification or authorization issued, granted, given or
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otherwise made available by or under the authority of any Governmental Authority
or pursuant to any Legal Requirement; or (b) right under any Contract with any
Governmental Authority.
Governmental Authority. "Governmental Authority" shall mean any: (a)
nation, state, commonwealth, province, territory, county, municipality, district
or other jurisdiction of any nature; (b) federal, state, local, municipal,
foreign or other government; or (c) governmental or quasi-governmental authority
of any nature (including any governmental division, department, agency,
commission, instrumentality, official, organization, unit, body or Entity and
any court or other tribunal).
Indemnified Parties. "Indemnified Parties" shall have the meaning set
forth in Section 4.19(a).
Leases. "Leases" shall have the meaning set forth in Section 2.9(a).
Legal Proceeding. "Legal Proceeding" shall mean any action, suit,
litigation, arbitration, proceeding (including any civil, criminal,
administrative, investigative or appellate proceeding), hearing, inquiry, audit,
examination or investigation commenced, brought, conducted or heard by or
before, or otherwise involving, any court or other Governmental Authority or any
arbitrator or arbitration panel.
Legal Requirement. "Legal Requirement" shall mean any federal, state,
local, municipal, foreign or other law, statute, constitution, principle of
common law, resolution, ordinance, code, edict, decree, rule, regulation, ruling
or requirement issued, enacted, adopted, promulgated, implemented or otherwise
put into effect by or under the authority of any Governmental Authority.
Liabilities. "Liabilities" shall mean any liability or obligation of any
kind or nature, secured or unsecured (whether absolute, accrued, contingent or
otherwise, and whether due or to become due).
March 1998 Balance Sheet. "March 1998 Balance Sheet" shall have the
meaning set forth in Section 2.2(b).
Material Adverse Effect. An event, violation, change, failure, inaccuracy,
circumstance or other matter will be deemed to have a "Material Adverse Effect"
on the Company if such event, violation, change, failure, inaccuracy,
circumstance or other matter (considered together with all other matters that
would constitute exceptions to the representations and warranties set forth in
Article 2 of the Agreement but for the presence of "Material Adverse Effect" or
other materiality qualifications, or any similar qualifications, in such
representations and warranties) would have a material adverse effect on (i) the
business, capitalization, operations or financial condition of the Company taken
as a whole, (ii) the ability of the Company to consummate the Merger or any of
the other transactions contemplated by the Agreement or to perform any of its
obligations under the Agreement, or (iii) Parent's ability to vote, receive
dividends with respect to or otherwise exercise ownership rights with respect to
the stock of the Surviving Corporation; provided, however, that: (A) any
material adverse effect that results from general economic, business or industry
conditions or legislative or regulatory initiatives shall be disregarded in
determining whether there has been a "Material Adverse Effect" on the Company;
(B) any material adverse effect that results from the taking of any action
required by this Agreement or from the announcement or pendency of the
transactions contemplated by this Agreement shall be disregarded in determining
whether there has been a "Material Adverse Effect" on the Company; (C) any
material adverse effect that results from the issuance of a report by the
Company's accountant that expresses doubt as to the Company's ability to
continue as a going concern or the Company's lack of liquidity and capital
resources shall be disregarded in determining whether there has been a "Material
Adverse Effect" on the Company; and (D) a decline in the Company's stock price
shall not, in and of itself, constitute a "Material Adverse Effect" on the
Company and shall be disregarded in determining whether there has been a
Material Adverse Effect on the Company. An event, violation, change, failure,
inaccuracy, circumstance or other matter will be deemed to have a "Material
Adverse Effect" on Parent if such event, violation, change, failure, inaccuracy,
circumstance or other matter (considered together with all other matters that
would constitute exceptions to the representations and warranties set forth in
Article 3 of the Agreement but for the presence of "Material Adverse Effect" or
other materiality qualifications, or any similar qualifications, in such
representations and warranties) would have a material adverse effect on the
business, operations or financial condition of Parent and its subsidiaries taken
as a whole; provided, however, that: (A) any material adverse effect that
results from general economic, business or industry conditions or legislative or
regulatory initiatives shall be
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disregarded in determining whether there has been a "Material Adverse Effect" on
Parent; (B) any material adverse effect that results from the taking of any
action required by this Agreement or from the announcement or pendency of the
transactions contemplated by this Agreement shall be disregarded in determining
whether there has been a "Material Adverse Effect" on Parent; and (C) a decline
in Parent's stock price shall not, in and of itself, constitute a "Material
Adverse Effect" on Parent and shall be disregarded in determining whether there
has been a "Material Adverse Effect" on Parent.
Material Company Contract. "Material Company Contract" shall have the
meaning set forth in Section 2.6(a).
Material Parent Contracts. "Material Parent Contracts" shall have the
meaning set forth in Section 3.16.
Materials of Environmental Concern. "Materials of Environmental Concern"
shall have the meaning set forth in Section 2.10.
Merger. "Merger" shall have the meaning set forth in the recitals.
Merger Sub. "Merger Sub" shall have the meaning set forth in the preamble.
NASD. "NASD" shall mean the National Association of Securities Dealers.
Nasdaq NMS. "Nasdaq NMS" shall have the meaning set forth in Section
1.5(b)(i).
Outstanding Shares. "Outstanding Shares" shall have the meaning set forth
in Section 1.5(b)(iii).
Parent. "Parent" shall have the meaning set forth in the preamble.
Parent Common Stock. "Parent Common Stock" shall have the meaning set
forth in Section 1.5(a)(iii).
Parent Disclosure Schedule. "Parent Disclosure Schedule" shall have the
meaning set forth in the preamble to Article 3.
Parent Options. "Parent Options" shall mean all outstanding options to
purchase shares of capital stock of Parent.
Parent SEC Documents. "Parent SEC Documents" shall have the meaning set
forth in Section 3.2(a).
Parent Stockholders' Meeting. "Parent Stockholders' Meeting" shall have
the meaning set forth in Section 4.10(a).
Parent Warrants. "Parent Warrants" shall mean all outstanding Warrants to
purchase shares of capital stock of Parent.
Past Premium Amount. "Past Premium Amount" shall have the meaning set
forth in Section 4.19(b).
Person. "Person" shall mean any individual, Entity or Governmental
Authority.
Pre-Closing Period. "Pre-Closing Period" shall have the meaning set forth
in Section 4.1.
Proprietary Asset. "Proprietary Asset" shall mean any: (a) patent, patent
application, trademark (whether registered or unregistered), trademark
application, trade name, fictitious business name, service mark (whether
registered or unregistered), service mark application, copyright (whether
registered or unregistered), copyright application, maskwork, maskwork
application, trade secret, know-how, sample, media and/or cell line and
procedures and formulations for producing any such sample, media and/or cell
line, process, formula, test data, customer list, franchise, system, computer
software, source code, computer program, invention, design, blueprint,
engineering drawing, proprietary product, technology, proprietary right or other
intellectual property right or intangible asset; or (b) right to use or exploit
any of the foregoing.
Prospectus/Joint Proxy Statement. "Prospectus/Joint Proxy Statement" shall
mean the prospectus/joint proxy statement, filed as a part of the S-4
Registration Statement, to be sent to the Company's
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stockholders in connection with the Company Stockholders' Meeting and to
Parent's stockholders in connection with the Parent Stockholders' Meeting.
Representatives. "Representatives" shall mean officers, directors,
employees, agents, attorneys, accountants and advisors.
Required Company Stockholder Vote. "Required Company Stockholder Vote"
shall have the meaning set forth in Section 2.13.
Required Parent Stockholder Vote. "Required Parent Stockholder Vote" shall
have the meaning set forth in Section 3.8.
S-4 Registration Statement. "S-4 Registration Statement" shall have the
meaning set forth in Section 2.25(d).
SEC. "SEC" shall have the meaning set forth in Section 2.2(a).
Securities Act. "Securities Act" shall mean the Securities Act of 1933, as
amended.
Superior Offer. "Superior Offer" shall mean an unsolicited, bona fide
written offer made by a third party to purchase more than 50% of the outstanding
shares of Company Common Stock on terms that the Board of Directors of the
Company determines, in its reasonable judgment, after consultation with its
financial advisor, to be more favorable from a financial point of view to the
Company's stockholders than the terms of the Merger; provided, however, that any
such offer shall not be deemed to be a "Superior Offer" if any financing
required to consummate the transaction contemplated by such offer is not
committed and is not likely to be obtained by such third party on a timely
basis.
Surviving Corporation. "Surviving Corporation" shall have the meaning set
forth in Section 1.1.
Tax. "Tax" shall mean any tax (including any income tax, franchise tax,
capital gains tax, gross receipts tax, value-added tax, surtax, excise tax, ad
valorem tax, transfer tax, stamp tax, sales tax, use tax, property tax, business
tax, withholding tax or payroll tax), levy, assessment, tariff, duty (including
any customs duty), deficiency or fee, and any related charge or amount
(including any fine, penalty or interest), imposed, assessed or collected by or
under the authority of any Governmental Authority.
Tax Return. "Tax Return" shall mean any return (including any information
return), report, statement, declaration, estimate, schedule, notice,
notification, form, election, certificate or other document or information filed
with or submitted to, or required to be filed with or submitted to, any
Governmental Authority in connection with the determination, assessment,
collection or payment of any Tax or in connection with the administration,
implementation or enforcement of or compliance with any Legal Requirement
relating to any Tax.
Third Party Proprietary Assets. "Third Party Proprietary Assets" shall
have the meaning set forth in Section 2.5(b).
Total Merger Shares. "Total Merger Shares" shall have the meaning set
forth in Section 1.5(b)(i).
Triggering Event. A "Triggering Event" shall be deemed to have occurred
if: (i) this Agreement is terminated due to breach of this Agreement by the
Company; (ii) the Board of Directors of the Company shall have failed to
recommend, or shall for any reason have withdrawn or shall have amended or
modified in a manner adverse to Parent its recommendation in favor of the
adoption and approval of this Agreement or the approval of the Merger; (iii) the
Company shall have failed to include in the Prospectus/Joint Proxy Statement the
recommendation of the Board of Directors of the Company in favor of adoption and
approval of this Agreement and approval of the Merger; (iv) the Company shall
have approved, endorsed or recommended any Acquisition Proposal or Parent
terminates this Agreement after the Company publicly announces it is considering
an Acquisition Proposal; (v) a tender or exchange offer relating to securities
of the Company shall have been commenced and the Company shall not have sent to
its securityholders, within ten (10) business days after the commencement of
such tender or exchange offer, a statement disclosing that the Company does not
recommend acceptance of such tender or exchange offer; (vi) an Acquisition
Proposal is
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publicly announced, and the Company (A) fails to issue a press release
announcing its opposition to such Acquisition Proposal within five (5) business
days after such Acquisition Proposal is announced or (B) otherwise fails to
actively oppose such Acquisition Proposal; or (vii) the Company shall have
failed to hold the Company Stockholders' Meeting as promptly as practicable and
in any event within 45 days after the S-4 Registration Statement is declared
effective under the Securities Act.
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<PAGE> 232
EXHIBIT B
[RESERVED]
<PAGE> 233
EXHIBIT C
DIRECTORS OF SURVIVING CORPORATION
Michael J. Brennan, M.D., Ph.D.
Alan G. Walton, Ph.D., D.Sc.
