SCHEDULE 14A INFORMATION
Proxy Statement Pursuant to Section 14(a) of the Securities
Exchange Act of 1934 (Amendment No. )
Filed by the Registrant (X) Filed by
a Party other than the Registrant ( )
Check the appropriate box:
(X) Preliminary Proxy Statement ( ) Confidential, for Use of the
Commission Only (as permitted
by Rule 14a-6(e)(2))
( ) Definitive Proxy Statement
( ) Definitive Additional Materials
( ) Soliciting Material Pursuant to Rule 14a-11(c) or Rule 14a-12
INCYTE PHARMACEUTICALS, INC.
(Name of Registrant as Specified in its Charter)
(Name of Person(s) Filing Proxy Statement, if other than Registrant)
Payment of Filing Fee (Check the appropriate box):
(X) No fee required
( ) Fee computed on table below per Exchange Act Rules 14a-6(i)(4) and 0-11.
1) Title of each class of securities to which transaction applies:
2) Aggregate number of securities to which transaction applies:
3) Per unit price or other underlying value of transaction
computed pursuant to Exchange Act Rule 0-11 (Set forth the
amount on which the filing fee is calculated and state how it
was determined):
4) Proposed maximum aggregate value of transaction:
5) Total fee paid:
<PAGE>
( ) Fee paid previously with preliminary materials.
( ) Check box if any part of the fee is offset as provided by Exchange Act Rule
0-11(a)(2) and identify the filing for which the offsetting fee was paid
previously. Identify the previous filing by registration statement number, or
the Form or Schedule and the date of its filing.
1) Amount Previously Paid:
2) Form, Schedule, or Registration Statement No.:
3) Filing Party:
4) Date Filed:
<PAGE>
INCYTE PHARMACEUTICALS, INC.
_______________, 1998
Dear Stockholder:
You are cordially invited to attend a Special Meeting of Stockholders
of Incyte Pharmaceuticals, Inc. (the "Company"). The meeting will be held at
[______] a.m. Pacific Time, on _______________, 1998 at the [Stanford Park
Hotel, 100 El Camino Real, Menlo Park, California].
At the Special Meeting, you will be asked to consider and approve a
proposal (the "Incyte Genetics Stock Proposal") being recommended by your Board
of Directors (the "Board") in order to effect a comprehensive plan that will
create two series of Common Stock. These series are intended to reflect
separately the performance of the Company's new Incyte Genetics division,
encompassing the Company's businesses of providing information-based tools and
services to the pharmaceutical industry to help them better understand the role
of genetic variation in human disease and drug response ("Incyte Genetics") and
its Incyte General division, encompassing the Company's businesses that are not
attributable to Incyte Genetics ("Incyte General". The plan will authorize the
Board to issue the remaining authorized Common Stock as shares of either such
series or to designate and issue such shares as a new series of Common Stock.
Incyte General and Incyte Genetics are sometimes referred to herein collectively
as the "Divisions" and individually as a "Division."
The Incyte Genetics Stock Proposal was adopted by the Board to separate
the business, cash flows and reported operating results of Incyte Genetics from
the rest of the Company's business. The Incyte Genetics Stock Proposal is
intended to charge the managers of each Division with the responsibility of
maximizing the returns from their businesses and permit the use of the Company's
stock incentive plans to provide more focused incentives to those management
teams and to employees of the two Divisions. In addition, this new equity
structure should increase the Company's flexibility in raising capital and
responding to acquisitions and other strategic opportunities by enabling the
Company to issue either Incyte Genetics Stock or Incyte General Stock as
appropriate under the particular circumstances.
By providing investors with separate series of Common Stock intended to
reflect the respective performances of the Company's businesses, the Incyte
Genetics Stock Proposal should allow investors and analysts to gain a better
understanding of each business and enable investors to invest in either or both
securities depending upon their individual investment objectives. The Board
believes that the separate reporting of each Division's results should result in
greater market recognition of the value of each of these businesses, while at
the same time enabling the Company to preserve the operational and financial
benefits it currently enjoys as a single company.
<PAGE>
The key elements of this plan are as follows:
o CREATION OF TRACKING STOCK. The Company will create two series of
Common Stock that are intended to reflect separately the performance
of Incyte Genetics and Incyte General. In order to do this, the
Company's Restated Certificate of Incorporation will be amended and
restated to provide for the issuance of the Company's 75,000,000
shares of authorized Common Stock in series by action of the Board, of
which 35,000,000 shares would initially be designated by the Board as
Incyte Pharmaceuticals, Inc.-- Incyte General Common Stock ("Incyte
General Stock") and 15,000,000 shares would initially be designated as
Incyte Pharmaceuticals, Inc.-- Incyte Genetics Common Stock ("Incyte
Genetics Stock"), in each case with the voting powers and relative,
participating, optional and other special rights and qualifications,
limitations and restrictions thereof as are described in the
accompanying Proxy Statement. The 25,000,000 remaining shares would be
available for issuance by the Board as Incyte Genetics Stock or Incyte
General Stock or for designation and issuance in one or more
additional series of Common Stock with the voting powers and relative,
participating, optional and other special rights and qualifications,
limitations and restrictions of any such additional series determined
by the Board.
o REDESIGNATION OF EXISTING COMMON STOCK. Each outstanding share of
the Company's existing Common Stock will be redesignated as one share
of Incyte General Stock.
o POSSIBLE PRIVATE PLACEMENT AND/OR INITIAL PUBLIC OFFERING OF INCYTE
GENETICS STOCK. Subject to the approval by the Company's stockholders
of the Incyte Genetics Stock Proposal and subject to prevailing market
and other conditions, the Company currently intends to (a) sell shares
of Incyte Genetics Stock or equity securities convertible into Incyte
Genetics Stock in a private placement to a limited number of
pharmaceutical companies (the "Incyte Genetics Private Placement") and
(b) depending on the capital needs of Incyte Genetics, to offer to the
public, for cash, shares of Incyte Genetics Stock (the "Incyte
Genetics Public Offering"). The Company currently plans to issue any
such shares from the authorized but unissued shares of capital stock,
as determined by the Board, and to allocate the net proceeds of any
Incyte Genetics Private Placement and any Incyte Genetics Public
Offering to Incyte Genetics. Subject to prevailing market and other
conditions, the Company currently expects that any Incyte Genetics
Public Offering would take place in 1999 and any Incyte Genetics
Private Placement would take place prior to any Incyte Genetics Public
Offering.
o PROPOSED DISTRIBUTION OF INCYTE GENETICS DESIGNATED SHARES. Subject to
the approval by the Company's stockholders of the Incyte Genetics Stock
Proposal, the Company currently intends to distribute up to 12,000,000
shares of Incyte Genetics Stock in the form of a stock dividend to the
holders of Incyte General Stock (the "Incyte Genetics Distribution").
The Company currently expects that the Incyte Genetics Distribution
would take place at least six months after the completion of any Incyte
Genetics Public Offering,
<PAGE>
but in no event more than 360 days after the filing of the amendment
and restatement of the Company's Restated Certificate of Incorporation
with the Secretary of State of Delaware.
The Incyte Genetics Stock Proposal will not result in a distribution or
spin-off to stockholders of any assets or liabilities of the Company or its
subsidiaries. Holders of Incyte Genetics Stock and Incyte General Stock will be
common stockholders of the Company and, as such, will be subject to all risks
associated with an investment in Incyte Pharmaceuticals, Inc. and all of its
businesses, assets and liabilities. Following implementation of the Incyte
Genetics Stock Proposal, there can be no assurance as to whether or to what
extent the market values of the Incyte Genetics Stock and the Incyte General
Stock will reflect the separate performance of the Company's businesses they are
intended to track, or that the combined market values of the Incyte Genetics
Stock and the Incyte General Stock will equal or exceed the market value of the
Company's existing Common Stock. Implementation of the Incyte Genetics Stock
Proposal will, to an extent, make the capital structure of the Company more
complex and may give rise to occasions when the interests of the holders of
Incyte Genetics Stock and the holders of Incyte General Stock may diverge or
conflict. In addition, the authorized but unissued shares of Common Stock will
be available for issuance from time to time at the sole discretion of the Board
as Incyte Genetics Stock, Incyte General Stock or as a new series of Common
Stock with voting powers and relative, participating, optional and other special
rights and qualifications, limitations and restrictions determined by the Board.
At the Special Meeting, you also will be asked to consider and approve
related proposals to amend the Company's 1991 Stock Plan, the Company's 1997
Employee Stock Purchase Plan and the Company's 1993 Directors' Stock Option Plan
(the "Additional Proposals").
THE BOARD HAS CAREFULLY CONSIDERED THE TERMS OF THE INCYTE GENETICS
STOCK PROPOSAL AND EACH OF THE ADDITIONAL PROPOSALS AND BELIEVES THEY ARE IN THE
BEST INTERESTS OF THE COMPANY AND ITS STOCKHOLDERS. ACCORDINGLY, THE BOARD
UNANIMOUSLY HAS RECOMMENDED THAT YOU APPROVE THESE PROPOSALS, WHICH ARE
DESCRIBED IN MORE DETAIL IN THE ACCOMPANYING PROXY STATEMENT. YOU ARE URGED TO
READ THE PROXY STATEMENT IN ITS ENTIRETY PRIOR TO VOTING YOUR SHARES.
PLEASE GIVE THESE PROXY MATERIALS YOUR CAREFUL ATTENTION. BECAUSE THE
AFFIRMATIVE VOTE OF THE HOLDERS OF A MAJORITY OF THE OUTSTANDING SHARES OF
EXISTING COMMON STOCK IS REQUIRED TO APPROVE THE INCYTE GENETICS STOCK PROPOSAL,
SHARES THAT ARE NOT VOTED WILL HAVE THE EFFECT OF A VOTE AGAINST THE INCYTE
GENETICS STOCK PROPOSAL.
<PAGE>
IT IS IMPORTANT THAT YOUR SHARES ARE REPRESENTED AT THIS MEETING. EVEN
IF YOU PLAN TO ATTEND THE MEETING, WE HOPE THAT YOU WILL PROMPTLY MARK, SIGN,
DATE AND RETURN THE ENCLOSED PROXY. THIS WILL NOT LIMIT YOUR RIGHT TO ATTEND OR
VOTE AT THE MEETING.
Sincerely yours,
Roy A. Whitfield
Chief Executive Officer
<PAGE>
INCYTE PHARMACEUTICALS, INC.
--------------------------------------------
NOTICE OF SPECIAL MEETING OF STOCKHOLDERS
TO BE HELD _______________, 1998
--------------------------------------------
To the Stockholders of Incyte Pharmaceuticals, Inc.:
A Special Meeting of Stockholders of Incyte Pharmaceuticals, Inc. (the
"Company") will be held at [the Stanford Park Hotel, 100 El Camino Real, Menlo
Park, California] on [__________], 1998, at [______] a.m., Pacific Time, for the
following purposes:
1. To consider and vote upon a proposal (the "Incyte Genetics Stock
Proposal") to authorize an amendment and restatement of the Company's
Restated Certificate of Incorporation (the "Certificate of
Incorporation" and, as so amended and restated, the "Amended and
Restated Certificate") that would:
(a) provide for the issuance of the Company's common stock, par
value $.001 (the "Common Stock"), in series by action of the
Board of Directors (the "Board"), of which 35,000,000 shares
would initially be designated by the Board as Incyte
Pharmaceuticals, Inc. -- Incyte General Common Stock, par
value $.001 ("Incyte General Stock"), 15,000,000 shares would
initially be designated as Incyte Pharmaceuticals, Inc. --
Incyte Genetics Common Stock, par value $.001 ("Incyte
Genetics Stock"), and 25,000,000 shares would initially be
undesignated;
(b) authorize the Board to issue any undesignated shares of Common
Stock as Incyte Genetics Stock or Incyte General Stock or to
designate and issue such shares in one or more additional
series of Common Stock and to determine the number of shares,
and the voting powers and relative, participating, optional
and other special rights and qualifications, limitations and
restrictions of any such series; and
(c) redesignate each outstanding share of the Company's existing
common stock, par value $.001 (the "Existing Common Stock"),
as one share of Incyte General Stock.
2. To consider and vote upon a proposal to amend the Company's 1991 Stock
Plan to provide that shares of Incyte General Stock and Incyte Genetics
Stock may be issued under the plan and to reserve 6,300,000 shares of
Incyte General Stock (the amount currently reserved under the 1991
Stock Plan) and 2,300,000 shares of Incyte Genetics Stock for issuance
thereunder.
3. To consider and vote upon a proposal to amend the Company's 1997
Employee Stock Purchase Plan to provide that shares of Incyte General
Stock and Incyte Genetics Stock may
<PAGE>
be issued under the plan and to reserve 400,000 shares of Incyte
General Stock (the amount currently reserved under the 1993
Director's Stock Option Plan) and 400,000 shares of Incyte
Genetics Stock for issuance thereunder; and
4. To consider and vote upon a proposal to amend the Company's 1993
Directors' Stock Option Plan to provide that the automatic stock
option grants thereunder will be made in a fixed proportion that
reflects the ratio of the number of shares of Incyte General Stock
outstanding at the time of grant to the number of shares of Incyte
Genetics Stock then outstanding and to reserve 400,000 shares of
Incyte General Stock (the amount currently reserved under the 1993
Director's Stock Option Plan) and 200,000 shares of Incyte Genetics
Stock for issuance thereunder.
Information relating to the four proposals, including the full text of
the proposed Amended and Restated Certificate, is contained in the accompanying
Proxy Statement. The accompanying Amended and Restated Certificate identifies
all amendments to be made to the Certificate of Incorporation in connection with
the proposals set forth in this Notice of Special Meeting of Stockholders and
the transactions contemplated hereby. Stockholders are urged to review the Proxy
Statement in its entirety prior to voting their shares.
If Proposal 1 is not approved by the stockholders, Proposals 2, 3 and 4
will not be implemented. Accordingly, a vote against Proposal 1 will have the
effect of a vote against Proposals 2, 3 and 4. If Proposal 1 is approved by the
stockholders, it will be implemented whether or not Proposals 2, 3 or 4 are
approved.
The approval of Proposal 1 will require the affirmative vote of the
holders of a majority of the outstanding shares of Existing Common Stock. The
approval of Proposals 2, 3 and 4 will require the affirmative vote of holders of
a majority of the shares of Existing Common Stock present in person or
represented by proxy at the meeting and entitled to vote thereon. Stockholders
are not entitled to dissenters' rights with regard to any of the proposals.
Stockholders of record as of the close of business on
[_______________], 1998 are entitled to notice of and to vote at the meeting and
any adjournment thereof. A complete list of stockholders entitled to vote at the
meeting will be available at the Secretary's office, 3174 Porter Drive, Palo
Alto, California, for ten days before the meeting.
<PAGE>
It is important that your shares are represented at this meeting. Even
if you plan to attend the meeting, we hope that you will promptly mark, sign,
date and return the enclosed proxy. This will not limit your right to attend or
vote at the meeting.
By Order of the Board of Directors
Lee Bendekgey
Vice President, Legal Affairs
and Secretary
_________________, 1998
<PAGE>
TABLE OF CONTENTS
Page
PROXY STATEMENT............................................................ 1
QUESTIONS AND ANSWERS...................................................... 4
PROXY STATEMENT SUMMARY.................................................... 9
INCYTE PHARMACEUTICALS, INC.
SELECTED CONSOLIDATED FINANCIAL DATA ....................................
INCYTE GENERAL
SELECTED COMBINED FINANCIAL DATA.........................................28
INCYTE GENETICS
SELECTED COMBINED FINANCIAL DATA.........................................30
CAUTIONARY STATEMENT FOR PURPOSES OF THE "SAFE HARBOR"
PROVISIONS OF THE PRIVATE SECURITIES LITIGATION REFORM ACT OF
1995.....................................................................31
RISK FACTORS...............................................................32
Stockholders of One Company; Financial Effects of One Division Could
Adversely Affect the Other Division................................32
Limited Separate Stockholder Rights......................................33
Limited Separate Voting Rights; Variable Voting Rights...................33
Management and Allocation Policies Subject to Change.....................35
Potential Divergence of Interests; No Specific Procedures for Resolution.35
Fiduciary Duties of the Board Owed to All Stockholders Regardless
of Class or Series.................................................38
Transfer of Funds Between Divisions; Equity Contributions................39
Absence of Approval Rights with Respect to Future Issuances
of Authorized Shares...............................................40
No Assurances as to Market Price.........................................41
Limitations on Potential Unsolicited Acquisitions........................41
Anti-Takeover Considerations.............................................42
No Assurance of Completion of Transactions...............................42
Certain Federal Income Tax Considerations................................42
PRICE RANGE OF AND DIVIDENDS ON EXISTING COMMON STOCK......................44
GENERAL....................................................................45
PROPOSAL 1 -- INCYTE GENETICS STOCK PROPOSAL...............................46
General.............................................................46
i
<PAGE>
TABLE OF CONTENTS
(continued)
Page
Background And Reasons for the Incyte Genetics Stock Proposal.......47
Vote Required.......................................................51
Recommendation of the Board of Directors............................51
Dividend Policy.....................................................51
Certain Management and Allocation Policies..........................51
Description of Incyte General Stock and Incyte Genetics Stock.......58
Incyte Genetics Designated Shares...................................72
Stock Transfer Agent and Registrar..................................73
Nasdaq National Market..............................................73
No Dissenters' Rights...............................................73
Certain Federal Income Tax Consequences.............................73
Restatement of Rights Agreement.....................................75
Anti-takeover Considerations........................................78
PROPOSAL 2 -- AMENDMENT OF THE 1991 STOCK PLAN.............................81
Summary of Amendments...............................................81
Summary of the Restated Stock Plan..................................81
PROPOSAL 3 -- AMENDMENT OF THE 1997 EMPLOYEE STOCK PURCHASE
PLAN................................................................87
Summary of Amendments...............................................87
Summary of the Restated ESPP........................................87
PROPOSAL 4 -- AMENDMENT OF THE 1993 DIRECTORS' STOCK OPTION PLAN...........90
Description of Amendments...........................................90
Summary of the Restated Directors' Option Plan......................90
EXECUTIVE COMPENSATION.....................................................93
Summary Compensation Table..........................................93
Compensation of Directors...........................................96
Compensation Committee Interlocks and Insider Participation.........96
SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND
MANAGEMENT..........................................................97
INDEPENDENT AUDITORS.......................................................99
STOCKHOLDER PROPOSALS FOR THE 1999 ANNUAL MEETING.........................100
ii
<PAGE>
TABLE OF CONTENTS
(continued)
Page
ANNEX A: Amended and Restated Certificate of Incorporation...................A-1
ANNEX B: Amended and Restated 1991 Stock Plan................................B-1
ANNEX C: Amended and Restated 1997 Employee Stock Purchase Plan..............C-1
ANNEX D: Amended and Restated 1993 Directors' Stock Option Plan..............D-1
ANNEX E: Incyte Pharmaceuticals, Inc.........................................E-1
ANNEX F: Incyte General......................................................F-1
ANNEX G: Incyte Genetics.....................................................G-1
ANNEX H: Additional Financial Information....................................H-1
ANNEX I: Factors That May Affect Results.....................................I-1
ANNEX J: Certain Scientific Terms............................................J-1
iii
<PAGE>
GLOSSARY OF DEFINED TERMS
Set forth below are certain defined terms used in this Proxy Statement
and the Annexes thereto, showing the pages on which each term is defined:
Acquiring Person............................................................
Additional Proposals........................................................
Affymetrix..................................................................
Amended and Restated Certificate............................................
Available Dividend Amount...................................................
Board.......................................................................
Business Judgment Rule......................................................
ByLaws......................................................................
Celera......................................................................
Certificate of Incorporation................................................
ChaseMellon.................................................................
Code........................................................................
Commercial Product or Service...............................................
Committee...................................................................
Common Stock................................................................
Common Stock Right..........................................................
Company.....................................................................
Convertible Securities......................................................
Delaware Law................................................................
diaDexus....................................................................
Directors' Option Plan......................................................
Disposition.................................................................
Distribution................................................................
Distribution Date...........................................................
Division....................................................................
Effective Date..............................................................
ESSP........................................................................
Existing Common Stock.......................................................
Expense Allocation..........................................................
Fair Value of the Net Proceeds..............................................
Fair Value..................................................................
GATT........................................................................
Generating Division.........................................................
Hexagen.....................................................................
INCY........................................................................
Incyte Genetics Public Offering.............................................
Incyte Genetics Stock.......................................................
-1-
<PAGE>
Incyte Genetics Designated Shares...........................................
Incyte Genetics Subsidiaries................................................
Incyte Genetics Stock Proposal..............................................
Incyte Genetics Private Placement...........................................
Incyte Management...........................................................
Incyte General Stock........................................................
Incyte Pharmaceuticals, Inc.................................................
Interdivision Transactions..................................................
Interdivision Asset Transfer................................................
ISO.........................................................................
Key Genetics Program........................................................
LifeSeq Genome(TM) Database.................................................
LifeSeq FL(R) Database......................................................
LifeSeq(R) Database.........................................................
Liquidation Units...........................................................
Market Value................................................................
Material Asset Transfer.....................................................
Merck.......................................................................
Merger Right................................................................
Nasdaq Stock Market, Inc....................................................
Net Proceeds................................................................
NSO.........................................................................
Offering Period.............................................................
PathoSeq Database...........................................................
PCT.........................................................................
Permitted Offer.............................................................
PhytoSeq(TM) Database.......................................................
Plan Effective Date.........................................................
Preferred Stock.............................................................
Proxy Statement.............................................................
Publicly Traded.............................................................
Purchase Period.............................................................
Purchasing Division.........................................................
Redemption Price............................................................
Related Business Transaction................................................
Restated Directors' Option Plan.............................................
Restated Rights Agreement...................................................
Restated Stock Plan.........................................................
Restated ESPP...............................................................
Rights Agent................................................................
Rights Agreement............................................................
Safe Harbor Provisions......................................................
-2-
<PAGE>
Securities Exchange Act of 1934.............................................
Selling Division............................................................
Series A Shares.............................................................
Series B Shares.............................................................
Service.....................................................................
SNPs........................................................................
Special Meeting.............................................................
Special Voting Rights.......................................................
Stock Plan..................................................................
Subscription Right..........................................................
Substantially All of the Properties and Assets..............................
Synteni.....................................................................
Tax Attributes..............................................................
TIGR........................................................................
Tracking Stock..............................................................
Trading Day.................................................................
USPTO.......................................................................
Voting Stock................................................................
ZooSeq(TM) Database.........................................................
Certain scientific terms used in this Proxy Statement and the Annexes
attached hereto are defined in Annex J - Certain Scientific Terms attached
hereto.
-3-
<PAGE>
INCYTE PHARMACEUTICALS, INC.
3174 Porter Drive
Palo Alto, California 94304
PROXY STATEMENT
SPECIAL MEETING OF STOCKHOLDERS
This Proxy Statement, first mailed to stockholders on or about
_______________, 1998, is furnished in connection with the solicitation by
Incyte Pharmaceuticals, Inc., a Delaware corporation (the "Company"), of proxies
in the accompanying form from holders of outstanding shares of the Company's
common stock, par value $.001 (the "Existing Common Stock"), for use at a
special meeting of stockholders to be held at [_________] a.m. Pacific Time, on
[________], 1998, and at any adjournments or postponements thereof (the "Special
Meeting"). For an index indicating the pages on which certain terms used in this
Proxy Statement are defined, see "Glossary of Defined Terms" located immediately
following the Table of Contents of this Proxy Statement.
At the Special Meeting, holders of the Existing Common Stock will be
asked to consider and approve a proposal (the "Incyte Genetics Stock Proposal")
to authorize the amendment and restatement of the Company's Restated Certificate
of Incorporation (the "Certificate of Incorporation") as set forth in Annex A
(the Certificate of Incorporation as so amended and restated, the "Amended and
Restated Certificate"), in order to effect a comprehensive plan that will (i)
create two new series of Common Stock that are intended to reflect separately
the performance of the Company's new Incyte Genetics division, encompassing the
Company's businesses of providing information-based tools and services to the
pharmaceutical industry to help them better understand the role of genetic
diversity in human disease and drug response ("Incyte Genetics") and its Incyte
General division, encompassing the Company's businesses that are not
attributable to Incyte Genetics ("Incyte General"), and (ii) authorize the Board
to issue the remaining authorized Common Stock as shares of either such series
or to designate and issue such shares as a new series of Common Stock. Incyte
General and Incyte Genetics are sometimes referred to herein collectively as the
"Divisions" and individually as a "Division."
The key elements of this plan are as follows:
o The Company would create two series of Common Stock that are intended
to reflect separately the performance of Incyte Genetics and Incyte
General. In order to do this, the Company's Restated Certificate of
Incorporation would be amended and restated to provide for the issuance
of the Company's Common Stock in series by action of the Board of
Directors (the "Board"), of which 35,000,000 shares would initially be
designated by the Board as Incyte Pharmaceuticals, Inc.-- Incyte
General Common Stock ("Incyte General Stock") and 15,000,000 shares
would initially be designated as Incyte Pharmaceuticals, Inc. -- Incyte
Genetics Common Stock ("Incyte Genetics Stock"), in each case with the
voting powers and relative, participating, optional and other special
rights and qualifications,
1
<PAGE>
limitations and restrictions of each such series as are described in
the accompanying Proxy Statement. The 25,000,000 remaining shares would
be available for issuance by the Board as Incyte Genetics Stock or
Incyte General Stock or for designation and issuance in one or more
additional series of Common Stock with voting powers and relative,
participating, optional and other special rights and qualifications,
limitations and restrictions determined by the Board.
o Each outstanding share of the Existing Common Stock would be
redesignated as one share of Incyte General Stock.
o Subject to the approval by the Company's stockholders of the Incyte
Genetics Stock Proposal and subject to prevailing market and other
conditions, the Company currently intends to (a) sell shares of Incyte
Genetics Stock or equity securities convertible into Incyte Genetics
Stock in a private placement to a limited number of pharmaceutical
companies (the "Incyte Genetics Private Placement") and (b) depending
on the capital needs of Incyte Genetics, to offer to the public for
cash shares of Incyte Genetics Stock (the "Incyte Genetics Public
Offering"). The Company currently plans to issue any such shares from
the authorized but unissued shares of capital stock, as determined by
the Board, and to allocate the net proceeds of any Incyte Genetics
Private Placement and any Incyte Genetics Public Offering to Incyte
Genetics. Subject to prevailing market and other conditions, the
Company currently expects that any Incyte Genetics Public Offering
would take place in 1999 and any Incyte Genetics Private Placement
would take place prior to any Incyte Genetics Public Offering.
o Subject to the approval by the Company's stockholders of the Incyte
Genetics Stock Proposal, the Company currently intends to distribute up
to 12,000,000 shares of Incyte Genetics Stock in the form of a stock
dividend to the holders of Incyte General Stock (the "Incyte Genetics
Distribution"). The Company currently expects that the Incyte Genetics
Distribution would take place at least six months after the completion
of any Incyte Genetics Public Offering, but in no event more than 360
days after the filing of the Amended and Restated Certificate with the
Secretary of State of Delaware (the date of such filing being referred
to as the "Effective Date").
The Incyte Genetics Stock Proposal will not result in a distribution or
spin-off to stockholders of any assets or liabilities of the Company or its
subsidiaries. Holders of Incyte Genetics Stock and Incyte General Stock will be
common stockholders of the Company and, as such, will be subject to all risks
associated with an investment in Incyte Pharmaceuticals, Inc. and all of its
businesses, assets and liabilities. Following implementation of the Incyte
Genetics Stock Proposal, there can be no assurance as to whether or to what
extent the market values of the Incyte Genetics Stock and the Incyte General
Stock will reflect the separate performance of the Company's businesses they are
intended to track, or that the combined market values of the Incyte Genetics
Stock and the Incyte General Stock will equal or exceed the market value of the
Company's existing Common Stock. Implementation of the Incyte Genetics Stock
Proposal will, to an extent, make the capital structure of the Company more
complex and give rise to occasions when the interests of the holders of Incyte
2
<PAGE>
Genetics Stock and the holders of Incyte General Stock diverge or conflict. In
addition, the authorized but unissued shares of Common Stock will be available
for issuance from time to time at the sole discretion of the Board as Incyte
Genetics Stock, Incyte General Stock or as a new series of Common Stock with
voting powers and relative, participating, optional and other special rights and
qualifications, limitations and restrictions determined by the Board. See "Risk
Factors."
The Existing Common Stock is approved for quotation on the Nasdaq
National Market; however, there has been no prior market for Incyte General
Stock or Incyte Genetics Stock. Application has been made to The Nasdaq Stock
Market, Inc. to redesignate the Existing Common Stock as Incyte General Stock to
be quoted on the Nasdaq National Market under the symbol INCY and for the
quotation of the Incyte Genetics Stock on the Nasdaq National Market under the
symbol [--------].
Stockholders also will be asked to consider and approve three related
proposals that would amend the Company's 1991 Stock Plan, the Company's 1997
Employee Stock Purchase Plan and the Company's 1993 Directors' Stock Option Plan
(the "Additional Proposals").
If the Incyte Genetics Stock Proposal is approved by the stockholders,
the Company will file with the Secretary of State of the State of Delaware the
Amended and Restated Certificate to effect the Incyte Genetics Stock Proposal.
If the Incyte Genetics Stock Proposal is not approved by the stockholders, the
Additional Proposals will not be implemented. Accordingly, a vote against the
Incyte Genetics Stock Proposal will have the effect of a vote against each of
the Additional Proposals. If the Incyte Genetics Stock Proposal is approved by
the stockholders, it will be implemented whether or not the Additional Proposals
are approved.
The Board has carefully considered the terms of the Incyte Genetics
Stock Proposal and each of the Additional Proposals and believes they are in the
best interests of the Company and its stockholders. Accordingly, the Board
unanimously has recommended that you approve these proposals, which are
described in more detail in the Proxy Statement. You are urged to read the Proxy
Statement in its entirety prior to voting your shares.
Stockholders should note that, if the Incyte Genetics Stock Proposal is
approved and the Existing Common Stock is redesignated as Incyte General Stock,
stockholders will not have to send in their certificates representing shares of
Existing Common Stock to be exchanged for certificates representing shares of
Incyte General Stock. Do not mail your existing Common Stock certificates to
either the Company or its transfer agent in connection with these transactions.
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QUESTIONS AND ANSWERS
RELATING TO THE
INCYTE GENETICS STOCK PROPOSAL
AND RELATED TRANSACTIONS
Q: WHY AM I RECEIVING THIS PROXY STATEMENT?
A: The Board is sending you this Proxy Statement to seek your approval, at
a special meeting of stockholders to be held on [_______________], 1998
(the "Special Meeting") of a proposal (the "Incyte Genetics Stock
Proposal") that would, among other things, provide for the issuance of the
Company's Common Stock in series and create two new series of "tracking
stock" that are intended to reflect separately the performance of the
Company's newly-formed Incyte General and Incyte Genetics divisions,
designated as Incyte General Stock and Incyte Genetics Stock, respectively.
35,000,000 shares of the Company's authorized Common Stock would initially
be designated as Incyte General Stock, 15,000,000 shares would initially be
designated as Incyte Genetics Stock and 25,000,000 shares would be
initially undesignated. The undesignated shares would be authorized for
designation and issuance by the Board as Incyte Genetics Stock, Incyte
General Stock or as a new series of Common Stock with voting powers and
relative, participating, optional and other special rights and
qualifications, limitations and restrictions determined by the Board. All
of the outstanding shares of Existing Common Stock would be redesignated as
Incyte General Stock.
At the Special Meeting, you are also being asked to vote on related
proposals to amend the Company's 1991 Stock Plan, 1997 Employee Stock
Purchase Plan and 1993 Directors' Stock Option Plan in connection with the
Incyte Genetics Stock Proposal (the "Additional Proposals").
The Board is seeking your proxy to vote in favor of the Incyte Genetics
Stock Proposal and the Additional Proposals at the Special Meeting.
Q: WHAT IS A TRACKING STOCK?
A: Tracking stock, which is also referred to as "alphabet stock," "targeted
stock" or "letter stock," represents shares of common stock of a
corporation, in this case the Company, that are intended to "track" the
performance of a business segment of that corporation. The Board proposes
creating two new series of tracking stock, to be designated as Incyte
General Stock and Incyte Genetics Stock:
o The Incyte Genetics Stock is intended to reflect the separate performance
of the Company's new Incyte Genetics division, encompassing the Company's
businesses of providing information-based tools and services to the
pharmaceutical industry to
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help them better understand the role of genetic diversity in human
disease and drug response; and
o The Incyte General Stock is intended to reflect the Company's Incyte
General division, encompassing the Company's businesses that are not
attributable to Incyte Genetics.
There can be no assurance as to whether or to what extent the market values
of the Incyte Genetics Stock and the Incyte General Stock will reflect the
separate performance of the Company's businesses they are intended to
track, or that the combined market values of the Incyte Genetics Stock and
the Incyte General Stock will equal or exceed the market value of the
Existing Common Stock.
Q: WHAT ARE THE COMPANY'S PLANS IF THE INCYTE GENETICS STOCK PROPOSAL IS
APPROVED?
A: If the Incyte Genetics Stock Proposal is approved, in addition to filing
the Amended and Restated Certificate the Company intends to:
o sell Incyte Genetics Stock or equity securities convertible into Incyte
Genetics Stock in a private placement to a limited number of
pharmaceutical companies, subject to prevailing market and other
conditions, and allocate the net proceeds thereof to Incyte Genetics (the
"Incyte Genetics Private Placement");
o depending on the capital needs of Incyte Genetics, offer and sell
Incyte Genetics Stock in a public offering for cash, subject to
prevailing market and other conditions, and allocate the net proceeds
thereof to Incyte Genetics (the "Incyte Genetics Public Offering"); and
o distribute up to 12,000,000 shares of Incyte Genetics Stock to the
holders of Incyte General Stock in the form of a stock dividend (the
"Incyte Genetics Distribution").
Q: WHEN WILL ALL OF THIS TAKE PLACE?
A: If the Incyte Genetics Stock Proposal is approved, the Company intends
to file the Amended and Restated Certificate with the Secretary of State of
Delaware shortly after the Special Meeting (the date such Amended and
Restated Certificate is filed being the "Effective Date"). If approval is
received as planned, the Effective Date would take place prior to January
1, 1999. The Company currently expects that the Incyte Genetics Private
Placement will occur prior to any Incyte Genetics Public Offering and that
any Incyte Genetics Public Offering would occur in 1999, in each case
subject to prevailing market and other conditions. However, the Board could
choose to conduct either any Incyte Genetics Private Placement or any
Incyte Genetics Public Offering at any time or not to conduct either an
Incyte Genetics
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Private Placement or an Incyte Genetics Public Offering or both, depending
on the circumstances at the time. The Company currently expects that the
Incyte Genetics Distribution will occur at least six months after any
Incyte Genetics Public Offering, but in any event no later than 360 days
after the Effective Date.
Q: WHAT WILL I OWN FOLLOWING EFFECTIVENESS OF THE INCYTE GENETICS STOCK
PROPOSAL?
A: If the Incyte Genetics Stock Proposal is approved, as of the Effective
Date you will continue to own a number of shares of Incyte General Stock
equal to the current number of shares of Existing Common Stock that you
currently own. Collectively, such shares of Incyte General Stock will
represent 100% of the outstanding shares of Incyte General Stock
immediately after the Effective Date. Pending the Incyte Genetics
Distribution, which may not occur until 360 days after the Effective Date,
you will not hold a direct interest in Incyte Genetics. Only stockholders
of record on the record date for the Incyte Genetics Distribution will
receive shares of Incyte Genetics Stock in such distribution. The shares of
Incyte Genetics Stock distributed in the Incyte Genetics Distribution,
together with the shares sold in any Incyte Genetics Public Offering and
any Incyte Genetics Private Placement, will collectively represent 100% of
the outstanding shares of Incyte Genetics Stock immediately after the
Incyte Genetics Distribution.
Q: WHEN AND WHERE WILL THE SPECIAL MEETING BE HELD?
A: The Special Meeting will be held at [______] a.m. Pacific Time, on
[_______________], 1998 at [the Stanford Park Hotel, 100 El Camino Real,
Menlo Park, California].
Q: WHAT DOES THE BOARD OF DIRECTORS RECOMMEND?
A: The Board has unanimously approved each proposal, believes that the
adoption of each proposal is in the best interests of you, your fellow
stockholders and the Company and unanimously recommends that you vote "FOR"
each of the proposals.
Q: WHAT VOTE IS REQUIRED TO APPROVE THE INCYTE GENETICS STOCK PROPOSAL AND
THE ADDITIONAL PROPOSALS?
A: The approval of the Incyte Genetics Stock Proposal requires the
affirmative vote of the holders of a majority of the outstanding shares of
Existing Common Stock. The approval of each of the Additional Proposals
requires the affirmative vote of holders of a majority of the shares of
Common Stock present in person or represented by proxy at the Special
Meeting and entitled to vote thereon.
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<PAGE>
Q: WILL THE INCYTE GENETICS STOCK PROPOSAL RESULT IN A CHANGE IN CONTROL OF
THE COMPANY?
A: No. There will be no change in control of the Company if the Incyte
Genetics Stock Proposal is approved.
Q: WILL THE INCYTE GENETICS STOCK PROPOSAL RESULT IN A SPIN-OFF?
A: No. The Incyte Genetics Stock Proposal will not result in a distribution
or spin-off of any assets or liabilities of the Company or its
subsidiaries. Holders of Incyte General Stock and Incyte Genetics Stock
will continue to be common stockholders of the Company and, as such, will
be subject to all risks associated with an investment in the entire Company
and all of its businesses, assets and liabilities.
Q: SHOULD I SEND IN MY STOCK CERTIFICATES?
A: No. If the Incyte Genetics Stock Proposal is approved, then upon filing
of the Amended and Restated Certificate, each of your shares of Existing
Common Stock will be automatically redesignated as one share of Incyte
General Stock. In connection with this redesignation, the stock certificate
representing your shares of Common Stock will represent ownership of the
same number of shares of Incyte General Stock.
Q: WILL THE INCYTE GENERAL STOCK AND THE INCYTE GENETICS STOCK BE LISTED ON
THE NASDAQ NATIONAL MARKET?
A: Application has been made to The Nasdaq Stock Market, Inc. to
redesignate the Existing Common Stock as Incyte General Stock to be quoted
on the Nasdaq National Market under the symbol INCY and for the quotation
of the Incyte Genetics Stock on the Nasdaq National Market under the symbol
[________].
Q: WHAT VOTING RIGHTS WILL I HAVE?
A: After the Effective Date, each share of Incyte General Stock will be
entitled to one vote. Until completion of the first to occur of any Incyte
Genetics Private Placement, any Incyte Genetics Public Offering or the
Incyte Genetics Distribution, there will be no shares of Incyte Genetics
Stock outstanding. The number of votes to which each share of Incyte
Genetics Stock will initially be entitled will be determined prior to the
first applicable record date after the initial issuance of Incyte Genetics
Stock, and will be based on the ratio of the then current market value of a
share of Incyte Genetics Stock to the then current market value of a share
of Incyte General Stock. Prior to any applicable record date thereafter,
the number of votes to which each share of Incyte Genetics Stock will be
entitled will be adjusted to reflect the ratio of the then current market
value of a share of Incyte Genetics Stock to the then current market value
of a share of Incyte General Stock. Holders of the Incyte General Stock and
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<PAGE>
the Incyte Genetics Stock will vote together as a single class except in
certain limited circumstances, under which the holders of Incyte General
Stock or Incyte Genetics Stock will have rights to vote as a separate
series.
Q: WHAT ARE THE TAX CONSEQUENCES TO ME?
A: The implementation of the Incyte Genetics Stock Proposal and the Incyte
Genetics Distribution is expected to be tax-free for federal income tax
purposes to stockholders (except with respect to any cash received in lieu
of fractional shares in the Incyte Genetics Distribution) based upon the
facts and law at the time of this Proxy Statement. You should consult a tax
advisor.
Q: DOES THE COMPANY INTEND TO PAY DIVIDENDS?
A: The Company currently intends to retain future earnings, if any, for the
development of its business and does not anticipate paying dividends on the
Incyte General Stock or the Incyte Genetics Stock in the foreseeable
future.
Q: WHAT DO I DO IF I HAVE ADDITIONAL QUESTIONS?
A: If you have any questions prior to the Special Meeting, please call
Dayna Wheeler, Associate Director of Investor Relations, at (650) 845-4589.
8
<PAGE>
PROXY STATEMENT SUMMARY
The following is a summary of certain information contained elsewhere in this
Proxy Statement and the Annexes hereto. Reference is made to, and this Summary
is qualified in its entirety by, the more detailed information contained in this
Proxy Statement and the Annexes hereto. Unless otherwise defined herein,
capitalized terms used in this Summary have the respective meanings ascribed to
them elsewhere in this Proxy Statement. See "Glossary of Defined Terms."
Stockholders are urged to read carefully this Proxy Statement and the Annexes
hereto in their entirety.
THE COMPANY
Incyte Pharmaceuticals, Inc. designs, develops and markets genomic
information-based tools including database products, genomic data management
software tools, genomic reagents and related services. The Company consists of
two divisions, the Incyte General division and the Incyte Genetics division.
INCYTE GENERAL Incyte General focuses on providing
information-based products and services to
assist pharmaceutical and biotechnology
companies in the discovery and development of
new drugs including the identification of new
disease targets and novel disease pathways, and
the evaluation of the safety and efficacy of
new drugs.
INCYTE GENETICS Incyte Genetics is a newly-formed division of
the Company. It focuses on providing
information-based products and services to
assist pharmaceutical companies in the
identification and analysis of a type of
genetic variation called single nucleotide
polymorphisms ("SNPs") believed to correlate to
a patients' disease prognosis and drug
response. Incyte Genetics believes that its
products and services could have application in
both the clinical development of new drugs and
disease management. Incyte Genetics will focus
on human gene mapping, human genome sequencing
and human SNP discovery.
The principal executive offices of the Company are located at 3174 Porter Drive,
Palo Alto, California 94304. The Company's telephone number is (650) 855-0555.
THE SPECIAL MEETING
DATE, TIME AND The Special Meeting will be held at [______] a.m. Pacific
PLACE FOR MEETING Time, on [_______________], 1998 at [the Stanford Park
Hotel, 100 El Camino Real, Menlo Park, California].
RECORD DATE [______________], 1998
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PROPOSALS TO BE The Special Meeting will be held to consider the Incyte
CONSIDERED AT THE Genetics Stock Proposal and the Additional Proposals as
SPECIAL MEETING follows:
Proposal 1 -- Incyte Genetics Stock Proposal. The
stockholders of the Company are being asked to consider and
approve the Incyte Genetics Stock Proposal, which, if
approved, would authorize the Company to file the Amended
and Restated Certificate set forth in Annex A hereto with
the Secretary of State of the State of Delaware. Such
Amended and Restated Certificate would, among other things:
(a) provide for the issuance of the Company's Common Stock
in series by action of the Board, of which 35,000,000 shares
would initially be designated by the Board as Incyte General
Stock, 15,000,000 shares would initially be designated as
Incyte Genetics Stock, and 25,000,000 shares would initially
be undesignated; (b) provide authorization to the Board to
issue any undesignated shares of Common Stock as Incyte
General Stock or Incyte Genetics Stock or to designate and
issue any such shares in one or more additional series of
Common Stock and to determine the number of shares, and the
voting powers and relative, participating, optional and
other special rights and qualifications, limitations and
restrictions of any such series; and (c) redesignate each
outstanding share of Existing Common Stock as one share of
Incyte General Stock.
Subject to approval by the Company's stockholders of the
Incyte Genetics Stock Proposal and subject to prevailing
market and other conditions, the Company is currently
considering plans to (a) sell shares of Incyte Genetics
Stock or equity securities convertible into Incyte Genetics
Stock to a limited number of pharmaceutical companies prior
to any Incyte Genetics Public Offering, allocating the net
proceeds to Incyte Genetics, (b) depending on the capital
needs of Incyte Genetics, offer to the public for cash,
sometime in 1999, shares of Incyte Genetics Stock,
allocating the net proceeds to Incyte Genetics, and (c)
distribute up to 12,000,000 shares of Incyte Genetics Stock
at least six months after the completion of any Incyte
Genetics Public Offering, but in any event no later than 360
days after the Effective Date, in the form of a stock
dividend to the holders of Incyte General Stock at the time
of such distribution.
Proposals 2, 3 and 4 -- Additional Proposals. The
stockholders of the Company are being asked to consider and
approve three proposals related to the Incyte Genetics Stock
Proposal that would amend the Company's 1991 Stock Plan (the
"Stock Plan"), 1997 Employee Stock
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Purchase Plan (the "ESPP"), and 1993 Directors' Stock Option
Plan (the "Directors' Option Plan").
Proposal 2 would amend the 1991 Stock Plan to provide that
shares of Incyte General Stock and Incyte Genetics Stock may
be issued under the plan and to reserve 6,300,000 shares of
Incyte General Stock and 2,400,000 shares of Incyte General
Stock for issuance thereunder.
Proposal 3 would amend the 1997 Employee Stock Purchase Plan
to provide that shares of Incyte General Stock and Incyte
Genetics Stock may be issued under the plan and to reserve
400,000 shares of Incyte General Stock and 400,000 shares of
Incyte Genetics Stock for issuance thereunder.
Proposal 4 would amend the 1993 Directors' Stock Option Plan
to provide that the automatic stock option grants thereunder
will be made in a fixed proportion that reflects the ratio
of the number of shares of Incyte General Stock outstanding
at the time of grant to the number of shares of Incyte
Genetics Stock then outstanding and to reserve 400,000
shares of Incyte General Stock and 200,000 shares of Incyte
Genetics Stock for issuance thereunder.
VOTE REQUIRED The affirmative vote of the holders of a majority of the
outstanding shares of Existing Common Stock will be required
to approve the Incyte Genetics Stock Proposal. The approval
of each of the Additional Proposals requires the affirmative
vote of a majority of the shares of Common Stock present in
person or represented by proxy at the Special Meeting and
entitled to vote thereon.
RECOMMENDATION OF
THE BOARD The Board of Directors has carefully considered the terms of
the Incyte Genetics Stock Proposal and each of the
Additional Proposals and believes they are in the best
interests of the Company and its stockholders. Accordingly,
the Board unanimously has recommended that you approve these
proposals, which are described in more detail in this Proxy
Statement. You are urged to read this Proxy Statement in its
entirety prior to voting your shares.
FAILURE OF
PROPOSAL If the Incyte Genetics Stock Proposal is not approved by the
stockholders, the Existing Common Stock will not be
redesignated as Incyte General Stock and the Incyte Genetics
Stock will not be created.
If the Incyte Genetics Stock Proposal is not approved by the
stockholders, the Additional Proposals will not be
implemented.
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Accordingly, a vote against the Incyte Genetics Stock
Proposal will have the effect of a vote against each of the
Additional Proposals. If the Incyte Genetics Stock Proposal
is approved by the stockholders, it will be implemented
whether or not the Additional Proposals are approved.
INCYTE GENETICS STOCK PROPOSAL
REASONS FOR THE The Incyte Genetics Stock Proposal was adopted by the Board
INCYTE GENETICS following its review of various alternatives to enhance
STOCK PROPOSAL stockholder value over the long term. In addition, the new
equity structure should increase the Company's flexibility
in raising capital and responding to acquisitions and other
strategic opportunities by enabling the Company to issue
either Incyte Genetics Stock or Incyte General Stock as
appropriate under the particular circumstances. The Incyte
Genetics Stock Proposal is intended to charge the managers
of the respective Divisions with the responsibility of
maximizing returns from their businesses and permit the use
of the Company's stock incentive plans to provide more
focused incentives to those management teams and the
employees of the Divisions. By providing investors with
separate series of Common Stock intended to reflect
separately the performance of Incyte General and Incyte
Genetics, the Incyte Genetics Stock Proposal should also
allow investors and analysts to gain a better understanding
of the businesses of Incyte General and Incyte Genetics, and
enable investors to invest in either or both securities
depending upon their individual investment objectives. The
Board believes that the separate reporting of each
Division's results should result in greater market
recognition of the value of each of the businesses, while at
the same time enabling the Company to preserve the
operational and financial benefits it currently enjoys as a
single company. See "Proposal 1 -- Incyte Genetics Stock
Proposal -- Background and Reasons for the Incyte Genetics
Stock Proposal."
DIVIDEND POLICIES The Company currently intends to retain future earnings, if
any, for the development of its businesses and does not
anticipate paying dividends on the Incyte Genetics Stock or
the Incyte General Stock in the foreseeable future.
CERTAIN MANAGEMENT
AND ALLOCATION
POLICIES Because Incyte General and Incyte Genetics will each be a
part of a single company, the Board has established policies
to separate the business and operations of Incyte Genetics
from those of Incyte General and to operate Incyte Genetics
in a manner approximating the operation of an independent
enterprise as closely as practicable. Some of these
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policies are summarized below. The Board will generally be
able to modify or rescind these policies, or to adopt
additional policies, without stockholder approval.
Financial Statements; Allocation Matters. The Company will
prepare financial statements for Incyte General and Incyte
Genetics in accordance with generally accepted accounting
principles, and these financial statements, taken together,
will comprise all of the accounts included in the
corresponding consolidated financial statements of the
Company.
Revenue Allocation. Revenues from the sale of a Division's
products and services generally will be reflected in the
operating results of that Division. Revenues derived from
the sale of products of both Divisions that are sold
together will be allocated between Incyte General and Incyte
Genetics in a reasonable and consistent manner by the
management of the Company subject to oversight by the Board.
Expense Allocation. All direct expenses generally will be
charged to the Division for the benefit of which they are
incurred. Corporate, general and administrative expenses
(including joint marketing and sales expenses) or other
indirect costs will be allocated to each Division in a
reasonable and consistent manner based on the Division's
utilization of the services to which such costs relate.
Tax Allocations. Income tax provisions and deferred income
taxes will generally be determined for each Division under
generally accepted accounting principles, as if each
Division were a separate taxpayer. If, however, either
Division has deductions, losses, net operating losses,
foreign tax credits, other tax credits or other tax
attributes ("Tax Attributes") that cannot be utilized by
that Division (the "Generating Division") to offset or
reduce its current or deferred income tax expense as a
separate taxpayer, a benefit will be allocated to the
Generating Division to the extent the Tax Attributes are
utilized in the consolidated income tax provision. Any
benefit so allocated may be subsequently adjusted if the
other Division subsequently generates Tax Attributes that it
can use, on a separate taxpayer basis, in lieu of the Tax
Attributes of the Generating Division. To the extent that
one of the divisions is allocated a benefit which, as a
result of expiration or otherwise, will not ultimately be
utilized on the consolidated tax return, the prior years
benefit for such attribute will be adjusted such that the
effect of the expiration or other adjustment is borne by the
division that generated the attribute.
The Generating Division will receive from the other Division
a payment, or offset against other amounts due, for its Tax
Attributes as they are utilized on the consolidated income
tax return. Any such payments or offsets may be adjusted or
refunded in the circumstances in which a benefit is modified
for provision purposes, as discussed above.
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Returns to Stockholders. Except as described under "Other
Interdivision Transactions" with respect to certain
interdivision investments and loans, earnings and cash flows
generated from the businesses of Incyte General or Incyte
Genetics generally will be used for reinvestment in the
business of the Division generating such earnings and
related cash flow, for repayment of its debt or for payment
of dividends on, or for the repurchase of shares of, the
Common Stock related to that Division.
Acquisitions of Programs, Products or Assets. Upon the
acquisition by the Company from a third party of any
programs, products, technologies or assets (whether by
acquisition of assets or stock, merger, consolidation or
otherwise), the aggregate cost of the acquisition and the
programs, products, technologies or assets acquired will be
allocated between Incyte General and Incyte Genetics based
on the business to which such items principally relate. As a
guideline, if the acquired program, product, technology or
asset is directly and primarily related to one Division's
line or lines of business, it will be allocated to such
Division, and otherwise it will be allocated in the manner
determined to be in the best interests of the Company. If
the aggregate cost of such acquisition is greater than 20%
of the fair value of the total assets of either Division,
such allocation will be reviewed and approved by the Board.
Review of Corporate Opportunities and Other Matters. Other
than as provided in the preceding paragraph, the Board will
review any matter that involves the allocation of a material
corporate opportunity of the Company to either Incyte
General or Incyte Genetics. If such a corporate opportunity
is directly and primarily related to one Division's line or
lines of business, it will be allocated to such Division,
and otherwise such corporate opportunity will be allocated
in the manner determined to be in the best interests of the
Company.
Disposition of Programs, Products or Assets. Upon any sale,
transfer, assignment or other disposition by Incyte of any
product, program, technology or asset not consisting of all
or substantially all of the assets of a Division, all
proceeds from such disposition will be allocated to the
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Division to which the program, product, technology or asset
had been allocated. If the program, product, technology or
asset was allocated to both Incyte General and Incyte
Genetics, the proceeds of the disposition will be allocated
between the Divisions based on their respective interests in
such program, product, technology or asset.
Interdivision Asset Transfers. The Board may at any time and
from time to time reallocate, at fair market value, any
program, product, technology or other asset from one
Division to the other (with the exception of the transfer of
Key Genetics Programs from Incyte Genetics to Incyte General
and Material Asset Transfers between Divisions, which
require certain stockholder approval). The compensation for
such reallocation may be in cash or other consideration with
a value equal to the fair market value of the reallocated
program, product, technology or other asset.
Other Interdivision Transactions. From time to time, Incyte
General and Incyte Genetics may engage in transactions
directly with one another or jointly with one or more third
parties. Research, development, production (including
sequencing) work, and corporate, general and administrative
(including, if appropriate, sales and marketing services)
services will be provided by one Division to the other
Division requesting such services on a cost basis. All other
interdivision transactions shall be on terms and conditions
comparable to those that would be obtainable in transactions
negotiated at arm's- length with unaffiliated third parties.
The terms of any interdivision loan or investment must be
comparable to that which would otherwise be obtained from a
third party on an arm's-length basis.
Access to Technology and Know-how. Each of Incyte General
and Incyte Genetics will have free access to all technology
and know-how of the Company that may be useful in such
Division's business, subject to any limitations applicable
to the Company's use of technology licensed from third
parties.
Capital and Research and Development Spending. Any decision
by the Board to fund capital expenditures or investments and
research and development spending in excess of the cash
flows of the respective Divisions will be made by the Board
in the exercise of its good faith business judgment.
Fiduciary and Management Responsibilities. Because Incyte
General and Incyte Genetics will continue to be part of a
single company, under
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current principles of Delaware law the Board and Incyte
Management will likely have an equal fiduciary duty to all
holders of Common Stock as a whole rather than separate or
additional duties to holders of either Incyte General Stock
or Incyte Genetics Stock. The Board and the Chief Executive
Officer, in exercising their discretion under the above
policies, in establishing new policies or in rescinding or
modifying existing policies, will consider various factors
and information which could be a benefit or a detriment to
the stockholders of the respective Divisions and will make
determinations in the best interests of the Company.
COMPARISON OF
EXISTING COMMON
STOCK WITH INCYTE
GENERAL COMMON
STOCK AND INCYTE
GENETICS COMMON
STOCK The following is a comparison of the Existing Common Stock
with the proposed Incyte General Stock and Incyte Genetics
Stock. This summary is qualified in its entirety by the more
detailed information contained in this Proxy Statement and
the Annexes hereto. See "Risk Factors," "Proposal 1-- Incyte
Genetics Stock Proposal-- Description of Incyte General
Stock and Incyte Genetics Stock" and the Amended and
Restated Certificate included in Annex A to this Proxy
Statement.
<TABLE>
<CAPTION>
Existing Common Incyte General Stock Incyte Genetics Stock
Stock
<S> <C> <C> <C>
Stockholders of Holders of Existing Holders of Incyte General Stock Holders of Incyte Genetics Stock
One Company: Common Stock are will continue to be subject to the will continue to be subject to the
subject to the risks risks associated with an investment risks associated with an investment
associated with an in the Company and all of its in the Company and all of its
investment in the businesses, assets and liabilities. businesses, assets and liabilities.
Company and all of its Financial effects arising from the Financial effects arising from the
businesses, assets and Incyte Genetics Stock that affect Incyte General Stock that affect the
liabilities. the Company's results of Company's results of operations or
operations or financial condition financial condition could, if
could, if significant, affect the significant, affect the results of
results of operations of Incyte operations of Incyte Genetics or the
General or the market price of market price of Incyte Genetics
Incyte General Stock. Stock.
Any net losses of either Any net losses of either
Division, and dividends or Division, and dividends or
distributions on, or repurchases distributions on, or repurchases
of, either series of Common Stock, of, either series of Common Stock,
or any Preferred Stock, or any Preferred Stock,
will reduce the assets of the will reduce the assets of the
Company legally available for Company legally available for
payment of future dividends on the payment of future dividends on the
other series of Common Stock. other series of Common Stock.
</TABLE>
16
<PAGE>
<TABLE>
<CAPTION>
Existing Common Incyte General Stock Incyte Genetics Stock
Stock
<S> <C> <C> <C>
Capitalization: One series of Common 35,000,000 shares of Common 15,000,000 shares of Common
Stock, consisting of Stock will initially be designated Stock will initially be designated as
75,000,000 authorized as Incyte General Stock. Each Incyte Genetics Stock. All of such
and 26,663,544 outstanding share of Existing shares will initially be designated
outstanding shares as Common Stock will be as "Incyte Genetics Designated
of June 30, 1998. redesignated as one share of Incyte Shares."
General Stock.
An additional 25,000,000 shares of
An additional 25,000,000 shares of Common Stock will be authorized
Common Stock will be authorized but unissued and will be available
but unissued and will be available for designation and issuance by the
for designation and issuance by the Board as Incyte General Stock,
Board as Incyte General Stock, Incyte Genetics Stock or a new
Incyte Genetics Stock or a new series of Common Stock with the
series of Common Stock with the voting powers and relative,
voting powers and relative, participating, optional and other
participating, optional and other special rights and qualifications,
special rights and qualifications, limitations and restrictions of any
limitations and restrictions of any such additional series determined
such additional series determined by the Board.
by the Board.
Listing Currently quoted on Application has been made to Application has been made for the
of Shares: the Nasdaq National redesignate the Existing Common quotation of the Incyte Genetics
Market under the Stock as Incyte General Stock, to Stock on the Nasdaq National
symbol "INCY." be quoted on the Nasdaq National Market under the symbol [_______].
Market under the symbol "INCY."
</TABLE>
17
<PAGE>
<TABLE>
<CAPTION>
Existing Common Incyte General Stock Incyte Genetics Stock
Stock
<S> <C> <C> <C>
Dividends: The Company's policy The Company intends to retain its The Company intends to retain its
is not to pay cash policy of not paying cash dividends policy of not paying cash dividends
dividends on shares of on shares of its capital stock with on shares of its capital stock with
its capital stock. respect to the Incyte General Stock respect to the Incyte Genetics
in order to retain earnings to fund Stock in order to retain earnings to
development of the Company's fund development of the
business. Therefore, the Company Company's business. Therefore,
does not expect to pay any cash the Company does not expect to
dividends on the Incyte General pay any cash dividends on the
Stock in the foreseeable future. Incyte Genetics Stock in the
foreseeable future.
Any dividends on the Incyte
General Stock will be paid at the Any dividends on the Incyte
Any dividends on the Incyte General Stock will be paid at the
discretion of the Board, based Any dividends on the Incyte
upon Genetics Stock will be paid discretion of the Board, based
at the the financial condition, upon Genetics Stock will be paid
results of discretion of the at the the financial condition,
Board, based upon operations and results of discretion of the
business the financial condition, Board, based upon operations and
results of requirements of Incyte business the financial condition,
General and operations and results of requirements of Incyte
business the Company as a whole. General and operations and
The requirements of Incyte business the Company as a whole.
Genetics Board may declare and The requirements of Incyte
pay and the Company as a whole. Genetics Board may declare and
The dividends exclusively on the pay and the Company as a whole.
Incyte Board may declare and pay The dividends exclusively on the
General Stock, exclusively on the Incyte Board may declare and pay
dividends exclusively on the General Stock, exclusively on the
Incyte Incyte Genetics Stock or dividends exclusively on the
on any General Stock, exclusively Incyte Incyte Genetics Stock or
on the combination thereof, in on any General Stock, exclusively
equal Incyte Genetics Stock or on on the combination thereof, in
any amounts or in unequal equal Incyte Genetics Stock or on
amounts, combination thereof, in any amounts or in unequal
equal notwithstanding the amount amounts, combination thereof, in
of amounts or in unequal amounts, equal notwithstanding the amount
dividends previously declared on of amounts or in unequal amounts,
notwithstanding the amount of dividends previously declared on
either series, the respective notwithstanding the amount of
voting dividends previously either series, the respective
declared on rights or liquidation voting dividends previously
rights of eitheeither series, the declared on rights or liquidation
respective voting series or any rights of eitheeither series, the
other factor. rights or respective voting series or any
liquidation rights of either other factor. rights or
Dividends will be paid out of the liquidation rights of either
series or any other factor. Dividends will be paid out of the
lesser of (i) assets of the series or any other factor.
Company Dividends will be paid lesser of (i) assets of the
out of the legally available for Company Dividends will be paid
the payment of lesser of (i) out of the legally available for
assets of the Company dividends the payment of lesser of (i)
and (ii) the Incyte legally assets of the Company dividends
available for the payment of and (ii) the Incyte legally
General Available Dividend available for the payment of
dividends and (ii) the Incyte General Available Dividend
Amount. See "Proposal 1 -- dividends and (ii) the Incyte
Genetics Available Dividend Amount. See "Proposal 1 --
Incyte Genetics Stock Proposal -- Genetics Available Dividend
Amount. See "Proposal 1 -- Incyte Genetics Stock Proposal --
Incyte Genetics Stock Proposal -- Amount. See "Proposal 1 --
Description of Incyte General Incyte Genetics Stock Proposal --
Stock and Incyte Genetics Stock." Description of Incyte General
Stock and Incyte Genetics Stock."
</TABLE>
18
<PAGE>
<TABLE>
<CAPTION>
Existing Common Incyte General Stock Incyte Genetics Stock
Stock
<S> <C> <C> <C>
Voting Rights: One vote per share. One vote per share. Until completion of the first to
occur of any Incyte Genetics
Holders of the Incyte General Private Placement, any Incyte
Stock will vote with holders of Genetics Public Offering or the
Incyte Genetics Stock as one Incyte Genetics Distribution, there
class of stock, except as to will be no shares of Incyte
certain Material Asset Transfers Genetics Stock outstanding. The
between Divisions and as required number of votes to which each
required by Delaware law. share of Incyte Genetics Stock will
initially be entitled will be determined
five trading days prior to the first record
date for any matter subject
to a stockholder vote in which shares
of Incyte General Stock are entitled
to vote after the initial issuance of Incyte
Genetics Stock. Each share of Incyte Genetics
Stock will be entitled to the number of votes
that reflect the ratio of the average market
value of one share of Incyte Genetics Stock to
the average market value of one share of Incyte
General Stock during the 20 consecutive trading
days beginning on the 25th trading day prior to
such date of determination. Prior to any
applicable record date thereafter, the number
of votes to which each share of Incyte Genetics
Stock is entitled will be adjusted so that each
share of Incyte Genetics Stock will be entitled
to the number of votes that reflect the ratio
of the average market value of a share of
Incyte Genetics Stock to the average market
value of one share of Incyte General Stock
during the 20 consecutive trading days
beginning on the 25th trading day prior to such
date of determination.
Holders of the Incyte General Stock will vote
with holders of Incyte Genetics Stock as one
class of stock, except as to transfers of
certain Key Programs from Incyte Genetics,
certain Material Asset Transfers between
Divisions and as required by Delaware law.
</TABLE>
19
<PAGE>
<TABLE>
<CAPTION>
Existing Common Incyte General Stock Incyte Genetics Stock
Stock
<S> <C> <C> <C>
Conversion of None. None. At the option of the Company, at any time on or
Common Stock at after the third anniversary of the Effective
Option of Date, all outstanding shares of Incyte Genetics
Company: Stock may be converted into Incyte General
Stock at a 20% premium to the then current
market value of the Incyte Genetics Stock.
The market value of the Incyte Genetics Stock
could be affected by many factors, including
the results of operations and financial
condition of the Company and each Division,
trading value, share issuances and repurchases,
the completion of any Incyte Genetics Private
Placement, any Incyte Genetics Public Offering
and the Incyte Genetics Distribution and
general economic and market conditions.
</TABLE>
20
<PAGE>
<TABLE>
<CAPTION>
Existing Common Incyte General Stock Incyte Genetics Stock
Stock
<S> <C> <C> <C>
Mandatory None. None. If the Company disposes of all or
Dividend on or substantially all of the properties
Redemption or and assets of Incyte Genetics (other
Conversion of than pro rata to the holders of all
Common Stock: outstanding shares of Incyte
Genetics Stock, in a liquidation, to
certain parties controlled by the
Company or in a transaction with a
company primarily engaged in a
complementary business), the
Company must either (i) distribute
to the holders of Incyte Genetics
Stock an amount in cash and/or
securities or other property equal to
the Fair Value of the Net Proceeds
of such disposition, either by
special dividend or by redemption
of all or part of the outstanding
shares of Incyte Genetics Stock, or
(ii) convert each share of Incyte
Genetics Stock into a number of
shares of Incyte General Stock
equal to 110% of the ratio of the
average Market Value of one share
of Incyte Genetics Stock to the
average Market Value of one share
of Incyte General Stock during the
20 consecutive trading days
beginning on the 26th trading day
after consummation of the
disposition transaction.
Optional None None The Company may redeem the
Redemption in outstanding shares of Incyte
Exchange for Genetics Stock for shares of the
Stock of a common stock of one or more
Subsidiary: wholly-owned subsidiaries of the
The Company may redeem the outstanding shares
of Incyte Genetics Stock for shares of the
common stock of one or more wholly-owned
subsidiaries of the Company that hold all of
the assets and liabilities of Incyte Genetics.
This would result in an actual "spin-off" of
Incyte Genetics.
</TABLE>
21
<PAGE>
<TABLE>
<CAPTION>
Existing Common Incyte General Stock Incyte Genetics Stock
Stock
<S> <C> <C> <C>
Liquidation: Holders of the Existing Holders of Incyte General Stock Holders of Incyte Genetics Stock
Common Stock are will be entitled to a portion of the will be entitled to a portion of the
entitled to receive the assets remaining for distribution to assets remaining for distribution to
net assets of the Com holders of Common Stock in holders of Common Stock in
pany, if any, remaining proportion to the aggregate proportion to the aggregate
for distribution to the liquidation units of Incyte General liquidation units of Incyte Genetics
holders of Existing Stock. Stock.
Common Stock.
Each share of Incyte General
Stock Each share of Incyte
Genetics will have such number of
Stock will have such number of
liquidation units as is equal to
the liquidation units as is equal
to the number of votes to which
one share number of votes to
which one share of such series
would be entitled if of such
series would be entitled if the
applicable record date was the
the applicable record date was
the date on which the
liquidation, date on which the
liquidation, dissolution or
winding-up was dissolution or
winding-up was announced.
announced.
</TABLE>
INCYTE GENETICS The Board determined that the initial equity interest of
DESIGNATED SHARES Incyte Genetics would be represented by 12,100,000 shares of
Incyte Genetics Stock. All of such shares will initially be
designated as "Incyte Genetics Designated Shares." This number
of Incyte Genetics Designated Shares does not include any
shares of Incyte Genetics Stock that might be sold in an
Incyte Genetics Private Placement or an Incyte Genetics Public
Offering, which shares would be issued from the authorized but
unissued shares of Common Stock, and also does not include
shares of Incyte Genetics Stock reserved for issuance under
the Company's stock-based employee compensation plans. Incyte
Genetics Designated Shares are authorized shares of Incyte
Genetics Stock, which are not issued and outstanding, but
which the Board, pursuant to the Company's management and
allocation policies, may from time to time issue, sell or
otherwise distribute and for which the proceeds or other
benefits of such issuance, sale or distribution would be
allocated to Incyte General. The shares of Incyte Genetics
Stock that are issuable with respect to the Incyte Genetics
Designated Shares are not outstanding shares of Incyte
Genetics Stock, are not eligible to receive dividends and
cannot be voted by the Company.
The number of Incyte Genetics Designated Shares will be:
(a) increased by
(i) the number of any outstanding shares of Incyte
Genetics Stock repurchased by the Company, the
22
<PAGE>
consideration for which was provided by Incyte
General, and
(ii) the number of shares of Incyte Genetics Stock
(rounded, if necessary, to the nearest whole number)
equal to the fair value (as determined by the Board)
of assets or properties (including cash) that had
been allocated to Incyte General that are
reallocated to Incyte Genetics (other than
reallocations that represent sales at fair value
between such Divisions) divided by the average
Market Value of one share of Incyte Genetics Stock
for the 20 consecutive Trading Days beginning on the
Trading Day prior to the date of such reallocation;
(b) decreased (but to not less than zero) by
(i) the number of any shares of Incyte Genetics
Stock issued by the Company, the proceeds of which
are allocated to Incyte General,
(ii) the number of any shares of Incyte Genetics
Stock issued upon the conversion, exercise or
exchange of Convertible Securities the proceeds of
which are allocated to Incyte General,
(iii) the number of any shares of Incyte Genetics
Stock issued by the Company as a dividend or
distribution or by reclassification, exchange or
otherwise to holders of Incyte General Stock,
(iv) the number of any shares of Incyte Genetics
Stock issued upon the conversion, exercise or
exchange of any Convertible Securities issued by the
Company as a dividend or other distribution
(including in connection with any reclassification
or exchange of shares) to holders of Incyte General
Stock, and
(v) the number of shares of Incyte Genetics Stock
(rounded, if necessary, to the nearest whole number)
equal to the fair value (as determined by the Board)
of assets or properties (including cash) that had
been allocated to Incyte Genetics that are
reallocated to Incyte General in consideration for a
reduction in the number of
23
<PAGE>
Incyte Genetics Designated Shares divided by the
average Market Value of one share of Incyte Genetics
Stock for the 20 consecutive Trading Days beginning
on the Trading Day prior to the date of such
reallocation; and
(c) adjusted as appropriate to reflect subdivisions
(by stock split or otherwise) and combinations (by
reverse stock split or otherwise) of the Incyte
Genetics Stock and dividends or distributions of
shares of Incyte Genetics Stock to holders of Incyte
Genetics Stock and other reclassifications of Incyte
Genetics Stock.
The Company currently intends to distribute all of the
Incyte Genetics Designated Shares existing immediately
following the Effective Date in the Incyte Genetics
Distribution within 360 days after the Effective Date. For
additional information regarding the Incyte Genetics
Designated Shares, see "Proposal 1 -- Incyte Genetics
Stock Proposal -- Incyte Genetics Designated Shares" and
"-- Certain Management and Allocation Policies --
Disposition of Incyte Genetics Designated Shares."
DISSENTERS' RIGHTS Under the Delaware General Corporation Law, holders of
shares of the Existing Common Stock will not have
dissenters' rights in connection with the Incyte Genetics
Stock Proposal.
TAX CONSIDERATIONS The Company has been advised by Shearman & Sterling, its
tax counsel, that for federal income tax purposes the
Incyte General Stock and the Incyte Genetics Stock will be
common stock of the Company and accordingly: (i) the
redesignation of the Existing Common Stock as Incyte
General Stock will not be taxable to the Company or
existing stockholders; (ii) if any Incyte Genetics Public
Offering [or any Incyte Genetics Private Placement]
occurs, the Company will not recognize any income, gain or
loss on the sale of the Incyte Genetics Stock to the
public; and (iii) if an Incyte Genetics Distribution
occurs, a holder of Incyte General Stock will not
recognize any income, gain or loss upon the receipt of the
Incyte Genetics Stock, except to the extent of any cash
received in lieu of fractional shares. There are, however,
no court decisions or other authorities bearing directly
on transactions similar to the Incyte Genetics Stock
Proposal. Further, the Internal Revenue Service (the
"Service") has announced that it will not issue advance
rulings on the federal income tax consequences of
transactions similar to the Incyte Genetics Stock
Proposal. It is possible, therefore, that the Service
could assert that the Incyte Genetics Stock or the Incyte
General
24
<PAGE>
Stock or both represent property other than stock of the
Company [and that the foregoing transactions would
therefore be taxable to the Company and its stockholders].
See "Proposal 1 -- Incyte Genetics Stock Proposal --
Certain Federal Income Tax Consequences."
RISK FACTORS When evaluating the Incyte Genetics Stock Proposal,
stockholders should be aware of certain risk factors
relating thereto. Such risk factors include: (i) the risks
associated with an investment in the Company and all of
its businesses, (ii) limited separate stockholder rights
with respect to the two series of Common Stock, and the
effect on the relative voting power of the Incyte Genetics
Stock and the Incyte General Stock of the vote per share
of the Incyte Genetics Stock, which will fluctuate based
on its fair market value compared to the fair market value
of the Incyte General Stock; (iii) the ability of the
Board to change certain management and allocation policies
without stockholder approval; (iv) the potential diverging
interests of two series of common stock; (v) the potential
effects of a possible disposition of assets attributed to
a Division; (vi) the lack of legal precedent with respect
to the fiduciary duties of the board of directors of a
company with two series of common stock, the rights of
which are defined by reference to specified businesses of
the company; (vii) the ability to transfer funds between
the Divisions; (viii) the effect of allocating financing
costs between the Divisions; (ix) the Company's ability to
issue authorized but unissued shares of Incyte Genetics
Stock or Incyte General Stock or to issue a new series of
Common Stock without stockholder approval; (x) no
assurances as to the market price of the Incyte Genetics
Stock or the Incyte General Stock; (xi) limitations on
potential unsolicited acquisitions of either Division;
(xii) certain anti-takeover considerations; (xiii) the
uncertainty of the completion of the Incyte Genetics
Public Offering, the Incyte Genetics Private Placement and
the Incyte Genetics Distribution; and (xiv) certain
potential adverse tax consequences. For additional
information with respect to the foregoing considerations,
see "Cautionary Statement for Purposes of the "Safe
Harbor" Provisions of the Private Securities Litigation
Reform Act of 1995" and "Risk Factors."
25
<PAGE>
INCYTE PHARMACEUTICALS, INC.
SELECTED CONSOLIDATED FINANCIAL DATA
The data set forth below should be read in conjunction with
"Management's Discussion and Analysis of Financial Condition and Results of
Operations" and the Consolidated Financial Statements and related Notes of
Incyte Pharmaceuticals, Inc. included in Annex E to this Proxy Statement.
<TABLE>
<CAPTION>
Six Months
Year Ended December 31 Ended June 30,
=========================================================================
1993 1994 1995 1995 1997 1997 1998
=========================================================================
(in thousands, except share and per share amounts) (unaudited)
<S> <C> <C> <C> <C> <C> <C> <C>
Statement of Operations Data:(1)
Revenues $ 672 $ 1,512 $ 12,299 $ 41,895 $ 89,996 $ 39,423 $ 63,472
Costs and expenses:
Research and development 4,764 11,169 19,272 41,337 72,452 32,503 44,819
Selling, general and 737 2,328 3,952 6,957 13,928 6,103 10,322
Acquisition-related charges -- -- -- -- -- -- 1,171
Charge for purchase of in-process
research and development -- -- -- 3,165 -- -- --
-------- -------- -------- -------- -------- -------- --------
Total costs and expenses 5,501 13,497 23,224 51,459 86,380 38,606 56,312
Income (loss) from operations (4,829) (11,985) (10,925) (9,564) 3,616 817 7,160
Interest and other income, net and losses
from joint venture 60 510 988 2,288 3,840 1,069 3,041
-------- -------- -------- -------- -------- -------- --------
Income (loss) before income taxes (4,769) (11,475) (9,937) (7,276) 7,456 1,886 10,201
Provision for income taxes -- -- -- -- 548 158 1,428
-------- -------- -------- -------- -------- -------- --------
Net income (loss) $ (4,769) $(11,475) $ (9,937) $ (7,276) $ 6,908 $ 1,728 $ 8,773
======== ======== ======== ======== ======== ======== ========
Basic net income (loss) per share(2)(3) $ (1.46) $ (0.82) $ (0.53) $ (0.32) $ 0.28 $ 0.07 $ 0.33
======== ======== ======== ======== ======== ======== ========
Number of shares used in 3,264 14,060 18,819 22,398 24,300 23,059 26,504
computation of basic net ======== ======== ======== ======== ======== ======== ========
income (loss) per share
Diluted net income (loss) per share(2)(3) $ (1.46) $ (0.82) $ (0.53) $ (0.32) $ 0.26 $ 0.07 $ 0.30
======== ======== ======== ======== ======== ======== ========
Number of shares used in 3,264 14,060 18,819 22,398 26,498 25,228 28,792
computation of diluted net ======== ======== ======== ======== ======== ======== ========
income (loss) per share
Incyte General Pro Forma Net Income (Loss) Per Share(4)
Incyte General Pro Forma Net income (loss) $ (4,769) $(11,475) $ (9,937) $ (7,488) $ 8,554 $ 2,339 $ 9,573
======== ======== ======== ======== ======== ======== ========
Pro Forma basic net income (loss) per share $ (1.46) $ (0.82) $ (0.53) $ (0.33) $ 0.35 $ 0.10 $ 0.36
======== ======== ======== ======== ======== ======== ========
Number of shares used in computation 3,264 14,060 18,819 22,398 24,300 23,059 26,504
of Pro Forma basic net income (loss) ======== ======== ======== ======== ======== ======== ========
per share
Diluted net income (loss) per share(2)(3) $ (1.46) $ (0.82) $ (0.53) $ (0.33) $ 0.32 $ 0.09 $ 0.33
======== ======== ======== ======== ======== ======== ========
Number of shares used in computation 3,264 14,060 18,819 22,398 26,498 25,228 28,792
of Pro Forma diluted net income (loss) ======== ======== ======== ======== ======== ======== ========
per share
Incyte Genetics Pro Forma Net Income (Loss) Per Share(4)
Incyte Genetics net income (loss) $ 212 $ (1,646) $ (611) $ (800)
======== ======== ======== =======
Pro Forma basic and diluted net income (loss) $ 0.02 $ (0.14) $ (0.05) $(0.07)
per share (2)(3) ======== ======== ======== =======
Number of shares used in computation
of Pro Forma basic and diluted net
income (loss) per share 12,000 12,000 12,000 12,000
======== ======== ======== =======
</TABLE>
26
<PAGE>
<TABLE>
<CAPTION>
December 31 Ended June 30,
=========================================================================
1993 1994 1995 1995 1997 1997 1998
=========================================================================
(in thousands) (unaudited)
<S> <C> <C> <C> <C> <C> <C> <C>
Balance Sheet Data:(1)
Cash, cash equivalents, restricted
and securities available-for-sale cash $15,540 $25,257 $41,128 $40,238 $119,095 $43,937 $130,710
Working capital 14,865 20,866 39,015 21,351 90,700 17,945 86,792
Total assets 17,807 29,350 58,892 69,173 199,089 83,502 219,188
Noncurrent portion of capital lease 517 148 147 37 801 23 594
obligations and notes payable
Accumulated deficit (8,349) (19,824) (29,761) (37,037) (30,129) (35,311) (23,100)
Stockholders' equity 16,451 24,344 47,606 44,834 145,702 50,926 157,876
</TABLE>
(1) Financial data for the years ended December 31, 1993, 1994, 1995, and
1996, have been restated to reflect the combined results and financial
position of the Company and Genome Systems, Inc. All periods through
December 31, 1997 have been restated to reflect the combined results and
financial position of the Company and Synteni, Inc. See Note 7 of Notes to
Consolidated Financial Statements.
(2) Basic and diluted net income (loss) per share for all periods have been
restated in accordance with FASB Statement No. 128, which the Company
adopted on December 31, 1997. See Note 1 of Notes to Consolidated
Financial Statement.
(3) Basic and diluted net income (loss) per share for 1993 have been restated
to retroactively eliminate cheap stock in accordance with the requirements
of Staff Accounting Bulletin No. 98, issued by the staff of the Securities
and Exchange Commission in February 1998.
(4) The Incyte Genetics and Incyte General pro forma net income (loss) per
share are computed assuming the Incyte Genetics Stock Proposal is approved
by the Company's stockholders. Incyte General pro forma net income (loss)
per share gives effect to the redesignation of all Existing Common Stock
as Incyte General Stock on a one-for-one basis. Incyte Genetics' pro forma
net income (loss) per share assumes 12,000,000 shares of Incyte Genetics
Stock are outstanding for all periods, as if the Incyte Genetics
Distribution had occurred on July 1, 1996.
27
<PAGE>
INCYTE GENERAL
SELECTED COMBINED FINANCIAL DATA
The data set forth below should be read in conjunction with
"Management's Discussion and Analysis of Financial Condition and Results of
Operations" and the Combined Financial Statements and related Notes of Incyte
General, a division of Incyte Pharmaceuticals, Inc., included in Annex F to this
Proxy Statement.
<TABLE>
<CAPTION>
Six Months
Year Ended December 31 Ended June 30,
=======================================================================================
1993 1994 1995 1996 1997 1997 1998
=======================================================================================
(in thousands) (unaudited)
<S> <C> <C> <C> <C> <C> <C> <C>
Statement of Operations Data:(1)
Revenues $ 672 $ 1,512 $ 12,299 $ 41,445 $ 88,863 $ 39,039 $ 62,337
Costs and expenses:
Research and development 4,764 11,169 19,272 41,130 70,152 31,553 43,221
Selling, general administrative 737 2,328 3,952 6,926 13,715 6,044 10,133
Charge for purchase of in-
process research and
development -- -- -- 3,165 -- -- --
Acquisition-related charges -- -- -- -- -- -- 1,171
-------- -------- -------- -------- -------- -------- --------
Total costs and expenses 5,501 13,497 23,224 51,221 83,867 37,597 54,525
Income (loss) from operations (4,829) (11,985) (10,925) (9,776) 4,996 1,442 7,812
Interest and other income, net 60 510 988 2,288 4,140 1,069 3,681
-------- -------- -------- -------- -------- -------- --------
Income (loss) before income taxes (4,769) (11,475) (9,937) (7,488) 9,136 2,511 11,493
Provision for income taxes -- -- -- -- 582 172 1,920
-------- -------- -------- -------- -------- -------- --------
Net income (loss) $ (4,769) $(11,475) $ (9,937) $ (7,488) $ 8,554 $ 2,339 $ 9,573
======== ======== ======== ======== ======== ======== ========
</TABLE>
28
<PAGE>
<TABLE>
<CAPTION>
December 31 June 30,
=======================================================================================
1993 1994 1995 1995 1997 1997 1998
=======================================================================================
(in thousands, except share and per share amounts) (unaudited)
<S> <C> <C> <C> <C> <C> <C> <C>
Balance Sheet Data:(1)
Cash, cash equivalents and
marketable securities available-for- $15,540 $25,257 $41,128 $40,238 $113,095 $43,937 $126,710
sale
Working capital 14,865 20,866 39,015 21,671 90,777 18,221 87,649
Total assets 17,807 29,350 58,892 69,111 182,491 83,375 206,065
Noncurrent portion of capital lease 517 148 147 37 801 23 594
Obligations and notes payable
Division equity 16,451 24,344 47,606 45,154 136,079 51,202 149,673
</TABLE>
(1) The accompanying combined financial data have been derived from the
consolidated assets, liabilities, revenues and expenses recorded in the
accounting records of Incyte Pharmaceuticals, Inc. The accompanying
financial statements reflect the assets, liabilities, revenue and expenses
directly attributable to Incyte General as well as allocations deemed
reasonable by management to present the financial position, results of
operations and cash flows of Incyte General on a stand-alone basis.
29
<PAGE>
INCYTE GENETICS
SELECTED COMBINED FINANCIAL DATA
The data set forth below should be read in conjunction with
"Management's Discussion and Analysis of Financial Condition and Results of
Operations" and the Combined Financial Statements and related Notes of Incyte
Genetics, a division of Incyte Pharmaceuticals, Inc., included in Annex G to
this Proxy Statement.
<TABLE>
<CAPTION>
July 1, 1996 Six Months Ended
Through Year Ended June 30,
December 31, December 31, -----------------
Statement of Operations Data(1): 1996 1997 1997 1998
------------- ------------ ---- ----
(in thousands) (unaudited)
<S> <C> <C> <C> <C>
Revenues $ 450 $ 1,133 $ 384 $1,135
Costs and expenses:
Research and development 207 2,300 950 1,598
Selling, general and administrative 31 213 59 189
----- ------- ------ ------
Total costs and expenses 238 2,513 1,009 1,787
Income (loss) from operations 212 (1,380) (625) (652)
Losses from joint venture -- (300) -- (640)
----- ------- ------ ------
Income (loss) before income taxes 212 (1,680) (625) (1,292)
Income tax benefit -- (34) (14) (492)
----- ------- ------ ------
Net income (loss) $ 212 $ (1,646) $ (611) $ (800)
===== ========= ======= =======
</TABLE>
<TABLE>
<CAPTION>
December 31, June 30,
----------------------------------- ------------------------------
Balance Sheet Data:(1) 1996 1997 1997 1998
--------------- -------------- ------------ ------------
(in thousands) (unaudited)
<S> <C> <C> <C>
Restricted Cash $ -- $ 6,000 $ -- $ 4,000
Working capital (deficit) (320) (77) (276) (857)
Total assets 62 16,598 127 13,123
Division equity (320) 9,623 (276) 8,203
</TABLE>
(1) The accompanying combined financial data have been derived from the
consolidated assets, liabilities, revenues and expenses recorded in the
accounting records of Incyte Pharmaceuticals, Inc. The accompanying
financial statements reflect the assets, liabilities, revenue and expenses
directly attributable to Incyte Genetics as well as allocations deemed
reasonable by management to present the financial position, results of
operations and cash flows of Incyte Genetics on a stand-alone basis.
30
<PAGE>
CAUTIONARY STATEMENT FOR PURPOSES OF THE "SAFE HARBOR"
PROVISIONS OF THE PRIVATE SECURITIES LITIGATION REFORM
ACT OF 1995
When used in this Proxy Statement, the word "expects," "anticipates,"
"estimates," and similar expressions are intended to identify forward-looking
statements. Such statements, which include statements under the captions "Proxy
Statement Summary -- Incyte Genetics Stock Proposal," "Risk Factors," "Proposal
1 -- Incyte Genetics Stock Proposal -- Background and Reasons for the Incyte
Genetics Proposal," Annex E -- "Incyte Pharmaceuticals, Inc. -- Management's
Discussion and Analysis of Financial Condition and Results of Operations," Annex
F -- "Incyte General -- Description of Business and "-- Management's Discussion
and Analysis of Financial Condition and Results of Operations" and Annex G --
"Incyte Genetics -- Description of Business" and "-- Management's Discussion and
Analysis of Financial Condition and Results of Operations" as to the timing of
availability of products under development, the ability to commercialize
products developed under collaborations and alliances, the performance and
utility of the Company's products and services, the profitability of the two
Divisions and the adequacy of capital resources, are subject to risks and
uncertainties that could cause actual results to differ materially from those
projected. These risks and uncertainties include, but are not limited to, those
risks discussed below as well as the extent of utilization of genomic and
pharmacogenetics information by the pharmaceutical and biotechnology industries
in both research and development, risks relating to the development of new
products and their use by potential collaborators of the Company, the impact of
technological advances and competition, the ability to successfully integrate
the operations of recent business combinations, the cost of accessing
technologies developed by other companies, uncertainty as to the scope of
coverage, enforceability or commercial protection from patents that issue on
gene sequences and other genetic information, the viability of joint ventures
and businesses in which the Company has purchased equity, uncertainties
associated with the ability to raise capital and the risks set forth in this
Proxy Statement under the captions "Risk Factors" and Annex I -- "Factors That
May Affect Results." The cautionary statements made in this Proxy Statement
should be read as being applicable to all related forward-looking statements
wherever they appear in this Proxy Statement.