OFFICERS OF SURVIVING CORPORATION
Michael J. Brennan, M.D., Ph.D., President and Chief Executive Officer
Mark D. Gessler, Senior Vice President, Corporate Development and Chief
Financial Officer
Alan G. Walton, Ph.D., D.Sc., Chairman of the Board of Directors
<PAGE> 234
EXHIBIT D
FORM OF COMPANY STOCK OPTION AGREEMENT
<PAGE> 235
ONCORMED, INC.
STOCK OPTION AGREEMENT
WITNESSETH:
RECITALS
A. The Board of Directors (the "Board") of OncorMed, Inc. (the
"Corporation") has adopted the Corporation's Restated 1993 Stock Option Plan
(the "Plan") for the purpose of attracting and retaining the services of
employees (including officers and directors), non-employee Board members and
consultants.
B. Optionee is an individual who is to render valuable services to the
Corporation or one or more parent or subsidiary corporations, and this Agreement
is executed pursuant to, and is intended to carry out the purposes of, the Plan
in connection with the grant of a stock option to purchase shares of the
Corporation's common stock ("Common Stock") under the Plan.
NOW, THEREFORE, it is hereby agreed as follows:
1. GRANT OF OPTION. Subject to and upon the terms and conditions set
forth in this Agreement, the Corporation hereby grants to Optionee, as of the
grant date (the "Grant Date") specified in the accompanying Notice of Grant of
Stock Option (the "Grant Notice"), a stock option to purchase up to that number
of shares of the Corporation's Common Stock (the "Option Shares") as is
specified in the Grant Notice. Such Option Shares shall be purchasable from time
to time during the option term at the exercise price (the "Exercise Price")
specified in the Grant Notice.
2. OPTION TERM. This option shall expire at the close of business on the
expiration date (the "Expiration Date") specified in the Grant Notice, unless
sooner terminated in accordance with Paragraph 5 or 6.
3. LIMITED TRANSFERABILITY. This option shall be exercisable only by
Optionee during Optionee's lifetime and shall not be transferable or assignable
by Optionee other than by will or by the laws of descent and distribution
following Optionee's death.
4. EXERCISABILITY. This option shall become exercisable for the Option
Shares in accordance with the installment schedule specified in the Grant
Notice. As this option becomes exercisable for one or more installments, those
installments shall accumulate, and the option shall remain exercisable for the
accumulated installments until the Expiration Date or sooner termination of the
option term under Paragraph 5 or 6. In no event shall this option become
exercisable for any additional Option Shares following Optionee's cessation of
Service.
5. CESSATION OF SERVICE. The option term specified in Paragraph 2 shall
terminate (and this option shall cease to remain outstanding) prior to the
Expiration Date in accordance with the following provisions:
(a) This option shall immediately terminate and cease to remain
outstanding for any Option Shares for which it is not exercisable at the
time of Optionee's cessation of Service (as defined below).
(b) Should Optionee cease to remain in Service for any reason other
than death or permanent disability, then the period during which this
option is to remain exercisable shall be limited to the three (3)-month
period following the date of such cessation of Service.
(c) Should such Service terminate by reason of permanent disability,
then the period during which this option is to remain exercisable shall be
limited to the twelve (12)-month period following the date of such
cessation of Service.
(d) Should Optionee die while holding this option, then the period
during which this option is to remain exercisable shall be limited to the
twelve (12)-month period following the date of Optionee's death. During
such limited period, this option may be exercised by the personal
representative of Optionee's estate or by the person or persons to whom
this option is transferred pursuant to Optionee's will or in accordance
with the laws of descent and distribution.
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(e) Under no circumstances, however, shall this option be exercisable
after the specified expiration date of the option term.
(f) During the applicable limited post-Service exercise period, this
option may not be exercised in the aggregate for more than the number of
vested shares for which this option is exercisable on the date of
Optionee's cessation of Service. Upon the expiration of such limited
exercise period or (if earlier) upon the expiration of the option term,
this option shall terminate and cease to be exercisable for any vested
shares for which this option has not been exercised. However, this option
shall, immediately upon Optionee's cessation of Service, terminate and
cease to be outstanding with respect to any Option Shares for which this
option is not at that time exercisable or in which Optionee is not
otherwise at that time vested.
(g) For purposes of this Agreement, the following definitions shall be
in effect:
Optionee shall be deemed to remain in SERVICE for so long as such
individual performs services on a periodic basis to the Corporation (or
any parent or subsidiary corporation) in the capacity of an Employee, a
non-employee member of the Board, a consultant or an independent
contractor.
Optionee shall be considered to be an EMPLOYEE for so long as such
individual performs services while in the employ of the Corporation or
any parent or subsidiary, subject to the control and direction of the
employer entity not only as to the work to be performed but also as to
the manner and method of performance.
Optionee shall be deemed to have incurred a PERMANENT DISABILITY if
Optionee is unable to engage in any substantial gainful activity by
reason of any medically determinable physical or mental impairment
expected to result in death or to be of continuous duration of twelve
(12) months or more.
A corporation shall be considered to be a SUBSIDIARY of the
Corporation if it is a member of an unbroken chain of corporations
beginning with the Corporation, provided each such corporation in the
unbroken chain (other than the last corporation) owns, at the time of
determination, stock possessing fifty percent (50%) or more of the total
combined voting power of all classes of stock in one of the other
corporations in such chain. A corporation shall be considered to be a
PARENT of the Corporation if it is a member of an unbroken chain ending
with the Corporation provided each such corporation in the unbroken
chain (other than the Corporation) owns, at the time of determination,
stock possessing fifty percent (50%) or more of the total combined
voting power of all classes of stock in one of the other corporations in
such chain.
6. CORPORATE TRANSACTION.
(a) In the event of any of the following stockholder-approved transactions
to which the Corporation is a party (a "Corporate Transaction"):
(i) a merger or consolidation in which more than fifty percent (50%)
of the Corporation's outstanding voting stock is transferred to a person or
persons different from those who held the stock immediately prior to such
transaction, or
(ii) the sale, transfer or other disposition of all or substantially
all of the Corporation's assets in complete liquidation or dissolution of
the Corporation,
this option, to the extent outstanding at such time but not otherwise
exercisable, shall automatically accelerate so that such option shall,
immediately prior to the specified effective date for the Corporate Transaction,
become fully exercisable for all the Option Shares at the time subject to such
option and may be exercised for all or any portion of such shares. No such
acceleration of this option, however, shall occur if and to the extent: (i) this
option is, in connection with the Corporate Transaction, either to be assumed by
the successor corporation or parent thereof or replaced with a comparable option
to purchase shares of the capital stock of the successor corporation or parent
thereof or (ii) this option is to be replaced by a comparable cash incentive
program of the successor corporation based on the option spread existing at the
time of the Corporate
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<PAGE> 237
Transaction. The determination of option comparability under clause (i) or (ii)
shall be made by the Plan Administrator, and such determination shall be final,
binding and conclusive.
(b) The portion of this option accelerated in connection with any Corporate
Transaction shall remain exercisable as an incentive stock option under the
Federal tax laws (if the option is designated as such in the Grant Notice) only
to the extent the applicable dollar limitation of Paragraph 17 is not exceeded
in the calendar year of such Corporate Transaction.
(c) This option, to the extent not previously exercised, shall terminate
immediately after the consummation of such Corporate Transaction and cease to
remain outstanding, unless it is expressly assumed by the successor corporation
or parent thereof.
(d) This Agreement shall not in any way affect the right of the Corporation
to adjust, reclassify, reorganize or otherwise make changes in its capital or
business structure or to merge, consolidate, dissolve, liquidate or sell or
transfer all or any part of its business or assets.
7. ADJUSTMENT IN OPTION SHARES.
(a) In the event any change is made to the Common Stock issuable under the
Plan by reason of any stock split, stock dividend, recapitalization, combination
of shares, exchange of shares or other change affecting the outstanding Common
Stock as a class effected without the Corporation's receipt of consideration,
the Plan Administrator shall make appropriate adjustments to (i) the number
and/or class of securities subject to this option and (ii) the Exercise Price
payable per share in order to prevent any dilution or enlargement of rights and
benefits hereunder. Such adjustments shall be final, binding and conclusive.
(b) If this option is to be assumed in connection with any Corporate
Transaction under Paragraph 6 or is otherwise to continue outstanding, then this
option shall, immediately after the effective date of such Corporate
Transaction, be appropriately adjusted to apply and pertain to the number and
class of securities which would have been issued to Optionee in the consummation
of such Corporate Transaction had the option been exercised immediately prior to
such Corporate Transaction. Appropriate adjustments shall also be made to the
Exercise Price payable per share, provided the aggregate Exercise Price payable
hereunder shall remain the same.
8. PRIVILEGE OF STOCK OWNERSHIP. The holder of this option shall not have
any of the rights of a stockholder with respect to the Option Shares until such
individual shall have exercised the option and paid the Exercise Price for the
purchased Option Shares.
9. MANNER OF EXERCISING OPTION.
(a) In order to exercise this option with respect to all or any part of the
Option Shares for which this option is at the time exercisable, Optionee (or in
the case of exercise after Optionee's death, Optionee's executor, administrator,
heir or legatee, as the case may be) must take the following actions:
(i) Deliver to the Secretary of the Corporation an executed notice of
exercise in substantially the form of Exhibit I to this Agreement (the
"Exercise Notice") in which there is specified the number of Option Shares
which are to be purchased under the exercised option.
(ii) Pay the aggregate Exercise Price for the purchased shares through
one of the following alternatives:
(1) full payment in cash or by check made payable to the
Corporation's order;
(2) full payment in shares of Common Stock held for the requisite
period necessary to avoid a charge to the Corporation's earnings for
financial reporting purposes and valued at Fair Market Value (as such
term is defined below) on the Exercise Date (as such term is defined
below); or
(3) full payment effected through a broker-dealer sale and
remittance procedure pursuant to which Optionee shall provide concurrent
irrevocable written instructions (i) to a Corporation-designated
brokerage firm to effect the immediate sale of the purchased shares and
remit to the Corporation, out of the sale proceeds available on the
settlement date, sufficient funds to cover the
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<PAGE> 238
aggregate Exercise Price payable for the purchased shares plus all
applicable Federal, state and local income and employment taxes required
to be withheld in connection with such purchase and (ii) to the
Corporation to deliver the certificates for the purchased shares
directly to such brokerage firm in order to complete the sale
transaction.
(iii) Furnish to the Corporation appropriate documentation that the
person or persons exercising this option (if other than Optionee) have the
right to exercise the option.
(b) For purposes of this Agreement, the Exercise Date shall be the date on
which the executed Exercise Notice shall have been delivered to the Corporation.
Except to the extent the sale and remittance procedure specified above is
utilized in connection with the option exercise, payment of the Exercise Price
for the purchased shares must accompany such Exercise Notice.
(c) For all valuation purposes under this Agreement, the Fair Market Value
per share of Common Stock on any relevant date shall be determined in accordance
with the following provisions:
(i) If the Common Stock is not at the time listed or admitted to
trading on any Stock Exchange but is traded on the Nasdaq National Market,
the Fair Market Value shall be the closing selling price per share of
Common Stock on the date in question, as the price is reported by the
National Association of Securities Dealers through the Nasdaq National
Market or any successor system. If there is no closing selling price for
the Common Stock on the date in question, then the Fair Market Value shall
be the closing selling price on the last preceding date for which such
quotation exists.
(ii) If the Common Stock is not at the time listed or admitted to
trading on any Stock Exchange or the Nasdaq National Market, but is traded
on the Nasdaq SmallCap Market or over-the-counter market, the fair market
value shall be the mean between the highest bid and lowest asked prices of
one share of Common Stock on the day preceding the date in question on the
Nasdaq SmallCap Market or over-the-counter market, as such prices are
reported by the National Association of Securities Dealers through its
Nasdaq system or any successor system. If there are no reported bid and
asked prices for the Common Stock on such day, then the mean between the
highest bid and lowest asked prices on the last preceding date for which
such quotations exist shall be determinative of fair market value.
(iii) If the Common Stock is at the time listed or admitted to trading
on any Stock Exchange, then the Fair Market Value shall be the closing
selling price per share of Common Stock on the date in question on the
Stock Exchange determined by the Plan Administrator to be the primary
market for the Common Stock, as such price is officially quoted in the
composite tape of transactions on such exchange. If there is no closing
selling price for the Common Stock on the date in question, then the Fair
Market Value shall be the closing selling price on the last preceding date
for which such quotation exists.
(iv) If the Common Stock is at the time neither listed nor admitted to
trading on any Stock Exchange nor traded on the Nasdaq National Market, the
Nasdaq SmallCap Market or in the over-the-counter market, or if the Plan
Administrator determines that the value determined pursuant to subparagraph
(1), (2) or (3) does not accurately reflect the fair market value of the
Common Stock, then such Fair Market Value shall be determined by the Plan
Administrator after taking into account such factors as the Plan
Administrator shall deem appropriate.
(d) For purposes of this Agreement, Stock Exchange shall mean either the
American Stock Exchange or the New York Stock Exchange.
(e) As soon as practical after receipt of the Exercise Notice, the
Corporation shall mail or deliver to or on behalf of Optionee (or any other
person or persons exercising this option in accordance herewith) a certificate
or certificates representing the purchased Option Shares.
(f) In no event may this option be exercised for any fractional share.
10. GOVERNING LAW. The interpretation, performance and enforcement of
this Agreement shall be governed by the laws of the State of Maryland without
resort to that State's conflict-of-laws provisions.
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<PAGE> 239
11. COMPLIANCE WITH LAWS AND REGULATIONS. The exercise of this option and
the issuance of Option Shares upon such exercise shall be subject to compliance
by the Corporation and Optionee with all applicable requirements of law relating
thereto and with all applicable regulations of any securities exchange on which
shares of the Corporation's Common Stock may be listed at the time of such
exercise and issuance.
12. SUCCESSORS AND ASSIGNS. The provisions of this Agreement shall inure
to the benefit of, and be binding upon, the Corporation and its successors or
assigns, whether by Corporate Transaction or otherwise, and Optionee, the legal
representatives of his or her estate, his or her respective heirs or legatees
and permitted assignees.
13. LIABILITY OF CORPORATION.
(a) If the Option Shares covered by this Agreement exceed, as of the Grant
Date, the number of shares which may without stockholder approval be issued
under the Plan, then this option shall be void with respect to such excess
shares unless stockholder approval of an amendment sufficiently increasing the
number of shares issuable under the Plan is obtained in accordance with the
provisions of Section II of Article Four of the Plan.
(b) The inability of the Corporation to obtain approval from any regulatory
body having authority deemed by the Corporation to be necessary to the lawful
issuance and sale of any Common Stock pursuant to this option shall relieve the
Corporation of any liability with respect to the non-issuance or sale of the
Common Stock as to which such approval shall not have been obtained. The
Corporation shall use its best efforts to obtain all such approvals.
14. NO EMPLOYMENT/SERVICE CONTRACT. Nothing in this Agreement or in the
Plan shall confer upon Optionee any right to continue in the Service of the
Corporation (or any parent or subsidiary employing or retaining Optionee) for
any period of specific duration or interfere with or otherwise restrict in any
way the rights of the Corporation (or any such parent or subsidiary) or
Optionee, which rights are hereby expressly reserved by each party, to terminate
Optionee's Service at any time for any reason whatsoever, with or without cause.
15. NOTICES. Any notice required to be given or delivered to the
Corporation under the terms of this Agreement shall be in writing and addressed
to the Corporation in care of the Secretary at the Corporation's principal
offices at 205 Perry Parkway, Gaithersburg, MD 20877. Any notice required to be
given or delivered to Optionee shall be in writing and addressed to Optionee at
the address indicated on the Grant Notice. All notices shall be deemed to have
been given or delivered upon personal delivery or upon deposit in the U.S. mail,
by registered or certified mail, postage prepaid and properly addressed to the
party to be notified.
16. CONSTRUCTION. This Agreement and the option evidenced hereby are made
and granted pursuant to the Plan and are in all respects limited by and subject
to the express terms and provisions of the Plan. All decisions of the Plan
Administrator with respect to any question or issue arising under the Plan or
this Agreement shall be conclusive and binding on all persons having an interest
in this option.
17. ADDITIONAL TERMS APPLICABLE TO AN INCENTIVE STOCK OPTION. In the
event this option is designated an incentive stock option in the Grant Notice,
the following terms and conditions shall also apply to the grant:
(a) This option shall cease to qualify for favorable tax treatment as
an incentive stock option under the Federal tax laws if (and to the extent)
this option is exercised for one or more Option Shares: (i) more than three
(3) months after the date Optionee ceases to be an Employee for any reason
other than death or permanent disability (as defined in Paragraph 5) or
(ii) more than one (1) year after the date Optionee ceases to be an
Employee by reason of permanent disability.
(b) If this option is to become exercisable in a series of
installments as indicated in the Grant Notice, no such installment shall
qualify for favorable tax treatment as an incentive stock option under the
Federal tax laws if (and to the extent) the aggregate Fair Market Value
(determined at the Grant Date) of the shares of the Corporation's Common
Stock for which such installment first becomes exercisable hereunder will,
when added to the aggregate value (determined as of the respective date or
dates of grant) of the Common Stock or other securities for which this
option or one or more other
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<PAGE> 240
incentive stock options granted to Optionee prior to the Grant Date
(whether under the Plan or any other option plan of the Corporation or any
parent or subsidiary) first become exercisable during the same calendar
year, exceed One Hundred Thousand Dollars ($100,000) in the aggregate.
Should the number of shares of Common Stock for which this option first
becomes exercisable in any calendar year exceed the applicable One Hundred
Thousand Dollar ($100,000) limitation, the option may nevertheless be
exercised for those excess shares in such calendar year as a non-statutory
option.
(c) Should the exercisability of this option be accelerated upon a
Corporate Transaction in accordance with Paragraph 6, then this option
shall qualify for favorable tax treatment as an incentive stock option
under the Federal tax laws only to the extent the aggregate Fair Market
Value (determined at the Grant Date) of the number of shares of the
Corporation's Common Stock for which this option first becomes exercisable
in the calendar year in which the Corporate Transaction occurs does not,
when added to the aggregate value (determined as of the respective date or
dates of grant) of the shares of Common Stock or other securities for which
this option or one or more other incentive stock options granted to
Optionee prior to the Grant Date (whether under the Plan or any other
option plan of the Corporation or any parent or subsidiary) first become
exercisable during the same calendar year, exceed One Hundred Thousand
Dollars ($100,000) in the aggregate. Should the number of shares of Common
Stock for which this option first becomes exercisable in the calendar year
of such Corporate Transaction exceed the applicable One Hundred Thousand
Dollar ($100,000) limitation, the option may nevertheless be exercised for
the excess shares in such calendar year as a non-statutory option.
(d) Should Optionee hold, in addition to this option, one or more
other options to purchase shares of the Corporation's Common Stock which
become exercisable for the first time in the same calendar year as this
option, then the foregoing limitations on the exercisability of such
options as incentive stock options under the Federal tax laws shall be
applied on the basis of the order in which such options are granted.
(e) To the extent this option should fail to qualify for incentive
stock option treatment under the Federal tax laws, Optionee shall recognize
compensation income at the time the option is exercised in an amount equal
to the Fair Market Value of the purchased Option Shares less the aggregate
Exercise Price paid for those shares, and Optionee must make appropriate
arrangements with the Corporation or any parent or subsidiary employing
Optionee for the satisfaction of all Federal, state or local income and
employment tax withholding requirements applicable to such compensation
income.
18. ADDITIONAL TERMS APPLICABLE TO A NON-STATUTORY STOCK OPTION. In the
event this option is designated a non-statutory stock option in the Grant
Notice, Optionee shall make appropriate arrangements with the Corporation or any
parent or subsidiary employing Optionee for the satisfaction of all Federal,
state or local income and employment tax withholding requirements applicable to
the exercise of this option.
19. MARKET STAND-OFF. In connection with any public offering of the
Corporation's securities, Optionee hereby agrees to be subject to a lock-up for
such period following the public offering as required by the underwriter or
underwriters of such public offering. During such periods, Optionee agrees not
to directly or indirectly sell, offer to sell, contract to sell (including,
without limitation, any short sale), grant any option to purchase or otherwise
transfer or dispose of (other than to donees who agree to be similarly bound)
any Option Shares during such period without the prior written consent of such
underwriter or underwriters.
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<PAGE> 241
EXHIBIT I
NOTICE OF EXERCISE OF STOCK OPTION
I hereby notify OncorMed, Inc. (the "Corporation") that I elect to purchase
shares of the Corporation's Common Stock (the "Purchased Shares")
at the option exercise price of $ per share (the "Exercise Price") pursuant
to that certain option (the "Option") granted to me under the Corporation's
Restated 1993 Stock Option Plan on , 199 to purchase up to
shares of the Corporation's Common Stock.
Concurrently with the delivery of this Exercise Notice to the Secretary of
the Corporation, I shall hereby pay to the Corporation the Exercise Price for
the Purchased Shares in accordance with the provisions of my agreement with the
Corporation evidencing this Option and shall deliver whatever additional
documents may be required by such agreement as a condition for exercise.
Alternatively, I may utilize the special broker-dealer sale and remittance
procedure specified in my agreement to effect the payment of the Exercise Price
for the Purchased Shares.
, 199
Date
--------------------------------------
Optionee
Address:
--------------------------------------
---------------------------------
Print name in exact manner
it is to appear on the
stock certificate:
- ---------------------------------------------------
Address to which certificate
is to be sent, if different
from address above:
- -----------------------------------------------
---------------------------------------------------------------
Social Security Number:
- -----------------------------------------
<PAGE> 242
EXHIBIT E
FORM OF COMPANY PROPRIETARY INFORMATION AND ASSIGNMENT AGREEMENT
<PAGE> 243
PROPRIETARY INFORMATION AND INVENTIONS AGREEMENT
------------------------------------
(Date)
OncorMed, Inc.
205 Perry Parkway
Gaithersburg, ED 20877
Ladies and Gentlemen:
The following confirms an agreement between OncorMed, Inc., a Delaware
corporation (the "Company"), and any successor in interest, and me, which is a
material part of the consideration for my employment or continued employment by
the Company:
20. PROPRIETARY INFORMATION. I recognize that the Company is engaged in a
continuous program of research, development and production. I also recognize
that the Company possesses or has rights to information (including information
developed by me during my employment by the Company) which has commercial value
in the Company's business ("Proprietary Information"). By way of illustration,
but not limitation, Proprietary Information includes inventions, products,
processes, methods, techniques I formulas, compositions, compounds, projects,
developments, plans, research data, clinical data, financial data, personnel
data, computer programs, customer and supplier lists, and contacts at or
knowledge of customers or prospective customers of the Company.