31
<PAGE>
RISK FACTORS
Stockholders of One Company; Financial Effects of One Division Could Adversely
Affect the Other Division
Incyte General and Incyte Genetics are not separate legal entities.
Holders of Incyte General Stock and Incyte Genetics Stock will be stockholders
of a single company and will not have any interest in the assets of their
respective Division. Notwithstanding the allocation of assets and liabilities
(including contingent liabilities) and stockholders' equity between the
Divisions for the purpose of preparing their respective financial statements,
the change in the capital structure of the Company contemplated by the Incyte
Genetics Stock Proposal will not affect legal title to such assets or
responsibility for such liabilities of the Company or any of its subsidiaries.
The assets of each Division are subject to the obligations and liabilities
incurred by either Division, whether such obligations or liabilities arise from
lawsuits, contract or other indebtedness allocated to such Division. If one
Division is unable to satisfy its obligations or liabilities out of assets or
other resources allocated to it, the Company may be required to satisfy the
obligations or liabilities using assets or resources allocated to the other
Division. As such, the holders of Incyte General Stock and Incyte Genetics Stock
can be affected by decisions of the Board and the Company's management regarding
the assets and liabilities of both Divisions. Subject to the Management and
Allocation Policies described under "Proposal 1 -- Incyte Genetics Stock
Proposal -- Management and Allocation Policies," the Board's fiduciary duties to
the Company and its stockholders, and the rights of the holders of a series of
Common Stock to vote separately as a class, the Board or management may allocate
assets and divert revenue streams or products between Divisions without
stockholder approval.
Financial effects arising from a Division that affect the consolidated
results of operations or financial position of the Company could affect the
results of operations or financial position of the other Division and the market
price of the series of Common Stock related to the other Division. Moreover, any
net losses of Incyte General or Incyte Genetics and any distributions on, or
repurchases of, any shares of capital stock will reduce the funds of the Company
legally available for the payment of dividends on all classes and series of
common stock of the Company. Accordingly, Incyte General's and Incyte Genetics'
financial information should be read in conjunction with the Company's
consolidated financial information.
The Company will continue to prepare consolidated financial statements
and also provide such consolidated financial statements to the stockholders of
each of Incyte General and Incyte Genetics. If the Incyte Genetics Stock
Proposal is approved, the Company will provide to stockholders of each of Incyte
General and Incyte Genetics separate financial statements, management's
discussion and analysis of financial condition and results of operations,
descriptions of businesses and other relevant information for the respective
Division, together with the Company's consolidated financial statements.
32
<PAGE>
Limited Separate Stockholder Rights
Under the Incyte Genetics Stock Proposal, holders of the Incyte General
Stock would not have any legal rights specifically related to the assets
attributed to Incyte Genetics, and holders of Incyte Genetics stock would not
have any legal rights specifically related to the assets attributed to Incyte
General, except (i) as set forth in the provisions relating to dividend and
liquidation rights and requirements for a mandatory exchange of Incyte Genetics
Stock upon the disposition of all or substantially all of the properties and
assets allocated to Incyte Genetics, as described under "Proposal 1 -- Incyte
Genetics Stock Proposal -- Description of Incyte General Stock and Incyte
Genetics Stock -- Exchange of Incyte Genetics Stock" and (ii) separate voting
rights in limited circumstances with respect to the transfer of certain key
programs out of Incyte Genetics, certain material asset transfers between
Divisions and items requiring a separate vote under the Delaware General
Corporation Law, as discussed below under "--Limited Separate Voting Rights;
Variable Voting Rights." Separate meetings for the holders of Incyte General
Stock and Incyte Genetics Stock will not be held.
Holders of Incyte General Stock and Incyte Genetics Stock will be
common stockholders of the Company, and will continue to be subject to all the
risks associated with an investment in the Company and all of its businesses and
liabilities. The Company and its subsidiaries will continue to be responsible
for each of their respective liabilities.
Limited Separate Voting Rights; Variable Voting Rights
Under the Incyte Genetics Stock Proposal, holders of both the Incyte
General Stock and of Incyte Genetics Stock will vote together as a single voting
group, except that the Amended and Restated Certificate requires a series vote
of Incyte Genetics Stock with respect to the transfer of certain key programs
out of Incyte Genetics and may require a series vote of the stock of either or
both Divisions with respect to certain Material Asset Transfers between
Divisions. In addition, the approval of the holders of a majority of the
outstanding shares of each series of Common Stock, voting together as a single
series, is required under the current Delaware General Corporation Law to
approve any amendment to the Certificate of Incorporation that would alter or
change the powers, preferences or special rights of the shares of such series so
as to affect them adversely. Accordingly, except in limited circumstances,
holders of shares of one series of Common Stock could not bring a proposal to a
vote of the holders of that series of Common Stock only, but would be required
to bring any proposal to a vote of all common stockholders. If a separate vote
on a matter by the holders of either the Incyte General Stock or Incyte Genetics
Stock is not required under the Delaware General Corporation Law, stock market
rules or the Amended and Restated Certificate, either series of Common Stock
that is entitled to more than the number of votes required to approve such
matter will be in a position to control the outcome of such vote even if the
matter involves a divergence or conflict of the interests of the holders of the
Incyte General Stock and Incyte Genetics Stock. See "--Potential Divergence of
Interests; No Specific Procedures for Resolution."
33
<PAGE>
Conversely, if a separate vote on a matter by the holders of either the
Incyte General Stock or Incyte Genetics Stock is required under the Delaware
General Corporation Law, by stock market rules or by the Board, such holders of
either Incyte General Stock or Incyte Genetics Stock could prevent approval of
such matter, even if the holders of a majority of the total number of votes cast
or entitled to be cast with respect to both the Incyte General Stock and Incyte
Genetics Stock voting together as a group were to vote in favor of it. See
"Proposal 1 -- Incyte Genetics Stock Proposal -- Description of Incyte General
Stock and Incyte Genetics Stock -- Voting Rights."
Each share of Incyte General Stock will have one vote. Until the
completion of the first to occur of any Incyte Genetics Private Placement, any
Incyte Genetics Public Offering or the Incyte Genetics Distribution, there will
be no shares of Incyte Genetics Stock outstanding. The number of votes to which
each share of Incyte Genetics Stock will initially be entitled will be
determined prior to the first record date relating to a vote on any matter on
which the holders of the Incyte Genetics Stock are entitled to vote after the
initial issuance of Incyte Genetics Stock. Five trading days prior to such
record date, the number of votes to which each share of Incyte Genetics Stock is
entitled will be determined so as to equal the ratio of the average market value
of one share of Incyte Genetics Stock to the average market value of one share
of Incyte General Stock for the 20 consecutive trading days beginning on the
25th trading day prior to such date of determination. Five trading days prior to
each applicable record date thereafter, the number of votes to which each share
of Incyte Genetics Stock is entitled will be adjusted to equal the ratio of the
average market value of one share of Incyte Genetics Stock to the average market
value of one share of Incyte General Stock for the 20 consecutive trading days
beginning on the 25th trading day prior to such date of determination..
Accordingly, the relative voting power per share of Incyte General Stock and
Incyte Genetics Stock will fluctuate based on the respective market values of
the two series of Common Stock. Market value could be affected by many factors,
including the results of operations of the Company and each of the Divisions,
trading volume, share issuances and repurchases, and general economic and market
conditions. See "Proposal 1 -- Incyte Genetics Stock Proposal -- Description of
Incyte General Stock and Incyte Genetics Stock -- Voting Rights." Changes in the
aggregate votes or relative voting power of Incyte General Stock or Incyte
Genetics Stock could result from the market's reaction to a decision by the
Company's management or the Board that is perceived to affect differently one
series of Common Stock in comparison to the other or the issuance or repurchase
of shares of Common Stock of either series.
Upon the approval by the stockholders and the filing of the Amendment
and Restated Certificate with the Delaware Secretary of State there will be only
Incyte General Stock outstanding, and consequently holders of Incyte General
Stock will hold all of the voting power of the Company. The Company expects
that, even after completion of any Incyte Genetics Private Placement, any Incyte
Genetics Public Offering and the Incyte Genetics Distribution, holders of Incyte
General Stock will still hold a substantial majority of the total voting power
of the Company. As a result, on matters submitted to a vote of the common
stockholders as a group, the preferences of the holders of Incyte General Stock
are likely to dominate and determine the outcome of such vote unless and until
the relative number of shares outstanding and/or the market value of each series
of the Company's Common Stock materially changes.
34
<PAGE>
Management and Allocation Policies Subject to Change
The Board has adopted certain management and allocation policies
described herein with respect to cash management, the allocation of corporate
expenses, rights to commercialize products, interdivision transactions and other
matters. Such management and allocation policies may be modified or rescinded by
the Board, in its sole discretion, without the approval of stockholders,
although there is no present intention to do so. The Board could also adopt
additional policies depending upon the circumstances. The Board could decide to
modify or rescind such policies, or to adopt additional polices, and any such
decision could have disparate effects upon holders of shares of any series of
Common Stock. Any determination of the Board to modify or rescind such policies,
or to adopt additional policies, including any such decision that would have
disparate impacts upon holders of Incyte General Stock and holders of Incyte
Genetics Stock, would be made in accordance with the Board's good faith business
judgment of the best interests of the Company, taking into consideration the
interests of all common stockholders. See "Proposal 1 -- Incyte Genetics Stock
Proposal -- Certain Management and Allocation Policies."
Potential Divergence of Interests; No Specific Procedures for Resolution
Occasions may arise when the interest of the holders of Incyte General
Stock and the holders of Incyte Genetics Stock may diverge or appear to diverge.
Examples include, among others, determinations by the Board to: (i) allocate
resources and financial support to or pursue business opportunities or
operational strategies through one Division instead of the other Division, (ii)
exchange each outstanding share of Incyte Genetics Stock for cash or shares of
Incyte General Stock, (iii) approve the disposition of all or substantially all
of the properties and assets of Incyte Genetics, (iv) allocate consideration to
be received by holders of Common Stock in connection with a merger or
consolidation involving the Company among holders of different series of Common
Stock, (v) if and to the extent there are Incyte Genetics Designated Shares,
allocate the proceeds of future issuances of Incyte Genetics Stock either to
Incyte General as a reduction in the number of Incyte Genetics Designated Shares
or to the equity of Incyte Genetics, (vi) pay or omit dividends on any series of
Common Stock or (vii) approve transactions involving the transfer of funds or
assets from one Division to the other or make other operational or financial
decisions with respect to one Division that could be considered to be
detrimental to the other Division.
Other than as described under "Proposal 1 -- Incyte Genetics Stock
Proposal -- Certain Management and Allocation Policies," no specific procedures
have been adopted for consideration of matters involving a divergence of
interests among the holders of the Company's Common Stock. The policies that
have been adopted could be modified or rescinded by the Board, in its sole
discretion, without the approval of stockholders, although there is no present
intention to do so. The Board could also adopt additional policies without
stockholder approval. The Board intends to exercise its judgment from time to
time, depending on the circumstances, as to how best to obtain information
regarding the divergence (or potential divergence) of interests, under what
circumstances to seek the assistance of outside advisors, whether a committee of
the Board should be appointed to address the matter, and how to assess which
available alternative is in the best interests of the
35
<PAGE>
Company and all of its stockholders. The Board believes the advantages of
retaining flexibility in determining how best to fulfill its responsibilities in
such circumstances as they may arise outweigh any perceived advantages from
attempting to adopt specific procedures in advance to cover all conceivable
circumstances. Each of the foregoing potential diverging or conflicting
interests is discussed below:
Operational and Financial Decisions. The Board could, in its sole
discretion, from time to time, make operational and financial decisions or
implement policies that affect disproportionately the businesses of Incyte
General and Incyte Genetics, such as transfers of services, funds or assets
between Divisions and other interdivision transactions, the allocation of
financing opportunities in the public markets and the allocation of business
opportunities, resources and personnel that may be suitable for both Divisions.
Any such decision may favor one Division at the expense of the other. For
example, the decision to obtain funds for one Division may adversely affect the
ability of the other Division to obtain funds sufficient to implement its growth
strategies. All such decisions will be made by the Board in its good faith
business judgment or in accordance with procedures and policies adopted by the
Board from time to time, including the policies described under "Proposal 1 --
Incyte Genetics Stock Proposal -- Certain Management and Allocation Policies,"
to ensure that such decisions will be made in a manner consistent with the best
interests of the Company, taking into consideration the interests of all common
stockholders. For further discussion of potential divergence of interests, see
"--Fiduciary Duties of the Board; No Definitive Precedent Under Delaware Law,"
"--Transfers of Funds Between Divisions; Equity Contributions," and "Proposal 1
- -- Incyte Genetics Stock Proposal -- Certain Management and Allocation
Policies."
Optional Exchange of Incyte Genetics Stock. The Board could, in its
sole discretion and without stockholder approval, determine to exchange shares
of Incyte Genetics Stock for shares of Incyte General Stock (or any combination
thereof) at a 20% premium over the then current market value of Incyte Genetics
Stock at any time following the third anniversary of the Effective Date. Any
such determination could be made at a time when either or both of Incyte
Genetics Stock and Incyte General Stock may be considered to be overvalued or
undervalued. In addition, any such conversion at any premium would dilute the
interests in the Company of the holders of Incyte General Stock and would
preclude holders of Incyte Genetics Stock from retaining their investment in a
security that is intended to reflect separately the performance of that
Division. If such exchange is perceived as dilutive to Incyte General Stock, the
market price of such stock may be adversely affected. The Company cannot predict
the impact on the market prices of Incyte General Stock or Incyte Genetics Stock
of its ability to effect any such exchange or the effect, if any, that the
exercise by the Company of this exchange right would have on the market price of
Incyte General Stock or Incyte Genetics Stock prevailing at such time. In
determining whether to convert Incyte Genetics Stock into Incyte General Stock,
the Board will act in accordance with its good faith business judgment that any
such conversion is in the best interests of the Company as a whole, but not
necessarily in the best interests of either Division individually. See "Proposal
1 -- Incyte Genetics Stock Proposal -- Description of Incyte General Stock and
Incyte Genetics Stock -- Exchange of Incyte Genetics Stock."
36
<PAGE>
Fair Value Upon Disposition of Division Assets. As long as the assets
attributed to a Division continue to represent less than substantially all of
the properties and assets of the Company, the Board may approve sales and other
dispositions of any amount of the properties and assets of such Division without
stockholder approval (other than the transfer of certain key programs out of
Incyte Genetics and certain material asset transfers between Divisions). The
proceeds from any such sale would be assets attributed to such Division and used
for its benefit, subject to the management and allocation policies described
under "Proposal 1 -- Incyte Genetics Stock Proposal -- Certain Management and
Allocation Policies." The Amended and Restated Certificate would contain
provisions that, in the event of a disposition of all or substantially all of
the properties and assets of Incyte Genetics (other than pro rata to the holders
of all outstanding shares of Incyte Genetics Stock, in a liquidation, to certain
parties controlled by the Company or in a transaction with a company primarily
engaged in a complementary business), require the Company to (i) distribute to
holders of the Incyte Genetics Stock an amount in cash and/or securities or
other property equal to their proportionate interest in the Fair Value of the
Net Proceeds of such Disposition either by special dividend or redemption of all
or part of the shares of such Incyte Genetics Stock or (ii) convert the
outstanding shares of Incyte Genetics Stock into a number of shares of Incyte
General Stock equal to 110% of the ratio, calculated over a period of time, of
the average Market Value of one share of Incyte Genetics Stock to the average
Market Value of one share of Incyte General Stock. See "Proposal 1 -- Incyte
Genetics Stock Proposal -- Description of Incyte Genetics Stock and Incyte
General Stock -- Conversion and Redemption." The terms of the Common Stock do
not require the Board to select the option that would result in the distribution
with the highest value to the holders of Incyte Genetics Stock or with the
smallest effect on the Incyte General Stock. The Board would select an option
based upon its good faith business judgment that such option is in the best
interests of the Company as a whole. See "--Fiduciary Duties of the Board Owed
to All Stockholders Regardless of Class or Series." If Incyte Genetics were a
separate, independent company and its shares were acquired by another person,
certain costs of such disposition, including corporate level taxes, might not be
payable in connection with such an acquisition. As a result, the consideration
that would be received by stockholders of such a separate independent company in
connection with such an acquisition might be greater than the Fair Value of the
Net Proceeds that would be received by holders of the Incyte Genetics Stock if
the assets of Incyte Genetics were sold. In addition, no assurance can be given
that the Net Proceeds per share of Incyte Genetics Stock to be received in
connection with a Disposition of all of the assets of Incyte Genetics will be
equal to or more than the market value per share of such Incyte Genetics Stock
prior to or after announcement of such Disposition. See "--No Assurances as to
Market Price" and "Proposal 1 -- Incyte Genetics Stock Proposal -- Description
of Incyte General Stock and Incyte Genetics Stock -- Conversion and Redemption
- -- Mandatory Dividend on or Redemption or Conversion of Common Stock."
Allocation of Proceeds upon Issuance of Incyte Genetics Stock. If and
to the extent there are Incyte Genetics Designated Shares at the time of any
sale of shares of Incyte Genetics Stock, the Board would determine the
allocation of the proceeds of such sale between Incyte General and Incyte
Genetics. Any such allocation would be reflected on the financial statements of
the Division to which such proceeds were allocated and to the extent such net
proceeds are allocated to Incyte General would reduce the number of Incyte
Genetics Designated Shares.
37
<PAGE>
No Assurance of Payment of Dividends. The Company has not paid
dividends in the past and does not anticipate paying any dividends in the
foreseeable future. Any dividends on the Incyte General Stock or Incyte Genetics
Stock that may be declared by the Board will be payable out of the lesser of:
(i) the funds of the Company legally available for such purpose, which are
determined on the basis of the entire Company, and (ii) the Available Dividend
Amount with respect to the relevant Division, which in general is equal to the
amount legally available for such purpose determined in accordance with Delaware
law applied as if such Division were a separate corporation. Such dividends are
further subject to the prior payment of dividends on outstanding shares of any
class or series of capital stock of the Company with preferential dividend
provisions. Any net losses of the Company (without regard to whether such losses
arose from any specific Division), and any dividends or distributions on, or
repurchases of, the Incyte General Stock or Incyte Genetics Stock, and dividends
on, and certain repurchases of, preferred stock, will reduce the funds of the
Company legally available for payment of dividends on both the Incyte General
Stock and Incyte Genetics Stock. Subject to limitations imposed by the Delaware
General Corporation Law and the Amended and Restated Certificate, the Board may
declare and pay dividends on Incyte General Stock and Incyte Genetics Stock in
equal or unequal amounts, or may decide not to declare and pay such dividends,
notwithstanding the relationship between the Available Dividend Amounts for the
respective Divisions, the respective amounts of prior dividends paid on, or
liquidation rights of, the Incyte General Stock or Incyte Genetics Stock or any
other factor. See "Proposal 1 -- Incyte Genetics Stock Proposal -- Description
of Incyte General Stock and Incyte Genetics Stock -- Dividends."
Allocation of Proceeds of Mergers or Consolidations. The Amended and
Restated Certificate does not contain any provisions governing how consideration
to be received by the Company's stockholders in connection with a merger or
consolidation involving the Company (in which the Common Stock is to be
converted into other securities, cash or other property) is to be allocated
among holders of Incyte Genetics Stock and Incyte General Stock. In any such
merger or consolidation, the allocation of consideration would be determined by
the Board and would be subject to approval by a majority of the voting power of
all shares of Common Stock of the Company, voting together as one group.
Fiduciary Duties of the Board Owed to All Stockholders Regardless of Class or
Series
The Company is not aware of any legislative or judicial precedent
involving the fiduciary duties of directors of corporations having two classes
or series of common stock, or separate classes or series of capital stock, the
rights of which are defined by reference to specified operations of the
corporation. Principles of Delaware law established in cases involving differing
treatment of two classes of capital stock or two groups of holders of the same
class of capital stock provide that a board of directors owes an equal duty to
all stockholders regardless of class or series and does not have separate or
additional duties to either group of stockholders. Under these principles and
the related principle known as the "business judgment rule," absent abuse of
discretion, a good faith business decision made by a disinterested and
adequately informed Board, or a committee thereof, with respect to any matter
having disparate impacts upon holders of Incyte General Stock and
38
<PAGE>
holders of Incyte Genetics Stock would be a defense to any challenge to such
determination made by or on behalf of the holders of either series of Common
Stock. Nevertheless, a Delaware court hearing a case involving such a challenge
may decide to apply principles of Delaware law other than those discussed above,
or, because such a case could be a case of first impression, may fashion new
principles of Delaware law to decide such a case. There may arise circumstances
involving a divergence or conflict of the interests of the holders of Incyte
General Stock and holders of Incyte Genetics Stock in which the Board is held to
have properly discharged its fiduciary duties but in which holders of Incyte
General Stock or Incyte Genetics Stock consider themselves to be disadvantaged
relative to the other series. In such a case, such holders might not have any
remedy under Delaware law with respect to the circumstances giving rise to the
divergence or conflict of interests.
Disproportionate ownership interests of members of the Board in Incyte
General Stock or Incyte Genetics Stock or disparity in the respective market
values of the Incyte General Stock and Incyte Genetics Stock held by such
directors could create or appear to create potential conflicts of interest when
directors are faced with decisions that could have different implications for
the different series. See "--Potential Divergence of Interests; No Specific
Procedures for Resolution" and "Proposal 1 -- Incyte Genetics Stock Proposal --
Certain Management and Allocation Policies -- Fiduciary and Management
Responsibilities."
Transfer of Funds Between Divisions; Equity Contributions
If the Incyte Genetics Stock Proposal is approved by stockholders, all
debt incurred or stock issued by the Company and its subsidiaries following the
Effective Date would be (unless the Board otherwise provides) specifically
attributed to and reflected in the financial statements of the Division that
includes the entity which incurred the debt or issued the stock or, in the case
of debt or stock that is not specifically attributed to one of the Divisions,
Incyte General. The Board could, however, determine from time to time that debt
incurred or stock issued by entities included in a Division should be
specifically attributed to and reflected in the financial statements of the
other Division to the extent that the debt is incurred or the stock is issued
for the benefit of such other Division.
To the extent the cash needs of Incyte Genetics exceed the cash
provided by such Division, Incyte General may fund Incyte Genetics in accordance
with the policies described under "Proposal 1 -- Incyte Genetics Stock Proposal
- -- Certain Management and Allocation Policies." Incyte General will manage the
financial activities of all of the Company's Divisions, including the investment
of surplus cash, the issuance and repayment of short-term and long-term debt and
capital lease obligations and the issuance of Common Stock.
No specific criteria have been established for determining when a
transfer between Divisions will be reflected as a borrowing or an investment.
The Board expects to make such determinations, either in specific instances or
by setting generally applicable policies from time to time, after consideration
of such factors as it deems relevant, including, without limitation, the needs
of the Company, the expected effect on the valuation of the Common Stock of each
Division, the financing
39
<PAGE>
needs and objectives of the Divisions, the investment objectives of the
Divisions, the availability, cost and time associated with alternative financing
sources, prevailing interest rates and general economic conditions.
Loans from one Division to another Division, if any, will bear interest
at such rates and have such repayment schedules and other terms as are
established from time to time by, or pursuant to procedures established by, the
Board. The Board expects to make such determinations, either in specific
instances or by setting generally applicable policies from time to time, after
consideration of such factors as it deems relevant, including, without
limitation, the needs of the Company, the use of proceeds by and
creditworthiness of the recipient Division, the capital expenditure plans and
investment opportunities available to each Division and the availability of and
cost and time associated with alternative financing sources. See "Proposal 1 --
Incyte Genetics Stock Proposal -- Certain Management and Allocation Policies --
Other Interdivision Transactions."
Although the number of shares attributable to any funding of one
Division by the other by way of a capital contribution would be determined by
reference to the market value of stock of the Division being funded as of the
date of such event, an increase (or decrease) could occur at a time when such
Division's stock could be considered undervalued or overvalued. In addition, the
creation of or an increase in the number of shares of a Division's stock may
result in dilution in net tangible book value per share to the existing holders
of such stock.
Absence of Approval Rights with Respect to Future Issuances of Authorized Shares
The authorized but unissued shares of capital stock of the Company will
be available for issuance from time to time at the sole discretion of the Board
for any proper corporate purpose. Such issuances could include Incyte Genetics
Stock, Incyte General Stock, or a combination thereof, as well as the issuance
of such shares upon the conversion or exercise of securities of the Company that
are convertible into or exercisable or exchangeable for such shares. In
addition, the Board will be able to designate and issue a new series of Common
Stock from the authorized but unissued shares of Common Stock or a new series of
preferred stock from the authorized but unissued shares of preferred stock. The
approval of the stockholders of the Company will not be sought by the Company
for the issuance of authorized but unissued shares of capital stock of the
Company, unless deemed advisable by the Board or required by applicable law,
regulation or stock market requirements. Subject to prevailing market and other
conditions, the Company currently expects that the shares of Incyte Genetics
Stock or preferred stock issued in any Incyte Genetics Private Placement and the
shares of Incyte Genetics Stock issued in any Incyte Genetics Public Offering
would come from the authorized but unissued shares of capital stock.
In addition, as permitted by Delaware law, the Amended and Restated
Certificate will permit the number of authorized shares of any class of capital
stock to be increased or decreased (but not below the number of shares then
outstanding in such class, respectively) by the affirmative vote of the holders
of a majority of the voting power of the shares of capital stock of the Company
entitled to vote with respect to such matter. Immediately after the Effective
Date, only Incyte General Stock
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will be outstanding and consequently holders of Incyte General Stock will hold
all of the voting power of the Company. In addition, the Company expects that,
even after completion of any Incyte Genetics Private Placement, any Incyte
Genetics Public Offering and the Incyte Genetics Distribution, holders of Incyte
General Stock will still hold a substantial majority of the voting power of the
Company. This provision could allow holders of Incyte General Stock to authorize
and issue shares of capital stock under circumstances which could preserve the
ability of such holders to continue to exercise control over a majority of the
voting power of the Company and, therefore, could make it more difficult to
replace the current Board and management of the Company. The Company has no
current intention to take any action to authorize any additional shares of
capital stock, other than as described herein.
No Assurances as to Market Price
Because there has been no prior market for the Incyte General Stock and
Incyte Genetics Stock, there can be no assurance as to their market prices
following issuance thereof. There can be no assurance that the combined market
values of the Incyte General Stock and Incyte Genetics Stock held by a
stockholder immediately following the effectiveness of the Incyte Genetics Stock
Proposal will equal or exceed the market value of the Existing Common Stock held
by such stockholder prior to the announcement or effectiveness of the Incyte
Genetics Stock Proposal, and the combined market value could be less than such
market value of the Existing Common Stock. Until an orderly market develops for
the Incyte General Stock and Incyte Genetics Stock, and perhaps thereafter,
their respective trading prices may fluctuate significantly. If an active
trading market does develop, there can be no assurance that it will be
maintained. The prices at which the shares of Incyte General Stock or Incyte
Genetics Stock will trade will be determined in the trading markets and may be
influenced by many factors, including the consolidated results of the Company,
as well as the respective performance of Incyte General and Incyte Genetics,
investors' expectations for the Company and each Division, trading volume and
general economic and market conditions. There is no assurance that investors
will assign value to the Incyte General Stock or Incyte Genetics Stock based on
the reported financial results and fundamental operating prospects of the
related Division. Financial results of the Divisions that impact the Company's
consolidated results of operations or financial condition could affect the
market prices of the Incyte General Stock and Incyte Genetics Stock. In
addition, the Company cannot predict the impact on the market values of the
Incyte General Stock or Incyte Genetics Stock, or certain terms of the
securities, such as the ability of the Company to convert shares of Incyte
Genetics Stock, the discretion of the Board to make various determinations, or
the impact on the market value of each series of Common Stock of its voting
power.
Limitations on Potential Unsolicited Acquisitions
If Incyte General or Incyte Genetics were stand-alone corporations, any
person interested in acquiring either of such corporations without negotiation
with management could seek control of the outstanding stock of such corporation
by means of a tender offer or proxy contest. Although the Incyte Genetics Stock
Proposal would create two series of Common Stock that are intended to reflect
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the separate performance of the Divisions, a person interested in acquiring only
one Division without negotiation with the Company's management would still be
required to seek control of the voting power represented by all of the
outstanding capital stock of the Company entitled to vote on such acquisition,
including the series of Common Stock related to the other Division. See
"--Limited Separate Stockholder Rights," "--Limited Separate Voting Rights;
Variable Voting Rights," and "Proposal 1 -- Incyte Genetics Stock Proposal --
Description of Incyte General Stock and Incyte Genetics Stock -- Voting Rights."
Anti-Takeover Considerations
The Company has adopted a Stockholder Rights Plan pursuant to which
each share of Existing Common Stock (including, after implementation of the
Incyte Genetics Stock Proposal, if approved, shares of Incyte General Stock and
Incyte Genetics Stock) is accompanied by a preferred stock purchase right. These
rights will cause substantial dilution to a person or group that attempts to
acquire the Company on terms not approved by the Board and may have the effect
of deterring hostile takeover attempts.
The existence of two series of Common Stock could present complexities
and could in certain circumstances pose obstacles, financial and otherwise, to
an acquiring person. The Stockholder Rights Plan and the existence of the two
series of Common Stock could, under certain circumstances, prevent stockholders
from profiting from an increase in the market value of their shares as a result
of a change in control of the Company by delaying or preventing such change in
control. Although the Board has no present intention of doing so, it could issue
shares of preferred stock or of a new or existing series of Common Stock that
could be used to create voting or other impediments or to discourage persons
seeking to gain control of the Company and could also be privately placed with
purchasers favorable to the Board in opposing such action. See "Proposal 1 --
Incyte Genetics Stock Proposal -- Anti-takeover Considerations."
No Assurance of Completion of Transactions
This Proxy Statement describes the Incyte Genetics Private Placement,
the Incyte Genetics Public Offering and the Incyte Genetics Distribution as
currently contemplated by the Board. Such transactions are subject to various
conditions and uncertainties and there can be no assurance that all or any of
such transactions will be completed or, if they are completed, that they will be
completed on the terms described in this Proxy Statement.
Certain Federal Income Tax Considerations
The Company has been advised by its tax counsel that for federal income
tax purposes the Incyte General Stock and the Incyte Genetics Stock will be
common stock of the Company and accordingly: (i) the redesignation of the
Existing Common Stock as Incyte General Stock will not be taxable to the Company
or existing stockholders; (ii) if any Incyte Genetics Private Placement or any
Incyte Genetics Public Offering occurs, the Company will not recognize any
income, gain or loss
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on the sale of the Incyte Genetics Stock to the public; and (iii) when the
Incyte Genetics Distribution occurs, a holder of Incyte General Stock will not
recognize any income, gain or loss upon the receipt of the Incyte Genetics
Stock, except to the extent of any cash received in lieu of fractional shares.
However, there are no court decisions or other authorities bearing directly on
transactions similar to the Incyte Genetics Stock Proposal. Further, the Service
has announced that it will not issue advance rulings with respect to tracking
stock transactions. It is possible, therefore, that the Service could assert
that the Incyte Genetics Stock or the Incyte General Stock or both represent
property other than Common Stock of the Company. Any such determination could
have a material adverse effect on the Company and result in adverse tax
consequences for stockholders of the Company. See "Proposal 1 -- Incyte Genetics
Stock Proposal -- Certain Federal Income Tax Consequences." Stockholders are
urged to consult their own tax advisors as to the particular tax consequences of
the redesignation to them under federal, state, local or foreign law.
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PRICE RANGE OF AND DIVIDENDS ON EXISTING COMMON STOCK
The Existing Common Stock was traded on the American Stock Exchange
from the Company's initial public offering on November 4, 1993 until January 15,
1996. Since January 16, 1996, the Existing Common Stock has been traded on the
Nasdaq National Market under the symbol "INCY." The following table sets forth
for the periods indicated the high and low sales prices for the Existing Common
Stock on the applicable market. All prices have been adjusted to reflect a 2-
for-1 stock split effected in the form of a 100% stock dividend in November
1997.
1996 High Low
---- ---
First Quarter............................. $19.69 $12.31
Second Quarter............................ 19.94 11.56
Third Quarter............................. 24.88 16.25
Fourth Quarter............................ 26.44 17.75
1997
First Quarter............................. 37.25 24.06
Second Quarter............................ 35.88 20.75
Third Quarter............................. 42.25 29.81
Fourth Quarter............................ 45.25 31.50
1998
First Quarter............................. 51.00 34.00
Second Quarter............................ 48.00 31.00
Third Quarter (through September 25, 42.00 18.50
1998)..................................
On September 25, 1998, the last reported sale price for the Existing
Common Stock on the Nasdaq National Market was $23 11/16. As of September 25,
1998, there were approximately 354 holders of record of the Existing Common
Stock.
The Company has never declared or paid dividends on its capital stock.
For a description of the Company's intended dividend policy following approval
of the Incyte Genetics Stock Proposal, see "Proposal 1 -- Incyte Genetics Stock
Proposal -- Dividend Policy."
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GENERAL
This Proxy Statement is furnished in connection with the solicitation
by the Company of proxies in the accompanying form to be used at the Special
Meeting to be held at [Stanford Park Hotel, 100 El Camino Real, Menlo Park,
California], on [_______________], 1998, at [_____] a.m., Pacific Time, and at
any adjournments or postponements thereof. The shares represented by the proxies
in response to this solicitation and not properly revoked will be voted at the
Special Meeting in accordance with the instructions contained therein. A
stockholder who has given a proxy may revoke it at any time before it is
exercised by filing with the Secretary of the Company a written revocation or a
duly executed proxy bearing a later date or by voting in person at the Special
Meeting. On the matters coming before the Special Meeting for which a choice has
been specified by a stockholder by means of the ballot on the form of proxy, the
shares will be voted accordingly. If no choice is specified, the shares will be
voted "FOR" the approval of each of the Incyte Genetics Stock Proposal and
Additional Proposals (Proposals 1, 2, 3 and 4 referred to in Items 1, 2, 3 and 4
in the Notice of Special Meeting and described in this Proxy Statement).
Stockholders of record at the close of business on [_______________],
1998 (the "Record Date") are entitled to vote at the Special Meeting. As of the
close of business on such date, ________ shares of Existing Common Stock were
outstanding. The presence in person or by proxy of the holders of a majority of
the outstanding shares of Existing Common Stock will constitute a quorum for the
transaction of business at the Special Meeting. Each holder of Existing Common
Stock will be entitled to one vote for each share held as of the Record Date, on
all matters brought before the Special Meeting.
The approval of the Incyte Genetics Stock Proposal will require the
affirmative vote of a majority of the outstanding shares of Existing Common
Stock. Each of the Additional Proposals will require the affirmative vote of a
majority of the shares present in person or represented by proxy at the Special
Meeting and entitled to vote on such proposal. Abstentions with respect to any
proposal will have the same effect as negative votes. If a broker which is the
record holder of certain shares indicates on a form of proxy that it does not
have discretionary authority to vote such shares on any proposal, or if shares
are not voted in other circumstances in which proxy authority is defective or
has been withheld with respect to such proposal, these non-voted shares will be
counted for quorum purposes. With respect to the Incyte Genetics Stock Proposal,
these non-voted shares will have the same effect as negative votes. With respect
to the Additional Proposals, these non-voted shares will not be deemed to be
present or represented for purposes of determining whether stockholder approval
of such proposal has been obtained.
The expense of printing and mailing proxy materials will be borne by
the Company. In addition to the solicitation of proxies by mail, solicitation
may be made by certain directors, officers and other employees of the Company by
personal interview, telephone or facsimile. No additional compensation will be
paid to such persons for such solicitation. The Company will reimburse brokerage
firms and others for their reasonable expenses in forwarding solicitation
materials to beneficial owners of the Existing Common Stock.
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PROPOSAL 1 -- INCYTE GENETICS STOCK PROPOSAL
General
The stockholders of the Company are being asked to consider and approve
the Incyte Genetics Stock Proposal which, if approved, will amend and restate
the Certificate of Incorporation to (i) provide for the issuance of the
Company's authorized Common Stock in series by action of the Board, of which
35,000,000 shares would initially be designated as Incyte General Stock,
15,000,000 shares would initially be designated as Incyte Genetics Stock and
25,000,000 shares would initially be undesignated; (ii) provide authorization to
the Board to issue any undesignated shares as Incyte General Stock or Incyte
Genetics Stock or to designate and issue such shares in one or more additional
series of Common Stock and to determine the number of shares, and the voting
powers and relative, participating, optional and other special rights and
qualifications, limitations and restrictions of any such series; and (iii)
redesignate each share of the Existing Common Stock as one share of Incyte
General Stock.
Subject to the approval by the Company's stockholders of the Incyte
Genetics Stock Proposal and subject to prevailing market and other conditions,
the Company currently intends to (a) sell shares of Incyte Genetics Stock or
equity securities convertible into Incyte Genetics Stock in a private placement
to a limited number of pharmaceutical companies and (b) depending on the capital
needs of Incyte Genetics, to offer to the public for cash shares of Incyte
Genetics Stock. The Company currently plans to issue any such shares from the
authorized but unissued shares of capital stock, as determined by the Board, and
to allocate the net proceeds of any Incyte Genetics Private Placement and any
Incyte Genetics Public Offering to Incyte Genetics. Subject to prevailing market
and other conditions, the Company currently expects that any Incyte Genetics
Public Offering would take place in 1999 and the Incyte Genetics Private
Placement would take place prior to any Incyte Genetics Public Offering.
Subject to approval by the Company's stockholders of the Incyte
Genetics Stock Proposal, the Company currently intends to distribute the Incyte
Genetics Designated Shares in the Incyte Genetics Distribution in the form of a
stock dividend to the holders of Incyte General Stock. The Company currently
expects that the Incyte Genetics Distribution would take place at least six
months after the completion of any Incyte Genetics Public Offering, but in no
event more than 360 days after the Effective Date.
If the Incyte Genetics Stock Proposal is not approved by the
stockholders, the Existing Common Stock will not be redesignated as Incyte
General Stock and the Incyte Genetics Stock will not be created.
If the Incyte Genetics Stock Proposal is approved by the stockholders
at the Special Meeting, the Company anticipates that the Amended and Restated
Certificate (see Annex A) will be filed with the Secretary of State of the State
of Delaware shortly thereafter. The Amended and Restated Certificate will become
effective upon filing with the Secretary of State of the State of Delaware.
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Certificates formerly representing shares of Existing Common Stock that are held
by stockholders will be deemed to represent an equal number of shares of Incyte
General Stock. Stockholders should not mail in their stock certificates
evidencing Existing Common Stock to either the Company or its transfer agent in
connection with the Incyte Genetics Stock Proposal. New certificates
representing shares of Incyte General Stock will be issued in replacement of
certificates formerly representing shares of Existing Common Stock as such
certificates are received and canceled by the transfer agent from time to time.
The authorized but unissued shares of the two new series of the
Company's Common Stock and the undesignated shares of Common Stock will be
available for issuance from time to time by the Company at the discretion of the
Board for any proper corporate purpose, which could include raising capital,
payment of stock dividends, providing compensation or benefits to employees or
acquiring companies or businesses. Such Common Stock would provide the Board
with a means to complete acquisitions or to further divide the Company into
additional Divisions, through the creation of separate series of Common Stock.
The issuance of such additional shares or series would not be subject to
approval by the stockholders of the Company unless deemed advisable by the Board
or required by applicable law, regulation or the listing requirements of the
stock market or stock exchange upon which the Company's shares are listed.
Background And Reasons for the Incyte Genetics Stock Proposal
The Incyte Genetics Stock Proposal has been approved by the Board with
the goal of creating flexibility for the future growth of the Company, and to
advance the Company's financial and strategic objectives, all in an effort to
enhance the overall return to the holders of Existing Common Stock.
If the Company's stockholders approve the Incyte Genetics Stock
Proposal, the resulting amendments to the Certificate of Incorporation will
create two series of Common Stock of the Company, namely the Incyte General
Stock and the Incyte Genetics Stock, each having the rights and privileges
described elsewhere in this Proxy Statement. The Incyte Genetics Stock Proposal
will also authorize the Board to issue in one or more additional or existing
series of Common Stock, with each new series having voting powers and relative,
participating, optional and other special rights and qualifications, limitations
and restrictions determined by the Board before the issuance of any shares of
such series. See "--Description of Incyte General Stock and Incyte Genetics
Stock" and Annex A.
The Incyte Genetics Stock is intended to reflect the value and track
the performance of the businesses of Incyte Genetics. Through Incyte Genetics,
the Company seeks to create a new information-based business providing genomic
tools and services focused on information relating to the role of genetic
variation in disease and drug response. Specifically, Incyte Genetics will
generate this information by mapping and sequencing human genes and discovery
variations known as single nucleotide polymorphisms or 'SNPs.'
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After reviewing in detail the financial performance of the Company, the
Board believes that tracking the businesses of Incyte Genetics separately from
the rest of the Company should result in a higher market valuation being placed
on the Company's businesses than if the businesses of Incyte Genetics and the
Company's other businesses did not have separately traded securities. The Board
considered the inherent conflict between managing and valuing the current
established, profitable businesses of Incyte General and new emerging,
development stage businesses of Incyte Genetics. The Board and management
examined various alternatives designed to achieve greater overall value in these
respective businesses. The Board determined that the separation of the new
businesses, focused on generating information related to the role of genetic
variation in disease and drug response, from the Company's other businesses, and
the creation of two series of Common Stock to track those Divisions, should
provide returns to stockholders that are linked to the performance of a
particular business unit. The value of each series of stock is expected to be
based on the performance of the business to which it relates and is influenced
by the factors that affect the value of common stock generally (i.e., current
and future earnings potential, dividends and comparable valuations). In
addition, the separation of Incyte Genetics from Incyte General will provide
stockholders, analysts and other market participants with separate financial and
other information to evaluate the respective businesses.
At meetings held on June 15, 1998, July 13, 1998, September 10, 1998
and September 25, 1998, the Board considered a variety of structural proposals
to increase the overall value of the Existing Common Stock to its stockholders.
The Board evaluated alternatives available to the Company in view of its
strategic objectives, capital requirements, past financial results and other
factors. They had extensive discussions with financial and legal officers of the
Company. Among the alternatives which the Board considered were (i) the
preservation of the Company's current equity and operating structure; (ii) the
separation of various of the Company's businesses through a distribution (for
example, in a spin-off) to the Company's stockholders or the creation of special
purpose financing entities; (iii) the license to third parties of certain of the
Company's assets or technology; and (iv) the creation of two classes or series
of Common Stock to reflect separately the results of Incyte Genetics and Incyte
General.
The Board determined that preservation of the Company's current equity
and operating structure would likely result in a lower market valuation being
placed on the Company's businesses than under the Incyte Genetics Stock Proposal
because of the effects of the expected losses of Incyte Genetics on the
Company's consolidated financial results and earnings per share. The Board also
determined that a spin-off to stockholders of a separate company owning certain
assets and technologies of the Company could create significant control, tax and
intellectual property ownership issues. These issues arise in part because of
the common core intellectual property, technology and data production methods
utilized by the businesses of Incyte Genetics and Incyte General. The Board
determined that the creation of a special purpose financing entity into which
certain assets and technologies are contributed would also result in substantial
dilution to existing stockholders if the Company exercised purchase rights and
complicate financial statements so as to make it more difficult for stockholders
to track the current businesses. Further, the Board determined that the license
to third parties of the assets allocated to Incyte Genetics or other
technologies would not realize the
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full value of such assets or technologies. Following deliberation over and
consideration of the advantages and disadvantages of the various alternatives,
the Board concluded that the Incyte Genetics Stock Proposal was the best
alternative for the Company and its stockholders.
The Board's adoption of the Incyte Genetics Stock Proposal is part of
its ongoing effort to increase the long-term value of the Company.
In reaching its conclusion, the Board identified the following as the
potential advantages of the Incyte Genetics Stock Proposal:
o Opportunity to Increase Stockholder Value. The creation of two series
of Common Stock, intended to reflect separately the performance of
Incyte General and Incyte Genetics, offers the opportunity to increase
stockholder value by more specifically tracking the financial
performance of each Division. The two businesses have different
characteristics and goals with respect to growth, profitability, risks
and financial management. Incyte Genetics is a new business, focusing
on a different type of genomic information than the current business.
It is at an earlier stage of development, with a higher risk profile
and expected to require a significant investment over the next few
years. This structure will allow the Company to sustain the growth and
profitability of its current business residing with Incyte General,
while continuing to invest in and build value in the businesses of
Incyte Genetics. The separate reporting of each Division's operating
results should enable the investment community to better appreciate the
value of each business unit and invest in either or both securities
depending on their investment objectives.
o Increased Financial and Strategic Flexibility. The Incyte Genetics
Stock Proposal should provide the Company with increased financial and
strategic flexibility in raising capital and entering into acquisitions
and other strategic opportunities by enabling the Company to issue
Incyte Genetics Stock or Incyte General Stock as appropriate. In
particular, given the early stage of development of Incyte Genetics,
substantial funds will be needed to establish its products and
services. A separate equity security for Incyte Genetics would allow
the Company to raise capital through offerings of Incyte Genetics Stock
without diluting the interests of holders of Incyte General Stock.
o Opportunity to Facilitate Both Autonomy and Synergy. The Incyte
Genetics Stock Proposal allows each Division to establish its own
business strategy, financial model and culture while retaining the
advantages and synergies of doing business as a single company. This
structure allows the Company to preserve the benefits of tax
consolidation, credit availability and strategic management of a single
corporation. Specifically, the Company will retain ownership of all of
its technologies, which the Board considers to be a significant
long-term strategic benefit. In addition, it preserves operational
efficiencies by allowing both Divisions to utilize common data
production facilities and share management and administrative
resources, particularly with respect to marketing, sales and business
development. These
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synergies would allow each Division to benefit from cost savings as
compared to the costs each Division would incur if it operated
separately.
o Increased Ability to Focus Management On, and Tie Employee Incentives
To, Specific Businesses. The creation of separate series of Common
Stock, each of which is designed to reflect the operating results of a
distinct Division, increases the Company's ability to focus management
of the respective Divisions on maximizing returns from such businesses
and provides the opportunity to use the Company's stock incentive plans
to provide focused incentives to those management teams and employees
of the two Divisions.
o Ability to Act Quickly for Future Acquisitions or Financings. The
ability of the Board to create one or more additional series of Common
Stock or to increase or decrease the number of shares in existing
series without the need to obtain stockholder approval at the time of
creation of each additional series would provide the Board with a means
to act quickly and definitively in future acquisitions or to further
divide the Common Stock of the Company into additional series.
o Tax-Free Nature of Proposal. Implementation of the Incyte Genetics
Stock Proposal is expected to be tax free for United States federal
income tax purposes to the Company and its stockholders. See "--Certain
Federal Income Tax Consequences."
The Board also considered the following potential disadvantages of the
Incyte Genetics Stock Proposal:
o Complex Capital Structure. The Incyte Genetics Stock Proposal requires
a more complex capital structure which may not be easily understood by
investors and thus could inhibit the efficient valuation of either or
both series of Common Stock.
o Potential Diverging or Conflicting Interests. There are potential
diverging or conflicting interests of the two Divisions, and issues
could arise in resolving any conflicts. See "--Certain Management and
Allocation Policies" and "Risk Factors -- Potential Divergence of
Interests; No Specific Procedures for Resolution."
o Risks of Entire Company Applicable to Each Series. Investors in Incyte
Genetics Stock or Incyte General Stock will be exposed to the risks of
the Company's consolidated businesses and liabilities such as tort,
intellectual property or product liability claims and stockholder
lawsuits because both Divisions remain legally a part of the Company.
See " -- Certain Management and Allocation Policies" and "Risk Factors
-- Stockholders of One Company; Financial Effects of One Division Could
Adversely Affect the Other Division."
o Possible Adverse Tax Treatment. It is possible that the service could
assert that the Incyte Genetics Stock or the Incyte General Stock or
both represent property other than common stock of the Company. Any
such determination could have a material adverse effect on the Company
and result in adverse tax consequences for stockholders of the Company.
See "--Certain Federal Income Tax Consequences."
o Possible Inability to Obtain Future Tax Rulings. In recent private
letter rulings involving "tracking stock" the Service has declined to
issue rulings on whether such "tracking stock" will be treated as stock
of the issuer. Accordingly, if the Company desires to undertake a
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proposed acquisition using either Incyte Genetics Stock or Incyte
General Stock, it may be difficult or impossible to obtain a ruling
from the Service.
o Possible Inability to Use Pooling of Interests Method of Accounting.
Two series of stock will create a possible inability to use the
pooling of interests method of accounting in connection with future
acquisitions using Incyte General Stock or Incyte Genetics Stock.
o Implementation and Ongoing Costs. The costs associated with
implementing the Incyte Genetics Stock Proposal and the ongoing cost of
operating separate Divisions will exceed the costs associated with
operating the Company as it currently exists.
The Board determined that on balance the potential advantages of the
Incyte Genetics Stock Proposal outweigh the potential disadvantages and
concluded that the Incyte Genetics Stock Proposal is in the best interests of
the Company and its stockholders.
Vote Required
The Incyte Genetics Stock Proposal requires the affirmative vote of the
holders of a majority of the outstanding shares of Existing Common Stock.
Recommendation of the Board of Directors
The Board of Directors has carefully considered the terms of the Incyte
Genetics Stock Proposal and believes it is in the best interests of the company
and its stockholders. Accordingly, the Board unanimously has recommended that
you approve this proposal, which is described in more detail in this Proxy
Statement. You are urged to read this Proxy Statement in its entirety prior to
voting your shares.
Dividend Policy
The Company has never declared or paid dividends on its capital stock.
The Board currently intends to retain future earnings, if any, for the
development of the businesses of Incyte General and Incyte Genetics and does not
anticipate paying dividends on the Incyte General Stock or Incyte Genetics Stock
in the foreseeable future.
Certain Management and Allocation Policies
Because Incyte General and Incyte Genetics will each be a part of a
single company, the Board has established policies to separate the business and
operations of Incyte Genetics from those of Incyte General and to operate Incyte
Genetics in a manner approximating the operation of an independent enterprise as
closely as practicable. The policies relating to interdivision business
transactions, the financing of Incyte Genetics and Incyte General, and the
allocation of debt,
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corporate overhead, interest, taxes and other charges between Incyte General and
Incyte Genetics are summarized below.
Except as otherwise provided in the policies, the Board may further
modify or rescind the policies or adopt additional policies in its sole
discretion without approval of the stockholders. Any decision of the Board to
modify or rescind such policies or to adopt additional policies would be made by
the Board in a manner consistent with its fiduciary duties to the Company and
all of its stockholders. Any such decision could have different effects upon the
holders of Incyte General Stock and Incyte Genetics Stock and could result in
benefits or detriments to the holders of one series of such stock compared to
the other. With respect to any change in accounting policy, although generally
accepted accounting principles require that such a change in policy be
preferable (in accordance with such principles) to the previous policy, there is
no assurance that such a change would be beneficial for the individual interests
of either the holders of Incyte General Stock or Incyte Genetics Stock. A
discussion of the principles of Delaware law which would govern any additional
policies or a change or modification in existing policies concerning the two
Divisions may be found under "Risk Factors -- Fiduciary Duties of the Board; No
Definitive Precedent under Delaware Law."
Financial Statements; Allocation Matters. The Company will prepare
financial statements in accordance with generally accepted accounting
principles, consistently applied, for Incyte General and Incyte Genetics, and
these financial statements, taken together, will comprise all of the accounts
included in the corresponding consolidated financial statements of the Company.
The financial statements of each of Incyte General and Incyte Genetics will
reflect the financial condition, results of operations and cash flows of the
businesses included therein. The combined financial statements of Incyte General
will also include any accounts or assets of the Company not specifically
allocated to Incyte Genetics.
Revenue Allocation. Other than revenues received in connection with
transactions subject to the policy described under "--Other Interdivision
Transactions," revenues from the sale of a Division's products and services will
be credited to such Division. Revenues derived from the sale of products of both
Divisions that are sold together shall be allocated by the management of the
Company ("Incyte Management") subject to oversight by the Board. Among the
factors Incyte Management will consider in making such allocation are (i) the
sales prices of such products when sold individually; (ii) the cost to each
Division of developing and providing such products and any margin targets
established for such products; and (iii) the allocation of revenues made with
respect to prior sales of the same or similar bundled products.
Expense Allocation. Other than expenses incurred in connection with
transactions subject to the policy described under "--Other Interdivision
Transactions," all direct expenses will be charged to the Division for the
benefit of which they are incurred. Corporate, general, and administrative
expenses (including joint marketing and sales expenses) or other indirect costs
will be allocated to each Division in a reasonable and consistent manner based
on the Division utilizing the services to which such costs relate.
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Tax Allocations. Income tax provisions and deferred income taxes will
generally be determined for each Division under generally accepted accounting
principles, as if each Division were a separate taxpayer. If, however, either
Division has deductions, losses, net operating losses, foreign tax credits,
other tax credits or other tax attributes ("Tax Attributes") that cannot be
utilized by that Division (the "Generating Division") to offset or reduce its
current or deferred income tax expense as a separate taxpayer, a benefit will be
allocated to the Generating Division to the extent the Tax Attributes are
utilized in the consolidated income tax provision. Any benefit so allocated may
be subsequently adjusted if the other Division subsequently generates Tax
Attributes that it can use, on a separate taxpayer basis, in lieu of the Tax
Attributes of the Generating Division. To the extent that one of the divisions
is allocated a benefit which, as a result of expiration or otherwise, will not
ultimately be utilized on the consolidated tax return, the prior years benefit
for such attribute will be adjusted such that the effect of the expiration or
other adjustment is borne by the division that generated the attribute.
The Generating Division will receive from the other Division a payment,
or offset against other amounts due, for its Tax Attributes as they are utilized
on the consolidated income tax return. Any such payments or offsets may be
adjusted or refunded in the circumstances in which a benefit is modified for
provision purposes, as discussed above.
Returns to Stockholders. Other than as contemplated by subparagraph (F)
of "--Other Interdivision Transfers" below and other than the initial funding of
Incyte Genetics by the Company, earnings and cash flows generated from the
businesses of Incyte General or Incyte Genetics generally will be used for
reinvestment in the business of the Division generating such earnings and
related cash flows, for repayment of its debt or for payment of dividends on, or
for the repurchase of shares of, Common Stock related to that Division.
Acquisitions of Programs, Products or Assets. Upon the acquisition by
the Company from a third party of any programs, products, technologies or assets
(whether by acquisition of assets or stock, merger, consolidation or otherwise),
the aggregate cost of the acquisition and the programs, products, technologies
or assets acquired will be allocated between Incyte General and Incyte Genetics
based on the business to which such items principally relate. As a guideline, if
the acquired program, product, technology or asset is directly and primarily
related to one Division's line or lines of business, it will be allocated to
such Division, and otherwise it will be allocated in the manner determined to be
in the best interests of the Company. As a guideline, if the aggregate cost of
such acquisition is greater than 20% of the fair value of the total assets of
either Division, such allocation will be reviewed and approved by the Board. Any
such determination will be final and binding on all holders of Common Stock.
Review of Corporate Opportunities and Other Matters. Other than as
provided in the preceding paragraph, the Board will review any matter which
involves the allocation of a material corporate opportunity of the Company to
either Incyte General or Incyte Genetics. If a corporate opportunity is directly
and primarily related to one Division's existing line or lines of business it
will be allocated to such Division. Any corporate opportunity that is not
directly and primarily related to one Division's line of business will be
allocated in a manner determined to be in the best interests of the Company.
Among the factors that may be considered in making such allocation are whether a
particular corporate opportunity is principally related to the business of
Incyte General or Incyte Genetics, whether one Division, because of its
managerial or scientific expertise, would be better positioned to undertake the
corporate opportunity, existing contractual agreements and restrictions, and
other matters that are deemed relevant. The Board will review material
allocations, including allocations between the Divisions of significant tax
benefits or charges, the write-off of significant assets, the allocation of
significant liabilities, and any actions which would significantly affect the
Divisions' access to the Company's credit.
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Disposition of Programs, Products or Assets. Upon any sale, transfer,
assignment or other disposition by Incyte of any product, program, technology or
asset not consisting of all or substantially all of the assets of a Division,
all proceeds from such disposition will be allocated to the Division to which
the program, product, technology or asset had been allocated. If the program,
product, technology or asset was allocated to both Incyte General and Incyte
Genetics, the proceeds of the disposition shall be allocated between the
Divisions based on their respective interests in such program, product,
technology or asset. Such allocation will be made in a manner determined by the
Board to be fair and reasonable to the Divisions and to holders of the common
stock representing such Divisions, taking into account such matters as the Board
deems relevant. Any such determination by the Board will be final and binding on
all holders of Common Stock.
Interdivision Asset Transfers. The Board may at any time and from time
to time reallocate any program, product, technology or other asset from one
Division to the other. All such reallocations will be made at fair market value,
determined by the Board, taking into account, in the case of a program under
development, the commercial potential of such program, the phase of development
of such program, the expenses associated with realizing any income from such
program, the likelihood and timing of any such realization and other matters
that the Board deems relevant. The consideration for such reallocation may be
paid in cash or other consideration with a value equal to the fair market value
of the program, product, technology or asset being reallocated or, in the case
of a reallocation thereof from Incyte General to Incyte Genetics, the Board may
elect to account for such reallocation as an increase in the Incyte Genetics
Designated Shares in accordance with the provisions of the Amended and Restated
Certificate.
Notwithstanding the foregoing, the Amended and Restated Certificate
would provide that no Key Genetics Program, as defined below, may be transferred
out of Incyte Genetics into Incyte General without a series vote of the holders
of the Incyte Genetics Stock.
"Key Genetics Program" is any of the following:
(A) the line of business engaged in by Incyte Genetics with regard
to Human Gene Mapping;
(B) the line of business engaged in by Incyte Genetics with regard
to Human Genomic Sequencing for the purpose of discovering
SNPs;
(C) the line of business engaged in by Incyte Genetics with regard
to Human SNP Discovery; and
(D) any additional program, product, technology or service being
developed from time-to-time in Incyte Genetics which
constituted 20% or more of the research and development
expenditures of Incyte Genetics in any one of the three most
recently completed fiscal years.
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In addition, the Amended and Restated Certificate would provide that a
transfer of assets from one Division to the other requires the approval of the
holders of the Common Stock representing the Division for which such transfer of
assets constitutes a Material Asset Transfer, voting as a separate series. A
transfer of assets from one Division to the other will constitute a "Material
Asset Transfer" for any Division for which the Fair Value of the assets being
transferred is equal to or greater than 20% of the Fair Value of all of the
assets of such Division.
Other Interdivision Transactions. This policy covers interdivision
transactions other than transfers of programs, products, technologies or assets
that are subject to the policy described above under "Interdivision Asset
Transfers." From time to time, Incyte General and Incyte Genetics may engage in
transactions directly with one another or jointly with one or more third
parties. Such transactions may include agreements by one Division to provide
products and services for use by the other Division and joint ventures or other
collaborative arrangements to develop new products and services jointly and with
third parties. Such transactions shall be subject to the following conditions:
(A) Research, development, production (including sequencing) work
and other services performed by one Division for the benefit
of the other Division will be charged to the Division for
which work is performed on a cost basis. For example,
sequencing costs will be allocated on a cost per template
basis where appropriate and in the manner described above
under "Expense Allocation," and the Division performing the
research, development or production work or other services
will not recognize revenue as a result of performing such
work.
(B) Corporate, general and administrative (including, if
appropriate, sales and marketing services) services will be
provided by one Division to the other Division requesting such
services on a cost basis and such costs will be allocated in
the manner described above under "Expense Allocation."
(C) Other than research, development, production, corporate,
general and administrative services, interdivision
transactions will be on terms and conditions that would be
obtainable in transactions negotiated at arm's-length with
unaffiliated third parties.
(D) Any interdivision transaction (i) to be performed on terms and
conditions that deviate from the policies set forth in
subparagraphs (A), (B) or (C) above and (ii) that is material
will require approval by the Board, which approval must
include a determination by the Board that the transaction is
fair and reasonable to each Division and to holders of the
Common Stock representing each Division.
(E) If a Division (the "Purchasing Division") requires any product
or service from the other Division (the "Selling Division")
for sales to third parties (a "Commercial Product or
Service"), the Purchasing Division may request that the
Selling Division provide the Purchasing Division with such
Commercial Product or Service. Subject to the determination by
Incyte Management that the terms to obtain such product or
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service from the Selling Division are comparable to those that
would be obtained from third parties on an arm's length basis,
the Purchasing Division may accept such terms and conditions.
(F) From time to time loans to, and investments in, one Division
may be made by the other Division. The material terms of any
such loan or investment, including any interest rate, maturity
date or rate of return, must be comparable to those that would
be obtained from a third party on an arm's-length basis.
Access to Technology and Know-how. Each of Incyte General and Incyte
Genetics will have free access to all technology and know-how of the Company
that may be useful in such Division's business, without regard to any allocation
of know-how between the Divisions, subject to any obligations or limitations
applicable to the Company. As part of the access to technology between
Divisions, Incyte General will make available to Incyte Genetics at no charge
all of its databases, including the LifeSeq(R) and LifeSeq FL(TM) databases for
use in SNP discovery programs and Incyte Genetics will make available to Incyte
General at no charge LifeSNP(TM) and LifeSeq Genome(TM) databases to Incyte
General for the purpose of identifying full-length genes for Incyte General's
LifeSeq FL(TM) database. As Incyte General and Incyte Genetics are part of one
company, no contract or other document will codify this arrangement. As a
result, as generally provided with respect to these management and allocation
policies, this arrangement may be modified or rescinded by the Board without
approval of Incyte General, Incyte Genetics or any stockholders.
Voting. In addition to any stockholder approval required by Delaware
law, whenever the approval of the holders of the Common Stock representing a
Division is required to take any action pursuant to the Amended and Restated
Certificate, such requirement will be satisfied if a meeting of the holders of
the Common Stock representing such Division is held at which a quorum is present
and the proposed action receives the affirmative vote of a majority of the
shares present in person or represented by proxy at the meeting.
Capital and Operating Expense Spending. Any decision by the Board to
fund capital expenditures or investments and operating expenditures in excess of
the cash flows of the respective Divisions will be made by the Board in the
exercise of its good faith business judgment based on all relevant
circumstances, including the financing and investing needs and objectives of
each Division, the availability and cost of alternative financing, the existence
of alternative investment opportunities for Incyte General and Incyte Genetics,
and the Board's analysis of the desirability of making such investment or
acquisition.
Fiduciary and Management Responsibilities. Because Incyte General and
Incyte Genetics will continue to be part of a single company, under current
principles of Delaware law the Board and Incyte Management will likely have an
equal fiduciary duty to all holders of the Company's Common Stock as a whole
rather than separate or additional duties to holders of either Incyte General
Stock or Incyte Genetics Stock. Under these principles and the related principle
known as the "business judgment rule," absent abuse of discretion, a good faith
business decision made by a
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disinterested and adequately informed Board, or a committee thereof, with
respect to any matter having disparate impacts upon holders of Incyte General
Stock and holders of Incyte Genetics Stock would be a defense to any challenge
to such determination made by or on behalf of the holders of either series of
Common Stock. The Board and the Chief Executive Officer, in exercising their
discretion under the above policies, in establishing new policies or in
rescinding or modifying existing policies, will consider various factors and
information which could be a benefit or a detriment to the stockholders of the
respective Divisions and will make determinations in the best interests of the
Company.
Separate management teams for each of Incyte General and Incyte
Genetics have been designated by the Chief Executive Officer and approved by the
Board to ensure that the efforts of each team of managers are appropriately
focused on the business and operations for which they have responsibility.
In furtherance of the objective that directors and senior management of
the Company as a whole remain impartial notwithstanding their equity ownership
interests in Incyte General and Incyte Genetics, the Board expects to adopt
guidelines for its members and members of senior management of the Company with
respect to the equity interests such person hold in each of Incyte Genetics
Stock and Incyte General Stock. Because of the anticipated differences in
trading values between the two securities, the actual value of the shares of
Incyte General Stock and Incyte Genetics Stock held by directors and such
members of senior management is likely to vary significantly.
Disposition of Incyte Genetics Designated Shares. Incyte Genetics
Designated Shares may be (a) issued upon the exercise or conversion of
outstanding stock options, warrants or convertible securities allocated to
Incyte General, (b) subject to the restrictions set forth below under "Issuance
and Sale of Additional Shares of Common Stock," sold for any valid business
purpose or (c) distributed as a dividend to the holders of shares of Incyte
General Stock, all as determined from time to time by the Board.
The Company expects to distribute the Incyte Genetics Designated Shares
existing immediately following the Effective Date to the holders of Incyte
General Stock in the form of a stock dividend. It is currently expected that
this distribution would take place at least six months after the completion of
any Incyte Genetics Public Offering, but in no event later than 360 days after
the Effective Date. See "--Incyte Genetics Designated Shares."
Issuance and Sale of Additional Shares of Common Stock. When additional
shares of Common Stock are issued and sold by the Company, the Company will
identify (i) the number of such shares issued and sold for the account of the
Division to which they relate, the proceeds of which will be allocated to and
reflected in the financial statements of such Division and (ii) the number of
such shares issued and sold that will reduce the number of Incyte Genetics
Designated Shares, if any. Subject to the approval by the Company's stockholders
of the Incyte Genetics Stock Proposal and subject to prevailing market and other
conditions, the Company currently intends to
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(a) sell shares of Incyte Genetics Stock or equity securities convertible into
Incyte Genetics Stock in a private placement to a limited number of
pharmaceutical companies and (b) depending on the capital needs of Incyte
Genetics, to offer to the public for cash shares of Incyte Genetics Stock. The
Company currently plans to issue any such shares from the authorized but
unissued shares of capital stock, as determined by the Board, and to allocate
the net proceeds of any Incyte Genetics Private Placement and any Incyte
Genetics Public Offering to Incyte Genetics. Subject to prevailing market and
other conditions, the Company currently expects that any Incyte Genetics Public
Offering would take place in 1999 and the Incyte Genetics Private Placement
would take place prior to any Incyte Genetics Public Offering.
Open Market Purchases of Shares of Common Stock. Incyte may make open
market purchases of any series of its Common Stock in accordance with applicable
securities law requirements.
Description of Incyte General Stock and Incyte Genetics Stock
The following description is qualified by reference to Annex A to this
Proxy Statement, which contains the full text of the Amended and Restated
Certificate.
General. The Certificate of Incorporation currently provides that
Incyte is authorized to issue 80,000,000 shares of capital stock, consisting of
75,000,000 shares of Common Stock and 5,000,000 shares of preferred stock. If
the Incyte Genetics Stock Proposal is approved by the Incyte stockholders, the
Company will be authorized to issue 80,000,000 shares of capital stock,
consisting of 75,000,000 shares of Common Stock, of which 35,000,000 shares will
be designated Incyte General Stock, 15,000,000 shares will be designated Incyte
Genetics Stock and 25,000,000 shares will be undesignated Common Stock, and
5,000,000 shares of preferred stock. Each designated series of Common Stock will
have the voting powers, qualifications and rights described below.
Dividends. The Company has never paid any cash dividends on shares of
its capital stock. The Company currently intends to retain its earnings to
finance future growth and, therefore, does not anticipate paying any cash
dividends on the Common Stock in the foreseeable future.
Dividends on each series of Common Stock may be declared and paid only
out of the lesser of (i) assets of the Company legally available therefor under
Delaware law and (ii) the Incyte General Available Dividend Amount (with respect
to the Incyte General Stock) or the Incyte Genetics Available Dividend Amount
(with respect to the Incyte Genetics Stock). Subject to such limitations, the
Board may, in its sole discretion, declare and pay dividends exclusively on any
series of Common Stock, in equal or unequal amounts, notwithstanding the amounts
available for the payment of dividends on each series, the respective voting and
liquidation rights of each series, the amounts of prior dividends declared on
each series or any other factor. See "--Dividend Policy."
As stated above, in addition to the statutory limitations under the
Delaware General Corporate Law, dividends on the Incyte General Stock and Incyte
Genetics Stock would be limited
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to an amount not in excess of the Incyte General Available Dividend Amount and
the Incyte Genetics Available Dividend Amount, as the case may be. The
"Available Dividend Amount" with respect to a particular series of Common Stock,
as of any date, is defined to mean generally the lesser of
(a) the excess of
(i) an amount equal to the total assets of the Division
less the total liabilities (not including preferred
stock) of the Division as of such date, over
(ii) the aggregate par value of, or any greater amount
determined to be capital in respect of, all
outstanding shares of the series of Common Stock
attributed to such Division, or
(b) the amount legally available for the payment of dividends
determined in accordance with Delaware law applied as if such
Division were a separate corporation.
Voting Rights. Holders of shares of each series of Common Stock will
vote together as a single class on all matters as to which common stockholders
generally are entitled to vote. On all such matters, each share of Incyte
General Stock will have one vote. Until the completion of the first to occur of
any Incyte Genetics Private Placement, any Incyte Genetics Public Offering and
the Incyte Genetics Distribution, there will be no shares of Incyte Genetics
Stock outstanding. The number of votes to which each share of Incyte Genetics
Stock will initially be entitled will not be determined until the first record
date relating to a vote on any matter on which the holders of the Incyte
Genetics Stock are entitled to vote after the initial issuance of Incyte
Genetics Stock. On the fifth (5th) Trading Day prior to such record date, the
number of votes to which each share of Incyte Genetics Stock is entitled will be
determined so as to equal the ratio (rounded to the nearest five decimal places)
of the average Market Value of one share of Incyte Genetics Stock to the average
Market Value of one share of Incyte General Stock during the 20 consecutive
Trading Days beginning on the 25th Trading Day prior to such Trading Day. On the
fifth (5th) Trading Day prior to any applicable record date thereafter, the
number of votes to which each share of Incyte Genetics Stock is entitled will be
adjusted to equal the ratio (rounded to the nearest five decimal places) of the
average Market Value of one share of Incyte Genetics Stock to the average Market
Value of one share of Incyte General Stock during the 20 consecutive Trading
Days beginning on the 25th Trading Day prior to such Trading Day. If no shares
of Incyte General Stock are outstanding on any such date, then all other series
of Common Stock outstanding on such date will have a number of votes such that
each share of the series of common stock that has the highest Market Value per
share on such date (the "Base Series") will have one vote, and each share of
each other series of outstanding Common Stock will have the number of votes
determined according to the immediately preceding sentence, treating, for such
purpose, the Base Series as the Incyte General Stock in such sentence.
"Market Value" of a share of any class or series of capital stock of
the Company on any day shall mean the average of the high and low reported sales
prices of a share of such class or series on such day (or, if such class or
series is then Publicly Traded and such day is not a Trading Day for
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such class or series, then the first Trading Day preceding such day) or, in case
no such reported sale takes place on such Trading Day, the average of the
reported closing bid and asked prices of a share of such class or series on such
Trading Day, in either case as quoted on The Nasdaq Stock Market or, if the
shares of such class or series are not quoted on The Nasdaq Stock Market on such
Trading Day, on the principal national securities exchange in the United States
on which the shares of such class or series are listed or admitted to trading
or, if not quoted on The Nasdaq Stock Market or listed or admitted to trading on
any national securities exchange on such Trading Day, the Fair Value of a share
of such class or series as set forth in clause (ii) of the definition of Fair
Value set forth under "--Conversion and Redemption"; provided that, for purposes
of determining the Market Value of a share of any class or series of capital
stock for any period, (i) the "Market Value" of a share of capital stock on any
day prior to any "ex-dividend" date or any similar date occurring during such
period for any dividend or distribution (other than any dividend or distribution
contemplated by clause (ii)(B) of this sentence) paid or to be paid with respect
to such capital stock shall be reduced by the Fair Value of the per share amount
of such dividend or distribution and (ii) the "Market Value" of any share of
capital stock on any day prior to (A) the effective date of any subdivision (by
stock split or otherwise) or combination (by reverse stock split or otherwise)
of outstanding shares of such class or series of capital stock occurring during
such period or (B) any "ex-dividend" date or any similar date occurring during
such period for any dividend or distribution with respect to such capital stock
to be made in shares of such class or series of capital stock or Convertible
Securities that are convertible, exchangeable or exercisable for such class or
series of capital stock shall be appropriately adjusted, as determined by the
Board, to reflect such subdivision, combination, dividend or distribution.
"Publicly Traded" with respect to any security shall mean that such
security is (i) registered under Section 12 of the Securities Exchange Act of
1934, as amended (or any successor provision of law), and (ii) listed for
trading on the New York Stock Exchange or the American Stock Exchange (or any
national securities exchange registered under Section 7 of the Securities
Exchange Act of 1934, as amended (or any successor provision of law), that is
the successor to either such exchange) or quoted on The Nasdaq Stock Market (or
any successor market system).
"Trading Day" means each weekday other than any day on with the
relevant class of capital stock of the Company is not quoted on The Nasdaq Stock
Market or traded on any national securities exchange.
The voting rights of the Incyte Genetics Stock will be appropriately
adjusted so as to avoid dilution in the aggregate voting rights of any series of
Common Stock in the event the outstanding shares of any series are subdivided
(by stock split, reclassification or otherwise) or combined (by reverse stock
split, reclassification or otherwise), or in the event of the issuance of shares
of any series as a dividend or a distribution to holders of shares of such
series. If shares of only one series of Common Stock are outstanding, or if
shares of any series of Common Stock are entitled to vote separately as a class
as to any matter, each share of that series would have one vote as to such
matter.
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The relative voting rights of each series of Common Stock will be
adjusted from time to time as described above so that a holder's voting rights
may more closely reflect the market value of such holder's equity investment in
Incyte. Adjustments in the relative voting rights of each series of Common Stock
may influence an investor interested in acquiring and maintaining a fixed
percentage of Incyte's voting power to acquire such percentage of all series of
Common Stock, and will limit the ability of investors in one series to acquire
for the same consideration relatively greater or lesser voting power per share
than investors in the other series. To the extent the relative market values of
each series of Common Stock change prior to the first such adjustment or in
between any adjustments, however, an investor in one series of Common Stock may
acquire relatively more or less voting power for the same consideration when
compared with investors in another series of Common Stock.
The Amended and Restated Certificate will require the approval by the
holders of the Incyte Genetics Stock, voting together as a single series, to
transfer any Key Genetics Program out of Incyte Genetics and into Incyte
General. In addition, in connection with certain asset transfers between
Divisions, the Amended and Restated Certificate will require the approval by the
holders of any Division for which such asset transfer constitutes a Material
Asset Transfer, voting together as a single series. See "--Certain Management
and Allocation Policies -- Interdivision Asset Transfers."
In addition to the voting rights provided in the Amended and Restated
Certificate, the approval of the holders of a majority of the outstanding shares
of a series of Common Stock, voting together as a single series, is required
under the current Delaware General Corporation Law to approve any amendment to
the Certificate of Incorporation that would alter or change the powers,
preferences or special rights of the shares of such series so as to affect them
adversely. The Delaware General Corporation Law does not currently provide for
any other separate voting rights for a series of common stock. Consequently,
because most matters brought to a stockholder vote will only require the
approval of a majority of all of Incyte's outstanding capital stock entitled to
vote on such matters (including all series of Common Stock) voting together as a
single series and because the holders of Incyte General Stock will initially
have more than the number of votes required to approve any such matter, such
holders will initially be in a position to control the outcome of the vote on
such a matter. See "Risk Factors -- Limited Separate Voting Rights; Variable
Voting Rights."
Conversion and Redemption. The Incyte Genetics Stock may be converted
or redeemed upon the terms described below. The Company cannot predict the
impact on the market prices for each series of Common Stock of its ability to
effect such conversion or redemption.
Mandatory Dividend on, or Redemption or Conversion of, Incyte Genetics
Stock. Upon the sale, transfer, assignment or other disposition (whether by
merger, consolidation, sale or contribution of assets or stock or otherwise), in
one transaction or a series of related transactions (a "Disposition"), by the
Company of all or substantially all of the properties and assets of Incyte
Genetics to one or more persons or entities (other than (w) the Disposition by
the Company of all
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or substantially all of the Company's properties and assets in one transaction
or a series of related transactions in connection with the liquidation,
dissolution or winding-up of the Company and the distribution of assets to
stockholders, (x) on a pro rata basis to the holders of all outstanding shares
of the Incyte Genetics Stock, (y) to any person or entity controlled by the
Company (as determined by the Board) or (z) in connection with a Related
Business Transaction), the Company will be required, on or prior to the 85th
Trading Day for the Incyte Genetics Stock following the consummation of such
Disposition, to either:
(1) provided that there are assets of the Company legally available
therefor:
(i) subject to the limitations described above under
"--Dividends," declare and pay a dividend or other distribution in cash
and/or securities (other than Common Stock) or other property to the
holders of outstanding shares of the Incyte Genetics Stock having a
Fair Value as of the date of such consummation equal in the aggregate
to the Fair Value of the Net Proceeds of such Disposition as of the
date of such consummation; or
(ii) (A) if such Disposition involves all (not merely
substantially all) of the properties and assets of Incyte Genetics,
redeem all outstanding shares of Incyte Genetics Stock in exchange for
cash and/or securities (other than Common Stock) or other property
having a Fair Value as of the date of such consummation in the
aggregate equal to the Fair Value of the Net Proceeds of such
Disposition as of the date of such consummation; or
(B) if such Disposition involves substantially all
(but not all) of the properties and assets of Incyte Genetics, redeem
such number of whole shares of the Incyte Genetics Stock (but in any
event not more than the number of shares of Incyte Genetics Stock
outstanding) as have in the aggregate an average Market Value, during
the 20 consecutive Trading Days for the Incyte Genetics Stock beginning
on the 26th Trading Day immediately succeeding the consummation of such
Disposition, closest to the Fair Value of the Net Proceeds of such
Disposition as of the date of such consummation, in consideration for
cash and/or securities (other than Common Stock) or other property
having a Fair Value in the aggregate equal to such Fair Value of the
Net Proceeds of such Disposition as of the date of such consummation;
provided, however, that the Company may only redeem shares of Incyte
Genetics Stock pursuant to this paragraph (ii) if the Fair Value of the
Net Proceeds to be paid in redemption of such series would be less than
or equal to the Incyte Genetics Available Dividend Amount after
consummation of the Disposition; or
(2) convert each outstanding share of the Incyte Genetics Stock into a
number of fully paid and nonassessable shares of Incyte General Stock (or if
Incyte General Stock is not Publicly Traded at such time and shares of another
class or series of Common Stock (other than Incyte Genetics Stock) are then
Publicly Traded, of such class or series as has the largest market
capitalization as of the close of business on the Trading Day immediately
preceding the date of the
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notice of such conversion mailed to holders), equal to 110% of the ratio
(rounded to the nearest five decimal places) of the average Market Value of one
share of Incyte Genetics Stock to the average Market Value of one share of
Incyte General Stock (or of such other stock), during the 20 consecutive Trading
Days beginning on the 26th Trading Day following the consummation of such
Disposition.
For purposes of the foregoing, "substantially all of the properties and
assets" of Incyte Genetics means a portion of such properties and assets that
represents at least 80% of the then Fair Value of the properties and assets of
Incyte Genetics.
The Board may, within one year after a dividend or other distribution
or redemption following a Disposition by Incyte Genetics of its properties or
assets, convert each outstanding share of Incyte Genetics Stock into a number of
fully paid and nonassessable shares of Incyte General Stock (or if Incyte
General Stock is not Publicly Traded at such time and shares of another class of
series of Common Stock (other than Incyte Genetics Stock) are then Publicly
Traded, of such class or series as has the largest market capitalization as of
the close of business on the Trading Day immediately preceding the date of the
notice of such conversion mailed to holders) equal to 110% of the ratio (rounded
to the nearest five decimal places) average Market Value of one share of Incyte
Genetics Stock to one share of Incyte General Stock the average Market Value as
of the fifth Trading Day prior to the date of the notice of such conversion
mailed to such holders.
Any such conversion would dilute the interest in the Company of holders
of the Incyte General Stock and would preclude holders of both series of Common
Stock from retaining their investment in a security reflecting separately the
business of their respective Division. In determining whether to effect any such
conversion following such a dividend or other distribution or partial
redemption, the Board, in its sole discretion and consistent with its fiduciary
duties, in addition to other matters, would likely consider whether the
remaining properties and assets of Incyte Genetics continue to constitute a
viable business. Other considerations could include the number of shares of
Incyte Genetics Stock remaining issued and outstanding and the per share market
price of such Incyte Genetics Stock.
A "Related Business Transaction" means any Disposition of all or
substantially all of the properties and assets of Incyte Genetics in a
transaction or series of related transactions that result in the Company
receiving in consideration of such properties and assets primarily equity
securities (including, without limitation, capital stock, debt securities
convertible into or exchangeable for equity securities or interests in a general
or limited partnership or limited liability company, without regard to the
voting power or other management or governance rights associated therewith) of
any entity which (i) acquires such properties or assets or succeeds (by merger,
formation of a joint venture or otherwise) to the business conducted with such
properties or assets or controls such acquiror or successor and (ii) is
primarily engaged or proposes to engage primarily in one or more businesses
similar or complementary to the businesses conducted by Incyte Genetics prior to
such Disposition, as determined by the Board. The purpose of the Related
Business Transaction exception is to enable the Company to "dispose" of
properties or assets of Incyte Genetics to other entities
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engaged or proposing to engage in businesses similar or complementary to those
of Incyte Genetics without resulting in a dividend or other distribution on, or
a conversion or redemption of, the Incyte Genetics Stock.
The "Net Proceeds" of a Disposition of any of the properties and assets
of Incyte Genetics means, as of any date, an amount, if any, equal to what
remains of the gross proceeds of such Disposition after any payment of, or
reasonable provision is made as determined by the Board for, (a) any taxes
payable by the Company in respect of such Disposition or in respect of any
resulting dividend or other distribution or redemption, (b) any transaction
costs, including, without limitation, any legal, investment banking and
accounting fees and expenses and (c) any liabilities (contingent or otherwise)
of or attributed to Incyte Genetics, including, without limitation, any
liabilities for deferred taxes or any indemnity or guarantee obligations of the
Company incurred in connection with the Disposition or otherwise and any
liabilities for future purchase price adjustments and any preferential amounts
plus any accumulated and unpaid dividends in respect of any Preferred Stock
attributed to Incyte Genetics.
The Company may elect to pay the dividend or other distribution or
redemption price referred to in clause (1)(i) or (1)(ii) of the sixth preceding
paragraph above either in the same form as the proceeds of the Disposition were
received or in any other combination of cash, securities (other than Common
Stock) or other property that the Board determines will have an aggregate Fair
Value of not less than the amount of the Fair Value of the Net Proceeds.
"Fair Value" means (i) in the case of equity securities or debt
securities of a class or series that has previously been Publicly Traded for a
period of at least 15 months, the Market Value thereof (if such Market Value, as
so defined, can be determined); (ii) in the case of an equity security or debt
security that has not been Publicly Traded for at least 15 months or the Market
Value of which cannot be determined, the fair value per share of stock or per
other unit of such security, on a fully distributed basis, as determined in good
faith by the Board; (iii) in the case of cash denominated in U.S. dollars, the
face amount thereof and in the case of cash denominated in other than U.S.
dollars, the face amount thereof converted into U.S. dollars at the rate
published in The Wall Street Journal on the date for the determination of Fair
Value or, if not so published, at such rate as shall be determined in good faith
by the Board based upon such information as the Board shall in good faith
determine to be appropriate in accordance with good business practice; and (iv)
in the case of property other than securities or cash, the "Fair Value" thereof
shall be determined in good faith by the Board based upon such appraisals or
valuation reports of such independent experts as the Board shall in good faith
determine to be appropriate in accordance with good business practice.
Conversion of Incyte Genetics Stock at Option of the Company. The Board
may at any time on or after the third anniversary of the Effective Date convert
each outstanding share of Incyte Genetics Stock into a number of fully paid and
nonassessable shares of Incyte General Stock (or if Incyte General Stock is not
Publicly Traded at such time and shares of another class or series of Common
Stock (other than Incyte Genetics Stock) are then Publicly Traded, of such class
or series as has the largest market capitalization as of the close of business
on the Trading Day immediately
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preceding the date of the notice of such conversion mailed to holders), equal to
120% of the ratio (rounded to the nearest five decimal places) of the average
Market Value of one share of Incyte Genetics Stock to the average Market Value
of one share of Incyte General Stock (or of such other stock), during the 20
consecutive Trading Days beginning on the 26th Trading Day prior to the first
public announcement by Incyte of such conversion.
The foregoing provision allows the Company the flexibility to convert
all outstanding shares of Incyte Genetics Stock and leave outstanding one series
of Common Stock that would represent the equity interest in all of Incyte's
businesses. The optional conversion could be exercised at any future time if the
Board determined that, under the facts and circumstances then existing, an
equity structure consisting of two series of common stock was no longer in the
best interests of all of Incyte's stockholders. Such conversion may be
completed, however, at a time that is disadvantageous to the holders of a
particular series of Common Stock. The right of the Board to convert at any time
all outstanding shares of Incyte Genetics Stock as described above does not
preclude the Board from making an offer to exchange such shares on terms other
than those provided in the Amended and Restated Certificate. Although any
alternative offer would be subject to acceptance by holders of the shares to be
exchanged, such offer could be made on terms less favorable than those provided
in the Amended and Restated Certificate. See "Risk Factors -- Limited Separate
Stockholder Rights" and "--Potential Divergence of Interests; No Specific
Procedures for Resolution."
Optional Redemption in Exchange for Stock of Subsidiary. At any time at
which all of the assets and liabilities of Incyte Genetics (and no other assets
or liabilities of the Company or any subsidiary thereof) are held directly or
indirectly by one or more wholly owned subsidiaries of the Company (the "Incyte
Genetics Subsidiaries"), the Board may, provided that there are assets of the
Company legally available therefor, redeem all of the outstanding shares of
Incyte Genetics Stock for all of the outstanding shares of the common stock of
the Incyte Genetics Subsidiaries in exchange. [Prior to any such distribution,
the Incyte Genetics Subsidiaries shall pay to the Company an amount equal to the
tax, if any, payable by the Company on such distribution. If the Incyte Genetics
Subsidiaries do not have sufficient cash to pay such taxes the payment shall be
made in the form of an interest-bearing promissory note.]
These provisions are intended to give the Company increased flexibility
with respect to spinning-off the assets of Incyte Genetics by transferring the
assets of Incyte Genetics to one or more wholly-owned subsidiaries and redeeming
the shares of Incyte Genetics Stock in exchange for stock of such subsidiary or
subsidiaries. As a result of any such redemption, holders of Incyte Genetics
Stock would hold securities of separate legal entities operating in Incyte
Genetics' lines of business. Such a redemption could be authorized by the Board
at any time in the future if it determines that, under the facts and
circumstances then existing, an equity structure consisting of Incyte Genetics
Stock and Incyte General Stock is no longer in the best interests of all of the
Company's stockholders.