21. OBLIGATION OF CONFIDENTIALITY. I understand and agree that my
employment creates a relationship of confidence and trust between the Company
and me with respect to (i) all Proprietary Information, and (ii) the
confidential information of Others with which the Company has a business
relationship. At all times, both during my employment by the Company and after
its termination, I will keep in confidence and trust all such information, and I
will not use or disclose any such information without the written consent of the
Company, except as may be necessary in the ordinary course of performing my
duties to the Company.
22. DISCLOSURE AND ASSIGNMENT OF INVENTIONS. In addition, I hereby agree
as follows:
(a) All Proprietary Information shall be the sole property of the
Company and its assigns, and the Company and its assigns shall be the sole
owner of all trade secrets, patents, trademarks, copyrights, and other
rights in connection therewith. I hereby assign to the Company any rights I
may have or acquire in such Proprietary Information.
(b) All documents, records, apparatus, equipment and other physical
property, whether or not pertaining to Proprietary Information, furnished
to me by the Company or produced by me or others in connection with my
employment shall be and remain the sole property of the Company. I shall
return to the Company all such materials and property as and when requested
by the Company. Even if the Company does not so request, I shall return all
such materials and property upon termination of my employment by me or by
the Company for any reason, and I will not take with me any such material
or property or any reproduction thereof upon such termination.
(c) I will promptly disclose to the Company, or any persons designated
by it, all improvements, inventions, works of authorship, formulas, ideas,
processes, techniques, know-how and data, whether or not patentable
(collectively, "Inventions"), made or conceived, reduced to practice or
learned by me, either alone or jointly with others, during the term of my
employment and for one (1) year thereafter.
(d) All Inventions which I conceive, develop or have developed (in
whole or in part, either alone or jointly with others) and (i) which use or
have used equipment, supplies, facilities or trade secret information of
the Company, or (ii) which use or have used the hours for which I am to be
or was compensated by the Company, or (iii) which relate at the time of
conception or reduction to practice thereof to the business of the Company
or to its actual or demonstrably anticipated research and development or
(iv) which result from any work performed by me for the Company, shall be
the sole property of the Company and its assigns (and to the fullest extent
permitted by law shall be deemed
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<PAGE> 244
works "made for hire"), and the Company and its assigns shall be the sole
owner of all patents, copyrights and other rights in connection therewith.
I hereby assign to the Company any rights I may have or acquire in such
Inventions. I agree that any Invention required to be disclosed under
paragraph (c) above within one (1) year after the term of my employment
shall be presumed to have been conceived during my employment. I understand
that I may overcome the presumption by showing that such Invention was
conceived after the termination of my employment.
(e) With respect to Inventions described in paragraph (d) above, I
will assist the Company in every proper way (but at the Company's expense)
to obtain and from time to time enforce patents, copyrights or other rights
on said Inventions in any and all countries, and will execute all documents
reasonably necessary or appropriate for this purpose. This obligation shall
survive the termination of my employment, but the Company shall compensate
me at a reasonable rate after such termination for time actually spent by
me at the Company's request on such assistance. In the event that the
Company is unable for any reason whatsoever to secure my signature to any
document reasonably necessary or appropriate for any of the foregoing
purposes, (including renewals, extensions, continuations, divisions or
continuations in part), I hereby irrevocably designate and appoint the
Company and its duly authorized officers and agents, as my agents and
attorneys-in-fact to act for and in my behalf and instead of me, put only
for the purpose of executing and filing any such document and doing all
other lawfully permitted acts to accomplish the foregoing purposes with the
same legal force and effect as if executed by me.
(f) I understand that this Agreement does not require assignment of an
invention for which no equipment, supplies, facility, or trade secret
information of the Company was used and which was developed entirely on my
own time, unless the invention relates (i) directly to the business of the
Company, or (ii) to the Company's actual or demonstrably anticipated
research or development. However, I will disclose any Inventions as
required by paragraph (c) above in order to permit the Company to determine
such issues as may arise. Such disclosure shall be received in confidence
by the Company.
23. OTHER BUSINESS ACTIVITIES. So that the Company may be aware of the
extent of any other demands upon my time and attention, I will disclose to the
Company (such disclosure to be held in confidence by the Company) the nature and
scope of any other business activity in which I am or become engaged during the
term of my employment. During the term of my employment, I will not engage in
any business activity which is related to the Company's business or its actual
or demonstrably anticipated research and development.
24. NON-SOLICITATION OF EMPLOYEES, CUSTOMERS OR OTHERS. I will not now or
in the future disrupt, damage, impair or interfere with the business of the
Company, whether by way of interfering with or raiding its employees, disrupting
its relationships with customers, agents, vendors, distributors or
representatives, or otherwise. During my employment with the Company and for one
(1) year thereafter, I will not encourage or solicit any employee of the Company
to leave the Company for any reason; provided, however, that this obligation
shall not affect any responsibility I may have as an employee of the Company
with respect to the bona fide hiring and firing of Company personnel.
25. PRIOR INVENTIONS. As a matter of record I attach hereto a complete
list of all inventions or improvements relevant to the subject matter of my
employment by the Company which have been made or conceived or first reduced to
practice by me, alone or jointly with others, prior to my employment with the
Company that I desire to remove from the operation of this Agreement, and I
covenant that such list is complete. If no such list is attached to this
Agreement, I represent that I have no such Inventions and improvements at the
time of signing this Agreement.
26. OBLIGATIONS TO FORMER EMPLOYERS. I represent that my execution of
this Agreement, my employment with the Company and my performance of my proposed
duties to the Company in the development of its business will not violate any
obligations I may have to any former employer or any other third party,
including any obligations to keep confidential any proprietary or confidential
information. I have not entered into, and I will not enter into, any agreement
which conflicts with or would, if performed by me, cause me to breach this
Agreement.
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<PAGE> 245
27. CONFIDENTIAL INFORMATION OF FORMER EMPLOYERS. In the course of
performing my duties to the Company, I will not utilize any proprietary or
confidential information of any former employer.
28. NO EMPLOYMENT AGREEMENT. I agree that this Agreement does not
constitute an employment agreement and that, unless otherwise provided in a
written contract signed by both the Company and me, (i) my employment with the
Company is "at will," and (ii) I shall have the right to resign my employment,
and the Company shall have the right to terminate my employment, at any time and
for any reason, with or without cause.
29. UNITED STATES GOVERNMENT OBLIGATIONS. I acknowledge that the Company
from time to time may have agreements with other persons or with the United
States Government, or agencies thereof, which impose obligations or restrictions
on the Company regarding inventions made during the course of work under such
agreements or regarding the confidential nature of such work. I agree to be
bound by all such obligations and restrictions which are made known to me and to
take all action necessary to discharge the obligations of the Company under such
agreements.
30. MISCELLANEOUS.
(a) If one or more provisions of this Agreement are held to be
unenforceable under applicable law, such provision shall be construed, if
possible, so as to be enforceable under applicable law, else, such provision
shall be excluded from this Agreement and the balance of the Agreement shall be
interpreted as if such provision were so excluded and shall be enforceable in
accordance with its terms.
(b) No delay or omission by the Company in exercising any right hereunder
will operate as a waiver of that or any other right. A waiver or consent given
by the Company on any one occasion is effective only in that instance and will
not be construed as a bar to or waiver of any right on any other occasion.
(c) I expressly consent to be bound by the provisions hereof for the
benefit of the Company or any subsidiary or affiliate thereof to whose employ I
may be transferred without the necessity that this Agreement be reassigned at
the time of such transfer.
(d) This Agreement shall be governed by and construed under the laws of the
State of Maryland as applied to agreements among Maryland residents entered into
and to be performed entirely within Maryland, without regards to the application
of choice of law rules.
(e) This Agreement shall be effective as of the first day of my employment
by the Company, shall be binding upon me, my heirs, executors, assigns and
administrators and shall inure to the benefit of the Company, its successors and
assigns.
Dated:
- -------------------------------------------------
--------------------------------------
Employee Signature
Name:
--------------------------------------
SS#:
--------------------------------------
Accepted and Agreed to:
ONCORMED, INC.
By:
- ----------------------------------------------------
Name:
- -------------------------------------------------
Title:
- --------------------------------------------------
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<PAGE> 246
EXHIBIT A
ONCORMED, INC.
205 PERRY PARKWAY
GAITHERSBURG, MD 20877
LADIES AND GENTLEMEN:
1. The following is a complete list of all inventions or improvements
relevant to the subject matter of my employment by OncorMed, Inc. (the
"Company") that have been made or conceived or first reduced to practice by me,
alone or jointly with others, prior to my employment by the Company that I
desire to remove from the operation of the Company's Proprietary Information and
Inventions.
---------------------- No inventions or improvements.
---------------------- See below: Any and all inventions regarding
---------------------- Additional sheets attached.
2. I propose to bring to my employment the following materials and
documents of a former employer:
---------------------- No materials or documents.
---------------------- See below:
Date:
- ---------------------------------------------
--------------------------------------
Employee Signature
Name:
--------------------------------------
<PAGE> 247
EXHIBIT F
FORM OF COMPANY AFFILIATE AGREEMENT
<PAGE> 248
AFFILIATE AGREEMENT
This Affiliate Agreement (this "Agreement") is entered into as of July 6,
1998, by and between
GENE LOGIC INC., a Delaware corporation ("Parent"), and the undersigned
affiliate ("Affiliate") of ONCORMED, INC., a Delaware corporation (the
"Company").
RECITALS
A. Pursuant to that certain Agreement and Plan of Merger and
Reorganization (the "Merger Agreement"), dated as of July 6, 1998, by and among
Parent, GENE LOGIC ACQUISITION CORP., a Delaware corporation ("Merger Sub") and
the Company, the Company will merge with and into Merger Sub (the "Merger").
B. As a result of the Merger, the stockholders of the Company will receive
shares (the "Shares") of Parent Common Stock (as defined in the Merger
Agreement). Affiliate understands that he, she or it may be deemed an
"affiliate" of the Company as such term is used in paragraphs (c) and (d) of
Rule 145 ("Rule 145") under the Securities Act of 1933, as amended (the "Act"),
and as such Affiliate may only transfer, sell or dispose of Shares in accordance
with this Agreement and Rule 145.
C. Affiliate understands that the representations, warranties and
covenants set forth herein will be relied upon by Parent, Merger Sub and the
Company, and their respective counsel.
AGREEMENT
NOW, THEREFORE, the parties hereby agree as follows:
31. Capitalized terms used in this Agreement and not otherwise defined
shall have the meanings given them in the Merger Agreement.
32. Affiliate represents, warrants, understands and agrees that:
(a) Affiliate has the requisite power and capacity to execute and
deliver this Agreement and to make the representations, warranties and
agreements herein and to perform Affiliate's obligations hereunder;
(b) Affiliate has carefully read this Agreement and has discussed the
terms hereof with counsel, to the extent Affiliate felt necessary, the
requirements, limitations and restrictions on Affiliate's ability to sell,
transfer or otherwise dispose of the Shares Affiliate may receive upon the
consummation of the Merger and fully understands the requirements,
limitations and restrictions this Agreement places upon Affiliate's ability
to transfer, sell or otherwise dispose of such Shares;
(c) If Affiliate has executed any other agreement in connection
herewith (the "Other Agreements"), Affiliate understands and agrees to
abide by all restrictions contained therein;
(d) Affiliate will not sell, pledge, transfer or otherwise dispose of
any of the Shares held by Affiliate unless at such time either (i) such
transfer shall be in conformity with the provisions of Rule 145, (ii)
Affiliate shall have furnished to Parent an opinion of counsel reasonably
satisfactory to Parent, to the effect that no registration under the Act
would be required in connection with the proposed offer, sale, pledge,
transfer or other disposition or (iii) a registration statement under the
Act covering the proposed offer, sale, pledge, or other disposition shall
be effective under the Act; and
(e) Affiliate is the beneficial owner of the Company Common Stock,
Company Preferred Stock, Company Options and/or Company Warrants set forth
below, or, if not set forth below, that Affiliate is not the beneficial
owner of any Company Common Stock, Company Preferred Stock, Company Options
or Company Warrants.
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<PAGE> 249
33. Affiliate understands and agrees that, except as set forth in the
Merger Agreement, Parent is under no obligation to register the sale, transfer
or other disposition of the Shares or to take any other action necessary in
order to make compliance with an exemption from registration available.
34. Each party hereto acknowledges that (i) it will be impossible to
measure in money the damage to Parent if Affiliate fails to comply with any of
the obligations imposed by this Agreement, (ii) every such obligation is
material and (iii) in the event of any such failure, Parent will not have an
adequate remedy at law or damages and, accordingly, each party hereto agrees
that injunctive relief or other equitable remedy, in addition to remedies at law
or damages, is an appropriate remedy for any such failure.
35. This Agreement is made under, and shall be construed and enforced in
accordance with, the laws of the State of Delaware applicable to agreements made
and to be performed solely therein, without giving effect to principles of
conflicts of law. In any action between or among any of the parties, whether
arising out of this Affiliate Agreement or otherwise: (a) each of the parties
irrevocably and unconditionally consents and submits to the exclusive
jurisdiction and venue of the state and federal courts located in Maryland; (b)
if any such action is commenced in a state court, then, subject to applicable
law, no party shall object to the removal of such action to any federal court
located in Montgomery County, Maryland; (c) each of the parties irrevocably
waives the right to trial by jury; and (d) each of the parties irrevocably
consents to service of process by first class certified mail, return receipt
requested, postage prepaid, to the address appearing under such party's name on
the signature page hereto.
36. This Agreement constitutes the entire agreement between the parties
with respect to the subject matter hereof and supersedes all prior agreements
and understandings between the parties with respect thereto. No addition to or
modification of any provision of this Agreement shall be binding upon either
party hereto unless made in writing and signed by both parties hereto. The
parties hereto waive their right to a trial by jury in any action at law or suit
in equity based upon, or arising out of, this Agreement or the subject matter
hereof.
37. This Agreement shall be binding upon, enforceable by and inure to the
benefit of the parties named herein and their respective successors; this
Agreement may not be assigned by any party without the prior written consent of
Parent. Any attempted assignment not in compliance with this paragraph shall be
void and have no effect. Notwithstanding anything contained in this Agreement to
the contrary, nothing in this Agreement, expressed or implied, is intended to
confer on any Person other than the parties hereto or their respective heirs,
successors and assigns, any rights, remedies, obligations or liabilities under
or by reason of this Agreement.
38. This Agreement may be executed in one or more counterparts, each of
which shall be deemed to be an original but all of which together shall
constitute one and the same agreement.
[THIS SPACE INTENTIONALLY LEFT BLANK]
F-2
<PAGE> 250
IN WITNESS WHEREOF, the parties hereto have executed and delivered this
Agreement as of the date first written above.
GENE LOGIC INC.
By:
--------------------------------------
--------------------------------------
Print Name and Title
Address: 708 Quince Orchard Road
Gaithersburg, Maryland 20878
AFFILIATE
--------------------------------------
--------------------------------------
Print Name, and Title (if applicable)
Address:
--------------------------------------
--------------------------------------
Shares of Company Common
Stock Beneficially Owned:
--------------------------------------
Shares of Company Preferred
Stock Beneficially Owned:
--------------------------------------
Shares of Company Common
Stock Subject to Company Options:
--------------------------------------
Shares of Company Common
Stock Subject to Company Warrants:
--------------------------------------
<PAGE> 251
EXHIBIT G
LIST OF PERSONS TO ENTER INTO EMPLOYMENT OR CONSULTING AND
NONCOMPETITION AGREEMENTS
EMPLOYMENT AND NONCOMPETITION AGREEMENT
Dr. Douglas Dolginow
Dr. Joseph Vockley
CONSULTING AND NONCOMPETITION AGREEMENT
Dr. Timothy J. Triche
<PAGE> 252
APPENDIX B
OPINION OF HAMBRECHT & QUIST LLC
July 2, 1998
Confidential
The Board of Directors
Oncormed, Inc.
205 Perry Parkway
Gaithersburg, MD 20877
Ladies and Gentlemen:
You have requested our opinion as to the fairness from a financial point of
view to the holders of the outstanding shares of common stock (the "Common
Stock") of Oncormed, Inc. ("Oncormed" or the "Company") of the consideration to
be received by such shareholders in connection with the proposed merger of the
Company (the "Proposed Transaction") with and into Gene Logic Acquisition Corp.
("Merger Sub"), a wholly owned subsidiary of Gene Logic Inc. ("Gene Logic")
pursuant to the Agreement and Plan of Merger to be dated as of July 6, 1998,
among Gene Logic, Merger Sub, and Oncormed (the "Agreement").
We understand that the terms of the Agreement provide, among other things,
that Oncormed shareholders will receive 4,849,815 shares of Gene Logic common
stock, subject to reduction in certain circumstances such that the aggregate
value of all shares issued at closing does not exceed $38.2 million, as more
fully set forth in the Agreement. For purposes of this opinion, we have assumed
that the Proposed Transaction will qualify as a tax-free reorganization under
the United States Internal Revenue Code for the shareholders of the Company and
that the Proposed Transaction will be accounted for as a purchase.
Hambrecht & Quist LLC ("Hambrecht & Quist"), as part of its investment
banking services, is regularly engaged in the valuation of businesses and their
securities in connection with mergers and acquisitions, strategic transactions,
corporate restructurings, negotiated underwritings, secondary distributions of
listed and unlisted securities, private placements and valuations for corporate
and other purposes. We have acted as a financial advisor to the Board of
Directors of Oncormed in connection with the Proposed Transaction, and we will
receive a fee for our services, which include the rendering of this opinion.
In the past, we have provided investment banking and other financial
advisory services to Gene Logic and Oncormed and have received fees for
rendering these services. In particular, Hambrecht & Quist acted as placement
agent for Oncormed in connection with a private placement transaction earlier
this year. In the ordinary course of business, Hambrecht & Quist acts as a
market maker and broker in the publicly traded securities of Gene Logic and
receives customary compensation in connection therewith, and also provides
research coverage for Gene Logic. In the ordinary course of business, Hambrecht
& Quist may actively trade in the equity and derivative securities of Gene Logic
for its own account and for the accounts of its customers and, accordingly, may
at any time hold a long or short position in such securities. Hambrecht & Quist
may in the future provide additional investment banking or other financial
advisory services to Gene Logic. We are also familiar with Gene Logic, having
acted as a placement agent in connection with a private placement transaction
and as a co-managing underwriter for Gene Logic's initial public offering in
1997. In addition, Hambrecht & Quist (together with its affiliates) currently
own 210,000 shares of Gene Logic common stock. Investment funds for which
Hambrecht & Quist or its affiliates serve as investment advisor, H&Q Life
Sciences Investors and H&Q Healthcare Investors, own 140,000 and 210,000 shares
of Gene Logic, respectively.
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<PAGE> 253
In connection with our review of the Proposed Transaction, and in arriving
at our opinion, we have, among other things:
(i) reviewed the publicly available financial statements of Gene Logic
for recent years and interim periods to date and certain other
relevant financial and operating data of Gene Logic made available to
us from published sources and from the internal records of Gene
Logic;
(ii) reviewed certain internal financial and operating information,
including certain projections, relating to Gene Logic prepared by the
management of Gene Logic;
(iii) discussed the business, financial condition and prospects of Gene
Logic with certain of its officers;
(iv) reviewed the publicly available financial statements of Oncormed for
recent years and interim periods to date and certain other relevant
financial and operating data of Oncormed made available to us from
published sources and from the internal records of Oncormed;
(v) reviewed certain internal financial and operating information,
including certain projections, relating to Oncormed prepared by the
management of Oncormed;
(vi) discussed the business, financial condition and prospects of the
Oncormed with certain of its officers;
(vii) reviewed the recent reported prices and trading activity for the
common stocks of Gene Logic and Oncormed and compared such
information and certain financial information for Gene Logic and
Oncormed with similar information for certain other companies
engaged in businesses we consider comparable;
(viii) reviewed the financial terms, to the extent publicly available, of
certain comparable merger and acquisition transactions;
(ix) reviewed drafts of the Agreement; and
(x) performed such other analyses and examinations and considered such
other information, financial studies, analyses and investigations and
financial, economic and market data as we deemed relevant.
In rendering our opinion, we have assumed and relied upon the accuracy and
completeness of all of the information concerning Gene Logic or Oncormed
considered in connection with our review of the Proposed Transaction, and we
have not assumed any responsibility for independent verification of such
information. We have not prepared any independent valuation or appraisal of any
of the assets or liabilities of Gene Logic or Oncormed; nor have we conducted a
physical inspection of the properties and facilities of either company. With
respect to the financial forecasts and projections made available to us and used
in our analysis, we have assumed that they reflect the best currently available
estimates and judgments of the expected future financial performance of Gene
Logic and Oncormed. For purposes of this opinion, we have assumed that neither
Gene Logic nor Oncormed is a party to any pending transactions, including
external financings, recapitalizations or material merger discussions, other
than the Proposed Transaction and those activities undertaken in the ordinary
course of conducting their respective businesses. Our opinion is necessarily
based upon market, economic, financial and other conditions as they exist and
can be evaluated as of the date of this letter and any change in such conditions
would require a reevaluation of this opinion. We express no opinion as to the
price at which Gene Logic common stock will trade subsequent to the Effective
Time (as defined in the Agreement).
It is understood that his letter is for the information of the Board of
Directors in connection with their review of the Proposed Transaction and may
not be used for any other purpose without our prior written consent; provided,
however, that this letter may be reproduced in full in the proxy
statement/prospectus relating to the Proposed Transaction. This letter does not
constitute a recommendation to any stockholder as to how such stockholder should
vote on the Proposed Transaction.
B-2
<PAGE> 254
Based upon and subject to the foregoing and after considering such other
matters as we deem relevant, we are of the opinion that as of the date hereof
the consideration to be received by the holders of the Common Stock in the
Proposed Transaction is fair to such holders from a financial point of view. We
express no opinion, however, as to the adequacy of any consideration received in
the Proposed Transaction by Gene Logic or any of its affiliates.
Very truly yours,
HAMBRECHT & QUIST LLC
By /s/ DAVID G. GOLDEN
------------------------------------
David G. Golden
Managing Director
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<PAGE> 255
APPENDIX C
OPINION OF ING BARING FURMAN SELZ LLC
[ING BARINGS LETTERHEAD]
July 6, 1998
Board of Directors
Gene Logic Inc.