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General Conversion and Redemption Provisions. Not later than the 10th
Trading Day following the consummation of a Disposition referred to above under
"--Mandatory Dividend on or Redemption or Conversion of Incyte Genetics Stock,"
the Company will announce publicly by press release (i) the estimated Net
Proceeds of such Disposition, (ii) the number of shares outstanding of the
Incyte Genetics Stock and (iii) the number of shares of Incyte Genetics Stock
into or for which Convertible Securities are then convertible, exchangeable or
exercisable and the conversion, exchange or exercise price thereof. Not earlier
than the 26th Trading Day and not later than the 30th Trading Day following the
consummation of such Disposition, the Company will announce publicly by press
release which of the actions specified in clause (1)(i), (1)(ii)(A), (1)(ii)(B)
or (2) of the first paragraph under "--Mandatory Dividend on or Redemption or
Conversion of Incyte Genetics Stock" it has irrevocably determined to take.
If the Company determines to pay a dividend or other distribution as
described in clause (1)(i) of such paragraph, the Company will be required, not
later than the 30th Trading Day following the consummation of such Disposition,
to cause to be given to each holder of shares of Incyte Genetics Stock and to
each holder of Convertible Securities convertible into or exchangeable or
exercisable for shares of Incyte Genetics Stock (unless alternate provision for
notice to the holders of such Convertible Securities is made pursuant to the
terms of such Convertible Securities), a notice setting forth (i) the record
date for determining holders entitled to receive such dividend or other
distribution, which shall be not earlier than the 40th Trading Day and not later
than the 50th Trading Day following the consummation of such Disposition, (ii)
the anticipated payment date of such dividend or other distribution (which will
not be more than 85 Trading Days following the consummation of such
Disposition), (iii) the type of property to be paid as such dividend or other
distribution in respect of outstanding shares of Incyte Genetics Stock, (iv) the
Net Proceeds of such Disposition, (v) the number of outstanding shares of Incyte
Genetics Stock and the number of shares of Incyte Genetics Stock into or for
which outstanding Convertible Securities are then convertible, exchangeable or
exercisable and the conversion, exchange or exercise price thereof and (vi) in
the case of notice to be given to holders of Convertible Securities, a statement
to the effect that a holder of such Convertible Securities will be entitled to
receive such dividend or other distribution only if such holder properly
converts, exchanges or exercises such Convertible Securities on or prior to the
record date referred to in clause (i) of this sentence. Such notice will be sent
by first-class mail, postage prepaid, to each such holder at such holder's
address as the same appears on the transfer books of the Company.
If the Company determines to undertake a redemption pursuant to clause
(1)(ii)(A) of the first paragraph under "--Mandatory Dividend on or Redemption
or Conversion of Incyte Genetics Stock," the Company will be required, not
earlier than the 35th Trading Day and not later than the 45th Trading Day prior
to the redemption date, to cause to be given to each holder of shares of Incyte
Genetics Stock, and to each holder of Convertible Securities convertible into or
exchangeable or exercisable for shares of Incyte Genetics Stock (unless
alternate provision for such notice to the holders of such Convertible
Securities is made pursuant to the terms of such Convertible Securities) a
notice setting forth (i) a statement that all shares of Incyte Genetics Stock
outstanding on the redemption date will be redeemed, (ii) the redemption date
(which will not be more than 85 Trading
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Days following the consummation of such Disposition), (iii) the type of property
in which the redemption price for the shares to be redeemed is to be paid, (iv)
the Net Proceeds of such Disposition, (v) the place or places where certificates
for shares of Incyte Genetics Stock, properly endorsed or assigned for transfer
(unless the Company waives such requirement) are to be surrendered for delivery
of cash and/or securities or other property, (vi) the number of outstanding
shares of Incyte Genetics Stock and the number of shares of Incyte Genetics
Stock into or for which outstanding Convertible Securities are then convertible,
exchangeable or exercisable and the conversion, exchange or exercise price
thereof, (vii) in the case of notice to be given to holders of Convertible
Securities, a statement to the effect that a holder of such Convertible
Securities will be entitled to participate in such redemption only if such
holder properly converts, exchanges or exercises such Convertible Securities on
or prior to the redemption date referred to in clause (ii) of this sentence and
a statement as to what, if anything, such holder will be entitled to receive
pursuant to the terms of such Convertible Securities or the Amended and Restated
Certificate as then amended if such holder thereafter converts, exchanges or
exercises such Convertible Securities and (viii) a statement to the effect that,
except as otherwise provided below, dividends or other distributions on such
shares of Incyte Genetics Stock shall cease to be paid as of such redemption
date. Such notice will be sent by first-class mail, postage prepaid to each such
holder at such holder's address as the same appears on the transfer books of the
Company.
If the Company determines to undertake a redemption pursuant to clause
(1)(ii)(B) of the first paragraph under "--Mandatory Dividend on or Redemption
or Conversion of Incyte Genetics Stock," the Company will be required, not later
than the 30th Trading Day following consummation of the Disposition referred to
in such paragraph, to cause to be given to each holder of shares of Incyte
Genetics Stock and to each holder of Convertible Securities that are convertible
into or exchangeable or exercisable for shares of Incyte Genetics Stock (unless
alternate provision for such notice to the holders of such Convertible
Securities is made pursuant to the terms of such Convertible Securities), a
notice setting forth (i) a date, not earlier than the 40th Trading Day and not
later than the 50th Trading Day following the consummation of such Disposition
in respect of which such redemption is to be made, on which shares of Incyte
Genetics Stock will be selected for redemption, (ii) the anticipated redemption
date, which will not be more than 85 Trading Days following the consummation of
such Disposition, (iii) the type of property in which the redemption price for
the shares to be redeemed is to be paid, (iv) the Net Proceeds of such
Disposition, (v) the number of outstanding shares of Incyte Genetics Stock and
the number of shares of Incyte Genetics Stock into or for which outstanding
Convertible Securities are then convertible, exchangeable or exercisable and the
conversion, exchange or exercise price thereof, (vi) in the case of notice to be
given to holders of Convertible Securities, a statement to the effect that a
holder of such Convertible Securities will be entitled to participate in such
selection for redemption only if such holder properly converts, exchanges or
exercises such Convertible Securities on or prior to the date referred to in
clause (i) of this sentence and a statement as to what, if anything, such holder
will be entitled to receive pursuant to the terms of such Convertible Securities
or the Amended and Restated Certificate as then amended if such holder
thereafter converts, exchanges or exercises such Convertible Securities and
(vii) a statement that the Company will not be required to register a transfer
of any shares of Incyte Genetics Stock for a period of 15 Trading Days next
preceding the date referred to
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in clause (i) of this sentence. Promptly, but not earlier than 40 Trading Days
nor more than 50 Trading Days following the consummation of such Disposition,
the Company is required to cause to be given to each holder of shares of Incyte
Genetics Stock to be so redeemed a notice setting forth (1) the number of shares
of Incyte Genetics Stock held by such holder to be redeemed, (2) a statement
that such shares of Incyte Genetics Stock will be redeemed, (3) the redemption
date, (4) the kind and per share amount of cash and/or securities or other
property to be received by such holder with respect to each share of Incyte
Genetics Stock to be redeemed, including details as to the calculation thereof,
(5) the place or places where certificates for shares of Incyte Genetics Stock,
properly endorsed or assigned for transfer (unless the Company waives such
requirement) are to be surrendered for delivery of such cash and/or securities
or other property, (6) if applicable, a statement to the effect that the shares
being redeemed may no longer be transferred on the transfer books of the Company
after the redemption date and (7) a statement to the effect that, except as
otherwise provided below, dividends or other distributions on such shares of
Incyte Genetics Stock will cease to be paid as of such redemption date. Such
notices will be sent by first-class mail, postage prepaid to each such holder,
at such holder's address as the same appears on the transfer books of the
Company.
If less than all of the outstanding shares of Incyte Genetics Stock are
to be redeemed as described above under "--Mandatory Dividend on or Redemption
or Conversion of Incyte Genetics Stock," such shares will be redeemed by the
Company pro rata among the holders of outstanding shares of Incyte Genetics
Stock or by such other method as may be determined by the Board to be equitable.
In the event of any conversion as described above under "--Conversion
of Incyte Genetics Stock at Option of the Company" or "--Mandatory Dividend on
or Redemption or Conversion of Incyte Genetics Stock," the Company will cause to
be given, not earlier than the 35th Trading Day and not later than the 45th
Trading Day prior to the date fixed for such conversion, to each holder of
shares of the class of Incyte Genetics Stock to be so converted and to each
holder of Convertible Securities that are convertible into or exchangeable or
exercisable for shares of Incyte Genetics Stock (unless alternate provision for
such notice to the holders of such Convertible Securities is made pursuant to
the terms of such Convertible Securities), a notice setting forth (i) a
statement that all outstanding shares of Incyte Genetics Stock will be
converted, (ii) the conversion date (which, in the case of a conversion after a
Disposition, will not be more than 85 Trading Days following the consummation of
such Disposition), (iii) the per share number of shares of Incyte General Stock
to be received with respect to each share of Incyte Genetics Stock, including
details as to the calculation thereof, (iv) the place or places where
certificates for shares of Incyte Genetics Stock, properly endorsed or assigned
for transfer (unless the Company waives such requirement) are to be surrendered
for delivery of certificates for shares of Incyte Genetics Stock, (v) the number
of outstanding shares of Incyte Genetics Stock and the number of shares of
Incyte Genetics Stock into or for which outstanding Convertible Securities are
then convertible, exchangeable or exercisable and the conversion, exchange or
exercise price thereof, (vi) a statement to the effect that, except as otherwise
provided below, dividends or other distributions on such shares of Incyte
Genetics Stock will cease to be paid as of such conversion date and (vii) in the
case of notice to be given to holders
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of Convertible Securities, a statement to the effect that a holder of such
Convertible Securities will be entitled to receive shares of Incyte Genetics
Stock upon such conversion only if such holder properly converts, exchanges or
exercises such Convertible Securities on or prior to the conversion date
referred to in clause (ii) of this sentence and a statement as to what, if
anything, such holder will be entitled to receive pursuant to the terms of such
Convertible Securities or the Amended and Restated Certificate as then amended
if such holder thereafter converts, exchanges or exercises such Convertible
Securities. Such notice will be sent by first-class mail, postage prepaid, to
such holder at such holder's address as the same appears on the transfer books
of the Company.
If the Company determines to redeem shares of Incyte Genetics Stock as
described above under "--Redemption in Exchange for Stock of Subsidiary," the
Company will cause to be given to each holder of shares of Incyte Genetics Stock
and to each holder of Convertible Securities convertible into or exchangeable or
exercisable for shares of Incyte Genetics Stock (unless alternate provision for
such notice to the holders of such Convertible Securities is made pursuant to
the terms of such Convertible Securities), a notice setting forth (i) a
statement that all shares of Incyte Genetics Stock outstanding on the redemption
date will be redeemed in exchange for shares of common stock of the Incyte
Genetics Subsidiaries, (ii) the redemption date, (iii) the place or places where
certificates for shares of Incyte Genetics Stock properly endorsed or assigned
for transfer (unless the Company waives such requirement) are to be surrendered
for delivery of certificates for shares of common stock of the Incyte Genetics
Subsidiaries, (iv) a statement to the effect that, except as otherwise provided
below, dividends or other distributions on such shares of Incyte Genetics Stock
will cease to be paid as of such redemption date, (v) the outstanding number of
shares of Incyte Genetics Stock and the number of shares of Incyte Genetics
Stock into or for which outstanding Convertible Securities are then convertible,
exchangeable or exercisable and the conversion, exchange or exercise price
thereof and (vi) in the case of notice to be given to holders of Convertible
Securities, a statement to the effect that a holder of such Convertible
Securities will be entitled to receive shares of common stock of the Incyte
Genetics Subsidiaries only if such holder properly converts, exchanges or
exercises such Convertible Securities on or prior to the date referred to in
clause (ii) of this sentence and a statement as to what, if anything, such
holder will be entitled to receive pursuant to the terms of such Convertible
Securities or the Amended and Restated Certificate as then amended if such
holder thereafter converts, exchanges or exercises such Convertible Securities.
Such notice will be sent by first-class mail, postage prepaid, not less than 30
Trading Days nor more than 45 Trading Days prior to the redemption date, to each
such holder at such holder's address as the same appears on the transfer books
of the Company.
Neither the failure to mail any notice described above to any
particular holder of shares of Incyte Genetics Stock or of any Convertible
Securities nor any defect therein will affect the sufficiency thereof with
respect to any other holder of outstanding shares of Incyte Genetics Stock or of
outstanding Convertible Securities, or the validity of any such conversion or
redemption.
The Company will not be required to issue or deliver fractional shares
of any class or series of capital stock or any fractional securities to any
holder of Incyte Genetics Stock upon any conversion, redemption, dividend or
other distribution described above. If more than one share of
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Incyte Genetics Stock is held at the same time by the same holder, the Company
may aggregate the number of shares of any class or series of capital stock that
is issuable or the amount of securities or property that is distributable to
such holder upon any such conversion, redemption, dividend or other distribution
(including any fractions of shares or securities). If the number of shares of
any class or series of capital stock or the amount of securities remaining to be
issued or distributed to any holder of Incyte Genetics Stock is a fraction, the
Company will, if such fraction is not issued or distributed to such holder, pay
a cash adjustment in respect of such fraction in an amount equal to the Fair
Value of such fraction on the fifth Trading Day prior to the date such payment
is to be made (without interest).
No adjustments in respect of dividends or other distributions will be
made upon the conversion or redemption of any shares of Incyte Genetics Stock;
provided, however, that if such shares are converted or redeemed by the Company
after the record date for determining holders of Incyte Genetics Stock entitled
to any dividend or other distribution thereon, such dividend or other
distribution will be payable to the holders of such shares at the close of
business on such record date notwithstanding such conversion or redemption, in
each case without interest.
Before any holder of Incyte Genetics Stock will be entitled to receive
certificates representing shares of any capital stock, cash and/or other
securities or property to be distributed to such holder with respect to any
conversion or redemption of shares of Incyte Genetics Stock, such holder is
required to surrender at such place as the Company specified certificates for
shares of Incyte Genetics Stock, properly endorsed or assigned for transfer
(unless the Company waives such requirement). As soon as practicable after the
Company's receipt of certificates for such shares of Incyte Genetics Stock, the
Company will deliver to the person for whose account such shares were so
surrendered, or to the nominee or nominees of such person, certificates
representing the number of whole shares of the kind of capital stock, cash
and/or other securities or property to which such person was entitled, together
with any fractional payment referred to above, in each case without interest. If
less than all of the shares of Incyte Genetics Stock represented by any one
certificate are to be redeemed, the Company will issue and deliver a new
certificate for the shares of Incyte Genetics Stock not redeemed.
From and after any conversion or redemption of shares of Incyte
Genetics Stock, all rights of a holder of shares of Incyte Genetics Stock that
were converted or redeemed will cease, except for the right, upon surrender of
the certificates representing such shares of Incyte Genetics Stock, to receive
the cash and/or the certificates representing shares of the kind and amount of
capital stock and/or other securities or property for which such shares were
converted or redeemed, together with any fractional payment or rights to
dividends or other distributions as provided above, in each case without
interest. No holder of a certificate that immediately prior to the conversion or
redemption of Incyte Genetics Stock represented shares of Incyte Genetics Stock
will be entitled to receive any dividend or other distribution or interest
payment with respect to shares of any kind of capital stock into or in exchange
for which shares of Incyte Genetics Stock were converted or redeemed until
surrender of such holder's certificate in exchange for a certificate or
certificates representing shares of such kind of capital stock. Upon such
surrender, there will be paid to the holder the amount of
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any dividends or other distributions (without interest) which theretofore became
payable with respect to a record date occurring after the conversion or
redemption, but which were not paid by reason of the foregoing, with respect to
the number of whole shares of the kind of capital stock represented by the
certificate or certificates issued upon such surrender. From and after a
conversion or redemption, the Company will, however, be entitled to treat the
certificates for Incyte Genetics Stock that have not yet been surrendered for
conversion or redemption as evidencing the ownership of the number of whole
shares of the kind of capital stock for which the shares of Incyte Genetics
Stock represented by such certificates shall have been converted or redeemed,
notwithstanding the failure to surrender such certificates.
The Company will pay any and all documentary, stamp or similar issue or
transfer taxes that may be payable in respect of the issue or delivery of any
shares of capital stock and/or other securities on conversion or redemption of
shares of Incyte Genetics Stock pursuant hereto. The Company will not, however,
be required to pay any tax that may be payable in respect of any transfer
involved in the issue or delivery of any shares of capital stock and/or other
securities in a name other than that in which the shares of Incyte Genetics
Stock so converted or redeemed were registered, and no such issue or delivery
will be made unless and until the person requesting such issue has paid to the
Company the amount of any such tax, or has established to the satisfaction of
the Company that such tax had been paid.
Liquidation Rights. In the event of a voluntary or involuntary
dissolution, liquidation or winding up of the affairs of the Company, after the
Company has satisfied or made provision for its debts and obligations and for
payment to the holders of shares of any series of capital stock having
preferential rights to receive distributions of the net assets of Incyte, the
holders of each series of Common Stock will be entitled to receive the net
assets, if any, remaining for distribution to common stockholders on a per share
basis in proportion to the respective per share liquidation units of such series
and will have no direct claim against any particular assets of Incyte or any of
its subsidiaries. Each share of Incyte General Stock will have such number of
liquidation units as is equal the number of votes to which one share of Incyte
General Stock would be entitled to if the applicable record date was the date on
which such dissolution, liquidation, or winding-up was announced. Each share of
Incyte Genetics Stock will have such number of liquidation units as is equal to
the number of votes to which one share of Incyte Genetics Stock would be
entitled to if the applicable record date was the date on which such
dissolution, liquidation, or winding-up was announced. A merger or business
combination involving Incyte or a sale of all or substantially all of the assets
of Incyte will not be treated as a dissolution, liquidation or winding-up for
purposes of the foregoing provisions.
Determinations by the Board. Any determination made by the Board in
good faith under any of the provisions described above will be final and binding
on all stockholders of Incyte.
Preemptive Rights. Neither holders of Incyte General Stock nor holders
of Incyte Genetics Stock will have any preemptive rights or any rights to
convert their shares into other securities of the Company.
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Incyte Genetics Designated Shares
The Board determined that the initial equity interest in Incyte
Genetics would be represented by 12,000,000 shares of Incyte Genetics Stock. All
of such 12,000,000 shares of Incyte Genetics Stock will be designated as "Incyte
Genetics Designated Shares." Incyte Genetics Designated Shares are authorized
shares of Incyte Genetics Stock, which are not issued and outstanding, but which
the Board, pursuant to the Company's management and allocation policies, may
from time to time issue, sell or otherwise distribute and for which the proceeds
or other benefits of such issuance, sale or distribution would be allocated to
Incyte General. The shares of Incyte Genetics Stock that are issuable with
respect to the Incyte Genetics Designated Shares are not outstanding shares of
Incyte Genetics Stock, are not eligible to receive dividends and cannot be voted
by the Company.
The number of Incyte Genetics Designated Shares will be:
(a) increased by (i) the number of any outstanding shares of
Incyte Genetics Stock repurchased by the Company, the
consideration for which came from Incyte General, and (ii) the
number of shares of Incyte Genetics Stock (rounded, if
necessary, to the nearest whole number) equal to the fair
value (as determined by the Board) of assets or properties
(including cash) allocated to Incyte General that are
reallocated to Incyte Genetics (other than reallocations that
represent sales at fair value between such Divisions) divided
by the average Market Value of one share of Incyte Genetics
Stock for the 20 consecutive Trading Days beginning on the
25th Trading Day prior to the date of such reallocation;
(b) decreased (but to not less than zero) by (i) the number of any
shares of Incyte Genetics Stock issued by the Company, the
proceeds of which are allocated to Incyte General, (ii) the
number of any shares of Incyte Genetics Stock issued upon the
conversion, exercise or exchange of Convertible Securities the
proceeds of which are attributed to Incyte General, (iii) the
number of any shares of Incyte Genetics Stock issued by the
Company as a dividend or distribution or by reclassification,
exchange or otherwise to holders of Incyte General Stock, (iv)
the number of any shares of Incyte Genetics Stock issued upon
the conversion, exercise or exchange of any Convertible
Securities issued by the Company as a dividend or other
distribution (including in connection with any
reclassification or exchange of shares) to holders of Incyte
General Stock, and (v) the number of shares of Incyte Genetics
Stock (rounded, if necessary, to the nearest whole number)
equal to the fair value (as determined by the Board) of assets
or properties (including cash) allocated to Incyte Genetics
that are reallocated to Incyte General in consideration for a
reduction in the number of Incyte Genetics Designated Shares
divided by the average Market Value of one share of Incyte
Genetics Stock for the 20 consecutive Trading Days beginning
on the 25th Trading Day prior to the date of such
reallocation; and
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(c) adjusted as appropriate to reflect subdivisions (by stock
split or otherwise) and combinations (by reverse stock split
or otherwise) of the Incyte Genetics Stock and dividends or
distributions of shares of Incyte Genetics Stock to holders of
Incyte Genetics Stock and other reclassifications of Incyte
Genetics Stock.
"Convertible Securities" means any securities of the Company, including
preferred stock, warrants, options and other rights (other than Common Stock),
that are convertible into, exchangeable for or evidence the right to purchase
any shares of any series of Common Stock, whether upon conversion, exercise or
exchange, pursuant to anti-dilution provisions of such securities or otherwise.
Stock Transfer Agent and Registrar
ChaseMellon Shareholders Services, L.L.C. ("ChaseMellon") is the
transfer agent and registrar for the Existing Common Stock. If the Incyte
Genetics Stock Proposal is approved by the stockholders, ChaseMellon will be
selected as the transfer agent and registrar for the Incyte General Stock and
the Incyte Genetics Stock.
Nasdaq National Market
The Existing Common Stock is traded on the Nasdaq National Market under
the symbol INCY. There has been no prior market for the Incyte General Stock or
the Incyte Genetics Stock. Application has been made to The Nasdaq Stock Market,
Inc. to redesignate the Existing Common Stock as Incyte General Stock, to be
quoted on the Nasdaq National Market under the symbol "INCY," and for the
quotation of the Incyte Genetics Stock on the Nasdaq National Market under the
symbol ________. The Company cannot predict to what extent a public market will
develop for the shares of Incyte General Stock or Incyte Genetics Stock or the
prices at which the shares of Incyte General and the Incyte Genetics Stock may
trade in such market or otherwise. See "Risk Factors -- No Assurances as to
Market Price."
No Dissenters' Rights
Holders of shares of the Existing Common Stock will not have
dissenters' rights in connection with the Incyte Genetics Stock Proposal.
Certain Federal Income Tax Consequences
The following summary of the federal income tax consequences of the
Incyte Genetics Stock Proposal and the ownership of Incyte General Stock and
Incyte Genetics Stock is based on the opinion of Shearman & Sterling, tax
counsel to the Company. The discussion is based on the Internal Revenue Code of
1986, as amended to the date hereof (the "Code"), Treasury Department
regulations, published positions of the Service, and court decisions now in
effect, all of which are subject to change. In particular, Congress could enact
legislation affecting the treatment of stock
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with characteristics similar to the Incyte General Stock and the Incyte Genetics
Stock or the Treasury Department could promulgate regulations that change
current law, including regulations issued pursuant to its authority under
section 337(d) of the Code. Any future legislation or regulations could be
enacted or promulgated so as to apply retroactively to the Incyte Genetics Stock
Proposal. This discussion addresses only those stockholders who hold the
Existing Common Stock and will hold the Incyte General Stock as a capital asset
within the meaning of section 1221 of the Code and is included for general
information only. It does not discuss all aspects of federal income taxation
that may be relevant to a stockholder in light of that stockholder's particular
tax circumstances and does not apply to certain types of stockholders that may
be subject to special treatment under the federal income tax laws, including
without limitation, dealers in securities or currencies, traders in securities
that elect to mark to market, banks, life insurance companies, tax-exempt
organizations, S corporations and other pass-through entities, mutual funds,
small business investment companies and persons that hold their Existing Common
Stock or Incyte General Stock as part of a straddle, hedging or conversion
transaction or persons whose functional currency is not the U.S. dollar. The
discussion does not address the tax consequences to foreign corporations,
foreign partnerships, nonresident alien individuals, foreign estates or foreign
trusts or to stockholders who acquired their stock pursuant to the exercise of
employee stock options or otherwise as compensation. In addition, neither
foreign, state or local tax consequences nor estate and gift tax considerations
are discussed.
Stockholders should consult their own tax advisors with regard to the
application of the federal income tax laws to their particular situation, as
well as to the applicability and effect of any state, local, or foreign tax laws
to which they may be subject.
In tax counsel's opinion, for federal income tax purposes the Incyte
General Stock and Incyte Genetics Stock will be common stock of the Company.
Accordingly, for federal income tax purposes, (i) the redesignation of the
Existing Common Stock as Incyte General Stock will not be taxable to the Company
or existing stockholders; (ii) the Company will not recognize any income, gain
or loss on the sale of any securities in any Incyte Genetics Private Placement
or any Incyte Genetics Public Offering; (iii) if an Incyte Genetics Distribution
occurs, (a) a holder of Incyte General Stock will not recognize any income, gain
or loss upon receipt of the Incyte Genetics Stock, except to the extent of any
cash received in lieu of fractional shares, (b) the basis of the Existing Common
Stock held by a stockholder immediately before the Incyte Genetics Distribution
will be allocated between the Incyte General Stock and the Incyte Genetics Stock
received in proportion to the market value of the Incyte General Stock and the
Incyte Genetics Stock on the date of distribution, (c) the holding period of the
Incyte Genetics Stock will include the holding period of the Incyte General
Stock; and (iv) the Incyte Genetics Stock will not be "section 306 stock."
Upon the taxable sale or exchange of the Incyte General Stock or Incyte
Genetic Stock received in an Incyte Genetics Distribution, a stockholder will
recognize gain or loss equal to the difference between (i) any cash received
plus the fair market value of any other consideration received, and (ii) the tax
basis of the stock sold or exchanged. Any gain or loss on the taxable sale or
exchange of the Incyte General Stock or Incyte Genetics Stock would be a capital
gain or loss, and
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would be long-term capital gain or loss if the stockholder's holding period in
the Incyte General Stock or Incyte Genetics Stock is more than one year.
The Service has announced that it will not issue advance rulings on the
classification of an instrument that has certain voting and liquidation rights
in an issuing corporation but whose dividend rights are determined by reference
to the earnings of a segregated portion of the issuing corporation's assets,
including assets held by a subsidiary. In addition, there are no court decisions
or other authorities that bear directly on the effect of the features of the
Incyte General Stock and the Incyte Genetics Stock. It is possible, therefore,
that the Service could assert that the Incyte General Stock or the Incyte
Genetics Stock represents stock in a separate corporation rather than stock in
the Company. If the Incyte General Stock or the Incyte Genetics Stock were
treated as other than stock of the Company, the redesignation of the Existing
Common Stock, any Incyte Genetics Private Placement, any Incyte Genetics Public
Offering, or the Incyte Genetics Distribution could be taxable to stockholders
and the Company. As indicated above, however, it is the opinion of counsel that
the Service would not prevail in any such assertion.
Certain noncorporate stockholders of the Incyte General Stock or Incyte
Genetics Stock could be subject to backup withholding at a rate of 31% on the
payment of dividends on or proceeds from the sale of such stock. Backup
withholding will apply only if the stockholder (i) fails to furnish its taxpayer
identification number ("TIN"), which, for an individual, would be his or her
social security number, (ii) furnishes an incorrect TIN, (iii) is notified by
the Service that it has failed to properly report payments of interest or
dividends or (iv) under certain circumstances, fails to certify under penalties
of perjury that it has furnished a correct TIN and has been notified by the
Service that it is subject to backup withholding for failure to report payments
of interest or dividends. Stockholders should consult their tax advisors
regarding their qualification for exemption from backup withholding and the
procedures for obtaining such an exemption if applicable. The amount of any
backup withholding from a payment to a stockholder of the Incyte General Stock
or Incyte Genetics Stock will be allowed as a credit against such stockholder's
federal income tax liability and may entitle such stockholder to a refund,
provided that the required information is furnished to the Service.
Restatement of Rights Agreement
On September 25, 1998, the Board approved a dividend payable to all
holders of Existing Common Stock of record on October 13, 1998 of one preferred
stock purchase right on each share of Existing Common Stock (a "Common Stock
Right"). The terms of the Common Stock Rights are set forth in a Rights
Agreement (the "Rights Agreement") between the Company and ChaseMellon, as
Rights Agent (the "Rights Agent"). If the stockholders approve the Incyte
Genetics Stock Proposal, the Rights Agreement will be amended and restated to
reflect the change in the Company's capital structure, and the Board will
declare a distribution to the holders of Incyte Genetics Stock of a right (an
"Incyte Genetics Stock Right") for each outstanding share of Incyte Genetics
Stock. Pursuant to this amendment and restatement, each Common Stock Right will
be redesignated as a right referred to in this Proxy Statement as an "Incyte
General Stock Right." The
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Rights Agreement, as amended and restated (the "Restated Rights Agreement"),
will provide that (i) each Incyte General Stock Right, when it becomes
exercisable, will entitle the registered holder to purchase from the Company one
one-thousandth of a share of Series A Participating Preferred Stock, par value
$.001 per share, at a purchase price of $200.00, subject to adjustment, and (ii)
each Incyte Genetics Stock right, when it becomes exercisable, will entitle the
registered holder to purchase from the Company one one-thousandth of a share of
Series B Participating Preferred Stock, par value $.001 per share, at a purchase
price of $___, subject to adjustment. The Incyte General Stock Rights and Incyte
Genetics Stock Rights are referred to together as the "Rights."
The Restated Rights Agreement will provide that, initially, the Incyte
General Stock Rights and Incyte Genetics Stock Rights will be evidenced by the
certificates representing shares of Incyte General Stock and Incyte Genetics
Stock, respectively, then outstanding, and no separate Rights certificates will
be distributed. The Incyte General Stock and the Incyte Genetics Stock are
referred to together as the "Voting Stock." The Rights will separate from the
Voting Stock and a Distribution Date will occur upon the earliest of (i) a
public announcement that a person, entity or group of affiliated or associated
persons and/or entities (an "Acquiring Person") has acquired, or obtained the
right to acquire, beneficial ownership of securities having 15% or more of the
voting power of all outstanding voting securities of the Company, other than as
a result of repurchases of stock by the Company or certain inadvertent actions
by certain stockholders, or (ii) ten days (unless such date is extended by the
Board) following the commencement of, or a public announcement of an intention
to make, a tender offer or exchange offer which would result in any person,
entity or group of affiliated or associated persons and/or entities becoming an
Acquiring Person. Until the Distribution Date, the Incyte General Stock Rights
will be transferred with (and only with) the Incyte General Stock, and the
Incyte Genetics Stock Rights will be transferred with (and only with) the Incyte
Genetics Stock. For purposes of the Restated Rights Agreement, the total voting
rights of the Voting Stock will be determined based upon the voting rights of
holders of outstanding shares of Incyte General Stock and Incyte Genetics Stock
in effect at the time of any such determination. See "--Description of Incyte
General Stock and Incyte Genetics Stock -- Voting Rights."
The Rights will not be exercisable until the Distribution Date. The
Rights will expire on the earliest of (i) September 25, 2008, (ii) consummation
of a merger transaction with a person or group who acquired Voting Stock
pursuant to a Permitted Offer (as defined below), and is offering in the merger
the same price per share and form of consideration paid in the Permitted Offer,
or (iii) redemption or exchange of the Rights by the Company as described below.
In the event that, after the first date of public announcement by the
Company or an Acquiring Person that an Acquiring Person has become such, the
Company is involved in a merger or other business combination transaction
(whether or not the Company is the surviving corporation) or 50% or more of the
Company's assets or earning power are sold (in one transaction or a series of
transactions), proper provision will be made so that each holder of a Right
(other than an Acquiring Person) will thereafter have the right to receive, upon
the exercise thereof at the then-current exercise price of the Right, that
number of shares of Incyte General Stock, in the case of a Incyte General Stock
Right, and Incyte Genetics Stock, in the case of an Incyte Genetics Stock Right,
in the event
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that the Company is the surviving corporation of a merger or consolidation, or
Common Stock of the acquiring company (or, in the event there is more than one
acquiring company, the acquiring company receiving the greatest portion of the
assets or earning power transferred) which at the time of such transaction would
have a market value of two times the exercise price of the Right (such right
being called the "Merger Right"). In the event that a person becomes the
beneficial owner of securities having 15% or more of the voting power of all
then outstanding voting securities of the Company (unless pursuant to a tender
offer or exchange offer for all outstanding shares of Voting Stock at a price
and on terms determined prior to the date of the first acceptance of payment for
any of such shares by at least a majority of the members of the Board who are
not officers of the Company and are not Acquiring Persons or affiliates or
associates thereof to be both adequate and otherwise in the best interests of
the Company and its stockholders (a "Permitted Offer")), then proper provision
will be made so that each holder of an Incyte General Stock Right and an Incyte
Genetics Stock Right will for a 60-day period (subject to extension under
certain circumstances) thereafter have the right to receive upon exercise that
number of shares of Incyte General Stock or Incyte Genetics Stock, as the case
may be (or, at the election of the Company, which election may be obligatory if
sufficient authorized shares of Voting Stock are not available, a combination of
Common Stock, property, other securities such as Preferred Stock and/or a
reduction in the exercise price of the Right) having a market value of two times
the exercise price of the Right (such right being called the "Subscription
Right"). The holder of a Right will continue to have the Merger Right whether or
not such holder exercises the Subscription Right. Notwithstanding the foregoing,
upon the occurrence of any of the events giving rise to the exercisability of
the Merger Right or the Subscription Right, any Rights that are or were at any
time after the Distribution Date owned by an Acquiring Person will immediately
become null and void.
At any time prior to the earlier to occur of a Person's becoming an
Acquiring Person or the expiration of the Rights, the Company may redeem the
Rights in whole, but not in part, at a price of $.01 per Right (the "Redemption
Price"), which redemption shall be effective upon the action of the Board.
Additionally, the Company may thereafter redeem the then-outstanding Rights in
whole, but not in part, at the Redemption Price (a) if such redemption is
incidental to a merger or other business combination transaction or series of
transactions involving the Company but not involving an Acquiring Person or
certain related persons or (b) following an event giving rise to, and the
expiration of the exercise period for, the Subscription Right if and for as long
as an Acquiring Person beneficially owns securities representing less than 15%
of the voting power of the Company's voting securities and at the time of
redemption there are no other Acquiring Persons. The redemption of Rights
described in the preceding sentence will be effective only as of such time when
the Subscription Right is not exercisable, and in any event, only after ten
business days' prior notice. Upon the effective date of the redemption of the
Rights, the right to exercise the Rights will terminate and the only right of
the holders of Rights will be to receive the Redemption Price.
The Restated Rights Agreement will provide that, subject to applicable
law, the Board may, at its option at any time after a person becomes an
Acquiring Person (but not after the acquisition by such person of 50% or more of
the outstanding Voting Stock), exchange all or part of the then outstanding and
exercisable Incyte General Stock Rights and Incyte Genetics Stock Rights (except
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for Rights which have become void) for shares of Incyte General Stock or Incyte
Genetics Stock, as the case may be, equivalent to one share of Incyte General
Stock per Incyte General Stock Right and one share of Incyte Genetics Stock per
Incyte Genetics Stock Right or, alternatively, for substitute consideration
consisting of cash, securities of the Company or other assets (or any
combination thereof).
Prior to the Distribution Date, the terms of the Restated Rights
Agreement may be amended by the Board without the consent of the holders of the
Rights. After the Distribution Date, the terms of the Restated Rights Agreement
may be amended by the Board in any manner which the Company may deem necessary
or desirable and which will not adversely affect the interests of the Rights
holders.
Until a Right is exercised, the holder thereof, as such, will have no
rights as a stockholder of the Company, including, without limitation, the right
to vote or to receive dividends.
A copy of the form of the Restated Rights Agreement (which includes as
Exhibit B-1 the Form of Rights Certificate for Incyte General Stock Rights and
as Exhibit B-2 the Form of Rights Certificate for Incyte Genetics Stock Rights)
will be filed with the Commission as an exhibit to the Company's Form 8-A with
respect to the Incyte General Stock Rights and Incyte Genetics Stock Rights and
is incorporated herein by reference. A copy of the Rights Agreement was filed
with the Commission as Exhibit to the Company's Form 8-A on September 30, 1998
and is incorporated herein by reference. A copy of the Restated Rights Agreement
is available free of charge from the Rights Agent. The foregoing description of
the Rights is a summary only and is qualified in its entirety by reference to
the Restated Rights Agreement and the Rights Agreement.
Anti-takeover Considerations
The following information is provided with respect to certain matters
that could be viewed as having the effect of discouraging an attempt to obtain
control of the Company.
The Certificate of Incorporation currently provides that the Board has
the authority, without further action by the stockholders, to issue from time to
time preferred stock in one or more series and to fix the number of shares,
voting powers, and the designations, preferences and relative, parti cipating,
optional or other special rights of the shares of such series, and the
qualifications, limitations or restrictions thereof. The voting powers,
preferences and rights and qualifications, limitations and restrictions of
different series of preferred stock may differ with respect to voting rights,
dividend rates, amounts payable on liquidation, conversion rights, redemption
provisions, sinking fund provisions, and other matters.
If the Incyte Genetics Stock Proposal is approved, the Amended and
Restated Certificate will further provide that the Board has the authority,
without further action by the stockholders, to issue from time to time shares of
a new series of Common Stock and to fix the number of shares, voting powers, and
the designations, preferences and relative, participating, optional or other
special rights
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of the shares of such series, and the qualifications, limitations or
restrictions thereof or to increase or decrease the number of shares of any
existing series. The voting powers, preferences and rights, and the
qualifications, limitations or restrictions thereof of different series of
Common Stock may differ with respect to voting rights, dividend rates, amounts
payable on liquidation, conversion rights, redemption provisions, and other
matters.
Although the Board has no present intention of doing so, it could issue
shares of preferred stock or a new or existing series of Common Stock that
could, depending on the terms of such stock, make more difficult or discourage
an attempt to obtain control of the Company by means of a merger, tender offer,
proxy contest or other means. Such shares could be used to create voting or
other impediments or to discourage persons seeking to gain control of the
Company and could also be privately placed with purchasers favorable to the
Board in opposing such action. In addition, the Board could authorize holders of
a series of preferred stock or Common Stock to vote either separately as a
class, or with the holders of the Company's currently outstanding Common Stock,
on any merger, sale or exchange of assets by the Company or any other
extraordinary corporate transaction. The mere existence of the additional
authorized shares could have the effect of discouraging unsolicited takeover
attempts. The issuance of new shares also could have a dilutive effect on the
voting power of existing holders of Common Stock and on earnings per share and
could be used to dilute the stock ownership of a person or entity seeking to
obtain control of the Company should the Board consider the action of such
entity or person not to be in the best interests of the stockholders and the
Company.
The Company is subject to the provisions of Section 203 of the Delaware
General Corporation Law, an anti-takeover law. In general, the statute prohibits
a publicly held Delaware corporation from engaging in a business combination
with an "interested stockholder" for a period of three years after the date of
the transaction in which the person became an interested stockholder, unless the
business combination is approved in a prescribed manner. A "business
combination" includes a merger, asset sale or other transaction resulting in
financial benefit to the stockholder. An "interested stockholder" is a person
who, together with affiliates and associates, owns (or within three years prior,
did own) 15% or more of the corporation's voting stock.
The Company's Bylaws establish an advance notice procedure for
stockholders to nominate candidates for election as directors or to bring other
business before an annual meeting of stockholders of the Company. The Bylaws
provide that only persons who are nominated by, or at the direction of, the
Board or any nominating committee designated by the Board, or by a stockholder
who has given timely written notice to the Secretary of the Company, will be
eligible for election as directors of the Company. The Bylaws also provide that
in order to properly submit any business to an annual meeting of stockholders, a
stockholder must give timely written notice to the Secretary of the Company of
such stockholder's intention to bring such business before such meeting.
Generally, for notice of stockholder nominations or other business to be
submitted to any annual meeting to be timely under the Company's Bylaws, such
notice must be received not less than 60 days nor more than 90 days prior to the
scheduled date of such meeting. However, if notice or prior public disclosure of
the date of the annual meeting is given or made to stockholders less than
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70 days prior to the meeting date, the Company must receive the stockholder's
notice by the earlier of (i) the close of business on the 10th day after the
earlier of the day the Company mailed notice of the annual meeting date or
provided such public disclosure of the meeting date and (ii) two days prior to
the scheduled date of the annual meeting. A stockholder's notice must also
contain certain information specified in the Bylaws.
The Restated Rights Agreement will permit disinterested stockholders to
acquire additional shares of the Company or of an acquiring company at a
substantial discount in the event of certain described changes in control. See
"--Restated Rights Agreement."
Certain provisions described above may have the effect of delaying
stockholder actions with respect to certain business combinations and the
election of new members to the Board. As such, the provisions could have the
effect of discouraging open market purchases of Common Stock because they may be
considered disadvantageous by a stockholder who desires to participate in a
business combination or elect a new director. In addition, to the extent that
potential takeovers are thereby discouraged, stockholders may not have the
opportunity to dispose of all or a part of their stock at a price that may be
higher than the price prevailing in the market.
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PROPOSAL 2 -- AMENDMENT OF THE 1991 STOCK PLAN
The holders of Existing Common Stock are being asked to consider and
approve a proposal to amend and restate the Stock Plan, as set forth in Annex B
hereto (as amended and restated, the "Restated Stock Plan"). In [September]
1998, Board approved the Restated Stock Plan, subject to the approval by the
Company's stockholders of the Restated Stock Plan and the Incyte Genetics Stock
Proposal. If those stockholder approvals are obtained, the Restated Stock Plan
will become effective on the date of initial issuance of shares of the Incyte
Genetics Stock (the "Plan Effective Date"). If stockholder approvals are not
obtained or if the Board determines not to proceed with implementation of the
Incyte Genetics Stock Proposal, the Stock Plan, as currently in effect without
the amendments described herein, will continue in effect.
The following summary of the principal features of the Restated Stock
Plan is qualified by reference to the terms of the Restated Stock Plan, which is
attached to this Proxy Statement as Annex B.
Summary of Amendments
The amendments to the Stock Plan approved by the Board and submitted
for stockholder approval are intended to clarify that grants made after the Plan
Effective Date may be made with respect to either Incyte General Stock or Incyte
Genetics Stock or both, in the same manner and to the same extent as permitted
with respect to the Existing Common Stock. The amendments also provide that
6,300,000 shares of Incyte General Stock (the amount currently reserved under
the 1991 plan) nd 2,400,000 shares of Incyte Genetics Stock are reserved for
issuance under the Stock Plan. Finally, the amendments reflect changes made to
applicable laws and regulations under Section 16 of the Exchange Act and the
Code since March 1995, the date the Stock Plan was last amended and restated in
its entirety.
Summary of the Restated Stock Plan
The Stock Plan was adopted by the Board of Directors in November 1991
and approved by the Company's stockholders in December 1991, with the most
recent amendments to the Stock Plan approved by the Company's stockholders in
June 1998. The purpose of the Restated Stock Plan is to assist the Company in
the recruitment, retention and motivation of employees and of independent
contractors who are in a position to make material contributions to the
Company's progress. The Restated Stock Plan offers a significant incentive to
the employees and independent contractors of the Company by enabling such
individuals to acquire Incyte General Stock, Incyte Genetics Stock, or both,
thereby increasing their proprietary interest in the growth and success of
Incyte General, Incyte Genetics, and the Company.
The Restated Stock Plan provides for the direct award or sale of shares
of either or both series of Common Stock and for the grant of both incentive
stock options ("ISO") to purchase Incyte General Stock or Incyte Genetics Stock
intended to qualify for preferential tax treatment under Section 422 of the Code
and nonstatutory stock options ("NSO") to purchase Incyte General Stock
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or Incyte Genetics Stock that do not qualify for such treatment under the Code.
All employees (including officers) of the Company or any subsidiary and any
independent contractor who performs services for the Company or a subsidiary are
eligible to purchase shares of Common Stock and to receive awards of shares or
grants of NSOs. Only employees are eligible to receive grants of ISOs. As of
_________, 1998, ___ employees were eligible to be considered for the grant of
options under the Restated Stock Plan. Options to purchase more than 400,000
shares may not be granted in a single calendar year to any participant in the
Restated Stock Plan.
Under the Stock Plan prior to its amendment and restatement, a total of
6,300,000 shares of Existing Common Stock have been reserved for issuance. A
total of 6,300,000 shares of Incyte General Stock and 2,400,000 shares of Incyte
Genetics Stock have been reserved for issuance under the Restated Stock Plan. If
any option granted under the Restated Stock Plan expires or terminates for any
reason without having been exercised in full, then the unpurchased shares
subject to that option will once again be available for additional option
grants. As of June 30, 1998, the Company had outstanding options under the Stock
Plan to purchase an aggregate of 3,605,738 shares of Existing Common Stock at
exercise prices ranging from $0.15 to $47.00 per share, or a weighted average
per share exercise price of $18.61. A total of 1,796,331 shares of Existing
Common Stock are available for future issuance under the Stock Plan and, if the
Restated Stock Plan is approved and assuming no additional stock or stock option
grants occur under the Stock Plan prior to the Plan Effective Date, a total of
1,796,331 shares of Incyte General Stock and 2,400,000 shares of Incyte Genetics
Stock would be available for future issuance under the Restated Stock Plan.
Outstanding awards under the Stock Plan will be adjusted to reflect the
Incyte Genetics Stock Proposal in accordance with the adjustment provision of
the Restated Stock Plan. The Company currently anticipates that upon the Plan
Effective Date, outstanding options to purchase Existing Common Stock will be
converted into options to purchase the same number of shares of Incyte General
Stock. The per share exercise price for each such option to purchase Existing
Common Stock will continue to be the per share exercise price for the shares of
Incyte General Stock subject to the converted option.
The Compensation Committee and the Management Stock Option Committee of
the Board (collectively, the "Committee") have not made any determination with
respect to future awards under the Restated Stock Plan, and any allocation of
such awards will be made only in accordance with the provisions of the Restated
Stock Plan, including the additional shares of stock that the stockholders are
being asked to approve. The Company believes that the granting of options is
necessary to attract the highest quality personnel as well as to reward and
thereby retain existing key personnel. Moreover, the attraction and retention of
such personnel is essential to the continued progress of the Company which
ultimately is in the interests of the Company's stockholders.
As of _______________, 1998, the following persons or groups had in
total, received options to purchase shares of Existing Common Stock under the
Stock Plan as follows: (i) the Chief Executive Officer and the other executive
officers named in the Summary Compensation Table: Mr. Roy A. Whitfield,
[329,400] shares, Dr. Randal W. Scott, [319,400] shares, and Dr. Denise M.
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Gilbert, [300,000] shares, (ii) all current executive officers of the Company as
a group: [948,800] shares; (iii) all current directors who are not executive
officers as a group: 20,000 shares; and (iv) all employees of the Company,
including all current officers who are not executive officers, as a group:
[3,805,860] shares.
The proceeds from the issuance of shares of Incyte Genetics Stock upon
the purchase of shares or the exercise of options under the Restated Stock Plan
will be allocated to Incyte Genetics. The proceeds from the issuance of shares
of Incyte General Stock upon the purchase of shares or the exercise of options
under the Restated Stock Plan will be allocated to Incyte General.
Administration
The Restated Stock Plan will be administered by the Committee. Subject
to the limitations set forth in the Restated Stock Plan, the Committee has the
authority to determine, among other things, to whom options will be granted and
shares will be sold, the series of Common Stock and the number of shares, the
term during which an option may be exercised and the rate at which the options
may be exercised and the shares may vest.
Terms of Options and of Shares Offered for Sale
The maximum term of each option that may be granted under the Restated
Stock Plan is 10 years. Stock options granted under the Restated Stock Plan must
be exercised by the optionee before the earlier of the expiration of such option
or the date 90 days after termination of the optionee's employment, except that
the period may be extended on certain events including death and termination of
employment due to disability.
The exercise price under each option will be established by the
Committee; however, the exercise price per share of an ISO to purchase shares of
a series of Common Stock cannot be lower than the fair market value of one share
such series on the date of grant and the exercise price per share of a NSO may
not be less than the par value per share of the Common Stock. See "Price Range
of and Dividends on Existing Common Stock" for the recent market price of the
Existing Common Stock. The exercise price must be paid in full at the time of
exercise. Under the Restated Stock Plan, the exercise price is payable in cash
or, in certain circumstances, shares of the same series of Common Stock or by
promissory note. The Restated Stock Plan also allows an optionee to pay the
exercise price by giving "exercise/sale" or "exercise/pledge" directions. If
exercise/sale directions are given, a number of option shares sufficient to pay
the exercise price and any withholding taxes is issued to a securities broker
selected by the Company, who, in turn, sells the shares in the open market. The
broker remits the exercise price and any withholding taxes to the Company from
the proceeds of the sale, and the optionee receives any remaining shares or
cash. If exercise/pledge directions are given, the option shares are issued
directly to a securities broker or other lender selected by the Company. The
broker or other lender will hold the shares as security and will extend credit
for up to 50% of their market value. The loan proceeds will be paid to the
Company to the extent necessary to pay the exercise price and any withholding
taxes. Any excess
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<PAGE>
\loan proceeds may be paid to the optionee. If the loan proceeds are
insufficient to cover the exercise price and withholding taxes, the optionee
will be required to pay the deficiency to the Company at the time of exercise.
The terms of any sale of shares of Common Stock under the Restated
Stock Plan will be set forth in a common stock purchase agreement to be entered
into between the Company and each purchaser. The Committee will determine the
terms and conditions of such stock purchase agreements, which need not be
identical. The purchase price for shares of Common Stock sold under the Restated
Stock Plan may not be less than the par value of such shares. The purchase price
may be paid, at the Committee's discretion, with a full-recourse promissory note
secured by the shares, except that the par value of the shares must be paid in
cash. Shares may also be awarded under the Restated Stock Plan in consideration
of services rendered prior to the award, without a cash payment by the
recipient.
Options may have such terms and be exercisable in such manner and at
such times as the Committee may determine. Common Stock transferred pursuant to
the Restated Stock Plan (including shares acquired upon the exercise of certain
options) may be subject to repurchase by the Company in the event that any
applicable vesting conditions are not satisfied. A holder of shares of a series
of Common Stock transferred under the Restated Stock Plan has the same voting,
dividend and other rights as the Company's other stockholders of such series.
Amendment and Termination
The Restated Stock Plan may be amended at any time by the Board of
Directors, subject to applicable laws. Unless sooner terminated by the Board of
Directors, the Restated Stock Plan will terminate on the tenth anniversary of
the Plan Effective Date, and, following such date, no further options may be
granted or stock sold pursuant to such plan except upon the exercise of options
granted prior to the termination date.
Effect of Certain Corporate Events
In the event of a subdivision of either series of the outstanding
Common Stock or a combination or consolidation of either series of the
outstanding Common Stock (by reclassification or otherwise) into a lesser number
of shares, a spinoff or a similar occurrence, or declaration of a dividend
payable in shares of a series of Common Stock or, if in an amount that has a
material effect on the price of the shares of such series, in cash, the
Committee will make adjustments in the number and/or exercise price of options
and/or the number of shares of the relevant series of Common Stock available
under the Restated Stock Plan, as appropriate.
Upon any distribution of shares of Incyte Genetics Stock to the holders
of outstanding Incyte General Stock, including the Incyte Genetics Distribution,
each outstanding option to purchase Incyte General Stock under the Restated
Stock Plan (an "Existing General Option") will be converted into an option to
purchase the same number of shares of Incyte General Stock (an "Adjusted General
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Option") and an option to purchase such number or fraction of shares of Incyte
Genetics Stock as would have been distributed with respect to the number of
shares of Incyte General Stock covered by the Existing General Option (an
"Adjusted Genetics Option"). For example, if one-half of one share of Incyte
Genetics Stock is distributed with respect to each share of Incyte General
Stock, a holder of an Existing General Option to purchase 100 shares of Incyte
General Stock would receive an Adjusted General Option to purchase 100 shares of
Incyte General Stock and an Adjusted Genetics Option to purchase 50 shares of
Incyte Genetics Stock. The number or fraction of shares of Incyte Genetics Stock
distributed with respect to one share of Incyte General Stock is referred to as
the "Distribution Ratio." The Adjusted Genetics Option and the Adjusted General
Option are referred to collectively as the "Adjusted Options."
The exercise price of the Adjusted Options will be set so that the
aggregate exercise prices of the Adjusted Options will equal the aggregate
exercise price of the Existing General Option. A combined value of the two
series of stock (the "Combined Value") will be determined. The Combined Value
will equal the sum of (i) the Incyte General Value plus (ii) the Distribution
Ratio multiplied by the Incyte Genetics Value. The Incyte General Value and
Incyte Genetics Value will equal the volume-weighted average trading prices per
share of the Incyte General Stock and the Incyte Genetics Stock, respectively,
for the first 10 Trading Days beginning on the date of distribution (or, if
later, the first day on which the Incyte Genetics Stock commences trading
following the distribution). Each Adjusted General Option will have its exercise
price per share set at the product of (i) the Incyte General Value and (ii) a
fraction (the "Adjustment Factor"), the numerator of which is the exercise price
of the Existing General Option and the denominator of which is the Combined
Value. Each Adjusted Genetics Option will have its exercise price per share set
at the product of (i) the Incyte Genetics Value and (ii) the Adjustment Factor.
All other terms of each Adjusted General Option and Adjusted Genetics Option
will be the same as the terms of the related Existing General Option.
In the event of a merger or other reorganization, outstanding options
will be subject to the agreement of merger or reorganization. Such agreement
will provide for the assumption of outstanding options by the surviving
corporation or its parent, for their continuation by the Company (if the Company
is the surviving corporation), for payment of a cash settlement equal to the
difference between the amount to be paid for one share under the agreement of
merger or reorganization and the exercise price for each option, or for the
acceleration of the exercisability of each option followed by the cancellation
of options not exercised, in all cases without the optionees' consent.
Certain Federal Income Tax Consequences of Options Under the Restated Stock Plan
Neither the optionee nor the Company will incur any federal tax
consequences as a result of the grant of an option. The optionee will have no
taxable income upon exercising an ISO (except that the alternative minimum tax
may apply), and the Company will receive no deduction when an ISO is exercised.
Upon exercising a NSO to purchase a series of Common Stock, the optionee
generally must recognize ordinary income equal to the "spread" between the
exercise price and the
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<PAGE>
fair market value of such series of Common Stock on the date of exercise; the
Company will be entitled to a deduction for the same amount. In the case of an
employee, the option spread at the time a NSO to purchase a series of Common
Stock is exercised is subject to income tax withholding, but the optionee
generally may elect to satisfy the withholding tax obligation by having shares
of such series of Common Stock withheld from those purchased under the NSO. The
tax treatment of a disposition of option shares acquired under the Restated
Stock Plan depends on how long the shares have been held and on whether such
shares were acquired by exercising an ISO or by exercising a NSO. The Company
will not be entitled to a deduction in connection with a disposition of option
shares, except in the case of a disposition of shares acquired under an ISO
before the applicable ISO holding periods have been satisfied.
The above description of tax consequences is based upon federal tax
laws and regulations and does not purport to be a complete description of the
federal income tax aspects of the Restated Stock Plan.
The Board of Directors recommends a vote "FOR" amendment and
restatement of the Company's 1991 Stock Plan.
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PROPOSAL 3 -- AMENDMENT OF THE 1997 EMPLOYEE STOCK PURCHASE
PLAN
The holders of Existing Common Stock are being asked to consider and
approve a proposal to amend and restate the ESPP, as set forth in Annex C hereto
(as amended and restated, the "Restated ESPP"). In September 1998, Board
approved the Restated ESPP, subject to the approval by the Company's
stockholders of the Restated ESPP and the Incyte Genetics Stock Proposal. If
those stockholder approvals are obtained, the Restated ESPP will become
effective on the Plan Effective Date. If stockholder approvals are not obtained
or if the Board determines not to proceed with implementation of the Incyte
Genetics Stock Proposal, the ESPP, as currently in effect without the amendments
described herein, will continue in effect.
The following summary of the principal features of the Restated ESPP is
qualified by reference to the terms of the Restated ESPP, which is attached to
this Proxy Statement as Annex C.
Summary of Amendments
The amendments to the ESPP approved by the Board and submitted for
stockholder approval provide that, for purchase periods after the Plan Effective
Date, participants in the ESPP may purchase either Incyte General Stock or
Incyte Genetics Stock or both, in such proportions as the participants may
determine. The amendments also provide that 400,000 shares of Incyte General
Stock and 400,000 shares of Incyte Genetics Stock are available for issuance
under the ESPP. In addition, the limitation that no participant may purchase
more than 2,000 shares in any one purchase period has been deleted.
Summary of the Restated ESPP
The ESPP was adopted by the Board in February 1997, effective August 1,
1997, and approved by the Company's stockholders in June 1997. The purpose of
the Restated ESPP is to give eligible employees an opportunity to purchase
shares of the Common Stock at a price below their market value and to pay for
the purchases through payroll deductions. There are 400,000 shares of Existing
Common Stock reserved for issuance under the ESPP. As of June 30, 1998,
15,920 shares of Existing Common Stock had been issued pursuant to the ESPP
and 384,080 shares remained available for issuance. Under the Restated ESPP,
400,000 shares of Incyte General Stock and 400,000 shares of Incyte Genetics
Stock are reserved for issuance.
Outstanding rights to purchase shares under the Restated ESPP will be
adjusted to reflect the Incyte Genetics Stock Proposal in accordance with the
adjustment provision of the Restated ESPP. The Company currently anticipates
that upon the Plan Effective Date, outstanding rights to purchase Existing
Common Stock will be converted into rights to purchase the same number of shares
of Incyte General Stock. The per share purchase price for each such right to
purchase Existing Common Stock will continue to be the per share purchase price
for the shares of Incyte General Stock subject to such adjusted right.
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Administration
The Restated ESPP is administered by the Compensation Committee of the
Board. The Compensation Committee has the authority to construe, interpret and
apply the terms of the Restated ESPP, to determine eligibility, to establish
such limitations and procedures as it determines are consistent with the
Restated ESPP and to adjudicate any disputed claims under the Restated ESPP.
Eligibility; Price of Shares
Each regular full-time and part-time employee of the Company and
subsidiaries designated by the Board who customarily works at least 20 hours per
week and more than five months in any calendar year is eligible to participate
in the Restated ESPP after one year of employment. However, no employee is
eligible to participate in the Restated ESPP if, immediately after electing to
participate, the employee would own stock of the Company (including stock such
employee may purchase under outstanding options) representing 5% or more of the
total combined voting power or value of all classes of stock of the Company. In
addition, no employee is permitted to participate if under the Restated ESPP and
all similar purchase plans of the Company or its subsidiaries, such rights would
accrue at a rate which exceeds $25,000 of the fair market value of such stock
(determined at the time the right is granted) for each calendar year.
Under the Restated ESPP, each calendar year is divided into two
six-month "purchase periods" commencing May 1 and November 1 of each year. At
the end of each purchase period, the Company will apply the amount contributed
by the participant during that period to purchase shares of Incyte General
Stock, Incyte Genetics Stock, or both, for him or her, in the proportions as to
each series of Common Stock as the participant determines. The purchase price
per share for a series of Common Stock will be equal to 85% of the lower of (a)
the market price of the such series immediately before the beginning of the
applicable "offering period" or (b) the market price of such series on the last
business day of the purchase period. In general, each offering period is 24
months long, but a new offering period begins every six months. Thus, up to four
overlapping offering periods may be in effect at the same time. If, with respect
to a series of Common Stock, the market price is lower when a subsequent
offering period begins, the subsequent offering period automatically becomes the
applicable offering period.
Participation; Payroll Deductions; Purchase of Shares
Eligible employees become participants in the Restated ESPP by
executing a subscription agreement authorizing payroll deductions and filing it
with the payroll office before the first day of the applicable offering period.
The payroll deductions made for each participant may be not be less than 1% or
exceed 10% of the participant's cash compensation, as the participant may
designate in the subscription agreement. Payroll deductions commence with the
first paycheck issued during the offering period and are deducted from
subsequent paychecks throughout the offering period unless changed or terminated
as provided in the Restated ESPP.
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Participants are notified by statements of account as soon as
practicable following the end of each purchase period as to the amount of
payroll deductions, the number of shares purchased, the purchase price and the
remaining cash balance of their accounts. Certificates representing the shares
are delivered to a brokerage account and kept in such account pursuant to the
subscription agreement.
Withdrawal From the Restated ESPP; Termination of Employment
Participants may withdraw from the Restated ESPP at any time. As soon
as practicable after withdrawal, payroll deductions cease and all amounts
credited to the participant's account are refunded in cash, without interest. A
participant who has withdrawn from the Restated ESPP cannot be a participant in
future offering periods unless he or she re-enrolls pursuant to the Restated
ESPP's guidelines.
Termination of a participant's status as an eligible employee is
treated as an automatic withdrawal from the Restated ESPP. A participant may
designate in writing a beneficiary who is to receive shares and cash in the
event of the participant's death subsequent to the purchase of shares, but prior
to delivery. A participant may also designate a beneficiary to receive cash in
his or her account in the event of such participant's death prior to the last
day of the offering period. Any other attempted assignment, except by will, and
the laws of descent and distribution, may be treated as a withdrawal.
Amendment and Termination
The Restated ESPP may be amended or terminated at any time by the
Board, subject to applicable laws, and will terminate on [the tenth anniversary
of the Plan Effective Date].
Effect of Certain Corporate Events
In the event of a subdivision of either series of the outstanding
Common Stock or a combination or consolidation of either series of the
outstanding Common Stock (by reclassification or otherwise) into a lesser number
of shares, a spinoff or a similar occurrence, or declaration of a dividend
payable in a series of Common Stock or, if in an amount that has a material
effect on the price of the shares of such series, in cash, the Compensation
Committee will make adjustments in the number and/or purchase price of shares of
the relevant series of Common Stock and/or the number of shares of such series
available under the Restated ESPP, as appropriate.
The Board recommends a vote "FOR" amendment and restatement of the
Company's 1997 Employee Stock Purchase Plan.
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PROPOSAL 4 -- AMENDMENT OF THE 1993 DIRECTORS' STOCK OPTION PLAN
The holders of Existing Common Stock are being asked to consider and
approve a proposal to amend and restate the Directors' Option Plan, as set forth
in Annex D hereto (as amended and restated, the "Restated Directors' Option
Plan"). In [September] 1998, Board approved the Restated Directors' Option Plan,
subject to the approval by the Company's stockholders of the Restated Directors'
Option Plan and the Incyte Genetics Stock Proposal. If those stockholder
approvals are obtained, the Restated Directors' Option Plan will become
effective on the Plan Effective Date. If stockholder approvals are not obtained
or if the Board determines not to proceed with implementation of the Incyte
Genetics Stock Proposal, the Directors' Option Plan, as currently in effect
without the amendments described herein, will continue in effect.
The following summary of the principal features of the Restated
Directors' Option Plan is qualified by reference to the terms of the Restated
Directors' Option Plan, which is attached to this Proxy Statement as Annex D.
Description of Amendments
The amendments to the Directors' Option Plan approved by the Board and
submitted for stockholder approval change the number of shares subject to
options granted on the date of each annual meeting of stockholders to reflect
the creation of the tracking stock capital structure.
Under the Directors' Option Plan as currently in effect, each eligible
director receives an option to purchase 5,000 shares of Existing Common Stock on
the date of each annual meeting of stockholders. An aggregate of 400,000 shares
of Existing Common Stock are authorized for issuance under the Directors' Option
Plan.
The amendments to the Directors' Option Plan authorize the issuance of
up to 200,000 shares of Incyte Genetics Stock under the Directors' Option Plan.
Such shares will be in addition to the 400,000 shares of Incyte General Stock
presently authorized for issuance under the Directors' Option Plan. The
formula-based option grants to eligible directors will be amended as described
below.
Summary of the Restated Directors' Option Plan
The Directors' Option Plan was adopted by the Board of Directors in
July 1993 and approved by the Company's stockholders in September 1993, with the
most recent amendment to the Directors' Option Plan approved by the stockholders
in June 1995. The purpose of the Restated Directors' Option Plan is to assist
the Company in the recruitment, retention and motivation of certain non-employee
directors. The Restated Directors' Option Plan offers a significant incentive to
non-employee directors of the Company by enabling such individuals to acquire
the Company's Common Stock, thereby increasing their proprietary interest in the
growth and success of the Company.
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The Restated Directors' Option Plan provides for the automatic grant of
options to purchase shares of Incyte General Stock and Incyte Genetics Stock to
directors of the Company who are not employees of the Company, who do not own or
represent an owner of 5% or more of either series of Common Stock, and who do
not join the Board through a contractual arrangement between the Company and a
third party. Each such director will receive, on the date of each annual meeting
of stockholders of the Company, an option to purchase _____ shares of Incyte
General Stock and an option to purchase ______ shares of Incyte Genetics Stock
at the respective fair market values of such series of Common Stock on the date
of grant. Such options will vest in full on the first anniversary of the date of
grant. Each such director who is not initially elected at a regular annual
meeting of the Company's stockholders will receive an option to purchase a pro
rata portion of ____ shares of Incyte General Stock and an option to purchase a
pro rata portion of ______ shares of Incyte Genetics Stock, in each case based
upon the number of full months remaining from the date of election until the
next regular annual meeting of the Company's stockholders divided by twelve.
A total of 400,000 shares of Incyte General Stock and 200,000 a total
of shares of Incyte Genetics Stock have been reserved for issuance under the
Restated Directors' Option Plan. If any option granted under the Restated
Directors' Option Plan expires or terminates for any reason without having been
exercised in full, then the unpurchased shares subject to that option will once
again be available for additional option grants. As of June 30, 1998, the
Company had outstanding options under the Directors' Option Plan to purchase an
aggregate of 287,500 shares of Existing Common Stock at exercise prices ranging
from $2.00 to $44.25 per share, or a weighted average per share exercise price
of $11.18. A total of 112,500 shares of Existing Common Stock is available for
future issuance under the Directors' Option Plan and, if the Restated Directors'
Option Plan is approved and assuming no additional stock or stock option grants
occur under the Directors' Option Plan prior to the Plan Effective Date, a total
of 112,500 shares of Incyte General Stock and 200,000 shares of Incyte Genetics
Stock would be available for future issuance under the Restated Directors'
Option Plan.
Outstanding awards under the Directors' Option Plan will be adjusted to
reflect the Incyte Genetics Stock Proposal in accordance with the adjustment
provision of the Restated Directors' Option Plan. The Company currently
anticipates that upon the Plan Effective Date, outstanding options to purchase
Existing Common Stock will be converted into options to purchase the same number
of shares of Incyte General Stock. The per share exercise price for each such
option to purchase Existing Common Stock will continue to be the per share
exercise price for the shares of Incyte General Stock subject to the converted
option.
Terms of Options
The term of each option granted under the Restated Directors' Option
Plan is 10 years. Stock options granted under the Restated Directors' Option
Plan must be exercised by the optionee before the earlier of the expiration of
such option or the date six months days after termination of the optionee's
service as a director, except that the period may be extended on certain events
including death and termination of employment due to disability.
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The exercise price of an option granted under the Restated Directors'
Option Plan must be paid in full at the time of exercise in cash or, in certain
circumstances, shares of Common Stock of the same series. The Restated
Directors' Option Plan also allows an optionee to pay the exercise price by
giving "exercise/sale" or "exercise/pledge" directions, as described above under
"Proposal 2 -- Amendment of the 1991 Stock Plan -- Summary of the Restated Stock
Plan -- Terms of Options and of Shares Offered for Sale."
Effect of Certain Corporate Events
Options granted under the Restated Directors' Option Plan are subject
to adjustment in the event of certain corporate events in the same manner as
options granted under the Restated Stock Plan. See "Proposal 2 -- Amendment of
the 1991 Stock Plan -- Summary of the Restated Stock Plan--Effect of Certain
Corporate Events."
Amendment and Termination
The Restated Directors' Option Plan may be amended or terminated at any
time by the Board, subject to applicable laws, except that the provisions of the
Plan relating to the amount, price and timing of option grants may not be
amended more than once in any six-month period.
Certain Federal Income Tax Consequences of Options Under the Restated
Directors' Option Plan
Neither the optionee nor the Company will incur any federal tax
consequences as a result of the grant of an option. Upon exercising an option to
purchase shares of a series of Common Stock, the optionee generally must
recognize ordinary income equal to the "spread" between the exercise price and
the fair market value of such series on the date of exercise; the Company will
be entitled to a deduction for the same amount. Upon disposition of option
shares acquired under the Directors' Option Plan, the difference generally
between the sales proceeds and the fair market value of the shares on the date
of exercise will be treated as a capital gain or loss -- either long-term or
short-term, depending on how long the shares have been held. The Company will
not be entitled to a deduction in connection with a disposition of option
shares.
The above description of tax consequences is based upon federal tax
laws and regulations and does not purport to be a complete description of the
federal income tax aspects of the Restated Directors' Option Plan.
The Board of Directors recommends a vote "FOR" amendment and
restatement of the Company's 1993 Directors' Stock Option Plan.
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EXECUTIVE COMPENSATION
Summary Compensation Table
The following table summarizes all compensation paid to the Company's
Chief Executive Officer and to the Company's other two executive officers for
services rendered in all capacities to the Company for the fiscal years ended
December 31, 1997, 1996 and 1995.
<TABLE>
<CAPTION>
Summary Compensation Table
Long Term
Annual Compensation
Compensation Awards
Securities
Name and Underlying All Other
Principal Position Year Salary ($) Bonus ($) Options (#) Compensation ($)
------------------ ---- ---------- --------- ----------- ----------------
<S> <C> <C> <C> <C> <C>
Roy A. Whitfield 1997 $260,000 $100,000 9,000 --
Chief Executive Officer 1996 230,000 75,000 30,000 --
1995 210,000 50,000 70,000 --
Randal W. Scott 1997 240,000 100,000 9,000 --
President, 1996 215,000 75,000 30,000 --
Chief Scientific Officer 1995 195,000 40,000 60,000 --
and Secretary
Denise M. Gilbert 1997 220,000 100,000 15,000 --
Executive Vice President, 1996 180,000 75,000 30,000 --
Chief Financial Officer 1995(1) 45,962 5,000 255,000 $2,800(2)
and Treasurer
</TABLE>
- ------------------------------------
(1) Dr. Gilbert joined the Company in October 1995.
(2) Represents amounts paid to Dr. Gilbert for consulting services in 1995
prior to her employment.
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The following tables set forth certain information as of December 31,
1997 and for the fiscal year then ended with respect to stock options to
purchase shares of Existing Common Stock granted to and exercised by the
individuals named in the Summary Compensation Table above.
<TABLE>
<CAPTION>
Option Grants in 1997
Potential
Realizable Value at
Assumed Annual Rates
of Stock Price
Appreciation
Individual Grants for Option Term(4)
---------------------------------------------------------- ---------------------
Number of % of
Securities Total Options
Underlying Granted to Exercise
Options Employees in Price Expiration
Name Granted(#)(1) Fiscal Year ($/Sh)(2) Date(3) 5%($) 10%($)
- ---- ------------- ------------- ---------- ------------ ---------- ---------
<S> <C> <C> <C> <C> <C> <C>
Roy A. Whitfield 9,000 1.03% $36.625 12/08/07 $207,299 $525,337
Randal W. Scott 9,000 1.03 36.625 12/08/07 207,299 525,337
Denise M. Gilbert 15,000 1.71 36.625 12/08/07 345,499 875,562
- ------------------------------------
</TABLE>
(1) Options granted in 1997 vest 25% on the first anniversary of the date
of grant, with the remaining shares vesting monthly over three years.
Under the terms of the 1991 Stock Plan, the committee designated by the
Board of Directors to administer the 1991 Stock Plan retains the
discretion, subject to certain limitations within the 1991 Stock Plan,
to modify, extend or renew outstanding options and to reprice
outstanding options. Options may be repriced by canceling outstanding
options and reissuing new options with an exercise price equal to the
fair market value on the date of reissue, which may be lower than the
original exercise price of such canceled options.
(2) The exercise price on the date of grant was equal to 100% of the fair
market value on the date of grant.
(3) The options have a term of 10 years, subject to earlier termination in
certain events related to termination of employment.
(4) The 5% and 10% assumed rates of appreciation are suggested by the rules
of the Securities and Exchange Commission and do not represent the
Company's estimate or projection of the future Common Stock price.
There can be no assurance that any of the values reflected in the table
will be achieved.
94
<PAGE>
Aggregated Option Exercises in Last Fiscal Year
and 1997 Year End Option Values
<TABLE>
<CAPTION>
Number of
Securities
Underlying Value of
Unexercised Unexercised
Options at In-the-Money Options at
December 31, 1997(#) December 31, 1997($)(5)
Shares Acquired Value Exercisable/ Exercisable/
Name on Exercise (#) Realized ($)(1) Unexercisable Unexercisable
- ---- --------------- --------------- ------------- -------------
<S> <C> <C> <C> <C>
Roy A. Whitfield(2) 32,668 $ 913,403 164,900/31,500 $6,041,569/$616,781
Randal W. Scott(3) 57,500 1,397,969 172,068/31,500 6,389,211/616,781
Denise M. Gilbert(4) 20,000 477,875 242,500/37,500 8,766,094/667,031
</TABLE>
- ------------------------------------
(1) Calculated on the basis of the fair market value of the underlying
securities at the exercise date minus the exercise price.
(2) Options to purchase 67,392 shares were exercisable immediately as of the
date of grant, but the shares underlying such options are subject to
rights of repurchase by the Company, which rights lapse as to 25% of the
shares covered by the respective options on the first anniversary of the
date of grant and lapse ratably on a monthly basis thereafter, with the
repurchase right terminating in full on the fourth anniversary of the
date of grant.
(3) Options to purchase 51,350 shares were exercisable immediately as of the
date of grant, but the shares underlying such options are subject to
rights of repurchase by the Company, which rights lapse as to 25% of the
shares covered by the respective options on the first anniversary of the
date of grant and lapse ratably on a monthly basis thereafter, with the
repurchase right terminating in full on the fourth anniversary of the
date of grant.
(4) Options to purchase 107,188 shares were exercisable immediately as of
the date of grant, but the shares underlying such options are subject to
rights of repurchase by the Company, which rights lapse as to 25% of the
shares covered by the respective options on the first anniversary of the
date of grant and lapse ratably on a monthly basis thereafter, with the
repurchase right terminating in full on the fourth anniversary of the
date of grant.
(5) Calculated on the basis of the fair market value of the underlying
securities at December 31, 1997 ($45.00 per share) minus the exercise
price.
95
<PAGE>
Compensation of Directors
Directors who are employees of the Company do not receive any fees for
service on the Board of Directors. Directors Barry M. Bloom, Jeffrey J.
Collinson, Frederick B. Craves, and Jon S. Saxe are reimbursed for their
expenses for each meeting attended, and Messrs. Collinson and Saxe and Drs.
Craves and Bloom are each compensated $2,500 per diem in connection with their
attendance at Board meetings. Pursuant to the Company's 1993 Directors' Stock
Option Plan (the "Directors' Plan"), in May 1997 each of Drs. Bloom and Craves
and Messrs. Saxe and Collinson received an annual automatic grant of an option
to purchase 10,000 shares of Existing Common Stock at an exercise price of
$27.6875 per share; such options vested in full on the first business day
following the 1998 Annual Meeting of Stockholders. The Board amended the
Directors' Plan in March 1998 to reduce the annual option grants receivable by
eligible directors from 10,000 shares to 5,000 shares.
Compensation Committee Interlocks and Insider Participation
The Compensation Committee consists of Messrs. Collinson and Saxe and
Drs. Bloom and Craves, who are outside directors of the Company. From January
1997 through July 1997, the Company had a consultancy arrangement with The
Craves Group, a consulting group in which Dr. Craves is a general partner.
Pursuant to the arrangement, the Company paid The Craves Group $10,000 per month
through July 1997, at which time the arrangement was terminated.
96
<PAGE>
SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The following table sets forth certain information as of March 1, 1998
as to shares of the Existing Common Stock beneficially owned by: (i) each person
who is known by the Company to own beneficially more than 5% of the Existing
Common Stock, (ii) each of the Company's directors, (iii) each of the Company's
executive officers named under "Executive Compensation -- Summary Compensation
Table," and (iv) all directors and executive officers of the Company as a group.
Ownership information is based upon information furnished by the respective
individuals or entities, as the case may be.
Shares Percentage
Beneficially Beneficially
Owned(1) Owned(1)
Pharmacia & Upjohn, Inc.................... 1,527,666 5.8%
The Pharmacia & Upjohn Centre
67 Alma Road
Windsor, Berkshire
SL4 3HD, United Kingdom
Pfizer Inc................................. 1,420,000 5.4%
235 East 42nd Street
New York, NY 10017
Jeffrey J. Collinson(2).................... 409,712 1.5%
Roy A. Whitfield(3)........................ 670,560 2.5%
Randal W. Scott(4)......................... 401,400 1.5%
Denise M. Gilbert(5)....................... 245,000 *
Frederick B. Craves(6)..................... 89,600 *
Jon S. Saxe(7)............................. 74,000 *
Barry M. Bloom(8).......................... 43,500 *
All directors and executive
officers as a group (7 persons) (9)...... 1,933,772 7.1%
- ------------------------------------
* Less than 1%.
(1) To the Company's knowledge, the persons named in the table have sole
voting and investment power with respect to all shares of Existing
Common Stock shown as beneficially owned by them, subject to community
property laws where applicable and the information contained in the
notes to this table.
(2) Includes 360,000 shares held by Schroders Incorporated, and 400 shares
held by Collinson Howe Venture Partners, Inc. Mr. Collinson, a director
of the Company, shares voting and investment power with respect to such
shares. Mr. Collinson disclaims beneficial ownership of shares held by
Schroders Incorporated, except to the extent of his proportionate
interest therein. Mr. Collinson is the majority stockholder of Collinson
Howe Venture Partners, Inc. and may be deemed to be the beneficial owner
of the shares held by that entity. Also includes 49,312 shares held by
Indian Chase, Inc., over which Mr. Collinson has voting and
97
<PAGE>
investment power. Mr. Collinson disclaims beneficial ownership of
shares held by Indian Chase, Inc. except to the extent of his
proportionate interest therein.
(3) Includes 167,400 shares subject to options exercisable within 60 days of
March 1, 1998.
(4) Includes 174,568 shares subject to options exercisable within 60 days of
March 1, 1998.
(5) Includes 245,000 shares subject to options exercisable within 60 days of
March 1, 1998.
(6) Includes 4,000 shares held by Burrill & Craves, a general partnership.
Dr. Craves is a general partner of such partnership and may be deemed to
be the beneficial owner of the shares held by the partnership. Also
includes 4,200 shares held by a trust for which Dr. Craves is a trustee,
7,400 shares held by Dr. Craves' spouse, and 74,000 shares subject to
options exercisable within 60 days of March 1, 1998.
(7) Includes 74,000 shares subject to options exercisable within 60 days of
March 1, 1998.
(8) Includes 43,500 shares subject to options exercisable within 60 days of
March 1, 1998.
(9) Includes shares included pursuant to notes (2), (3), (4), (5), (6), (7)
and (8) above.
98
<PAGE>
INDEPENDENT AUDITORS
The consolidated financial statements of the Company and the combined
financial statements of Incyte General and combined financial statements of
Incyte Genetics as of December 31, 1997 and December 31, 1996, and for each of
the three years in the period ended December 31, 1997, included in this Proxy
Statement have been audited by Ernst & Young LLP, independent auditors, as set
forth in their reports thereon included elsewhere herein.
The consolidated financial statements of Hexagen plc as of December 31,
1997 and 1996, and for the year ended December 31, 1997, and the period ended
December 31, 1996 included in this Proxy Statement, have been audited by Coopers
& Lybrand, independent auditors, as set forth in their report thereon included
elsewhere herein.
Representatives of Ernst & Young LLP will be present at the Special
Meeting. Such representatives will have the opportunity to make a statement if
they so desire and will be available to respond to appropriate questions.
99
<PAGE>
STOCKHOLDER PROPOSALS FOR THE 1999 ANNUAL MEETING
To be considered for inclusion in the Company's proxy statement and form
of proxy for its 1999 Annual Meeting of Stockholders, a stockholder proposal
must be received at the principal executive offices of the Company not later
than January 1, 1999.
A stockholder proposal not included in the Company's proxy statement for
the 1999 Annual Meeting will be ineligible for presentation at the meeting
unless the stockholder gives timely notice of the proposal in writing to the
Secretary of the Company at the principal executive offices of the Company and
otherwise complies with the provisions of the Company's Bylaws. For a
stockholder's notice to be timely, the Company's Bylaws provide that the Company
must have received the notice not less than 60 days nor more than 90 days prior
to the scheduled date of such meeting. However, if notice or prior public
disclosure of the date of the annual meeting is given or made to stockholders
less than 70 days prior to the meeting date, the Company must receive the
stockholder's notice by the earlier of (i) the close of business on the 10th day
after the earlier of the day the Company mailed notice of the annual meeting
date or provided such public disclosure of the meeting date and (ii) two days
prior to the scheduled date of the annual meeting.
100
<PAGE>
ANNEX A: AMENDMENT AND RESTATEMENT
OF CERTIFICATE OF INCORPORATION
<PAGE>
RESTATED CERTIFICATE OF INCORPORATION
OF
INCYTE PHARMACEUTICALS, INC.
Incyte Pharmaceuticals, Inc., a corporation organized and
existing under the laws of the State of Delaware (the "Corporation"), hereby
certifies as follows:
FIRST: The name of the Corporation is Incyte Pharmaceuticals,
Inc.
SECOND: The original Certificate of Incorporation of the
Corporation was filed with the Secretary of State of the State of Delaware on
April 8, 1991 and the original name of the Corporation was INCYTE
Pharmaceuticals, Inc; the Original Certificate of Incorporation of the
Corporation, pursuant to Section 242 and 245 of the General Corporation of the
State of Delaware, was restated and amended on November 5, 1993.
THIRD: Pursuant to Sections 242 and 245 of the General
Corporation Law of the State of Delaware, this Restated Certificate of
Incorporation restates, integrates and further amends the provisions of the
Restated Certificate of Incorporation of the Corporation.
FOURTH: The text of the Restated Certificate of Incorporation as
heretofore amended or supplemented is hereby restated and amended to read in its
entirety as follows:
ARTICLE I
The name of the Corporation is Incyte Pharmaceuticals, Inc.
ARTICLE II
The address of its registered office in the State of Delaware is
Corporation Trust Center, 1209 Orange Street, in the City of Wilmington, County
of New Castle, Delaware 19801. The name of its registered agent at such address
is The Corporation Trust Company.
ARTICLE III
The nature of the business or purposes to be conducted or
promoted is to engage in any lawful act or activity for which corporations may
be organized under the General Corporation Law of Delaware.
ARTICLE IV
A. Authorized Capital Stock. The total number of shares of all classes
of capital stock which the Corporation shall have authority to issue is eighty
million (80,000,000), of which seventy-five million (75,000,000) shares of the
par value of one-tenth of one cent ($.001) each shall be Common Stock (the
"Common Stock") and five million (5,000,000) shares of the par value of
one-tenth of one cent ($.001) each shall be Preferred Stock (the "Preferred
Stock"). The number of authorized shares of Common Stock or Preferred Stock may
be increased or decreased (but not below the number of shares thereof then
outstanding) by the affirmative vote of the holders of a majority of the then
<PAGE>
outstanding shares of Common Stock, without a vote of the holders of the
Preferred Stock, or of any series thereof, unless a vote of any such Preferred
Stock holders is required pursuant to the provisions established by the Board of
Directors of this Corporation (the "Board of Directors") in the resolution or
resolutions providing for the issue of such Preferred Stock, and if such holders
of such Preferred Stock are so entitled to vote thereon, then, except as may
otherwise be set forth in this Restated Certificate of Incorporation, the only
stockholder approval required shall be the affirmative vote of a majority of the
combined voting power of the Common Stock and the Preferred Stock so entitled to
vote.
Upon the effectiveness of this Amendment and restatement of the Restated
Certificate of Incorporation, and without any further action on the part of the
Corporation or its stockholders, each share of the Corporation's Common Stock
then issued and outstanding shall automatically be redesignated as one fully
paid and nonassessable share of "Incyte Pharmaceuticals, Inc. - Incyte General
Common Stock", having a par value of one-tenth of one cent ($.001) per share.
Reference to the Certificate or this Certificate of Incorporation shall refer to
the Restated Certificate of Incorporation as the same may be amended from time
to time. Certain capitalized terms used in Article IV shall have the meanings
set forth in Section D.7 of Article IV.
B. Preferred Stock. The Preferred Stock may be issued from time to time
in one or more series. The Board of Directors is expressly authorized to provide
for the issue, in one or more series, of all or any of the remaining shares of
Preferred Stock and, in the resolution or resolutions providing for such issue,
to establish for each such series the number of its shares, the voting powers,
full or limited, of the shares of such series, or that such shares shall have no
voting powers, and the designations, preferences and relative, participating,
optional or other special rights of the shares of such series, and the
qualifications, limitations or restrictions thereof. The Board of Directors is
also expressly authorized (unless forbidden in the resolution or resolutions
providing for such issue) to increase or decrease (but not below the number of
shares of the series then outstanding) the number of shares of any series
subsequent to the issuance of shares of that series. In case the number of
shares of any such series shall be so decreased, the shares constituting such
decrease shall resume the status that they had prior to the adoption of the
resolution originally fixing the number of shares of such series.
C. Common Stock. The Common Stock may be issued from time to time in one
or more series. The Board of Directors is expressly authorized to provide for
the issue, in one or more series, of all or any of the remaining shares of
Common and, in the resolution or resolutions providing for such issue, to
establish for each such series the number of its shares, the voting powers, full
or limited, of the shares of such series, or that such shares shall have no
voting powers, and the designations, preferences and relative, participating,
optional or other special rights of the shares of such series, and the
qualifications, limitations or restrictions thereof. The Board of Directors is
also expressly authorized (unless forbidden in the resolution or resolutions
providing for such issue) to increase or decrease (but not below the number of
shares of the series then outstanding) the number of shares of any series
subsequent to the issuance of shares of that series. In case the number of
shares of any such series shall be so decreased, the shares constituting such
decrease shall resume the status that they had prior to the adoption of the
resolution originally fixing the number of shares of such series.
D. Incyte General Stock and Incyte Genetics Stock. The
designations and the voting powers and relative, participating, optional and
other special rights and qualifications, limitations and restrictions of the
Incyte General Stock and the Incyte Genetics Stock (as defined below) are as set
forth below:
1. Designation. One series of Common Stock is hereby designated
as "Incyte Pharmaceuticals, Inc. - Incyte General Common Stock", having
a par value of one-tenth of one cent ($.001) per share (the "Incyte
General Stock") consisting of _______ shares and a second series of
Common Stock is hereby designated as "Incyte Pharmaceuticals, Inc. -
Incyte Genetics Common Stock", having a par value of one-tenth of one
cent ($.001) per share (the "Incyte Genetics Stock") consisting of
_______ shares. The Board of Directors is expressly authorized to
increase or decrease (but not below the number of shares of the series
then outstanding) the number of shares of Incyte General Stock or Incyte
Genetics Stock subsequent to the issuance
<PAGE>
of shares of each such series. In case the number of shares of either
such series shall be so decreased, the shares constituting such decrease
shall resume the status of undesignated shares of Common Stock.
2. Dividend Rights. Subject to the express terms of any
outstanding series of Preferred Stock, dividends may be declared and
paid on the Incyte General Stock and the Incyte Genetics Stock, in such
amounts and at such times as the Board may determine, only out of the
lesser of (i) assets of the Corporation legally available therefor under
Delaware law and (ii) the Available Dividend Amount with respect to such
series of Common Stock. Subject to such limitations, the Board may, in
its sole discretion, declare and pay dividends exclusively on any series
of Common Stock, in equal or unequal amounts, notwithstanding the
amounts available for the payment of dividends on each series, the
respective voting and liquidation rights of each series, the amounts of
prior dividends declared on each series or any other factor.
3. Voting.
(a) Except as otherwise provided by law and as provided in
paragraph 4 below, holders of shares of each series of Common
Stock will vote together as a single class on all matters as to
which such holders generally are entitled to vote (including any
amendment to the Certificate of Incorporation that would alter or
change the powers, preferences or special rights of the shares of
such series so as to affect them adversely), and no separate vote
or consent of the holders of shares of Incyte General Stock or
Incyte General Stock will be required for the approval of any
such matter. On all such matters, each share of Incyte General
Stock will have one vote. The number of votes that each share of
Incyte Genetics Stock will be entitled to will be determined on
the first record date relating to a vote on any matter on which
the holders of the Incyte Genetics Stock are entitled to vote
after the initial issuance of Incyte Genetics Stock. On the fifth
(5th) Trading Day prior to such record date, the number of votes
to which each share of Incyte Genetics Stock is entitled will be
determined so as to equal the ratio (rounded to the nearest five
decimal places) of the average Market Value of one share of
Incyte Genetics Stock to the average Market Value of one share of
Incyte General Stock during the 20 consecutive Trading Days
beginning on the 25th Trading Day prior to such Trading Day. On
the fifth (5th) Trading Day prior to any applicable record date
thereafter, the number of votes to which each share of Incyte
Genetics Stock is entitled will be adjusted to equal the ratio
(rounded to the nearest five decimal places) of the average
Market Value of one share of Incyte Genetics Stock to the average
Market Value of one share of Incyte General Stock during the 20
consecutive Trading Days beginning on the 25th Trading Day prior
to such Trading Day. If no shares of Incyte General Stock are
outstanding on any such date, then all other series of Common
Stock outstanding on such date will have a number of votes such
that each share of the series of common stock that has the
highest Market Value per share on such date (the "Base Series")
will have one vote, and each share of each other series of
outstanding Common Stock will have the number of votes determined
according to the immediately preceding sentence, treating, for
such purpose, the Base Series as the Incyte General Stock in such
sentence. If shares of only one series of Common Stock are
outstanding, or if shares of any series of Common Stock are
entitled to vote separately as a class as to any matter, each
share of that series would have one vote as to such matter.
(b) In the event the outstanding shares of either the
Incyte General Stock or the Incyte Genetics Stock are subdivided
(by stock split, reclassification or otherwise) or combined (by
reverse stock split, reclassification or otherwise), or in the
event of the issuance of shares of either series as a dividend or
a distribution to holders of shares of such series, the voting
rights of the Incyte Genetics Stock will be appropriately
adjusted so as to avoid dilution in the aggregate voting rights
of either series.
4. Special Voting Rights.
(a) Key Genetics Programs.
<PAGE>
So long as shares of Incyte Genetics Stock are
outstanding, the Corporation shall not, without the affirmative
vote or consent of the holders of a majority of all Incyte
Genetics Stock outstanding at the time, voting separately as a
series, in person or by proxy, either in writing or at a meeting,
transfer any Key Genetics Program out of Incyte Genetics into
Incyte General.
(b) Material Asset Transfers.
So long as the shares of a series of Common Stock related
to a Division are outstanding, the Corporation shall not, without
the affirmative vote or consent of the holders of a majority of
all Common Stock of such series outstanding at the time, voting
separately as a series, in person or by proxy, either in writing
or at a meeting, transfer assets between such Division and
another Division if such transfer would constitute a Material
Asset Transfer for such Division.
5. Conversion or Redemption of the Incyte Genetics Stock. Shares
of Incyte Genetics Stock are subject to conversion or redemption
upon the terms described below.
(a) Mandatory Dividend on or Redemption or Conversion
of Incyte Genetics Stock.
(1) In the event of a Disposition, in one
transaction or a series of related transactions, by the
Corporation of all or substantially all of the properties
and assets of Incyte Genetics to one or more persons or
entities (other than (w) the Disposition by the
Corporation of all or substantially all of the
Corporation's properties and assets in one transaction or
a series of related transactions in connection with the
liquidation, dissolution or winding-up of the Corporation
and the distribution of assets to stockholders, (x) on a
pro rata basis to the holders of all outstanding shares of
the Incyte Genetics Stock, (y) to any person or entity
controlled by the Corporation (as determined by the Board)
or (z) in connection with a Related Business Transaction),
the Corporation shall, on or prior to the 85th Trading Day
for the Incyte Genetics Stock following the consummation
of such Disposition, either:
(A) provided that there are assets of the
Corporation legally available therefor:
(i) subject to compliance with
paragraph 2 of this Section D, declare and
pay a dividend or other distribution in cash
and/or securities (other than Common Stock)
or other property to the holders of
outstanding shares of the Incyte Genetics
Stock having a Fair Value as of the date of
such consummation equal in the aggregate to
the Fair Value of the Net Proceeds of such
Disposition as of the date of such
consummation; or
(ii) (x) subject to the last
sentence of this paragraph 5(a)(1),
if such Disposition involves all
(not merely substantially all) of
the properties and assets of Incyte
Genetics, redeem, as of the
Redemption Date determined as
provided by paragraph 5(e)(3), all
outstanding shares of (or if Incyte
General Stock is not Publicly Traded
at such time and shares of another
class or series of Common Stock
(other than Incyte Genetics Stock)
are then Publicly Traded, of such
class or series as has the largest
market capitalization as of the
close of business on the Trading Day
immediately preceding the date of
the notice of such conversion mailed
to holders) Incyte Genetics Stock in
exchange
<PAGE>
for cash and/or securities (other
than Common Stock) or other property
having a Fair Value as of the date
of such consummation in the
aggregate equal to the Fair Value of
the Net Proceeds of such Disposition
as of the date of such consummation;
or
(y) subject to the last
sentence of this paragraph 5(a)(1),
if such Disposition involves
substantially all (but not all) of
the properties and assets of Incyte
Genetics, redeem, as of the
Redemption Date determined as
provided in paragraph 5(e)(4), such
number of whole shares of the Incyte
Genetics Stock (but in any event not
more than the number of shares of
Incyte Genetics Stock outstanding)
as have in the aggregate an average
Market Value, during the 20
consecutive Trading Days for the
Incyte Genetics Stock beginning on
the 26th Trading Day immediately
succeeding the consummation of such
Disposition closest to the Fair
Value of the Net Proceeds of such
Disposition as of the date of such
consummation, in consideration for
cash and/or securities (other than
Common Stock) or other property
having a Fair Value in the aggregate
equal to such Fair Value of the Net
Proceeds of such Disposition as of
the date of such consummation;
(B) declare that each outstanding share of
the Incyte Genetics Stock shall be converted, as of
the Conversion Date determined as provided by
paragraph 5(e)(5), into a number of fully paid and
nonassessable shares of Incyte General Stock (or if
Incyte General Stock is not Publicly Traded at such
time and shares of another class or series of
Common Stock (other than Incyte Genetics Stock) are
then Publicly Traded, of such class or series as
has the largest market capitalization as of the
close of business on the Trading Day immediately
preceding the date of the notice of such conversion
mailed to holders), equal to 110% of the ratio
(rounded to the nearest five decimal places) of the
average Market Value of one share of Incyte
Genetics Stock to the average Market Value of one
share of Incyte General Stock, during the 20
consecutive Trading Days beginning on the 26th
Trading Day following the consummation of such
Disposition.
Notwithstanding the foregoing provisions of this paragraph 5(a)(1), the
Corporation may only redeem shares of Incyte Genetics Stock as provided by
paragraphs 5(a)(1)(ii)(x) or (y) only if the Fair Value of the Net Proceeds to
be paid in redemption of such class is less than or equal to the Incyte Genetics
Available Dividend Amount.
(2) For purposes of this paragraph 5(b):
(A) As of any date, "substantially all of
the properties and assets of Incyte Genetics" shall
mean a portion of such properties and assets that
represents at least 80% of the then Fair Value of
the properties and assets attributed to Incyte
Genetics as of such date;
(B) In the case of a disposition of the
properties and assets attributed to Incyte Genetics
in a series of related transactions, such
Disposition shall not be deemed to have been
consummated until the consummation of the last of
such transactions; and
<PAGE>
(C) The Corporation may elect to pay the
dividend or other distribution or redemption price
referred to in paragraph 5(a)(1) above either in
the same form as the proceeds of the Disposition
were received or in any other combination of cash,
securities (other than Common Stock) or other
property that the Board determines will have an
aggregate Fair Value of not less than the amount of
the Fair Value of the Net Proceeds of such
Disposition.
(3) After the payment of the distribution or the
redemption price with respect to the Incyte Genetics Stock
as provided for by paragraph 5(a)(1)(A), the Board may
declare that each shares of Incyte Genetics Stock
remaining outstanding shall be converted, but only as of a
Conversion Date (determined as provided by paragraph
5(e)(3)) prior to the first anniversary of the payment of
such distribution or redemption price, into a number of
fully paid and nonassessable shares of Incyte General
Stock equal to 110% of the average Market Value of one
share of Incyte Genetics Stock to one share of Incyte
General Stock as of the fifth Trading Day prior to the
date of the notice of such conversion required by
paragraph 5(e)(5).
(b) Conversion of Incyte Genetics Stock at Option of the
Corporation. The Board may, at any time on or after the third
anniversary of the initial issuance of Incyte Genetics Stock,
declare that each outstanding share of Incyte Genetics Stock
shall be converted, as of a Conversion Date determined as
provided by paragraph 5(e)(5), into a number of fully paid and
nonassessable shares of Incyte General Stock (or if Incyte
General Stock is not Publicly Traded at such time and shares of
another class or series of Common Stock (other than Incyte
Genetics Stock) are Publicly Traded, of such class or series as
has the largest market capitalization as of the close of business
on the Trading Day immediately preceding the date of the notice
of such Conversion mailed to holders), equal to 120% of the ratio
(rounded to the nearest five decimal places) of the average
Market Value of one share of Incyte Genetics Stock to the average
Market Value of one share of Incyte General Stock, during the 20
consecutive Trading Days beginning on the 26th Trading Day prior
to the notice of such conversion required by paragraph 5(e)(5).
(c) Optional Redemption in Exchange for Stock of
Subsidiary. At any time at which all of the assets and
liabilities of Incyte Genetics (and no other assets or
liabilities of the Corporation or any subsidiary thereof) are
held directly or indirectly by one or more wholly owned
subsidiaries of the Corporation (each an "Incyte Genetics
Subsidiary"), the Board may, provided that there are assets of
the Corporation legally available therefor, redeem all of the
outstanding shares of Incyte Genetics Stock, on a Redemption Date
of which notice is delivered in accordance with paragraph
5(e)(6), in exchange for all of the outstanding shares of the
common stock of each Incyte Genetics Subsidiary as will be
outstanding immediately following such exchange of shares, such
Incyte Genetics Subsidiary shares to be delivered to the holders
of the Incyte Genetics Stock on the Redemption Date either
directly or indirectly through another Incyte Genetics Subsidiary
(as a wholly-owned subsidiary thereof) and to be divided among
the holders of Incyte Genetics Stock pro rata in accordance with
the number of Incyte Genetics Stock held by each on such
Redemption Date, each of which shares of common stock of such
Incyte Genetics Subsidiary shall be, upon such delivery, fully
paid and nonassessable.
(d) Certain Provisions Respecting Convertible Securities.
The provisions of this paragraph 5(d) shall not apply to the
extent that adjustments in respect of a conversion or redemption
of all outstanding shares of Incyte Genetics Stock are otherwise
made pursuant to the provisions of such Convertible Securities.
After any Conversion Date or Redemption Date on which all
outstanding shares of Incyte Genetics Stock were converted or
redeemed, any share of Incyte Genetics Stock that is issued on
conversion, exercise or exchange of any Convertible Securities
shall, immediately upon issuance pursuant to such conversion,
exercise or exchange and without any notice
<PAGE>
or any other action on the part of the Corporation or its Board
of Directors or the holder of such share of Incyte Genetics
Stock, be converted into (in case all such outstanding shares
were converted) or redeemed in exchange for (in case all such
outstanding shares were redeemed) the kind and amount of shares
of capital stock, cash and/or other securities or property that a
holder of such Convertible Securities would have been entitled to
receive pursuant to the terms of such Convertible Securities had
such terms provided that the conversion, exercise or exchange
privilege in effect immediately prior to any such conversion or
redemption of all outstanding shares of Incyte Genetics Stock
would be adjusted so that the holder of any such Convertible
Securities thereafter surrendered for conversion, exercise or
exchange would be entitled to receive the kind and amount of
shares of capital stock, cash and/or other securities or property
such holder would have received as a result of such action had
such Convertible Securities been converted, exercised or
exchanged immediately prior thereto.
(e) Notice and Other Provisions.
(1) Not later than the 10th Trading Day following
the consummation of a Disposition referred to in paragraph
5(a)(1), the Corporation will announce publicly by press
release (i) the estimated Net Proceeds of such
Disposition, (ii) the number of shares outstanding of the
Incyte Genetics Stock and (iii) the number of shares of
Incyte Genetics Stock into or for which Convertible
Securities are then convertible, exchangeable or
exercisable and the conversion, exchange or exercise price
thereof. Not earlier than the 26th Trading Day and not
later than the 30th Trading Day following the consummation
of such Disposition, the Corporation will announce
publicly by press release which of the actions specified
in paragraph 5(a)(1) it has irrevocably determined to take
in respect of such Disposition.
(2) If the Corporation determines to pay a dividend
or other distribution pursuant to paragraph 5(a)(1)(A)(i),
the Corporation will be required, not later than the 30th
Trading Day following the consummation of such
Disposition, to cause to be given to each holder of shares
of Incyte Genetics Stock and to each holder of Convertible
Securities convertible into or exchangeable or exercisable
for shares of Incyte Genetics Stock (unless alternate
provision for notice to the holders of such Convertible
Securities is made pursuant to the terms of such
Convertible Securities), a notice setting forth (i) the
record date for determining holders entitled to receive
such dividend or other distribution, which shall be not
earlier than the 40th Trading Day and not later than the
50th Trading Day following the consummation of such
Disposition, (ii) the anticipated payment date of such
dividend or other distribution (which will not be more
than 85 Trading Days following the consummation of such
Disposition), (iii) the type of property to be paid as
such dividend or other distribution in respect of
outstanding shares of Incyte Genetics Stock, (iv) the Net
Proceeds of such Disposition, (v) the number of
outstanding shares of Incyte Genetics Stock and the number
of shares of Incyte Genetics Stock into or for which
outstanding Convertible Securities are then convertible,
exchangeable or exercisable and the conversion, exchange
or exercise price thereof and (vi) in the case of notice
to be given to holders of Convertible Securities, a
statement to the effect that a holder of such Convertible
Securities will be entitled to receive such dividend or
other distribution only if such holder properly converts,
exchanges or exercises such Convertible Securities on or
prior to the record date referred to in clause (i) of this
sentence. Such notice will be sent by first-class mail,
postage prepaid, to each such holder at such holder's
address as the same appears on the transfer books of the
Corporation.
(3) If the Corporation determines to undertake a
redemption pursuant to paragraph 5(a)(1)(A)(ii)(x), the
Corporation will be required, not earlier than the 35th
<PAGE>
Trading Day and not later than the 45th Trading Day prior
to the redemption date, to cause to be given to each
holder of shares of Incyte Genetics Stock, and to each
holder of Convertible Securities convertible into or
exchangeable or exercisable for shares of Incyte Genetics
Stock (unless alternate provision for such notice to the
holders of such Convertible Securities is made pursuant to
the terms of such Convertible Securities) a notice setting
forth (i) a statement that all shares of Incyte Genetics
Stock outstanding on the redemption date will be redeemed,
(ii) the redemption date (which will not be more than 85
Trading Days following the consummation of such
Disposition), (iii) the type of property in which the
redemption price for the shares to be redeemed is to be
paid, (iv) the Net Proceeds of such Disposition, (v) the
place or places where certificates for shares of Incyte
Genetics Stock, properly endorsed or assigned for transfer
(unless the Corporation waives such requirement) are to be
surrendered for delivery of cash and/or securities or
other property, (vi) the number of outstanding shares of
Incyte Genetics Stock and the number of shares of Incyte
Genetics Stock into or for which outstanding Convertible
Securities are then convertible, exchangeable or
exercisable and the conversion, exchange or exercise price
thereof, (vii) in the case of notice to be given to
holders of Convertible Securities, a statement to the
effect that a holder of such Convertible Securities will
be entitled to participate in such redemption only if such
holder properly converts, exchanges or exercises such
Convertible Securities on or prior to the redemption date
referred to in clause (ii) of this sentence and a
statement as to what, if anything, such holder will be
entitled to receive pursuant to the terms of such
Convertible Securities or, if applicable, this Section 5
and (viii) a statement to the effect that, except as
otherwise provided below, dividends or other distributions
on such shares of Incyte Genetics Stock shall cease to be
paid as of such redemption date. Such notice will be sent
by first-class mail, postage prepaid to each such holder
at such holder's address as the same appears on the
transfer books of the Corporation.
(4) If the Corporation determines to undertake a
redemption pursuant to paragraph 5(a)(1)(A)(ii)(y), the
Corporation will be required, not later than the 30th
Trading Day following consummation of the Disposition
referred to in such paragraph, to cause to be given to
each holder of shares of Incyte Genetics Stock and to each
holder of Convertible Securities that are convertible into
or exchangeable or exercisable for shares of Incyte
Genetics Stock (unless alternate provision for such notice
to the holders of such Convertible Securities is made
pursuant to the terms of such Convertible Securities), a
notice setting forth (i) a date, not earlier than the 40th
Trading Day and not later than the 50th Trading Day
following the consummation of such Disposition in respect
of which such redemption is to be made, on which shares of
Incyte Genetics Stock will be selected for redemption,
(ii) the anticipated redemption date, which will not be
more than 85 Trading Days following the consummation of
such Disposition, (iii) the type of property in which the
redemption price for the shares to be redeemed is to be
paid, (iv) the Net Proceeds of such Disposition, (v) the
number of outstanding shares of Incyte Genetics Stock and
the number of shares of Incyte Genetics Stock into or for
which outstanding Convertible Securities are then
convertible, exchangeable or exercisable and the
conversion, exchange or exercise price thereof, (vi) in
the case of notice to be given to holders of Convertible
Securities, a statement to the effect that a holder of
such Convertible Securities will be entitled to
participate in such selection for redemption only if such
holder properly converts, exchanges or exercises such
Convertible Securities on or prior to the date referred to
in clause (i) of this sentence and a statement as to what,
if anything, such holder will be entitled to receive
pursuant to the terms of such Convertible Securities or,
if applicable, this Section 5 and (vii) a statement that
the Corporation will not be required to register a
transfer of any shares of Incyte Genetics Stock for a
period of 15 Trading Days next preceding the date referred
to in clause (i) of this sentence. Promptly, but not
earlier than 40 Trading Days nor more than 50 Trading Days
following the consummation of such Disposition, the
Corporation is required to cause to be
<PAGE>
given to each holder of shares of Incyte Genetics Stock to
be so redeemed a notice setting forth (1) the number of
shares of Incyte Genetics Stock held by such holder to be
redeemed, (2) a statement that such shares of Incyte
Genetics Stock will be redeemed, (3) the redemption date,
(4) the kind and per share amount of cash and/or
securities or other property to be received by such holder
with respect to each share of Incyte Genetics Stock to be
redeemed, including details as to the calculation thereof,
(5) the place or places where certificates for shares of
Incyte Genetics Stock, properly endorsed or assigned for
transfer (unless the Corporation waives such requirement)
are to be surrendered for delivery of such cash and/or
securities or other property, (6) if applicable, a
statement to the effect that the shares being redeemed may
no longer be transferred on the transfer books of the
Corporation after the redemption date and (7) a statement
to the effect that, except as otherwise provided below,
dividends or other distributions on such shares of Incyte
Genetics Stock will cease to be paid as of such redemption
date. Such notices will be sent by first-class mail,
postage prepaid to each such holder, at such holder's
address as the same appears on the transfer books of the
Corporation.
(5) In the event of any conversion pursuant to
paragraph 5(a)(1)(B), 5(a)(3) or 5(b), the Corporation
will cause to be given, not earlier than the 35th Trading
Day and not later than the 45th Trading Day prior to the
date fixed for such conversion, to each holder of shares
of the class of Incyte Genetics Stock to be so converted
and to each holder of Convertible Securities that are
convertible into or exchangeable or exercisable for shares
of Incyte Genetics Stock (unless alternate provision for
such notice to the holders of such Convertible Securities
is made pursuant to the terms of such Convertible
Securities), a notice setting forth (i) a statement that
all outstanding shares of Incyte Genetics Stock will be
converted, (ii) the conversion date (which, in the case of
a conversion after a Disposition, will not be more than 85
Trading Days following the consummation of such
Disposition), (iii) the per share number of shares of
Incyte General Stock to be received with respect to each
share of Incyte Genetics Stock, including details as to
the calculation thereof, (iv) the place or places where
certificates for shares of Incyte Genetics Stock, properly
endorsed or assigned for transfer (unless the Corporation
waives such requirement) are to be surrendered for
delivery of certificates for shares of Incyte Genetics
Stock, (v) the number of outstanding shares of Incyte
Genetics Stock and the number of shares of Incyte Genetics
Stock into or for which outstanding Convertible Securities
are then convertible, exchangeable or exercisable and the
conversion, exchange or exercise price thereof, (vi) a
statement to the effect that, except as otherwise provided
below, dividends or other distributions on such shares of
Incyte Genetics Stock will cease to be paid as of such
conversion date and (vii) in the case of notice to be
given to holders of Convertible Securities, a statement to
the effect that a holder of such Convertible Securities
will be entitled to receive shares of Incyte Genetics
Stock upon such conversion only if such holder properly
converts, exchanges or exercises such Convertible
Securities on or prior to the conversion date referred to
in clause (ii) of this sentence and a statement as to
what, if anything, such holder will be entitled to receive
pursuant to the terms of such Convertible Securities or,
if applicable, this Section 5. Such notice will be sent by
first-class mail, postage prepaid, to such holder at such
holder's address as the same appears on the transfer books
of the Corporation.
(6) If the Corporation determines to redeem shares
of Incyte Genetics Stock pursuant to paragraph 5(c), the
Corporation will cause to be given to each holder of
shares of Incyte Genetics Stock and to each holder of
Convertible Securities convertible into or exchangeable or
exercisable for shares of Incyte Genetics Stock (unless
alternate provision for such notice to the holders of such
Convertible Securities is made pursuant to the terms of
such Convertible Securities), a notice setting forth (i) a
statement that all shares of Incyte Genetics Stock
outstanding on the redemption date will be redeemed in
exchange for shares
<PAGE>
of common stock of the Incyte Genetics Subsidiaries, (ii)
the redemption date, (iii) the place or places where
certificates for shares of Incyte Genetics Stock properly
endorsed or assigned for transfer (unless the Corporation
waives such requirement) are to be surrendered for
delivery of certificates for shares of common stock of the
Incyte Genetics Subsidiaries, (iv) a statement to the
effect that, except as otherwise provided below, dividends
or other distributions on such shares of Incyte Genetics
Stock will cease to be paid as of such redemption date,
(v) the outstanding number of shares of Incyte Genetics
Stock and the number of shares of Incyte Genetics Stock
into or for which outstanding Convertible Securities are
then convertible, exchangeable or exercisable and the
conversion, exchange or exercise price thereof and (vi) in
the case of notice to be given to holders of Convertible
Securities, a statement to the effect that a holder of
such Convertible Securities will be entitled to receive
shares of common stock of the Incyte Genetics Subsidiaries
only if such holder properly converts, exchanges or
exercises such Convertible Securities on or prior to the
date referred to in clause (ii) of this sentence and a
statement as to what, if anything, such holder will be
entitled to receive pursuant to the terms of such
Convertible Securities or, if applicable, this Section 5
if such holder thereafter converts, exchanges or exercises
such Convertible Securities. Such notice will be sent by
first-class mail, postage prepaid, not less than 30
Trading Days nor more than 45 Trading Days prior to the
redemption date, to each such holder at such holder's
address as the same appears on the transfer books of the
Corporation.
(7) If less than all of the outstanding shares of
Incyte Genetics Stock are to be redeemed pursuant to
paragraph 5(a)(1)(A)(ii)(y), the shares to be redeemed by
the Corporation shall be selected from among the holders
of shares of Incyte Genetics Stock outstanding at the
close of business on the record date for such redemption
on a pro rata basis among all such holders or by lot or by
such other method as may be determined by the Board of
Directors of the Corporation to be equitable.
(8) The Corporation will not be required to issue
or deliver fractional shares of any class or series of
capital stock or any fractional securities to any holder
of Incyte Genetics Stock upon any conversion, redemption,
dividend or other distribution described above. If more
than one share of Incyte Genetics Stock is held at the
same time by the same holder, the Corporation may
aggregate the number of shares of any class or series of
capital stock that is issuable or the amount of securities
or property that is distributable to such holder upon any
such conversion, redemption, dividend or other
distribution (including any fractions of shares or
securities). If the number of shares of any class or
series of capital stock or the amount of securities
remaining to be issued or distributed to any holder of
Incyte Genetics Stock is a fraction, the Corporation will,
if such fraction is not issued or distributed to such
holder, pay a cash adjustment in respect of such fraction
in an amount equal to the Fair Value of such fraction on
the fifth Trading Day prior to the date such payment is to
be made (without interest).
(9) No adjustments in respect of dividends or other
distributions will be made upon the conversion or
redemption of any shares of Incyte Genetics Stock;
provided, however, that if the Conversion Date or the
Redemption Date, as the case may be, with respect to the
shares of Incyte Genetics Stock shall be subsequent to the
record date for determining holders of Incyte Genetics
Stock entitled to any dividend or other distribution
thereon, such dividend or other distribution will be
payable to the holders of such shares at the close of
business on such record date notwithstanding such
conversion or redemption, in each case without interest.
<PAGE>
(10) Before any holder of Incyte Genetics Stock
will be entitled to receive certificates representing
shares of any capital stock, cash and/or other securities
or property to be distributed to such holder with respect
to any conversion or redemption of shares of Incyte
Genetics Stock pursuant to this Section 5, such holder is
required to surrender at such place as the Corporation
specified certificates for shares of Incyte Genetics
Stock, properly endorsed or assigned for transfer (unless
the Corporation waives such requirement). As soon as
practicable after the Corporation's receipt of
certificates for such shares of Incyte Genetics Stock, the
Corporation will deliver to the person for whose account
such shares were so surrendered, or to the nominee or
nominees of such person, certificates representing the
number of whole shares of the kind of capital stock, cash
and/or other securities or property to which such person
was entitled, together with any fractional payment
referred to above, in each case without interest. If less
than all of the shares of Incyte Genetics Stock
represented by any one certificate are to be redeemed, the
Corporation will issue and deliver a new certificate for
the shares of Incyte Genetics Stock not redeemed.
(11) From and after any applicable Conversion Date
or Redemption Date, as the case may be, all rights of a
holder of shares of Incyte Genetics Stock that were
converted or redeemed will cease, except for the right,
upon surrender of the certificates representing such
shares of Incyte Genetics Stock pursuant to paragraph
5(e)(10), to receive the cash and/or the certificates
representing shares of the kind and amount of capital
stock and/or other securities or property for which such
shares were converted or redeemed, together with any
fractional payment contemplated by paragraph 5(e)(8) or
rights to dividends or other distributions as provided in
paragraph 5(e)(9), in each case without interest. No
holder of a certificate that immediately prior to the
applicable Conversion Date or Redemption Date represented
shares of Incyte Genetics Stock will be entitled to
receive any dividend or other distribution or interest
payment with respect to shares of any kind of capital
stock into or in exchange for which shares of Incyte
Genetics Stock were converted or redeemed until surrender
of such holder's certificate as required by this Section 5
in exchange for a certificate or certificates representing
shares of such kind of capital stock. Upon such surrender,
there will be paid to the holder the amount of any
dividends or other distributions (without interest) which
theretofore became payable as of a record date after the
Conversion Date or Redemption Date, but which were not
paid by reason of the foregoing, with respect to the
number of whole shares of the kind of capital stock
represented by the certificate or certificates issued upon
such surrender. From and after a Conversion Date or
Redemption Date, the Corporation will, however, be
entitled to treat the certificates for Incyte Genetics
Stock that have not yet been surrendered for conversion or
redemption as evidencing the ownership of the number of
whole shares of the kind of capital stock for which the
shares of Incyte Genetics Stock represented by such
certificates shall have been converted or redeemed,
notwithstanding the failure to surrender such
certificates.
(12) The Corporation will pay any and all documentary,
stamp or similar issue or transfer taxes that may be
payable in respect of the issue or delivery of any shares
of capital stock and/or other securities on conversion or
redemption of shares of Incyte Genetics Stock pursuant
hereto. The Corporation will not, however, be required to
pay any tax that may be payable in respect of any transfer
involved in the issue or delivery of any shares of capital
stock and/or other securities in a name other than that in
which the shares of Incyte Genetics Stock so converted or
redeemed were registered, and no such issue or delivery
will be made unless and until the person requesting such
issue has paid to the Corporation the amount of any such
tax, or has established to the satisfaction of the
Corporation that such tax had been paid.
<PAGE>
(13) Neither the failure to mail any notice
required by this paragraph 5(e) to any particular holder
of shares of Incyte Genetics Stock or of any Convertible
Securities nor any defect therein will affect the
sufficiency thereof with respect to any other holder of
outstanding shares of Incyte Genetics Stock or of
outstanding Convertible Securities, or the validity of any
such conversion or redemption.
(14) The Board may establish such rules and
requirements to facilitate the effectuation of the
transactions contemplated by this Section 5 as the Board
shall determine to be appropriate.
6. Liquidation, Dissolution or Winding Up. In the event of a
voluntary or involuntary dissolution, liquidation or winding up of the
affairs of the Company, after Incyte has satisfied or made provision for
its debts and obligations and for payment to the holders of shares of
any series of capital stock having preferential rights to receive
distributions of the net assets of Incyte, the holders of Incyte General
Stock and Incyte Genetics Stock will be entitled to receive the net
assets, if any, remaining for distribution to common stockholders on a
per share basis in proportion to the respective per share liquidation
units of such series and will have no direct claim against any
particular assets of Incyte or any of its subsidiaries. Each share of
Incyte General Stock will have such number of liquidation units as is
obtained by multiplying 100 by the number of votes to which one share of
Incyte General Stock would be entitled to if the applicable record date
was the date on which such dissolution, liquidation, or winding-up was
announced. Each share of Incyte Genetics Stock will have such number of
liquidation units as is obtained by multiplying 100 by the number of
votes to which one share of Incyte Genetics Stock would be entitled to
if the applicable record date was the date on which such dissolution,
liquidation, or winding-up was announced. A merger or business
combination involving Incyte or a sale of all or substantially all of
the assets of Incyte will not be treated as a dissolution, liquidation
or winding-up for purposes of the foregoing provisions.
7. Definitions. As used in this paragraph IV.C., the following
terms shall have the following meanings (with terms defined in the
singular having comparable meaning when used in the plural and vice
versa), unless another definition is provided or the context otherwise
requires:
(a) "Available Dividend Amount", with respect to a
particular series of Common Stock, as of any date, means
generally the lesser of
(i) the excess of
(A) an amount equal to the total assets of
the Division less the total liabilities (not
including preferred stock) of the Division as of
such date, over
(B) the aggregate par value of, or any
greater amount determined to be capital in respect
of, all outstanding shares of the series of Common
Stock attributed to such Division, or
(ii) the amount legally available for the payment
of dividends determined in accordance with Delaware law
applied as if such Division were a separate corporation.
(b) "Conversion Date" means the date fixed by the
Board as the effective date for the conversion of shares of
Incyte Genetics Stock into shares of Incyte General Stock as
shall be set forth in the notice to holders of shares of
Incyte Genetics Stock and to holders of any Convertible
Securities that are convertible into or exchangeable or
exercisable for shares of Incyte Genetics Stock subject to
such conversion required pursuant to paragraph 5(e)(5).
<PAGE>
(c) "Convertible Securities" means any securities of the
Corporation, including preferred stock, warrants, options and
other rights (other than Common Stock), that are convertible
into, exchangeable for or evidence the right to purchase any
shares of any series of Common Stock, whether upon conversion,
exercise or exchange, pursuant to anti-dilution provisions of
such securities or otherwise.
(d) "Disposition" means the sale, transfer, assignment or
other disposition (whether by merger, consolidation, sale or
contribution of assets or stock or otherwise) of properties or
assets (including stock, other securities and goodwill).
(e) "Division" means, as of any date, Incyte General or
Incyte Genetics, as the case may be.
(f) "Fair Value" means (i) in the case of equity
securities or debt securities of a class or series that has
previously been Publicly Traded for a period of at least 15
months, the Market Value thereof (if such Market Value, as so
defined, can be determined); (ii) in the case of an equity
security or debt security that has not been Publicly Traded for
at least 15 months or the Market Value of which cannot be
determined, the fair value per share of stock or per other unit
of such security, on a fully distributed basis, as determined in
good faith by the Board; (iii) in the case of cash denominated in
U.S. dollars, the face amount thereof and in the case of cash
denominated in other than U.S. dollars, the face amount thereof
converted into U.S. dollars at the rate published in The Wall
Street Journal on the date for the determination of Fair Value
or, if not so published, at such rate as shall be determined in
good faith by the Board based upon such information as the Board
shall in good faith determine to be appropriate in accordance
with good business practice; and (iv) in the case of property
other than securities or cash, the "Fair Value" thereof shall be
determined in good faith by the Board based upon such appraisals
or valuation reports of such independent experts as the Board
shall in good faith determine to be appropriate in accordance
with good business practice.
(g) "Incyte General" shall mean ___.
(h) "Incyte Genetics" shall mean ___.
(i) "Key Genetics Program" means any of the following:
(A) Human Gene Mapping;
(B) Genomic Sequencing for the purpose of
discovering SNPs;
(C) Human SNP Discovery; and
(D) any additional program, product, technology
or service being developed from time to time
Incyte Genetics which constituted 20% or
more of the research and development budget
of Incyte Genetics in any one of the three
most recently completed fiscal years.
(j) "Market Value" of a share of any class or series of
capital stock of the Corporation on any day means the average of
the high and low reported sales prices of a share of such class
or series on such day (or, if such class or series is then
Publicly Traded and such day is not a Trading Day for such class
or series, then the first Trading Day preceding such day) or, in
case no such reported sale takes place on such Trading Day, the
average of the reported closing bid and asked prices of a share
of such class or series on such Trading Day, in either case as
quoted on The Nasdaq National Market or, if the shares of such
class or series are not quoted on The Nasdaq National
<PAGE>
Market on such Trading Day, on the principal national securities
exchange in the United States on which the shares of such class
or series are listed or admitted to trading or, if not quoted on
The Nasdaq National Market or listed or admitted to trading on
any national securities exchange on such Trading Day, the Fair
Value of a share of such class or series as set forth in clause
(ii) of the definition of Fair Value set forth under
"--Conversion and Redemption"; provided that, for purposes of
determining the Market Value of a share of any class or series of
capital stock for any period, (i) the "Market Value" of a share
of capital stock on any day prior to any "ex- dividend" date or
any similar date occurring during such period for any dividend or
distribution (other than any dividend or distribution
contemplated by clause (ii)(B) of this sentence) paid or to be
paid with respect to such capital stock shall be reduced by the
Fair Value of the per share amount of such dividend or
distribution and (ii) the "Market Value" of any share of capital
stock on any day prior to (A) the effective date of any
subdivision (by stock split or otherwise) or combination (by
reverse stock split or otherwise) of outstanding shares of such
class or series of capital stock occurring during such period or
(B) any "ex-dividend" date or any similar date occurring during
such period for any dividend or distribution with respect to such
capital stock to be made in shares of such class or series of
capital stock or Convertible Securities that are convertible,
exchangeable or exercisable for such class or series of capital
stock shall be appropriately adjusted, as determined by the
Board, to reflect such subdivision, combination, dividend or
distribution.
(k) "Material Asset Transfer" means, for any Division, a
transfer of assets between such Division and another Divison,
with respect to which the Fair Value of the assets being
transferred is equal to or greater than 25% of the Fair Value of
all of the assets of such Division.
(l) "Net Proceeds" of a Disposition of any of the
properties and assets of Incyte Genetics means, as of any date,
an amount, if any, equal to what remains of the gross proceeds of
such Disposition after any payment of, or reasonable provision is
made as determined by the Board for, (a) any taxes payable by the
Corporation (or which would have been payable but for the use of
tax benefits attributable to Incyte General) in respect of such
Disposition or in respect of any resulting dividend or other
distribution or redemption, (b) any transaction costs, including,
without limitation, any legal, investment banking and accounting
fees and expenses and (c) any liabilities (contingent or
otherwise) of or attributed to Incyte Genetics, including,
without limitation, any liabilities for deferred taxes or any
indemnity or guarantee obligations of the Corporation incurred in
connection with the Disposition or otherwise and any liabilities
for future purchase price adjustments.
(m) "Publicly Traded" with respect to any security means
that such security is (i) registered under Section 12 of the
Securities Exchange Act of 1934, as amended (or any successor
provision of law), and (ii) listed for trading on the New York
Stock Exchange or the American Stock Exchange (or any national
securities exchange registered under Section 7 of the Securities
Exchange Act of 1934, as amended (or any successor provision of
law), that is the successor to either such exchange) or quoted on
The Nasdaq National Market (or any successor market system).
(n) "Redemption Date" means the date fixed by the Board as
the effective date for a redemption of shares of Incyte Genetics
Stock, as set forth in a notice to holders thereof required
pursuant to paragraphs 5(e)(3), (4) or (5).
(o) "Related Business Transaction" means any Disposition of
all or substantially all of the properties and assets of Incyte
Genetics in a transaction or series of related transactions that
result in the Corporation receiving in consideration of such
properties and assets primarily equity securities (including,
without limitation, capital stock, debt securities convertible
into or exchangeable for equity securities or interests in a
general or limited partnership or limited liability Corporation,
without regard to the voting power or other management or
governance rights associated therewith) of any entity which (i)
acquires such properties or assets or succeeds (by merger,
formation of a joint
<PAGE>
venture or otherwise) to the business conducted with such
properties or assets or controls such acquiror or successor and
(ii) is primarily engaged or proposes to engage primarily in one
or more businesses similar or complementary to the businesses
conducted by Incyte Genetics prior to such Disposition, as
determined by the Board. The purpose of the Related Business
Transaction exception is to enable the Corporation technically to
"dispose" of properties or assets of Incyte Genetics to other
entities engaged or proposing to engage in businesses similar or
complementary to those of Incyte Genetics without resulting in a
dividend or other distribution on, or a conversion or redemption
of, the Incyte Genetics Stock.
(p) "Substantially All of the Properties and Assets" of
Incyte Genetics means a portion of such properties and assets
that represents at least 80% of the then Fair Value of the
properties and assets of Incyte Genetics.
(q) "Trading Day" means each weekday other than any day on
with the relevant class of capital stock of the Corporation is
not quoted on The Nasdaq National Market or traded on any
national securities exchange.
PROVIDED, that the Corporation shall take no action
which would have the effect of reducing the Genetics Designated
Shares to a number which is less than zero. Within 45 days after
the end of each fiscal quarter of the Corporation, the
Corporation shall prepare and file a statement of such change
with the transfer agent for the Incyte Genetics Stock and with
the Clerk of the Corporation.
ARTICLE V
The Corporation is to have perpetual existence.
ARTICLE VI
In furtherance and not in limitation of the powers conferred by
the laws of the State of Delaware:
A. The Board of Directors is expressly authorized to adopt, amend
or repeal the by-laws of the Corporation; provided, however, that the by-laws
may only be amended in accordance with the provisions thereof.
B. Elections of directors need not be by written ballot unless
the by-laws of the Corporation shall so provide.
C. The books of the Corporation may be kept at such place within
or without the State of Delaware as the by-laws of the Corporation may provide
or as may be designated from time to time by the Board of Directors.
ARTICLE VII
A. A director of the Corporation shall not be personally liable
to the Corporation or its stockholders for monetary damages for breach of
fiduciary duty as a director, except for liability (i) for any breach of the
director's duty of loyalty to the Corporation and its stockholders; (ii) for
acts or omissions not in good faith or which involve intentional misconduct or
knowing violations of law; (iii) under Section 174 of the Delaware General
Corporation Law; or (iv) for any transaction from which the director derived an
improper personal benefit.
<PAGE>
B. Each person who is or is made a party or is threatened to be
made a party to or is involved in any action, suit or proceeding, whether civil,
criminal, administrative or investigative (hereinafter a "proceeding"), by
reason of the fact that he or she, or a person of whom he or she is the legal
representative, is or was a director or officer of the Corporation or is or was
serving at the request of the Corporation as a director, officer, employee or
agent of another corporation or of a partnership, joint venture, trust or other
enterprise, including service with respect to employee benefit plans, whether
the basis of such proceeding is alleged action in an official capacity as a
director, officer, employee or agent or in any other capacity while serving as a
director, officer, employee or agent, shall be indemnified and held harmless by
the Corporation to the fullest extent authorized by the Delaware General
Corporation Law, as the same exists or may hereafter be amended (but, in the
case of any such amendment, only to the extent that such amendment permits the
Corporation to provide broader indemnification rights than said law permitted
the Corporation to provide prior to such amendment), against all expense,
liability and loss (including attorneys' fees, judgments, fines, ERISA excise
taxes or penalties and amounts paid or to be paid in settlement) reasonably
incurred or suffered by such person in connection therewith and such
indemnification shall continue as to a person who has ceased to be a director,
officer, employee or agent and shall inure to the benefit of his or her heirs,
executors and administrators; provided, however, that, except as provided in the
second paragraph hereof, the Corporation shall indemnify any such person seeking
indemnification in connection with a proceeding (or part thereof) initiated by
such person only if such proceeding (or part thereof) was authorized by the
Board of Directors of the Corporation. The right to indemnification conferred in
this section shall be a contract right and shall include the right to be paid by
the Corporation any expenses incurred in defending any such proceeding in
advance of its final disposition; provided, however, that, if the Delaware
General Corporation Law requires, the payment of such expenses incurred by a
director or officer in his or her capacity as a director or officer (and not in
any other capacity in which service was or is rendered by such person while a
director or officer, including, without limitation, service to an employee
benefit plan) in advance of the final disposition of a proceeding, shall be made
only upon delivery to the Corporation of an undertaking, by or on behalf of such
director or officer, to repay all amounts so advanced if it shall ultimately be
determined that such director or officer is not entitled to be indemnified under
this section or otherwise. The Corporation may, by action of its Board of
Directors, provide indemnification to employees and agents of the Corpo ration
with the same scope and effect as the foregoing indemnification of directors and
officers.
If a claim under the first paragraph of this section is not paid
in full by the Corporation within thirty (30) days after a written claim has
been received by the Corporation, the claimant may at any time thereafter bring
suit against the Corporation to recover the unpaid amount of the claim and, if
successful in whole or in part, the claimant shall be entitled to be paid also
the expense of prosecuting such claim. It shall be a defense to any such action
(other than an action brought to enforce a claim for expenses incurred in
defending any proceeding in advance of its final disposition where the required
undertaking, if any is required, has been tendered to the Corporation) that the
claimant has not met the standards of conduct which make it permissible under
the Delaware General Corporation Law for the Corporation to indemnify the
claimant for the amount claimed, but the burden of proving such defense shall be
on the Corporation. Neither the failure of the Corporation (including its Board
of Directors, independent legal counsel, or its stockholders) to have made a
determination prior to the commencement of such action that indemnification of
the claimant is proper in the circumstances because he or she has met the
applicable standard of conduct set forth in the Delaware General Corporation
Law, nor an actual determination by the Corporation (including its Board of
Directors, independent legal counsel, or its stockholders) that the claimant has
not met such applicable standard of conduct, shall be a defense to the action or
create a presumption that the claimant has not met the applicable standard of
conduct.
The right to indemnification and the payment of expenses incurred
in defending a proceeding in advance of its final disposition conferred in this
section shall not be exclusive of any other right which any person may have or
hereafter acquire under any statute, provision of the Restated Certificate of
Incorporation, by-law, agreement, vote of stockholders or disinterested
directors or otherwise.
C. The Corporation may maintain insurance, at its expense, to
protect itself and any director, officer, employee or agent of the Corporation
or another corporation, partnership, joint venture, trust or other enterprise
against any such expense, liability or loss, whether or not the Corporation
would have the power to indemnify such person against such expense, liability or
loss under the Delaware General Corporation Law.
<PAGE>
D. Any repeal or modification of the foregoing provisions of this
Article VII shall not adversely affect any right or protection of any director,
officer, employee or agent of the Corporation existing at the time of such
repeal or modification.
E. The amendment or repeal of this Article VII shall require the
approval of the holders of shares representing at least sixty six and two-thirds
percent (66-2/3%) of the shares of the Corporation entitled to vote in the
election of directors, voting as one class.
ARTICLE VIII
The Corporation reserves the right to amend or repeal any
provision contained in this restated certificate of incorporation, in the manner
now or hereafter prescribed by statute, and all rights conferred upon a
stockholder herein are granted subject to this reservation.
FIFTH: This Restated Certificate of Incorporation was duly
adopted by the Board of Directors of the Corporation.
SIXTH: This Restated Certificate of Incorporation was duly
adopted at a meeting of the stockholders in accordance with Sections 242 and 245
of the General Corporation Law of the State of Delaware.
IN WITNESS WHEREOF, Incyte Pharmaceuticals, Inc. has caused this
certificate to be signed by its Chief Executive Officer and its Vice President,
Legal Affairs and Secretary this _____ day of ______________, 1998.
INCYTE PHARMACEUTICALS, INC.
By:
--------------------------
Name: Roy A. Whitfield
Title: Chief Executive Officer
Attest:
By:
----------------------------
Name: Lee Bendekgey
Title: Vice President, Legal Affairs and
Secretary
<PAGE>
ANNEX B: AMENDED AND RESTATED 1991 STOCK PLAN
<PAGE>
ANNEX C: AMENDED AND RESTATED 1997 EMPLOYEE STOCK PURCHASE PLAN
<PAGE>
ANNEX D: AMENDED AND RESTATED 1993 DIRECTORS' STOCK OPTION PLAN
<PAGE>
ANNEX E: INCYTE PHARMACEUTICALS, INC.
Page
----
SELECTED CONSOLIDATED FINANCIAL DATA....................................... E-1
MANAGEMENT'S DISCUSSION AND ANALYSIS....................................... E-3
CONSOLIDATED FINANCIAL STATEMENTS..........................................E-10
<PAGE>
INCYTE PHARMACEUTICALS, INC.
SELECTED CONSOLIDATED FINANCIAL DATA
The data set forth below should be read in conjunction with
"Management's Discussion and Analysis of Financial Condition and Results of
Operations" and the Consolidated Financial Statements and related Notes of
Incyte Pharmaceuticals, Inc. included in this Annex E.
<TABLE>
<CAPTION>
-----------------------------------------------------------------------------
Year Ended
December 31,
-----------------------------------------------------------------------------
Statement of Operations Data(1): 1993 1994 1995 1996 1997
-------------- ------------ ----------- ----------- -----------
(in thousands, except per share amounts)
<S> <C> <C> <C> <C> <C>
Revenues $ 672 $ 1,512 $12,299 $41,895 $89,996
Costs and expenses:
Research and development 4,764 11,169 19,272 41,337 72,452
Selling, general and
administrative 737 2,328 3,952 6,957 13,928
Acquisition-related charges -- -- -- -- --
Charge for purchase of in-process
research and development -- -- -- 3,165 --
---------- ----------- ---------- --------- --------
Total costs and expenses 5,501 13,497 23,224 51,459 86,380
Income (loss) from operations (4,829) (11,985) (10,925) (9,564) 3,616
Interest and other income, net and
losses from joint venture 60 510 988 2,288 3,840
---------- ---------- ---------- --------- --------
Income (loss) before income taxes (4,769) (11,475) (9,937) (7,276) 7,456
Provision for income taxes -- -- -- -- 548
---------- ---------- --------- --------- --------
Net income (loss) $(4,769) $(11,475) $(9,937) $(7,276) $6,908
========== ========== ========= ========= ========
Basic net income (loss) per share(2, 3) $(1.46) $(0.82) $(0.53) $(0.32) $0.28
========== ========== ========= ========= ========
Number of shares used in
computation of basic net income
(loss) per share 3,264 14,060 18,819 22,398 24,300
========== ========== ========= ========= ========
Diluted net income (loss) per share(2, 3) $(1.46) $(0.82) $(0.53) $(0.32) $0.26
========== ========== ========= ========= ========
Number of shares used in
Computation of diluted net income
(loss) per share 3,264 14,060 18,819 22,398 26,498
========== ========= ========= ========= ========
Incyte General Pro Forma Net Income (Loss) Per Share(4)
Incyte General net income (loss) $(4,769) $(11,475) $(9,937) $(7,488) $8,554
========== ========== ========= ========= ========
Pro Forma basic net income (loss)
per share $(1.46) $(0.82) $(0.53) $(0.33) $0.35
Number of shares used in ========== ========== ========= ========= ========
computation of Pro Forma basic
net income (loss) per share 3,264 14,060 18,819 22,398 24,300
========== ========== ========= ========= ========
Pro Forma diluted income
(loss) per share $(1.46) $(0.82) $(0.53) $(0.33) $0.32
========== ========== ========= ========= ========
Number of shares used in
computation of Pro Forma diluted
net income (loss) per share 3,264 14,060 18,819 22,398 26,498
========== ========== ========= ========= ========
Incyte Genetics Pro Forma Net Income
(Loss) Per Share(4)
Incyte Genetics net income (loss) $ 212 $(1,646)
========= ========
Pro Forma basic and diluted net income (loss)
per share $ 0.02 $ (0.14)
========= ========
Number of shares used in
computation of Pro Forma basic and diluted net
income (loss) per share 12,000 12,000
========= ========
</TABLE>
<TABLE>
<CAPTION>
-----------------------------
Six Months Ended
June 30,
-----------------------------
Statement of Operations Data(1): 1997 1998
------------ -------------
(unaudited)
<S> <C> <C>
Revenues $39,423 $63,472
Costs and expenses:
Research and development 32,503 44,819
Selling, general and
administrative 6,103 10,322
Acquisition-related charges -- 1,171
Charge for purchase of in-process
research and development -- --
-------- --------
Total costs and expenses 38,606 56,312
Income (loss) from operations 817 7,160
Interest and other income, net and
losses from joint venture 1,069 3,041
-------- --------
Income (loss) before income taxes 1,886 10,201
Provision for income taxes 158 1,428
-------- --------
Net income (loss) $1,728 $8,773
======== ========
Basic net income (loss) per share(2, 3) $0.07 $0.33
======== ========
Number of shares used in
computation of diluted net income
(loss) per share 23,059 26,504
======== ========
Diluted net income (loss) per share(2, 3) $0.07 $0.30
======== ========
Number of shares used in
computation of diluted net income
(loss) per share 23,228 28,792
======== ========
Incyte General Pro Forma Net Income (Loss) Per Share(4)
Incyte General net income (loss) $2,339 $9,573
======== ========
Pro Forma basic net income (loss) per share $0.10 $0.36
======== ========
Number of shares used in
computation of Pro Forma basic net income
(loss) per share 23,059 26,504
======== ========
Pro Forma Diluted net income (loss) per share $0.09 $0.33
======== ========
Number of shares used in
computation of Pro Forma diluted net income
(loss) per share 25,228 28,792
======== ========
Incyte Genetics Pro Forma Net Income
(Loss) Per Share(4)
Incyte Genetics net income (loss) $ (611) $ (800)
========= ========
Pro Forma basic and diluted net income
(loss) per share $ (0.05) $ (0.07)
========= ========
Number of shares used in
computation of Pro Forma basic and diluted net
income (loss) per share 12,000 12,000
========= ========
</TABLE>
E-1
<PAGE>
<TABLE>
<CAPTION>
December 31, June 30,
1993 1994 1995 1996 1997 1997 1998
-------- -------- -------- -------- -------- -------- --------
(in thousands) (unaudited)
<S> <C> <C> <C> <C> <C> <C> <C>
Balance Sheet Data:(1)
Cash, cash equivalents, restricted
cash and securities available-for-sale $15,540 $25,257 $41,128 $40,238 $119,095 $43,937 $130,710
Working capital 14,865 20,866 39,015 21,351 90,700 17,945 86,792
Total assets 17,807 29,350 58,892 69,173 199,089 83,502 219,188
Noncurrent portion of capital lease
obligations and notes payable 517 148 147 37 801 23 594
Accumulated deficit (8,349) (19,824) (29,761) (37,037) (30,129) (35,311) (23,100)
Stockholders' equity 16,451 24,344 47,606 44,834 145,702 50,926 157,876
</TABLE>
1 Financial data for the years ended December 31, 1993, 1994, 1995, and
1996, have been resated to reflect the combined results and financial
position of the Company and Genome Systems, Inc. All periods through
December 31, 1997 have been restated to reflect the combined results
and financial position of the Company and Synteni, Inc. See Note 7 of
Notes to Consolidated Financial Statements.
2 Basic and diluted net income (loss) per share for all periods have
been restated in accordance with FASB Statement No. 128, which the
Company adopted on December 31, 1997. See Note 1 of Notes to
Consolidated Financial Statements.
3 Basic and diluted net income (loss) per share for 1993 have been
restated to retroactively eliminate cheap stock in accordance with
the requirements of Staff Accounting Bulletin No. 98, issued by the
staff of the Securities and Exchange Commission in February 1998.
4 The Incyte Genetics and Incyte General pro forma net income (loss)
per share are computed assuming the Incyte Genetics Stock Proposal is
approved by the Company's stockholders. Incyte General pro forma net
income (loss) per share gives effect to the redesignation of all
Existing Common Stock as Incyte General Stock on a one-for-one basis.
Incyte Genetics' pro forma net income (loss) per share assumes
12,000,000 shares of Incyte Genetics Stock are outstanding for all
periods, as if the Incyte Genetics Distribution had occurred on July
1, 1996.
E-2
<PAGE>
INCYTE PHARMACEUTICALS, INC.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
The following discussion and analysis of the Company's financial
condition and results of operations should be read in conjunction with "Selected
Consolidated Financial Data" and the Consolidated Financial Statements and
related Notes included elsewhere in this Annex E.
When used in this discussion, the words "expects," "anticipates,"
"estimates," and similar expressions are intended to identify forward-looking
statements. Such statements, which include statements as to profitability,
expected expenditure levels, the adequacy of capital resources, growth in
operations, and Year 2000 related actions, are subject to risks and
uncertainties that could cause actual results to differ materially from those
projected. These risks and uncertainties include, but are not limited to, those
risks discussed below, as well as the extent of utilization of genomic
information by the biotechnology, pharmaceutical, and agricultural industries;
risks relating to the development of new database products and their use by
potential collaborators of the Company; the impact of technological advances and
competition; the ability of the Company to obtain and retain customers;
competition from other entities; early termination of a database collaboration
agreement or failure to renew an agreement upon expiration; the ability to
successfully integrate the operations of recent business combinations; the cost
of accessing technologies developed by other companies; uncertainty as to the
scope of coverage, enforceability or commercial protection from patents that
issue on gene sequences and other genetic information; developments in and
expenses relating to litigation; the results and viability of joint ventures and
businesses in which the Company has purchased equity; ability to raise capital
through the sale of private or public equity; the ability of the Company to
implement in a timely manner the programs and actions related to the Year 2000
issue; and the matters discussed below under the caption "--Factors That May
Affect Results." These forward-looking statements speak only as of the date
hereof. The Company expressly disclaims any obligation or undertaking to release
publicly any updates or revisions to any forward-looking statements contained
herein to reflect any change in the Company's expectations with regard thereto
or any change in events, conditions or circumstances on which any such statement
is based.
Overview
Incyte Pharmaceuticals, Inc. ("Incyte" and, together with its wholly
owned subsidiaries, the "Company") designs, develops and markets genomic
information-based tools including database products, genomic data management
software tools, genomic reagents and related services. The Company consists of
two divisions, the Incyte General division ("Incyte General") and the Incyte
Genetics division ("Incyte Genetics"). Incyte General focuses on information
that can assist pharmaceutical and biotechnology companies in the discovery and
development of new drugs including the identification of new disease targets and
novel disease pathways, and the evaluation of the safety and efficacy of new
drugs. Incyte Genetics focuses on products and services that can assist
pharmaceutical companies in the identification and analysis of a type of genetic
variation, called single nucleotide polymorphisms ("SNPs"), believed to
correlate to a patients' disease prognosis and drug response.
Revenues recognized by the Company consist primarily of non-exclusive
database access fees related to database agreements. Revenues also include the
sales of genomic screening products and services, microarray-based gene
expression services, fees for custom or "satellite" database services, and
genomic data management software tools and maintenance. The Company's database
agreements provide for future milestone payments and royalties from the sale of
products derived from proprietary information obtained through the databases.
There can be no assurance that any database subscriber will ever generate
products from information contained within the databases and thus that the
Company will ever receive milestone payments or royalties.
Incyte General's business is established, generating significant
revenues with profits reported since the first quarter of 1997. Incyte Genetics'
business is in an early stage and will require a substantial investment over the
next few years, estimated to be between $100 million to $150 million by the end
of the year 2000. Incyte Genetics generates
E-3
<PAGE>
minimal revenues and is expected to operate at a significant loss for the next
few years. Due to the investment required for Incyte Genetics and the resulting
net loss, on a consolidated basis the Company expects to report a net loss for
1999 and possibly 2000.
In September 1998, the Company completed the acquisition of Hexagen
Limited ("Hexagen"), a privately held SNP discovery company based in Cambridge,
England. The Company issued 976,130 shares of its Common Stock ("Existing Common
Stock") and $5.0 million in cash in exchange for all of Hexagen's outstanding
capital stock. In addition, the Company assumed Hexagen's stock options, which
if exercised and fully vested, would amount to 125,909 shares of Existing Common
Stock. The transaction will be accounted for as a purchase with a portion of the
purchase price, estimated to be approximately $10.6 million, to be expensed in
the third quarter of 1998 as a charge for the purchase of in-process research
and development. The assets, liabilities and the results of operations of
Hexagen, as well as the amortization of the goodwill generated by the
acquisition will be allocated in entirety to Incyte Genetics. The Company will
allocate the purchase price based on the relative fair value of the net tangible
and intangible assets acquired, based on independent appraisal which is
preliminary, and subject to revision. In performing this allocation the Company
considered, among other factors, the technology research and development
projects in-process at the date of acquisition. With regard to the in-process
research and development projects, the Company considered factors such as the
stage of development of the technology at the time of acquisition, the
importance of each project to the overall development plan, and the projected
incremental cash flows from the projects when completed and any associated
risks. Associated risks include the inherent difficulties and uncertainties in
completing each project and thereby achieving technological feasibility and
risks related to the impact of potential changes in future target markets.
Incyte Genetics currently anticipates requiring $100 to $150 million
through the year 2000, including the funds to develop the in-process technology
into commercially viable products over the next two years. If the projects
associated with the development of in-process technology are not successfully
completed the Company may not realize the value assigned to the in-process
research and development projects. In addition, the value of the other acquired
intangible assets may also become impaired.
In January 1998, the Company completed the acquisition of Synteni,
Inc. ("Synteni"), a privately-held microarray-based gene expression company. The
transaction has been accounted for as a pooling-of-interests, and the
consolidated financial statements discussed herein and all historical financial
information have been restated to reflect the combined operations of both
companies. The Company's ability to generate revenues and operating profits from
microarray-based gene expression services will be dependent on the ability of
the Company to obtain high volume customers for microarray services. Prior to
the merger, Synteni's microarray service agreements consisted of small volume
pilot or feasibility agreements.
In September 1997, the Company formed a joint venture, diaDexus, LLC
("diaDexus"), with SmithKline Beecham Corporation ("SB") which will utilize
genomic and bioinformatics technologies in the discovery and commercialization
of molecular diagnostics. The Company and SB each hold a 50 percent equity
interest in diaDexus. The investment is accounted for under the equity method,
and the Company records its share of diaDexus' earnings and losses on its
statement of operations.
The Company has made, and will continue to make strategic equity
investments in, and strategic acquisitions of, technologies and businesses that
are complementary to the businesses of the Company. As a result the Company may
record losses or expenses related to the Company's proportionate ownership
interest in such long-term equity investments, record charges for the
acquisition of in-process technologies, or to record charges for the recognition
of the impairment in the value of the securities underlying such investments.
On September 28, 1998, shareholders of one company in which the
Company holds an equity investment, OncorMed, Inc. ("OncorMed"), agreed to an
acquisition by Gene Logic Inc. ("Gene Logic"). Gene Logic will issue 4,849,815
shares of its common stock, for an estimated purchase price of $39.1 million,
including transaction fees, in exchange for all of the outstanding common stock
of OncorMed. The investment in OncorMed is accounted for under the cost method
of accounting. In January 1998, the Company announced a relationship relating to
the joint development of a proteomics database with Oxford GlycoSciences plc.
("OGS"). As part of this relationship, the Company made a $5.0 million equity
investment and a follow on investment in April 1998 of approximately $0.8
million as part of the OGS initial public offering of its ordinary shares. As
part of the collaborative agreement, the Company has agreed to reimburse OGS for
up to $5.0 million in 1999 if revenues are not sufficient to offset OGS'
expenses for services rendered.
Due to the recent stock market volatility, the market value of
certain investments held by the Company are below their book value. The decrease
in the market price of these investments is considered temporary and therefore
no change in the carrying value of the investments is considered necessary. The
Company will continue to evaluate its long term equity investments for
impairment on a quarterly basis.
In an effort to broaden its business, the Company is investing in a
number of new areas, including microarray services, molecular diagnostics,
pharmacogenomics and proteomics. Given that many of these address new markets,
or involve untested technologies, it is not known if any of them will generate
revenues or if the revenues will be
E-4
<PAGE>
sufficient to provide an adequate return on the investment. Depending on the
investment required and the timing of such investments, expenses or losses
related to these investments could adversely affect operating results.
The Company has incurred and is likely to continue to incur
substantial expenses in its defense of the lawsuits filed in January and
September 1998 by Affymetrix, Inc. ("Affymetrix") alleging patent infringement
by Synteni and Incyte. Affymetrix seeks a preliminary injunction enjoining
Incyte and Synteni from using certain microarray technology in a manner alleged
to infringe an Affymetrix patent and a permanent injunction enjoining Incyte and
Synteni from further infringement of certain Affymetrix patents. In addition,
Affymetrix seeks damages, costs, attorneys' fees and interest. Affymetrix
further requests that any such damages be trebled on its allegation of willful
infringement by the Company and Synteni. Incyte and Synteni believe they have
meritorious defenses and intend to defend these suits vigorously. However, there
can be no assurance that the Company and Incyte will be successful in the
defense of these suits, and litigation, regardless of the outcome, could result
in substantial expenses and diversion of the efforts of management and technical
personnel. Further, there can be no assurance that any license that may be
required as a result of these suits or the outcome thereof would be made
available on commercially acceptable terms, if at all.
E-5
<PAGE>
Results of Operations
Six months ended June 30, 1997 and 1998
Net income and diluted earnings per share were $8.8 million and $0.30
per share, respectively, for the six months ended June 30, 1998, compared to
$1.7 million and $0.07 per share for the corresponding period in 1997. Earnings
per share were affected by a follow-on public offering in August 1997 of
Existing Common Stock that resulted in an increase in the number of shares
outstanding of 2.7 million shares. The Company's results of operations and
earnings per share for the six months ended June 30, 1997 have been restated to
account for the acquisition of Synteni, which was accounted for as a
pooling-of-interests. All share and per share data have been adjusted
retroactively for a two-for-one stock split effected in the form of a stock
dividend paid on November 7, 1997 to holders of record on October 17, 1997.
While the Company has reported net income for the past six quarters, there can
be no assurance that the Company can maintain profitability. See "Factors that
May Affect Results--History of Operating Losses; Uncertainty of Continued
Profitability or Revenues."
Revenues. Revenues for the six months ended June 30, 1998 increased
to $63.5 million compared to $39.4 million for the corresponding period in 1997.
Revenues resulted primarily from database access fees and, to a much lesser
extent, from genomic screening products and services, custom satellite database
services, microarray-based gene expression services, and genomic data management
software tools and maintenance. The increase in revenues was primarily due to
new database agreements as well as the expansion of existing database agreements
to include additional databases.
Expenses. Total costs and expenses for the six months ended June 30,
1998 increased to $56.3 million compared to $38.6 million for the corresponding
period in 1997. Total costs and expenses in 1998 included a pretax
acquisition-related charge of $1.2 million for the acquisition of Synteni. The
charge consisted primarily of accounting, legal and investment banking fees.
Total costs and expenses are expected to increase in 1999 due to the development
of new products and services. A significant portion of these costs and expenses
will be attributed to the development of Incyte Genetics database products and
the resources needed to support these products.
Research and development expenses for the six months ended June 30,
1998 increased to $44.8 million compared to $32.5 million for the corresponding
period in 1997. The increase in research and development expenses resulted
primarily from an increase in bioinformatics and software development efforts,
microarray production and technology development, and continued investment in
the growth of the Company's intellectual property portfolio. The Company expects
research and development spending to increase over the next year due in
particular to the development of new databases and expansion of existing
databases as well as increases in sequencing and microarray operations.
Selling, general and administrative expenses for the six months ended
June 30, 1998 increased to $10.3 million compared to $6.1 million for the
corresponding period in 1997. The increase in selling, general and
administrative expenses resulted primarily from the growth in marketing, sales
and customer support, expenses related to the defense of the Affymetrix lawsuits
and increased administrative personnel related to the growing complexity of the
Company's business. The Company expects that selling, general and administrative
expenses will increase over the next year due to the growth in marketing, sales
and customer service functions to support Incyte General's and Incyte Genetics'
products, legal expenses related to the Company's defense of the Affymetrix
lawsuits and increased administrative personnel required to support the growing
complexity of the Company's business.
Interest and Other Income, Net. Interest and other income, net for
the six months ended June 30, 1998 increased to $3.7 million from $1.1 million
for the corresponding period in 1997. This was primarily a result of increased
interest income from higher average combined cash, cash equivalent and
marketable securities balances due primarily to the completion of a follow-on
public offering in August 1997.
Losses from Joint Venture. Losses from joint venture were $0.6
million for the six months ended June 30, 1998. The loss represents the
Company's equity share of diaDexus' net losses from operations. Beginning in
April
E-6
<PAGE>
1998, the Company's share of diaDexus' net losses was offset by the amortization
of the excess of the Company's share of diaDexus' net assets over its basis. The
amortization of this amount is expected to approximate the Company's equity
share in diaDexus' net losses and continue through the third quarter of 1998. As
diaDexus was formed in September 1997, no losses from joint venture were
incurred in the six months ended June 30, 1997. The Company expects that losses
from joint venture will continue at least through 1999.
Income Taxes. The estimated effective annual income tax rate for the
six months ended June 30, 1998 and 1997 is 14.0% and 8.4%, respectively, which
represents the provision of federal and state alternative minimum taxes after
utilization of net operating loss carryforwards and research and development
credits. The increase in the effective tax rate resulted primarily from the
Company's expectation that in 1998 it would fully utilize all federal net
operating loss carryforwards available to benefit the income tax provision.
Years ended December 31, 1995, 1996, and 1997
The Company recorded net income for the year ended December 31, 1997
of $6.9 million, compared to net losses of $7.3 million and $9.9 million for the
years ended December 31, 1996 and 1995, respectively. On a per share basis,
basic net income per share was $0.28 for the year ended December 31, 1997 and
basic net loss per share was $0.32 and $0.53 for the years ended December 31,
1996 and 1995, respectively. Diluted net income per share was $0.26 for the year
ended December 31, 1997 and diluted net loss per share was $0.32 and $0.53 for
the years ended December 31, 1996 and 1995, respectively. The net income per
share in 1997 reflects the issuance of approximately 2.7 million shares in
August 1997 follow-on public offering. The net loss per share in 1996 and 1995
reflects the issuance of approximately 0.6 million shares in 1996 in connection
with the Company's business combinations with Genome Systems, Inc. ("Genome
Systems") and Combion, Inc. ("Combion") and the issuance of approximately 3.7
million shares in a November 1995 follow-on public offering. The net income
(loss) per share for all periods presented reflects the issuance of
approximately 2.3 million shares in January 1998 in connection with the
Company's business combination with Synteni. All share and per share data have
been adjusted retroactively for a two-for-one stock split effected in the form
of a stock dividend paid on November 7, 1997 to holders of record on October 17,
1997.
Revenues. Revenues for the years ended December 31, 1997, 1996 and
1995 were $90.0 million, $41.9 million and $12.3 million, respectively. Revenues
resulted primarily from database access fees and, to a much lesser extent, from
custom satellite database services, genomic screening products and services, and
gene expression services. The increase in revenues from year to year was
predominantly driven by an increase in the number of database agreements, as
well as the expansion of existing database agreements to include additional
databases.
Expenses. Total costs and expenses for the years ended December 31,
1997, 1996 and 1995 were $86.4 million, $51.5 million and $23.2 million,
respectively. Total costs and expenses for the year ended December 31, 1996
included a one-time charge of $3.2 million for the purchase of in-process
research and development relating to the acquisition of Combion.
Research and development expenses for the years ended December 31,
1997, 1996 and 1995 were $72.5 million, $41.3 million and $19.3 million,
respectively. The increase in research and development expenses resulted
primarily from an increase in bioinformatics and software development efforts,
increased data and reagent production capacity, increased microarray production
and technology development initiatives, license and milestone payments under
research and development alliances, and increased costs related to intellectual
property protection, technology development, and continued investment in the
growth of the Company's intellectual property portfolio.
Selling, general and administrative expenses for the years ended
December 31, 1997, 1996 and 1995 were $13.9 million, $7.0 million and $4.0
million, respectively. The increase in selling, general and administrative
expenses resulted primarily from the growth in marketing, sales, customer
support, and corporate administration.
Interest and Other Income, Net. Interest and other income, net for
the years ended December 31, 1997, 1996 and 1995 were $4.1 million, $2.3 million
and $1.0 million, respectively. Interest and other income, net increased as a
E-7
<PAGE>
result of increased interest income from higher average combined cash, cash
equivalent and marketable securities balances.
Losses from Joint Venture. Losses from joint ventures were $0.3
million for the year ended December 31, 1997. The loss represents the Company's
share of diaDexus' losses from operations. Since diaDexus was formed in
September 1997, no losses from joint ventures were recognized prior to 1997.
Income Taxes. The effective annual income tax rate for 1997 was 7.3%,
which represents the provision of federal and state alternative minimum taxes
after utilization of net operating loss carryforwards. No provisions have been
recorded prior to the 1997 fiscal year as the Company incurred annual net
operating losses.
Liquidity and Capital Resources
As of June 30, 1998, the Company had $130.7 million in cash, cash
equivalents, restricted cash and marketable securities, compared to $119.1
million as of December 31, 1997 and $40.2 million as of December 31, 1996. For
the year ended December 31, 1997, the increase was primarily due to net proceeds
of $87.2 million from the issuance of Existing Common Stock in an August 1997
follow-on public offering. For the six months ended June 30, 1998, cash provided
by operating and financing activities was partially offset by capital
expenditures, consisting primarily of purchases of data processing-related
computer hardware, laboratory equipment and facilities improvements, as well as
investments in research and development alliances. The Company has classified
all of its marketable securities as short-term, as the Company may decide not to
hold its marketable securities until maturity in order to take advantage of
favorable market conditions. Available cash is invested in accordance with the
Company's investment policy's primary objectives of liquidity, safety of
principal and diversity of investments.
Net cash provided by operating activities was $33.1 million for the
six months ended June 30, 1998, as compared to $12.0 million for the six months
ended June 30, 1997. The increase in net cash provided by operating activities
resulted primarily from the increase in net income and deferred revenues and the
decrease in accounts receivable partially offset by the increase in prepaid
expenses, deposits and other assets and the decrease in accounts payable. Net
cash provided by operating activities was $18.0 million for the year ended
December 31, 1997 compared to $18.5 million for the year ended December 31, 1996
and net cash used in operating activities of $8.8 million for the year ended
December 31, 1995. The decrease in net cash provided by operating activities in
1997 compared to 1996 resulted primarily from increases in accounts receivable
partially offset by the change from net loss to net income, increases in accrued
and other liabilities, increases in deferred revenue due to the prepayment of
database collaboration fees. Net cash provided by operating activities in 1996
as compared to use of cash in 1995 resulted from increases in accounts payable
and accrued and other liabilities, and decreases in net loss and accounts
receivable. Due to the significant investment expected in Incyte Genetics in
1999, the Company believes it may have a net cash use in its operating
activities in 1999.
The Company's investing activities, other than purchases, sales and
maturities of marketable securities, have mainly consisted of capital
expenditures and long-term investments. Capital expenditures for the six months
ended June 30, 1998 increased to $15.3 million from $9.1 million for the six
months ended June 30, 1997. Capital expenditures for the years ended December
31, 1997, 1996 and 1995 were $27.2 million, $20.5 million and $8.1 million,
respectively. Capital expenditures increased in 1997 and 1996 primarily due to
investments in computer and laboratory equipment as well as leasehold
improvements related to the expansion of the Company's facilities. Long-term
investments in companies with which the Company has research and development
alliances increased to $6.9 million for the six months ended June 30, 1998 from
$5.0 million for the six months ended June 30, 1997, and such investments
increased to $8.5 million for the year ended December 31, 1997 from $0.3 million
for the year ended December 31, 1996. Net cash used by investing activities may
in the future fluctuate significantly from period to period due to the timing of
strategic equity investments, capital purchases, maturities/sales and purchases
of marketable securities.
Net cash provided by financing activities was $2.8 million for the
six months ended June 30, 1998 compared to $4.3 million for the six months ended
June 30, 1997. Net cash provided by financing activities was $94.8 million,
E-8
<PAGE>
$1.5 million, and $32.9 million for the years ended December 31, 1997, 1996 and
1995, respectively. Net cash provided by financing activities in 1997 and 1995
was primarily due to proceeds from follow-on public stock offerings in August
1997 and November 1995, respectively, while net cash provided by financing
activities in 1996 was due to issuances of common stock upon exercise of stock
options.
The Company expects its cash requirements to increase significantly
in the remainder of 1998 and in 1999 as it invests in the business of Incyte
Genetics; increases its investment in data-processing-related computer hardware
in order to support its existing and new database products; continues to seek
access to technologies through investments, research and development alliances,
license agreements and/or acquisitions, and addresses its needs for larger
facilities and/or improvements in existing facilities. The Company has entered
into a multi-year lease with respect to a 95,000 square foot building being
constructed adjacent to the Company's Palo Alto headquarters. The Company's
share of tenant improvements is estimated to be between $10.0 million and $15.0
million, of which approximately $0.9 million has been expended through June 30,
1998. Given the current construction schedule, the Company does not expect to
begin to incur significant expenses related to this facility until late 1998 or
early 1999.
Based upon its current plans, the Company believes that its existing
resources and anticipated cash flow from operations will be adequate to satisfy
its capital needs at least through the next twelve months. However, the Company
may be unable to obtain additional collaborators or retain existing
collaborators for the Company's databases, and its database products and
services may not produce revenues which, together with the Company's cash, cash
equivalents, and marketable securities, would be adequate to fund the Company's
cash requirements. The Company's cash requirements depend on numerous factors,
including the ability of the Company to attract and retain collaborators for its
databases and products and services; expenditures in connection with alliances,
license agreements and acquisitions of and investments in complementary
technologies and businesses; competing technological and market developments;
the cost of filing, prosecuting, defending and enforcing patent claims and other
intellectual property rights; the purchase of additional capital equipment,
including capital equipment necessary to ensure the Company's sequencing and
microarray operations remain competitive; capital expenditures required to
expand the Company's facilities; and costs associated with the integration of
new operations assumed through mergers and acquisitions. Changes in the
Company's research and development plans or other changes affecting the
Company's operating expenses may result in changes in the timing and amount of
expenditures of the Company's capital resources.
The Company expects to continue to fund future operations with
revenues from database products and services; with its current cash, cash
equivalents, and marketable securities; and with respect to Incyte Genetics,
subject to the approval of the Incyte Genetics Stock Proposal by stockholders
and market and other conditions, from strategic equity investments from selected
pharmaceutical companies and/or the public equity markets. Additional funding,
if necessary, may not be available on favorable terms, if at all. If adequate
funds are not available through strategic equity investments from pharmaceutical
companies and/or the public markets, the Company may be required to curtail
operations significantly or to obtain funds through entering into collaborative
arrangements that may require the Company to relinquish rights to certain of its
technologies, product candidates, products or potential markets.
Year 2000
As a result of computer programs being written using two digits,
rather than four, to represent year dates, the performance of the Company's
computer systems and those of its suppliers and customers in the Year 2000 is
uncertain. Any computer programs that have time-sensitive software may recognize
a date using "00" as the year 1900 rather than the year 2000. This could result
in a system failure or miscalculations causing disruptions of operations,
including, among other things, a temporary inability to process transactions,
send invoices, or engage in other normal business activities.
The Company is in the process of evaluating the Year 2000 readiness
of the software products sold by the Company ("Products"), the information
technology systems used in its operations ("IT Systems"), and its non-IT
E-9
<PAGE>
Systems, such as building security, voice mail, and other systems. The Company
currently anticipates that this project will consist of the following phases:
(i) identification of all Products, IT Systems, non-IT Systems; (ii) assessment
of repair or replacement requirements; (iii) repair or replacement; (iv)
testing; (v) implementation; and (vi) creation of contingency plans in the event
of Year 2000 failures.
The Company will initiate an assessment of all current versions of
its Products and believes that this will be completed in the first half of 1999.
Even so, whether a complete system or device in which a Product is embedded will
operate correctly for an end-user depends in large part on the Year 2000
compliance of the system's other components, most of which are supplied by
parties other than the Company. The supplier of the Company's current financial
and accounting software has informed the Company that such software is Year 2000
compliant. The Company relies, both domestically and internationally, upon
various vendors, government agencies, utility companies, telecommunications
service companies, delivery service companies, and other service providers who
are outside of the Company's control. There is no assurance that such parties
will not suffer a Year 2000 business disruption, which could have a material
adverse effect on the Company's financial condition and results of operations.
To date, the Company has not incurred any material expenditures in
connection with identifying or evaluating Year 2000 compliance issues. Most of
its expenses have related to the opportunity cost of time spent by employees of
the Company evaluating the financial and accounting software, its Products, and
general year 2000 compliance matters. Absent a significant year 2000 compliance
deficiency, management estimates that the cost to complete its year 2000
compliance programs will be between $1 million and $1.5 million, which will be
expensed as incurred. The Company believes that available cash will be
sufficient to cover the projected costs associated with these activities.
The Company is focusing on identifying and addressing all aspects of
its operations that may be affected by the Year 2000 issue [and is addressing
the most critical applications first.] The Company intends to develop and
implement, if necessary, appropriate contingency plans to mitigate to the extent
possible the effects of any Year 2000 noncompliance. Although the full
consequences are unknown, the failure of either the Company's critical systems
or those of its material third parties to be Year 2000 compliant would result in
the interruption of the Company's business, which could have a material adverse
effect on the Company's business, financial condition and results of operations.
See Annex I "--Factors That may Affect Results," for a discussion of
certain factors that may affect the Company's financial condition and results of
operations.
E-10
<PAGE>
INCYTE PHARMACEUTICALS, INC.
CONSOLIDATED FINANCIAL STATEMENTS
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
Page
----
Report of Ernst & Young LLP, Independent Auditors..........................E-11
Consolidated Balance Sheets at December 31, 1996
and 1997, and June 30, 1998 (unaudited).................................E-13
Consolidated Statements of Operations for the years
ended December 31, 1995, 1996 and 1997 and the
six month periods ended June 30, 1997 and 1998
(unaudited).............................................................E-14
Consolidated Statements of Comprehensive Operations
for the years ended December 31, 1995, 1996 and 1997
and the six month periods ended June 30, 1997 and 1998
(unaudited).............................................................E-15
Consolidated Statements of Stockholders' Equity for
the years ended December 31, 1995, 1996 and 1997
and the six month periods ended June 30, 1998
(unaudited)..........................................................E-16
Consolidated Statements of Cash Flows for the years
ended December 31, 1995, 1996 and 1997 and the
six month periods ended June 30, 1997 and 1998
(unaudited)..........................................................E-17
Notes to Consolidated Financial Statements.................................E-19
E-11
<PAGE>
REPORT OF ERNST & YOUNG LLP, INDEPENDENT AUDITORS
The Board of Directors and Stockholders of Incyte Pharmaceuticals, Inc.
We have audited the accompanying consolidated balance sheets of Incyte
Pharmaceuticals, Inc., as of December 31, 1996 and 1997, and the related
consolidated statements of operations, consolidated statements of comprehensive
operations, stockholders' equity, and cash flows for each of the three years in
the period ended 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 consolidated financial position of Incyte
Pharmaceuticals, Inc., at December 31, 1996 and 1997, and the consolidated
results of its operations, and its cash flows for each of the three years in the
period ended December 31, 1997, in conformity with generally accepted accounting
principles.
/S/ERNST & YOUNG LLP
Palo Alto, California
January 12, 1998
except for "Principles of Consolidation" in Note 1 and paragraph 3 in Note 7 as
to which the date is
January 22, 1998
E-12
<PAGE>
INCYTE PHARMACEUTICALS, INC.
CONSOLIDATED BALANCE SHEETS
(in thousands)
<TABLE>
<CAPTION>
December 31, December 31, June 30,
1996 1997 1998
------ ------ -----
ASSETS (unaudited)
<S> <C> <C> <C>
Current assets:
Cash and cash equivalents $ 9,616 $ 55,598 $ 32,944
Restricted cash - 6,000 4,000
Marketable securities - available-for-sale 30,622 57,497 93,766
Accounts receivable, net 2,126 19,983 10,970
Prepaid expenses and other current assets 2,825 3,836 5,516
---------- ---------- ----------
Total current assets 45,189 142,914 147,196
Property and equipment, net 23,196 38,070 45,653
Long-term investments 452 14,800 21,054
Deposits and other assets 336 3,305 5,285
---------- ---------- ----------
Total assets $ 69,173 $ 199,089 $ 219,188
========== ========== ==========
LIABILITIES AND STOCKHOLDERS' EQUITY Current liabilities:
Accounts payable $ 4,780 $ 5,791 $ 3,527
Accrued liabilities 794 5,416 7,156
Accrued compensation 853 3,192 2,508
Due to joint venture - 6,000 4,000
Deferred revenue 17,411 31,815 43,213
---------- ---------- ----------
Total current liabilities 23,838 52,214 60,404
Non-current portion of accrued rent and other
non-current liabilities 501 1,173 908
---------- ---------- ----------
Total liabilities 24,339 53,387 61,312
---------- ---------- ----------
Stockholders' equity:
Preferred stock, $0.001 par value; 5,000,000 shares - - -
authorized; none issued and outstanding at December 31,
1996 and 1997 and June 30, 1998
Common stock, $0.001 par value; 75,000,000 shares 22 26 27
authorized; 22,389,802, 26,054,475, and 26,663,544
shares issued and outstanding at December 31, 1996 and
1997 and June 30, 1998, respectively
Additional paid-in capital 81,922 175,749 182,403
Deferred compensation - - (1,412)
Receivable from stockholder - - (49)
Accumulated other comprehensive income (loss) (73) 56 7
Accumulated deficit (37,037) (30,129) (23,100)
---------- ---------- ----------
Total stockholders' equity 44,834 145,702 157,876
---------- ---------- ----------
Total liabilities and stockholders' equity $ 69,173 $ 199,089 $ 219,188
========== ========== ==========
</TABLE>
See accompanying notes
E-13
<PAGE>
INCYTE PHARMACEUTICALS, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
(in thousands)
<TABLE>
<CAPTION>
Year Ended Six Months Ended
December 31, June 30,
------------------------------------ --------------------
1995 1996 1997 1997 1998
------ ------ ------ ------ -----
(unaudited)
<S> <C> <C> <C> <C> <C>
Revenues $ 12,299 $ 41,895 $ 89,996 $ 39,423 $ 63,472
Costs and expenses:
Research and development 19,272 41,337 72,452 32,503 44,819
Selling, general and administrative 3,952 6,957 13,928 6,103 10,322
Purchase of in-process research and
development - 3,165 - - -
Acquisition-related charges - - - - 1,171
--------- ---------- --------- -------- --------
Total costs and expenses 23,224 51,459 86,380 38,606 56,312
Income (loss) from operations (10,925) (9,564) 3,616 817 7,160
Interest income 1,186 2,538 4,326 1,138 3,718
Interest and other expense (198) (250) (186) (69) (37)
Losses from joint venture - - (300) - (640)
---------- ---------- --------- -------- --------
Income (loss) before income taxes (9,937) (7,276) 7,456 1,886 10,201
Provision for income taxes - - 548 158 1,428
---------- ---------- --------- -------- --------
Net income (loss) $ (9,937) $ (7,276) $ 6,908 $ 1,728 $ 8,773
========= ========= ========= ======== ========
Basic net income (loss) per share $ (0.53) $ (0.32) $ 0.28 $ 0.07 $ 0.33
========= ========= ========= ======== ========
Shares used in computing
basic net income (loss) per share 18,819 22,398 24,300 23,059 26,504
========= ========= ========= ======== ========
Diluted net income (loss) per share $ (0.53) $ (0.32) $ 0.26 $ 0.07 $ 0.30
======== ========= ========= ======== ========
Shares used in computing
diluted net income (loss) per share 18,819 22,398 26,498 25,228 28,792
========= ========= ========= ======== ========
Incyte General Pro Forma Net Income (Loss) Per Share (See Note 1 of the Consolidated Financial Statements)
Incyte General net income (loss) (9,937) (7,488) 8,554 2,339 9,573
========= ========= ========= ======== ========
Basic net income (loss) per share $ (0.53) $ 0.33) $ (0.32) $ (0.10) $ (0.36)
========= ========= ========= ======== ========
Number of shares used in computation of
diluted net income (loss) per share 18,819 22,398 26,498 25,228 28,792
========= ========= ========= ======== ========
Incyte Genetics Pro Forma Net Income (Loss) Per Share (See Note 1 of the Consolidated Financial Statements)
Incyte Genetics net income (loss) $ 212 $ (1,646) $ (611) $ (800)
=========
Basic and diluted net income (loss) per share $ 0.02 $ (0.14) $ (0.05) $ (0.07)
=========
Number of shares used in computation of basic 12,000 12,000 12,000 12,000
======== ========== ======= =========
and diluted net income (loss) per share
</TABLE>
See accompanying notes
E-14
<PAGE>
INCYTE PHARMACEUTICALS, INC.