708 Quince Orchard Road
Gaithersburg, Maryland 20878
Members of the Board:
ING Baring Furman Selz LLC has acted as financial advisor to Gene Logic
Inc. ("Gene Logic") in connection with the proposed acquisition of Oncormed,
Inc. ("Oncormed") pursuant to an Agreement and Plan of Merger and
Reorganization, dated July 6, 1998, among Gene Logic, Oncormed and Gene Logic
Acquisition Corp. ("Merger Sub"), a wholly owned subsidiary of Gene Logic (the
"Merger Agreement"), which provides, among other things, for the merger of
Oncormed with and into Merger Sub and the conversion of all outstanding shares
of Common Stock of Oncormed into shares of Common Stock of Gene Logic (the
"Merger"). The Merger Agreement is to be considered by the stockholders of Gene
Logic and Oncormed at special meetings expected to be held in October 1998 and
consummated shortly thereafter. Consummation of the Merger is subject to the
terms and conditions set forth in the Merger Agreement.
Pursuant to the Merger Agreement, all of the outstanding shares of Oncormed
Common Stock shall be converted into 4,849,815 shares of Gene Logic Common
Stock, subject to certain adjustments (the "Merger Shares"). Such shares of
outstanding Oncormed Common Stock shall consist of: (i) all shares of Oncormed
Common Stock outstanding as of the date of execution of the Merger Agreement;
plus (ii) all shares of Oncormed Common Stock issued pursuant to the exercise of
outstanding options subsequent to the execution of the Merger Agreement but
prior to the Effective Time of the Merger (as defined in the Merger Agreement);
plus (iii) all shares of Oncormed Common Stock issued pursuant to the conversion
prior to the Effective Time of the Merger of all shares of 6% Series A
Convertible Preferred Stock outstanding as of the date of the execution of the
Merger Agreement (the "Oncormed Preferred Stock"). Each issued and outstanding
share of Oncormed Common Stock shall be converted into the right to receive a
fraction of a share of Gene Logic Common Stock equal to the total number of
Merger Shares divided by the total number of shares of Oncormed Common Stock
outstanding as of the Effective Time of the Merger (the "Exchange Ratio"),
assuming exercise of all options and conversion of all the Oncormed Preferred
Stock as discussed above. In addition, Gene Logic will assume outstanding
warrants to purchase shares of Oncormed Stock.
The total number of Merger Shares shall be subject to a price "collar"
relating to the share price of Gene Logic Common Stock, pursuant to which the
following adjustment in the number of Merger Shares to be issued in the Merger
shall be made: in the event that the average per share closing price of Gene
Logic Common Stock for the fifteen (15) consecutive trading days ending the
second day immediately prior to the day of the meeting of the stockholders of
Gene Logic called for the purpose of approving the Merger (the "Gene Logic
Closing Price") exceeds $7.88, the total number of Merger Shares shall equal a
number expressed by the formula: $38,204,420 divided by the Gene Logic Closing
Price. In the event that the Gene Logic Closing Price is less than $6.34,
Oncormed may, at its discretion, terminate the Merger Agreement.
We have been requested by the Board of Directors of Gene Logic to render
our opinion with respect to the fairness, from a financial point of view, to
Gene Logic's stockholders of the consideration to be paid by Gene Logic to the
Oncormed Common stockholders pursuant to the Merger Agreement. We have not been
requested to opine as to, and our opinion does not in any manner address, the
Company's underlying business decision to proceed with or effect the Merger, or
constitute a recommendation of the Merger over any
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<PAGE> 256
alternative transactions which may be available to Gene Logic. Furthermore, no
opinion is expressed herein as to the market value of the Merger Shares to be
received by the Oncormed stockholders or the price at which the Gene Logic
Common Stock will trade at any time before or after consummation of the Merger.
In conducting our analysis and arriving at our opinion, we have, among
other things:
(i) reviewed the Merger Agreement and certain related documents and
the financial terms set forth therein;
(ii) reviewed Oncormed's Annual Report on Form 10-K for the fiscal
year ended December 31, 1997, Oncormed's Quarterly Report on Form 10-Q for
the quarter ended March 31, 1998 and certain other filings with the
Securities and Exchange Commission made by Oncormed;
(iii) reviewed Gene Logic's Annual Report on Form 10-K for the fiscal
year ended December 31, 1997, Gene Logic's Quarterly Report on Form 10-Q
for the quarter ended March 31, 1998 and certain other filings with the
Securities and Exchange Commission made by Gene Logic;
(iv) reviewed certain other publicly available information concerning
Oncormed including the historical stock prices and trading volume for
Oncormed's Common Stock from January 1, 1997 to date;
(v) reviewed certain other publicly available information concerning
Gene Logic including the historical stock prices and trading volume for
Gene Logic's Common Stock from November 21, 1997 to date;
(vi) reviewed and relied upon, without independent assessment as to
its accuracy or reasonableness, certain non-public information relating to
Gene Logic and Oncormed, including financial forecasts and projections for
each, furnished to us by Gene Logic and Oncormed, respectively;
(vii) reviewed and relied upon, without independent assessment as to
their accuracy or reasonableness, the pro forma financial projections of
the merged entity, prepared jointly by the managements of Gene Logic and
Oncormed and provided to us;
(viii) reviewed certain publicly available information, including
research reports, concerning certain other companies engaged in businesses
which we believe to be comparable to Gene Logic and Oncormed and the
trading markets for certain of such companies' securities;
(ix) reviewed selected terms of certain recent mergers and
acquisitions, which we believe to be relevant;
(x) conducted discussions with certain members of senior management of
Gene Logic and Oncormed concerning their respective businesses and
operations, assets, present condition and future prospects; and
(xi) performed such other analyses, examinations and procedures,
reviewed such other agreements and documents, and considered such other
factors, as we have deemed in our sole judgment, to be necessary,
appropriate or relevant to our opinion.
We have assumed and relied upon, without independent investigation or
verification, the accuracy and completeness of the information reviewed by us
for the purposes of this opinion. With respect to the internal financial
projections and other financial and operating data and discussions relating to
the independent businesses of both Gene Logic and Oncormed and to the strategic,
financial and operational benefits anticipated from the Merger provided by Gene
Logic and Oncormed, we have assumed that they have been reasonably prepared on
bases reflecting the best currently available estimates and judgments of the
prospects of Gene Logic and Oncormed, individually and jointly. We have relied
upon, without independent investigation or verification, the assessment by the
managements of Gene Logic and Oncormed of their ability to retain key employees
of both Gene Logic and Oncormed. We have also relied upon, without independent
investigation or verification, the assessment by the managements of Gene Logic
and Oncormed of Gene Logic's and Oncormed's partnerships, technologies and
potential future partnerships and products, the timing and risks associated with
the integration of Oncormed with Gene Logic, and the validity of, and risks
associated with, Gene Logic's and Oncormed's existing and future partnerships,
products and technologies.
C-2
<PAGE> 257
In arriving at our opinion, we made limited physical inspections of the
properties and facilities of Oncormed and Gene Logic. We have not made any
independent valuation or appraisal of any such properties or facilities, or of
the assets, liabilities or technology of Oncormed or Gene Logic, respectively,
nor have we been furnished with any such appraisals.
We have assumed the correctness of all legal, tax and accounting advice
given to Gene Logic and Oncormed and that the Merger will be accounted for as a
"purchase" business combination in accordance with U.S. Generally Accepted
Accounting Principles, will be treated as a tax-free reorganization and exchange
pursuant to the Internal Revenue Code of 1986, as amended, and will be
consummated in accordance with the terms set forth in the Merger Agreement.
We have taken into account our assessment of general economic, market and
financial conditions as they exist and can be evaluated as of the date hereof
and our experience in similar transactions, as well as our experience in
securities valuation in general. It should be understood that, although
subsequent developments may affect this opinion, we do not have any obligation
to update, revise or reaffirm this opinion.
We will receive a fee for our services as financial advisors to Gene Logic,
which is contingent upon the consummation of the Merger. In the ordinary course
of our business, we may trade the securities of Gene Logic and Oncormed for our
own account and for the accounts of our customers and, accordingly, may at any
time hold a long or short position in those securities. In addition, Gene Logic
has agreed to indemnify us for certain liabilities which arise out of the
rendering of this opinion.
For purposes of rendering our opinion, we have assumed that, in all
respects material to our analysis, the representations and warranties of
Oncormed contained in the Merger Agreement are true and correct and that
Oncormed will perform all of the covenants and agreements to be performed by it
under the Merger Agreement and all conditions to the obligations of Gene Logic
to consummate the Merger will be satisfied without any waiver thereof. We have
also assumed that all governmental, regulatory or other approvals and consents
required in connection with the consummation of the Merger will be satisfied
without any waiver thereof. We have also assumed that all material governmental,
regulatory or other approvals and consents required in connection with the
consummation of the Merger will be obtained and that in connection with
obtaining any governmental, regulatory or other approvals or consents, or any
amendments, modifications or waivers to any agreements, instruments or orders to
which either Gene Logic or Oncormed are a party or are subject or by which they
are bound, no limitations, restrictions or conditions will be imposed or
amendments, modifications or waivers made that would have a material adverse
effect on Gene Logic or Oncormed or materially reduce the contemplated benefits
of the Merger to Gene Logic.
This opinion is for the use and benefit of the Board of Directors of Gene
Logic and is rendered to the Board of Directors in connection with its
consideration of the Merger. It may not be used for any other purpose without
our prior written consent, except that this opinion may be reproduced in its
entirety in the joint proxy statement to be mailed to the Gene Logic and
Oncormed Common stockholders and filed with the Securities and Exchange
Commission with respect to the transactions contemplated by the Merger
Agreement, but may not otherwise be disclosed publicly in any manner without our
prior written consent. In addition, we express no recommendation or opinion as
to how the holders of Gene Logic Common Stock should vote at the stockholders'
meeting to be held for the purpose of approving the Merger.
Based upon and subject to the foregoing, as investment bankers, it is our
opinion on the date hereof that the consideration to be paid by Gene Logic to
the Oncormed stockholders pursuant to the Merger Agreement is fair from a
financial point of view to Gene Logic and its stockholders.
Very truly yours,
ING BARING FURMAN SELZ LLC
/s/ ING BARING FURMAN SELZ LLC
C-3
<PAGE> 258
PART II
INFORMATION NOT REQUIRED IN PROSPECTUS
ITEM 20. 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 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
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.
II-1
<PAGE> 259
ITEM 21. EXHIBITS AND FINANCIAL STATEMENT SCHEDULES.
(a) Exhibits
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION OF DOCUMENTS
- ------- ------------------------
<C> <S>
**2.1 Agreement and Plan of Merger and Reorganization dated as of
July 6, 1998, among the Registrant, Oncormed, Inc.