CONSOLIDATED STATEMENTS OF COMPREHENSIVE OPERATIONS
(in thousands)
<TABLE>
<CAPTION>
Year Ended Six Months Ended
December 31, June 30,
-------------- ---------
1995 1996 1997 1997 1998
------ ------ ------ ------ -----
(unaudited)
<S> <C> <C> <C> <C> <C>
Net income (loss) (9,937) (7,276) 6,908 1,728 8,773
Other comprehensive income (loss), net of taxes
Unrealized gains (losses) on securities 11 (106) 127 43 (49)
Foreign currency translation
adjustments -- -- 2 -- --
Other comprehensive income (loss) 11 (106) 129 43 (49)
Comprehensive income (loss) $(9,926) $(7,382) $ 7,037 $ 1,771 $ 8,724
======= ======= ======= ======= =======
</TABLE>
See accompanying notes
E-15
<PAGE>
INCYTE PHARMACEUTICALS, INC.
CONSOLIDATED STATEMENT OF STOCKHOLDERS' EQUITY
FOR THE YEARS ENDED DECEMBER 31, 1995, 1996 AND 1997
AND THE SIX MONTHS ENDED JUNE 30, 1998 (UNAUDITED)
(dollars in thousands)
<TABLE>
<CAPTION>
Common
Common Additional Stock To be Deferred
Stock Paid-in Capital Issued Compensation
------- ----------------- -------- ------------
<S> <C> <C> <C> <C> <C>
Balances at January 1, 1995 $ 16 $ 44,485 $ -- $ (355)
Issuance of 57,630 shares of -- 88 -- --
Common Stock upon exercise of
stock options
Issuance of 1,246,000 shares of 1 1 -- --
Common Stock
Issuance of 3,674,000 shares of 4 32,667 -- --
Common Stock, net of expenses
and underwriters' fees of $2,232
Cash received for common stock -- -- 100 --
subscription
Amortization of deferred -- -- -- 326
compensation
Net change in unrealized gains -- -- -- --
(losses) on marketable securities
Net loss -- -- -- --
Balances at December 31, 1995 21 77,241 100 (29)
Issuance of 457,296 shares of 1 1,581 -- --
Common Stock upon exercise of
stock options and 299,398 shares
upon exercise of warrant
Issuance of 249,200 common -- 100 (100) --
stock previously subscribed
Issuance of 146,342 shares of -- 3,000 -- --
Common Stock in exchange for
Combion, Inc.
Amortization of deferred -- -- -- 29
compensation
Net change in unrealized gains -- -- -- --
(losses) on marketable securities
Net loss -- -- -- --
Balances at December 31, 1996 22 81,922 -- --
Issuance of 2,755,426 shares of 3 87,239 -- --
Common Stock, net of expenses
and underwriters' fees of $5,065
Issuance of 462,434 shares of 1 3,559 -- --
Common Stock, net of expenses
of $41
Issuance of 431,879 shares of -- 3,029 -- --
Common Stock upon exercise of
stock options and 14,934 shares
upon exercise of warrant
Net change in unrealized gains -- -- -- --
(losses) on marketable Securities
Net change in cumulative -- -- -- --
translation adjustment
Net income -- -- -- --
Balances at December 31, 1997 26 175,749 -- --
Issuance of 245,752 Shares of 1 2,922 -- 2,923
Common Stock upon exercise of
stock options and 15,920 shares
issued under ESPP (unaudited)
Adjustment to conform fiscal -- 3,732 -- (1,658)
year of pooled entity - Synteni
(including issuance of 337,271
shares of Common Stock)
(unaudited)
Amortization of deferred 246 246
compensation
Net change in unrealized gains -- (49) (49)
(losses) on marketable securities
(unaudited)
Net income (unaudited) -- 8,773 8,773
Balances at June 30, 1998 $ 27 $ 182,403 $ -- $ (1,412)
========= ========= ========= =========
<CAPTION>
Receivable Accumulated Total
From Other Comprehensive Accumulated Stockholders'
Stockholder Income Deficit Equity
----------- -------- --------- -------
<S> <C> <C> <C> <C>
Balances at January 1, 1995 $ -- $ 22 $ (19,824) $ 24,344
Issuance of 57,630 shares of -- -- -- 88
Common Stock upon exercise of
stock options
Issuance of 1,246,000 shares of -- -- -- 2
Common Stock
Issuance of 3,674,000 shares of -- -- -- 32,671
Common Stock, net of expenses
and underwriters' fees of $2,232
Cash received for common stock -- -- -- 100
subscription
Amortization of deferred -- -- -- 326
compensation
Net change in unrealized gains -- 11 -- 11
(losses) on marketable securities
Net loss -- (9,937) (9,937)
Balances at December 31, 1995 -- 33 (29,761) 47,605
Issuance of 457,296 shares of -- -- -- 1,582
Common Stock upon exercise of
stock options and 299,398 shares
upon exercise of warrant
Issuance of 249,200 common -- -- -- --
stock previously subscribed
Issuance of 146,342 shares of -- -- -- 3,000
Common Stock in exchange for
Combion, Inc.
Amortization of deferred -- -- -- 29
compensation
Net change in unrealized gains -- (106) -- (106)
(losses) on marketable securities
Net loss -- -- (7,276) (7,276)
Balances at December 31, 1996 -- (73) (37,037) 44,834
Issuance of 2,755,426 shares of -- -- -- 87,242
Common Stock, net of expenses
and underwriters' fees of $5,065
Issuance of 462,434 shares of -- -- -- 3,560
Common Stock, net of expenses
of $41
Issuance of 431,879 shares of -- -- -- 3,029
Common Stock upon exercise of
stock options and 14,934 shares
upon exercise of warrant
Net change in unrealized gains -- 127 -- 127
(losses) on marketable Securities
Net change in cumulative -- 2 -- 2
translation adjustment
Net income -- -- 6,908 6,908
Balances at December 31, 1997 -- 56 (30,129) 145,702
Issuance of 245,752 Shares of
Common Stock upon exercise of
stock options and 15,920 shares
issued under ESPP (unaudited)
Adjustment to conform fiscal (49) (1,744) 281
year of pooled entity - Synteni
(including issuance of 337,271
shares of Common Stock)
(unaudited)
Amortization of deferred
compensation
Net change in unrealized gains
(losses) on marketable securities
(unaudited)
Net income (unaudited)
Balances at June 30, 1998 $ (49) $ 7 $ (23,100) $ 157,876
========= ========= ========= =========
(unaudited)
</TABLE>
See accompanying notes
E-16
<PAGE>
INCYTE PHARMACEUTICALS, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(in thousands)
<TABLE>
<CAPTION>
Year Ended Six Months Ended
December 31, June 30,
------------------------------- ---------------------
1995 1996 1997 1997 1998
------ ------ ------ ------ ------
(unaudited)
<S> <C> <C> <C> <C> <C>
Cash flows from operating activities:
Net income (loss) $ (9,937) $ (7,276) $ 6,908 $ 1,728 $ 8,773
Adjustments to reconcile net income (loss) to
net cash provided by (used in) operating
activities:
Depreciation and amortization 2,771 6,529 10,633 4,592 7,489
Expense for abandoned equipment 124 -- --
Noncash portion of purchase of in-process -- 3,000 -- -- --
research and development
Losses from joint venture -- -- 300 -- 640
Amortization of deferred compensation -- -- -- -- 246
Adjustment to conform fiscal year of -- -- -- -- 278
pooled entity
Changes in certain assets and liabilities:
Accounts receivable (7,439) 5,174 (18,451) (1,497) 9,233
Prepaid expenses and other assets (585) (2,074) (3,495) (1,077) (3,723)
Accounts payable 766 2,430 1,028 (963) (2,078)
Accrued and other liabilities 4,498 10,143 14,404 3,074 77
Deferred revenue 1,015 601 6,660 6,178 12,159
-------- -------- -------- -------- --------
Net cash provided by (used in) operating activities (8,787) 18,527 17,987 12,035 33,094
-------- -------- -------- -------- --------
Cash flows from investing activities:
Capital expenditures (8,122) (20,453) (27,225) (9,136) (15,325)
Long-term investments -- (313) (8,537) (5,000) (6,894)
Transfer to restricted cash -- -- (6,000)
Proceeds from sale of assets leased back under -- -- 1,696 1,528 --
operating leases
Purchases of marketable securities (74,037) (16,526) (53,464) (4,511) (60,171)
Sales and maturities of marketable securities 61,722 16,336 26,740 8,539 23,854
-------- -------- -------- -------- --------
Net cash used in investing activities (20,437) (20,956) (66,790) (8,580) (58,536)
-------- -------- -------- -------- --------
Cash flows from financing activities:
Proceeds from issuance of common stock 32,862 1,582 93,831 4,322 2,923
Proceeds from capital leases and notes payable 69 -- 1,000 -- --
Principal payments on capital lease (72) (121) (46) (53) (135)
obligations and notes payable -------- -------- -------- -------- --------
Net cash provided by financing activities 32,859 1,461 94,785 4,269 2,788
-------- -------- -------- -------- --------
Net increase (decrease) in cash and cash 3,635 (968) 45,982 7,724 (22,654)
equivalents
Cash and cash equivalents at beginning of period 6,949 10,584 9,616 9,616 55,598
-------- -------- -------- -------- --------
Cash and cash equivalents at end of period $ 10,584 $ 9,616 $ 55,598 $ 17,340 $ 32,944
======== ======== ======== ======== ========
</TABLE>
See accompanying notes
E-17
<PAGE>
INCYTE PHARMACEUTICALS, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS - CONTINUED
(in thousands)
<TABLE>
<CAPTION>
Year Ended Six Months Ended
December 31, June 30,
--------------------------------------- --------------------
Supplemental schedule of cash flow
information: 1995 1996 1997 1997 1998
------ ------ ------ ------ ------
(unaudited)
<S> <C> <C> <C> <C> <C>
Interest paid $ 45 $ 17 $ 16 $ 14 $ 43
============= ============= ============= =========== ==========
Income taxes paid $ -- $ -- $ 252 $ 70 $ 340
============= ============= ============= =========== ==========
Supplemental Schedule of Noncash Investing
and Financing Activities
Property and equipment acquired pursuant to
capital lease obligations $ 69 $ -- $ -- $ -- $ --
============= ============= ============= =========== ==========
Long-term investment acquired pursuant to
obligation to distribute restricted cash $ -- $ -- $ 6,000 $ -- $ --
============= ============= ============= =========== ==========
</TABLE>
See accompanying notes
E-18
<PAGE>
INCYTE PHARMACEUTICALS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(INFORMATION AS OF JUNE 30, 1998 AND FOR THE SIX MONTHS ENDED
JUNE 30, 1997 AND 1998 IS UNAUDITED)
Note 1. Organization and Summary of Significant Accounting Policies
Organization and Business. Incyte Pharmaceuticals, Inc. ("Incyte" and, together
with its wholly owned subsidiaries, the "Company") was incorporated in Delaware
in April 1991. The Company designs, develops, and markets genomic
information-based tools including database products, genomic data management
software tools, microarray-based gene expression services, genomic reagents and
related services. The Company consists of two divisions, the Incyte General
division ("Incyte General") and the Incyte Genetics division ("Incyte
Genetics"). Incyte General focuses on information that can assist pharmaceutical
and biotechnology companies in the discovery and development of new drugs
including the identification of new disease targets and novel disease pathways,
and the evaluation of the safety and efficacy of new drugs. Incyte Genetics
focuses on products and services to assist pharmaceutical companies in the
identification and analysis of a type of genetic variation called single
nucleotide polymorphisms ("SNPs"), believed to correlate to a patients' disease
prognosis and drug response.
Principles of Consolidation. The consolidated financial statements include the
accounts of Incyte Pharmaceuticals, Inc., and its wholly owned subsidiaries. All
material intercompany accounts, transactions, and profits have been eliminated
in consolidation.
In September 1998, the Company completed the acquisition of Hexagen Limited
("Hexagen"), a privately held company based in Cambridge, England. The
transaction will be accounted for as a purchase. The Company issued 976,130
shares of the Company's common stock (the "Existing Common Stock") and $5.0
million in cash in exchange for all of Hexagen's outstanding capital stock. In
addition, the Company assumed Hexagen's stock options, which if fully vested and
exercised, would amount to 125,909 shares of Existing Common Stock (unaudited).
The assets, liabilities and the results of operations of Hexagen as well as the
amortization of the goodwill generated by the acquisition will be allocated in
their entirety to Incyte Genetics.
In January 1998, the Company issued shares of the Existing Common Stock in
exchange for all of the capital stock of Synteni, Inc. ("Synteni"), a privately
held microarray-based genomics company in Fremont, California. Synteni is
developing and commercializing technology for generating microarrays and related
software and services. The merger has been accounted for as a pooling of
interests and, accordingly, the Company's financial statements and financial
data for all periods have been retroactively restated to include the accounts
and operations of Synteni since inception. Synteni's fiscal year ends on
September 30. Synteni's results of operations for the period from October 1,
1997 to December 31, 1997 were recorded directly in retained earnings in the
first quarter of fiscal 1998.
In July 1996, the Company issued shares of Existing Common Stock in exchange for
all of the outstanding shares of Genome Systems, Inc. ("Genome Systems"). The
transaction has been accounted for as a pooling of interests, and the
consolidated financial statements discussed herein and all historical financial
information have been restated to reflect the combined operations of both
companies.
In August 1996, the Company acquired Combion, Inc. ("Combion") for shares of
Existing Common Stock. The acquisition of Combion has been accounted for as a
purchase, and the consolidated financial statements discussed herein reflect the
inclusion of the results of Combion from the date of acquisition, August 15,
1996.
See Note 7 Consolidated Financial Statements.
Unaudited Interim Financial Information. The consolidated balance sheet as of
June 30, 1998, statements of operations, statements of comprehensive operations
and the statements of cash flows for the six months ended June
E-19
<PAGE>
30, 1997 and 1998 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.
Reclassifications. Certain reclassifications were made to prior periods'
balances to conform with the 1998 presentation.
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 amounts reported in the financial statements and
accompanying notes. Actual results could differ from those estimates.
Foreign Currency Translation. The financial statements of subsidiaries outside
the United States are measured using the local currency as the functional
currency. Assets and liabilities of these subsidiaries are translated at the
rates of exchange at the balance sheet date. The resultant translation
adjustments are included in accumulated other comprehensive income (loss), a
separate component of stockholders' equity. Income and expense items are
translated at average monthly rates of exchange.
Concentrations of Credit Risk. Cash, cash equivalents, and short-term
investments and trade receivables are financial instruments which potentially
subject the Company to concentrations of credit risk. The estimated fair value
of financial instruments approximates the carrying value based on available
market information. The Company primarily invests its excess available funds in
notes and bills issued by the U.S. government and its agencies and corporate
debt securities and, by policy, limits the amount of credit exposure to any one
issuer and to any one type of investment, other than securities issued or
guaranteed by the U.S. government. The Company's customers are pharmaceutical,
biotechnology and agricultural companies which are typically located in the
United States and Europe. The Company has not experienced any credit losses to
date and does not require collateral on receivables.
Segment Information. Export revenue for the years ended December 31, 1995, 1996
and 1997 and the six month periods ended June 30, 1997 and 1998 were $1,525,000,
$9,743,000, $25,694,000, $9,445,000 and $16,639,000, respectively.
Cash and Cash Equivalents. Cash and cash equivalents are held in U.S. banks or
in custodial accounts with U.S. banks. Cash equivalents are defined as all
liquid investments with maturity from date of purchase of 90 days or less that
are readily convertible into cash and have insignificant interest rate risk. All
other investments are reported as marketable securities - available-for-sale.
Restricted Cash. Restricted cash consists of cash held in an escrow account
which will be disbursed to the Company's joint venture, diaDexus, LLC
("diaDexus"), as needed in accordance with the joint venture agreement. In July
1998, all remaining amounts were disbursed to diaDexus. See Joint Venture and
Note 8 to the Consolidated Financial Statements.
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. The amortized cost of debt securities in this category is
adjusted for amortization of premiums and accretions of discounts to maturity.
Such amortization is included in interest income. Realized gains and losses and
declines in value judged to be other than temporary for available-for-sale
securities are included in interest and other expense.
E-20
<PAGE>
The following is a summary of the Company's investment portfolio, including cash
equivalents of $398,000, $40,064,000 and $10,150,000 as of December 31, 1996 and
1997 and June 30, 1998, respectively.
<TABLE>
<CAPTION>
Net
Unrealized Estimated
Amortized Gains Fair
Cost (Losses) Value
---- -------- -----
(in thousands)
<S> <C> <C> <C>
December 31, 1996
U.S. Treasury notes and other U.S. government and agency securities $ 30,695 $ (73) $ 30,622
Corporate debt securities 398 - 398
-------------- ----------- ---------
$ 1,093 $ (73) $ 31,020
============== =========== ========
December 31, 1997
U.S. Treasury notes and other U.S. government and agency securities $ 53,951 $ 47 $ 53,998
Corporate debt securities 30,543 - 30,543
Floating rate notes 13,013 7 13,020
-------------- ----------- ----------
$ 97,507 $ 54 $ 97,561
============== =========== ==========
June 30, 1998 (Unaudited)
U.S. Treasury notes and other U.S. government and agency securities $ 85,701 $ 5 $ 85,706
Corporate debt securities 10,150 - 10,150
Floating rate notes 8,003 - 8,003
-------------- ----------- ----------
$ 103,854 $ 5 $ 103,859
============== =========== ==========
</TABLE>
At December 31, 1996 and 1997, all of the Company's investments are classified
as short-term, as the Company has classified its investments as available for
sale and may not hold its investments until maturity in order to take advantage
of market conditions. Of the marketable securities held at December 31, 1997,
$78,530,000 had maturities under a year and $19,031,000 had maturities over a
year, but less than two years. Unrealized gains were not material and have
therefore been netted against unrealized losses. Realized gains and losses from
sales and maturities of marketable securities have not been material to date.
Accounts Receivable. Accounts receivable at December 31, 1996 and 1997 and June
30, 1998 included an allowance for doubtful accounts of $0, $225,000 and
$300,000, respectively.
Property and Equipment. Property and equipment is stated at cost, less
accumulated depreciation and amortization. Depreciation and amortization is
recorded using the straight-line method over the estimated useful lives of the
E-21
<PAGE>
respective assets (generally two to five years). Leasehold improvements are
amortized over the shorter of the estimated useful life of the assets or lease
term. Property and equipment consists of the following (in thousands):
<TABLE>
<CAPTION>
December 31, June 30
-------------- ---------
1996 1997 1998
------ ------ ------
(unaudited)
<S> <C> <C> <C>
Office equipment $ 1,018 $ 2,588 $ 2,850
Laboratory equipment 13,182 18,939 20,477
Computer equipment 9,990 22,168 32,035
Leasehold improvements 8,702 14,495 17,667
-------------- -------------- --------------
32,892 58,190 73,029
Less accumulated depreciation and
amortization 9,696 20,120 27,375
-------------- -------------- --------------
$ 23,196 $ 38,070 $ 45,653
============== ============== ==============
</TABLE>
Depreciation, expense, including depreciation expense of assets under capital
leases, was $2,175,000, $5,298,000, $8,758,000, $3,755,000 and $5,971,000 for
the years ended December 31, 1995, 1996, and 1997 and the six months ended June
30, 1997 and 1998, respectively. Amortization of leasehold improvements was
$266,000, $1,061,000, $2,260,000, $837,000 and $1,518,000 for the years ended
December 31, 1995, 1996 and 1997, and the six months ended June 30, 1997 and
1998, respectively.
Certain laboratory and computer equipment used by the Company could be subject
to technological obsolescence in the event that significant advancement is made
in competing or developing equipment technologies. Management continually
reviews the estimated useful lives of technologically sensitive equipment and
believes that those estimates appropriately reflect the current useful life of
its assets. In the event that a currently unknown significantly advanced
technology became commercially available, the Company would re-evaluate the
value and estimated useful lives of its existing equipment, possibly having a
material impact on the financial statements.
Long-Term Investments. The Company has made equity investments in a number of
companies whose businesses may be complementary to the Company's business. All
investments, except diaDexus which is accounted for under the equity method (see
Joint Venture and Note 8 to the Consolidated Financial Statements)), are carried
at cost which approximates the fair market value. The Company evaluates its
long-term investments for impairment on a quarterly basis.
Software Costs. In accordance with the provisions of Financial Accounting
Standards Board Statement No. 86, "Accounting for the Costs of Computer Software
to be Sold, Leased or Otherwise Marketed," the Company has capitalized software
development costs incurred in developing certain products once technological
feasibility of the products has been determined. Capitalized software costs are
amortized over three years.
Revenue Recognition. The Company recognizes revenue for database agreements
evenly over the term of the agreement. Revenue is deferred for fees received
before earned. Revenues from custom orders, such as satellite databases, are
recognized upon shipment. Revenues from reagents and genomic screening products
are recognized when shipped, and revenues from genomic screening services are
recognized upon completion. Revenue from gene expression microarray services is
recognized at the completion of key stages in the performance of the service, in
proportion to costs incurred.
Stock-Based Compensation. The Company accounts for stock option grants to
employees in accordance with APB Opinion No. 25, Accounting for Stock Issued to
Employees. The Company recognizes compensation expense equal to the difference,
if any, between the exercise price of the option and the fair market value of
the stock at the date of grant.
E-22
<PAGE>
Advertising Costs. All costs associated with advertising products are expensed
in the year incurred. Advertising expense for the years ended December 31, 1995,
1996 and 1997 and the six months ended June 30, 1997 and 1998 were $324,000,
$573,000, $772,000, $336,000 and $585,000, respectively.
Joint Venture. In September 1997, the Company formed a joint venture, diaDexus,
LLC, ("diaDexus") with SmithKline Beecham Corporation ("SB"), which will utilize
genomic and bioinformatic technologies in the discovery and commercialization of
molecular diagnostics. The Company and SB each hold a 50 percent equity interest
in diaDexus and the Company accounts for the investment under the equity method.
See Note 8 to Consolidated Financial Statements.
Net Income (Loss) Per Share. On December 31, 1997, the Company adopted Financial
Accounting Standards Board ("FASB") Statement No. 128, Earnings per Share, which
requires the Company to change the method used to compute earnings per share and
to restate all prior periods. The following table sets forth the computation of
basic and diluted net income (loss) per share (in thousands, except per share
data):
<TABLE>
<CAPTION>
Year Ended Six Months Ended
December 31, June 30,
----------------------------------- -----------------
1995 1996 1997 1997 1998
------ ------ ------ ------ ------
(unaudited)
<S> <C> <C> <C> <C> <C>
Numerator:
Net income (loss) $ (9,937) $ (7,276) $ 6,908 $ 1,728 $ 8,773
=========== ========== ======= ======= =======
Denominator:
Denominator for basic net income (loss)
per share - weighted-average shares 18,819 22,398 24,300 23,059 26,504
Dilutive potential common shares-
Stock options -- -- 2,198 2,169 2,288
----------- ---------- ------- ------- -------
Denominator for diluted net income (loss)
per share 18,819 22,398 26,498 25,228 28,792
=========== ========== ======= ======= =======
Basic net income (loss) per share $ (0.53) $ (0.32) $ 0.28 $ 0.07 $ 0.33
=========== ========== ======= ======= =======
Diluted net income (loss) per share $ (0.53) $ (0.32) $ 0.26 $ 0.07 $ 0.30
=========== ========== ======= ======= =======
</TABLE>
In October 1997, the Company's Board of Directors authorized a two-for-one stock
split effected in the form of a stock dividend paid on November 7, 1997 to
holders of record on October 17, 1997. All share and per share data have been
adjusted retroactively to reflect the split.
Options and warrants to purchase 3,100,000 and 3,194,000 shares of Existing
Common Stock were outstanding at December 31, 1995 and 1996, respectively, but
were not included in the computation of diluted loss per share, as their effect
was antidilutive.
Pro Forma net income (loss) per share (unaudited). The Incyte Genetics and
Incyte General pro forma net income (loss) per share are computed assuming the
Incyte Genetics Stock Proposal is approved by the Company's stockholders. Incyte
General pro forma net income (loss) per share gives effect to the redesignation
of all Existing Common Stock as Incyte General Stock on a one-for-one basis.
Incyte Genetics' pro forma net income (loss) per share assumes 12,000,000
shares of
E-23
<PAGE>
Incyte Genetics Stock are outstanding for all periods, as if the Incyte Genetics
Distribution had occurred on July 1, 1996.
Note 2. Database Agreements
As of December 31, 1997 the Company had entered into database agreements with
nineteen pharmaceutical, biotechnology and agricultural companies (twenty-one as
of June 30, 1998). Each subscriber has agreed to pay, during the term of the
agreement, annual fees to receive non-exclusive access to selected modules of
the Company's databases. In addition, if a company develops certain products
utilizing the Company's technology and proprietary database information,
potential milestone and royalty payments could be received by the Company. If
these agreements are not renewed and if the Company cannot sign a sufficient
number of new database agreements, the loss of revenue could have a material
adverse effect on the Company's business and operating results. Certain
companies also have satellite database agreements, whereby the Company provides
custom sequencing services, which are billed for separately. Satellite database
services are provided to the customer on an exclusive basis for a negotiated
period of time. None of the companies individually contributed more than 10% of
the Company's total revenues in the year ended December 31, 1997 or the six
months ended June 30, 1997 and 1998. Over 90% of the total revenues in 1996 were
derived from ten companies, three of which individually contributed more than
10% of the total, or approximately 37% in the aggregate. In 1995, the majority
of the total revenues were derived from five collaborators, including three of
which contributed more than 10% individually, or approximately 71% in the
aggregate.
In addition to the database agreements, the Company has entered
into a number of research and development alliances with companies and research
institutions. These agreements provide for the funding of research activities by
the Company and the possible payment of milestones, license fees, and, in some
cases, royalties.
Note 3. Commitments
At December 31, 1997, the Company had signed noncancelable operating leases on
multiple facilities, including facilities in Palo Alto and Fremont, California
and St. Louis, Missouri. The leases expire on various dates ranging from March
1998 to January 2006. Rent expense for the years ended December 31, 1995, 1996,
and 1997 and the six month periods ended June 30, 1997 and 1998 was
approximately $1,251,000, $1,675,000, $3,490,000, $1,324,000 and $2,554,000,
respectively.
The Company had laboratory and office equipment with a cost of approximately
$370,000, $189,000 and $65,000 at December 31, 1996 and 1997 and June 30, 1998,
respectively, and related accumulated amortization of approximately $268,000,
$136,000 and $16,000 at December 31, 1996 and 1997, and June 30, 1998,
respectively, under capital leases.
These leases are secured by the equipment leased thereunder.
At December 31, 1997, future noncancelable minimum payments under the operating
and capital leases and notes payable were as follows:
Capital Leases
Operating and
Leases Notes Payable
---------------- --------------
(In thousands)
Year ended December 31,
1998 $ 5,517 $ 48
1999 4,381 38
2000 3,902 19
2001 3,426 --
2002 and thereafter 4,592 --
------------------ ------------
Total minimum lease payments $ 21,818 105
==================
Less amount representing interest 6
------------
Present value of minimum lease payments 99
Less current portion 46
------------
Noncurrent portion $ 53
============
E-24
<PAGE>
In July 1997, Synteni obtained $1,000,000 in debt financing secured by the
Company's property and equipment. The loan is repayable in 48 equal monthly
installments commencing on September 1, 1997 and carries an annual interest rate
of 9%. In connection with the financing, the Company issued a warrant to
purchase 2,569 shares of common stock, exercisable for a period of seven years
from the date of issue at an exercise price of $7.79 per share. Using the
Black-Scholes model to determine the fair market value of the warrant,
management has determined that such fair value is nominal.
In July 1997, the Company entered into a multi-year lease with respect to a
95,000 square foot building to be constructed adjacent to the Company's Palo
Alto headquarters. The term of the lease is twelve years at an approximate
annual rent of $3.4 million. The Company's share of tenant improvements is
estimated to be between $10.0 million and $15.0 million, of which approximately
$0.9 million has been expended through June 30, 1998. Given the current
construction schedule, the Company does not expect to begin to incur significant
expenses related to this facility until late 1998 or early 1999.
The Company has entered into a number of research and development alliances with
companies and research institutions. As part of a collaborative agreement with
Oxford Glyco Sciences plc, relating to the joint development of a proteomics
database, Incyte has agreed to reimburse up to $5.0 million in 1999 if revenues
are not sufficient to offset expenses or services rendered. The Company's
commitments under any other of these agreements do not represent a significant
expenditure in relation to the Company's total research and development expense.
See Note 2 to Consolidated Financial Statements.
Note 4. Stockholders' Equity
Common Stock. At December 31, 1997, the Company had reserved a total of
4,644,823 shares of its Existing Common Stock for issuance upon exercise of
outstanding stock options described below. In October 1997, the Company's Board
of Directors authorized a two-for-one stock split effected in the form of a
stock dividend paid on November 7, 1997 to holders of record on October 17,
1997. All share and per share data have been adjusted retroactively to reflect
the split.
On May 21, 1997, the Company's stockholders approved an increase in the number
of shares authorized for issuance from 20,000,000 to 75,000,000.
Sales of Stock. In November 1995, the Company completed a follow-on public
offering and issued 3,674,000 shares of Existing Common Stock, including 274,000
shares issued in December, 1995 upon partial exercise of the underwriters'
over-allotment option, at $9.50 per share before deducting the underwriting
discount and offering expenses. In August 1997, the Company completed another
follow-on public offering and issued 2,755,426 shares of Existing Common Stock,
at $33.50 per share. Net proceeds from this offering were approximately $87.2
million after deducting the underwriting discount and offering expenses.
Stock Compensation Plans. The Company applies APB Opinion No. 25 and related
Interpretations in accounting for its stock compensation plans. The Company
records stock compensation expense for the difference between the exercise price
and the fair market value, if any, over the vesting period of the option. Had
compensation cost for the Company's two stock-based compensation plans been
determined consistent with FASB Statement No. 123, the Company's pro forma net
loss in the years ended December 31, 1996 and 1997 and six months ended June 30,
1997 would have been approximately $11.0 million, $0.5 million and $1.7 million,
respectively. For the six months ended June 30, 1998, the Company would have
reported pro forma net income of $3.4 million. Both the Company's pro forma
basic and diluted loss per share for the years ended December 31, 1996 and 1997
and six months ended June 30, 1997 would have been $0.49 per share, $0.02 per
share and $0.07 per share, respectively, and for the six months
E-25
<PAGE>
ended June 30, 1998, pro forma basic and diluted net income per share would have
been $0.13 and $0.12 per share, respectively. The weighted average fair value of
the options granted during the years ended December 31, 1996 and 1997 and the
six months ended June 30, 1997 and 1998 are estimated at $9.44, $14.66, $12.58,
and $20.52 per share, on the date of grant, using the Black-Scholes
multiple-option pricing model with the following assumptions: dividend yield 0%,
0%, 0%, and 0%, volatility of 55%, 56%, 56% and 56% risk-free interest rate with
an average of 6.10%, 6.05%, 6.35%, and 5.52% and an average expected life of
3.25, 3.37, 3.40, and 3.78 years, respectively. The fair value of the employees'
purchase rights under the Employee Stock Purchase Plan during the year ended
December 31, 1997 and the six months ended June 30, 1998 is estimated at $11.86
and $13.66, on the date of grant, using the Black- Scholes multiple-option
pricing model with the following assumptions: dividend yield 0% and 0%,
volatility of 56% and 56%, risk free interest rate of 5.64% and 5.44%, and an
expected life of 9 months, respectively.
The effects on pro forma disclosures of applying FASB 123 are not likely to be
representative of the effects on pro forma disclosures of future years. As FASB
123 is only applicable to options granted after December 31, 1994, the pro forma
effect will not be fully reflected until 1998. The Black-Scholes option
valuation model was developed for use in estimating the fair value of traded
options which have no vesting restrictions and are fully transferable. In
addition, option valuation models require the input of highly subjective
assumptions, including the expected stock price volatility and option life.
Because the Company's employee stock options have characteristics significantly
different from those of traded options, because changes in the subjective input
assumptions can materially affect the fair value estimate, and because the
Company has a relatively limited history with option behavior, in management's
opinion the existing models do not necessarily provide a reliable single measure
of the fair value of its employee stock options.
Summaries of stock option activity for the Company's three fixed stock option
plans as of December 31, 1995, 1996 and 1997, and related information for the
years ended December 31 are included in the plan descriptions below.
1991 Stock Plan. In November 1991, the Board of Directors adopted the 1991 Stock
Plan, which was amended and restated in 1992, 1995, 1996 and 1997 for issuance
of Existing Common Stock to employees, consultants, and scientific advisors.
Options issued under the plan shall, at the discretion of the compensation
committee of the Board of Directors, be either incentive stock options or
nonstatutory stock options. The exercise prices of incentive stock options
granted under the plan are not less than the fair market value on the date of
the grant, as determined by the Board of Directors. The exercise prices of
nonstatutory stock options granted under the plan are not less than 85% of the
fair market value on the date of the grant, as determined by the Board of
Directors. Options generally vest over approximately four years, pursuant to a
formula determined by the Company's Board of Directors, and expire after ten
years. On May 21, 1997, the Company's stockholders approved an increase in the
number of shares of Existing Common Stock reserved for issuance under the plan
from 4,000,000 to 4,800,000. On June 15, 1998, the Company's stockholders
approved an increase in the number of shares of Existing Common Stock reserved
for issuance under the plan from 4,800,000 to 6,300,000.
1996 Synteni Stock Plan. In December 1996, Synteni's board of directors approved
and adopted the 1996 Equity Incentive Plan ("Synteni Plan"). Under the Synteni
Plan, Synteni could grant incentive stock options, nonstatutory stock options,
stock bonuses or restricted stock purchase rights to purchase the aggregate
equivalent of 436,100 shares of Existing Common Stock. Incentive stock options
could be granted to employees and nonstatutory options and rights to purchase
restricted stock may be granted to employees, directors or consultants at
exercise prices of no less than 100% and 85%, respectively, of the fair value of
the common stock on the grant date, as determined by the board of directors.
Options could be granted with different vesting terms from time to time and
options expire no more than 10 years after the date of grant. All outstanding
options at the time of the merger with Incyte were converted to options to
purchase Incyte Common Stock, and the Synteni Plan was terminated.
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<PAGE>
Activity under the combined plan was as follows:
Shares Subject To
Outstanding Options
---------------------------------------
Weighted
Shares Average
Available Exercise
For Grant Shares Price
------------ ---------- -----------
Balance at January 1, 1995 217,664 1,303,416 $ 3.86
Additional authorization 1,600,000 -
Options granted (1,246,800) 1,246,800 9.14
Options exercised - (57,630) 1.53
Options canceled 19,918 (19,918) 6.51
------------- ---------- ---------
Balance at December 31, 1995 590,782 2,472,668 6.56
Additional authorization 800,000 - -
Options granted (1,052,300) 1,052,300 19.75
Options exercised - (446,556) 3.54
Options canceled 140,326 (140,326) 8.38
------------ --------- ---------
Balance at December 31, 1996 478,808 2,938,086 11.63
Additional authorization 800,000 - -
Shares authorized under Synteni Plan 436,100 - -
Options granted (1,159,508) 1,159,508 25.56
Options exercised - (408,171) 7.27
Options canceled 109,398 (109,398) 19.27
------------ --------- ---------
Balance at December 31, 1997 664,798 3,580,025 16.46
Additional authorization (unaudited) 1,500,000 - -
Options granted (unaudited) (350,087) 350,087 33.56
Options exercised (unaudited) - (254,474) 9.05
Options canceled (unaudited) 69,900 (69,900) 18.28
Termination of Synteni Plan (unaudited) (88,280) - -
------------ ----------- ---------
Balance at June 30, 1998 (unaudited) 1,796,331 3,605,738 $ 18.61
=========== ========= =========
Stock options issued by Synteni to purchase 89,587 Incyte equivalent common
shares at a weighted average exercise price of $1.49, and options to purchase
8,722 Incyte equivalent common shares exercised in the period from October 1,
1997 to December 31, 1997 were included in the 1998 activity under the Synteni
Plan. The Company recorded $1,658,000 of deferred compensation related to
these options, which will be amortized over the vesting period of the options.
Options to purchase a total of 2,914,596, 2,181,814 and 2,346,532 shares at
December 31, 1996 and 1997, and June 30, 1998, respectively, were exercisable.
Of the options exercisable, 803,004, 1,233,953 and 1,419,860 shares were vested
at December 31, 1996 and 1997, and June 30, 1998, respectively.
Non-Employee Directors' Stock Option Plan. In August 1993, the Board of
Directors approved the 1993 Directors' Stock Option Plan (the "Directors'
Plan"), which was amended in 1995. The Directors' Plan provides for the
automatic grant of options to purchase shares of Existing Common Stock to
non-employee directors of the Company. The maximum number of shares issuable
under the Directors' Plan is 400,000.
The Directors' Plan provides immediate issuance of options to purchase an
initial 40,000 shares of Existing Common Stock to each new non-employee director
joining the Board. The initial options are exercisable in five equal annual
E-27
<PAGE>
installments. Additionally, members who continue to serve on the Board will
receive annual option grants for 10,000 shares exercisable in full on the first
anniversary of the date of the grant. All options are exercisable at the fair
market value of the stock on the date of grant. At December 31, 1996 and 1997
and June 30, 1998, options to purchase 227,500, 267,500 and 287,500 shares of
Existing Common Stock at a weighted average exercise price of $5.37, $8.71 and
$11.18, respectively, were outstanding; options to purchase 141,500, 171,500 and
217,500 shares were vested and exercisable at December 31, 1996 and 1997 and
June 30, 1998, respectively. The Directors' Plan was amended in March 1998 by
the Board of Directors to eliminate the grant referred to above to each new
nonemployee director and to reduce the annual grants from 10,000 shares to 5,000
shares.
The following table summarizes information about stock options outstanding at
December 31, 1997, for the 1991 Stock Plan, the 1993 Directors' Stock Option
Plan and the Synteni 1996 Equity Incentive Plan
Options Outstanding Options Exercisable
-------------------------------------- ----------------------
Weighted
Average Weighted Weighted
Remaining Average Average
Range of Number Contractual Exercise Number Exercise
Exercise Prices Outstanding Life Price Exercisable Price
- --------------- ----------- ------ ------- ----------- -------
$0.15 - 1.00 434,284 7.35 $ 0.78 212,065 $ 0.75
$2.00 - 4.75 236,382 5.98 $ 3.00 204,382 $ 3.04
$5.31 - 7.56 419,108 6.99 $ 7.19 419,108 $ 7.19
$8.44 - 9.56 729,279 7.79 $ 8.73 729,279 $ 8.73
$10.69 - 19.81 546,143 8.21 $ 15.67 522,143 $ 15.59
$20.19 - 28.19 858,330 8.99 $ 22.57 266,377 $ 20.81
$31.00 - 36.63 512,000 9.81 $ 35.57 - $ -
$40.05 - 43.88 112,000 9.80 $ 41.90 - $ -
--------- ---- ------- --------- -------
$0.15 - 43.88 3,847,526 8.20 $ 15.92 2,353,354 $ 10.13
========= ==== ======= ========= =======
In July 1996, in connection with the Genome Systems transaction described in
Note 7 below, the Company issued, in exchange for an option to purchase capital
stock of Genome Systems, an option to purchase 21,482 shares of Existing Common
Stock at an exercise price of $0.0235 per share. The option was not issued under
the provisions of either plan described above. The option had been exercised
with respect to 10,740 shares as of December 31, 1997. The remaining 10,742
shares under the option were exercised in January 1998.
Employee Stock Purchase Plan. On May 21, 1997, the Company's stockholders
adopted the 1997 Employee Stock Purchase Plan ("ESPP"). The Company has
authorized 400,000 shares of Existing Common Stock for issuance under the ESPP.
Each regular full-time and part-time employee is eligible to participate after
one year of employment. The initial offering period commenced August 1, 1997 and
ends October 31, 1999. As of December 31, 1997 and June 30, 1998, $238,000 and
$167,000, respectively, has been deducted from employees' payroll.
Note 5. Income Taxes
As of December 31, 1997, the Company had federal net operating loss
carryforwards of approximately $27,800,000. The Company also had federal
research and development tax credit carryforwards of approximately $2,800,000.
The net operating loss carryforwards will expire at various dates, beginning on
2009, through 2012 if not utilized.
E-28
<PAGE>
Significant components of the Company's deferred tax assets are as follows:
December 31,
---------------------------------
1997 1996
------------ -------------
(in thousands)
Deferred tax assets:
Net operating loss carryforwards $ 10,000 $ 10,300
Research credits 4,000 1,500
Capitalized research and development 1,400 1,600
Other, net 2,800 1,500
----------- ----------
Deferred tax assets 18,200 14,900
Valuation allowance for deferred tax assets (18,200) (14,900)
----------- -----------
Net deferred tax asset $ -- $ --
=========== ==========
The valuation allowance for deferred tax assets increased by approximately
$4,100,000, $2,800,000 and $3,300,000 during the years ended December 31, 1995,
1996 and 1997. Approximately $4,100,000 of the valuation allowance for deferred
tax assets relates to benefits of stock option deductions which, when
recognized, will be allocated directly to contributed capital.
Utilization of the net operating losses and credits may be subject to an annual
limitation, due to the "change in ownership" provisions of the Internal Revenue
Code of 1986 and similar state provisions.
The provision for income taxes consists primarily of federal Alternative Minimum
Tax and differs from the federal statutory rate as follows:
Year ended
December 31,
1997
--------------
(in thousands)
Tax at U.S federal statutory rate $ 2,610
Use of net operating loss carryforwards (4,814)
Unbenefitted net operating losses 1,225
Non-deductible in-process research and development charges 1,108
Other 419
----------
Provision for income tax $ 548
==========
Note 6. Defined Contribution Plan
The Company has a defined contribution plan covering all domestic employees.
Employees may contribute a portion of their compensation, which is then matched
by the Company, subject to certain limitations. Defined contribution expense for
the Company was $0, $244,000, $520,000, $282,000, and $429,000 in the years
ended 1995, 1996 and 1997 and the six month periods ended June 30, 1997 and
1998, respectively.
Note 7. Business Combinations
In July 1996, the Company issued 408,146 shares of Existing Common Stock in
exchange for all of the capital stock of Genome Systems, Inc., a privately held
genomics company located in St. Louis, Missouri. Genome Systems provides genomic
research products and technical support services to scientists to assist them in
the identification and isolation
E-29
<PAGE>
of novel genes. The merger has been accounted for as a pooling of interests and,
accordingly, the Company's financial statements and financial data have been
restated to include the accounts and operations of Genome Systems since
inception.
In August 1996, the Company acquired all the common stock of Combion, a
microarray technology company in Pasadena, California, in a stock-for-stock
exchange, issuing 146,342 shares of Existing Common Stock valued at $3 million.
The acquisition has been accounted for as a purchase transaction and,
accordingly, the purchase price was allocated to assets and liabilities based on
the estimated fair value as of the date of acquisition. The purchase price has
been allocated based on the fair value of the net assets and the technology
acquired (recorded as a charge to in-process research and development).
Combion's results of operations have been included in the consolidated results
of operations since the date of acquisition. Pro forma results of operations
have not been presented because the effect of this acquisition was not material
to the Company's consolidated results of operations or financial position.
In January 1998, the Company issued 2,340,237 shares of Existing Common Stock in
exchange for all of the capital stock of Synteni, a privately held
microarray-based genomics company in Fremont, California. Synteni is developing
and commercializing technology for generating microarrays and related software
and services. The merger was accounted for as a pooling of interests and,
accordingly, the Company's financial statements and financial data have been
restated to include the accounts and operations of Synteni since inception.
The table below presents the separate results of operations for Incyte, Genome
Systems, and Synteni prior to the respective mergers. Incyte's results include
Genome Systems from August 1996 and Synteni from January 1998.
<TABLE>
<CAPTION>
Year Ended Six Months Ended
December 31, June 30,
--------------------------------------- ------------------------
1995 1996 1997 1997 1998
------ ------ ------ ------ -----
(unaudited)
<S> <C> <C> <C> <C> <C>
Revenues:
Incyte $ 9,908 $ 40,051 $ 88,351 $ 39,051 $ 63,472
Genome 2,304 1,734 - - -
Synteni 87 110 1,645 372 -
--------- ----------- ---------- ---------- ----------
Total $ 12,299 $ 41,895 $ 89,996 $ 39,423 $ 63,472
========= ========= ========== ========== ==========
Net income (loss):
Incyte $ (10,142) $ (6,724) $ 10,408 $ 2,923 $ 9,833
Genome 205 106 - - -
Synteni - (515) (3,500) (1,195) -
Merger related expenses - (143) - - (1,060)
---------- --------- ---------- ---------- ----------
Total $ (9,937) $ (7,276) $ 6,908 $ 1,728 $ 8,773
========= ========= ========== ========== ==========
</TABLE>
Note 8. Joint Venture
In September 1997, the Company formed a joint venture, diaDexus, in conjunction
with SB, which will utilize genomic and bioinformatic technologies in the
discovery and commercialization of molecular diagnostics. The Company and SB
each hold a 50 percent equity interest in diaDexus and the Company accounts for
the investment under the equity method. Beginning in April 1998, the Company's
share in diaDexus' net losses was offset by the amortization of the excess of
the Company's share of diaDexus' net assets over its basis. The amortization of
this amount is expected to approximate the Company's equity share in diaDexus'
net losses and continue through the third quarter of 1998. A portion of the
investment is reflected as restricted cash and in accrued liabilities on the
balance sheet at December 31, 1997 and June 30, 1998 since that balance is held
in an escrow account and will be disbursed to diaDexus as needed in accordance
with the joint venture agreement. In July 1998, all remaining amounts were
disbursed to diaDexus.
E-30
<PAGE>
Note 9. New Pronouncements
In June 1998, the FASB issued Statement No. 133, "Accounting for Derivative
Instruments and Hedging Activities." ("SFAS 133"). This statement is effective
for fiscal years beginning after June 15, 1999. SFAS 133 established standards
for reporting derivative instruments and hedging activities. Application of SFAS
133 will have no impact on the consolidated financial position or results of
operations as currently reported.
Note 10. Litigation
In January 1998, Affymetrix, Inc. ("Affymetrix") filed a lawsuit in the United
States District Court for the District of Delaware alleging infringement of U.S.
patent number 5,445,934 (the "'934 Patent") by both Synteni and Incyte. The
complaint alleges that the '934 Patent has been infringed by the making, using,
selling, importing, distributing or offering to sell in the United States high
density arrays by Synteni and Incyte and that such infringement was willful.
Affymetrix seeks a permanent injunction enjoining Synteni and Incyte from
further infringement of the '934 Patent and, in addition, seeks damages, costs
and attorney's fees and interest. Affymetrix further requests that any such
damages be trebled based on its allegation of willful infringement by Incyte and
Synteni.
In September 1998, Affymetrix filed an additional lawsuit in the United States
District Court for the District of Delaware alleging infringement of the U.S.
patent number 5,800,992 (the "'992 Patent") and U.S. patent number 5,744,305
(the "'305 Patent") by both Synteni and Incyte. The complaint alleges that the
'305 Patent has been infringed by the making, using, selling, importing,
distributing or offering to sell in the United States high density arrays by
Synteni and Incyte, that the '992 Patent has been infringed by the use of
Synteni's and Incyte's GEMTM microarray technology to conduct gene expression
monitoring using two-color labeling, and that such infringement was willful.
Affymetrix seeks a permanent injunction enjoining Synteni and Incyte from
further infringement of the '305 and '992 Patents and, in addition, Affymetrix
seeks a preliminary injunction enjoining Incyte and Synteni from using Synteni's
and Incyte's GEM microarray technology to conduct gene expression monitoring
using two-color labeling as described in the '992 patent.
Incyte and Synteni believe they have meritorious defenses and intend to defend
the suit vigorously. However, there can be no assurance that Incyte and Synteni
will be successful in the defense of these suits. Regardless of the outcome,
this litigation has resulted and is expected to continue to result in
substantial expenses and diversion of the efforts of management and technical
personnel. Further, there can be no assurance that any license that may be
required as a result of these suits or the outcome thereof would be made
available on commercially acceptable terms, if at all.
Note 11. Subsequent Events (unaudited)
In September 1998, the Company completed the acquisition of Hexagen, a privately
held company based in Cambridge, England. The transaction will be accounted for
as a purchase. The Company issued 976,130 shares of Existing Common Stock and
$5.0 million in cash in exchange for all of Hexagen's outstanding capital stock.
In addition, the Company assumed Hexagen's stock options, which if fully vested
and exercised, would amount to 125,909 shares of Existing Common Stock. The
assets, liabilities and the results of operations of Hexagen as well as the
amortization of the goodwill generated by the acquisition will be allocated in
their entirety to Incyte Genetics.
In September 1998, the Board of Directors of the Company recommended stockholder
approval of a proposal (the "Incyte Genetics Stock Proposal") that would create
two series of common stock which are intended to reflect separately the
performance of the Company's Incyte General and Incyte Genetics divisions. Under
the Incyte Genetics Stock Proposal, the Company's Certificate of Incorporation
would be amended to designate a new series of common stock entitled Incyte
Genetics Stock and to redesignate each share of the Company's Existing Common
Stock as one share of a new series of common stock entitled Incyte General
Stock. In addition, in conjunction with the Incyte Genetics Stock Proposal, the
Board has recommended for stockholder approval, amendments to the Company's
Stock Plan, Directors Plan, and ESPP, which would allow for the issuance of both
Incyte Genetics and Incyte General Stock through these plans.
If the Incyte Genetics Stock Proposal and the related proposal to amend the
Stock Plan are approved by the Company's stockholders and implemented by the
Board of Directors, the Stock Plan will be amended to provide 6,300,000 shares
of Incyte General Stock and 2,400,000 shares of Incyte Genetics Stock will be
reserved for issuance under the plan, and each outstanding option under the
Stock Plan will be converted into an option to purchase shares of Incyte General
Stock. Upon any distribution of shares of Incyte Genetics Stock to the holders
of outstanding Incyte General Stock,
E-31
<PAGE>
outstanding options under the Stock Plan will be adjusted so that a holder of an
outstanding option to purchase one share of Incyte General Stock under the Stock
Plan will be entitled to acquire one share of Incyte General Stock and such
number or fraction of shares of Incyte Genetics Stock as were distributed with
respect to each share of Incyte General Stock, for an aggregate exercise price
equal to the original exercise price of the outstanding option.
If the Incyte Genetics Stock Proposal and the related proposal to amend the
Directors' Plan are approved by the Company's stockholders and implemented by
the Board of Directors, the Directors' Plan will be amended to provide that up
to 400,000 shares of Incyte General Stock and 200,000 shares of Incyte Genetics
Stock will be reserved for issuance under the plan. Each annual option grant
will be amended to provide for the issuance of options to purchase shares of
Incyte General Stock and Incyte Genetics Stock in a proportion to be determined.
If the Incyte Genetics Stock Proposal and the related proposal to amend the ESPP
are approved by the Company's stockholders and implemented by the Board of
Directors, the ESPP will be amended to provide that up to 400,000 shares of
Incyte General Stock and 400,000 shares of Incyte Genetics Stock will be
reserved for issuance under the ESPP and that participants may purchase either
Incyte General Stock or Incyte Genetics Stock or both, in such proportions as
the participants may determine.
On September 25, 1998, the Board of Directors adopted a Stockholder Rights Plan
(the "Original Rights Plan"), pursuant to which one preferred stock purchase
right (an "Original Right") will be distributed for each outstanding share of
Common Stock held of record on October 13, 1998. One Original Right will also
attach to each share of Common Stock issued by the Company subsequent to such
date and prior to the distribution date defined below. Each Original Right
represents a right to purchase, under certain circumstances, a fractional share
of a newly created series of the Company's preferred stock at an exercise price
of $200.00, subject to adjustment. In general, the Original Rights will become
exercisable and trade independently from the Common Stock on a distribution date
that will occur on the earlier of (i) the public announcement of the acquisition
by a person or group of 15% or more of the Common Stock or (ii) ten days after
commencement of a tender or exchange offer for the Common Stock that would
result in the acquisition of 15% or more of the Common Stock. Upon the
occurrence of certain other events related to changes in ownership of the Common
Stock, each holder of an Original Right would be entitled to purchase shares of
Common Stock, or an acquiring corporation's common stock, having a market value
of twice the exercise price. Under certain conditions, the Original Rights may
be redeemed at $0.01 per Original Right by the Board of Directors. The Original
Rights expire on September 25, 2008. If the Incyte Genetics Stock Proposal is
approved by the Company's stockholders and implemented by the Board of
Directors, the Original Rights Plan will be amended and restated to, among other
things, (i) reflect the new equity structure of the Company, (ii) redesignate
each Original Right as an Incyte General Stock Right, (iii) issue an Incyte
Genetics Stock Right with respect to each share of Incyte Genetics Stock, which
will entitle the holders thereof to purchase shares of a newly designated series
of preferred stock under the conditions similar to those specified for the
Incyte General Stock Rights and the Original Rights (the Incyte General Stock
Rights and Incyte Genetics Stock Rights being collectively referred to as the
"Rights"), and (iv) change the triggers for exercisability of the Rights to 15%
of the voting power of all outstanding voting securities of the Company from 15%
of the outstanding Common Stock. The Rights will otherwise have attributes
similar to those of the Original Rights.
<PAGE>
ANNEX F: INCYTE GENERAL
Page
DESCRIPTION OF BUSINESS..............................................F - 1
SELECTED COMBINED FINANCIAL DATA....................................F - 10
MANAGEMENT'S DISCUSSION AND ANALYSIS................................F - 12
COMBINED FINANCIAL STATEMENTS.......................................F - 26
<PAGE>
INCYTE GENERAL
DESCRIPTION OF BUSINESS
Overview
Incyte General is a division of Incyte Pharmaceuticals, Inc. ("Incyte"
and, together with its subsidiaries, the "Company"), a leading provider of
genomic information-based tools and services including database products,
genomic data management software tools, genomic reagents and related services.
Incyte General focuses on genomic information- based tools that can assist
pharmaceutical and biotechnology companies in the discovery and development of
new drugs and assist agricultural companies in the identification of genes
relating to desirable agricultural traits and the development of new
agricultural products.
Incyte General's genomic databases integrate bioinformatics software
with proprietary and, when appropriate, publicly available genomic information
to create information-based tools used by pharmaceutical and biotechnology
companies in drug discovery and development. In building the databases, Incyte
General utilizes high-throughput, computer-aided gene sequencing and analysis
technologies to identify and characterize the expressed genes of the human
genome, as well as certain animal, plant and microbial genomes. By searching the
genomic databases, companies can integrate and analyze genomic information
from multiple sources in order to discover genes that may represent the basis
for new biological targets, therapeutic proteins, or gene therapy, antisense or
diagnostic products. Incyte General's genomic products and services are designed
to meet the need of the pharmaceutical and biotechnology industries to utilize
genomic information for the acceleration of the discovery and development of new
diagnostic and therapeutic products. These products and services can assist not
only with gene and target discovery, but also with functional genomic studies,
preclinical pharmacology and toxicology studies as well as understanding and
analyzing the results of clinical development studies.
Incyte General currently provides access to its genomic databases
through collaborations with pharmaceutical, biotechnology, and agricultural
companies worldwide. As of August 31, 1998, twenty-one companies had entered
into multi-year database agreements to obtain access to Incyte General's
databases on a non-exclusive basis. Revenues from these collaborators generally
include database access fees and, in some cases, additional fees for custom
sequencing services, referred to as "satellite" database services. Incyte
General's database agreements also provide for milestone payments and royalties
from the sale of their products derived from proprietary information contained
within one or more database modules.
Incyte General's portfolio of database modules includes the LifeSeq(R)
human gene sequence and expression database, the LifeSeq FL(R) database of
full-length human genes, the PathoSeq(TM) microbial genomic database, the
ZooSeq(TM) animal genomic; software products include the LifeTools(TM) suite of
bioinformatics software programs, LifeArray(TM) gene expression data management
and analysis software, and LifeSeq(R) 3D data mining and visualization software,
and a variety of custom database and sequencing services. Each database module
consists of a relational database that runs on UNIX-based client/server networks
and incorporates HyperText Markup Language ("HTML") and JAVA graphical user
interfaces enabling collaborators to use multiple search tools and browse
various database modules. The databases are available using either Oracle or
Sybase database architectures and operate on Sun Microsystems, Digital Equipment
Corporation and Silicon Graphics workstations.
Background
Genes, found in all living cells, are comprised of DNA, which in turn
is comprised of nucleotide base pairs or bases. Genes provide the necessary
information to code for the synthesis of proteins, the molecules which conduct
all functions within a cell. Many human diseases are associated with the
inadequate or inappropriate presence, production or performance of proteins. As
such, pharmaceutical and biotechnology companies often seek to develop drugs
that will bind to a targeted protein involved in disease in order to regulate,
inhibit or stimulate its biological activity. The serotonin receptor and the
estrogen receptor are examples of targeted proteins. Other proteins, known as
therapeutic proteins, have direct biological activity and may be capable of
treating disease. Insulin and human growth
F - 1
<PAGE>
hormone are examples of therapeutic proteins. Understanding the role
genes play in disease, and the protein targets or therapeutic proteins which
they encode, has thus become a significant area of interest and research within
the pharmaceutical and biotechnology industries.
One frequently employed method for determining gene function involves
the grouping of genes into "related" families based on similarities in DNA
sequence. DNA sequencing is a process that identifies the order in which the
bases in DNA are arranged in a particular section of DNA, or DNA fragment. Once
a gene's sequence is known, its function may be inferred by comparing its
sequence with the sequences of other human genes of known function, as genes
with similar, or homologous, sequences may have related functions. For example,
if an unknown gene shares sequence homology with a known tumor suppressor gene,
the unknown gene could similarly play a role in cancer. Comparing gene sequences
across species has also become a useful tool for understanding gene function, as
frequently it is easier to assess gene function in lower organisms than it is in
humans.
Another method used to determine gene function focuses on the analysis
of gene activity within a cell. When a gene is active, its DNA is copied into
messenger RNA or "mRNA." The population of mRNA within a cell can be isolated
and converted into copy DNA or "cDNA," thereby creating a cDNA library that
represents the population of mRNAs present in a cell type at a particular time.
In a process called "gene expression profiling," high-throughput cDNA
sequencing, computer analysis and microarray technologies can be used to
identify which genes are active or inactive and, if active, at what levels.
Expression profiles provide a more detailed picture of cellular genetics than
conventional laboratory techniques by indicating which genes, both known and
novel, are specifically correlated to discrete biological events in normal and
disease-state cells.
Due to improvements in sequencing technology, genomic information from
both public and private sources is increasing at a dramatic rate. As a result,
bioinformatics, or the use of computers and sophisticated algorithms to store,
analyze and interpret large volumes of biological data, is essential in order to
capture value from this growing pool of data. To date, the main focus of
bioinformatic and genomic tools has been drug discovery. Incyte General believes
these tools, as well as tools under development, will also assist researchers
with the preclinical and clinical development process. For example, with the
help of new technology and bioinformatic analyses, scientists may be able to
correlate genetic and physiologic response in preclinical animal models, examine
gene expression profiles in drug- treated animals to assess the pharmacological
activity and toxicity of new drugs, and stratify clinical trial patients
according to their gene expression profiles.
Products
Incyte General's products include an integrated platform of genomic
databases, data management software tools, microarray-based gene expression
services, and related reagents.
Genomic Databases. Incyte General provides its database collaborators
with non-exclusive database access. Database collaborators receive periodic data
updates, typically monthly, as well as software upgrades and additional search
and analysis tools when they become available. The fees and the period of access
are negotiated with each company, with the initial term typically lasting for a
period of three years. Fees generally consist of database access fees,
non-exclusive or exclusive license fees and option fees corresponding to patent
rights on proprietary sequences. Incyte General may also receive milestone and
royalty payments from database collaborators from the sale of their products
derived from Incyte General's technology and database information. Researchers
can browse not only Incyte General-generated data, but also public domain
information provided through HTML links to the World Wide Web. Incyte General
currently offers the following database modules:
o LifeSeq(R) Database. The LifeSeq human gene sequence and expression
database consists of a proprietary sequence database module linked to a
proprietary gene expression database module. Researchers can easily
move from one module to another through HTML-based graphical
interfaces. The sequence database contains Incyte General's
computer-edited gene sequence files and is used by collaborators to
identify related or homologous genes. For example, a scientist may
wish to identify new genes homologous to a gene
F - 2
<PAGE>
identified through the subscriber's own research and believed to be
linked to a disease. The expression database contains biological
information about each sequence in Incyte General's sequence database,
including tissue source, homologies, and annotations regarding
characteristics of the gene sequence. Most importantly, the expression
database contains a gene expression profile for every tissue in the
database combined with proprietary bioinformatics software to allow
researchers to browse data and compare differences in gene expression
across cells, tissues, and different disease states. Thus, the
expression database can be used to assist researchers in correlating
the presence of specific genes to discrete biological events in normal
and disease-state cells. Incyte continually adds additional sequences
and expression data from normal and diseased tissues to the LifeSeq
database.
o LifeSeq FL(R)Database. This database contains the full-length gene
sequences for DNA fragments of medically interesting genes found in
the LifeSeq human gene sequence and expression database. Incyte
General scientists and Incyte General's subscribers select genes for
inclusion in this database based on a number of factors, including
their sequence homologies to known therapeutically important gene
families, unusual tissue or disease-related expression patterns and
chromosomal location. A variety of methods, including a proprietary,
high-throughput cloning technology, Hidden Markov Models (HMM) and
algorithms to identify secreted proteins, are used to identify
medically interesting genes and obtain the full-length sequence.
o PathoSeq(TM)Database. The PathoSeq database currently contains
proprietary and public domain genomic data for over three dozen
medically relevant bacterial and fungal microorganisms. With
drug-resistant strains of bacteria and other microorganisms posing an
increasing threat to world health, pharmaceutical and biotechnology
companies are searching for genes unique to these pathogens that will
aid in the development of new drugs to treat infectious disease.
PathoSeq's software and bioinformatic tools edit all sequence data to
remove artifacts and contamination, assemble all sequences, display
the relative position of the DNA coding regions, and identify genes
either common among multiple microorganisms or unique to one microbial
genome. Incyte General believes PathoSeq can help researchers
understand the biology of microorganisms, study the mechanisms of drug
resistance, identify genes that may make effective drug targets, and,
ultimately, develop new therapeutics to treat and prevent infectious
disease.
o ZooSeq(TM)Database. The ZooSeq database, introduced in June 1997,
was developed to aid pharmaceutical and biotechnology companies in
designing and evaluating preclinical drug studies in animals, a
crucial step in the drug development process. ZooSeq contains genomic
information from animals commonly used in preclinical drug
pharmacology and toxicology studies. The database currently contains
gene sequence and expression data for the Sprague-Dawley rat, the
animal most commonly used in drug toxicology studies, mice and
cynomolgus monkey. ZooSeq is designed to allow scientists to compare
gene sequence, expression patterns and function across species. By
correlating a drug's effects on an animal with the animal's genetic
makeup, and then cross-referencing these data with Incyte General's
LifeSeq database, a researcher may better predict the drug's efficacy,
and side effects before moving to human clinical trials.
o Public Domain Databases. The LifeSeq PD and PathoSeq PD databases
are similar with respect to database architecture to the LifeSeq and
PathoSeq databases, differing in that they contain cDNA sequence data
obtained solely from public-domain sources and not Incyte General
proprietary sequences.
Satellite Database Services. To construct satellite databases, Incyte
General generates sequence data and gene expression profiles using genetic
material from tissues or cells selected by the database collaborators. Such
databases are provided exclusively for a negotiated time period in a format
compatible with Incyte General's non-exclusive database modules. These tissues
and cells can be provided by the database collaborators from their own tissue
banks,
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<PAGE>
internal research programs or from other sources. In 1998 Incyte General began
to offer high volume sequencing services to pharmaceutical, biotechnology,
agricultural and academic researchers.
Software. LifeSeq 3D provides sophisticated three-dimensional
visualization and analysis tools for the LifeSeq human gene sequence and
expression database. LifeTools, a suite of specialized bioinformatic software
programs, consists of high-throughput sequence analysis and data management
tools for handling complex genomic information from multiple sources. LifeTools
Blocks reads and edits raw sequence data, including data imported from public
databases, and annotates and clusters sequence fragments based on sequence
similarity. LifeTools SeqServer is a fast, scalable database search engine with
intranet-based graphical tools for interactive queries and analyses. LifeTools
Relational, a relational database management system, stores and distributes
sequence cluster, homology, tissue expression information and biological data.
Incyte General's database management architecture is based on open system
standards, providing interconnectivity between disparate systems and
applications, and enterprise-wide access to data and functions. Incyte General
intends to continue to develop new bioinformatic software programs internally,
as well as with third party software developers and development groups.
Incyte General has developed an enterprise-wide genomic information
management system capable of updating, reprocessing and integrating genetic data
from multiple sources and from different organisms. This system integrates
Incyte General proprietary, collaborator-specific and public domain data, and is
capable of comparing information from humans, animals, microbes, fungi and
plants. The system incorporates the architecture necessary to integrate Incyte
General's software tools with three-dimensional visualization tools, data mining
programs and project management capabilities, and is capable of being integrated
with additional technologies developed to more efficiently manage and analyze
genomic data.
DNA Clone and Other Services. Incyte General offers a variety of DNA
clone and other services designed to assist its collaborators in using
information from its databases in internal lab-based experiments. The DNA
fragments from which the information in Incyte General's databases is derived
represent valuable resources for researchers, enabling them to perform
bench-style experiments to supplement the information obtained from searching
Incyte General's databases. Incyte General retains a copy of all isolated clones
corresponding to the sequences in the database. Incyte General's collaborators
may request from Incyte General clones corresponding to a sequence of interest
on a one-by-one basis or through LifeSeq GeneAlbum, a subscription-based service
that provides database collaborators with large numbers of sequence verified DNA
clones. In addition, Incyte General produces a broad line of genomic research
products, such as DNA clones and insert libraries, and offers technical support
services, including high-throughput DNA screening, custom robotic services,
contract DNA preparation, and fluorescent in-situ hybridization, to assist
researchers in the identification and isolation of novel genes.
Microarray-Based Services. Incyte General offers microarray-based gene
expression services to the pharmaceutical, biotechnology and agricultural
industries. These services can be used to simultaneously evaluate the gene
expression profile of a large number of genes. A GEM(TM) microarray typically
contains probes for up to 10,000 genes. Some of the applications include
identifying the genes involved in a complex disease pathway, examining a
drug-treated tissue to understand how the drug affected the expression of
important genes, and studying several new drug candidates to determine if one
has a more favorable effect on gene expression than the others. Experiments can
use either prefabricated arrays or custom arrays. Prefabricated arrays contain
either public domain genes or related genes chosen from Incyte General's
databases. Examples of prefabricated arrays in development include an array
containing a collection of cancer-related genes; an array containing the genes
found in a microbial pathogen Staphlycoccus aureus or an array containing the
genes found in the rat liver and kidney. Custom arrays contain genes provided by
the customer or chosen by the customer from Incyte General's proprietary
databases.
Database Production
Incyte General engages in the high-throughput automated sequencing of
genes derived from tissue samples followed by the computer-aided analysis of
each gene sequence to identify homologies to genes of known function in
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<PAGE>
order to predict the biological function of newly identified sequences. The
derivation of information in Incyte General's databases involves the following
steps:
Tissue Access. Incyte General obtains tissue samples representing most
major organs in the human body from various academic and commercial
sources. Where possible, Incyte General obtains information as to the
medical history and pathology of the tissue. The genetic material is
isolated from the tissue and prepared for analysis. The results of this
analysis as well as the corresponding pathology and medical history
information are incorporated into the databases.
High-Throughput cDNA Sequencing. Incyte General utilizes specialized
teams in an integrated approach to its high-throughput sequencing and
analysis effort. Gene sequencing is performed using multiple work
shifts to increase daily throughput. One team develops and prepares
cDNA libraries from biological sources of interest, a second team
prepares the cDNAs using robotic workstations to perform key steps that
result in purified cDNAs for sequencing, and a third team operates the
automated DNA sequencers.
Bioinformatics. Sequence information generated from Incyte General's
high-throughput sequencing operations is uploaded to a network of
servers. Incyte General's proprietary bioinformatic software then
assembles and edits the sequence information. The sequence of each cDNA
is compared via automated, computerized algorithms to the sequences of
known genes in Incyte General's databases and public domain databases
to identify whether the cDNA codes for a known protein or is homologous
to a known gene. Each sequence is annotated as to its cell or tissue
source, its relative abundance and whether it is homologous to a known
gene with known function or previously unidentified. The bioinformatics
staff monitors this computerized analysis and may perform additional
analyses on sequence information. The finished data are then added to
Incyte General's proprietary sequence databases.
Customers
Incyte General has database agreements with twenty-one companies as of
August 31, 1998. Each collaborator has agreed to pay, during an average term of
three years, annual fees to receive non-exclusive access to Incyte General's
databases. For the six months ended June 30, 1998 and the year ended December
31, 1997, Incyte General recognized revenue from twenty and eighteen of these
companies, respectively, none of which individually contributed 10% or more of
total revenues. In 1996, Incyte General recognized revenue from ten of these
companies, three of which each contributed in excess of 10% of total revenues.
As of August 31, 1998, Incyte General had database agreements with:
Abbott Laboratories
ARIAD Pharmaceuticals, Inc.
BASF AG
Bayer Corporation
Bristol-Myers Squibb Company
Eli Lilly and Company
F. Hoffmann-La Roche Ltd.
Genentech, Inc.
Glaxo Wellcome plc
Hoechst AG
Johnson & Johnson
Monsanto Company
Novartis AG
Novo Nordisk A/S
NV Organon
Pfizer Inc
Pharmacia & Upjohn, Inc.
Rhone-Poulenc S.A.
Schering AG
SmithKline Beecham
Zeneca Ltd.
Certain of Incyte General's database agreements contain minimum annual update
requirements which if not met could result in Incyte's breach of the respective
agreement. One database collaborator has the right on 30 days' written notice to
terminate its database collaboration agreement. There can be no assurance that
any of Incyte General's database collaboration agreements will be renewed upon
expiration or will not be terminated earlier in accordance with their terms. The
loss of revenues from any database collaborator could have a material adverse
effect on Incyte General's business, financial condition and results of
operations. See "Annex I-- Factors That May Affect Results --
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<PAGE>
Factors Relating to Both Incyte General and Incyte Genetics -- New and Uncertain
Business" and "--Factors Relating to Incyte General -- Limited Operating
History; History of Operating Losses; Uncertainty of Continued Profitability or
Revenues," "--New and Uncertain Business," and "--Competition and Technological
Changes."
Development Programs
Since its inception, Incyte General has made substantial investments in
research and technology development. During the six months ended June 30, 1998
and the years ended December 31, 1997, 1996 and 1995, Incyte General spent
approximately $43.2 million, $70.2 million, $41.1 million, and $19.3 million,
respectively, on research and development activities. This investment in
research and development includes an active program to enter into relationships
with other technology-driven companies and, when appropriate, acquire licenses
to technologies for evaluation or use in the production and analysis process.
Not all of these technologies or relationships survive the evaluation process.
Incyte General has entered into a number of research and development
relationships with companies and research institutions. Incyte General's
commitments under any one of these agreements do not represent a significant
expenditure in relation to Incyte General's total research and development
expense.
In January 1998, Incyte General announced a relationship with Oxford
GlycoSciences plc, to investigate the use of proteomics, the large-scale,
high-throughput analysis of protein expression, in the development of new
database modules. As part of the relationship Incyte General made a $5 million
equity investment in Oxford GlycoSciences plc. Incyte General and Oxford
GlycoSciences are developing the LifeProt(TM) database, which will contain
protein expression and sequence information for a variety of human tissues, with
links to related gene information in the LifeSeq database.
Patents and Proprietary Technology
Incyte General's database business and competitive position is
dependent upon the Company's ability to protect its proprietary database
information and software technology. The Company relies on patent, trade secret
and copyright law, as well as nondisclosure and other contractual arrangements
to protect its proprietary information.
Incyte General's ability to license proprietary genes may be dependent upon
the Company's ability to obtain patents, protect trade secrets and operate
without infringing upon the proprietary rights of others. Other pharmaceutical,
biotechnology and biopharmaceutical companies, as well as academic and other
institutions have filed applications for, may have been issued patents or may
obtain additional patents and proprietary rights relating to products or
processes competitive with those of the Company. Patent applications filed by
competitors may claim some of the same gene sequences or partial gene sequences
as those claimed in patent applications filed by the Company. Incyte General is
aware that Merck & Co., Inc. ("Merck") (in conjunction with Washington
University) and The Institute for Genomic Research ("TIGR") have made certain
gene sequences publicly available, which may adversely affect the ability of the
Company and others to obtain patents on such genes. There can be no assurance
that such publication of sequence information will not adversely affect the
Company's ability to obtain patent protection for sequences that have been made
publicly available.
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<PAGE>
The Company's current policy is to file patent applications on what it
believes to be novel full-length cDNA sequences and partial sequences obtained
through Incyte General's high-throughput computer-aided gene sequencing efforts.
The Company has filed U.S. patent applications in which the Company has claimed
certain partial gene sequences and has filed patent applications in the U.S. and
applications under the Patent Cooperation Treaty ("PCT"), designating countries
in Europe as well as Asia, Canada, Japan, Mexico, and New Zealand, claiming
full-length gene sequences associated with cells and tissues that are the
subject of Incyte General's high-throughput gene sequencing program. To date,
the Company has been issued a number of patents with respect to full-length gene
sequences. Currently, the Company has no registered copyrights for Incyte
General's database-related software.
The patentability of partial gene sequences in general is highly
uncertain, involves complex legal and factual questions and has recently been
the subject of much controversy. No clear policy has emerged with respect to the
breadth of claims allowable for partial gene fragments. There is significant
uncertainty as to what claims, if any, will be allowed on partial gene sequences
derived through high-throughout gene sequencing. Certain court decisions suggest
that disclosure of a partial sequence may not be sufficient to support the
patentability of a full-length sequence and that patent claims to a partial
sequence may not cover a full-length sequence inclusive of that partial
sequence. In 1996, the United States Patent and Trademark Office ("USPTO")
issued guidelines limiting the number of gene sequences that can be examined in
a single patent application. Many of the Company's patent applications
containing multiple partial sequences contain more sequences than the maximum
number allowed under the new guidelines. The Company is reviewing its options,
and it is possible that due to the resources needed to comply with the
guidelines, the Company may decide to abandon patent applications for some of
its partial gene sequences. To date, no patent has issued from any of the
Company's patent applications claiming partial gene sequences.
There can be no assurance that patent applications relating to Incyte
General's products or processes will result in patents being issued, or that any
issued patents will be enforceable against competitors. Even if patents are
issued on the basis of gene sequences, there may be uncertainty as to the scope
of the coverage, enforceability or commercial protection provided by any such
patents. See "Annex I -- Factors That May Affect Results -- Factors Relating to
Both Incyte General and Incyte Genetics -- Uncertainty of Protection of Patents
and Proprietary Rights."
As the biotechnology industry expands, more patents are issued and
other companies engage in the business of discovering genes through the use of
high speed sequencers and other genomic-related businesses, the risk increases
that Incyte General's potential products, and the processes used to develop
these products, may be subject to claims that they infringe the patents of
others. Further, Incyte General is aware of several issued patents in the field
of microarray or gridding technology, which can be utilized in the generation of
gene expression information. Certain of these patents are the subject of
litigation. Therefore, Incyte General's operations may require it to obtain
licenses under any such patents or proprietary rights, and these licenses may
not be made available on terms acceptable to Incyte General. Litigation may be
necessary to defend against or assert claims of infringement, to enforce patents
issued to the Company, to protect trade secrets or know-how owned by the
Company, or to determine the scope and validity of the proprietary rights of
others. Incyte General believes that certain of the Company's patent
applications cover genes which may also be claimed in patent applications filed
by other parties. Interference proceedings may be necessary to establish which
party was the first to invent a particular sequence for the purpose of patent
protection. Such litigation or interference proceedings, regardless of the
outcome, could result in substantial costs to, and diversion of effort by Incyte
General, and may have a material adverse effect on Incyte General's business,
operating results and financial condition. In addition, there can be no
assurance that such proceedings or litigation would be resolved in Incyte
General's favor.
In January and September 1998, Affymetrix, Inc. ("Affymetrix") filed
lawsuits in the United States District Court for the District of Delaware
alleging infringement of three U.S. patents by both Synteni and Incyte. Incyte
believes that it and Synteni have meritorious defenses and intend to defend
these suits vigorously. See "Annex I -- Factors That May Affect Results --
Factors Relating to Both Incyte General and Incyte Genetics -- Litigation."
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<PAGE>
Competition
There is a finite number of genes in the human genome, and competitors
may seek to identify, sequence and determine in the shortest time possible the
biological function of a large number of genes in order to obtain a proprietary
position with respect to the largest number of new genes discovered. A number of
companies, institutions, and government-financed entities are engaged in gene
sequencing, gene discovery, gene expression analysis, positional cloning and
other genomic service businesses. Many of these companies, institutions and
entities have greater financial and human resources than Incyte General. In
addition, Incyte General is aware that other companies have developed genomic
databases and are marketing, or have announced their intention to market, their
data to pharmaceutical companies. Incyte General expects that additional
competitors may attempt to establish gene sequence, gene expression or other
genomic databases in the future.
In addition, competitors may discover and establish patent positions
with respect to gene sequences in Incyte General's databases. Further, certain
entities engaged in or with stated intentions to engage in gene sequencing,
including Merck & Co., Inc., The Institute for Genomic Research, and Celera
Genomics Corporation, have made or have stated their intention to make the
results of their sequencing efforts publicly available. These patent positions,
or the public availability of gene sequences comprising substantial portions of
the human genome or on microbial or plant genes, could decrease the potential
value of Incyte General's databases to Incyte General's collaborators and
adversely affect Incyte General's ability to realize royalties or other revenue
from commercialization of products based upon such genetic information.
The gene sequencing machines that are utilized in Incyte General's
high-throughput computer-aided gene sequencing operations are commercially
available and are currently being utilized by several competitors. Moreover,
some of Incyte General's competitors or potential competitors are in the process
of developing, and may successfully develop, proprietary sequencing technologies
that may be more advanced than the technology used by Incyte General. In
addition, Incyte General is aware that a number of companies are pursuing
alternative methods for generating gene expression information, including some
that have developed and are developing microarray technologies. At least one
other company currently offers microarray-based services that might be
competitive with those offered by Incyte General. These advanced sequencing or
gene expression technologies, if developed, may not be commercially available
for purchase or license by Incyte General on reasonable terms, if at all.
A number of companies have announced their intent to develop and market
software to assist pharmaceutical companies and academic researchers in the
management and analysis of their own genomic data, as well as the analysis of
sequence data available in the public domain. Some of these entities have access
to significantly greater resources than Incyte General, and their products may
achieve greater market acceptance than the products offered by Incyte General.
Incyte General believes that the features and ease of use of its
database software, its experience in high- throughput gene sequencing, the
cumulative size of its database, the quality of the data, including the
annotations in its database, and its experience with bioinformatics and database
software are important aspects of Incyte General's competitive position.
The genomics industry is characterized by extensive research efforts
and rapid technological progress. New developments are expected to continue and
there can be no assurance that discoveries by others will not render Incyte
General's services and potential products noncompetitive. In addition,
significant levels of research in biotechnology and medicine occur in
universities and other non-profit research institutions. These entities have
become increasingly active in seeking patent protection and licensing revenues
for their research results. These entities also compete with Incyte General in
recruiting talented scientists. See "Annex I -- Factors That May Affect Results
- -- Factors Relating to Incyte General -- Competition and Technological Changes."
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Government Regulation
Regulation by governmental authorities in the United States and other
countries will be a significant factor in the production and marketing of any
pharmaceutical products that may be developed by a licensee of Incyte General or
by Incyte General. At the present time Incyte General does not intend to develop
any pharmaceutical products itself. Incyte General's agreements with its
database collaborators provide for the payment to Incyte General of royalties on
any pharmaceutical products developed by such collaborators derived from
proprietary information obtained from Incyte General's genomic databases. Thus,
the receipt and timing of regulatory approvals for the marketing of such
products may have a significant effect in the future on Incyte General's
revenues. Pharmaceutical products developed by licensees will require regulatory
approval by governmental agencies prior to commercialization. In particular,
human pharmaceutical therapeutic products are subject to rigorous preclinical
and clinical testing and other approval procedures by the United States Food and
Drug Administration in the United States and similar health authorities in
foreign countries. Various federal and, in some cases, state statutes and
regulations also govern or influence the manufacturing, safety, labeling,
storage, recordkeeping and marketing of such pharmaceutical products, including
the use, manufacture, storage, handling and disposal of hazardous materials and
certain waste products. The process of obtaining these approvals and the
subsequent compliance with appropriate federal and foreign statutes and
regulations require the expenditure of substantial resources over a significant
period of time, and there can be no assurance that any approvals will be granted
on a timely basis, if at all. Any such delay in obtaining or failure to obtain
such approvals could adversely affect Incyte General's ability to earn milestone
payments, royalties or other license-based fees. Additional governmental
regulations that might arise from future legislation or administrative action
cannot be predicted, and such regulations could delay or otherwise affect
adversely regulatory approval of potential pharmaceutical products. See "Annex I
- -- Factors That May Affect Results -- Factors Relating to Both Incyte General
and Incyte Genetics -- Reliance on Pharmaceutical Industry; Uncertainty of
Health Care Reform and Related Matters."
Human Resources.
As of August 31, 1998, Incyte General had 635 full-time equivalent
employees (128 of whom were contract or part-time employees), including 243 in
sequencing, microarray and reagent production, 209 in bioinformatics, 155 in
research and technology development, and 128 in marketing, sales and
administrative positions. None of Incyte General's employees is covered by
collective bargaining agreements, and management considers relations with its
employees to be good. Incyte General's future success will depend in part on the
continued service of its key scientific, software, bioinformatics and management
personnel and its ability to identify, hire and retain additional personnel,
including personnel in the customer service, marketing and sales areas. There is
intense competition for qualified personnel in the areas of Incyte General's
activities, especially with respect to experienced bioinformatics and software
personnel, and there can be no assurance that Incyte General will be able to
continue to attract and retain such personnel necessary for the development of
Incyte General's business. Failure to attract and retain key personnel could
have a material adverse effect on Incyte General's business, financial condition
and operating results. See "Annex I -- Factors That May Affect Results --
Factors Relating to Both Incyte General and Incyte Genetics -- Management of
Growth" and "--Dependence on Key Employees."
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INCYTE GENERAL
SELECTED COMBINED FINANCIAL DATA
The data set forth below should be read in conjunction with
"Management's Discussion and Analysis of Financial Condition and Results of
Operations" and the Combined Financial Statements and related Notes of Incyte
General, a division of Incyte Pharmaceuticals, Inc., included in this Annex F.
<TABLE>
<CAPTION>
Year Ended Six Months Ended
December 31, June 30,
--------------------------------------------------------- -----------------------
1993 1994 1995 1996 1997 1997 1998
--------------------------------------------------------- -----------------------
(in thousands) Net (unaudited)
<S> <C> <C> <C> <C> <C> <C> <C>
Statement of Operations Data:(1)
Revenues ........................... $ 672 $ 1,512 $ 12,299 $ 41,445 $ 88,863 $ 39,039 $ 62,337
Costs and expenses:
Research and development ........ 4,764 11,169 19,272 41,130 70,152 31,553 43,221
Selling, general administrative . 737 2,328 3,952 6,926 13,715 6,044 10,133
Charge for purchase of in-
process research and
development .................. -- -- -- 3,165 -- -- --
Acquisition-related charges ..... -- -- -- -- -- -- 1,171
-------- -------- -------- -------- -------- -------- --------
Total costs and expenses ..... 5,501 13,497 23,224 51,221 83,867 37,597 54,525
Income (loss) from operations ...... (4,829) (11,985) (10,925) (9,776) 4,996 1,442 7,812
Interest and other income, net ..... 60 510 988 2,288 4,140 1,069 3,681
-------- -------- -------- -------- -------- -------- --------
Income (loss) before income taxes .. (4,769) (11,475) (9,937) (7,488) 9,136 2,511 11,493
Provision for income taxes ......... -- -- -- -- 582 172 1,920
-------- -------- -------- -------- -------- -------- --------
Income (loss) before income taxes .. $ (4,769) $(11,475) $ (9,937) $ (7,488) $ 8,554 $ 2,339 $ 9,573
======== ======== ======== ======== ======== ======== ========
Net income (loss) .................. $ (4,769) $(11,475) $ (9,937) $ (7,488) $ 8,554 $ 2,339 $ 9,573
======== ======== ======== ======== ======== ======== ========
</TABLE>
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<PAGE>
<TABLE>
<CAPTION>
Year Ended Six Months Ended
December 31, June 30,
--------------------------------------------------------- -------------------
1993 1994 1995 1996 1997 1997 1998
--------------------------------------------------------- -------------------
(in thousands) (unaudited)
<S> <C> <C> <C> <C> <C> <C> <C>
Balance Sheet Data:(1)
Cash, cash equivalents and
marketable securities available for
sale................................... $15,540 $25,257 $41,128 $40,238 $113,095 $43,937 $126,710
Working capital ....................... 14,865 20,866 39,015 21,671 90,777 18,221 87,649
Total assets .......................... 17,807 29,350 58,892 69,111 182,491 83,375 206,065
Noncurrent portion of capital lease
Obligations and notes payable ......... 517 148 147 37 801 23 594
Division equity ....................... $16,451 $24,344 $47,606 $45,154 $136,079 $51,202 $149,673
(1) The accompanying combined financial data have been derived from the
consolidated assets, liabilities, revenues and expenses recorded in
the accounting records of Incyte Pharmaceuticals, Inc. The
accompanying financial statements reflect the assets, liabilities,
revenue and expenses directly attributable to Incyte General as well
as allocations deemed reasonable by management to present the
financial position, results of operations and cash flows of Incyte
General on a stand-alone basis.
</TABLE>
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<PAGE>
INCYTE GENERAL
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
If the Incyte Genetics Stock Proposal is approved, Incyte
Pharmaceuticals, Inc. ("Incyte" and, together with its wholly owned
subsidiaries, the "Company") will provide to holders of Incyte General Stock and
Incyte Genetics Stock separate financial statements, management's discussion and
analysis, description of business and other relevant information for the Company
and its Incyte General division ("Incyte General") and Incyte Genetics division
("Incyte Genetics"). Notwithstanding the allocation of revenues, expenses,
assets and liabilities (including contingent liabilities) and stockholders'
equity between Incyte General and Incyte Genetics for the purpose of preparing
their respective financial statements, the Company continues to hold title to
all of the assets and is responsible for all of the liabilities allocated to
each division. Holders of Incyte General Stock and Incyte Genetics Stock will be
subject to the risks associated with an investment in a single corporation and
all of the Company's businesses, assets and liabilities. Events attributable to
Incyte Genetics that affect the Company's results of operations or financial
condition could affect the results of operations or financial position of Incyte
General or the market price of the Incyte General Stock. The following
discussion and analysis of Incyte General's financial condition and results of
operations should, therefore, be read in conjunction with "Selected Combined
Financial Data" and the Combined Financial Statements of Incyte General and
related Notes included elsewhere in this Annex F, and in conjunction with
"Selected Consolidated Financial Data, "Management's Discussion and Analysis of
Financial Condition and Results of Operations" and the Consolidated Financial
Statements and related Notes of the Company included in Annex E.
When used in this discussion, the words "expects," "anticipates,"
"estimates," and similar expressions are intended to identify forward-looking
statements. Such statements, which include statements as to profitability,
expected expenditure levels, the adequacy of capital resources, growth in
operations, and Year 2000 related actions, are subject to risks and
uncertainties that could cause actual results to differ materially from those
projected. These risks and uncertainties include, but are not limited to, those
risks discussed below, as well as the extent of utilization of genomic
information by the biotechnology, pharmaceutical and agricultural industries;
risks relating to the development of new database products and their use by
potential collaborators of Incyte General; the impact of technological advances
and competition; the ability of Incyte General to obtain and retain customers;
competition from other entities; early termination of a database collaboration
agreement or failure to renew an agreement upon expiration; the ability to
successfully integrate the operations of recent business combinations; the cost
of accessing technologies developed by other companies; uncertainty as to the
scope of coverage, enforceability or commercial protection from patents that
issue on gene sequences and other genetic information; developments in and
expenses relating to litigation; the results and viability of joint ventures and
businesses in which Incyte General has purchased equity; the ability of the
Company to implement in a timely manner the programs and actions related to the
Year 2000 issue; and the matters discussed in Annex I -- "Factors That May
Affect Results." These forward-looking statements speak only as of the date
hereof. The Company expressly disclaims any obligation or undertaking to release
publicly any updates or revisions to any forward-looking statements contained
herein to reflect any change in the Company's expectations with regard thereto
or any change in events, conditions or circumstances on which any such statement
is based.
Overview
Incyte General, a division of Incyte Pharmaceuticals, Inc. ("Incyte"
and, together with its wholly owned subsidiaries, the "Company") designs,
develops and markets genomic information-based tools that can assist
pharmaceutical and biotechnology companies in the discovery and development of
new drugs including the identification of new disease targets and novel disease
pathways, and the evaluation of the safety and efficacy of new drugs. In
addition, Incyte General is developing similar tools to assist agricultural
companies in the identification of useful genes and discovery of new products.
Incyte General's products include genomic database products, genomic data
management software tools, microarray-based gene expression services, genomic
reagents and related reagents. Incyte General's genomic databases integrate
bioinformatics software with proprietary and, when appropriate, publicly
available genetic information to create information-based tools used by
pharmaceutical and biotechnology companies in drug discovery and development. In
building the databases, Incyte General utilizes high-throughput, computer-aided
F - 12
<PAGE>
gene sequencing and analysis technologies to identify and characterize the
expressed genes of the human genome, as well as certain animal, plant and
microbial genomes.
Revenues recognized by Incyte General consist primarily of
non-exclusive database access fees related to database collaboration agreements.
Revenues also include the sales of genomic screening products and services,
microarray-based gene expression services, fees for custom or "satellite"
database services, and genomic data management software tools and maintenance.
Incyte General's database collaboration agreements provide for future milestone
payments and royalties from the sale of products derived from proprietary
information obtained through the databases. There can be no assurance that any
database collaborators will ever generate products from information contained
within the databases and thus that Incyte General will ever receive milestone
payments or royalties.
In January 1998, the Company completed the acquisition of Synteni, a
privately-held microarray-based gene expression company. The assets, liabilities
and results of operations of Synteni have been attributed to Incyte General. The
transaction has been accounted for as a pooling-of-interests, and the combined
financial statements of Incyte General discussed herein and all historical
financial information have been restated to reflect the combined operations of
both companies. The ability to generate revenues and operating profits from
microarray-based gene expression services will be dependent on the ability of
Incyte General to obtain high volume customers for microarray services. Prior to
the merger, Synteni's microarray service agreements consisted of small volume
pilot or feasibility agreements.
The Company has made and will continue to make strategic equity
investments in, and strategic acquisitions of, technologies and businesses that
are complementary to the businesses of the Company. The costs and expenses
related to these transactions may be attributed to Incyte General if they are
related to the technologies or businesses being pursued by Incyte General. As a
result Incyte General may record losses or expenses related to the Company's
proportionate ownership interest in such long-term equity investments, record
charges for the acquisition of in-process technologies, or record charges for
the recognition of the impairment in the value of the securities underlying such
investments.
On September 28, 1998, one company in which the Company holds an equity
investment, OncorMed, Inc. ("OncorMed"), was acquired by Gene Logic Inc. ("Gene
Logic"). Gene Logic will issue 4,849,815 shares of its common stock, for an
estimated purchase price of $39.1 million, including transactions fees. In
January 1998, the Company announced a relationship relating to the joint
development of a proteomics database with Oxford GlycoSciences plc ("OGS"). As
part of this relationship, the Company made a $5.0 million equity investment and
a follow on investment in April 1998 of approximately $0.8 million as part of
OGS's initial public offering of its ordinary shares. As part of the
collaborative agreement, the Company has agreed to reimburse OGS for up to $5.0
million in 1999 if revenues are not sufficient to offset OGS' expenses for
services rendered. Both the OncorMed investment and the OGS relationship have
been allocated to Incyte General.
To date, Incyte General has not recognized any significant losses on
its long-term equity investments. Due to the recent stock market volatility,
certain investments held by Incyte General are below the investment book value.
The decrease in the market price of these investments is considered temporary
and therefore no change in the carrying value of the investments is considered
necessary at this time. Incyte General will continue to evaluate its long-term
equity investments for impairment on a quarterly basis.
The need for continued investment in the development of Incyte
General's databases and related products and services, and for support of
ongoing collaborations, results in significant fixed expenses. If revenue in a
particular period does not meet expectations, Incyte General may not be able to
adjust significantly its level of expenditures in such period, which would have
an adverse effect on Incyte General's operating results. Incyte General may also
experience difficulty in forecasting levels of operating expenditures for, and
integration-related expenses with respect to, subsidiaries acquired through
acquisitions, at least until a substantial period of time has passed since the
acquisition date. This is particularly true when attempting to forecast
expenditure levels for acquired businesses that focus on technologies for which
there is not yet an established market. Incyte General believes that quarterly
comparisons of its financial results will not necessarily be meaningful and
should not be relied upon as an indication of future performance.
F - 13
<PAGE>
Due to the foregoing and other unforeseen factors, it is likely that in some
future quarter or quarters Incyte General's operating results may be below the
expectations of public market analysts and investors.
In an effort to broaden its business, Incyte General is investing in a
number of new areas, including microarray services, pharmacogenomics and
proteomics. Given that many of these investments address new markets, or involve
untested technologies, it is not known if any of them will generate revenues or
if the revenues will be sufficient to provide an adequate return on the
investment. Depending on the investment required and the timing of such
investments, expenses or losses related to these investments could adversely
affect operating results.
The Company has incurred and is likely to continue to incur substantial
expenses in its defense of the lawsuits filed in January and September 1998 by
Affymetrix alleging patent infringement by Synteni and Incyte. Because the
lawsuits relate to the microarray technology used in Incyte General's
microarray-based gene expression service business, the expenses related to these
lawsuits have been attributed to Incyte General. Specifically, Affymetrix seeks
a preliminary injunction enjoining Incyte and Synteni from using certain
microarray technology in a manner alleged to infringe an Affymetrix patent, and
a permanent injunction enjoining Synteni and Incyte from further infringement of
certain Affymetrix patents. In addition, Affymetrix seeks damages, costs,
attorneys' fees and interest. Affymetrix further requests that any such damages
be trebled on its allegation of willful infringement by Incyte and Synteni.
Incyte and Synteni believe they have meritorious defenses and intend to defend
the suits vigorously. However, there can be no assurance that Incyte and Synteni
will be successful in the defense of these suits, and litigation, regardless of
the outcome, could result in substantial expenses and diversion of the efforts
of management and technical personnel. Further, there can be no assurance that
any license that may be required as a result of these suits or the outcome
thereof would be made available on commercially acceptable terms, if at all.
Results of Operations
Six Months ended June 30, 1997 and Six Months ended June 30, 1998
Net income was $9.6 million for the six months ended June 30, 1998, as
compared to $2.3 million for the corresponding period in 1997. Incyte General's
results of operations for the six months ended June 30, 1997 have been restated
to account for the acquisition of Synteni, which was accounted for as a
pooling-of-interests. While Incyte General has reported net income for the past
six quarters, there can be no assurance that Incyte General can maintain
profitability. See Annex I -- "Factors that May Affect Results -- Factors
Relating to Incyte General -- History of Operating Losses; Uncertainty of
Continued Profitability or Revenues."
Revenues. Revenues for the six months ended June 30, 1998 increased to
$62.3 million compared to $39.0 million for the corresponding period in 1997.
Revenues resulted primarily from database access fees and, to a much lesser
extent, from genomic screening products and services, custom satellite database
services, microarray-based gene expression services, and genomic data management
software tools and maintenance. The increase in revenues was primarily
attributed to new collaborative database agreements as well as existing
collaborators subscribing to additional databases.
Expenses. Total costs and expenses for the six months ended June 30,
1998 increased to $54.5 million compared to $37.6 million for the corresponding
period in 1997. Total costs and expenses in 1998 included a pretax
acquisition-related charge of $1.2 million for the acquisition of Synteni. The
charge consisted primarily of accounting, legal and investment banking fees.
Total costs and expenses are expected to increase in the foreseeable future due
to significant growth in microarray production capacity, the continued
investment in new product development and bioinformatics, growth in marketing,
sales and customer support services, and defense of the Affymetrix lawsuits.
Research and development expenses for the six months ended June 30,
1998 increased to $43.2 million compared to $31.6 million for the corresponding
period in 1997. The increase in research and development expenses
F - 14
<PAGE>
resulted primarily from an increase in bioinformatics and software development
efforts, microarray production and technology development, and continued
investment in the growth of Incyte General's intellectual property portfolio.
Incyte General expects research and development spending to increase over the
next few years as Incyte General continues to pursue the development of new
database products and services, invests in new technologies, broadens its
microarray production operations and invests in the protection of its
intellectual property.
Selling, general and administrative expenses for the six months ended
June 30, 1998 increased to $10.1 million compared to $6.0 million for the
corresponding period in 1997. The increase in selling, general and
administrative expenses resulted primarily from the growth in marketing, sales
and customer support, expenses related to the defense of the Affymetrix lawsuits
and increased administrative personnel related to the growing complexity of
Incyte General's business. Incyte General expects that selling, general and
administrative expenses will increase through at least the remainder of 1998 due
particularly to continued growth in marketing, sales and customer support
functions, the expansion of Incyte General's United Kingdom operations, and
legal expenses related to the defense of the Affymetrix lawsuits.
Interest and Other Income, Net. Interest and other income, net for the
six months ended June 30, 1998 increased to $3.7 million from $1.1 million for
the corresponding period in 1997. This was primarily a result of increased
interest income from higher average combined cash, cash equivalent and
marketable securities balances due primarily to the completion of a follow-on
public offering in August 1997.
Income Taxes. The estimated effective annual income tax rate for the
six months ended June 30, 1998 and 1997 was 16.7% and 6.8% respectively, which
represents the provision of federal and state alternative minimum taxes after
utilization of net operating loss carryforwards and research and development
credits. The increase in the effective tax rate resulted primarily from Incyte
General's expectation that in 1998 it will fully utilize all federal net
operating loss carryforwards available to benefit the income tax provision.
Years ended December 31, 1997, 1996, and 1995
Incyte General recorded net income for the year ended December 31, 1997
of $8.6 million, compared to net losses of $7.5 million and $9.9 million for the
years ended December 31, 1996 and 1995, respectively.
Revenues. Revenues for the years ended December 31, 1997, 1996 and 1995
were $88.9 million, $41.4 million and $12.3 million, respectively. Revenues
resulted primarily from database access fees and, to a much lesser extent, from
custom satellite database services, genomic screening products and services, and
gene expression services. The increase in revenues from year to year was
predominantly driven by an increase in the number of database collaboration
agreements.
Expenses. Total costs and expenses for the years ended December 31,
1997, 1996 and 1995 were $83.9 million, $51.2 million and $23.2 million,
respectively. Total costs and expenses for the year ended December 31, 1996
included a one-time charge of $3.2 million for the purchase of in-process
research and development relating to the acquisition of Combion, Inc.
Research and development expenses for the years ended December 31,
1997, 1996 and 1995 were $70.2 million, $41.1 million and $19.3 million,
respectively. The increase in research and development expenses resulted
primarily from an increase in bioinformatics and software development efforts,
increased data and reagent production capacity, increased microarray production
and technology development initiatives, license and milestone payments under
research and development alliances, and increased costs related to intellectual
property protection.
Selling, general and administrative expenses for the years ended
December 31, 1997, 1996 and 1995 were $13.7 million, $6.9 million and $4.0
million, respectively. The increase in selling, general and administrative
expenses resulted primarily from the growth in marketing, sales, customer
support, and corporate administration.
F - 15
<PAGE>
Interest and Other Income, Net. Interest and other income, net for the
years ended December 31, 1997, 1996 and 1995 were $4.1 million, $2.3 million and
$1.0 million, respectively. Interest and other income, net increased primarily
as a result of increased interest income from higher average combined cash, cash
equivalent and marketable securities balances.
Income Taxes. The effective annual income tax rate for 1997 was 6.4%,
which represents the provision of federal and state alternative minimum taxes
after utilization of net operating loss carryforwards. No provisions have been
recorded prior to the 1997 fiscal year as Incyte General incurred annual net
operating losses.
Liquidity and Capital Resources
As of June 30, 1998, Incyte General had $126.7 million in cash, cash
equivalents, and marketable securities, compared to $113.1 million as of
December 31, 1997 and $40.2 million as of December 31, 1996. For the six month
period ended June 30, 1998, cash provided by operating and financing activities
was partially offset by capital expenditures, consisting primarily of purchases
of data processing-related computer hardware, laboratory equipment and
facilities improvements, as well as investments in research and development
alliances. For the year ended December 31, 1997, the increase in cash and cash
equivalents was primarily due to net proceeds of $87.2 from the issuance of
Existing Common Stock in the August 1997 follow-on public offering. Incyte
General has classified all of its marketable securities as short-term, as Incyte
General may decide not to hold its marketable securities until maturity in order
to take advantage of favorable market conditions. Available cash is invested in
accordance with the Company's investment policy's primary objectives of
liquidity, safety of principal and diversity of investments.
Net cash provided by operating activities was $32.5 million for the six
months ended June 30, 1998, as compared to $12.7 million for the six months
ended June 30, 1997. The increase in net cash provided by operating activities
resulted primarily from the increase in net income and deferred revenues due to
the prepayment of database collaboration fees and the decrease in accounts
receivable partially offset by the increase in prepaid expenses, deposits and
other assets and the decrease in accounts payable. Net cash provided by
operating activities was $19.6 million for the year ended December 31, 1997
compared to $18.0 million for the year ended December 31, 1996 and net cash used
by operating activities of $8.8 million for the year ended December 31, 1995.
The increase in net cash provided by operating activities in 1997 compared to
1996 resulted primarily from the change from net loss to net income, increases
in accrued and other liabilities, increases in deferred revenue due to the
prepayment of database collaboration fees, partially offset by increases in
accounts receivable. Net cash provided by operating activities in 1996 as
compared to use of cash in 1995 resulted from an increase in accounts payable,
and accrued and other liabilities, and decreases in net loss and accounts
receivable. Net cash generated by operating activities may in the future
fluctuate significantly from period to period due to the timing of large
prepayments by database collaborators.
Incyte General's investing activities, other than purchases, sales and
maturities of marketable securities, have mainly consisted of capital
expenditures and long-term investments. Capital expenditures for the six months
ended June 30, 1998 increased to $15.3 million from $9.1 million for the six
months ended June 30, 1997. Capital expenditures for the years ended December
31, 1997, 1996 and 1995 were $27.2 million, $20.5 million and $8.1 million,
respectively. Capital expenditures increased in 1997 and 1996 primarily due to
investments in computer and laboratory equipment as well as leasehold
improvements related to the expansion of the Company's facilities. Long- term
investments in companies with which the Company has research and development
alliances increased to $6.9 million for the six months ended June 30, 1998, from
$4.5 million for the year ended December 31, 1997 and $0.3 million for the year
ended December 31, 1996. Net cash used by investing activities may in the future
fluctuate significantly from period to period due to the timing of strategic
equity investments, capital purchases and maturities/sales and purchases of
marketable securities.
Net cash provided by financing activities was $3.4 million for the six
months ended June 30, 1998 as compared to $3.6 million for the six months ended
June 30, 1997. Net cash provided by financing activities was $83.2 million, $2.0
million, and $32.9 million for the years ended December 31, 1997, 1996 and 1995,
respectively. Net cash provided by financing activities in 1997 and 1995 was
primarily due to proceeds from follow-on public stock offerings of Existing
Common Stock in August 1997 and November 1995, respectively, while net cash
provided by financing activities in
F - 16
<PAGE>
1996 was due to issuances of Existing Common Stock upon exercise of stock
options. The proceeds from the August 1997 stock offering were partially offset
by Incyte General's contribution to Incyte Genetics of $11.6 million.
Incyte General expects its cash requirements to increase significantly
in the remainder of 1998 and in 1999 as it increases its investment in
data-processing-related computer hardware in order to support its existing and
new database products; continues to seek access to technologies through
investments; research and development alliances, license agreements and/or
acquisitions; and addresses its needs for larger facilities and/or improvements
in existing facilities. Incyte General has committed to provide $20.0 million,
in addition to funding provided through June 30, 1998, in cash to Incyte
Genetics, and may provide additional funding, as appropriate, in the form of
loans or investment. The Company has entered into a multi-year lease with
respect to a 95,000 square foot building being constructed adjacent to the
Company's Palo Alto headquarters, which will primarily be occupied by Incyte
General and a portion of the rent of which will be allocated to Incyte General.
Incyte General's share of tenant improvements is estimated to be between $10.0
million and $15.0 million, of which approximately $0.9 million has been expended
through June 30, 1998. Given the current construction schedule, Incyte General
does not expect to begin to incur significant expenses related to this facility
until late 1998 or early 1999.
Based upon its current plans, Incyte General believes that its existing
resources and anticipated cash flow from operations will be adequate to satisfy
its capital needs through the next twelve months. However, Incyte General may be
unable to obtain additional collaborators or retain existing collaborators for
the its databases, and its database products and services may not produce
revenues which, together with the Incyte General's cash, cash equivalents, and
marketable securities, would be adequate to fund its cash requirements. Incyte
General's cash requirements depend on numerous factors, including: the ability
of Incyte General to attract and retain collaborators for its databases and
products and services; expenditures in connection with alliances, license
agreements and acquisitions of and investments in complementary technologies and
businesses; competing technological and market developments; the cost of filing,
prosecuting, defending and enforcing patent claims and other intellectual
property rights; the purchase of additional capital equipment, including capital
equipment necessary to ensure Incyte General's sequencing and microarray
operations remain competitive; capital expenditures required to expand Incyte
General's facilities; costs associated with the integration of new operations
assumed through mergers and acquisitions and funding requirements of Incyte
Genetics.
Incyte General expects to continue to fund future operations with
revenues from database products and services in addition to using its current
cash, cash equivalents, and marketable securities. Changes in Incyte General's
research and development plans or other changes affecting the Incyte General's
operating expenses may result in changes in the timing and amount of
expenditures of Incyte General's capital resources. If additional capital is
raised through the sale of equity or convertible debt securities, the issuance
of these securities could result in dilution to the Company's existing
stockholders. Additional funding, if necessary, may not be available on
favorable terms, if at all. If adequate funds are not available, Incyte General
may be required to curtail operations significantly or to obtain funds through
entering into collaborative arrangements that may require Incyte General to
relinquish rights to certain of its technologies, product candidates, products
or potential markets.
Year 2000
See Annex E -- "Management's Discussion and Analysis of Financial
Condition and Results of Operations -- Year 2000," for a discussion of the
potential effect of the Year 2000 issue on the Company's operations.
Factors That May Affect Results
See Annex __, "Factors That May Affect Results," for a discussion of
certain factors that may affect Incyte General's business, financial condition
and results of operation.
F - 17
<PAGE>
<
INCYTE GENERAL
COMBINED FINANCIAL STATEMENTS
INDEX TO COMBINED FINANCIAL STATEMENTS
Page
----
Report of Ernst & Young LLP, Independent Auditors...........................F-19
Combined Balance Sheets at December 31, 1996
and 1997, and June 30, 1998 (unaudited).....................................F-20
Combined Statements of Operations for the years ended
December 31, 1995, 1996 and 1997 and the six months
ended June 30, 1997 and 1998 (unaudited)....................................F-21
Combined Statements of Comprehensive Operations for the
years ended December 31, 1995, 1996 and 1997 and the six
months ended June 30, 1997 and 1998 (unaudited).............................F-22
Combined Statement of Division Equity for the three years ended
December 31, 1997 and the six months ended June 30, 1998 (unaudited)........F-23
Combined Statements of Cash Flow for the years ended December 31, 1995,
1996 and 1997 and the six months ended June 30, 1997 and 1998 (unaudited)...F-24
Notes to Combined Financial Statements......................................F-26
F - 18
<PAGE>
REPORT OF ERNST & YOUNG LLP, INDEPENDENT AUDITORS
The Board of Directors and Stockholders of Incyte Pharmaceuticals, Inc.
We have audited the accompanying combined balance sheets of Incyte General, a
division of Incyte Pharmaceuticals, Inc., as of December 31, 1996 and 1997, and
the related combined statements of operations, statements of comprehensive
operations, division equity, and cash flows for each of the three years in the
period ended December 31, 1997. These financial statements are the
responsibility of Incyte Pharmaceuticals, Inc. 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 combined financial position of Incyte General at
December 31, 1996 and 1997, and the combined results of its operations and its
cash flows for each of the three years in the period ended December 31, 1997, in
conformity with generally accepted accounting principles.
As described above and more fully described in Note 1 to these financial
statements, Incyte General is a division of Incyte Pharmaceuticals, Inc.;
accordingly, the combined financial statements of Incyte General should be read
in conjunction with the audited consolidated financial statements of Incyte
Pharmaceuticals, Inc. Holders of Incyte General Stock will be subject to the
risks associated with an investment in a single corporation and all of the
business, assets and liabilities of Incyte Pharmaceuticals, Inc.
/S/ERNST & YOUNG LLP
Palo Alto, California
September 11, 1998
F - 19
<PAGE>
<TABLE>
<CAPTION>
INCYTE GENERAL
COMBINED BALANCE SHEETS
(in thousands)
December 31, December 31, June 30,
1996 1997 1998
------------ ----------- --------
(unaudited)
<S> <C> <C> <C>
Current assets:
Cash and cash equivalents ................. $ 9,616 $ 55,598 $ 32,944
Marketable securities available-for-sale .. 30,622 57,497 93,766
Accounts receivable, net .................. 2,126 19,183 10,970
Prepaid expenses and other current assets . 2,763 3,738 5,453
-------- -------- --------
Total current assets ................ 45,127 136,016 143,133
Property and equipment, net ..................... 23,196 38,070 45,653
Long-term investments ........................... 452 5,100 11,994
Deposits and other assets ....................... 336 3,305 5,285
-------- -------- --------
Total assets ........................ $69,111 $182,491 $206,065
======== ======== ========
LIABILITIES AND DIVISION EQUITY
Current liabilities:
Accounts payable .......................... $ 4,721 $ 5,614 $ 3,346
Accrued liabilities ....................... 794 5,416 7,156
Accrued compensation ...................... 830 3,094 2,444
Deferred revenue .......................... 17,111 31,115 42,538
-------- -------- --------
Total current liabilities ........... 23,456 45,239 55,484
Non-current portion of accrued rent and other
non-current liabilities ................... 501 1,173 908
-------- -------- --------
Total liabilities ................... 23,957 46,412 56,392
-------- -------- --------
Division equity ................................. 45,154 136,079 149,673
-------- -------- --------
Total liabilities and division equity........ $69,111 $ 182,491 $206,065
======= ========= =========
</TABLE>
See accompanying notes
F - 20
<PAGE>
<TABLE>
<CAPTION>
INCYTE GENERAL
COMBINED STATEMENTS OF OPERATIONS
(in thousands)
Year Ended Six Months Ended
December 31, June 30,
-------------------------------- -------------------
1995 1996 1997 1997 1998
-------------------------------- -------------------
(in thousands) (unaudited)
<S> <C> <C> <C> <C> <C>
Revenues .................................. $ 12,299 $ 41,445 $ 88,863 $ 39,039 $ 62,337
Cobsts and expenses:
Research and development ............. 19,272 41,130 70,152 31,553 43,221
Selling, general and administrative .. 3,952 6,926 13,715 6,044 10,133
Purchase of in-process research and
development ........................ -- 3,165 -- -- --
Acquisition-related charges .......... -- -- -- -- 1,171
-------- -------- -------- -------- ---------
Total costs and expenses .................. 23,224 51,221 83,867 37,597 54,525
Income (loss) from operations ............. (10,925) (9,776) 4,996 1,442 7,812
Interest income ........................... 1,186 2,538 4,326 1,138 3,718
Interest and other expense ................ (198) (250) (186) (69) (37)
--------- --------- --------- --------- ---------
Income (loss) before income taxes ......... (9,937) (7,488) 9,136 2,511 11,493
Provision for income taxes ................ -- -- 582 172 1,920
--------- --------- --------- --------- ---------
Net income (loss) ......................... $ (9,937) $ (7,488) $ 8,554 $ 2,339 $ 9,573
========= ========= ======== ======== ========
See accompanying notes
</TABLE>
F - 21
<PAGE>
<TABLE>
<CAPTION>
Year Ended Six Months Ended
December 31, June 30,
-------------------------------- -------------------
1995 1996 1997 1997 1998
-------------------------------- -------------------
(in thousands) (unaudited)
<S> <C> <C> <C> <C> <C>
Net income (loss) .......................... $(9,937) $(7,488) $ 8,554 $ 2,339 $ 9,573
Other comprehensive income (loss), net of
taxes
Unrealized gains (losses) on securities 11 (106) 127 43 (49)
Foreign currency translation
adjustments ................................ -- -- 2 -- --
------- ------- ------- ------- -------
Other comprehensive income (loss) .......... 11 (106) 129 43 (49)
------- ------- ------- ------- -------
Comprehensive income (loss) ................ $(9,926) $(7,594) $ 8,683 $ 2,382 $ 9,524
======= ======= ======= ======= =======
See accompanying notes
</TABLE>
F - 22
<PAGE>
<TABLE>
<CAPTION>
INCYTE GENERAL
COMBINED STATEMENT OF DIVISION EQUITY
FOR THE YEARS ENDED DECEMBER 31, 1995, 1996 AND 1997
AND THE SIX MONTHS ENDED JUNE 30, 1998 (UNAUDITED)
(in thousands)
Accumulated
Equity Other Total
Contrib- Comprehensive Accumulated Division
utions Income Deficit Equity
------------ -------------- ----------- ---------
<S> <C> <C> <C> <C>
Balances at January 1, 1995 ............... $ 44,146 $ 22 $ (19,824) 24,344
Equity contribution from Incyte
Pharmaceuticals, Inc. ................... 33,187 -- -- 33,187
Net change in unrealized gains (losses) on
marketable securities ................... -- 11 -- 11
Net loss ................................... -- -- (9,937) (9,937)
--------- --------- --------- ---------
Balances at December 31, 1995 .............. 77,333 33 (29,761) 47,605
Equity contribution from Incyte
Pharmaceuticals, Inc. ................... 4,611 -- -- 4,611
Equity contribution from Incyte Genetics ... 532 -- -- 532
Change in unrealized gains (losses) on
marketable securities ................... -- (106) -- (106)
Net loss ................................... -- -- (7,488) (7,488)
--------- --------- --------- --------
Balances at December 31, 1996 .............. 82,476 (73) (37,249) 45,154
Equity contribution from Incyte
Pharmaceuticals, Inc. ................... 93,831 -- -- 93,831
Equity contribution to Incyte Genetics ..... (11,589) -- -- (11,589)
Change in unrealized gains (losses) on
marketable securities ................... -- 127 -- 127
Net change in cumulative translation
adjustment ............................ 2 2
Net income ................................. -- -- 8,554 8,554
--------- --------- --------- ---------
Balances at December 31, 1997 .............. 164,718 56 (28,695) 136,079
Equity contribution from Incyte
Pharmaceuticals, Inc. (unaudited) ....... 3,169 -- -- 3,169
Equity contribution from Incyte Genetics
(unaudited) ............................. 620 -- -- 620
Net change in unrealized gains (losses) on
marketable securities (unaudited) ....... -- (49) -- (49)
Adjustment to conform fiscal year of pooled
entity - Synteni (unaudited) ............ 2,025 -- (1,744) 281
Net income (unaudited) ..................... -- -- 9,573 9,573
--------- --------- --------- ----------
Balances at June 30, 1998 (unaudited) ...... $ 170,532 $ 7 $ (20,866) $ 149,673
========= ========= ========= =========
See accompanying notes
</TABLE>
F - 23
<PAGE>
<TABLE>
<CAPTION>
INCYTE GENERAL
COMBINED STATEMENTS OF CASH FLOWS
(in thousands)
Year Ended Six Months Ended
December 31, June 30
---------------------------------------------- -------------------------
1995 1996 1997 1997 1998
---------- ----------- ---------- --------- --------
(Unaudited)
<S> <C> <C> <C> <C> <C>
Cash flows from operating activities:
Net income (loss) $(9,937) $ (7,488) $ 8,554 $ 2,339 $ 9,573
Adjustments to reconcile net income (loss)to
net cash provided by (used in) operating
activities:
Depreciation and amortization 2,771 6,529 10,633 4,592 7,489
Expense for abandoned equipment 124 - -
Noncash portion of purchase of in-process
research and development - 3,000 - - -
Amortization of deferred compensation - - - - 246
Adjustment to conform fiscal year of pooled
entity - - - - 278
Changes in certain assets and liabilities:
Accounts receivable (7,439) 5,174 (17,651) (1,497) 8,433
Prepaid expenses and other assets (585) (2,012) (3,459) (1,012) (3,758)
Accounts payable 766 2,371 910 (973) (2,082)
Accrued and other liabilities 4,498 10,120 14,329 3,051 111
Deferred revenue 1,015 301 6,260 6,190 12,184
------------ ------------ ------------ ----------- ------------
Net cash provided by (used in) operating activities (8,787) 17,995 19,576 12,690 32,474
------------ ------------ ------------ ----------- ------------
Cash flows from investing activities:
Capital expenditures (8,122) (20,453) (27,225) (9,136) (15,325)
Long-term investments - (313) (4,537) (5,000) (6,894)
Proceeds from sale of assets leased back under
operating leases - - 1,696 1,528 -
Purchases of marketable securities (74,037) (16,526) (53,464) (4,511) (60,171)
Sales and maturities of marketable securities 61,722 16,336 26,740 8,539 23,854
------------ ------------ ------------ ----------- ------------
Net cash used in investing activities (20,437) (20,956) (56,790) (8,580) (58,536)
------------ ------------ ------------ ----------- ------------
Cash flows from financing activities:
Contribution from Incyte Pharmaceuticals, Inc. 32,862 1,582 93,831 4,322 2,923
Proceeds from capital leases and notes payable 69 - 1,000 - -
Principal payments on capital lease obligations
And notes payable (72) (121) (46) (53) (135)
Equity contribution (to) from Incyte Genetics - 532 (11,589) (655) 620
------------ ------------ ------------ ----------- ------------
Net cash provided by financing activities 32,859 1,993 83,196 3,614 3,480
------------ ------------ ------------ ----------- ------------
Net increase (decrease) in cash and cash
equivalents 3,635 (968) 45,982 7,724 (22,654)
Cash and cash equivalents at beginning of period 6,949 10,584 9,616 9,616 55,598
------------ ------------ ------------ ----------- ------------
Cash and cash equivalents at end of period $10,584 $ 9,616 $ 55,598 $17,340 $ 32,944
============ ============ ============ =========== ============
See accompanying notes
</TABLE>
F - 24
<PAGE>
<TABLE>
<CAPTION>
INCYTE GENERAL
COMBINED STATEMENTS OF CASH FLOWS - CONTINUED
(in thousands)
Year Ended Six Months Ended
December 31, June 30
------------------------------------------------ --------------------------
Supplemental schedule of cash flow 1995 1996 1997 1997 1998
information: ------------ ------------ ------------ ----------- ----------
(unaudited)
<S> <C> <C> <C> <C> <C>
Supplemental schedule of cash flow
information:
Interest paid $ 45 $ 17 $ 16 $ 14 43
============ ============ ============ =========== ==========
Income taxes paid - - $ 252 $ 70 $ 340
============ ============ ============ =========== ==========
Supplemental Schedule of Noncash Investing
and Financing Activities:
Property and equipment acquired pursuant to
capital lease obligations $ 69 $ - $ - - $ -
============ ============ ============ =========== ==========
See accompanying notes
</TABLE>
F - 25
<PAGE>
INCYTE GENERAL
NOTES TO COMBINED FINANCIAL STATEMENTS
(INFORMATION AS OF JUNE 30, 1998 AND FOR THE SIX MONTHS ENDED
JUNE 30, 1997 AND 1998 IS UNAUDITED)
Note 1. Organization and Summary of Significant Accounting Policies
Organization and Business. Incyte General, a division of Incyte Pharmaceuticals,
Inc. ("Incyte" and, together with its wholly owned subsidiaries, the "Company"),
designs, develops and markets genomic information-based tools that can assist
pharmaceutical and biotechnology companies in the discovery and development of
new drugs including the identification of new disease targets and novel disease
pathways, and the evaluation of the safety and efficacy of new drugs. In
addition, Incyte General is developing similar tools to assist agricultural
companies in the identification of useful genes and the discovery of new
products. The products include genomic database products, genomic data
management software tools, microarray-based gene expression services, genomic
reagents and related reagents.
Basis of Presentation. The Board of Directors of the Company has recommended
stockholder approval of a proposal (the "Incyte Genetics Stock Proposal") that
would create two series of common stock that are intended to reflect separately
the performance of the Company's Incyte General and Incyte Genetics divisions.
Under the Incyte Genetics Stock Proposal, the Company's Certificate of
Incorporation would be amended to designate a new series of common stock
entitled Incyte Pharmaceuticals, Inc. - Incyte Genetics Common Stock ("Incyte
Genetics Stock") and to redesignate each share of the Company's existing common
stock ("Existing Common Stock") as one share of a new series of common stock
entitled Incyte Pharmaceuticals, Inc. - Incyte General Common Stock ("Incyte
General Stock").
The accompanying combined financial statements have been derived from the
consolidated assets, liabilities, revenues and expenses recorded in the
accounting records of the Company. These combined financial statements reflect
the assets, liabilities, revenue and expenses directly attributable to Incyte
General as well as allocations deemed reasonable by management to present the
financial position, results of operations and cash flows of Incyte General on a
stand-alone basis, in accordance with generally accepted accounting principles.
All significant intercompany accounts and transactions have been eliminated.
Although management is unable to estimate the actual costs that would have been
incurred if the services performed by the Company had been purchased from
independent third parties, the allocation methodologies have been described
within the respective footnotes, where applicable, and management considers the
allocations to be reasonable. However, the financial position, results of
operations and cash flows of Incyte General may differ from those that would
have been achieved had Incyte General operated autonomously or as an entity
independent of the Company. To date, Incyte General has been the sole source of
funding to Incyte Genetics. In September 1998, Incyte General committed
$20 million, in addition to funding provided through June 30, 1998, to Incyte
Genetics for working capital needs; however Incyte Genetics will have to find
alternative funding to fully support anticipated levels of operations.
Notwithstanding the allocation of assets and liabilities (including contingent
liabilities) and Division equity between Incyte General and Incyte Genetics for
purposes of preparing their respective financial statements, the Company
continues to hold title to all of the assets and is responsible for all of the
liabilities allocated to each division. If the Incyte Genetics Stock Proposal is
approved, holders of Incyte General Stock and Incyte Genetics Stock will be
subject to the risks associated with an investment in a single corporation and
all of the Company's businesses, assets and liabilities. Events attributable to
Incyte Genetics that affect the Company's results of operations or financial
condition could affect the results of operations or financial position of Incyte
General or the market price of Incyte General Stock.
The management and accounting policies applicable to the preparation of the
financial statements of Incyte General and Incyte Genetics described may be
modified or rescinded, or additional policies may be adopted, at the sole
discretion of the Company's Board of Directors at any time without approval of
the stockholders.
F - 26
<PAGE>
In January 1998, the Company issued shares of Existing Common Stock in exchange
for all of the capital stock of Synteni, Inc. ("Synteni"), a privately held
microarray-based genomics company in Fremont, California. Synteni is developing
and commercializing technology for generating microarrays and related software
and services. Synteni's assets, liabilities and operations have been allocated
to Incyte General. The merger has been accounted for as a pooling of interests
and, accordingly, Incyte General's combined financial statements and financial
data for all periods include the accounts and operations of Synteni since
inception. Synteni's fiscal year ended on September 30. Synteni's results of
operations for the period from October 1, 1997 to December 31, 1997 were
recorded directly in retained earnings in the first quarter of fiscal 1998.
In August 1996, the Company acquired Combion, Inc. ("Combion") for shares of
Existing Common Stock. The acquisition of Combion has been accounted for as a
purchase, and the combined financial statements discussed herein reflect the
inclusion of the results of Combion from the date of acquisition, August 15,
1996. See Note 7 to the Combined Financial Statements.
In July 1996, the Company issued shares of its Existing Common Stock in exchange
for all of the outstanding shares of Genome Systems, Inc. ("Genome Systems").
The activities of Genome Systems related to the operations of genetic mapping
have been allocated to Incyte Genetics and all other activities have been
allocated to Incyte General. The transaction has been accounted for as a pooling
of interests, and Incyte General's combined financial statements and all
historical financial data reflect the accounts and operations of Genome Systems
since inception.
Financial Statements and Allocation Matters. As a matter of policy, Incyte
General manages the financial activities of both of the Company's divisions.
These financial activities include the day to day cash disbursement and receipts
activities, investment of surplus cash, the issuance and repayment of short-term
and long-term debt and capital lease obligations and the issuance of common
stock. During the three year period ended December 31, 1997 and the six month
periods ended June 30, 1997 and 1998, the Company attributed all of its
short-term and long-term debt and capital lease obligations to Incyte General
based upon the specific purpose for which the debt was incurred. Accordingly,
all of the Company's interest expense has been allocated to Incyte General. All
revenues that are not directly attributed to Incyte Genetics' current product,
LifeSeq Atlas(TM), have been allocated to Incyte General. Incyte Genetics
recognizes all expenses directly incurred in its operations and is allocated
expenses for shared services; all other expenses are recognized by Incyte
General.
Unaudited Interim Financial Information. The combined balance sheet as of June
30, 1998, combined statements of operations, combined statements of
comprehensive operations and the combined statements of cash flows for the six
months ended June 30, 1997 and 1998 are unaudited, but include all adjustments
(consisting of normal recurring adjustments) which Incyte General considers
necessary for a fair presentation of the financial position, operating results
and cash flows for the periods presented.
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 amounts reported in the financial statements and
accompanying notes. Actual results could differ from those estimates.
Foreign Currency Translation. The financial statements of subsidiaries outside
the United States are measured using the local currency as the functional
currency. Assets and liabilities of these subsidiaries are translated at the
rates of exchange at the balance sheet date. The resultant translation
adjustments have been immaterial to date. Income and expense items are
translated at average monthly rates of exchange.
Concentrations of Credit Risk. Cash, cash equivalents, and short-term
investments and trade receivables are financial instruments which potentially
subject Incyte General to concentrations of credit risk. The estimated fair
value of financial instruments approximates the carrying value based on
available market information. Incyte General primarily invests its excess
available funds in notes and bills issued by the U.S. government and its
agencies and corporate debt securities and, by policy, limits the amount of
credit exposure to any one issuer and to any one type of investment, other
F - 27
<PAGE>
than securities issued or guaranteed by the U.S. government. Incyte General's
customers are pharmaceutical, biotechnology and agricultural companies which are
typically located in the United States and Europe. Incyte General has not
experienced any credit losses to date and does not require collateral on
receivables.
Segment Information. Export revenues for the years ended December 31, 1995, 1996
and 1997 and the six month periods ended June 30, 1997 and 1998 were $1,525,000,
$9,743,000, $25,694,000, $9,445,000 and $16,639,000, respectively.
Cash and Cash Equivalents. Cash and cash equivalents are held in U.S. banks or
in custodial accounts with U.S. banks. Cash equivalents are defined as all
liquid investments with maturities from date of purchase of 90 days or less that
are readily convertible into cash and have insignificant interest rate risk. All
other investments are reported as marketable securities -- available-for-sale.
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
division equity. The amortized cost of debt securities in this category is
adjusted for amortization of premiums and accretions of discounts to maturity.
Such amortization is included in interest income. Realized gains and losses and
declines in value judged to be other than temporary for available-for-sale
securities are included in interest and other expense.
The following is a summary of Incyte General's investment portfolio, including
cash equivalents of $398,000, $40,064,000 and $10,150,000 as of December 31,
1996 and 1997 and June 30, 1998, respectively.
<TABLE>
<CAPTION>
Net
Unrealized Estimated
Amortized Gains Fair
Cost (Losses) Value
---------- ---------- ---------
(in thousands)
<S> <C> <C> <C>
December 31, 1996
U.S. Treasury notes and other U.S. government and agency securities $ 30,695 $ (73) $ 30,622
Corporate debt securities ......................................... 398 -- 398
---------- ---------- ---------
$ 31,093 $ (73) $ 31,020
========== ========== =========
December 31, 1997
U.S. Treasury notes and other U.S. government and agency securities $ 53,951 $ 47 $ 53,998
Corporate debt securities ......................................... 30,543 -- 30,543
Floating rate notes ............................................... 13,013 7 13,020
---------- ---------- ---------
$ 97,507 $ 54 $ 97,561
========== ========== =========
June 30, 1998 (Unaudited)
U.S. Treasury notes and other U.S. government and agency securities $ 85,701 $ 5 $ 85,706
Corporate debt securities ......................................... 10,150 -- 10,150
Floating rate notes ............................................... 8,003 -- 8,003
---------- ---------- ---------
$ 103,854 $ 5 $ 103,859
========== ========== =========
</TABLE>
F - 28
<PAGE>
At December 31, 1996 and 1997, all of Incyte General's investments were
classified as short-term, as Incyte General has classified its investments as
available for sale and may not hold its investments until maturity in order to
take advantage of market conditions. Of the marketable securities held at
December 31, 1997, $78,530,000 had maturities under a year and $19,031,000 had
maturities over a year, but less than two years. Unrealized gains were not
material and have therefore been netted against unrealized losses. Realized
gains and losses from sales and maturities of marketable securities have not
been material to date.
Accounts Receivable. Accounts receivable at December 31, 1996 and 1997 and June
30, 1998 included an allowance for doubtful accounts of $0, $225,000 and
$300,000, respectively.
Property and Equipment. Property and equipment is stated at cost, less
accumulated depreciation and amortization. Depreciation and amortization are
recorded using the straight-line method over the estimated useful lives of the
respective assets (generally two to five years). Leasehold improvements are
amortized over the shorter of the estimated useful life of the assets or lease
term. Property and equipment consists of the following (in thousands):
<TABLE>
<CAPTION>
December 31, June 30,
---------------------------------------- -----------------
1996 1997 1998
------------------- --------------- -----------------
(Unaudited)
<S> <C> <C> <C>
Office equipment $ 1,018 $ 2,588 $ 2,850
Laboratory equipment 13,182 18,939 20,477
Computer equipment 9,990 22,168 32,035
Leasehold improvements 8,702 14,495 17,666
------------------- --------------- -----------------
32,892 58,190 73,028
Less accumulated depreciation and 9,696 20,120 27,375
amortization
------------------- --------------- -----------------
$ 23,196 $ 38,070 $ 45,653
=================== =============== =================
</TABLE>
Depreciation and amortization expense, including depreciation expense of assets
under capital leases, was $2,175,000, $5,298,000, $8,758,000, $3,755,000 and
$5,971,000 for the years ended December 31, 1995, 1996, and 1997 and the six
months ended June 30, 1997 and 1998, respectively. Amortization of leasehold
improvements was $266,000, $1,061,000, $2,260,000, $837,000 and $1,518,000 for
the years ended December 31, 1995, 1996 and 1997, and the six months ended June
30, 1997 and 1998, respectively. A portion of the depreciation and amortization
is allocated to Incyte Genetics in a manner consistent with Note 1 to Combined
Financial Statements.
Certain laboratory and computer equipment used by Incyte General could be
subject to technological obsolescence in the event that significant advancement
is made in competing or developing equipment technologies. Management
continually reviews the estimated useful lives of technologically sensitive
equipment and believes that those estimates appropriately reflect the current
useful life of its assets. In the event that a currently unknown significantly
advanced technology became commercially available, Incyte General would
re-evaluate the value and estimated useful lives of its existing equipment,
possibly having a material impact on the financial statements.
Long-Term Investments. Incyte General has made equity investments in a number of
companies whose businesses may be complementary to Incyte General's business. To
date, all investments have been carried at cost, which approximates the fair
market value. The Company evaluates its long-term investments for impairment on
a quarterly basis.
Software Costs. In accordance with the provisions of Financial Accounting
Standards Board Statement ("FASB") No. 86, "Accounting for the Costs of Computer
Software to be Sold, Leased or Otherwise Marketed," Incyte General has
capitalized software development costs incurred in developing certain products
once technological feasibility of the products has been determined. Capitalized
software costs are amortized over three years.
F - 29
<PAGE>
Revenue Recognition. Incyte General recognizes revenue for database
collaboration agreements evenly over the term of the agreement. Revenue is
deferred for fees received before earned. Revenues from custom orders, such as
satellite databases, are recognized upon shipment. Revenues from reagents and
genomic screening products are recognized when shipped, and revenues from
genomic screening services are recognized upon completion. Revenue from gene
expression microarray services is recognized at the completion of key stages in
the performance of the service, in proportion to costs incurred. All revenues
generated by the LifeSeq Atlas product have been allocated to Incyte Genetics.
Stock-Based Compensation. Incyte General accounts for stock option grants to
employees in accordance with APB Opinion No. 25, Accounting for Stock Issued to
Employees. Incyte General recognizes compensation expense, if any, equal to the
difference between the exercise price of the option and the fair market value of
the stock at the date of grant.
Advertising Costs. All costs associated with advertising products are expensed
in the year incurred. Advertising expenses for the years ended December 31,
1995, 1996 and 1997 and the six months ended June 30, 1997 and 1998 were
$324,000, $573,000, $772,000, $336,000 and $585,000, respectively.
Income Taxes. Both Incyte Genetics and Incyte General are included in the
consolidated United States federal income tax return filed by the Company.
Accordingly, the provision for federal income taxes and the related payments or
refunds of tax are determined on a consolidated basis. The consolidated
provision and the related tax payments or refunds have been reflected in both
Incyte Genetics, and Incyte General's financial statements in accordance with
the Company's tax allocation policy. In general, such policy provides that the
consolidated tax provision and related tax payments or refunds are allocated
among the divisions for financial statement purposes based principally upon the
financial income, taxable income, credits, preferences and other amounts
directly related to the respective divisions. For tax provision purposes, tax
benefits resulting from attributes (principally net operating losses and various
tax credits), which cannot be utilized by one of the divisions on a separate
return basis, but which can be utilized on a consolidated basis in that year or
in a carryback year, are allocated to the division that generated the
attributes.
New Pronouncements. In June 1997, the FASB issued Statement No. 130, Reporting
Comprehensive Income ("SFAS 130"), and Statement No. 131, Disclosures about
Segments of an Enterprise and Related Information ("SFAS 131") (collectively,
the "Statements"). The Statements are effective for fiscal periods beginning
after December 15, 1997. SFAS 130 establishes standards for reporting of
comprehensive income and its components in annual financial statements. SFAS 131
establishes standards for reporting financial and descriptive information about
an enterprise's operating segments in its annual financial statements and
selected segment information in interim financial reports. Reclassification or
restatement of comparative financial statements or financial information for
earlier periods is required upon adoption of SFAS 130 and SFAS 131,
respectively.
In June 1998, the FASB issued Statement No. 133, Accounting for Derivative
Instruments and Hedging Activities ("SFAS 133"). This statement is effective for
fiscal years beginning after June 15, 1999. SFAS 133 establishes standards for
reporting derivative instruments and hedging activities. Application of the SFAS
133 will have no impact on the Incyte General combined financial position or
results of operations as currently reported.
Note 2. Related party transactions
Overview. The Company allocates corporate general and administrative and
research and development expenses and income taxes in accordance with certain
policies adopted by the Company's Board of Directors. Such policies may be
further modified or rescinded, or additional policies may be adopted, by action
of the Company's Board of Directors without the approval of stockholders.
Shared Services. Incyte General operates as a division of the Company with
access to the Company's personnel, financial resources, facilities and fixed
assets. The two divisions, Incyte Genetics and Incyte General, will share
sequencing operations, marketing/sales and general and administrative services
with the costs being allocated to Incyte
F - 30
<PAGE>
General and Incyte Genetics in a reasonable and consistent manner, based on
utilization by each division of the services to which such costs relate.
Access to Technology and Know-How Incyte General has free access to all
technology and know-how of Incyte Genetics that may be useful, subject to any
obligations or limitations applicable to Incyte Genetics. The costs of
developing this technology remain in the business
Note 3. Database Agreements
As of December 31, 1997, Incyte General had database agreements with nineteen
pharmaceutical, biotechnology and agricultural companies (twenty-one as of June
30, 1998). Each company has agreed to pay, during the term of the agreement,
annual fees to receive non-exclusive access to selected modules of Incyte
General's databases. In addition, if a company develops certain products
utilizing Incyte General's technology and proprietary database information,
potential milestone and royalty payments could be received by Incyte General. If
these agreements are not renewed and if Incyte General cannot sign a sufficient
number of new database agreements, the loss of revenue could have a material
adverse effect on Incyte General's business and operating results. Certain
companies also have satellite database agreements, whereby Incyte General
provides custom sequencing services, which are billed for separately. Satellite
database services are provided to the customer on an exclusive basis for a
negotiated period of time. None of the companies individually contributed more
than 10% of Incyte General's total revenues in the year ended December 31, 1997
or the six months ended June 30, 1997 and 1998. Over 90% of the total revenues
in 1996 were derived from ten companies, three of which individually contributed
more than 10% of the total, or approximately 37% in the aggregate. In 1995, the
majority of the total revenues were derived from five companies, including three
of which contributed more than 10% individually, or approximately 71% in the
aggregate.
In addition to the database collaboration agreements, Incyte General has a
number of research and development alliances with companies and research
institutions. These agreements provide for the funding of research activities by
Incyte General and the possible payment of milestones, license fees, and, in
some cases, royalties.
Note 4. Commitments
At December 31, 1997, the Company had signed noncancelable operating leases on
multiple facilities, including facilities in Palo Alto and Fremont, California
and St. Louis, Missouri. The leases expire on various dates ranging from March
1998 to January 2006. Rent expense for the years ended December 31, 1995, 1996,
and 1997 and the six month periods ended June 30, 1997 and 1998, was
approximately $1,251,000, $1,675,000, $3,490,000, $1,324,000 and $2,554,000,
respectively. Rent allocated to Incyte Genetics was approximately $2,000,
$84,000, $30,000, and $56,000 from July 1, 1996 through December 31, 1996, for
the year ended December 31, 1997 and the six months ended June 30, 1997 and
1998, respectively.
Incyte General had laboratory and office equipment with a cost of approximately
$370,000, $189,000 and $65,000 at December 31, 1996 and 1997 and June 30, 1998,
respectively, and related accumulated amortization of approximately $268,000,
$136,000 and $16,000 at December 31, 1996 and 1997, and June 30, 1998,
respectively, under capital leases. These leases are secured by the equipment
leased thereunder.
At December 31, 1997, future noncancelable minimum payments under the operating
and capital leases and notes payable were as follows:
F - 31
<PAGE>
<TABLE>
<CAPTION>
Capital Leases
Operating and
Leases Notes Payable
-------------- ---------------
(in thousands)
Year ended December 31,
<S> <C> <C>
1998 $ 5,517 $ 48
1999 4,381 38
2000 3,902 19
2001 3,426 ---
2002 and thereafter 4,592 ---
-------------- ----------
Total minimum lease payments $ 21,818 105
==============
Less amount representing interest 6
----------
Present value of minimum lease payments 99
Less current portion 46
----------
Noncurrent portion $ 53
==========
</TABLE>
In July 1997, Synteni obtained $1,000,000 in debt financing secured by its
property and equipment. The loan is repayable in 48 equal monthly installments
commencing on September 1, 1997 and carries an annual interest rate of 9%. In
connection with the financing, Synteni issued a warrant to purchase the
equivalent of 2,569 shares of Existing Common Stock, exercisable for a period of
seven years from the date of issue at an exercise price of $7.79 per share. The
warrant was exercised immediately prior to the Company's merger with Synteni.
Using the Black-Scholes model to determine the fair market value of the warrant,
management has determined that such fair value is nominal.
In July 1997, the Company entered into a multi-year lease with respect to a
95,000 square foot building being constructed adjacent to the Company's Palo
Alto headquarters. The term of the lease is twelve years at an approximate
annual rent of $3.4 million. Incyte General's share of tenant improvements is
estimated to be between $10.0 million and $15.0 million, of which approximately
$0.9 million has been expended through June 30, 1998. Given the current
construction schedule, Incyte General does not expect to begin to incur
significant expenses related to this facility until late 1998 or early 1999.
Incyte General has a number of research and development alliances with companies
and research institutions. As part of the collaborative agreement, Incyte
General has agreed to reimburse OGS for up to $5.0 million in 1999 if revenues
are not sufficient to offset OGS' expenses for services rendered. Incyte
General's commitments under any other of these agreements do not represent a
significant expenditure in relation to Incyte General's total research and
development expense. See "Note 2 of Combined Financial Statements."
The development of Incyte Genetics' products and services will require
substantial funds. Incyte General intends to fund the operations of Incyte
Genetics for the foreseeable future. The Company's Board has approved a plan for
Incyte General to continue to fund Incyte Genetics' operations for an amount up
to $20.0 million. The funding will be provided on an as needed basis to support
Incyte Genetics working capital needs.
Note 5. Division Equity
Incyte General Stock. If the Incyte Genetics Stock Proposal is approved by
Incyte Stockholders each share of Existing Common Stock will be redesignated as
Incyte General Stock, which is intended to reflect the performance of Incyte
General, and a new series of common stock, Incyte Genetics Stock, will be
created to reflect the performance of Incyte Genetics. Incyte General and Incyte
Genetics stockholders will vote as one series of stock with Incyte General
stockholders receiving one vote per share. The number of votes allocated to each
share of Incyte Genetics Stock will be adjusted to reflect the ratio of the
average market values of the Incyte Genetics Stock and the Incyte General Stock
as of a 20 trading day period prior to the record date of any vote. Upon
liquidation, holders of Incyte General and Incyte
F - 32
<PAGE>
Genetics Stock will be entitled to a portion of the assets remaining for
distribution to holder of common stock in proportion to the aggregate
Liquidation Units, as defined, of each series of stock, which is to be
determined. Additional shares of Incyte General Stock may be issued from time to
time upon exercise of stock options or at the discretion of the Company's Board.
Stock Compensation Plans. The Company applies APB Opinion No. 25 and related
Interpretations in accounting for its stock compensation plans. The Company
records stock compensation expense for the difference between the exercise price
and their market value, if any, over the vesting period of the option. The
following pro forma net income (loss) per share is presented assuming the Incyte
Genetics Stock Proposal and Additional Proposals are approved by the Company's
stockholders and outstanding options under the Company's three stock-based
compensation plans are adjusted such that a holder of an outstanding option to
purchase one share of Existing Common Stock will be entitled to purchase one
Share of Incyte General Stock. Had compensation cost related to the Company's
three stock-based compensation plans been determined consistent with FASB
Statement No. 123, Incyte General's pro forma net income (loss) in the years
ended December 31, 1996 and 1997 and six month periods ended June 30, 1997 and
1998 would have been approximately $(11.3) million $1.0 million, $(1.1) million
and $4.5 million, respectively. Both Incyte General's pro forma basic and
diluted loss per share for the year ended December 31, 1996 and six months ended
June 30, 1997 would have been $(0.56) per share, and $(0.05) per share,
respectively, and for the year ended December 31, 1997 and the six month period
ended June 30, 1998 pro forma basic and diluted net income per share would have
been $0.05 and $0.04 per share and $0.17 and $0.16 per share, respectively. The
weighted average fair value of the options granted during the years ended
December 31, 1997 and 1996 and the six months ended June 30, 1997 and 1998 are
estimated at $9.44, $14.66, $12.58, and $20.52 per share, on the date of grant,
using the Black-Scholes multiple-option pricing model with the following
assumptions: dividend yield 0%, 0%, 0%, and 0%, volatility of 55%, 56%, 56% and
56% risk-free interest rate with an average of 6.10%, 6.05%, 6.35%, and 5.52%
and an average expected life of 3.25, 3.37, 3.40, and 3.78 years, respectively.
The fair value of the employees' purchase rights under the Employee Stock
Purchase Plan during the year ended December 31, 1997 and the six months ended
June 30, 1998 is estimated at $11.86 and $13.66, on the date of grant, using the
Black-Scholes multiple-option pricing model with the following assumptions:
dividend yield 0% and 0%, volatility of 56% and 56%, risk free interest rate of
5.64% and 5.44%, and an expected life of 9 months, respectively.
The effects on pro forma disclosures of applying FASB Statement No. 123 are not
likely to be representative of the effects on pro forma disclosures of future
years. As FASB Statement No.123 is only applicable to options granted after
December 31, 1994, the pro forma effect will not be fully reflected until 1998.
The Black-Scholes option valuation model was developed for use in estimating the
fair value of traded options which have no vesting restrictions and are fully
transferable. In addition, option valuation models require the input of highly
subjective assumptions, including the expected stock price volatility and option
life. Because Incyte General's employee stock options have characteristics
significantly different from those of traded options, because changes in the
subjective input assumptions can materially affect the fair value estimate, and
because Incyte General has a relatively limited history with option behavior, in
management's opinion the existing models do not necessarily provide a reliable
single measure of the fair value of its employee stock options.
Summaries of stock option activity for the Company's three fixed stock option
plans as of December 31, 1995, 1996 and 1997, and related information for the
years ended December 31 are included in the plan descriptions below.
1991 Stock Plan. In November 1991, the Board of Directors adopted the 1991 Stock
Plan (the "Stock Plan"), which was amended and restated in 1992, 1995, 1996 and
1997, to provide for issuance of Existing Common Stock to employees,
consultants, and scientific advisors. Options issued under the Stock Plan shall,
at the discretion of the compensation committee of the Board of Directors, be
either incentive stock options or nonstatutory stock options. The exercise
prices of incentive stock options granted under the Stock Plan are not less than
the fair market value on the date of the grant, as determined by the Board of
Directors. The exercise prices of nonstatutory stock options granted under the
Stock Plan are not less than 85% of the fair market value on the date of the
grant, as determined by the Board of Directors. Options generally vest over
approximately four years, pursuant to a formula determined by the Company's
Board of Directors, and expire after ten years. On May 21, 1997, the Company's
stockholders approved an increase
F - 33
<PAGE>
in the number of shares of Existing Common Stock reserved for issuance under the
Stock Plan from 4,000,000 to 4,800,000. On June 15, 1998, the Company's
stockholders approved an increase in the number of shares of Existing Common
Stock reserved for issuance under the Stock Plan from 4,800,000 to 6,300,000.
If the Incyte Genetics Stock Proposal and the related proposal to amend the
Stock Plan are approved by the Company's stockholders and implemented by the
Board of Directors, the Stock Plan will be amended to provide that up to
6,300,000 shares of Incyte General Stock and 2,400,000 shares of Incyte Genetics
Stock will be reserved for issuance under the plan, and each outstanding option
under the Stock Plan will be converted into an option to purchase shares of
Incyte General Stock. Upon any distribution of shares of Incyte Genetics Stock
to the holders of outstanding Incyte General Stock, outstanding options under
the Stock Plan will be adjusted to reflect the fact that a holder of an
outstanding option to purchase one share of Existing Common Stock under the
Stock Plan will be entitled to acquire one share of Incyte General Stock and
such number or fraction of shares of Incyte Genetics Stock as were distributed
with respect to each share of Incyte General Stock, for an aggregate exercise
price equal to the original exercise price of the outstanding option.
1996 Synteni Stock Plan. In December 1996, Synteni's Board of Directors approved
and adopted the 1996 Equity Incentive Plan ("Synteni Plan"). Under the Synteni
Plan, Synteni could grant incentive stock options, nonstatutory stock options,
stock bonuses or restricted stock purchase rights to purchase the aggregate
equivalent of 436,100 shares of Existing Common Stock. Incentive stock options
could be granted to employees and nonstatutory options and rights to purchase
restricted stock may be granted to employees, directors or consultants at
exercise prices of no less than 100% and 85%, respectively, of the fair value of
the common stock on the grant date, as determined by the board of directors.
Options could be granted with different vesting terms from time to time and
options expire no more than 10 years after the date of grant. All outstanding
options at the time of the merger with Incyte were converted to options to
purchase Existing Common Stock, and the Synteni Plan was terminated.
F - 34
<PAGE>
Activity under the 1991 Stock Plan and the Synteni Plan was as follows:
<TABLE>
<CAPTION>
Shares Subject To
Outstanding Options
----------------------------------------
Weighted
Shares Average
Available Exercise
For Grant Shares Price
------------------ --------------- -------------------
<S> <C> <C> <C>
Balance at January 1, 1995 217,664 1,303,416 $ 3.86
Additional authorization 1,600,000 - -
Options granted (1,246,800) 1,246,800 9.14
Options exercised - (57,630) 1.53
Options canceled 19,918 (19,918) 6.51
------------------ --------------- -------------------
Balance at December 31, 1995 590,782 2,472,668 6.56
Additional authorization 800,000 - -
Options granted (1,052,300) 1,052,300 19.75
Options exercised - (446,556) 3.54
Options canceled 140,326 (140,326) 8.38
------------------ --------------- -------------------
Balance at December 31, 1996 478,808 2,938,086 11.63
Additional authorization 800,000 - -
Shares authorized under Synteni Plan 436,100 - -
Options granted (1,159,508) 1,159,508 25.56
Options exercised - (408,171) 7.27
Options canceled 109,398 (109,398) 19.27
------------------ --------------- -------------------
Balance at December 31, 1997 664,798 3,580,025 16.46
Additional authorization 1,500,000
Options granted (unaudited) (350,087) 350,087 33.56
Options exercised (unaudited) - (254,474) 9.05
Options canceled (unaudited) 69,900 (69,900) 18.28
Termination of Synteni Plan (unaudited) (88,280) - -
------------------ --------------- -------------------
Balance at June 30, 1998 (unaudited) 1,796,331 3,605,738 $ 18.61
================== =============== ===================
</TABLE>
Stock options issued by Synteni to purchase 89,587 Incyte equivalent common
shares at a weighted average exercise price of $1.49 per share, and options to
purchase 8,722 Incyte equivalent common shares under the Synteni Plan exercised
in the period from October 1, 1997 to December 31, 1997 were included in the
1998 activity. The Company recorded $1,658,000 of deferred compensation related
to these options, which will be amortized over the vesting period of the
options.
Options to purchase a total of 2,914,596, 2,181,814 and 2,346,532 shares at
December 31, 1996 and 1997, and June 30, 1998, respectively, were exercisable.
Of the options exercisable, 803,004, 1,233,953 and 1,419,860 shares were vested
at December 31, 1996 and 1997, and June 30, 1998, respectively.
Non-Employee Directors' Stock Option Plan. In August 1993, the Company's Board
of Directors approved the 1993 Directors' Stock Option Plan (the "Directors'
Plan"), which was amended in 1995. The Directors' Plan provides for the
automatic grant of options to purchase shares of Existing Common Stock to
non-employee directors of the Company. The maximum number of shares issuable
under the Directors' Plan is 400,000.
The Directors' Plan provides immediate issuance of options to purchase an
initial 40,000 shares of Existing Common Stock to each new non-employee director
joining the Board. The initial options are exercisable in five equal annual
installments. Additionally, members who continue to serve on the Board will
receive annual option grants for 10,000 shares exercisable in full on the first
anniversary of the date of the grant. All options are exercisable at the fair
market
F - 35
<PAGE>
value of the stock on the date of grant. At December 31, 1996 and 1997 and June
30, 1998, options to purchase 227,500, 267,500 and 287,500 shares of Existing
Common Stock at a weighted average exercise price of $5.37, $8.71 and $11.18 per
share, respectively, were outstanding; 141,500, 171,500 and 217,500 shares are
vested and exercisable at December 31, 1996 and 1997 and June 30, 1998,
respectively. The Directors' Plan was amended in March 1998 by the Board of
Directors to eliminate the grant (to each new non-employee director) referred to
above and to reduce the annual grants from 10,000 shares to 5,000 shares.
If the Incyte Genetics Stock Proposal and the related proposal to amend the
Directors' Plan are approved by the Company's stockholders and implemented by
the Board of Directors, the Directors' Plan will be amended to provide that up
to 400,000 shares of Incyte General Stock and 200,000 shares of Incyte Genetics
Stock will be reserved for issuance under the plan. Each annual option grant
will be amended to provide for the issuance of options to purchase shares of
Incyte General Stock and Incyte Genetics Stock in a proportion to be determined.
The following table summarizes information about stock options outstanding at
December 31, 1997, for the 1991 Stock Plan, the 1993 Directors' Stock Option
Plan and the Synteni 1996 Equity Incentive Plan
<TABLE>
<CAPTION>
Options Outstanding Options Exercisable
-------------------------------------------------------------- -------------------------------
Weighted Weighted Weighted
Average Average Average
Range of Number Remaining Exercise Number Exercise
Exercise Prices Outstanding Contractual Life Price Exercisable Price
- -------------------- ----------------- --------------------- ------------- -------------- -----------
<S> <C> <C> <C> <C> <C>
$0.15-- 1.00 434,283 7.35 $ 0.78 212,065 $ 0.75
$2.00-- 4.75 236,382 5.98 $ 3.00 204,382 $ 3.04
$5.31-- 7.56 419,108 6.99 $ 7.19 419,108 $ 7.19
$8.44-- 9.56 729,279 7.79 $ 8.73 729,279 $ 8.73
$10.69-- 19.81 546,143 8.21 $15.67 522,143 $15.59
$20.19-- 28.l9 858,330 8.99 $22.57 266,377 $20.81
$31.00-- 36.63 512,000 9.81 $35.27 -- $--
40.25-- 43.88 112,000 9.80 $41.90 -- $--
----------------- --------------
$0.15-- 43.88 3,847,525 8.20 $15.92 2,353,354 $10.13
================= ==============
</TABLE>
In July 1996, in connection with the Genome Systems transaction described in
Note 7 below, the Company issued, in exchange for an option to purchase capital
stock of Genome Systems, an option to purchase 21,482 shares of Existing Common
Stock at an exercise price of $0.0235 per share. The option was not issued under
the provisions of either plan described above. The option has been exercised
with respect to 10,740 shares as of December 31, 1997. The remaining 10,742
shares under the option were exercised in January 1998.
Employee Stock Purchase Plan. On May 21, 1997, the Company's stockholders
adopted the 1997 Employee Stock Purchase Plan ("ESPP"). The Company has
authorized 400,000 shares of Existing Common Stock for issuance under the ESPP.
Each regular full-time and part-time employee is eligible to participate after
one year of employment. The initial offering period commenced August 1, 1997 and
ends October 31, 1999. As of December 31, 1997 and June 30, 1998, $238,000 and
$167,000, respectively, has been deducted from employees' payroll.
If the Incyte Genetics Stock Proposal and the related proposal to amend the ESPP
are approved by the Company's stockholders and implemented by the Board of
Directors, the ESPP will be amended to provide that up to 400,000 shares of
Incyte General Stock and 400,000 shares of Incyte Genetics Stock will be
reserved for issuance under the ESPP and that participants may purchase either
Incyte General Stock or Incyte Genetics Stock or both, in such proportions as
the participants may determine.
F - 36
<PAGE>
Note 6. Income Taxes
Income tax provisions and related assets and liabilities attributed to Incyte
General are determined in accordance with the Incyte tax allocation policy. See
Note 1 above.
As of December 31, 1997, Incyte General had federal net operating loss
carryforwards of approximately $26,300,000. Incyte General also had federal
research and development tax credit carryforwards of approximately $2,800,000.
The net operating loss carryforwards will expire at various dates, beginning in
2009 through 2012 if not utilized.
Significant components of Incyte General's deferred tax assets are as follows:
December 31,
---------------------------
1997 1996
--------- ---------
(in thousands)
Deferred tax assets:
Net operating loss carryforwards $ 9,500 $ 10,300
Research credits 4,000 1,500
Capitalized research and development 1,400 1,600
Other, net 2,800 1,500
--------- ---------
Deferred tax assets 17,700 14,900
Valuation allowance for deferred tax assets (17,700) (14,900)
--------- ---------
Net deferred tax asset $ -- $ --
========= =========
The valuation allowance for deferred tax assets increased by approximately
$4,100,000, $2,800,000 and $2,800,000 during the years ended December 31, 1995,
1996 and 1997. Approximately $4,100,000 of the valuation allowance for deferred
tax assets relates to benefits of stock option deductions which, when
recognized, will be allocated directly to contributed capital.
Utilization of the net operating losses and credits may be subject to an annual
limitation, due to the "change in ownership" provisions of the Internal Revenue
Code of 1986 and similar state provisions.
The provision for income taxes consists primarily of federal Alternative Minimum
Tax and differs from the federal statutory rate as follows:
Year ended
December 31,
1997
--------------
(in thousands)
Tax at U.S federal statutory rate $ 3,198
Use of net operating loss carryforwards (4,814)
Unbenefitted net operating losses 1,225
Non-deductible in-process research and development charges 1,108
Other (135)
---------
Provision for income tax $ 582
=========
Note 7. Defined Contribution Plan
The Company has a defined contribution plan covering all domestic employees.
Employees may contribute a portion of their compensation, which is then matched
by Incyte General, subject to certain limitations. Defined contribution
F - 37
<PAGE>
expense for Incyte General was $0, $231,000, $482,000, $267,000, and $410,000 in
the years ended 1995, 1996 and 1997 and the six month periods ended June 30,
1997 and 1998, respectively.
Note 8. Business Combinations
In July 1996, the Company issued 408,146 shares of Existing Common Stock in
exchange for all of the capital stock of Genome Systems, Inc. The merger has
been accounted for as a pooling of interests and, accordingly, Incyte General's
financial statements and financial data have been restated to include the
accounts and operations of Genome Systems since inception. The acquired
operations have been allocated in total to Incyte General.
In August 1996, the Company acquired all the common stock of Combion, in a
stock-for-stock exchange, issuing 146,342 shares of Existing Common Stock valued
at $3 million. The acquisition has been accounted for as a purchase transaction
and, accordingly, the purchase price was allocated to assets and liabilities
based on the estimated fair value as of the date of acquisition. The purchase
price has been allocated based on the fair value of the net assets and the
technology acquired (recorded as a charge to in-process research and
development). Combion's results of operations have been included in the
consolidated results of operations since the date of acquisition. Pro forma
results of operations have not been presented because the effect of this
acquisition was not material to Incyte General's consolidated results of
operations or financial position. The acquired operations have been allocated in
total to Incyte General.
In January 1998, the Company issued 2,340,237 shares of Existing Common Stock in
exchange for all of the capital stock of Synteni, Inc. The merger was accounted
for as a pooling of interests and, accordingly, Incyte General's financial
statements and financial data have been stated to include the accounts and
operations of Synteni since inception. The acquired operations have been
allocated in total to Incyte General.
The table below presents the separate results of operations for Incyte General
including Genome Systems from August 1996, Genome Systems, and Synteni prior to
the respective mergers (in thousands):
<TABLE>
<CAPTION>
Year Ended Six Months Ended
December 31, June 30,
---------------------------- -------------------
1995 1996 1997 1997 1998
(unaudited)
<S> <C> <C> <C> <C> <C>
Revenues:
Incyte ................ $ 9,908 $ 39,601 $ 87,218 $ 38,667 $ 62,337
Genome ................ 2,304 1,734 -- -- --
Synteni ............... 87 110 1,645 372 --
-------- -------- -------- -------- --------
Total .............. $ 12,299 $ 41,445 $ 88,863 $ 39,039 $ 62,337
======== ======== ======== ======== ========
Net income (loss):
Incyte General ........ $(10,142) $ (6,936) $ 11,965 $ 3,496 $ 10,944
Genome ................ 205 106 -- -- --
Synteni ............... -- (515) (3,500) (1,195) --
Merger related expenses -- (143) -- -- (1,060)
-------- -------- -------- -------- --------
Total ............. $ (9,937) $ (7,488) $ 8,465 $ 2,301 $ 9,884
======== ======== ======== ======== ========
</TABLE>
Note 9. Litigation
In January 1998, Affymetrix, Inc. ("Affymetrix") filed a lawsuit in the United
States District Court for the District of Delaware alleging infringement of U.S.
patent number 5,445,934 (the "'934 Patent") by both Synteni and Incyte. The
complaint alleges that the '934 Patent has been infringed by the making, using,
selling, importing, distributing or
F - 38
<PAGE>
offering to sell in the United States high density arrays by Synteni and Incyte
and that such infringement was willful. Affymetrix seeks a permanent injunction
enjoining Synteni and Incyte from further infringement of the '934 Patent and,
in addition, seeks damages, costs and attorney's fees and interest. Affymetrix
further requests that any such damages be trebled based on its allegation of
willful infringement by Incyte and Synteni.
In September 1998 Affymetrix filed an additional lawsuit in the United States
District Court for the District of Delaware alleging infringement of the U.S.
patent number 5,800,992 (the "'992 Patent") and U.S. patent number 5,744,305
(the "'305 Patent") by both Synteni and Incyte. The complaint alleges that the
'305 Patent has been infringed by the making, using, selling, importing,
distributing or offering to sell in the United States high density arrays by
Synteni and Incyte, that the '992 Patent has been infringed by the use of
Synteni's and Incyte' GEMTM microarray technology to conduct gene expression
monitoring using two-color labeling, and that such infringement was willful.
Affymetrix seeks a permanent injunction enjoining Synteni and Incyte from
further infringement of the '305 and '992 Patents and, in addition, Affymetrix
seeks a preliminary injunction enjoining Incyte and Synteni from using Synteni's
and Incyte's GEM microarray technology to conduct gene expression monitoring
using two-color labeling as described in the '992 Patent.
Incyte and Synteni believe they have meritorious defenses and intend to defend
these suits vigorously. However, there can be no assurance that Incyte and
Synteni will be successful in the defense of these suits. Regardless of the
outcome, this litigation has resulted and is expected to continue to result in
substantial expenses and diversion of the efforts of management and technical
personnel. Further, there can be no assurance that any license that may be
required as a result of these suits or the outcome thereof would be made
available on commercially acceptable terms, if at all.
Note 10. Subsequent Events (unaudited)
In September 1998, the Company completed the acquisition of Hexagen Limited
("Hexagen"), a privately held company based in Cambridge, England. The
transaction will be accounted for as a purchase. The Company issued 976,130
shares of Existing Common Stock and $5.0 million in cash in exchange for all of
Hexagen's outstanding capital stock. In addition, the Company assumed Hexagen's
stock options, which if fully vested and exercised, would amount to 125,909
shares of Existing Common Stock. The assets, liabilities, and results of
operations of Hexagen will be allocated in entirety to Incyte Genetics.
In conjunction with the Incyte Genetics Stock Proposal, the Company's Board has
recommended that stockholders approve additional proposals to amend the
Company's 1991 Stock Plan, 1993 Directors' Stock Option Plan and 1997 Employee
Stock Purchase Plan to allow for the purchase of both Incyte Genetics and Incyte
General Stock through these plans.
On September 25, 1998, the Board of Directors adopted a Stockholder Rights Plan
(the "Original Rights Plan"), pursuant to which one preferred stock purchase
right (an "Original Right") will be distributed for each outstanding share of
Common Stock held of record on October 13, 1998. One Original Right will also
attach to each share of Common Stock issued by the Company subsequent to such
date and prior to the distribution date defined below. Each Original Right
represents a right to purchase, under certain circumstances, a fractional share
of a newly created series of the Company's preferred stock at an exercise price
of $200.00, subject to adjustment. In general, the Original Rights will become
exercisable and trade independently from the Common Stock on a distribution date
that will occur on the earlier of (i) the public announcement of the acquisition
by a person or group of 15% or more of the Common Stock or (ii) ten days after
commencement of a tender or exchange offer for the Common Stock that would
result in the acquisition of 15% or more of the Common Stock. Upon the
occurrence of certain other events related to changes in ownership of the Common
Stock, each holder of an Original Right would be entitled to purchase shares of
Common Stock, or an acquiring corporation's common stock, having a market value
of twice the exercise price. Under certain conditions, the Original Rights may
be redeemed at $0.01 per Original Right by the Board of Directors. The Original
Rights expire on September 25, 2008. If the Incyte Genetics Stock Proposal is
approved by the Company's stockholders and implemented by the Board of
Directors, the Original Rights Plan will be amended and restated to, among other
things, (i) reflect the new equity structure of the Company, (ii) redesignate
each Original Right as an Incyte General Stock
F - 39
<PAGE>
Right, (iii) issue an Incyte Genetics Stock Right with respect to each share of
Incyte Genetics Stock, which will entitle the holders thereof to purchase shares
of a newly designated series of preferred stock under the conditions similar to
those specified for the Incyte General Stock Rights and the Original Rights (the
Incyte General Stock Rights and Incyte Genetics Stock Rights being collectively
referred to as the "Rights"), and (iv) change the triggers for exercisability of
the Rights to 15% of the voting power of all outstanding voting securities of
the Company from 15% of the outstanding Common Stock. The Rights will otherwise
have attributes similar to those of the Original Rights.
F - 40
<PAGE>
ANNEX G: INCYTE GENETICS
Page
DESCRIPTION OF BUSINESS..................................................G - 1
SELECTED COMBINED FINANCIAL DATA.........................................G - 11
MANAGEMENT'S DISCUSSION AND ANALYSIS.....................................G - 12
COMBINED FINANCIAL STATEMENTS............................................G - 16
<PAGE>
INCYTE GENETICS
DESCRIPTION OF BUSINESS
Overview
Incyte Genetics is a new division of Incyte Pharmaceuticals, Inc. (the
"Company"), formed to capitalize on the rapidly emerging field of
pharmacogenetics. Incyte Genetics is engaged in the commercial application of
pharmacogenetic information to the clinical development of new drugs and the
management and treatment of disease. Pharmacogenetic information can assist
pharmaceutical and biotechnology companies in understanding the role of genetic
variations (polymorphisms or "SNPs") between individuals in causing disease and
differential patient responses to drugs. Incyte Genetics will develop and market
databases, software and services to assist customers in the discovery and
application of medically relevant SNPs. Incyte Genetics believes that such
products and services should help improve clinical trial design, streamline the
clinical development process, improve clinical outcomes and facilitate selection
of the best drug candidates for commercialization.
Incyte Genetics believes it is well positioned to apply the broadest
platform of genomic tools to the discovery and analysis of SNPs and the
investigation of cortions between these genetic variations and drug
response. In particular, Incyte Genetics is leveraging the technologies and
genomic data generated over the past four years at Incyte Pharmaceuticals.
First, Incyte Genetics has access to the significant genomic information and
databases produced by the Company, in particular the LifeSeq(R) and LifeSeq
FL(R) human gene databases which between them contain information on more than
100,000 genes. Second, Incyte Genetics has established a high-throughput system
for the discovery and mapping of SNPs through the integration of the Company's
existing technologies with those obtained in the September 1998 acquisition of
Hexagen Limited ("Hexagen"). Third, once a sufficient number of medically
relevant SNPs are identified and characterized, Incyte Genetics expects to
genotype patient populations in collaboration with pharmaceutical companies.
The current business of the Company, to be redesignated Incyte
General, will remain essentially intact and continue to focus on its line of
gene discovery and expression databases, bioinformatics software,
microarray-based expression services, pharmacology/toxicology databases, genomic
reagents and related services. These products and services assist pharmaceutical
and biotechnology companies in the discovery and development of new drugs and
assist agricultural companies in the identification of genes relating to
desirable agricultural traits and the development of new agricultural products.
Incyte General will contribute its mapping program, including the current
LifeSeq Atlas(TM) database, the SNP discovery platform and personnel obtained
through the acquisition of Hexagen in September 1998, and the use of its
high-throughput sequencing technology to Incyte Genetics.
Scientific Background
The current genomics revolution represents a paradigm shift in the
methodology used by medical researchers to investigate disease. Researchers can
now focus on more than just the symptoms of disease; they can begin to address
the causes of disease at a genetic level. This revolution has been empowered by
a number of recent technical breakthroughs, including high-throughput automated
DNA sequencing, advances in gene mapping and the use of platforms such as
microarrays to study thousands of genes at a time. These technologies gave birth
to the new science of "genomics" - the study of the role of genes and their
products in disease.
The focus of genomics is DNA, a complex molecule composed of a linear
string of four units called nucleotides or bases -- adenine or "A", cytosine or
"C", thymine or "T" and guanine or "G". Specific regions of the DNA, called
genes, code for the synthesis of proteins, the molecules that conduct the
functions of the cell. The linear sequence of the four nucleotides provides the
instructions for the synthesis of proteins and distinguishes one gene from
another. It is estimated that only 3% to 5% of human DNA codes for all 100,000
to 150,000 human genes, referred to as the "coding" region. The function of the
remaining 95% to 97% of DNA is unknown, and these regions are referred to as
"non-coding" regions. DNA within a cell exists in the form of a double stranded
helix with one linear strand pairing
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with a second complementary linear strand. This double stranded helix is twisted
and compacted into rod-like structures called chromosomes, of which humans have
23 discrete pairs.
The human genome, or the total complement of our DNA, contains the
instructions for all physiological processes. Although every cell in the body
contains DNA for the same genes, not every gene is activated in every cell. A
skin cell is different from a liver cell because a different subset of genes is
active in skin cells than in liver cells. When a gene is activated, or turned
on, the body copies the coding region pertaining to that gene into a molecule
called messenger RNA ("mRNA"). Genes are not usually found in one contiguous
stretch on the DNA but rather the coding regions, or "exons", are interrupted by
non-coding regions called "introns". When a gene is activated and the body makes
a copy of the gene in the form of mRNA, the introns are removed to produce an
mRNA that represents only a contiguous coding region of the genomic DNA.
[Diagram depicting a rod-like chromosome containing DNA as a double-stranded
helix. The DNA helix contains a gene which, when activated, copies the coding
region of the gene in the form of mRNA which is then translated into the
protein encoded by that gene.]
[Diagram depicting the interspersing of (coding regions) exons, and (non-coding
regions) introns, within a gene along a linear DNA strand. When activated, the
introns are removed forming mRNA, made containing a copy of the exons and
creating a contiguous coding region of mRNA.]
The mRNA instructs the cell to make the particular protein for which it
encodes. When a gene is activated within a particular cell, the cell will
produce multiple copies of the corresponding mRNA molecule and subsequently, the
protein encoded by that gene. If large quantities of a particular protein are
needed, many copies of the same mRNA are made by the cell. Thus a gene is not
just "on" or "off", but can be activated or expressed at high or low levels. One
strategy used in genomics is to examine which genes are activated within a cell,
and at what level, by detecting the presence of the corresponding mRNA.
Genomic Tools
Companies involved in the field of genomics use a number of tools to
study the role of genes and their associated proteins in disease.
o Sequencing. In the same way that one word can be distinguished from another
word by the sequence of letters, one gene can be distinguished from another
gene by the sequence of the four nucleotides that comprise DNA. Sequencing
is an automated process consisting of a series of chemical reactions that
enable the determination of the order of nucleotides in a segment of DNA.
Sequencing can be used to determine the order of nucleotides within genomic
DNA or within mRNA. Genomic DNA sequencing will provide the DNA sequence of
a gene, including the introns and exons. However, since not every gene is
active in every cell it can be more valuable to study mRNA. As discussed
above, mRNA is a copy of the coding regions of a gene made when a gene is
activated. Because mRNA is unstable and can be difficult to manipulate,
researchers make a synthetic copy of the RNA, called "copy DNA" or "cDNA."
The cDNA, not the mRNA, is then sequenced. In contrast to genomic
sequencing, which is used to provide the entire structure of a gene (both
introns and exons), cDNA sequencing is used to identify those genes that
are active and to determine the sequence of the complete coding regions, or
exons, of the gene.
o Gene Mapping. Mapping refers to the determination of the physical location
of a gene in the genome and the relative position of that gene to another
gene or along a chromosome. Physiological processes and associated diseases
can be extremely complex and involve many genes. One gene can activate one
or more different genes forming a cascade of genetically controlled events
or a "pathway". When the genes involved in such a pathway are located
within neighboring regions of DNA, mapping can allow the location of one
member of the pathway to be used to identify the other members. In
addition, genetically inherited diseases that have been passed from
generation to
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generation may be associated with visible chromosome alterations, such as
deletions of large segments of the chromosome or insertions within the
chromosome. These physical chromosome abnormalities allow researchers to
identify the DNA regions and genes that have a critical role in causing the
disease.
o Gene Expression Analysis/Gene Expression Profiles. A key to understanding
the role genes play in disease is to investigate which genes are turned on,
or activated, in diseased tissues. To identify activated genes, scientists
examine the population of mRNA expressed in various cells and tissues and
the relative amounts of mRNA corresponding to different genes. A gene
expression profile represents an inventory of mRNAs detected in a cell or
tissue as well as their relative level of abundance. Knowing whether the
level of mRNA expression for a particular gene is increased or decreased in
diseased tissue may be important in determining gene function and devising
therapeutic strategies to help combat the disease.
o Microarray Technology. A microarray consists of DNA fragments attached to a
surface, usually a glass, plastic or silicon slide, in a grid-like
formation. The DNA fragments serve as probes to detect the presence of
specific populations of mRNA within normal and diseased cells. The DNA
fragments on the microarray will detect specific mRNA populations by
pairing with the complementary cDNA that has been prepared from mRNA
samples from normal and diseased cells. Microarray technology allows the
fabrication of very small grids containing probes for thousands of
different genes. The significance of microarrays is that they can be used
to analyze the expression patterns or sequence variations in a large number
of genes simultaneously. As a result, microarrays can be used in diagnostic
testing to quickly detect the presence of a large number of disease
markers, or in drug discovery and development, to evaluate the behavior of
a large number of related genes in a diseased tissue or in response to
treatment with a new drug.
o Bioinformatics. Bioinformatics, or the use of computers and software to
analyze biological data, is a dynamic process. As more genomic data is
generated, software and data processing capabilities are necessary to edit,
organize, visualize, query and analyze this data. Without these tools,
researchers could not fully capitalize on the value of genomic data being
generated by sequencing, mapping and microarray programs. The growing
complexity of genomic data requires the continuous development of new
algorithms and other analytical tools.