("Oncormed") and Gene Logic Acquisition Corp. ("Merger
Sub"). (See Appendix A to the Prospectus/Joint Proxy
Statement.)(2)
3.1 Amended and Restated Certificate of Incorporation.(1)
3.2 By-Laws, as amended and restated.(1)
4.1 Reference is made to Exhibits 3.1 and 3.2.
4.2 Specimen stock certificate.(1)
5.1 Legal Opinion of Cooley Godward LLP.(5)
8.1 Tax Opinion of Cooley Godward LLP.(5)
8.2 Tax Opinion of Brobeck, Phleger & Harrison LLP.(5)
*10.1 Form of Indemnity Agreement entered into between Registrant
and its directors and officers.(1)
*10.2 Registrant's 1997 Equity Incentive Plan (the "Stock
Plan").(1)
*10.3 Form of Stock Option Agreement under the Stock Plan.(1)
*10.4 Form of Stock Option Grant Notice.(1)
*10.5 Registrant's Employee Stock Purchase Plan and related
offering document.(1)
*10.6 Registrant's Non-Employee Directors' Stock Option Plan.(1)
*10.7 Form of Nonstatutory Stock Option under the Non-Employee
Directors' Stock Option Plan.(1)
*10.8 Stock Restriction Agreement, dated July 31, 1996, between
the Registrant and Mark D. Gessler.(1)
*10.9 Stock Restriction Agreement, dated December 20, 1996,
between the Registrant and Michael J. Brennan.(1)
*10.10 Stock Restriction Agreement, dated July 31, 1996, between
the Registrant and Michael J. Brennan.(1)
10.11 Amended and Restated Investor Rights Agreement, dated July
15, 1997, between the Registrant and certain investors.(1)
*10.12 Employment Agreement, dated October 31, 1995, between the
Registrant and Michael J. Brennan.(1)
*10.13 Amendment to the Employment Agreement, dated July 9, 1997,
between the Registrant and Michael J. Brennan.(1)
*10.14 Employment Agreement, dated May 16, 1996, between the
Registrant and Mark D. Gessler.(1)
*10.15 Amendment to the Employment Agreement, dated July 9, 1997,
between the Registrant and Michael J. Brennan.(1)
10.16 Series A-1 Convertible Preferred Stock Purchase Warrant,
dated August 1, 1995, issued to Oxford Bioscience Partners
L.P.(1)
10.17 Series A-1 Convertible Preferred Stock Purchase Warrant,
dated August 1, 1995, issued to Oxford Bioscience Partners
(Bermuda) Limited Partnership.(1)
10.18 Warrant for the purchase of Shares of Common Stock dated
August 29, 1997, between Registrant and ARE-708 Quince
Orchard, LLC.(1)
10.19 Warrant, dated April 24, 1997, issued to Venture Lending &
Leasing, Inc.(1)
10.20 Warrant issued to Hambrecht & Quist LLC.(1)
10.21 Lease Agreement, dated May 7, 1997, between Registrant and
M.O.R. XVIII Associates Limited Partnership.(1)
</TABLE>
II-2
<PAGE> 260
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION OF DOCUMENTS
- ------- ------------------------
<C> <S>
10.22 Lease Agreement, dated August 22, 1997, between Registrant
and ARE-708 Quince Orchard, LLC, as amended.(1)
10.23 Warrant, dated April 15, 1997, between Registrant and
Comdisco, Inc.(1)
+10.24 Target Discovery Collaboration and License Agreement, dated
May 27, 1997, between Registrant and Procter & Gamble
Pharmaceuticals, Inc. ("Procter & Gamble").(1)
+10.25 Promissory Note, dated May 27, 1997, between Registrant and
Procter & Gamble.(1)
+10.26 Drug Target and Drug Lead Discovery Collaboration Agreement,
dated September 9, 1997, between Registrant and Japan
Tobacco Inc.(1)
10.27 Share Purchase Agreement, dated September 9, 1997, between
Registrant and Japan Tobacco Inc.(1)
+10.28 License Agreement, dated May 22, 1996, between Registrant
and Yale University.(1)
+10.29 Amendment, dated October 1, 1997, to the License Agreement
between Registrant and Yale University.(1)
+10.30 Sole Commercial Patent License Agreement, dated June 15,
1997, between Registrant and Lockheed Martin Energy Research
Company.(1)
+10.31 License Agreement, dated May 30, 1997, between Registrant
and Dr. Kenneth L. Beattie.(1)
10.32 Warrant, dated September 30, 1997, issued to Venture Lending
& Leasing, Inc.(1)
+10.33 Genomic Database Collaboration and License Agreement between
Registrant and N.V. Organon dated as of December 31,
1997.(3)
*10.34 Employment Agreement, dated February 5, 1997 between the
Registrant and Keith O. Elliston.(3)
*10.35 Amendment to Employment Agreement, dated July 9, 1997,
between the Registrant and Keith O. Elliston.(3)
*10.36 Employment Agreement, dated September 7, 1996, between the
Registrant and Eric M. Eastman.(3)
*10.37 Amendment to Employment Agreement, dated July 9, 1997,
between the Registrant and Eric M. Eastman.(3)
*10.38 Employment Agreement, dated February 17, 1997, between the
Registrant and Daniel R. Passeri.(3)
*10.39 Amendment to Employment Agreement, dated July 9, 1997,
between the Registrant and Daniel R. Passeri.(3)
10.40 Form of Voting Agreement dated as of July 6, 1998 by and
between Registrant and each of Dr. Timothy J. Triche, Dr.
Douglas Dolginow, L. Robert Johnston, Jr., John Pappajohn,
Dr. Leslie Alexandre, John W. Colloton, Stephen Turner and
Dr. Wayne Patterson.(2)
10.41 Voting Agreement dated as of July 6, 1998 by and between the
Registrant and Oncor, Inc.(2)
10.42 Voting Agreement dated as of July 6, 1998 by and between the
Registrant and Incyte Pharmaceuticals, Inc.(2)
10.43 Voting Agreement dated as of July 6, 1998 by and between the
Registrant and each of Southbrook International Investments,
Ltd., Westover Investments L.P., Montrose Investments, Ltd.,
Brown Simpson Strategic Growth Fund, L.P., Brown Simpson
Strategic Growth Fund, Ltd., and Incyte Pharmaceuticals,
Inc.(2)
10.44 Form of Affiliate Agreement.(5)
10.45 Employment Agreement, dated July 1, 1998, between the
Registrant and Douglas Dolginow, M.D.(5)
10.46 Loan Agreement, dated July 6, 1998 between Registrant and
Oncormed, Inc.(5)
+10.47 Collaboration Agreement, dated June 30, 1998, between
Registrant and Hoechst Schering AgrEvo GmbH.(5)
</TABLE>
II-3
<PAGE> 261
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION OF DOCUMENTS
- ------- ------------------------
<C> <S>
11.1 Statement re: computation of per share earnings.(4)
23.1 Consent of Arthur Andersen LLP, Independent Public
Accountants.
23.2 Consent of Arthur Andersen LLP, Independent Public
Accountants.
23.3 Consent of Hambrecht & Quist LLC (included in Appendix B to
the Prospectus/Joint Proxy Statement).(5)
23.4 Consent of ING Baring Furman Selz LLC (included in Appendix
C to the Prospectus/Joint Proxy Statement).(5)
23.5 Consent of Brobeck, Phleger & Harrison LLP (included in
Exhibit 8.2).(5)
23.6 Consent of Cooley Godward LLP (included in Exhibit 8.1).(5)
24.1 Power of Attorney.(5)
99.1 Oncormed Form of proxy card.(5)
99.2 Gene Logic Form of proxy card.(5)
</TABLE>
- ---------------
* Indicates management compensatory plan, contract or arrangement.
** Schedules omitted pursuant to Regulation S-K, Item 601(b)(2) of the
Commission. Registrant undertakes to furnish such schedules to the
Commission supplementally upon request.
+ Confidential treatment has been granted with respect to certain portions of
this exhibit.
(1) Filed as an exhibit to Registrant's Registration Statement on Form S-1 (No.
333-37317) and incorporated herein by reference.
(2) Filed as an exhibit to Registrant's Schedule 13D filed with the Commission
on July 10, 1998 and incorporated herein by reference.
(3) Filed as an exhibit to Registrant's Annual Report on Form 10-K for the
fiscal year ended December 31, 1997 and incorporated herein by reference.
(4) Filed as an exhibit to Registrant's Quarterly Report on Form 10-Q for the
quarter ended June 30, 1998 and incorporated herein by reference.
(5) Previously filed as an exhibit to this Registration Statement.
(b) Financial Statement Schedules
No schedules are included because the information required to be set forth
therein is not applicable or is reflected in the financial statements or notes
thereto.
(c) Item 4(b) Reports
Reference is made to Appendix B to the Prospectus/Joint Proxy Statement
which is included in this Registration Statement.
ITEM 22. UNDERTAKINGS.
(i) Insofar as indemnification for liabilities arising under the Securities
Act may be permitted to directors, officers and controlling persons of the
Registrant pursuant to the Gene Logic Certificate, the Gene Logic By-laws and
the DGCL, the Registrant has been advised that in the opinion of the Commission
such indemnification is against public policy as expressed in the Securities 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 a 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
question has been settled by controlling precedent, submit to a court of
appropriate jurisdiction the question of whether such indemnification by it is
against public policy as expressed in the Securities Act and will be governed by
the final adjudication of such issue.
II-4
<PAGE> 262
(ii) The Registrant hereby undertakes:
(a) To respond to requests for information that is incorporated by
reference into the Prospectus/ Joint Proxy Statement pursuant to Items 4,
10(b), 11 or 13 of Form S-4, within one business day of receipt of such
request, and to send the incorporated documents by first class mail or
other equally prompt means. This includes information contained in
documents filed subsequent to the effective date of the Registration
Statement through the date of responding to the request;
(b) To supply by means of a post-effective amendment all information
concerning a transaction, and the company being acquired involved therein,
that was not the subject of and included in the Registration Statement when
it became effective;
(c) That prior to any public reoffering of the securities registered
hereunder through use of a prospectus which is a part of this Registration
Statement, by any person or party who is deemed to be an underwriter within
the meaning of Rule 145(c), the issuer undertakes that such reoffering
prospectus will contain the information called for by the applicable
registration form with respect to reofferings by persons who may be deemed
underwriters, in addition to the information called for by the other items
of the applicable form;
(d) That every prospectus: (1) that is filed pursuant to paragraph (c)
immediately preceding, or (2) that purports to meet the requirements of
Section 10(a)(3) of the Securities Act and is used in connection with an
offering of securities subject to Rule 415, will be filed as a part of an
amendment to the Registration Statement and will not be used until such
amendment is effective, and that, for purposes of determining any liability
under the Securities Act, each such post-effective amendment 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;.
(f) To file during any period in which offers or sales are being made,
a post-effective amendment to this Registration Statement:
(1) To include any prospectus required by Section 10(a)(3) of the
Securities Act;
(2) To reflect in the prospectus any facts or events arising after
the effective date of the Registration Statement (or the most recent
post-effective amendment thereof) which, individually or in the
aggregate, represent a fundamental change in the information set forth
in the Registration Statement. Notwithstanding the foregoing, any
increase or decrease in volume of securities offered (if the total
dollar value of securities offered would not exceed that which was
registered) and any deviation from the low or high end of the estimated
maximum offering range may be reflected in the form of prospectus filed
with the Commission pursuant to Rule 424(b) if, in the aggregate, the
changes in volume and price represent no more than 20 percent change in
the maximum aggregate offering price set forth in the "Calculation of
Registration Fee" table in the effective Registration Statement;
(3) To include any information with respect to the plan of
distribution not previously disclosed in the Registration Statement or
any material change to such information in the Registration Statement;
(g) That, for the purpose of determining any liability under the
Securities Act, each such post-effective amendment 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; and
(h) To remove from Registration by means of a post-effective amendment
any of the securities being registered which remain unsold at the
termination of the offering.
II-5
<PAGE> 263
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933, the Registrant
has duly caused this Registration Statement on Form S-4 to be signed on its
behalf by the undersigned, thereunto duly authorized, in the city of
Gaithersburg, Maryland on this 22nd day of September 1998.