The true power of genomics results from the integration of all of these
tools. Incyte General has achieved significant economies of scale in applying a
broad, integrated platform of genomic tools toward the development and marketing
of products and services that can assist pharmaceutical and biotechnology
companies in the discovery and development of new drugs. Specifically, those
products and services can assist companies in discovering new disease targets
and new therapeutic proteins. Medical researchers use the tools and data
provided by Incyte General to discover novel disease pathways and to understand
known pathways, thereby identifying which part of the pathway would be best
subject to therapeutic intervention. With respect to the development of new
drugs, Incyte General's products and services are being applied in the
evaluation of the safety and efficacy of new drugs by studying the effects of
potential drug candidates on gene expression in pre-clinical animal models and
clinical trial patients.
The Need to Understand Genetic Diversity
Due to genetic variation, individuals may respond differently to
treatment with the same drug. Few, if any, FDA-approved drugs are capable of
successfully treating every individual with a targeted disease, and of those
patients successfully treated, treating them without unwanted side-effects. In
fact, more than 100,000 deaths occurred in 1994 from adverse drug reactions,
making it the fourth leading cause of death in the United States. While some of
those deaths were due to drug-drug interactions, many were due to side-effects
of the drug. Lives might be spared, and significant savings realized, if
physicians could predict which patients will not respond to a particular
therapy, or which patients
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are most likely to suffer an adverse reaction. In addition, medicines might come
to market faster, and less expensively, if pharmaceutical companies are able to
genetically identify the optimal treatment group.
The differences in patients' drug responses are believed to result in
part from differences in the sequence of nucleotides within genes. The most
common form of sequence variation is known as a single nucleotide polymorphism
or "SNP." A SNP is defined as a single base difference within the same DNA
region between two individuals. Some SNPs are "silent" and not associated with a
disease or a patient's ability to respond to a particular therapy, and some SNPs
occur at a frequency that is too low to justify large-scale patient screening.
Thus, researchers need to do more than identify SNPs; they must identify the
most frequently occurring SMPs and identify those which correlate with a
patient's disease prognosis or ability to respond to a drug. A prominent example
of the utility of SNPs is the recent discovery that a variation in the
apolipoprotein E gene affects a patient's ability to respond to therapies for
Alzheimer's Disease.
Given that only an estimated 3% to 5% of human DNA codes for genes, and
that the function of the remaining 95% to 97% of human DNA is unknown, it is
difficult to identify useful SNPs without knowing the location of the genes,
their sequence and function. Although current genomic company efforts have
produced information that may be useful in discovering and understanding SNPs,
the information is limited. Furthermore, these companies are forced to take a
random approach to SNP identification. Such approaches are expected to result in
substantial information about SNPs in non-coding regions and therefore be less
valuable since the most important functional SNPs are expected to be in, or
near, the coding regions of the genes.
Incyte Genetics' Solution
Incyte Genetics believes it is well positioned to apply a broad
platform of genomic tools to the discovery and analysis of SNPs and the
investigation of correlations between these genetic variations and drug
response. In particular, Incyte Genetics is leveraging the technologies
developed, and genomic data generated, over the past four years at Incyte
General.
First, Incyte Genetics has access to the genomic information and
databases produced by Incyte General, in particular the LifeSeq(R) human gene
sequence and expression database and the LifeSeq FL(TM) full-length human gene
database. These databases are unique, containing proprietary information not
available elsewhere as to the sequence and gene expression profiles of more than
100,000 human genes. This information will allow Incyte Genetics to focus on
SNPs in coding regions, and on SNPs in medically relevant genes.
Second, Incyte Genetics has established an integrated program applying
a variety of genomic tools toward the understanding of genetic diversity and its
relationship to drug response. This consists of parallel efforts in (i) human
genomic sequencing, (ii) human gene mapping and (iii) human SNP discovery. This
program will allow, for the first time, the rapid discovery and mapping of SNPs
in medically relevant genes. The Company believes that the recent acquisition of
Hexagen Limited and its high throughput SNP discovery platform, in conjunction
with the sequencing, mapping and bioinformatic technologies developed by the
Incyte General division will provide Incyte Genetics with a significant
competitive edge.
Finally, once promising SNPs are identified, Incyte Genetics is
uniquely suited to embark on a program in genotyping, where a large number of
patients are screened for the presence or absence of genetic variations. These
genotypes would then be combined with information concerning a patient's disease
prognosis or drug response in order to generate a patient profile. Incyte
Genetics is in a position to leverage Incyte General's existing relationships
with approximately 20 of the world's largest pharmaceutical companies. These
companies control more than 60% of global pharmaceutical R&D spending and as a
result develop most of the world's new drugs.
Incyte General believes that through the discovery of SNPs and their
correlation to disease and drug response, its products and services could be
used by pharmaceutical companies to improve clinical trial design, streamline
the clinical development process, improve clinical outcomes and select the best
drug candidates for commercialization.
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Strategy
Incyte Genetics is devoted to assisting medical researchers in
identifying and correlating SNPs with drug response in order to improve the
clinical development process and develop more effective therapeutic regimens.
Incyte Genetics will design, develop and market databases, software and services
to assist pharmaceutical companies in the discovery and application of SNPs.
Initially, Incyte Genetics will identify SNPs within the coding regions of
genes, concentrating on those genes and gene pathways of most interest to
pharmaceutical companies. Incyte Genetics will work to identify correlations
between the most common SNPs, the patient populations most susceptible to a
disease, and those most likely to respond to certain therapeutic regimens or
those most likely to suffer adverse side effects. Subsequently, Incyte Genetics
plans to offer patient genotyping services to stratify patients according to the
presence or absence of SNPs in specific disease-related genes.
To implement this strategy, Incyte Genetics plans to:
o Generate near-term revenue by selling database subscriptions. Incyte
Genetics will provide non- exclusive access, through multi-year contracts,
to its three core databases: the LifeSeq Atlas(TM) human mapping database,
the LifeSeq Genome(TM)human genomic sequence database and the
LifeSNP(TM)human SNP database. Database subscribers will receive periodic
data updates and pay fees consisting of database access fees and possible
milestone and royalty payments from their sale of products derived from the
information. This non-exclusive approach, whereby the same data set is
provided to multiple subscribers, can yield substantial operating leverage.
This approach should generate near-term revenues for Incyte Genetics and
permit subscribers to share costs and thus receive more information with
less expense than they could achieve through internal development efforts.
o Leverage existing technology and information of Incyte General. Incyte
Genetics will leverage the broad technology platform developed by Incyte
General. This platform includes the efficient and cost-effective
high-throughput sequencing operations, proprietary robotics technologies,
state-oG -the- art mapping and microarray technologies and one of the
largest, most sophisticated bioinformatics organizations in the world.
Incyte Genetics will have access to the world's largest human sequence and
expression database, Incyte General's LifeSeq(R)database, containing
portions of what are believed to represent over 100,000 genes. As a result,
Incyte Genetics believes it is uniquely capable of discovering SNPs
associated with medically relevant genes.
o Exploit existing customer relationships. The products and services of
Incyte Genetics and Incyte General will be marketed by a single sales
force. This will enable Incyte Genetics to benefit from the close
relationships Incyte General has established with approximately twenty of
the world's leading pharmaceutical companies, including nine of the top ten
companies. In addition, as a result of Incyte General's efforts over the
last four years, the business model contemplated by Incyte Genetics, which
is centered upon providing non-exclusive access to genomic information, is
now accepted by many pharmaceutical companies.
o Access technology through licensing, collaborations or acquisitions. Incyte
Genetics will strive to access the most advanced and most cost-effective
genomic tools and technologies. This could be achieved through
in-licensing, collaborations or acquisitions. For example, the recent
acquisition of Hexagen Limited, a UK-based genomics company, provides
Incyte Genetics with a high throughput SNP discovery technology.
o Provide patient profiling services. As the LifeSNP(TM) database grows,
Incyte Genetics plans to offer genotyping and pharmacogenetic services.
These services, expected to be possible within two years, would include the
genotyping of patients in clinical trials to assist pharmaceutical
companies in demonstrating statistical correlations between the existence
of SNPs within a patient population
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and the response of that population to new drug therapies. Such
correlations may lead to additional products and services for Incyte
Genetics, including potential genotyping-based diagnostics, prognostic
tests and disease management services.
Products
Incyte Genetics will offer databases, software and services to assist
pharmaceutical companies in the discovery and analysis of genetic variation.
Incyte Genetics will leverage technology developed by Incyte General and use
information in Incyte General's databases. This will enable Incyte Genetics to
prioritize its programs and target gene- coding regions, consequently increasing
the utility of its products and accelerating their development.
Databases. Database access is being offered to pharmaceutical partners
through multi-year, non-exclusive subscription agreements. With the exception of
the LifeSeq Atlas(TM) database, Incyte Genetics began marketing access to its
databases in August 1998. The LifeSeq Atlas database has four subscribers, and
currently there are no subscribers to the LifeSNP(TM) and LifeSeq Genome(TM)
databases. Database subscribers will receive periodic data updates and will pay
database access fees and possible milestone and royalty payments from the sale
of drug and genotyping products they derive from the database information.
o LifeSeq Atlas Database. Contributed by Incyte General, the LifeSeq Atlas
database contains the genomic location of pharmaceutically relevant genes
and is currently provided to four pharmaceutical companies through
multi-year, non-exclusive subscriptions. Incyte Genetics is implementing
technical improvements to accelerate the expansion of this database. The
goal is to ramp up production capacity to map fragments of more than 10,000
genes per month and complete a map identifying the chromosome locations of
the majority of the more than 100,000 human genes by the end of 1999.
o LifeSNP Database. Incyte Genetics is building a database containing the
most common human SNPs. The thousands of SNPs already identified through
the cDNA sequencing programs of Incyte General have been contributed to
this database. Efforts to rapidly discover additional SNPs will initially
focus on the most medically relevant full-length genes in the LifeSeq
FL database. The goal is to identify, on average, one or more SNPs for
every gene over the next two years.
o LifeSeq Genome Database. This database will contain the genomic sequence of
human genes, identifying the exon and intron boundaries as well as
neighboring regions of DNA that may regulate gene expression. The goal is
to ultimately identify the structure of every gene in the human genome.
Bioinformatics Software. Incyte Genetics plans to offer its
subscribers a broad range of bioinformatics software tools. The bioinformatics
software will be based on the database architecture developed for the LifeSeq
database and other database products offered by Incyte General. This common
database architecture will enable subscribers of databases from both divisions
to move seamlessly from one database to another. Project management and other
tools will be available to subscribers in addition to unique tools designed
specifically to deal with the complexities related to collapsing, editing,
analyzing, mining and visualizing Incyte Genetics' mapping, SNP and genomic
sequence data.
Directed SNP Programs. Incyte Genetics intends to initiate SNP
programs focused on specific candidate genes, gene families, disease pathways,
therapeutic areas or drug targets for individual pharmaceutical partners. These
programs may include the identification of genes associated with a particular
disease and an in-depth study of the population frequency and disease
correlation of SNPs within a selected DNA region. Incyte Genetics anticipates
that the resultant SNPs will be added to the LifeSNP database. Programs focused
on gene families could include ion channels, tyrosine kinases, G-protein coupled
receptors, metabolic pathways and immune response genes. Programs focused on
diseases could include cardiovascular disease, infectious disease, inflammation/
immunology, neurobiology and oncology.
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Pharmacogenetic Services. Within the next two years Incyte Genetics
anticipates offering genotyping and patient profiling services to the
pharmaceutical companies to help identify statistically significant and
medically relevant associations between SNPs in specific genes and drug response
or disease susceptibility. Incyte Genetics expects that this service will be
used to assist in the evaluation of new drugs in clinical trials
and to assess clinical trial design.
Technology Platform
Incyte Genetics has access to an integrated platform of technologies
that will assist it in rapid discovery and application of SNPs. This broad array
of technologies should allow Incyte Genetics to focus on identifying SNPs within
the coding regions of genes, concentrating initially on those genes and gene
pathways of most interest to pharmaceutical companies.
Mapping. The human gene mapping program, transferred from Incyte
General, uses very large overlapping DNA fragments (approximately 100,000 bases)
and high-throughput robotics to identify the genomic locations of genes in the
LifeSeq database. The large fragments can be ordered by determining which
fragments overlap with one or more adjacent fragments. Individual genes are thus
mapped and ordered to one or more of the overlapping large DNA fragments. The
resultant database, LifeSeq Atlas, can be used by database subscribers in their
search to identify disease-related genes. In addition, this program will drive
the genomic sequencing effort, indicating the gene-rich regions of DNA to
sequence.
Genomic Sequencing. The genomic sequencing program uses advanced
high-throughput sequencing technology, including important proprietary
enhancements made by Incyte in order to maximize productivity. These proprietary
enhancements include sequencing software, detection systems and a new generation
of robotics technologies used for sample preparation processes and sequencing.
Incyte Genetics' genomic sequencing efforts are highly directed, focusing on the
DNA in and around coding regions, as well as genes of medical importance
identified through the use of Incyte General's LifeSeq(R) expression database
and LifeSeq FL(TM) full-length gene database.
SNP Discovery. Incyte Genetics uses two sources for SNP discovery: (i)
the evaluation of genome sequence information from multiple individuals; and
(ii) the use of Hexagen's fluorescence Single Strand Conformational
Polymorphisms ("fSSCP") technology.
o High-throughput Sequencing. The thousands of SNPs discovered through the
random cDNA sequencing program of Incyte General, as part of its LifeSeq
database production efforts, have been contributed to Incyte Genetics.
Incyte Genetics will supplement this information by high-throughput
sequencing of new patient samples selected from diverse populations.
o fSSCP. The acquisition of Hexagen provides Incyte Genetics with a
high-throughput SNP discovery technology. Hexagen's gel-based system uses
sample multiplexing technology to detect SNPs by observing changes in the
tertiary structure of a single stranded DNA fragment due to base pair
changes. Incyte General has contributed technologies in the areas of
electrophoresis, fluorescence chemistries, sequencing and bioinformatics to
continue to develop and improve the accuracy and efficiency of this
technology. fSSCP is particularly useful for identifying SNPs in genes not
expressed or more rarely expressed.
Development Programs. Incyte Genetics is developing various platforms
that can be used for the high throughput screening of patient samples in order
to correlate SNPs with patients' responses to drugs. This includes development
of existing microarray platforms to enable the cost effective detection of SNPs.
In addition, Incyte Genetics is developing and enhancing its bioinformatics
software to assist in analyzing the unique features of SNP data.
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Relationship to Incyte General
Incyte Genetics has access to the LifeSeq and LifeSeq FL databases
developed and marketed by Incyte General. These databases, believed to be the
world's largest source of human gene sequence and expression information,
contain information on a majority of all human genes. These databases will allow
Incyte Genetics to target medically relevant genes and to focus on SNPs in, or
near, gene coding regions. In addition, Incyte Genetics should benefit from the
existing sequencing, mapping and bioinformatics technology developed over the
last four years by the Company and the established relationships with
approximately twenty of the world's leading pharmaceutical companies.
Incyte General and Incyte Genetics will share certain services. In
order to take full advantage of the economies of scale associated with large
volume sequencing, one central sequencing operation will service both divisions
with costs allocated to each division based on work performed. Because the
targeted customer base of each division is similar, one marketing and sales
organization will support the products of both divisions with costs allocated to
each division based on work performed.
diaDexus Joint Venture
In September 1997, the Company established a 50-50 joint venture
company, diaDexus LLC ("diaDexus"), with SmithKline Beecham Corporation ("SB").
diaDexus is applying genomic and bioinformatic technologies to the discovery and
commercialization of novel molecular diagnostic products. The Company has
provided diaDexus with non-exclusive acces to its human and microbial databases
(LifeSeq, LifeSeq FL, LifeSeq Atlas, LifeSeq GeneAlbum(TM), and PathoSeq(TM))
for diagnostic applications. diaDexus has exclusive rights to develop diagnostic
tests based on novel molecular targets and genetic alterations identified as
part of SB's drug discovery. SB and the Company have also each assigned various
additional technologies and intelelctual property rights in the diagnostic field
and contributed a combined total of $25 million in funding.
diaDexus will focus initially on the generation of unique diagnostic
markers for so-called "homebrew" tests - scientifically validated tests which
are awaiting formal regulatory approval - for reference laboratory testing and
for license to diagnostic kit manufacturers. Ultimately, diaDexus may develop
its own capacity to manufacture kits for sale to clinical testing laboratories.
The initial product range will focus on tests for disease detection. New tests
for improved diagnosis, staging and patient stratification in infectious disease
and oncology will be accorded particular emphasis, together with the creation of
pharmacogenetic tests to optimize treatment selection based on genetic
differences between individuals.
Patents and Proprietary Technology
Incyte General and Incyte Genetics will each have access, without
charge or allocation, to all technology and intellectual property of the Company
that may be useful in each division's business, including sequencing and
bioinformatics technologies. Incyte General will make available at no charge to
Incyte Genetics the LifeSeq database for Incyte Genetics' use in SNP discovery.
Similarly, Incyte Genetics will make available at no charge to Incyte General
the LifeSeq Genome database for Incyte General's use in identifying full-length
genes which would be included in the LifeSeq FL database.
Incyte Genetics' database business and competitive position are
dependent upon its ability to protect its proprietary database information and
software technology. Incyte Genetics relies on patent, trade secret and
copyright law, as well as nondisclosure and other contractual arrangements, to
protect its proprietary position.
Incyte Genetics' ability to license proprietary SNPs may be dependent
on its ability to obtain patents, protect trade secrets and operate without
infringing the proprietary rights of others. Other pharmaceutical, biotechnology
and genomics companies, as well as academic and other institutions, have filed
applications for and may have been issued patents for or may obtain additional
patents and proprietary rights relating to, products or processes competitive
with those of Incyte Genetics. Patent applications filed by competitors may
claim some of the same SNPs as those claimed in patent applications filed by the
Company for the benefit of Incyte Genetics.
In support of Incyte Genetics' plan to commercialize SNP data, the
Company plans to seek patent protection for patentable SNPs identified in the
LifeSeq database, through the Incyte Genetics human genome sequencing program,
and through the use of Incyte Genetics' fSSCP discovery technology. These
patents will claim rights in patentable SNPs for diagnostic and genotyping
purposes. As information relating to particular SNPs is developed, the Company
plans to seek additional rights in those SNPs that are associated with specific
diseases, functions or drug responses. As between Incyte General and Incyte
Genetics, Incyte Genetics will have the exclusive right to
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commercialize the SNP data, human genome data and human genome mapping data for
use in pharmacogenetic applications.
The scope of patent protection for gene sequences, including SNPs, is
highly uncertain, involves complex legal and factual questions and has recently
been the subject of much controversy. No clear policy has emerged with respect
to the breadth of claims allowable for SNPs. There is significant uncertainty as
to what, if any, claims will be allowed on SNPs discovered through high
throughput discovery programs.
There can be no assurance that patent applications relating to Incyte
Genetics' products or processes will result in patents being issued or that any
issued patents will be enforceable against competitors. Even if patents are
issued on SNP sequences, there may be uncertainty as to the scope of coverage,
enforceability or commercial protection provided by any such patents.
As the biotechnology industry expands, more patents are issued and
other companies engage in the business of genomic sequencing and SNP discovery
through the use of high speed sequencers and other genomic-related businesses,
the risk increases that Incyte Genetics' products, and the processes used to
develop those products, may be subject to claims of infringement. Therefore,
Incyte Genetics' operations may require it to obtain licenses under any such
proprietary rights. There can be no assurance that such licenses would be made
available on terms acceptable to Incyte Genetics. Litigation may be necessary to
defend against or assert claims of infringement, to enforce patents issued to
Incyte, or to determine the scope and validity of the proprietary rights of
others. Such litigation could result in substantial costs to, and diversion of
effort by, Incyte Genetics, and may have a material adverse effect on Incyte
Genetics' business, operating results or financial condition. In addition, there
can be no assurance that any such litigation would be resolved in Incyte
Genetics' favor. See "Annex I--Factors Relating to Both Incyte General and
Incyte Genetics--Uncertainty of Protection of Patents and Proprietary Rights"
and "--Litigation"
Competition.
A number of companies, institutions, and government-financed entities
are engaged in human gene sequencing, mapping and polymorphism discovery or
detection. Many of these companies, institutions and entities have greater
financial and human resources than Incyte Genetics. At least three other
companies, Celera Genomics Corporation ("Celera"), Affymetrix, Inc.
("Affymetrix") and Genset, S.A., have announced their intent to market mapping,
sequence and/or polymorphism data to the pharmaceutical industry. Incyte
Genetics expects that additional competitors may attempt to establish databases
containing such information in the future and that competition in the industry
will continue.
In addition, competitors may discover and establish patent positions
with respect to gene sequences and polymorphisms in Incyte Genetics' databases.
One company, Celera, has announced its intention to make the results of its
genomic sequencing efforts publicly available. Competitors' patent positions or
the public availability of gene sequences and SNPs could decrease the potential
value of Incyte Genetics' databases and services to the Incyte Genetics'
collaborators and adversely affect Incyte Genetics' ability to realize royalties
or other revenue from commercialization of products based upon such information.
The gene sequencing machines that are utilized in Incyte Genetics'
high-throughput computer-aided genomic sequencing operations are commercially
available and are currently being utilized by at least one competitor. Moreover,
the majority owner of Celera has announced the development of a new gel-based
sequencing machine that it expects to have ready for commercial production in
early 1999 and that a large number of these machines will be provided to Celera.
Based on the preliminary specifications of this machine, the Company believes
that its current sequencing technology is at least equivalent if not superior to
these new machines; however, until these machines are commercially available,
the Company cannot be certain that this is the case. Although the Company has
been told that it will have access to these machines, there can be no assurance
that access will be provided under conditions that are acceptable to the Company
or at all.
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The SNP discovery platform used by Incyte Genetics represents a
modification of a process that is in the public domain. Other companies could
make similar or superior improvements in this process without providing access
to the Company to these improvements.
Incyte Genetics' current competitive advantage centers on the fact that
its human mapping, genomic sequencing and polymorphism programs are
gene-directed using the full-length sequences or portions of genes already
present in the LifeSeq(R) database. Given that only approximately 3% to 5% of
human DNA contains genes or coding regions, this is expected to be a more
efficient approach than the random approach used in most competitive efforts. In
addition, Incyte Genetics' efforts should benefit from its ability to leverage
the existing technology platform developed by Incyte General as well as Incyte
General's established relationships with a large number of pharmaceutical
companies.
Government Regulation
Incyte Genetics' database agreements may provide for the payment of
royalties on any pharmaceutical or diagnostic products developed by database
subscribers and derived from proprietary information obtained from the
databases. Thus, the receipt and timing of regulatory approvals for the
marketing of such products may have a significant effect in the future on Incyte
Genetics' revenues. Pharmaceutical products developed by licensees will require
regulatory approval by governmental agencies prior to commercialization. In
particular, human pharmaceutical therapeutic products are subject to rigorous
pre-clinical and clinical testing and other approval procedures by the United
States Food and Drug Administration in the United States and similar health
authorities in foreign countries. Various federal and, in some cases, state
statutes and regulations also govern or influence the manufacturing, safety,
labeling, storage, recordkeeping and marketing of such pharmaceutical products,
including the use, manufacture, storage, handling and disposal of hazardous
materials and certain waste products. The process of obtaining these approvals
and the subsequent compliance with appropriate federal and foreign statutes and
regulations require the expenditure of substantial resources over a significant
period of time, and there can be no assurance that any approvals will be granted
on a timely basis, if at all. Any such delay in obtaining or failure to obtain
such approvals could adversely affect Incyte Genetics' ability to earn milestone
payments, royalties or other license-based fees. Additional governmental
regulations that might arise from future legislation or administrative action
cannot be predicted, and such regulations could delay or otherwise affect
adversely regulatory approval of potential pharmaceutical products. See "Annex
I-- Factors That May Affect Results--Factors Relating to Both Incyte General and
Incyte Genetics--Reliance on Pharmaceutical Industry; Uncertainty of Health Care
Reform and Related Matters."
Human Resources
As of September 30, 1998, 97 employees were dedicated to the programs
of Incyte Genetics. This consists of 45 full-time employees from Hexagen, and
approximately 52 full-time equivalents in departments shared by Incyte Genetics
and Incyte General, including approximately 20 in sequencing operations and 32
in mapping production. None of the Company's employees are covered by collective
bargaining agreements. Incyte Genetics' future success will depend in part on
the continued service of its key scientific, bioinformatics and management
personnel and its ability to identify, hire and retain additional personnel. The
Company experiences intense competition for qualified personnel in the areas of
Incyte Genetics' activities, especially with respect to experienced
bioinformatics and software personnel, and there can be no assurance that the
Company will be able to continue to attract and retain such personnel necessary
for the development of Incyte Genetics' business. Failure to attract and retain
key personnel could have a material adverse effect on Incyte Genetics' business,
financial condition and operating results. See "Annex I -- Factors That May
Affect Results-- Factors Relating to Both Incyte General and Incyte
Genetics--Management of Growth" and "--Dependence on Key Employees."
G - 10
<PAGE>
INCYTE GENETICS
SELECTED COMBINED FINANCIAL DATA
The data set forth below should be read in conjunction with "Management's
Discussion and Analysis of Financial Condition and Results of Operations" and
the Combined Financial Statements and related Notes of Incyte Genetics, a
division of Incyte Pharmaceuticals, Inc., included in this Annex G.
<TABLE>
<CAPTION>
July 1, 1996
Through Year Ended Six Months Ended
December 31, December 31, June 30,
----------------------------
Statement of Operations Data(1): 1996 1997 1997 1998
------------- ------------- ------------- -------------
(in thousands) (unaudited)
<S> <C> <C> <C> <C>
Revenues $ 450 $ 1,133 $ 384 $ 1,135
Costs and expenses:
Research and development 207 2,300 950 1,598
Selling, general and administrative 31 213 59 189
------------- ---------- ----------- ----------
Total costs and expenses 238 2,513 1,009 1,787
Income (loss) from operations 212 (1,380) (625) (652)
Losses from joint venture - (300) - (640)
------------- ---------- ----------- ----------
Income (loss) before income taxes 212 (1,680) (625) (1,292)
Income tax benefit - (34) (14) (492)
------------- ---------- ----------- ----------
Net income (loss) $ 212 $ (1,646) $ (611) $ (800)
============= ========== =========== ==========
December 31, June 30,
---------------------------------- ------------------------
Balance Sheet Data(1): 1996 1997 1997 1998
-------------- -------------- ------- ------
(in thousands) (unaudited)
Restricted Cash $ -- $ 6,000 $ -- $ 4,000
Working capital (deficit) (320) (77) (276) (857)
Total assets 62 16,598 127 3,123
Division equity (320) 9,623 (276) 8,203
</TABLE>
(1) The accompanying combined financial data have been derived from the
consolidated assets, liabilities, revenues and expenses recorded in the
accounting records of Incyte Pharmaceuticals, Inc. The accompanying
financial statements reflect the assets, liabilities, revenue and expenses
directly attributable to Incyte Genetics as well as allocations deemed
reasonable by management to present the financial position, results of
operations and cash flows of Incyte Genetics on a stand-alone basis.
G - 11
<PAGE>
INCYTE GENETICS
MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
If the Incyte Genetics Stock Proposal is approved, Incyte
Pharmaceuticals, Inc. ("Incyte" and, together with its wholly owned
subsidiaries, the "Company") will provide to holders of Incyte Genetics Stock
and Incyte General Stock separate financial statements, management's discussion
and analysis, description of business and other relevant information for the
Company and its Incyte General division ("Incyte General") and Incyte Genetics
division ("Incyte Genetics"). Notwithstanding the allocation of revenues,
expenses, assets and liabilities (including contingent liabilities) and
stockholders' equity between Incyte General and Incyte Genetics for the purpose
of preparing their respective financial statements, the Company continues to
hold title to all of the assets and is responsible for all of the liabilities
allocated to each division. Holders of Incyte General Stock and Incyte Genetics
Stock will be subject to the risks associated with an investment in a single
corporation and all of the Company's businesses, assets and liabilities. Events
attributable to Incyte General that affect the Company's results of operations
or financial condition could affect the results of operations or financial
position of Incyte Genetics or the market price of the Incyte Genetics Stock.
The following discussion and analysis of Incyte Genetics' financial condition
and results of operations should, therefore, be read in conjunction with
"Selected Combined Financial Data" and the Combined Financial Statements of
Incyte Genetics and related Notes included elsewhere in this Annex G and in
conjunction with "Selected Consolidated Financial Data," "Management's
Discussion and Analysis of Financial Condition and Results of Operations" and
the "Consolidated Financial Statements" and related Notes of the Company
included in Annex E.
When used in this discussion, the words "expects," "anticipates,"
"estimates," and similar expressions are intended to identify forward-looking
statements. Such statements, which include statements as to expected
profitability, expenditure levels, the adequacy of capital resources, growth in
operations, and Year 2000 related actions, are subject to risks and
uncertainties that could cause actual results to differ materially from those
projected. These risks and uncertainties include, but are not limited to, those
risks discussed below, as well as the extent of utilization of genomic
information, particularly genetic variation, by the pharmaceutical industry in
both research and development and disease management; risks relating to the
development of new database products and their use by potential subscribers of
Incyte Genetics; the impact of technological advances and competition; the
ability of Incyte Genetics to obtain and retain customers; competition from
other entities; uncertainties associated with obtaining additional funds; early
termination of a database subscription agreement or failure to renew an
agreement upon expiration; the ability to successfully integrate the operations
of recent business combinations; the cost of accessing technologies developed by
other companies; uncertainty as to the scope of coverage, enforceability or
commercial protection from patents that issue on gene sequences and other
genetic information; developments in and expenses relating to litigation; the
results and viability of joint ventures and businesses in which Incyte Genetics
has purchased equity; the ability to raise capital through the sale of private
or public equity or otherwise; the ability of the Company to implement in a
timely manner the programs and actions related to the Year 2000 issue; and the
matters discussed below under the caption "Annex I--Factors That May Affect
Results." These forward-looking statements speak only as of the date hereof. The
Company expressly disclaims any obligation or undertaking to release publicly
any updates or revisions to any forward-looking statements contained herein to
reflect any change in the Company's expectations with regard thereto or any
change in events, conditions or circumstances on which any such statement is
based.
Overview
Incyte Genetics is a new division of Incyte Pharmaceuticals, Inc.,
formed to capitalize on the rapidly emerging field of pharmacogenetics. Incyte
Genetics is engaged in the commercial application of pharmacogenetic information
to the clinical development of new drugs and the management and treatment of
disease. Pharmacogenetic information can assist pharmaceutical and biotechnology
companies in understanding the role of genetic variations between individuals
(polymorphisms or "SNPs") in causing disease and differential patient responses
to drugs. Incyte Genetics will develop and market databases, software and
services to assist customers in the discovery and application of
G - 12
<PAGE>
medically relevant SNPs. Incyte Genetics believes that such products and
services should help improve clinical trial design, streamline the clinical
development process, improve clinical outcomes and facilitate selection of the
best drug candidates for commercialization.
Revenues recognized by Incyte Genetics currently consist of database
subscription fees for the LifeSeq AtlasTM gene mapping database product. Future
revenues are expected to consist of continued fees from its LifeSeq Atlas
database, subscription fees related to the non-exclusive access to information
within the LifeSNP(TM) polymorphism and LifeSeq Genome(TM) sequence databases,
both currently under development, as well as fees from individual pharmaceutical
company directed programs. These directed programs are expected to consist of
the identification and analysis of genetic variation in certain diseases or gene
families of specific interest to a pharmaceutical company.
Incyte Genetics is expected to operate at a significant loss for the
next few years. Incyte General has committed to provide, in addition to funding
provided through June 30, 1999, $20 million in cash, and may provide additional
funding, as appropriate, in the form of loans or investments. In addition,
Incyte Genetics expects to fund expenses from a combination of database
revenues, strategic equity investments from pharmaceutical partners and, if
necessary, from public equity financing. Although operating expense levels are
currently expected to be $10 million to $15 million for the second half of 1998,
and in excess of $50 million for 1999, these expense levels may be adjusted
upwards or downwards depending on pharmaceutical company interest in Incyte
Genetics' products and the availability of equity financing.
In September 1998, the Company completed the acquisition of Hexagen, a
privately held SNP discovery company based in Cambridge, England. The
transaction will be accounted for under the purchase method of accounting. The
Company issued 976,130 shares of Incyte Pharmaceuticals, Inc. common stock
("Existing Common Stock") and $5.0 million in cash in exchange for all of
Hexagen's outstanding capital stock. In addition, the Company assumed Hexagen's
stock options which, if fully vested and exercised, would amount to 125,909
shares of Existing Common Stock. The transaction will be accounted for as a
purchase with a portion of the purchase price, estimated to be approximately
$10.6 million, to be expensed in the third quarter of 1998 as a charge for the
purchase of in-process research and development. The assets, liabilities and
results of operations of Hexagen, as well as the amortization of the goodwill
generated by the acquisition, will be allocated in their entirety to Incyte
Genetics.
The Company will allocate the purchase price based on the relative
fair value of the net tangible and intangible assets acquired, based on an
independent appraisal which is preliminary and subject to revision. In
performing this allocation the Company considered, among other factors, the
technology research and development projects in-process at the date of
acquisition, which is preliminary and subject to revision. With regard to the
in-process research and development projects, the Company considered factors
such as the stage of development of the technology at the time of acquisition,
the importance of each project to the overall development plan, the projected
incremental cash flows from the projects when completed and any associated risks
and whether there was any alternative future use for the technology. Associated
risks include the inherent difficulties and uncertainties in completing each
project and thereby achieving technological feasibility and risks related to the
impact of potential changes in future target markets.
Incyte Genetics currently anticipates requiring $100 to $150 million
through the year 2000, including the funds required to develop the in-process
technology into commercially viable products over the next two years. If the
projects associated with the development of in-process technology are not
successfully completed, the Company may not realize the value assigned to the
in-process research and development projects. In addition, the value of the
other acquired intangible assets may also become impaired.
In September 1997, the Company formed a joint venture, diaDexus, with
SmithKline Beecham Corporation ("SB") which will utilize genomic and
bioinformatic technologies in the discovery and commercialization of molecular
diagnostics. The long-term goal of diaDexus includes the development of
genotyping tools to detect the presence of specific genetic markers which can
serve as diagnostics for disease states or disease prognosis. The Company and SB
each hold a 50 percent equity interest in diaDexus. The investment is accounted
for under the equity method and Incyte Genetics records the Company's share of
diaDexus' earnings and losses on its statement of operations.
Results of Operations
Six months ended June 30, 1997 and 1998 (unaudited)
Revenues. Revenues for the six months ended June 30, 1998 and 1997 were
approximately $1,135,000 and $384,000, respectively. All revenues consist of
database access fees for the LifeSeq Atlas database. The increase in revenues
was due to an increase in the number of subscribers in the two periods.
Expenses. Research and development expenses for the six months ended
June 30, 1998 and 1997 were approximately $1,598,000 and $950,000, respectively.
The increase in research and development expenses was primarily due to increased
personnel levels and reagent costs to support the continued development of the
LifeSeq Atlas database. Incyte Genetics expects research and development
expenses to increase significantly over the next few years as Incyte Genetics
continues to pursue the development and support of its LifeSeq Atlas database in
addition to the development of its LifeSNP and LifeSeq Genome databases and
other new products and services.
G - 13
<PAGE>
Selling, general and administrative expenses for the six months ended
June 30, 1998 and 1997 were approximately $189,000 and $59,000, respectively.
The increase in selling, general and administrative expenses was primarily due
to an increase in effort to support the expanding operations of Incyte Genetics.
Incyte Genetics expects that selling, general and administrative expenses will
increase significantly as its marketing, sales and customer support efforts
increase to support new products and administrative efforts increase to support
Incyte Genetics' planned growth in operations.
Losses from Joint Venture. Losses from joint venture were $640,000 for
the six months ended June 30, 1998 and zero for the six months ended June 30,
1997. The loss represents Incyte Genetics' equity share of diaDexus' net losses
from operations. Beginning in April 1998, the Company's share in diaDexus' net
losses were offset by the amortization of the excess of the Company's share of
diaDexus' net assets over its basis. The amortization of this amount is expected
to approximate Incyte Genetics' equity share in diaDexus' losses through the
third quarter of 1998. As diaDexus was only formed in September 1997, no losses
from joint venture were incurred in the corresponding period ending in 1997.
Incyte Genetics expects to continue to incur losses from joint venture through
at least 1999.
Income Taxes. In accordance with the Company's tax allocation policy,
Incyte Genetics has recorded a tax benefit of $492,000 and $14,000 for the six
months ended June 30, 1998 and 1997, respectively, which represents the
estimated effect of Incyte Genetics' losses on the consolidated income tax
provision.
July 1, 1996 through December 31, 1996 and the year ended December 31, 1997.
Revenues. Revenues for the year ended December 31, 1997 and from July
1, 1996 through December 31, 1996 were approximately $1,133,000 and $450,000,
respectively. All revenues consist of database access fees for the LifeSeq
Atlas(TM) database. The increase in revenues was primarily due to an increase in
the number of subscribers in the two periods.
Expenses. Research and development expenses for the year ended December
31, 1997 and from July 1, 1996 through December 31, 1996 were approximately
$2,300,000 and $207,000, respectively. The increase in research and development
expenses was primarily due to an increase in the average staffing levels and a
full year of expenses in 1997.
Selling, general and administrative expenses for the year ended
December 31, 1997 and from July 1, 1996 through December 31, 1996 were
approximately $213,000 and $31,000, respectively. The increase in selling,
general and administrative expenses was primarily due to an increase in the
average staffing levels and a full year of expenses in 1997.
Losses from Joint Venture. Losses from joint venture were $300,000 for
the year ended December 31, 1997. The loss represents Incyte Genetics' share of
diaDexus' losses from operations. Since diaDexus was only formed in September
1997, no losses from joint venture were recognized prior to 1997.
Income Taxes. In accordance with the Company's tax allocation policy,
Incyte Genetics has recorded a tax benefit of $34,000 for the year ended
December 31, 1997, which represents the estimated effect of Incyte Genetics'
1997 loss on the consolidated income tax provision.
Liquidity and Capital Resources
Historically, Incyte Genetics has relied on Incyte General to fund its
operations. The continued development of Incyte Genetics' products will require
substantial funds. Operating expense levels are currently expected to be $10
million to $15 million for the second half of 1998, and in excess of $50 million
for 1999. Incyte Genetics currently anticipates requiring total funds of
approximately $100 million to $150 million through the year 2000. Incyte General
has committed to provide, in addition to funding provided through June 30, 1998,
$20 million in cash, and may provide additional funding, as appropriate, in the
form of loans or investments. Incyte Genetics intends to seek additional funds
from a combination of revenues from database subscribers, strategic equity
investments from pharmaceutical companies and, if necessary, from public equity
financing. Given that only $20 million in funding has been committed to date,
Incyte Genetics needs additional funding to maintain its anticipated level of
operations and to provide for operating requirements. If additional capital is
raised through the sale of equity or convertible debt securities, the issuance
of these securities could
G - 14
<PAGE>
result in dilution to stockholders. Incyte Genetics intends, when possible, to
adjust the level of operating expense depending on the availability of funds.
Additional funding may not be available on commercially acceptable terms, if at
all. If adequate funds are unavailable, Incyte Genetics may be required to
curtail its research and development and other operations significantly. If
operations are curtailed significantly, Incyte Genetics' products and services
may not develop in a sufficiently timely manner and its long-term prospects may
be materially and adversely affected.
Year 2000
See Annex E--"Management's Discussion and Analysis of Financial
Condition and Results of Operations--Year 2000," for a discussion of the
potential effect of the Year 2000 issue on the Company's operations.
Factors That May Affect Results
See Annex I--"Factors That May Affect Results," for a discussion of
certain factors that may affect Incyte Genetics' business, financial condition,
and results of operations.
G - 15
<PAGE>
INCYTE GENETICS
COMBINED FINANCIAL STATEMENTS
INDEX TO COMBINED FINANCIAL STATEMENTS
Page
----
Report of Ernst & Young LLP, Independent Auditors...........................G-17
Combined Balance Sheets as of December 31, 1996 and 1997,
and June 30, 1998 (unaudited)...............................................G-18
Combined Statements of Operations and Division Equity from July 1,
1996 to December 31, 1996, for the year ended December 1997 and for
the six months ended June 30, 1997 and 1998 (unaudited).....................G-19
Combined Statement of Cash Flows from July 1, 1996 to December 31, 1996,
for the year ended December 1997 and for the six months ended
June 30, 1997 and 1998 (unaudited)..........................................G-20
Notes to Combined Financial Statements......................................G-21
G - 16
<PAGE>
REPORT OF ERNST & YOUNG LLP, INDEPENDENT AUDITORS
The Board of Directors and Stockholders of Incyte Pharmaceuticals, Inc.
We have audited the accompanying combined balance sheets of Incyte Genetics, a
division of Incyte Pharmaceuticals, Inc., as of December 31, 1996 and 1997, and
the related combined statements of operations and division equity and combined
statements of cash flows from July 1, 1996 through December 31, 1996, and for
the year ended December 31, 1997. These financial statements are the
responsibility of Incyte Genetics' 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 combined financial position of Incyte Genetics, a
division of Incyte Pharmaceuticals, Inc., at December 31, 1996 and 1997, and the
combined results of its operations and its cash flows from July 1, 1996 through
December 31, 1996, and for the year ended December 31, 1997 in conformity with
generally accepted accounting principles.
As described above and more fully described in Note 1 to these financial
statements, Incyte Genetics is a division of Incyte Pharmaceuticals, Inc.
Accordingly the combined financial statements of Incyte Genetics should be read
in conjunction with the audited consolidated financial statements of Incyte
Pharmaceuticals, Inc. Holders of Incyte Genetics Stock will be subject to the
risks associated with an investment in a single corporation and all of the
business, assets and liabilities of Incyte Pharmaceuticals, Inc.
/S/ERNST & YOUNG LLP
Palo Alto, California
September 11, 1998
G - 17
<PAGE>
<TABLE>
<CAPTION>
INCYTE GENETICS
COMBINED BALANCE SHEETS
(in thousands)
December 31, December 31, June 30,
1996 1997 1998
----------------- ----------------- ----------------
(unaudited)
<S> <C> <C> <C>
ASSETS
Current assets:
Restricted cash $ - $ 6,000 $ 4,000
Accounts receivable - 800 -
Prepaid expenses and other current assets 62 98 63
----------------- ----------------- ----------------
Total current assets 62 6,898 4,063
Investment in joint venture - 9,700 9,060
----------------- ----------------- ------------------
Total assets $ 62 $ 16,598 $ 13,123
================= ================= ==================
LIABILITIES AND DIVISION EQUITY (DEFICIT)
Current liabilities:
Accounts payable $ 59 $ 177 $ 181
Accrued liabilities 23 98 64
Due to joint venture - 6,000 4,000
Deferred revenues 300 700 675
----------------- ----------------- ------------------
Total current liabilities 382 6,975 4,920
Division equity (deficit) (320) 9,623 8,203
----------------- ----------------- ------------------
Total liabilities and division equity $ 62 $ 16,598 $ 13,123
================= ================= ==================
See accompanying notes.
</TABLE>
G - 18
<PAGE>
<TABLE>
<CAPTION>
INCYTE GENETICS
COMBINED STATEMENTS OF OPERATIONS AND DIVISION EQUITY
(in thousands)
July 1, 1996 Year Six Months Six Months
Through Ended Ended Ended
December 31, December 31, June 30, June 30,
1996 1997 1997 1998
----------------- ------------------ --------------- -----------------
(unaudited)
<S> <C> <C> <C> <C>
Revenues
$ 450 1,133 $ 384 $ 1,135
Costs and expenses:
Research and development 207 2,300 950 1,598
Selling, general and administrative 31 213 59 189
----------------- ------------------ --------------- -----------------
Total costs and expenses 238 2,513 1,009 1,787
Income (loss) from operations 212 (1,380) (625) (652)
Losses from joint venture - (300) - (640)
----------------- ------------------ --------------- -----------------
Income (loss) before income taxes 212 (1,680) (625) (1,292)
Income tax benefit - (34) (14) (492)
----------------- ------------------ --------------- -----------------
Net income (loss) 212 (1,646) (611) (800)
Division equity (deficit), beginning of - (320) (320) 9,623
period
Contribution to (from) the division (532) 11,589 655 (620)
----------------- ------------------ --------------- -----------------
Division equity (deficit), end of period $ (320) $ 9,623 $ (276) $ 8,203
================= ================== =============== =================
See accompanying notes
</TABLE>
G - 19
<PAGE>
INCYTE GENETICS
COMBINED STATEMENTS OF CASH FLOWS
(in thousands)
<TABLE>
<CAPTION>
Six Six
July 1, 1996 Year Months Months
Through Ended Ended Ended
December 31, December 31, June 30, June 30,
1996 1997 1997 1998
------------------ ----------------- ----------------- ---------------
(unaudited)
<S> <C> <C> <C> <C>
Cash flows from operating activities:
Net income (loss) $ 212 (1,646) (611) (800)
Adjustments to reconcile net income to net cash
provided by (used in) operating activities
Losses from joint venture - 300 - 640
Changes in certain assets and liabilities:
Accounts receivables - (800) - 800
Prepaid expenses and other current assets (62) (36) (65) 35
Accounts payable 59 118 10 4
Accrued liabilities 23 75 23 (34)
Deferred revenues 300 400 (12) (25)
------------------ ----------------- ----------------- ---------------
Net cash provided by (used in) operating activities 532 (1,589) (655) 620
------------------ ----------------- ----------------- ---------------
Cash flows from investing activities: - -
Investment in joint venture - (4,000) - -
Transfer to restricted cash - (6,000) - -
------------------ ----------------- ----------------- ---------------
Net cash used by investing activities - (10,000) - -
------------------ ----------------- ----------------- ---------------
Cash flows from financing activities:
Equity contribution from (to) Incyte General (532) 11,589 655 (620)
------------------ ----------------- ----------------- ---------------
Net increase (decrease) in cash and cash equivalents - - - -
Cash and cash equivalents at beginning of period - - - -
------------------ ----------------- ----------------- ---------------
Cash and cash equivalents at end of period $ - $ - $ - $ -
================== ================= ================= ===============
See accompanying notes
</TABLE>
G - 20
<PAGE>
INCYTE GENETICS
NOTES TO COMBINED FINANCIAL STATEMENTS
(INFORMATION AS OF JUNE 30, 1998 AND FOR THE SIX MONTHS ENDED
JUNE 30, 1997 AND 1998 IS UNAUDITED)
Note 1. Organization and Summary of Significant Accounting Policies
Organization and Business. Incyte Genetics, a division of Incyte
Pharmaceuticals, Inc. ("Incyte", and together with its wholly owned
subsidiaries, the "Company"), represents a new business unit of Incyte
Pharmaceuticals, Inc. formed to develop products and services related to genetic
mapping to assist pharmaceutical companies in the identification and analysis of
a type of genetic variation believed to correlate to disease prognosis and drug
response, called single nucleotide polymorphisms ("SNPs"). The products in
development include databases, software, reagents, genotyping and related
services. Incyte Genetics believes these products and services could have
applications in both the development of new drugs as well as disease management.
Basis of Presentation. The Board of Directors of the Company has recommended
stockholder approval of a proposal (the "Incyte Genetics Stock Proposal") that
would create two series of common stock that are intended to reflect separately
the performance of the Company's Incyte General and Incyte Genetics divisions.
Under the Incyte Genetics Stock Proposal, the Company's Certificate of
Incorporation would be amended to designate a new series of common stock
entitled Incyte Pharmaceuticals, Inc.-Incyte Genetics Common Stock ("Incyte
Genetics Stock") and to redesignate each share of the Company's existing common
stock ("Existing Common Stock") as one share of a new series of common stock
entitled Incyte Pharmaceuticals, Inc.-Incyte General Common Stock ("Incyte
General Stock").
The accompanying combined financial statements have been derived from
the consolidated assets, liabilities, revenues and expenses recorded in the
accounting records of the Company. These combined financial statements reflect
the assets, liabilities, revenue and expenses of the Company and its
wholly-owned subsidiaries directly related to its programs in the area of
genetic mapping, as well as allocations deemed reasonable by management to
present the financial position, results of operations and cash flows of Incyte
Genetics on a stand-alone basis, in accordance with generally accepted
accounting principles. All significant intercompany accounts and transactions
have been eliminated. Although management is unable to estimate the actual costs
that would have been incurred if the services performed by the Company had been
purchased from independent third parties, the allocation methodologies have been
described within the respective footnotes, where applicable, and management
considers the allocations to be reasonable. However, the financial position,
results of operations and cash flows of Incyte Genetics may differ from those
that would have been achieved had Incyte Genetics operated autonomously or as an
entity independent of the Company. To date, Incyte Genetics' sole source of
funding has been from advances from Incyte General. In September 1998, Incyte
General committed funding of $20 million, in addition to funds provided through
June 30, 1998, funding to Incyte Genetics for working capital needs; however,
Incyte Genetics will have to find alternative funding to fully support
anticipated levels of operations.
Notwithstanding the allocation of assets and liabilities (including contingent
liabilities) and division equity between Incyte General and Incyte Genetics for
the purposes of preparing their respective financial statements, the Company
continues to hold title to all of the assets and is responsible for all of the
liabilities allocated to each division. If the Incyte Genetics Stock Proposal is
approved, holders of Incyte General Stock and Incyte Genetics Stock will be
subject to the risks associated with an investment in a single corporation and
all of the Company's businesses, assets and liabilities. Events attributable to
Incyte General that affect the Company's results of operations or financial
condition could affect the results of operations or financial position of Incyte
Genetics or the market price of Incyte Genetics Stock.
The management and accounting policies applicable to the preparation of the
financial statements of Incyte General and Incyte Genetics may be modified or
rescinded, or additional policies may be adopted, at the sole discretion by the
Company's Board of Directors at any time without approval of the stockholders.
G - 21
<PAGE>
Financial Statements and Allocation Matters. Incyte General manages the
financial activities of both of the Company's divisions. These financial
activities include the day to day cash disbursements and receipts activities,
investment of surplus cash, the issuance, and repayment of short-term and
long-term debt and capital lease obligations and the issuance of common stock.
During the three year period ended December 31, 1997 and the six month periods
ended June 30, 1997 and 1998, the Company attributed all of its short-term and
long-term debt and capital lease obligations to Incyte General based upon the
specific purpose for which the debt was incurred. Accordingly, all of the
Company's interest expense has been allocated to Incyte Genetics. All revenues
that are not directly attributed to the Incyte Genetics product, LifeSeq
Atlas(TM), have been allocated to Incyte General. Incyte Genetics recognizes all
expenses directly incurred in its operations and is allocated expenses for
shared services. All other expenses are recognized by Incyte General.
Unaudited Interim Financial Information. The combined balance sheet as of June
30, 1998, combined statements of operations for the six months ended June 30,
1997 and 1998 and the statements of cash flows for the six months ended June 30,
1997 and 1998 are unaudited, but include all adjustments (consisting of normal
recurring adjustments) which Incyte Genetics considers necessary for a fair
presentation of the financial position, operating results and cash flows for the
periods presented.
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 amounts reported in the financial statements and
accompanying notes. Actual results could differ from those estimates.
Concentrations of Credit Risk. Trade receivables are financial instruments which
potentially subject Incyte Genetics to concentrations of credit risk. Incyte
Genetics' customers are pharmaceutical companies which are typically located in
the United States. Incyte Genetics has not experienced any credit losses to date
and does not require collateral on receivables.
Restricted Cash. Restricted cash consists of cash held in an escrow account
which will be disbursed to Incyte Genetics' joint venture, diaDexus, LLC
("diaDexus"), as needed in accordance with the joint venture agreement In July
1998, all remaining amounts were disbursed to diaDexus. See Joint Venture and
Note 4 to the Combined Financial Statements.
Prepaid and Other Current Assets. Prepaid and other current assets primarily
consist of supplies and reagents on hand that are used in support of Incyte
Genetics' day-to-day operations and unbilled receivable balances.
Software Costs. In accordance with the provisions of Financial Accounting
Standards Board Statement No. 86, Accounting for the Costs of Computer Software
to be Sold, Leased or Otherwise Marketed, Incyte Genetics has a policy of
capitalizing software development costs incurred in developing certain products
once technological feasibility of the products has been determined. Capitalized
software costs are amortized over three years and have been immaterial to date.
Accrued Expenses. Accrued expenses represent any accrued liability that is
directly attributable to Incyte Genetics.
Joint Venture. In September 1997, the Company formed a joint venture, diaDexus,
LLC ("diaDexus"), with SmithKline Beecham Corporation ("SB") which will utilize
genomic and bioinformatic technologies in the discovery and commercialization of
molecular diagnostics. The Company and SB each hold a 50 percent equity interest
in diaDexus. The investment is accounted for under the equity method, and Incyte
Genetics records the Company's share of diaDexus' earnings and losses in its
statement of operations.
Revenue Recognition. Incyte Genetics' LifeSeq Atlas database has historically
been sold in conjunction with Incyte General's databases and a single annual
database access fee charged for the combined set of databases. Thus, a portion
of the total revenues has been allocated to the LifeSeq Atlas database based on
the Company's management and
G - 22
<PAGE>
accounting policies. These revenues are recognized by Incyte Genetics evenly
over the term of the agreement. Revenue is deferred for fees received before
earned.
Significant Customers. In the year ended December 31, 1996, one customer
accounted for 100% of total revenues. In the year ended December 31, 1997, and
the six months ended June 30, 1998, three customers accounted for 100% of total
revenues. One customer accounted for 100% of the receivable balance as of
December 31, 1997.
Stock-Based Compensation. The Company accounts for stock option grants to
employees in accordance with APB Opinion No. 25, Accounting for Stock Issued to
Employees. Incyte Genetics' employees have received options to purchase Existing
Common Stock to date. The Company records stock compensation expense equal to
the difference, if any, between the exercise price of the option and the fair
market value of the stock at the date of grant.
Allocated Expenses. Certain overhead, selling, administrative and corporate
expenses represent an allocation of the operating expenses, and include payroll
and charges for office space which Incyte Genetics shares with Incyte General.
These costs have been allocated to Incyte Genetics based on the ratio that the
total headcount for Incyte Genetics bears to the total headcount of Incyte
General.
Income Taxes. Both Incyte Genetics and Incyte General are included in the
consolidated United States federal income tax return filed by the Company.
Accordingly, the provision for federal income taxes and the related payments or
refunds of tax are determined on a consolidated basis. The consolidated
provision and the related tax payments or refunds have been reflected in both
Incyte Genetics' and Incyte General's financial statements in accordance with
the Company's tax allocation policy. In general, such policy provides that the
consolidated tax provision and related tax payments or refunds are allocated
among the divisions for financial statement purposes based principally upon the
financial income, taxable income, credits, preferences and other amounts
directly related to the respective divisions. For tax provision purposes, tax
benefits resulting from attributes (principally net operating losses and various
tax credits), which cannot be utilized by one of the divisions on a separate
return basis, but which can be utilized on a consolidated basis in that year or
in a carryback year, are allocated to the division that generated the
attributes.
Cash Flows. The Company does not maintain separate cash accounts for Incyte
Genetics, and all cash receipts and disbursements are made by Incyte General.
For the purposes of the statement of cash flows, the allocated assets and
liabilities of Incyte Genetics have been used to calculate the cash flow
statement.
New Pronouncements. In June 1997, the FASB issued Statement No. 130, Reporting
Comprehensive Income ("SFAS 130"), and Statement No. 131, Disclosures about
Segments of an Enterprise and Related Information ("SFAS 131") (collectively,
the "Statements"). The Statements are effective for fiscal periods beginning
after December 15, 1997. SFAS 130 establishes standards for reporting of
comprehensive income and its components in annual financial statements. SFAS 131
establishes standards for reporting financial and descriptive information about
an enterprise's operating segments in its annual financial statements and
selected segment information in interim financial reports. Reclassification or
restatement of comparative financial statements or financial information for
earlier periods is required upon adoption of SFAS 130 and SFAS 131,
respectively. Adoption of the Statements' disclosure requirements had no impact
on the Incyte Genetics' consolidated financial position or results of
operations.
In June 1998, the FASB issued Statement No. 133, Accounting for Derivative
Instruments and Hedging Activities ("SFAS 133"). The statement is effective for
fiscal years beginning after June 15, 1999. SFAS 133 establishes standards for
reporting derivative instruments and hedging activities. Application of SFAS 133
will have no impact on the Incyte Genetics combined financial position or
results of operations as currently reported.
Note 2. Related party transactions
Overview. The Company allocates corporate general and administrative expenses,
research and development expenses, and income taxes in accordance with certain
policies adopted by the Company's Board of Directors. Such policies may
G - 23
<PAGE>
be further modified or rescinded by action of the Company's Board of Directors
who may adopt additional policies, without approval of Incyte Genetics'
stockholders, subject only to their fiduciary duty to such stockholders.
Shared Services. Incyte Genetics operates as a division of the Company with
access to the Company's personnel, financial resources, facilities, and fixed
assets. The two divisions, Incyte Genetics and Incyte General will share
sequencing operations, marketing/sales and general and administrative services
with the costs being allocated to Incyte General and Incyte Genetics in a
reasonable and consistent manner, based on utilization by each division of the
services to which such costs relate.
Access to Technology and Know-How. Incyte Genetics has free access to all
technology and know-how of the Company that may be useful, subject to any
obligations or limitations applicable to the Company. The costs of developing
this technology remain in the business unit responsible for its development.
Note 3. Joint Venture
In September 1997, the Company formed a joint venture, diaDexus, LLC
("diaDexus"), with SmithKline Beecham Corporation ("SB") which will utilize
genomic and bioinformatic technologies in the discovery and commercialization of
molecular diagnostics. The Company and SB each hold a 50 percent equity interest
in diaDexus. The investment is accounted for under the equity method and Incyte
Genetics records the Company's share of diaDexus' earnings and losses on its
statement of operations.
Note 4. Division Equity
Incyte Genetics Stock. If the Incyte Genetics Stock Proposal is approved by the
Company's stockholders each share of Existing Common Stock will be redesignated
as Incyte General Stock, which is intended to reflect the performance of Incyte
General, and a new series of common stock, Incyte Genetics Stock, will be
created to reflect the performance of Incyte Genetics. Incyte General and Incyte
Genetics stockholders will vote as one class of stock with Incyte General
stockholders receiving one vote per share. The number of votes allocated to each
share of Incyte Genetics' Stock will be adjusted to reflect the ratio of the
average market values of the Incyte Genetics Stock and the Incyte General Stock
as of a 20 trading day period prior to the record date of any vote. Upon
liquidation, holders of Incyte General and Incyte Genetics Stock will be
entitled to a portion of the assets remaining for distribution to holders of
common stock in proportion to the aggregate Liquidation Units, as defined, of
each series of stock, which is to be determined. Additional shares of Incyte
Genetics Stock may be issued from time to time upon exercise of stock options or
at the discretion of the Company's Board.
Incyte Genetics Stock Options. Currently, Incyte Genetics employees have
received options to purchase Existing Common Stock. Should the Incyte Genetics
Stock Proposal be approved, the Company's 1991 Stock Plan (the "Stock Plan") and
1993 Directors' Stock Option Plan (the "Directors' Plan") will be amended to
provide for the issuance of options to purchase Incyte General Stock and Incyte
Genetics Stock. Options issued under the plan shall, at the discretion of the
compensation committee of the Board of Directors, be either incentive stock
options or nonstatutory stock options. The exercise prices of incentive stock
options granted under the Stock Plan will not be less than the fair market value
of the relevant series of common stock on the date of the grant, as determined
by a Committee of the Company's Board of Directors. The exercise prices of
nonstatutory stock options granted under the plans are not less than 85% of the
fair market value of the relevant series of common stock on the date of the
grant, as determined by a Committee of the Company's Board of Directors. Options
granted under the Stock Plan generally vest over approximately four years,
pursuant to a formula determined by a committee of the Company's Board of
Directors, and expire after ten years. In addition, should the Incyte Genetics
Stock Proposal and the Additional Proposals be approved, the Company's 1997
Employee Stock Purchase Plan (the "ESPP") will be amended to provide for the
issuance of Incyte General Stock and Incyte Genetics Stock.
G - 24
<PAGE>
Note 5. Income Taxes
Income tax provisions and related assets and liabilities attributed to Incyte
Genetics are determined in accordance with the Incyte tax allocation policy. See
Note 1.
For the year ended December 31, 1997, Incyte Genetics generated a loss before
income taxes of approximately $1,680,000 for which a benefit of $34,000 has been
allocated to Incyte Genetics in accordance with the allocation policy. The
difference between the expected tax benefit at 35% and the benefit recorded will
be allocated to Incyte Genetics in the future to the extent that benefits are
realized on the consolidated income tax provision.
Note 6. Defined Contribution Plan
The Company has a defined contribution plan covering all domestic employees.
Employees may contribute a portion of their compensation, which is then matched
by Incyte Genetics, subject to certain limitations. Defined contribution expense
for Incyte Genetics was approximately $13,000, $38,000, $15,000 and $19,000 from
July 1, 1996 through December 31, 1996, for the year ended December 31, 1997 and
the six months ended June 30, 1997 and 1998, respectively.
Note 7. Litigation
In January 1998, Affymetrix, Inc. ("Affymetrix") filed a lawsuit in the United
States District Court for the District of Delaware alleging infringement of U.S.
patent number 5,445,934 (the "'934 Patent") by both Synteni and Incyte. The
complaint alleges that the '934 Patent has been infringed by the making, using,
selling, importing, distributing or offering to sell in the United States high
density arrays by Synteni and Incyte and that such infringement was willful.
Affymetrix seeks a permanent injunction enjoining Synteni and Incyte from
further infringement of the '934 Patent and, in addition, seeks damages, costs
and attorney's fees and interest. Affymetrix further requests that any such
damages be trebled based on its allegation of willful infringement by Incyte and
Synteni.
In September 1998, Affymetrix filed an additional lawsuit in the United States
District Court for the District of Delaware alleging infringement of the U.S.
patent number 5,800,992 (the "'992 Patent") and U.S. patent number 5,744,305
(the "'305 Patent") by both Synteni and Incyte. The complaint alleges that the
'305 Patent has been infringed by the making, using, selling, importing,
distributing or offering to sell in the United States high density arrays by
Synteni and Incyte, that the '992 Patent has been infringed by the use of
Synteni's and Incyte's GEMTM microarray technology to conduct gene expression
monitoring using two-color labeling, and that such infringement was willful.
Affymetrix seeks a permanent injunction enjoining Synteni and Incyte from
further infringement of the '305 and '992 Patents and, in addition, Affymetrix
seeks a preliminary injunction enjoining Incyte and Synteni from using Synteni's
and Incyte's GEM microarray technology to conduct gene expression monitoring
using two-color labeling, as described in the '992 Patent.
Incyte and Synteni believe they have meritorious defenses and intend to defend
the suits vigorously. However, there can be no assurance that Incyte and Synteni
will be successful in the defense of these suits. Regardless of the outcome,
this litigation has resulted and is expected to continue to result in
substantial expenses and diversion of the efforts of management and technical
personnel. Further, there can be no assurance that any license that may be
required as a result of these suits or the outcome thereof would be made
available on commercially acceptable terms, if at all. All of the costs
associated with the defense of the litigation have been allocated to Incyte
General.
G - 25
<PAGE>
Note 8. Subsequent Events (unaudited)
In September 1998, the Company completed the acquisition of Hexagen Limited
("Hexagen"), a privately held company based in Cambridge, England. The
transaction will be accounted for as a purchase. The Company issued 976,130
shares of Existing Common Stock and $5.0 million in cash in exchange for all
27,721,541 shares of Hexagen's outstanding capital stock. In addition, the
Company assumed Hexagen's stock options, which if exercised, would amount to
125,909 shares of Existing Common Stock. The assets, liabilities and results of
operations of Hexagen have been allocated to Incyte Genetics.
In September 1998, the Board of Directors of the Company recommended stockholder
approval of a proposal (the "Incyte Genetics Stock Proposal") that would create
two series of common stock that are intended to reflect separately the
performance of the Company's Incyte General and Incyte Genetics divisions. Under
the Incyte Genetics Stock Proposal, the Company's Certificate of Incorporation
would be amended to designate a new series of common stock entitled Incyte
Genetics Stock and to redesignate each share of Existing Common Stock as one
share of a new series of common stock entitled Incyte General Stock. In
addition, the Board has recommended for stockholder approval amendments to the
Company's Stock Plan, Directors' Plan, and ESPP, that would allow for the
issuance of both Incyte Genetics Stock and Incyte General Stock through these
plans.
On September 25, 1998, the Board of Directors adopted a Stockholder Rights Plan
(the "Original Rights Plan"), pursuant to which one preferred stock purchase
right (an "Original Right") will be distributed for each outstanding share of
Common Stock held of record on October 13, 1998. One Original Right will also
attach to each share of Common Stock issued by the Company subsequent to such
date and prior to the distribution date defined below. Each Original Right
represents a right to purchase, under certain circumstances, a fractional share
of a newly created series of the Company's preferred stock at an exercise price
of $200.00, subject to adjustment. In general, the Original Rights will become
exercisable and trade independently from the Common Stock on a distribution date
that will occur on the earlier of (i) the public announcement of the acquisition
by a person or group of 15% or more of the Common Stock or (ii) ten days after
commencement of a tender or exchange offer for the Common Stock that would
result in the acquisition of 15% or more of the Common Stock. Upon the
occurrence of certain other events related to changes in ownership of the Common
Stock, each holder of an Original Right would be entitled to purchase shares of
Common Stock, or an acquiring corporation's common stock, having a market value
of twice the exercise price. Under certain conditions, the Original Rights may
be redeemed at $0.01 per Original Right by the Board of Directors. The Original
Rights expire on September 25, 2008. If the Incyte Genetics Stock Proposal is
approved by the Company's stockholders and implemented by the Board of
Directors, the Original Rights Plan will be amended and restated to, among other
things, (i) reflect the new equity structure of the Company, (ii) redesignate
each Original Right as an Incyte General Stock Right, (iii) issue an Incyte
Genetics Stock Right with respect to each share of Incyte Genetics Stock, which
will entitle the holders thereof to purchase shares of a newly designated series
of preferred stock under the conditions similar to those specified for the
Incyte General Stock Rights and the Original Rights (the Incyte General Stock
Rights and Incyte Genetics Stock Rights being collectively referred to as the
"Rights"), and (iv) change the triggers for exercisability of the Rights to 15%
of the voting power of all outstanding voting securities of the Company from 15%
of the outstanding Common Stock. The Rights will otherwise have attributes
similar to those of the Original Rights.
G - 26
<PAGE>
ANNEX H: ADDITIONAL FINANCIAL INFORMATION
Page
Unaudited Pro Forma Financial Information H-1
Condensed Consolidated Financial Statements of Hexagen plc for the
six months ended June 30, 1997 and 1998 (unaudited) H-8
Consolidated Financial Statements of Hexagen plc for
the year ended December, 1997 and the period ended
December 31, 1996 H-15
<PAGE>
UNAUDITED PRO FORMA FINANCIAL INFORMATION
The following Unaudited Pro Forma Condensed Balance Sheets as of June
30, 1998, and the Unaudited Pro Forma Condensed Statements of Operations for the
year ended December 31, 1997, and the six months ended June 30, 1998 give effect
to the acquisition by Incyte Pharmaceuticals, Inc. of all of the outstanding
capital stock of Hexagen Limited, formerly Hexagen plc ("Hexagen"), accounted
for using the purchase method of accounting. The assets, liabilities and results
of operations of Hexagen, as well as the amortization of the goodwill generated
by the acquisition, have been allocated in their entirety to the Incyte Genetics
division of Incyte Pharmaceuticals, Inc. In addition, the Unaudited Pro Forma
Condensed Balance Sheets give effect to the commitment of Incyte General, a
division of Incyte Pharmaceuticals, Inc., to fund Incyte Genetics a total of $20
million in cash.
The Unaudited Pro Forma Condensed Financial Statements are based on the
historical financial statements of the Company and its two divisions, Incyte
General and Incyte Genetics, and Hexagen, and give effect to the assumptions and
adjustments set forth in the accompanying Notes to the Unaudited Pro Forma
Condensed Balance Sheet and Statements of Operations.
The Unaudited Pro Forma Financial Statements include the following:
(A) Incyte Genetics Pro Forma includes the accounts of Incyte Genetics,
Hexagen and Proforma entries.
(B) Incyte General Pro Forma includes the accounts of Incyte General and
Proforma entries.
(C) Incyte Consolidated Pro Forma includes the accounts of Incyte
General, Incyte Genetics, Hexagen and Pro Forma Entries.
The Unaudited Pro Forma Condensed Balance Sheet assumes that the
acquisition was consummated on June 30, 1998. The Unaudited Pro Forma Condensed
Statement of Operations for the year ended December 31, 1997 assumes the
acquisition was consummated on January 1, 1997 and the Unaudited Pro Forma
Condensed Statement of Operations for the six months ended June 30, 1998 assumes
the acquisition was consummated on January 1, 1998.
The pro forma adjustments are based on the agreements between the
Company and Hexagen, which provide for Hexagen shareholders to receive 976,130
shares of newly issued Incyte Pharmaceuticals, Inc. common stock (the "Existing
Common Stock"), options to purchase 125,909 shares of Existing Common Stock and
$5 million in cash.
The Unaudited Pro Forma Condensed Statement of Operations excludes any
potential benefits that might result from the acquisition due to synergies that
may be derived and from the elimination of any duplicate efforts or any
non-recurring costs of the integration of the two operations. The Unaudited Pro
Forma Condensed Financial Statements do not purport to be indicative of the
results that actually would have occurred if the acquisition occurred on the
dates indicated or indicative of results which may be obtained in the future.
The Unaudited Pro Forma Condensed Financial Statements should be read in
conjunction with the historical financial statements and accompanying Notes for
the Company, Incyte Genetics, Incyte General and Hexagen.
The historical financial statements of Hexagen included herein are
expressed in British pounds sterling (BPS) and are prepared in accordance with
accounting principles generally accepted in the United Kingdom ("U.K. GAAP").
For purposes of preparing pro forma information in accordance with accounting
principles generally accepted in the United States ("U.S. GAAP"), the historical
statements have been adjusted as appropriate utilizing the reconciliations of
the approximate effect on net income (loss) and shareholders' equity of
differences between U.K. GAAP and U.S. GAAP provided in Hexagen's historical
financial statements. For purposes of preparing the pro forma information,
certain reclassifications have also been made to the U.K. GAAP historical
statements to conform with the U.S. GAAP presentation. The statements have been
translated into U.S. dollars using the following exchange rates:
<PAGE>
BPS to $
-----------
Pro Forma Condensed Balance Sheet at June 30, 1998 1.67
Pro Forma Condensed Statement of Operations for the year ended 1.64
December 31, 1997
Pro Forma Condensed Statement of Operations for the six months ended 1.65
June 30, 1998
<PAGE>
<TABLE>
<CAPTION>
UNAUDITED PROFORMA CONDENSED BALANCE SHEET
June 30, 1998
(in thousands)
Incyte General Incyte Hexagen Incyte Incyte Incyte General
Combined Genetics Genetics Pro Genetics Pro Pro Forma
Combined Forma Entries Forma Total Entries
------------ ----------- ---------- ------------- ------------ ---------------
ASSETS (A)
- ---------------------------------------
Current assets:
<S> <C> <C> <C> <C> <C> <C>
Cash and cash equivalents $ 32,944 $ -- $ 2,826 $ -- $ 2,826 $ (5,000)(3)
Restricted cash -- 4,000 -- -- 4,000 --
Marketable securities -
available-for-sale 93,766 -- -- -- -- --
Accounts receivable, net 10,970 -- -- -- -- --
Prepaid expenses and other current
assets 5,453 63 361 -- 424 --
--------- --------- --------- --------- --------- ---------
Total current assets 143,133 4,063 3,187 -- 7,250 (5,000)
Property and equipment, net 45,653 -- 2,141 -- 2,141 --
Long-term investments 11,994 9,060 -- -- 9,060 --
Deposits and other assets 5,285 -- -- 16,015(1) 36,015 --
20,000(2)
Total assets --------- --------- --------- --------- --------- ---------
$ 206,065 $ 13,123 $ 5,328 $ 36,015 $ 54,466 $ (5,000)
========= ========= ========= ========= ========= =========
LIABILITIES AND STOCKHOLDERS'
EQUITY
Current liabilities:
Accounts payable $ 3,346 $ 181 $ 299 $ -- $ 480 $ --
Accrued and other current liabilities 9,600 64 1,007 1,200 2,271 20,000(2)
Due to joint venture -- 4,000 -- -- 4,000 --
Deferred revenue 42,538 675 -- -- 675 --
--------- --------- --------- --------- --------- ---------
Total current liabilities 55,484 4,920 1,306 1,200 7,426 --
Non-current portion of accrued rent
and other Non-current liabilities 908 -- 771 -- 771 --
--------- --------- --------- --------- --------- ---------
Total liabilities 56,392 4,920 2,077 1,200 8,197 20,000
--------- --------- --------- --------- --------- ---------
Stockholders' equity:
Division equity 149,673 8,203 -- -- -- --
Common stock -- -- -- -- --
Additional paid-in capital -- -- -- (10,648) 46,269 (20,000)(2)
28,714 (1) (5,000)(3)
20,000 (2)
Preferred Ordinary Stock -- -- 10,261 (10,261)(1) -- --
Ordinary "A" Stock -- -- 387 (387)(1) -- --
Ordinary Stock -- -- 1,668 (1,668)(1) -- --
Deferred compensation -- -- (1,413) 1,413 (1) -- --
Receivable from stockholder -- -- -- -- -- --
Accumulated other comprehensive income -- -- 286 (286)(1) -- --
Accumulated deficit -- -- (7,938) 7,938 -- --
--------- --------- --------- --------- --------- ---------
Total stockholders' equity 149,673 8,203 3,251 34,815 46,269 (25,000)
--------- --------- --------- --------- --------- ---------
Total liabilities and stockholders'
equity $ 206,065 $13,123 $5,328 $36,015 $54,466 $(5,000)
========= ========= ========= ========= ========= =========
See accompanying notes
</TABLE>
<TABLE>
<CAPTION>
UNAUDITED PROFORMA CONDENSED BALANCE SHEET
June 30, 1998
(in thousands)
Incyte Incyte
Incyte General Consolidated Consolidated
Pro Forma Pro Forma Pro Forma
Total Entries Total
-------------- --------------- --------------
ASSETS (B) (C)
- ---------------------------------------
Current assets:
<S> <C> <C> <C>
Cash and cash equivalents $ 27,944 $ (5,000)(1) $ 30,770
Restricted cash -- -- 4,000
Marketable securities -
available-for-sale 93,766 -- 93,766
Accounts receivable, net 10,970 -- 10,970
Prepaid expenses and other current
assets 5,453 -- 5,877
--------- --------- ---------
Total current assets 138,133 (5,000) 145,383
Property and equipment, net 45,653 -- 47,794
Long-term investments 11,994
Deposits and other assets 5,285 16,015(1) 21,300
Total assets --------- --------- ---------
$ 201,065 $ 11,015 $ 235,531
========= ========= =========
LIABILITIES AND STOCKHOLDERS'
EQUITY
Current liabilities:
Accounts payable $ 3,346 $ -- $ 3,826
Accrued and other current liabilities 29,600 1,200 11,871
Due to joint venture -- -- 4,000
Deferred revenue 42,538 -- 43,213
Total current liabilities 75,484 1,200 62,910
Non-current portion of accrued rent
and other Non-current liabilities 908 -- 1,679
--------- --------- ---------
Total liabilities 76,392 1,200 64,589
--------- --------- ---------
Stockholders' equity:
Division equity -- -- --
Common stock -- -- 28
Additional paid-in capital 124,673 (10,648)(1) 195,468
23,714 (1)
Preferred Ordinary Stock -- (10,261)(1) --
Ordinary "A" Stock -- (387)(1) --
Ordinary Stock -- (1,668)(1) --
Deferred compensation -- 1,413 (1) (1,412)
Receivable from stockholder -- -- (1) (49)
Accumulated other comprehensive income -- (286)(1) 7
Accumulated deficit -- 7,938 (1) (23,100)
--------- --------- ---------
Total stockholders' equity 124,673 9,815 170,942
--------- --------- ---------
Total liabilities and stockholders'
equity $201,065 $11,015 $235,531
========= ========= =========
See accompanying notes
</TABLE>
H-2
<PAGE>
NOTES TO THE UNAUDITED PRO FORMA
CONDENSED BALANCE SHEET
The Unaudited Pro Forma Condensed Balance Sheet was prepared to reflect
the acquisition by Incyte Pharmaceuticals, Inc. of all of the outstanding
capital stock of Hexagen, accounted for using the purchase method of accounting
as if such transaction was consummated on June 30, 1998. In addition, the
Unaudited Pro Forma Condensed Balance Sheet gives effect to the commitment of
Incyte General to fund Incyte Genetics with a total of $20 million in cash.
(1) The pro forma adjustment represents the entry to record: the
issuance of 976,130 shares of Existing Common Stock, options
to purchase 125,909 shares of Existing Common Stock at a price
of $2.03 per share, and $5 million in cash in exchange for all
of the shares and outstanding stock options of Hexagen; the
related charge for the purchase of in-process research and
development of $10.6 million and resulting goodwill and other
intangibles of $16.0 million.
(2) The pro forma adjustment represents the entry to record Incyte
General's commitment to provide $20 million of additional
funding to Incyte Genetics to support Incyte Genetics'
working capital needs.
(3) The pro forma adjustment represents the entry to record the
$5 million equity infusion from Incyte General to Incyte
Genetics, as Incyte General performs all treasury functions
for Incyte Genetics.
H-3
<PAGE>
<TABLE>
<CAPTION>
UNAUDITED PRO FORMA CONDENSED STATEMENT OF OPERATIONS
Year Ended December 31, 1997
(in thousands, except per share amounts)
Incyte Incyte
Incyte Incyte Genetics Consolidated
General Genetics Incyte Pro Forma Pro Forma Pro Forma
Combined Combined Consolidated Hexagen Adjustments Total Total
-------- --------- ------------ ------- ----------- ----------- -------------
(C) (A) (C)
<S> <C> <C> <C> <C> <C> <C> <C>
Revenues $ 88,863 $ 1,133 $ 89,996 $ -- $ -- $ 1,133 $ 89,996
Costs and expenses
Research and development 70,152 2,300 74,452 3,351 -- 5,651 75,803
Selling, general, and administrative
13,715 213 13,928 1,214 2,182 3,609 17,324
-------- -------- -------- -------- -------- -------- --------
Total costs and expenses
83,867 2,513 86,380 4,565 2,182 9,260 93,127
Income (loss) from operations
4,996 (1,380) 3,616 (4,565) (2,182) (8,127) (3,131)
Interest and other income (expense), net
4,140 (300) 3,840 320 -- 20 4,160
-------- -------- -------- -------- -------- -------- --------
Income (loss) before income taxes
9,136 (1,680) 7,456 (4,245) (2,182) (8,107) (1,029)
Provision for income taxes
582 (34) 548 -- -- (34) 548
-------- -------- -------- -------- -------- -------- --------
Net income (loss) 8,554 (1,646) 6,908 (4,245) (2,182) (8,073) 481
======== ======== ======== ======== ======== ======== ========
Basic net income (loss) per share 0.28 0.02
-------- --------
Shares used in computing basic
net income (loss) per share 24,300 25,276
-------- --------
Diluted net income (loss) per share 0.26 0.02
-------- --------
Shares used in computing diluted
net income (loss) per share 26,498 25,276
-------- --------
See accompanying notes
</TABLE>
H-4
<PAGE>
NOTES TO THE PRO FORMA
CONDENSED STATEMENT OF OPERATIONS
The Unaudited Pro Forma Condensed Statement of Operations for the year
ended December 31, 1997 was prepared to reflect the acquisition by Incyte
Pharmaceuticals, Inc. of all of the outstanding capital stock of Hexagen
accounted for under the purchase method of accounting, as if it occurred on
January 1, 1997.
The adjustments reflected in the Unaudited Pro Forma Condensed
Statement of Operations represent the amortization of the intangible assets
acquired in the acquisition of Hexagen over an estimated useful life of 8 years.
The Unaudited Pro Forma basic and diluted net income per share were
computed assuming the 976,130 shares of Existing Common Stock issued in
connection with the acquisition were outstanding as of January 1, 1997. The
Unaudited Pro Forma diluted net income per share also gives effect to dilutive
potential shares of Existing Common Stock subject to options assumed in
connection with the acquisition under the treasury stock method.
No adjustments have been made to reflect the charge for the purchase of
in-process research and development, as the entry represents a non-recurring
charge. No tax benefit has been recognized for the Hexagen net operating loss,
as the related deferred tax asset has been fully offset by a valuation
allowance.
H-5
<PAGE>
<TABLE>
<CAPTION>
UNAUDITED PROFORMA CONDENSED STATEMENT OF OPERATIONS
Six Months Ended June 30, 1998
(in thousands, except per share amounts)
Incyte Incyte
Incyte Incyte Genetics Consolidated
General Genetics Incyte Pro Forma Pro Forma Pro Forma
Combined Combined Consolidated Hexagen Adjustments Total Total
-------- --------- ------------- ------- ----------- ----------- -------------
(A) (C)
<S> <C> <C> <C> <C> <C> <C> <C>
Revenues $ 62,337 $ 1,135 $ 63,472 $ -- $ -- $ 1,135 $ 63,472
Costs and expenses
Research and development
43,221 1,598 44,819 1,885 -- 3,483 46,704
Selling, general, and administrative
10,133 189 10,322 806 1,091 2,086 12,219
Acquisition-related charges
1,171 -- 1,171 -- -- -- 1,171
------- ------- --------- ------- ------- ------- ---------
Total costs and expenses $ 54,525 $ 1,787 $ 56,312 $ 2,691 $ 1,091 $ 5,569 $ 60,094
Income (loss) from operations 7,812 (652) 7,160 (2,691) (1,091) (4,434) 3,378
Interest and other income (expense), net 3,681 (640) 3,041 38 -- (602) 3,079
------- ------- --------- ------- ------- ------- ---------
Income (loss) before income taxes 11,493 (1,292) 10,201 (2,653) (1,091) (5,036) 6,457
Provision for income taxes 1,920 (492) 1,428 -- -- (492) 1,428
Net income (loss) ======= ======= --------- ======= ======= ======= =--------
$ 9,573 $ (800) $ 8,723 $(2,653) $(1,091) $(4,544) $ 5,029
======= ======= ========= ======= ======= ======= =========
Basic net income per share $ 0.33 $ 0.18
--------- ---------
Shares used in computing basic net income per share 26,504 27,480
--------- ---------
Diluted net income per share $ 0.30 $ 0.17
--------- ---------
Shares used in computing diluted net income per share 28,792 29,882
--------- ---------
</TABLE>
See accompanying notes
H-6
<PAGE>
NOTES TO THE PRO FORMA
CONDENSED STATEMENT OF OPERATIONS
The Unaudited Pro Forma Condensed Statement of Operations for the six
months ended June 30, 1998 was prepared to reflect the acquisition by Incyte
Pharmaceuticals, Inc. of all of the outstanding capital stock of Hexagen
accounted for under the purchase method of accounting, as if it occurred on
January 1, 1998.
The adjustments reflected in The Unaudited Pro Forma Condensed
Statement of Operations represent the amortization of the intangible assets
acquired in the acquisition of Hexagen.
The Unaudited Pro Forma basic and diluted net income per share were
computed assuming the 976,130 shares of Existing Common Stock issued in
connection with the acquisition, were outstanding as of January 1, 1998. The
Unaudited Pro Forma net income per share also gives effect to dilutive potential
shares of Existing Common Stock subject to options assumed in connection with
the acquisition, under the treasury stock method.
No adjustments have been made to reflect the charge for the purchase of
in-process research and development, recorded by the Company at the time of the
acquisition, as it represents a non-recurring charge directly attributable to
the transaction. No tax benefit has been recognized for the Hexagen net
operating loss, as the related deferred tax asset has been fully offset by a
valuation allowance.
H-7
<PAGE>
HEXAGEN plc
Condensed Consolidated Financial Statements
for the Six Months Ended June 30, 1997 and 1998 (unaudited)
H-8
<PAGE>
HEXAGEN plc
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(unaudited)
Six months ended
June 30,
--------------------------
1997 1998
(pound) (pound)
-------- --------
Cost and expenses:
Research and development (945,141) (1,142,072)
General and administrative (334,450) (1,216,347)
-------- ----------
Net loss from operations (1,279,591) (2,358,419)
Interest income 153,882 97,000
Interest payable and similar charges (73,636) (74,000)
------- ----------
Net loss (1,199,345) (2,335,419)
========== ==========
See accompanying notes
H-9
<PAGE>
HEXAGEN plc
CONDENSED CONSOLIDATED BALANCE SHEETS
(unaudited)
December 31, June 30,
1997* 1998
------------ ------------
(pound) (pound)
Fixed assets 1,328,131 1,282,229
--------- ---------
Current assets:
Debtors: amounts falling due within one year 339,045 216,560
Cash at hand and in bank 233,460 177,563
Short term investments 3,400,000 1,515,000
--------- ---------
Total current assets 3,972,505 1,909,123
Creditors: amounts falling due within one year (997,529) (781,877)
-------- --------
Net current assets 2,974,976 1,127,246
--------- ---------
Total assets less current liabilities 4,303,107 2,409,475
Creditors: amounts falling due
after more than one year (811,249) (461,900)
--------- ---------
Net assets 3,491,858 1,947,575
========= =========
Capital and reserves
Called up share capital 1,376,117 1,384,978
Merger reserve (240,000) (240,000)
Share premium 5,566,507 5,566,507
Accumulated deficit (3,210,766) (4,763,910)
---------- ----------
Equity shareholders' fund 3,491,858 1,947,575
========== ==========
* The balances at December 31, 1997 are derived
from the audited financial statements
See accompanying notes
H-10
<PAGE>
HEXAGEN plc
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(unaudited)
Six months ended
June 30,
---------------------------
1997 1998
---------- -----------
(pound) (pound)
Net cash flows from continuing operations (1,570,625) (1,495,276)
---------- ----------
Returns on investments and servicing of finance
Interest received 153,882 97,000
Interest paid on finance leases (73,636) (74,000)
------- -------
80,246 23,000
------ ------
Net cash outflow before management
of liquid resources (1,490,379) (1,324,276)
and financing ----------- ----------
Management of liquid resources
Sale of treasury deposits 1,270,000 1,885,000
--------- ---------
1,270,000 1,885,000
--------- ---------
Financing
Issue of shares -- 8,861
Repayment of principal under finance leases (182,488) (263,192)
Change in finance lease funds not yet utilized 415,342 (214,290)
------- --------
Net cash inflow (outflow) from financing 232,854 (468,621)
------- --------
Increase (decrease) in cash 12,475 (55,897)
======= --------
See accompanying notes
H-11
<PAGE>
HEXAGEN plc
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
June 30, 1998
Note 1...BASIS OF PRESENTATION
The accompanying unaudited condensed consolidated financial statements have been
prepared in accordance with applicable Accounting Standards in the United
Kingdom (U.K. GAAP) applied on a basis consistent with the audited financial
statements for the year ended December 31, 1997. Those accounting practices
differ in certain respects from United States generally accepted accounting
practices (U.S. GAAP) as discussed in Note 2. In preparing the financial
statements and notes thereto, certain reclassifications and changes in
presentation have been made in order to comply with accounting presentation and
disclosure requirements in the United States.