GENE LOGIC INC.
By: /s/ MICHAEL J. BRENNAN, M.D.,
PH.D.
-------------------------------------
Michael J. Brennan, M.D., Ph.D.,
President and Chief Executive Officer
Pursuant to the requirements of the Securities Act of 1933, as amended,
this Registration Statement has been signed below by the following persons on
behalf of the Registrant and in the capacities and on the dates indicated.
<TABLE>
<CAPTION>
SIGNATURE TITLE DATE
--------- ----- ----
<C> <S> <C>
/s/ MICHAEL J. BRENNAN, M.D., PH.D. President and Chief September 22, 1998
- ----------------------------------------------------- Executive Officer
Michael J. Brennan, M.D., Ph.D. (Principal Executive
Officer)
/s/ MARK D. GESSLER Senior Vice President, September 22, 1998
- ----------------------------------------------------- Corporate Development,
Mark D. Gessler Chief Financial Officer and
Secretary (Principal
Financial and Accounting
Officer)
/s/ ALAN G. WALTON, PH.D., D.SC.* Chairman of the Board of September 22, 1998
- ----------------------------------------------------- Directors
Alan G. Walton, Ph.D., D.Sc.
/s/ JULES BLAKE, PH.D.* Director September 22, 1998
- -----------------------------------------------------
Jules Blake, Ph.D.
/s/ CHARLES L. DIMMLER, III* Director September 22, 1998
- -----------------------------------------------------
Charles L. Dimmler, III
/s/ G. ANTHONY GORRY, PH.D.* Director September 22, 1998
- -----------------------------------------------------
G. Anthony Gorry, Ph.D.
/s/ JEFFREY D. SOLLENDER* Director September 22, 1998
- -----------------------------------------------------
Jeffrey D. Sollender
*By /s/ MARK D. GESSLER
--------------------------------------------------
Mark D. Gessler
Attorney-in-fact
</TABLE>
II-6
<PAGE> 264
INDEX TO EXHIBITS
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION OF DOCUMENTS
- ------- ------------------------
<C> <S>
**2.1 Agreement and Plan of Merger and Reorganization dated as of
July 6, 1998, among the Registrant, Oncormed, Inc.
("Oncormed") and Gene Logic Acquisition Corp. ("Merger
Sub"). (See Appendix A to the Prospectus/Joint Proxy
Statement.)(2)
3.1 Amended and Restated Certificate of Incorporation.(1)
3.2 By-Laws, as amended and restated.(1)
4.1 Reference is made to Exhibits 3.1 and 3.2.
4.2 Specimen stock certificate.(1)
5.1 Legal Opinion of Cooley Godward LLP.(5)
8.1 Tax Opinion of Cooley Godward LLP.(5)
8.2 Tax Opinion of Brobeck, Phleger & Harrison LLP.(5)
*10.1 Form of Indemnity Agreement entered into between Registrant
and its directors and officers.(1)
*10.2 Registrant's 1997 Equity Incentive Plan (the "Stock
Plan").(1)
*10.3 Form of Stock Option Agreement under the Stock Plan.(1)
*10.4 Form of Stock Option Grant Notice.(1)
*10.5 Registrant's Employee Stock Purchase Plan and related
offering document.(1)
*10.6 Registrant's Non-Employee Directors' Stock Option Plan.(1)
*10.7 Form of Nonstatutory Stock Option under the Non-Employee
Directors' Stock Option Plan.(1)
*10.8 Stock Restriction Agreement, dated July 31, 1996, between
the Registrant and Mark D. Gessler.(1)
*10.9 Stock Restriction Agreement, dated December 20, 1996,
between the Registrant and Michael J. Brennan.(1)
*10.10 Stock Restriction Agreement, dated July 31, 1996, between
the Registrant and Michael J. Brennan.(1)
10.11 Amended and Restated Investor Rights Agreement, dated July
15, 1997, between the Registrant and certain investors.(1)
*10.12 Employment Agreement, dated October 31, 1995, between the
Registrant and Michael J. Brennan. (1)
*10.13 Amendment to the Employment Agreement, dated July 9, 1997,
between the Registrant and Michael J. Brennan.(1)
*10.14 Employment Agreement, dated May 16, 1996, between the
Registrant and Mark D. Gessler.(1)
*10.15 Amendment to the Employment Agreement, dated July 9, 1997,
between the Registrant and Michael J. Brennan.(1)
10.16 Series A-1 Convertible Preferred Stock Purchase Warrant,
dated August 1, 1995, issued to Oxford Bioscience Partners
L.P.(1)
10.17 Series A-1 Convertible Preferred Stock Purchase Warrant,
dated August 1, 1995, issued to Oxford Bioscience Partners
(Bermuda) Limited Partnership.(1)
10.18 Warrant for the purchase of Shares of Common Stock dated
August 29, 1997, between Registrant and ARE-708 Quince
Orchard, LLC. (1)
10.19 Warrant, dated April 24, 1997, issued to Venture Lending &
Leasing, Inc.(1)
</TABLE>
<PAGE> 265
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION OF DOCUMENTS
- ------- ------------------------
<C> <S>
10.20 Warrant issued to Hambrecht & Quist LLC.(1)
10.21 Lease Agreement, dated May 7, 1997, between Registrant and
M.O.R. XVIII Associates Limited Partnership.(1)
10.22 Lease Agreement, dated August 22, 1997, between Registrant
and ARE-708 Quince Orchard, LLC, as amended.(1)
10.23 Warrant, dated April 15, 1997, between Registrant and
Comdisco, Inc.(1)
+10.24 Target Discovery Collaboration and License Agreement, dated
May 27, 1997, between Registrant and Procter & Gamble
Pharmaceuticals, Inc. ("Procter & Gamble").(1)
+10.25 Promissory Note, dated May 27, 1997, between Registrant and
Procter & Gamble.(1)
+10.26 Drug Target and Drug Lead Discovery Collaboration Agreement,
dated September 9, 1997, between Registrant and Japan
Tobacco Inc.(1)
10.27 Share Purchase Agreement, dated September 9, 1997, between
Registrant and Japan Tobacco Inc.(1)
+10.28 License Agreement, dated May 22, 1996, between Registrant
and Yale University.(1)
+10.29 Amendment, dated October 1, 1997, to the License Agreement
between Registrant and Yale University.(1)
+10.30 Sole Commercial Patent License Agreement, dated June 15,
1997, between Registrant and Lockheed Martin Energy Research
Company.(1)
+10.31 License Agreement, dated May 30, 1997, between Registrant
and Dr. Kenneth L. Beattie.(1)
10.32 Warrant, dated September 30, 1997, issued to Venture Lending
& Leasing, Inc.(1)
+10.33 Genomic Database Collaboration and License Agreement between
Registrant and N.V. Organon dated as of December 31,
1997.(3)
*10.34 Employment Agreement, dated February 5, 1997 between the
Registrant and Keith O. Elliston.(3)
*10.35 Amendment to Employment Agreement, dated July 9, 1997,
between the Registrant and Keith O. Elliston.(3)
*10.36 Employment Agreement, dated September 7, 1996, between the
Registrant and Eric M. Eastman.(3)
*10.37 Amendment to Employment Agreement, dated July 9, 1997,
between the Registrant and Eric M. Eastman.(3)
*10.38 Employment Agreement, dated February 17, 1997, between the
Registrant and Daniel R. Passeri.(3)
*10.39 Amendment to Employment Agreement, dated July 9, 1997,
between the Registrant and Daniel R. Passeri.(3)
10.40 Form of Voting Agreement dated as of July 6, 1998 by and
between Registrant and each of Dr. Timothy J. Triche, Dr.
Douglas Dolginow, L. Robert Johnston, Jr., John Pappajohn,
Dr. Leslie Alexandre, John W. Colloton, Stephen Turner and
Dr. Wayne Patterson.(2)
10.41 Voting Agreement dated as of July 6, 1998 by and between
Registrant and Oncor, Inc.(2)
10.42 Voting Agreement dated as of July 6, 1998 by and between
Registrant and Incyte Pharmaceuticals, Inc.(2)
10.43 Voting Agreement dated as of July 6, 1998 by and between
Registrant and each of Southbrook International Investments,
Ltd., Westover Investments L.P., Montrose Investments, Ltd.,
Brown Simpson Strategic Growth Fund, L.P., Brown Simpson
Strategic Growth Fund, Ltd., and Incyte Pharmaceuticals,
Inc.(2)
10.44 Form of Affiliate Agreement.(5)
</TABLE>
<PAGE> 266
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION OF DOCUMENTS
- ------- ------------------------
<C> <S>
10.45 Employment Agreement, dated July 1, 1998, between the
Registrant and Douglas Dolginow, M.D.(5)
10.46 Loan Agreement, dated July 6, 1998 between Registrant and
Oncormed, Inc.(5)
+10.47 Collaboration Agreement, dated June 30, 1998, between
Registrant and Hoechst Schering AgrEvo GmbH.(5)
11.1 Statement re: computation of per share earnings.(4)
23.1 Consent of Arthur Andersen LLP, Independent Public
Accountants.
23.2 Consent of Arthur Andersen LLP, Independent Public
Accountants.
23.3 Consent of Hambrecht & Quist LLC (included in Appendix B to
the Prospectus/Joint Proxy Statement).(5)
23.4 Consent of ING Baring Furman Selz LLC (included in Appendix
C to the Prospectus/Joint Proxy Statement).(5)
23.5 Consent of Brobeck, Phleger & Harrison LLP (included in
Exhibit 8.2).(5)
23.6 Consent of Cooley Godward LLP (included in Exhibit 8.1).(5)
24.1 Power of Attorney.(5)
99.1 Oncormed Form of proxy card.(5)
99.2 Gene Logic Form of proxy card.(5)
</TABLE>
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* Indicates management compensatory plan, contract or arrangement.
** Schedules omitted pursuant to Regulation S-K, Item 601(b)(2) of the
Commission. Registrant undertakes to furnish such schedules to the
Commission supplementally upon request.
+ Confidential treatment has been granted with respect to certain portions of
this exhibit.
(1) Filed as an exhibit to Registrant's Registration Statement on Form S-1 (No.
333-37317) and incorporated herein by reference.
(2) Filed as an exhibit to Registrant's Schedule 13D filed with the Commission
on July 10, 1998 and incorporated herein by reference.
(3) Filed as an exhibit to Registrant's Annual Report on Form 10-K for the
fiscal year ended December 31, 1997 and incorporated herein by reference.
(4) Filed as an exhibit to Registrant's Quarterly Report on Form 10-Q for the
quarter ended June 30, 1998 and incorporated herein by reference.
(5) Previously filed as an exhibit to this Registration Statement.
<PAGE> 1
Exhibit 23.1
CONSENT OF INDEPENDENT PUBLIC ACCOUNTANTS
As independent public accountants, we hereby consent to the use of our
reports on the Oncormed, Inc. financial statements and to all references to our
firm included in or made a part of this Registration Statement on Form S-4.
ARTHUR ANDERSEN LLP
Washington, D.C.
September 17, 1998
<PAGE> 1
Exhibit 23.2
CONSENT OF INDEPENDENT PUBLIC ACCOUNTANTS
As independent public accountants, we hereby consent to the use of our
report (and to all references to our Firm) included in or made a part of this
registration statement.
/s/ ARTHUR ANDERSEN LLP
Baltimore, Maryland
September 22, 1998