The condensed consolidated balance sheet as of June 30, 1998 and December 31,
1997 and the consolidated statements of operations and 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 have been condensed or omitted pursuant to the rules and regulations of
the Securities and Exchange Commission.
Note 2 SUMMARY OF SIGNIFICANT DIFFERENCES BETWEEN U.K. GAAP AND U.S. GAAP
Employee share options
Under both U.K. and U.S. GAAP, if stock options are issued at below fair market
value there is a compensation cost charged to the profit and loss account. Under
U.K. GAAP any compensation cost arising on options issued to reward past
performance is charged to the profit and loss account when the options are
granted. Under U.S. GAAP the equivalent compensation cost is charged to the
profit and loss account over the vesting period of the related share options.
The effect of this difference on the group is as follows:
Six months ended June 30,
----------------------------------
1997 1998
------------ -------------
(pound) (pound)
Net loss under U.K. GAAP (1,199,345) (2,335,419)
U.S. GAAP adjustments:
Deferral of stock compensation
expense on stock options 25,987 727,330
granted ----------- -----------
Net loss under U.S. GAAP (pound)(1,173,358) (pound)(1,608,089)
=========== ===========
H-12
<PAGE>
HEXAGEN plc
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
June 30, 1998
The difference between the treatment of stock compensation for option grants
between U.K. GAAP and U.S. GAAP has no impact on cash flows, and has no effect
on the total consolidated net shareholders' equity of the Company.
Statement of cash flows
Under U.K. GAAP, cash does not include short term deposits and investments which
cannot be withdrawn without notice and without incurring a financial penalty.
Such items are shown as current asset investments. Under U.S. GAAP, deposits
with a maturity period at inception of less than three months and which are
convertible into known amounts of cash are included as cash and cash
equivalents.
The effect of this difference on the group is as follows:
<TABLE>
<CAPTION>
June 30,
------------------------------------------
1997 1998
------------------ -------------
<S> <C> <C>
Cash as reported under U.K. GAAP (pound) 179,367 (pound) 177,563
Adjustments for cash equivalents 5,250,000 1,515,000
---------- ---------
Cash and equivalents under U.S. GAAP 5,429,367 1,692,563
========== =========
Increase (decrease) in cash under U.K. GAAP 12,475 (55,897)
Adjustment for cash equivalents (1,270,000) (1,885,000)
----------- ----------
Decrease in cash and cash equivalents under (pound) (1,257,525) (pound) (1,940,897)
=========== ===========
U.S. GAAP
</TABLE>
Additionally, under U.K. GAAP cash flows are presented separately for operating
activities, returns on investments and servicing of finance, taxation, capital
expenditures and financial investment, and management of liquid resources and
financing. Under U.S. GAAP, cash flows are classified under operating,
investing, and financing activities.
Note 3 SUBSEQUENT EVENTS
In September 1998, Incyte Pharmaceuticals, Inc. ("Incyte") completed the
acquisition of the Company. Incyte issued 976,130 shares of its Common Stock and
$5.0 million in cash in exchange for all of the outstanding capital stock of the
Company. In addition, Incyte assumed all of the Company's outstanding stock
options. Immediately prior to the consummation of this transaction, the Company
was re-registered as a private limited company under the law of England and
Wales under the name Hexagen Limited.
X H-13
<PAGE>
HEXAGEN plc
Condensed Consolidated Financial Statements
for the Year Ended December 31, 1997
H-14
<PAGE>
Financial statements
for the year ended 31 December 1997
Pages
Report of independent accountants ........................................ H-16
Consolidated profit and loss account ..................................... H-17
Statement of total recognized gains and losses ........................... H-18
Balance sheets ........................................................... H-19
Consolidated cash flow statement ......................................... H-20
Notes to the financial statements ........................................ H-21
H-15
<PAGE>
Report of independent accountants
To the Board of Directors and Shareholders of
Hexagen plc
We have audited the accompanying consolidated financial statements of Hexagen
plc, a development stage company, as at December 31, 1997 and 1996, and the
consolidated profit and loss accounts, statements of total recognized gains and
losses and cash flows of Hexagen plc for the year ended December 31 1997 and
period ended December 31, 1996. These consolidated 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
in the United Kingdom which are substantially the same as those followed in the
United States. These 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 forming our opinion, we have considered the adequacy of the disclosures made
in the financial statements concerning the basis of preparation. The financial
statements have been prepared on a going concern basis and the validity of this
depends on the company successfully obtaining additional finance. The financial
statements do not include any adjustments that would result from a failure to
obtain this funding. Details of the circumstances relating to this fundamental
uncertainty are discussed in note 1. Our opinion is not qualified in this
respect.
In our opinion, the consolidated financial statements referred to above present
fairly, in all material respects, the consolidated financial position of Hexagen
plc at December 31, 1997 and 1996, and the consolidated results of its
operations, total recognized gains and losses and its cash flows for the year
ended December 31, 1997 and period ended December 31, 1996 in conformity with
accounting principles generally accepted in the United Kingdom which differ in
certain respects from those generally accepted in the United States (see note 30
to the financial statements).
/s/ Coopers & Lybrand
Coopers & Lybrand
Chartered Accountants
Cambridge, England
August 14, 1998
except for the information presented in note 30 for which the date is October 1,
1998.
H-16
<PAGE>
Consolidated profit and loss account
for the year ended 31 December 1997
<TABLE>
<CAPTION>
Notes 1997 10 months
ended
31 December
1996
as restated
(pound) (pound)
<S> <C> <C> <C>
Net operating expenses - continuing operations 2 (2,751,444) (767,132)
Exceptional net operating expenses 2 (77,550) (101,250)
---------- --------
Operating loss - continuing operations (2,828,994) (868,382)
Investment income 5 318,341 125,649
Interest payable and similar charges 6 (123,161) (13,019)
---------- --------
Retained loss for the financial year 7,20 (2,633,814) (755,752)
========== ========
There is no difference between the loss on ordinary activities before taxation
and the retained loss for the year stated above, and their historical cost
equivalents.
</TABLE>
H-17
<PAGE>
<TABLE>
<CAPTION>
Statement of total recognized gains and losses
1997 1996
(pound) (pound)
<S> <C> <C>
(Loss) for the financial year and
total recognized losses relating
to the year (2,633,814) (755,752)
========== ========
</TABLE>
The introduciton to UITF Abstract 17 ("Employee share schemes") has necessitated
a prior year adjustment relating to the granting of options in 1996 (see note
10).
The cumulative effect on opening reserves is nil, comprising charges to the
prior year profit and loss account of (pound)101,250, offset by a corresponding
credit to reserves representing the proceeds of the equity investment.
H-18
<PAGE>
<TABLE>
<CAPTION>
Balance sheets
at 31 December 1997
Notes Group Company Group Company
1997 1997 1996 1996
as restated
(pound) (pound) (pound) (pound)
<S> <C> <C> <C> <C> <C>
Fixed Assets
Tangible Assets 11 1,328,131 - 1,009,692 -
Investments 12 - 250,000 - 250,000
--------- ------- --------- -------
1,328,131 250,000 1,009,692 250,000
--------- ------- --------- -------
Current Assets
Debtors: amounts falling due
within one year 13 339,045 - 325,547 31,710
Debtors: amounts falling due
after one year 13 - 6,668,656 - 6,667,527
Short-term investments 3,400,000 - 6,520,000 -
Cash at bank and in hand 233,460 25,321 166,892 269
--------- --------- --------- ---------
3,972,505 6,693,977 7,012,439 6,699,506
Creditors: amounts falling due
within one year 14 (997,529) - (1,201,300) (5,531)
--------- --------- ----------- ---------
Net current assets 2,974,976 6,693,977 5,811,139 6,693,975
--------- --------- --------- ---------
Total assets less current
liabilities 4,303,107 6,943,977 6,820,831 6,943,975
Creditors: amounts falling due
after more than one year 15 (811,249) - (772,709) -
--------- --------- ---------- ---------
Net assets 3,491,858 6,943,977 6,048,122 6,943,975
========= ========= ========= =========
Capital and reserves
Called up share capital 18 1,376,117 1,376,117 1,376,117 1,376,117
Share premium 20 5,566,507 5,566,507 5,566,507 5,566,507
Merger reserve 20 (240,000) - (240,000) -
Profit and loss account 20 (3,210,766) 1,353 (654,502) 1,351
----------- --------- --------- ---------
Shareholder's funds 21 3,491,858 6,943,977 6,048,122 6,943,975
=========== ========= ========= =========
Equity shareholders' deficit/
(funds) (3,214,742) 237,377 (708,578) 187,275
Non-equity shareholders' funds 6,706,600 6,706,600 6,756,700 6,756,700
--------- --------- --------- ---------
Total shareholders' funds 3,491,858 6,943,977 6,048,122 6,943,975
========== ========= ========= =========
</TABLE>
H-19
<PAGE>
<TABLE>
<CAPTION>
Consolidated cash flow statement
for the year ended 31 December 1997
Notes Year 10 months
ended ended
31 December 31 December
1997 1996
(pound) (pound)
Net cash outflow from continuing operating activities
<S> <C> <C> <C>
22 (2,898,115) (164,754)
---------- ----------
Returns on investments and servicing of finance
Interest received 305,786 108,923
Interest paid on finance leases (123,161) (13,019)
---------- ----------
182,625 95,904
---------- ----------
Taxation
UK corporation tax paid - -
---------- ----------
Capital expenditure
Purchase of tangible fixed assets - (85,874)
Sale of tangible fixed assets 2,396 32,900
2,396 (52,974)
---------- ----------
Net cash outflow before management of liquid
resources and financing (2,713,094) (121,824)
---------- ----------
Management of liquid resources
Purchase of treasury deposits - (6,520,000)
Sale of treasury deposits 3,120,000 -
3,120,000 (6,520,000)
---------- ----------
Financing
Issue of shares - 6,677,574
Repayment of principal under finance leases (445,675) (48,271)
Finance lease funds not yet utilized 105,337 179,413
---------- ----------
Net cash inflow from financing (340,338) 6,808,716
---------- ----------
Increase in cash 23 66,568 166,892
========== ==========
</TABLE>
H-20
<PAGE>
1 Principal accounting policies
The financial statements have been prepared in accordance with applicable
Accounting Standards in the United Kingdom. A summary of the more important
accounting policies, which have been applied consistently, is set out below.
Basis of preparing the financial statements - going concern assumption
The company supports its subsidiary, Hexagen Technology Limited, through
intercompany funding. The directors estimate that cash and short term
investments held at the balance sheet date within the group are not sufficient
to continue funding activities for a full twelve months from 1 January 1998.
Accordingly, the directors currently plan to obtain further finance which would
enable the group to continue its activities for the foreseeable future. The
directors intend to obtain these additional funds during 1998. However, there is
uncertainty over the amount of finance which would be obtained.
The financial statements have been prepared on a going concern basis which
assumes that the company and its subsidiaries will continue in operational
existence for the foreseeable future.
The validity of this assumption depends on Hexagen plc being able to obtain
adequate additional finance to continue its activities.
If the company or its subsidiary were unable to continue in operational
existence for the foreseeable future, adjustments would have to be made to
reduce the balance sheet values of assets to their recoverable amounts, to
provide for further liabilities that might arise, and to reclassify fixed assets
as current assets.
Whilst the directors are presently uncertain as to the outcome of the matters
mentioned above, they believe that it is appropriate for the financial
statements to be prepared on the going concern basis.
Basis of consolidation
The consolidated profit and loss account includes the financial statements of
the holding company and its subsidiary undertaking. The consolidated financial
statements have been prepared using the principles of merger accounting. The
cost of investment in the company's balance sheet is recorded as the nominal
value of the shares issued.
Change in presentation of financial information
FRS1 ("Cash flow statements") was revised in 1996 to change the format for
reporting cash flows. The revised standard came into effect for accounting
periods ending on or after 23 March 1997. Accordingly the group's cash flow
statement has been presented under the new format.
Change in accounting policy
UITF Abstract 17 ("Employee share schemes") was introduced in 1997 and applies
to accounting periods ending on or after 22 June 1997. In accordance with its
provisions, Hexagen plc has made a charge to the profit and loss account when
options are granted being the market value of the shares at the date of grant
less the exercise price of the options. The charge is then credited back to
reserves in accordance with the Abstract. The effects of the change in
accounting policy are disclosed in note 10.
Tangible fixed assets
The cost of tangible fixed assets is their purchase cost, together with any
incidental costs of acquisition. Depreciation is calculated so as to write off
the cost of tangible fixed assets, less their estimated residual values, on a
straight line basis over the expected useful economic lives of the assets
concerned. The principal annual rates used for this purpose are:
H-21
<PAGE>
%
Laboratory equipment 20
Fixtures and fittings 11
Office equipment 20
Computer equipment 33 1/3
Finance and operating leases
Costs in respect of operating leases are charged on a straight line basis over
the lease term. Leasing agreements which transfer to the company substantially
all the benefits and risks of ownership of an asset are treated as if the asset
had been purchased outright. The assets are included in fixed assets and the
capital element of the leasing commitments is shown as obligations under finance
leases. The lease rentals are treated as consisting of capital and interest
elements. The capital element is applied to reduce the outstanding obligations
and the interest element is charged against profit in proportion to the reducing
capital element outstanding. Assets held under finance leases are depreciated
over the shorter of the lease terms and the useful lives of equivalent owned
assets.
Deferred taxation
Provision is made for deferred taxation, using the liability method, on all
material timing differences to the extent that it is probable that a liability
or asset will crystallize.
Research and development
Costs associated with research and development are charged to the profit and
loss account in the year in which they occur.
Foreign currencies
Trading transactions denominated in foreign currencies are translated into
sterling at the exchange rate ruling when the transaction was entered into.
Monetary assets and liabilities denominated in foreign currencies are translated
into sterling at the exchange rates ruling at the balance sheet date. Exchange
gains or losses are taken to the profit and loss account in the year in which
they arise.
Turnover
There is no turnover shown in the accounts.
Pension scheme arrangements
The company operates a defined contribution pension scheme. The pension cost is
the amount of contributions payable in the year.
H-22
<PAGE>
2 Net operating expenses
Year 10 months
ended ended
31 December 31 December
1997 1996
as restated
(pound) (pound)
Continuing operations 2,046,451 482,519
Research and development 704,993 284,613
--------- -------
Administrative expenses 2,751,444 767,132
Exceptional administrative expenses 77,550 101,250
--------- -------
2,828,994 868,382
========= =======
The exceptional administrative expenses arise from the charge made on the
granting of share options. The charge is the difference between the market value
of the shares at the date of grant and the exercise price of the options (see
note 10).
3 Directors' emoluments
Year 10 months
ended ended
31 December 31 December
1997 1996
(pound) (pound)
Aggregate emoluments 223,189 106,257
Company pension contributions to defined
contribution scheme 18,478 9,750
------- -------
241,667 116,007
======= =======
Included above are amounts paid to the highest paid director of:
Year 10 months
ended ended
31 December 31 December
1997 1996
(pound) (pound)
Aggregate emoluments 112,046 57,374
Company pension contributions to defined
contribution scheme 9,291 5,250
------- ------
121,337 62,624
======= ======
Benefits accrued to two directors during the year under a defined contribution
scheme.
H-23
<PAGE>
4 Employee information
The average monthly number of persons (including executive directors) employed
by the group during the year was:
Year 10 months
ended ended
31 December 31 December
1997 1996
Number Number
By Activity
Research 24 5
Administration 5 4
--------- -------
29 9
========= =======
Year 10 months
ended ended
31 December 31 December
1997 1996
(pound) (pound)
Staff costs (for the above persons)
Wages and salaries 898,468 198,526
Social security costs 92,226 19,859
Other pension costs (see note 16) 80,383 17,883
--------- -------
1,071,077 236,268
========= =======
5 Investment income
Year 10 months
ended ended
31 December 31 December
1997 1996
(pound) (pound)
Other interest receivable 318,341 125,649
======= =======
6 Interest payable and similar charges
Year 10 months
ended ended
31 December 31 December
1997 1996
(pound) (pound)
On finance leases 123,161 13,019
======= ======
H-24
<PAGE>
7 Loss on ordinary activities before taxation
Year 10 months
ended ended
31 December 31 December
1997 1996
(pound) (pound)
Loss on ordinary activities before taxation is
stated after charging:
Depreciation charge for the year:
Tangible owned fixed assets -- 949
Tangible fixed assets held under finance leases 251,352 8,700
Research and development expenditure - current year 2,046,451 482,519
Auditors' remuneration:
Audit (company(pound)500 (1996:(pound)500)) 6,000 4,500
Other services to the group 4,900 17,450
Hire of other assets - operating leases 91,093 15,117
========= =======
8 Tax on profit on ordinary activities
No corporation tax liability arises on the results for the year due to the loss
incurred. At 31 December 1997 there were estimated tax losses to carry forward
in excess of (pound)3,150,000 (1996: (pound)500,000).
9 Profit for the financial year
As permitted by section 230 of the Companies Act 1985, the parent company's
profit and loss account has not been included in these financial statements. The
parent company's profit for the financial year was (pound)2.
10 Change in accounting policies
The prior year adjustment of (pound)101,250 is made as a result of the change in
accounting policy for share options discussed in note 1. The adjustment is
reported in the statement of total recognized gains and losses and reserves (see
note 20).
The effect of the change in accounting policy is to increase the current year's
loss before taxation by (pound)77,550. The effect on the comparative profit and
loss account is to increase the loss before taxation from (pound)654,502 to
(pound)755,752.
H-25
<PAGE>
11 Tangible fixed assets
Group
Office
equipment
and
fixtures
Laboratory Computer and
equipment equipment fittings Total
(pound) (pound) (pound) (pound)
Cost
At 1 January 1997 628,020 131,541 259,780 1,019,341
Additions 319,456 172,641 80,465 572,562
Disposals (2,071) (700) -- (2,771)
------- ------- ------ -------
At 31 December 1997 945,405 303,482 340,245 1,589,132
------- ------- ------ -------
Depreciation
At 31 December 1996 -- 5,364 4,285 9,649
Charge for year 140,203 71,121 40,028 251,352
------- ------- ------ -------
At 31 December 1997 140,203 76,485 44,313 261,001
------- ------- ------ -------
Net book value
At 31 December 1997 805,202 226,997 295,932 1,328,131
======= ======= ======= =========
Net book value
At 31 December 1996 628,020 126,177 255,495 1,009,692
======= ======= ======= =========
The net book value of tangible fixed assets includes an amount
of(pound)1,328,131 (1996:(pound)965,567) in respect of assets held under finance
leases.
The company has no tangible fixed assets.
12 Fixed asset investments
Company
Interest in
group undertakings
(pound)
Cost and net book value:
At 31 December 1997 and at 1 January 1997 250,000
=======
Interests in group undertakings
<TABLE>
<CAPTION>
Name of Country of Description of shares held Percentage of
undertaking incorporation shares held
<S> <C> <C> <C>
Hexagen Technology Limited Great Britain Ordinary 0.2p shares 100%
</TABLE>
Hexagen Technology Limited's principal activity is research into potential new
drug targets. Its results are included in the consolidated financial statements.
H-26
<PAGE>
13 Debtors
<TABLE>
<CAPTION>
Group Company Group Company
1997 1997 1996 1996
(pound) (pound) (pound) (pound)
<S> <C> <C> <C> <C>
Amounts falling due within one year
Other debtors 118,345 -- 233,490 31,710
Prepayments and accrued income 220,700 -- 92,057 --
------- --------- ------- ---------
339,045 -- 325,547 31,710
------- --------- ------- ---------
Amounts falling due after one year
Amounts owed by group undertaking -- 6,668,656 -- 6,667,527
------- --------- ------- ---------
-- 6,668,656 -- 6,667,527
======= ========= ======= =========
</TABLE>
14 Creditors: amounts falling due within one year
<TABLE>
<CAPTION>
Group Company Group Company
1997 1997 1996 1996
(pound) (pound) (pound) (pound)
<S> <C> <C> <C> <C>
Trade creditors 376,977 -- 644,296 5,531
Obligations under finance leases 526,384 -- 332,700 --
Other taxation and social security 31,384 -- 86,710 --
Accruals and deferred income 62,784 -- 137,594 --
------- ------- --------- -----
997,529 -- 1,201,300 5,531
======= ======= ========= =====
</TABLE>
15 Creditors: amounts falling due after more than one year
<TABLE>
<CAPTION>
Group Company Group Company
1997 1997 1996 1996
(pound) (pound) (pound) (pound)
<S> <C> <C> <C> <C>
Obligations under finance leases 811,249 -- 772,709 --
======= ======== ======= =========
</TABLE>
H-27
<PAGE>
The net finance lease obligations to which the group is committed are:
1997 1996
(pound) (pound)
In one year or less 526,384 332,700
Between one and two years 526,384 332,700
Between two and five years 284,865 440,009
--------- ---------
1,337,633 1,105,409
========= =========
Hexagen plc has guaranteed the liabilities of Hexagen Technology Limited with
regard to that company's finance lease commitments
16 Deferred taxation
At 31 December 1997 the company has no potential liability for deferred
taxation.
The group had potential deferred tax assets as follows:
<TABLE>
<CAPTION>
Amount provided Amount unprovided
1997 1996 1997 1996
pound) (pound) (pound) (pound)
<S> <C> <C> <C> <C>
Tax effect of timing differences because of:
Excess of capital allowances over -- -- -- (2,784)
depreciation
Other -- -- (992,546) (203,630)
------- ------- -------- --------
-- -- (992,546) (206,414)
======= ======= ======== ========
</TABLE>
17 Pensions
The group operates a defined contribution scheme. The pension charge for the
year is(pound)80,383 (1996:(pound)17,883).(pound)45 remained outstanding at the
year-end and is included within accruals.
18 Called up share capital
1997 1996
(pound) (pound)
Authorised
23,355,672 preferred ordinary shares of 5p each 1,167,784 1,167,784
5,000,000 'A' ordinary shares of 5p each 250,000 250,000
3,339,668 ordinary shares of 5p each 166,983 166,983
--------- ---------
1,584,767 1,584,767
========= =========
Allotted, called up and fully paid
23,355,331 preferred ordinary shares of 5p each 1,117,767 1,117,767
5,000,000 'A' ordinary shares of 5p each 250,000 250,000
167,000 (1996: Nil) ordinary shares of 5p each 8,350 --
--------- ---------
1,376,117 1,367,767
Allotted shares - not fully paid up
Nil (1996: 167,000) preferred ordinary shares of 5p each -- 8,350
--------- ---------
1,376,117 1,376,117
========= =========
On 26 November 1997 the holders of 167,000 of the preferred ordinary shares
exercised the right to convert their shares into ordinary shares.
The preferred ordinary shares rank in priority to the other shares in a return
of capital and in the payment of a dividend.
H-28
<PAGE>
The priority in respect of the dividend is limited to 8% (non-cumulative) of the
nominal value of the shares. Thereafter they rank equally with the 'A' ordinary
and ordinary shares.
The priority in respect of a return of capital is limited to the subscription
price plus any arrears of dividends. Thereafter they rank equally with the 'A'
ordinary and ordinary shares. The preferred ordinary shares are classed as non
equity because one of the rights in respect of dividends is for a limited
amount.
The classes of shares are equal in all other respects.
19 Options in shares of Hexagen plc
Options have been granted for 5p ordinary shares as follows:
Number Subscription Period
of shares price per share within which options exercisable
50,000 5p 15 July 1997 - 15 July 2003
10,000 5p 12 August 1997 - 12 August 2003
225,000 5p 3 September 1997 - 3 September 2003
30,000 5p 23 September 1997 - 23 September 2003
30,000 5p 30 September 1997 - 30 September 2003
100,000 5p 7 October 1997 - 7 October 2003
40,000 5p 14 October 1997 - 14 October 2003
15,000 5p 21 October 1997 - 21 October 2003
150,000 5p 1 November 1997 - 1 November 2003
25,000 5p 16 December 1997 - 16 December 2003
75,000 5p 28 February 1998 - 28 February 2004
15,000 5p 1 March 1998 - 28 February 2004
95,000 5p 1 March 1998 - 29 February 2004
50,000 5p 1 April 1998 - 1 April 2004
72,000 5p 1 May 1998 -1 May 2004
35,000 5p 1June 1998 -1 June 2004
75,000 5p 1 July 1998 - 1 July 2004
20,000 5p 1 August 1998 - 1 August 2004
15,000 5p 1 September 1998 - 1 September 2004
15,000 5p 1 October 1998 - 1 October 2004
50,000 5p 1 December 1998 - 1 December 2004
---------
1,192,000
=========
H-29
<PAGE>
20 Reserves
<TABLE>
<CAPTION>
Group Share Merger Profit and
premium reserve loss account
(pound) (pound) (pound)
<S> <C> <C> <C>
At 1 January 1997 5,566,507 (240,000) (654,502)
Prior year adjustment (see note 10) -- -- (101,250)
Reversal of prior year adjustment (see note 1) -- -- 101,250
Reversal of share option charge (see note 1) -- -- 77,550
Loss for the year -- -- (2,633,814)
--------- -------- ----------
5,566,507 (240,000) (3,210,766)
========= ======== ==========
</TABLE>
Company
Share Profit and
premium loss account
(pound) (pound)
At 1 January 1997 5,566,507 1,351
Profit for the year -- 2
--------- -----
5,566,507 1,353
========= =====
21 Reconciliation of movements in shareholders' funds
Group Group
1997 1996
(pound) (pound)
Opening shareholders' funds 6,048,122 --
Share issue during the year -- 7,006,700
Expenses of share issues -- (64,076)
Reversal of share option charge 77,550 101,250
(Loss) for the financial year (2,633,814) (755,752)
Difference arising on consolidation -- (240,000)
--------- ---------
Closing shareholders' funds 3,491,858 6,048,122
========= =========
H-30
<PAGE>
22 Reconciliation of operating loss to net cash outflow from operating
activities
Year 10 months
ended ended
31 December 31 December
1997 1996
(pound) (pound)
Continuing operating activities
Operating loss (2,828,994) (868,382)
Share option charge 77,550 101,250
---------- --------
(2,751,444) (767,132)
Depreciation on tangible fixed assets 251,352 9,649
Loss on sale of tangible fixed assets 375 7,900
Decrease/(increase) in other debtors 115,145 (191,714)
(Increase) in prepayments and accrued
income (116,088) (92,057)
(Decrease)/increase in trade creditors (267,319) 644,296
(Decrease)/increase in other taxation and
social security (55,326) 86,710
(Decrease)/increase in accruals and
deferred income (74,810) 137,594
---------- --------
Net cash outflow from continuing
operating activities (2,898,115) (164,754)
========== ========
23 Reconciliation of net cash flow to movement in net funds
Year 10 months
ended ended
31 December 31 December
1997 1996
(pound) (pound)
Increase in cash in the period 66,568 166,892
Cash (inflow)/outflow from decrease in
debt and lease financing 445,675 48,271
Cash (inflow)/outflow from
(decrease)/increase in liquid resources (3,120,000) 6,520,000
---------- ---------
Change in net funds resulting from cash
flows (2,607,757) 6,735,163
Other non-cash items
New finance leases (677,899) (1,153,680)
--------- ---------
Movement in net funds in the period (3,285,656) 5,581,483
Net funds at 1 January/incorporation 5,581,483 --
--------- ---------
Net funds at 31 December 2,295,827 5,581,483
========= =========
H-31
<PAGE>
24 Analysis of net funds
At At
1 January Cash 31 December
1997 flow 1997
(pound) (pound) (pound)
Cash in hand, at bank 166,892 66,568 233,460
Finance leases (1,105,409) (232,224) (1,337,633)
Current asset investments 6,520,000 (3,120,000) 3,400,000
--------- ---------- ---------
Total 5,581,483 (3,285,656) 2,295,827
========= ========== =========
25 Capital commitments
Group
1997 1996
(pound) (pound)
Capital expenditure that has been contracted for but has not
been provided for in the financial statements 386,100 39,000
======= ======
26 Contingent liabilities
The Inland Revenue has recently challenged the group's view that it has been
trading since incorporation. The company has sought professional advice on this
matter but if the challenge is upheld, taxation may become payable on interest
receivable since incorporation. This would amount to (pound)30,500 (plus
interest) for the year ended 31 December 1996 and (pound)70,500 for the year
ended 31 December 1997. No provision has been made in the financial statements
for these amounts.
27 Financial commitments
At 31 December 1997 the group had annual commitments under non-cancellable
operating leases as follows:
Land and Land and
buildings Other buildings Other
1997 1997 1996 1996
(pound) (pound) (pound) (pound)
Expiring within one year -- 9,036 -- --
In the second to fifth years
inclusive 70,000 9,000 70,000 21,068
------ ----- ------ ------
70,000 18,036 70,000 21,068
====== ====== ====== ======
28 Post balance sheet event
In February 1998 the group entered into a lease agreement for further premises
at 214 Cambridge Science Park, Milton Road, Cambridge.
The new agreement replaced the existing lease on the premises which at 31
December 1997 committed the group to (pound)70,000 per annum for less than five
years (see note 27). Under the terms of the new agreement, the group is
committed to annual leasing costs on the premises of (pound)180,000 for more
than five years.
H-32
<PAGE>
29 Related party transactions
The company has taken advantage of the exemption available to companies not to
disclose transactions with wholly owned subsidiaries which are eliminated on
consolidation. There are no other related party transactions requiring
disclosure.
30 Summary of significant differences between UK and US Generally Accepted
Accounting Principles ("GAAP")
The accompanying consolidated financial statements have been prepared in
accordance with accounting principles generally accepted in the United Kingdom
("UK GAAP"). Such principles differ in certain respects from generally accepted
accounting principles in the United States ("US GAAP"). A summary of principal
differences and additional disclosures applicable to the Group are set out
below.
Reconciliation of consolidated profit and loss account:
1997 1996
(pound) (pound)
Retained loss under UK GAAP (2,633,814) (755,752)
US GAAP adjustments:
Stock options 40,174 91,931
---------- --------
Net loss under US GAAP (2,593,640) (663,821)
========== ========
Reconciliation of shareholders' equity:
1997 1996
(pound) (pound)
Shareholders' funds under UK GAAP 3,491,858 6,048,122
US GAAP adjustments:
Stock options 132,105 91,931
--------- ---------
Shareholders' equity under US GAAP 3,623,963 6,140,053
========= =========
(i) Stock options
Under both UK and US GAAP, options issued with an exercise price below the fair
market value are considered compensatory. Under UK GAAP, the compensation charge
on options issued to reward past performance is reflected in the profit and loss
on the date of grant.
Under US GAAP, compensation cost also represents the difference between the
current market price and the exercise price on the grant date, but is recognized
in the profit and loss over the vesting period of the options granted.
(ii) Disclosures related to development stage enterprises
The company was formed on 12 March 1996 to research potential new drug targets
that may enable the treatment of human and veterinary diseases. The company is
considered a development stage enterprise as defined by Financial Accounting
Standards Board Statement No. 7, Accounting and Reporting by Development Stage
Enterprises. As required under the standard, the deficit accumulated in the
development stage on a UK GAAP basis from 12 March 1996 to 31 December 1997 is
(pound)3,210,766. The cumulative statements of profit and loss and cash flows
for the period since inception are shown below.
H-33
<PAGE>
Consolidated profit and loss account from 12 March 1996, date of inception, to
31 December 1997
(pound)
Net operating expenses - continuing operations (3,518,576)
Exceptional net operating expenses (178,800)
----------
Operating loss - continuing operations (3,697,376)
Investment income 443,990
Interest payable and similar charges (136,180)
----------
Retained loss since inception (3,389,566)
==========
Consolidated cash flow statement from 12 March 1996, date of inception, to 31
December 1997
(pound)
Net cash outflow from continuing operating activities (3,062,869)
----------
Returns on investments and servicing of finance
Interest received 414,709
Interest paid on finance leases (136,180)
----------
278,529
----------
Capital expenditure
Purchase of tangible fixed assets (85,874)
Sale of tangible fixed assets 35,296
----------
(50,578)
----------
Net cash outflow before management of liquid resources and
financing (2,834,918)
----------
Management of liquid resources
Purchase of treasury deposits (6,520,000)
Sale of treasury deposits 3,120,000
----------
(3,400,000)
----------
Financing
Issue of shares 6,677,574
Repayment of principal under finance leases (493,946)
Finance lease funds not yet utilized 284,750
----------
Net cash inflow from financing 6,468,378
----------
Increase in cash 233,460
==========
(iii) Statement of cash flows
Under UK GAAP, the consolidated cash flow statements have been prepared in
accordance with the revised version of UK Financial Reporting Standard No.1
("FRS 1 revised") and presents substantially the same information as required
under SFAS No. 95. Under US GAAP however, there are certain differences from UK
GAAP with regard to classification of items within the cash flow statement.
Under UK GAAP, cash flows are presented separately for operating activities,
returns on investments and servicing of finance, taxation, capital expenditure
and financial investment, acquisitions and disposals, equity dividends paid,
management of liquid resources and financing. Under US GAAP cash flows are
classified under operating activities, investing activities and financing
activities. Under UK GAAP, cash is defined as cash in hand and deposits
repayable on demand, less overdrafts repayable on demand. Under US GAAP, cash
and cash equivalents are defined as cash and investments with original
maturities of three months or less.
H-34
<PAGE>
A summary of the Group's operating, investing and financing activities
classified in accordance with US GAAP is presented below. For the purposes of
this summary, the Group considers all highly liquid investments with a maturity
of three months or less at the time of purchase to be cash equivalents.
1997 1996
(pound) (pound)
Net cash used in operating activities (2,715,490) (68,850)
Net cash provided by investing activities (997,604) (52,974)
Net cash (used in)/provided by financing activities (340,338) 6,808,716
---------- ---------
Net increase in cash and cash equivalents (4,053,432) 6,686,892
Cash and cash equivalents at beginning of period 6,686,892 -
---------- --------
Cash and equivalents at end of period 2,633,460 6,686,892
========== =========
Cash and cash equivalents are:
Cash at bank and in hand 233,460 166,892
Current asset investments 2,400,000 6,520,000
H-35
<PAGE>
ANNEX I: FACTORS THAT MAY AFFECT RESULTS
If the Incyte Genetics Stock Proposal is approved and implemented,
holders of Incyte General Stock and Incyte Genetics Stock will be stockholders
of Incyte Pharmaceuticals, Inc. ("Incyte" and, together with its wholly owned
subsidiaries, the "Company"). The Company owns all of the assets and is
responsible for all of the liabilities of both Incyte General and Incyte
Genetics. Losses and liabilities of one division that affect the Company's
resources or financial condition could adversely affect the financial condition
or results of operations of the other division and the market price of the
series of Common Stock relating to that division. Accordingly, in evaluating the
financial condition and results of operations of the Company, Incyte General and
Incyte Genetics, you should carefully consider the factors set forth below.
When used in this discussion, the words "expects," "anticipates,"
"estimates," and similar expressions are intended to identify forward-looking
statements. Such statements, which include statements as to profitability,
expected expenditure levels, the adequacy of capital resources, growth in
operations, and Year 2000 related actions, are subject to risks and
uncertainties that could cause actual results to differ materially from those
projected. These risks and uncertainties include, but are not limited to, those
risks discussed below. These forward-looking statements speak only as of the
date hereof. The Company expressly disclaims any obligation or undertaking to
release publicly any updates or revisions to any forward-looking statements
contained herein to reflect any change in the Company's expectations with regard
thereto or any change in events, conditions or circumstances on which any such
statement is based.
Factors Relating to Both Incyte General and Incyte Genetics
Uncertain Effects of Recent Acquisitions. The combinations of Synteni,
Inc. ("Synteni") and Hexagen Limited ("Hexagen") with the Company involve
several potential operating and business risks, including the integration of
Synteni's, Hexagen's and the Company's businesses and management in a timely,
efficient and effective manner, the timely integration of Synteni's microarray
technology and services and Hexagen's technology with the Company's products and
services, integration of the respective sales and marketing and research and
development efforts, and any resulting loss of efficiency or loss of employees.
The combined companies may not realize any revenue enhancements or cost savings.
Also, any cost savings that are realized may be offset by increases in other
expenses or operating losses, including losses due to problems in integrating
the acquired companies with the Company. See "--Factors Relating to Both Incyte
General and Incyte Genetics--Risks Associated With Acquisitions." Although the
Company believes that beneficial synergies will result from the Synteni merger
and Hexagen acquisition, the combination of the companies' businesses, even if
achieved in an efficient, effective and timely manner, may not result in
combined results of operations and financial condition superior to what would
have been achieved by each company independently, and may take longer than
expected. See "--Factors Relating to Both Incyte General and Incyte
Genetics--History of Operating Losses; Uncertainty of Continued Profitability or
Revenues."
Risks Associated with Acquisitions. As part of its business strategy,
the Company may from time to time acquire assets and businesses principally
relating or complementary to its operations. These acquisitions may include
acquisitions for the purpose of acquiring specific technology. The Company
acquired two companies, Genome Systems, Inc. and Combion, Inc. in 1996, acquired
Synteni in January 1998, and acquired Hexagen in September 1998. If the Company
acquires additional businesses that are not located near the Company's Palo
Alto, California headquarters, the Company may experience more difficulty
integrating and managing the acquired businesses' operations. These and any
other acquisitions by the Company involve risks commonly encountered in
acquisitions of companies. These risks include, among other things, the
following: the Company may be exposed to unknown liabilities of acquired
companies; the Company may incur acquisition costs and expenses higher than it
anticipated; fluctuations in the Company's quarterly and annual operating
results may occur due to the costs and expenses of acquiring and integrating new
businesses or technologies; the Company may experience difficulty and expense of
assimilating the operations and personnel of the acquired businesses; the
Company's ongoing business may be disrupted and its management's time and
<PAGE>
attention may be diverted; the Company may be unable to integrate successfully
or to complete the development and application of acquired technology and may
fail to achieve the anticipated financial, operating and strategic benefits from
these acquisitions; the Company may experience difficulties in establishing and
maintaining uniform standards, controls, procedures and policies; the Company's
relationships with key employees and customers of acquired businesses may be
impaired, or these key employees and customers may be lost, as a result of
changes in management and ownership of the acquired businesses; the Company may
incur amortization expenses if an acquisition is accounted for as a purchase,
resulting in significant goodwill or other intangible asset; and the Company's
stockholders may be diluted if the consideration for the acquisition consists of
equity securities. The Company may not overcome these risks or any other
problems encountered in connection with acquisitions. If the Company is
unsuccessful in doing so, its business, financial condition and results of
operations could be materially and adversely affected.
History of Operating Losses; Uncertainty of Continued Profitability or
Revenues. For the years ended December 31, 1996 and 1995, the Company had net
losses of $7.3 million and $9.9 million, respectively, and as of June 30, 1998,
the Company had an accumulated deficit of $23.1 million. Driven by the Incyte
General division, the Company has experienced substantial revenue growth since
1995 and has reported quarterly profits since the first quarter of 1997.
However, because the Company intends to make a significant investment in
building the business of Incyte Genetics over the next few years, the Company
expects to report a consolidated net loss for 1999 and possibly 2000. The
Company may report consolidated net losses in future periods as well.
Part of the Company's commercialization strategy is to license to
database collaborators the Company's patent rights to individual partial genes
or full-length cDNA sequences from the Company's proprietary sequence database,
for development as potential pharmaceutical, diagnostic or other products. Any
potential product that is the subject of such a license will require several
years of further development, clinical testing and regulatory approval prior to
commercialization. Accordingly, the Company does not expect to receive any
milestone or royalty payments from any such licenses for a substantial period of
time, if at all.
Fluctuations in Operating Results. The Company's operating results may
fluctuate significantly from quarter to quarter as a result of a variety of
factors, including changes in the demand for the Company's products and
services; the pricing of database access to database collaborators; the nature,
pricing and timing of other products and services provided to the Company's
collaborators; changes in the research and development budgets of the Company's
collaborators and potential collaborators; capital expenditures; acquisition and
licensing costs and other costs related to the expansion of the Company's
operations, including operating losses of acquired businesses such as Synteni;
the introduction of competitive databases or services; and expenses related to,
and results of, litigation (including the lawsuits filed by Affymetrix, Inc.
described below under "--Factors Relating to Both Incyte General and Incyte
Genetics-Litigation") and other proceedings relating to intellectual property
rights. In particular, the Company has a limited ability to control the timing
of database installations, a lengthy sales cycle is required for the Company's
database products, the Company's revenue levels are difficult to forecast, the
time required to complete custom orders can vary significantly and the Company's
increasing investments in external alliances could result in significant
quarterly fluctuations in expenses due to the payment of milestones, license
fees or research payments.
The Company's investments in joint ventures and businesses, particularly
diaDexus, LLC ("diaDexus"), the Company's joint venture with SmithKline Beecham
Corporation, may require the Company to record losses or expenses related to its
proportionate ownership interest in such entities, to record charges for the
acquisition of in-process technologies, or to record charges for the recognition
of the impairment in the value of the securities underlying such investments. To
date, the Company have not recognized any significant losses on its long-term
equity investments, all of which to date have been allocated to Incyte General.
Due to the recent stock market volatility, certain investments held by Incyte
General are below the investments' book value. The decrease in the market price
of these investments is considered temporary and therefore no change in the
carrying value of the investments is considered necessary. Incyte General will
continue to evaluate its
<PAGE>
long term equity investments for impairment on a quarterly basis. As part of the
collaborative agreement with Oxford GlycoSciences plc ("OGS") relating to the
joint development of a proteomics database, Incyte General has agreed to
reimburse OGS up to $5.0 million in 1999 if revenues are not sufficient to
offset OGS' expenses for services rendered. In an effort to broaden its
business, the Company is investing in a number of new areas, including
microarray services, molecular diagnostics, pharmacogenomics and proteomics.
Given that many of these address new markets, or involve untested technologies,
it is not known if any of them will generate revenues or if the revenues will be
sufficient to provide an adequate return on the investment. Depending on the
investment required and the timing of such investments, expenses or losses
related to these investments could adversely affect operating results.
Litigation. In January 1998, Affymetrix filed a lawsuit in the United
States District Court for the District of Delaware alleging infringement of U.S.
patent number 5,445,934 (the "'934 Patent") by both Synteni and Incyte. The
complaint alleges that the '934 Patent has been infringed by the making, using,
selling, importing, distributing or offering to sell in the United States high
density arrays by Synteni and Incyte and that such infringement was willful.
Affymetrix seeks a permanent injunction enjoining Synteni and Incyte from
further infringement of the '934 Patent and, in addition, seeks damages, costs
and attorney's fees and interest. Affymetrix further requests that any such
damages be trebled based on its allegation of willful infringement by Synteni
and Incyte.
In September 1998, Affymetrix filed an additional lawsuit in the United
States District Court for the District of Delaware alleging infringement of the
U.S. patent number 5,800,992 (the "'992 Patent") and U.S. patent number
5,744,305 (the "'305 Patent") by both Synteni and Incyte. The complaint alleges
that the '305 Patent has been infringed by the making, using, selling,
importing, distributing or offering to sell in the United States high density
arrays by Synteni and Incyte, that the '992 Patent has been infringed by the use
of Synteni's and Incyte's GEMTM microarray technology to conduct gene expression
monitoring using two-color labeling, and that such infringement was willful.
Affymetrix seeks a preliminary injunction enjoining Synteni and Incyte from
using Synteni's and Incyte's GEM microarray technology to conduct gene
expression monitoring using two-color labeling, as described in the '992 patent,
and a permanent injunction enjoining Synteni and the Company from further
infringement of the '305 and '992 Patents.
Incyte and Synteni believe they have meritorious defenses and intend to
defend these suits vigorously. However, there can be no assurance that Incyte
and Synteni will be successful in the defense of these suits. Regardless of the
outcome, this litigation has resulted and is expected to continue to result in
substantial expenses and diversion of the efforts of management and technical
personnel. Further, there can be no assurance that any license that may be
required as a result of these suits or the outcome thereof would be made
available on commercially acceptable terms, if at all.
New and Uncertain Business. The Company's single nucleotide polymorphism
("SNP") discovery business and microarray-based gene expression service business
represents businesses for which there is no precedent. The utility of the
information generated by these businesses is unproven. The nature and price of
the products and services offered in these businesses are such that there are a
limited number of companies that are potential collaborators for such products
and services. Additional factors that may affect demand for the Company's
products and services include: the extent to which pharmaceutical and
biotechnology companies may choose to generate the information in-house; the
emergence of competitors offering similar services at competitive prices; the
extent to which the information in the Company's databases are made public by,
or is the subject of, patents issued to others; the Company's ability to
establish and enforce proprietary rights to its products; and the emergence of
technological innovations that are more advanced than the technology used by and
available to the Company.
Risks Associated with Strategic Investments. The Company has funded and
intends in the future to fund strategic equity investments in joint ventures or
businesses that complement the business of the Company.
<PAGE>
These investments, such as the Company's investment in diaDexus, may be illiquid
and may require the Company to record losses and expenses related to its
proportionate ownership interest in such entities, charges related to the
acquisition of in-process technologies, or the impairment in the value of the
securities underlying such investments. These losses may exceed amounts
anticipated, which could result in the Company's operating results being below
the expectations of public market analysts and investors. These investments may
often be made in securities for which there is no public trading market or in
securities not registered under the Securities Act of 1933 and therefore subject
to trading restrictions, either of which increases the Company's risk of
investment and reduces the liquidity of the Company's investment. In addition,
the Company could be required to invest greater amounts than initially
anticipated or to devote substantial management time to the management of
research and development relationships and joint ventures. The occurrence of any
of the foregoing could result in a material adverse effect on the Company's
business, financial condition and results of operations.
Lengthy Sales Cycle. The ability of the Company to obtain new
collaborators for its databases, software tools and microarray and other
services depends in significant part upon prospective collaborators' perceptions
that the Company's databases, software tools, and microarray services can help
accelerate drug discovery efforts. The sales cycle is typically lengthy due to
the education effort that is required, as well as the need to effectively sell
the benefits of the Company's databases, software tools, and microarray services
to a variety of constituencies within potential collaborator companies. In
addition, each database collaboration and microarray services agreement involves
the negotiation of agreements containing terms that may be unique to each
partner, such as the scope of any licenses granted and whether satellite
database services or access to multiple database modules is desired. The Company
may expend substantial funds and management effort with no assurance that a
collaboration will result.
Uncertainty of Protection of Patents and Proprietary Rights. Incyte
General's and Incyte Genetic's database businesses and competitive position are
dependent in part upon the Company's ability to protect its proprietary database
information and software technology. Despite the Company's efforts to protect
its proprietary database information and software technology, unauthorized
parties may attempt to obtain and use information that the Company regards as
proprietary. Although the Company's database collaboration agreements require
its collaborators to provide adequate security for, and to control access to the
Company's databases, policing unauthorized use of the Company's databases and
software by the Company or its collaborators is difficult. The Company relies on
patent, trade secret, and copyright law, and nondisclosure and other contractual
arrangements to protect its proprietary information.
To date, the Company has been issued a number of patents with respect to
the gene sequences in the Company's databases and has filed for patents on
selected features of its related software, but has not been issued patents or
registered copyrights for that software. Patents cannot prevent others from
developing, selling or licensing databases that include sequences which might be
covered by the Company's patents and copyrights. The Company cannot prevent
others from independently developing software that might be covered by any
copyrights issued to the Company and trade secret laws do not prevent
independent development. Thus, there can be no assurance that others will not
independently develop substantially equivalent proprietary information and
techniques or otherwise gain access to the Company's proprietary information,
that this information will not be disclosed or that the Company can effectively
protect its rights to unpatented trade secrets.
The Company pursues a policy of having its employees, consultants and
advisors execute proprietary information and invention agreements upon
commencement of employment or consulting relationships with the Company. These
agreements provide that all confidential information developed or made known to
the individual during the course of the relationship shall be kept confidential
except in specified circumstances. These agreements may not, however, provide
meaningful protection for the Company's trade secrets or other proprietary
information in the event of unauthorized use or disclosure of this information.
The Company's current policy is to file patent applications on what it
believes to be novel full-length cDNA sequences and partial sequences obtained
through the Company's high-throughput computer-aided gene sequencing efforts.
The Company has filed U.S. patent applications in which the Company has claimed
certain partial gene sequences and has filed patent applications in the U.S. and
applications under the Patent Cooperation Treaty ("PCT") designating countries
in Europe as well as Canada, Japan, Mexico and New Zealand claiming full-length
gene sequences associated with cells and tissues that are the subject of the
<PAGE>
Company's high-throughput gene sequencing program. To date, the Company holds a
number of issued U.S. patents on full-length genes, but no patent has issued
from any of the Company's patent applications that claim partial gene sequences.
The Company is aware that a number of entities, such as Merck & Co., Inc. (in
conjunction with Washington University), have made certain gene sequences
publicly available, which may adversely affect the ability of the Company and
others to obtain patents on such genes. The Company's ability to obtain patent
protection for certain sequences that have been made publicly available may be
adversely affected.
The Company believes that certain of its patent applications claim genes
which may also be claimed in patent applications filed by other parties. In some
or all of these applications, a determination of priority of inventorship may
need to be decided in an interference before the United States Patent and
Trademark Office ("USPTO"). The USPTO has declared an interference involving a
Company patent application covering one full-length gene, and the Company has
been informed that interferences may be declared with respect to applications
covering approximately a dozen additional genes.
In support of Incyte Genetics' plan to commercialize SNP data, the
Company plans to seek patent protection for patentable SNPs identified in the
LifeSeq database, through the Incyte Genetics human genome sequencing program,
and through the use of Hexagen's fSSCP SNP-discovery technology. These patents
will claim rights in patentable SNPs for diagnostic and genotyping purposes. As
information relating to particular SNPs is developed, the Company plans to seek
additional rights in those SNPs that are associated with specific diseases,
functions or drug responses. Incyte Genetics will have the exclusive right to
commercialize the SNP data, human genome data and human genome mapping data, for
use in pharmacogenetic applications.
The patentability of partial gene sequences in general is uncertain,
involves complex legal and factual questions, and has recently been the subject
of much controversy. As a result, patent applications filed by the Company on
such partial gene sequences may not result in issued patents. Even if patents
are issued for partial gene sequences, there may be uncertainty as to the scope
of the coverage, enforceability or commercial protection provided by any such
patents. Certain court decisions suggest that disclosure of a partial sequence
may not be sufficient to support the patentability of a full-length sequence and
that patent claims to a partial sequence may not cover a full-length sequence
inclusive of that partial sequence.
The USPTO has had a substantial backlog of biotechnology patent
applications and, in particular, applications that claim gene sequences. In
1996, the USPTO issued guidelines limiting the number of partial gene sequences
that can be examined within a single patent application. Many of the Company's
patent applications containing multiple partial sequences contain more sequences
than the maximum number allowed under the new guidelines. The Company is
reviewing its options and, due to the resources needed to comply with the
guidelines, may decide to abandon patent applications for some of its partial
gene sequences. Given that the Company's cost of filing large numbers of patent
applications and maintaining issued patents can be significant, the Company may
choose not to pursue every application. If the Company does not pursue patent
protection for all of its full-length and partial gene sequences, the value of
its intellectual property portfolio could be diminished.
In view of the possible delay in obtaining allowance of some of the
Company's patent applications, and the secrecy of patent applications, the
Company does not know if other applications that would have priority over the
Company's applications have been filed. Also, changes in U.S. patent laws
resulting from the General Agreement on Tariffs and Trade ("GATT") became
effective in June 1995. Most notably, GATT resulted in U.S. law being amended to
change the term of patent protection from seventeen years from patent
<PAGE>
issuance to twenty years from the earliest effective filing date of the
application. Because the average time from filing to issuance of biotechnology
applications is at least one year and may be more than three years depending on
the subject matter, a twenty-year patent term from the date of filing may result
in a substantially shortened term of patent protection, which may adversely
affect the Company's period of exclusivity under any patents that may issue to
the Company. Pending applications claiming large numbers of gene sequences may,
in some situations, need to be refiled while claiming priority to the earliest
filing date and, in such situations, the patent term will be measured from the
date of the earliest priority application. This would reduce the patent term and
have a potentially adverse effect on the Company's period of exclusivity.
Biotechnology patent law outside the United States is even more
uncertain and is currently undergoing review and revision in many countries.
Further, the laws of certain foreign countries may not protect the Company's
intellectual property rights to the same extent as do the laws of the United
States. The Company may participate in opposition proceedings to determine the
validity of its or its competitors' non-U.S. patents, which could result in
substantial costs to and diversion of effort by the Company.
As the biotechnology industry expands, more patents are issued and other
companies engage in the business of discovering genes and SNPs through the use
of high speed sequencers and in other genomic-related businesses, such as
microarray and gene expression profiling, the risk increases that the Company's
potential products or the processes used by the Company to develop these
products may be subject to claims that they infringe the patents of others.
Certain of these patents are the subject of litigation. Therefore, the Company's
operations may require it to obtain licenses under any of these patents or
proprietary rights, and these licenses may not be made available on terms
acceptable to the Company. Litigation may be necessary to defend against or
assert claims of infringement, to enforce patents issued to the Company, to
protect trade secrets or know-how owned by the Company, or to determine the
scope and validity of the proprietary rights of others. The Company could also
be involved in interferences with respect to patent applications. Given the
large number of applications filed by the Company, a large number of
interferences could be expensive and time consuming. In addition, it is
impossible to predict how many, if any, of the interferences would be resolved
in the Company's favor. The Company is currently involved in litigation and
interference proceedings with respect to patents and intellectual property
rights. Litigation or interference proceedings, regardless of the outcome, could
result in substantial costs to, and diversion of effort by the Company, and may
have a material adverse effect on the Company's business, financial condition
and results of operations. In addition, these efforts by the Company may not be
successful.
As is typical in the genomics and software industries, the Company has
from time to time received, and believes that it likely will receive in the
future, notices from third parties alleging infringement claims. The Company
believes that it is not infringing the patent rights of any such third party,
and in circumstances in which the Company has determined a response to an
alleged infringement claim to be appropriate, the Company has notified the
claimant to that effect. To date, except as set forth above under "--Factors
Relating to Both Incyte General and Incyte Genetics-Litigation," no third party
has filed suit with respect to an alleged claim against the Company. Action may,
however, be taken against the Company in the future, either with respect to
previously asserted or new claims. The outcome of any such action is uncertain.
<PAGE>
Future Capital Needs; Uncertainty of Additional Funding. Based upon its
current plans, the Company believes that its existing resources and anticipated
cash flow from operations will be adequate to satisfy its capital needs at least
through the next twelve months. However, the Company may be unable to raise
sufficient funds to support the efforts of the Incyte Genetics, obtain
additional collaborators or retain existing collaborators for the Company's
databases, and its database products and services may not produce revenues
which, together with the Company's cash, cash equivalents, and marketable
securities, would be adequate to fund the Company's cash requirements. The
Company's cash requirements depend on numerous factors, including: the ability
of the Company to attract and retain collaborators for its databases and
products and services; expenditures in connection with alliances, license
agreements and acquisitions of and investments in complementary technologies and
businesses; competing technological and market developments; the cost of filing,
prosecuting, defending and enforcing patent claims and other intellectual
property rights; the purchase of additional capital equipment, including capital
equipment necessary to ensure the Company's sequencing and microarray operations
remain competitive; capital expenditures required to expand the Company's
facilities; and costs associated with the integration of new operations assumed
through mergers and acquisitions. The Company expects to continue to fund future
operations with revenues from database products and services and with private
and/or public equity capital to support Incyte Genetics, in addition to using
its current cash, cash equivalents, and marketable securities. Changes in the
Company's research and development plans or other changes affecting the
Company's operating expenses may result in changes in the timing and amount of
expenditures of the Company's capital resources. Additional funding, if
necessary, may not be available on favorable terms, if at all. If adequate funds
are not available, the Company may be required to curtail operations
significantly or to obtain funds through entering into collaborative
arrangements that may require the Company to relinquish rights to certain of its
technologies, product candidates, products or potential markets.
Management of Growth. The Company has recently experienced, and expects
to continue to experience, significant growth in the number of its employees and
the scope of its operations. This growth has placed, and may continue to place,
a significant strain on the Company's management and operations. The Company's
ability to manage effectively this growth will depend upon its ability to
broaden its management team and its ability to attract, hire and retain skilled
employees. The Company's success will also depend on the ability of its officers
and key employees to continue to implement and improve its operational,
management information and financial control systems and to expand, train and
manage its employee base. In addition, the Company must continue to take steps
to provide customer support resources as the number of overall database
collaborators and the number of requests from collaborators increases. Further,
the Company's database collaborators typically have worldwide operations and may
require support at multiple U.S. and foreign sites. Providing this support may
require the Company to open offices in addition to its Palo Alto, California
headquarters and its offices in Fremont, California, St. Louis, Missouri and
Cambridge, England which could result in additional burdens on the Company's
systems and resources. The Company's inability to manage growth effectively,
including its growth through acquisitions, could have a material adverse effect
on the Company's business, financia condition and results of operations.
Dependence on Key Employees. The Company is highly dependent on the
principal members of its management, operations and scientific staff, including
Roy A. Whitfield, its Chief Executive Officer, and Randal W. Scott, its
President and Chief Scientific Officer, the loss of whose services would have a
material adverse effect on the Company's business. The Company has not entered
into any employment agreements with any of these persons and does not maintain
any key person life insurance policy on the life of any employee. The Company's
future success also will depend in part on the continued service of its key
scientific, software, bioinformatics and management personnel and its ability to
identify, hire and retain additional personnel, including personnel in the
customer service, marketing and sales areas. The Company experiences intense
competition for qualified personnel in the areas of the Company's activities,
especially with respect to experienced bioinformatics and software personnel,
and there can
<PAGE>
be no assurance that the Company will be able to continue to attract and retain
personnel necessary for the development of the Company's business. Failure to
attract and retain key personnel could have a material adverse effect on the
Company's business, financial condition and results of operations.
Dependence on Others. The Company relies on a limited number of
suppliers of gene sequencing machines and certain reagents required in
connection with the gene sequencing process. Although the Company is evaluating
alternative gene sequencing machines, these machines may not be available in
sufficient quantities, available at acceptable costs, or prove to be more
cost-effective than current machines. Patent right issues concerning certain
current and future generation sequencing machines may also arise which could
prevent the Company from using them or make their use more expensive. If the
Company is unable to obtain additional machines or an adequate supply of
reagents or other materials at commercially reasonable rates, its ability to
identify genes and SNPs through gene sequencing and related methods would be
adversely affected. In addition, although the Company obtains, from a number of
sources, tissue samples from which mRNA or DNA may be isolated, the loss of
access to some of these sources increased fees for access to these sources or
increased restrictions on use of the information generated could adversely
affect the Company's business.
The gene sequencing machines that are utilized in the Company's high
throughput computer-aided genomic sequencing operations are commercially
available and are currently being utilized by at least one competitor. Moreover,
the majority owner of Celera Genomics Corporation ("Celera") has announced that
a new gel-based sequencing machine is expected to be ready for commercial
production in early 1999, and that a large number of these sequencing machines
will be provided to Celera. Although the Company has been told that it will have
access to these machines, there is no guarantee that access will be provided
under conditions that are acceptable to the Company or at all.
The Company's strategy for the development of its database and
sequencing business and the commercialization of its portfolio of partial and
full-length gene sequences may require the Company to enter into various
research and development relationships with corporate and academic collaborators
and others. The success of these relationships is dependent upon the performance
of outside parties of their responsibilities. The Company may not be able to
establish collaborative arrangements or license agreements that the Company
deems necessary or acceptable to develop its database and sequencing business
or, in the future, to commercialize its portfolio of partial and full-length
gene sequences. In addition, these collaborative arrangements or license
agreements may not be successful. The Company's collaborators may also be
pursuing alternative technologies or developing alternative products either on
their own or in collaboration with others, including the Company's competitors.
The Company has relied on scientific, technical, pathology, commercial
and other data supplied and disclosed by others, including its academic
collaborators and sources of tissue samples, and may rely on these data in the
construction of its database. There can be no assurance that these data contain
no errors or omissions, or that the sources of these data have acquired the data
in compliance with applicable legal requirements, the knowledge of which would
adversely change the prospects for the Company's business.
Year 2000 Issue. As a result of computer programs being written using
two digits, rather than four, to represent year dates, the performance of the
Company's computer systems and those of its suppliers and customers in the Year
2000 is uncertain. Any computer programs that have time-sensitive software may
recognize a date using "00" as the year 1900 rather than the year 2000. This
could result in a system failure or miscalculations causing disruptions of
operations, including, among other things, a temporary inability to process
transactions, send invoices, or engage in other normal business activities.
The Company is in the process of evaluating the Year 2000 readiness of
the software products sold by the Company ("Products"), the information
technology systems used in its operations ("IT Systems"), and its non-IT
Systems, such as building security, voice mail, and other systems. The Company
currently anticipates that this project will consist of the following phases:
(i) identification of all Products, IT Systems, non-IT Systems; (ii) assessment
of repair or replacement requirements; (iii) repair or replacement; (iv)
testing; (v) implementation; and (vi) creation of contingency plans in the event
of Year 2000 failures.
<PAGE>
The Company will initiate an assessment of all current versions of its
Products and believes that this will be completed in the first half of 1999.
Even so, whether a complete system or device in which a Product is embedded will
operate correctly for an end-user depends in large part on the Year 2000
compliance of the system's other components, most of which are supplied by
parties other than the Company. The supplier of the Company's current financial
and accounting software has informed the Company that such software is Year 2000
compliant. The Company relies, both domestically and internationally, upon
various vendors, government agencies, utility companies, telecommunications
service companies, delivery service companies, and other service providers who
are outside of the Company's control. There is no assurance that such parties
will not suffer a Year 2000 business disruption, which could have a material
adverse effect on the Company's financial condition and results of operations.
To date, the Company has not incurred any material expenditures in
connection with identifying or evaluating Year 2000 compliance issues. Most of
its expenses have related to the opportunity cost of time spent by employees of
the Company evaluating the financial and accounting software, its Products, and
general Year 2000 compliance matters. Absent a significant Year 2000 compliance
deficiency, management currently estimates that the cost to complete its Year
2000 compliance programs will be between $1.0 million and $1.5 million, which
will be expensed as incurred.
The Company is focusing on identifying and addressing all aspects of its
operations that may be affected by the Year 2000 issue and is addressing the
most critical applications first. The Company intends to develop and implement,
if necessary, appropriate contingency plans to mitigate to the extent possible
the effects of any Year 2000 noncompliance. Although the full consequences are
unknown, the failure of either the Company's critical systems or those of its
material third parties to be Year 2000 compliant would result in the
interruption of the Company's business, which could have a material adverse
effect on the Company's business, financial condition and results of operations.
Hazardous Materials; Environmental Matters. The Company's research and
development involves the controlled use of hazardous and radioactive materials
and biological waste. The Company is subject to federal, state and local laws
and regulations governing the use, manufacture, storage, handling and disposal
of these materials and certain waste products. Although the Company believes
that its safety procedures for handling and disposing of these materials comply
with the standards prescribed by such laws and regulations, the risk of
accidental contamination or injury from these materials cannot be completely
eliminated. In the event of such an accident, the Company could be held liable
for any damages that result and any such liability could exceed the resources of
the Company. Although the Company believes that it is in compliance in all
material respects with applicable environmental laws and regulations and
currently does not expect to make material additional capital expenditures for
environmental control facilities in the near-term, the Company may in the future
be required to incur significant costs to comply with environmental laws and
regulations, and there can be no assurance that the operations, business or
assets of the Company will not be materially or adversely affected by current or
future environmental laws or regulations.
Reliance on Pharmaceutical Industry; Uncertainty of Health Care Reform
and Related Matters. The Company expects that all of its revenues in the
foreseeable future will be derived from products and services provided to the
pharmaceutical and biotechnology industries. Accordingly, the Company's success
in the foreseeable future is directly dependent upon the success of the
companies within those industries and their continued demand for the Company's
products and services. The Company's operations may in the future be subject to
substantial period-to-period fluctuations as a consequence of reductions and
delays in research and development expenditures by companies in these industries
resulting from factors such as changes in economic conditions, changes in the
regulatory environment affecting health care and health care providers, pricing
pressures, market-driven pressures on companies to consolidate and reduce costs,
and other factors affecting research and development spending. The occurrence of
any of the foregoing factors could have a material adverse effect on the
Company's business, financial condition and results of operations.
<PAGE>
Risk of Business Interruption. The Company conducts all of its
sequencing and a significant portion of its other activities at its facilities
in Palo Alto, California, and conducts all of microarray-related operations at
its facilities in Fremont, California. Both locations are in a seismically
active area. Although the Company maintains business interruption insurance, the
Company does not currently have, nor does it plan to obtain, earthquake
insurance. A major catastrophe (such as an earthquake or other natural disaster)
could result in a prolonged interruption of the Company's business.
Factors Relating to Incyte General
Uncertain Effects of the Synteni Merger. The combination of Synteni and
the Company involves several potential operating and business risks, including
the integration of Synteni's and Incyte General's businesses and management in a
timely, efficient and effective manner, the timely integration of Synteni's
microarray technology and services with Incyte General's database products and
services, integration of the respective sales and marketing and research and
development efforts, and any resultin loss of efficiency or loss of employees.
The combined companies may not realize any revenue enhancements or cost savings.
Also, any cost savings that are realized due to the merger may be offset by
increases in other expenses or operating losses, including losses due to
problems in integrating the two companies. See "--Factors Relating to Both
Incyte General and Incyte Genetics--Risks Associated With Acquisitions."
Although Incyte General believes that beneficial synergies will result from the
Synteni merger, the combination of the two companies' businesses, even if
achieved in an efficient, effective and timely manner, may not result in
combined results of operations and financial condition superior to what would
have been achieved by each company independently, and may take longer than
expected. See "--Factors Relating to Incyte General--History of Operating
Losses; Uncertainty of Continued Profitability or Revenues."
History of Operating Losses; Uncertainty of Continued Profitability or
Revenues. For the years ended December 31, 1996 and 1995, Incyte General had net
losses of $7.5 million and $9.9 million, respectively, and as of June 30, 1998,
Incyte General had an accumulated deficit of $20.9 million. Incyte General has
experienced substantial revenue growth since 1995 and has reported quarterly
profits since the first quarter of 1997. However, Incyte General may not be able
to maintain revenue growth or profitability. Incyte General's continued
investment in new product and technology development, obligations under existing
and future research and development alliances, and increased investment in
marketing, sales and customer service will require a continued increase in
expenditures in 1998 and beyond. Synteni's ability to contribute to the
profitability of Incyte General will be dependent on the ability of Incyte
General to obtain high volume customers for microarray services and the costs
associated with increasing microarray production capacity. Prior to the merger,
Synteni's microarray service agreements consist of small volume pilot or
feasibility agreements. Incyte General's ability to achieve and maintain
significant revenues will be dependent upon its ability to obtain additional
database collaborators, retain existing collaborators, and expand its customer
base for microarray services. Incyte General's ability to maintain profitability
will be dependent upon its ability to obtain database collaborators, expand its
customer base for microarray services, the level of expenditures necessary for
Incyte General to maintain and support its services to its collaborators, and
the extent to which it incurs research and development, investment,
acquisition-related or other expenses related to the development and provision
of its products and services to database collaborators. While, as of August
1998, Incyte General had twenty-one database agreements, Incyte General may be
unable to enter into any additional collaborations. Further, Incyte General's
database agreements typically have a term of three years. Some of these
agreements require Incyte General to meet certain performance obligations. These
agreements may not be renewed upon expiration, and a database agreement may be
terminated earlier by a collaborator if Incyte General breaches the agreement
and fails to cure such breach within a specified period. The loss of revenues
from any database collaborator could have a material adverse effect on Incyte
General's business, financial condition and results of operations.
Part of Incyte General's commercialization strategy is to license to
database collaborators Incyte
<PAGE>
General's patent rights to individual partial genes or full-length cDNA
sequences from Incyte General's proprietary sequence database, for development
as potential pharmaceutical, diagnostic or other products. Any potential product
that is the subject of such a license will require several years of further
development, clinical testing and regulatory approval prior to
commercialization. Accordingly, Incyte General does not expect to receive any
milestone or royalty payments from any such licenses for a substantial period of
time, if at all.
Fluctuations in Operating Results. Incyte General's operating results
may fluctuate significantly from quarter to quarter as a result of a variety of
factors, including: changes in the demand for Incyte General's products and
services; the pricing of database access to database collaborators; the nature,
pricing and timing of other products and services provided to Incyte General's
collaborators; changes in the research and development budgets of Incyte
General's collaborators and potential collaborators; capital expenditures;
acquisition and licensing costs and other costs related to the expansion of
Incyte General's operations, including operating losses of acquired businesses
such as Synteni; the introduction of competitive databases or services; and
expenses related to, and results of, litigation and other proceedings relating
to intellectual property rights. In particular, Incyte General has a limited
ability to control the timing of database installations, there is a lengthy
sales cycle required for Incyte General's database products, Incyte General's
revenue levels are difficult to forecast, the time required to complete custom
orders can vary significantly and Incyte General's increasing investments in
external alliances could result in significant quarterly fluctuations in
expenses due to the payment of milestones, license fees or research payments.
Incyte General's equity investments may require Incyte General to record
charges for the acquisition of in-process technologies, or to record charges for
recognition of the impairment in the value of the securities underlying such
investments. See "--Factors Relating to Both Incyte General and Incyte
Genetics--Fluctuations in Operating Results."
To date, Incyte General has not recognized any significant losses on its
long-term equity investments. Due to the recent stock market volatility, certain
investments held by Incyte General are below the investments book value. The
decrease in the market price of these investments is considered temporary and
therefore no change in the carrying value of the investments is considered
necessary at this time. Incyte General will continue to evaluate its long-term
equity investments for impairment on a quarterly basis.
The need for continued investment in development of Incyte General's
databases and related products and services and for extensive ongoing
collaborator support capabilities results in significant fixed expenses. If
revenue in a particular period does not meet expectations, Incyte General may
not be able to adjust significantly its level of expenditures in such period,
which would have an adverse effect on Incyte General's operating results. Incyte
General may also experience difficulty in forecasting levels of operating
expenditures for, and integration-related expenses with respect to, subsidiaries
acquired through acquisitions, at least until a substantial period of time has
passed since the acquisition date. This is particularly true when attempting to
forecast expenditure levels for acquired businesses that focus on technologies
for which there is not yet an established market. Incyte General believes that
quarterly comparisons of its financial results will not necessarily be meaningfu
and should not be relied upon as an indication of future performance. Due to the
foregoing and other unforeseen factors, it is likely that in some future quarter
or quarters, Incyte General's operating results will be below the expectations
of public market analysts and investors. In such event, the price of Incyte
General's Common Stock would likely be materially and adversely affected.
Competition and Technological Changes. There are a finite number of
genes in the human genome, and competitors may seek to identify, sequence and
determine in the shortest time possible the biological function of a large
number of genes in order to obtain a proprietary position with respect to the
largest number of new genes discovered. There are a number of companies, other
institutions, and
<PAGE>
government-financed entities engaged in gene sequencing, gene discovery, gene
expression analysis, positional cloning and other genomic service businesses.
Many of these companies, institutions and entities have greater financial and
human resources than Incyte General. In addition, Incyte General is aware that
other companies have developed genomic databases and are marketing, or have
announced their intention to market their data to pharmaceutical companies.
Incyte General expects that additional competitors may attempt to establish gene
sequence, gene expression or other genomic databases in the future.
In addition, competitors may discover and establish patent positions
with respect to gene sequences in Incyte General's databases. Further, certain
entities engaged in gene sequencing have made the results of their sequencing
efforts publicly available. Celera Genomics Corporation ("Celera") has the goal
of sequencing the entire human genome within three years and intends to make the
sequence information publicly available. The public availability of gene
sequences or resulting patent positions comprising substantial portions of the
human genome or microbial or plant genomes could decrease the potential value of
Incyte General's databases to Incyte General's collaborators and adversely
affect Incyte General's ability to realize royalties or other revenue from
commercialization of products based upon this genetic information.
Some of Incyte General's competitors or potential competitors are in the
process of developing, and may successfully develop, proprietary sequencing
technologies that may be more advanced than the technology used by Incyte
General. In addition, Incyte General is aware that a number of companies are
pursuing alternative methods for generating gene expression information,
including some that have developed, and are developing, microarray technologies.
At least one other company currently offers microarray-based services that might
be competitive with those offered by Incyte General. These advanced sequencing
or gene expression technologies, if developed, may not be commercially available
for purchase or license by Incyte General on reasonable terms, if at all.
A number of companies have announced their intent to develop and market
software to assist pharmaceutical companies and academic researchers in the
management and analysis of their own genomic data, as well as the analysis of
sequence data available in the public domain. Some of these entities have access
to significantly greater resources than Incyte General, and their products may
achieve greater market acceptance than Incyte General's products.
Incyte General's databases also require extensive software support and
incorporate features determined by database collaborators' needs. If Incyte
General experiences delays or difficulties in implementing its database software
or collaborator-requested features, its ability to service its collaborators may
be adversely affected, which might have an adverse effect on Incyte General's
business and operating results.
The genomics industry is characterized by extensive research efforts and
rapid technological progress. To remain competitive, Incyte General will be
required to continue to expand its databases and to enhance the functionality of
its bioinformatics and database software. New developments are expected to
continue and discoveries by others may render Incyte General's services and
potential products noncompetitive.
Future Capital Needs; Uncertainty of Additional Funding. Based upon its
current plans, Incyte General believes that its existing resources and
anticipated cash flow from operations will be adequate to satisfy its capital
needs at least through the next twelve months. However, Incyte General may be
unable to obtain additional collaborators or retain existing collaborators for
its databases, and its database products and services may not produce revenues
which, together with the Incyte General's cash, cash equivalents, and marketable
securities, would be adequate to fund its cash requirements. Incyte General's
cash requirements depend on numerous factors, including: the ability of Incyte
General to attract and retain collaborators for its databases and products and
services; expenditures in connection with alliances, license
<PAGE>
agreements and acquisitions of and investments in complementary technologies and
businesses; competing technological and market developments; the cost of filing,
prosecuting defending and enforcing patent claims and other intellectual
property rights; the purchase of additional capital equipment, including capital
equipment necessary to ensure Incyte General's sequencing and microarray
operations remain competitive; capital expenditures required to expand Incyte
General's facilities; costs associated with the integration of new operations
assumed through mergers and acquisitions; and funding requ;irements of Incyte
Genetics. Incyte General has committed to Incyte Genetics to provide $20 million
in cash and will provide additional funding, as appropriate, in the form of
loans or investment. Incyte General expects to continue to fund future
operations with revenues from database products and services in addition to
using its current cash, cash equivalents, and marketable securities. Changes in
Incyte General's research and development plans or other changes affecting
Incyte General's operating expenses may result in changes in the timing and
amount of expenditures of Incyte General's capital resources. If additional
capital is raised through the sale of equity or convertible debt securities, the
issuance of these securities could result in dilution to Incyte General's
existing stockholders. Additional funding, if necessary, may not be available on
favorable terms, if at all. If adequate funds are not available, Incyte General
may be required to curtail operations significantly or to obtain funds through
entering into collaborative arrangements that may require Incyte General to
relinquish rights to certain of its technologies, product candidates, products
or potential markets.
Factors Relating to Incyte Genetics
New and Uncertain Business; Product Development Risk. Incyte Genetics'
business is based on products, including databases, and services to assist
pharmaceutical companies in the identification and correlation of genetic
variation to disease and drug response. This business is new and unproven.
Incyte Genetics' products will focus on SNPs, one type of genetic
variation. The role of SNPs in disease and drug response is not fully
understood, and relatively few therapeutic or diagnostic products based on SNPs
have been developed and commercialized. Incyte Genetics believes that
pharmaceutical companies will be interested in its products and services due to
their belief that certain SNPs correlate with a patient's disease prognosis,
disease susceptibility, ability to respond to a particular drug or class of
drugs and in particular with a patient's susceptibility to adverse drug
reactions. With the exception of a few anecdotal examples, these correlations
between SNPs and disease and drug response are unproven. Furthermore, the
process to identify statistically significant correlations is time-consuming and
could involve the collection and screening of a large number of patient samples.
Incyte Genetics has not yet discovered the SNPs that would be the subject of
these correlation studies, and does not currently have access to the patient
samples needed, or access to a technology proven to be able to rapidly detect
pre-determined SNPs reproducibly and at a low cost in large numbers of patient
samples. Most SNPs may occur at a frequency in the population that is too low to
warrant their use in analyzing genetic variation in patients. It may be
difficult to identify SNPs that both correlate with patient disease and drug
response as well as occur at a high enough frequency to justify their use by
pharmaceutical companies in drug development or in disease management. Incyte
Genetics' strategy of using high-throughput mutation detection processes and
sequencing to identify SNPs and genes rapidly and obtain proprietary rights in
as many SNPs and genes as possible is also unproven. In addition, ethical and
social concerns about the confidentiality of patient specific genetic
information and about the use of genetic testing for diagnostic purposes could
adversely affect the market acceptance of Incyte Genetics' products or those
developed by its collaborators.
Incyte Genetics' success will also depend upon its ability to develop,
use and enhance new and relatively unproven technologies. Among other things,
Incyte Genetics will need to improve the throughput of Hexagen's fSSCP
SNP-discovery technology. Incyte Genetics may not be able to achieve these
necessary improvements and other factors may impair its ability to develop the
LifeSNP database. The failure to rapidly develop this database would adversely
affect Incyte Genetics' business and results of operations.
Early Stage of Development; Anticipated Operating Losses. Incyte
Genetics is at an early stage of
<PAGE>
development. To date, it has generated only limited revenues from database
agreements. All of these revenues relate to the LifeSeq Atlas(TM) database
previously developed by the Company. Hexagen, which will be an important part of
Incyte Genetics' business, was founded in 1996 and has generated no revenues to
date. Incyte Genetics' expansion of its research and development efforts will
require substantial increases in expenditures, including the hiring of a
substantial number of new employees, over the next several years. As a result,
Incyte Genetics currently expects to incur operating losses for at least the
next few years. Incyte Genetics may never achieve significant revenues or
profitable operations.
Incyte Genetics believes that, for the next couple of years, it will
derive the majority of its revenues from fees paid by pharmaceutical companies
in return for access to Incyte Genetics' databases and from fees paid by
pharmaceutical companies in return for pharmacogenetic and directed SNP program
services. The latter services are not yet offered. Incyte Genetics' LifeSNP and
LifeSeq Genome databases are being developed and currently generate no fees.
Incyte Genetics' ability to generate significant revenues will depend upon its
ability to attract and retain pharmaceutical partners as database subscribers.
Only a limited number of pharmaceutical companies are potential subscribers for
Incyte Genetics' proposed products and services due to their nature and price.
These companies may choose to conduct SNP discovery and analysis in-house, to
form an industry consortium, or to work with Incyte Genetics' competitors.
Incyte Genetics has not entered into any database or service agreements other
than agreements relating to the existing LifeSeq Atlas mapping database, and it
may be unable to attract any additional subscribers. Incyte Genetics expects
that the database agreements will provide for the payment of milestone and
royalty payments from the sale of drugs, diagnostic products and genotyping
products derived from the information within the databases. Subscribers may not
develop such products or may encounter delays and difficulties in developing and
commercializing products based on Incyte Genetics' products and services. Any
product developed by a database subscriber will require several years of
development, clinical testing and regulatory approval prior to
commercialization. Accordingly, Incyte Genetics does not expect to receive any
milestone or royalty payments under any collaborative arrangement for a
substantial period of time, if at all.
The level of demand for Incyte Genetics' products and services will be
unpredictable due to a number of other factors, including: the possible
emergence of competitors offering similar or superior products and services at
competitive prices; the extent to which the information in Incyte Genetics' and
the Company's databases is made public or is the subject of patents issued to
others; Incyte Genetics' ability to establish and enforce proprietary rights to
its products; regulatory developments or changes in public perceptions relating
to the use of genetic information and the diagnosis and treatment of disease
based on genetic information; and technological innovations in gene sequencing,
mapping and SNP discovery and detection. Incyte Genetics' ability to achieve
profitability will also depend upon the level of expenditures necessary to
support its services to subscribers, and the extent to which it incurs research
and development, investment, acquisition-related or other expenses.
Incyte Genetics' operating results will be affected by losses and
expenses relating to its equity interest in diaDexus and any other strategic
investments Incyte Genetics might make in the future. Although it has no
specific plans at this time, Incyte Genetics will consider making strategic
equity investments in businesses perceived to be complementary. These
investments may be illiquid, may require Incyte Genetics to record losses or
expenses related to its proportionate ownership interest, to record charges for
acquisition of in-process technologies, or to record charges relating to the
impairment in the value of its investments. In addition, any investments in
external alliances could result in significant quarterly fluctuations in
expenses due to the payment of milestones, license fees or research payments.
Uncertain Effects of the Hexagen Acquisition. The acquisition of Hexagen
involves several potential risks, including the uncertainties associated with
attempting to integrate Hexagen's and Incyte Genetics's businesses, management,
technologies and research and development efforts. This integration has begun
only very recently, and it may result in a loss of efficiency or employees, or
may otherwise be unsuccessful. The timely development of the LifeSNP database
will depend upon the successful integration of Hexagen's fSSCP
<PAGE>
technology into Incyte Genetics' technologies and processes, and also upon
Incyte Genetics' ability to improve the throughput of Hexagen's fSSCP
technology. Incyte Genetics may not be able to achieve these necessary
improvements. The discovery of SNPs is a competitive area and other companies
may develop or obtain access to SNP discovery and detection platforms, which
Incyte Genetics may not be provided access to, that may make Hexagen's fSSCP
technology obsolete.
Need for Additional Funding. Incyte Genetics will require substantial
additional funding to develop its databases and other products and services, and
to market any products and services that may be developed. Incyte Genetics
currently anticipates requiring total funds of approximately $100 million to
$150 million through the year 2000. Initially, Incyte General has committed to
provide Incyte Genetics with $20 million in cash. Incyte Genetics intends to
fund the remainder of its anticipated cash requirements from third-party
sources, including database subscription revenues, strategic equity investments
from pharmaceutical companies and/or the proceeds from an Incyte Genetics Public
Offering. Other than the LifeSeq AtlasTM database revenues Incyte Genetics
currently has no other database subscribers and has no commitments for equity
investments. Incyte Genetics' ability to fund its anticipated cash requirements
is difficult to predict and dependent on a number of factors, some of which are
under the control of Incyte Genetics, and many of which are not. These factors
include the receptivity of pharmaceutical companies to Incyte Genetics'
products, the utility of SNPs, the ability to raise capital from the equity
markets, the effect of competitive efforts, and the progress of Incyte Genetics'
research and development efforts. Additional funding may not be available on
favorable terms or at all. If adequate funds are unavailable, Incyte Genetics
may be required to curtail its research and development and other operations
significantly. If operations are curtailed significantly, Incyte Genetics'
products and services may not develop in a sufficiently timely manner and its
long-term prospects may be materially and adversely affected. In addition, if
additional capital is raised through the sale of equity or convertible debt
securities, the existing holders of Incyte Genetics Stock could be diluted.
Competition and Technological Changes. A number of companies,
institutions, and government-financed entities are engaged in the study of
genetic variation, including gene sequencing, mapping and polymorphism discovery
or detection. Many of these companies, institutions and entities have greater
financial and human resources than Incyte Genetics. At least three other
companies, Celera, Affymetrix, Inc. and Genset, S.A., have announced their
intent to market mapping, sequence and/ or polymorphism data to the
pharmaceutical industry. Incyte Genetics expects that additional competitors may
attempt to establish databases containing such information in the future and
that competition in the industry will continue to intensify.
In addition, competitors may discover and establish patent positions
with respect to gene sequences and polymorphisms in Incyte Genetics' databases.
One company, Celera, has announced its intention to make the results of its
genomic sequencing efforts publicly available. Competitors' patent positions or
the public availability of gene sequences and polymorphisms could decrease the
potential value of Incyte Genetics' databases and services to the Incyte
Genetics' collaborators and adversely affect the Incyte Genetics' ability to
realize royalties or other revenue from commercialization of products based upon
such information.
The gene sequencing machines that are utilized in Incyte Genetics' high
throughput computer-aided genomic sequencing operations are commercially
available and are currently being utilized by at least one competitor. Moreover,
the majority owner of Celera has announced the development of a new gel-based
sequencing machine that it expects to have ready for commercial production in
early 1999, and that a large number of such sequencing machines will be provided
to Celera. See "--Factors Relating to Both Incyte General and Incyte
Genetics--Dependence on Others."
The SNP discovery platform used by Incyte Genetics represents a
modification of a process that is in the public domain. Although the patent
protection is being sought for these improvements, no patents have yet been
issued. Other companies could make similar or superior improvements in this
process without providing access to the Company to these improvements.
<PAGE>
Incyte Genetics expects that its databases will require extensive
software support and will need to incorporate features determined by database
collaborators. If Incyte Genetics is delayed or has problems implementing its
database software or collaborator-requested features, its ability to service its
collaborators may be adversely affected. This could adversely affect Incyte
Genetics' business and operating results.
The genomics and pharmacogenetics industries are characterized by
extensive research efforts and rapid technological progress. To remain
competitive, Incyte Genetics will have to expand its databases rapidly, enhance
the functionality of its bioinformatics and database software and invest in new
technologies. In particular, the development of the LifeSNP database will
require improvements in the throughput of Hexagen's SNP discovery technology.
New developments in the industry are expected to continue, and discoveries by
others may render Incyte Genetics' potential products and services
noncompetitive.
Dependence on Incyte General. Incyte Genetics has made no investment in
marketing or product sales resources, and currently intends to rely upon Incyte
General's marketing and sales staff to market all of the potential products and
services to be developed by Incyte Genetics. Sufficient marketing resources may
not be available to Incyte Genetics when needed, and the Company may determine
that Incyte Genetics needs to have its own marketing and sales staff, which
could be difficult and expensive t create. In addition, Incyte Genetics will
depend on the sequencing operations of Incyte General. This operation needs to
be expanded significantly in order to meet the needs of Incyte Genetics' genomic
sequencing program. If sufficient sequencing resources are not available to
Incyte Genetics, it may be required to build its own operations or seek third
parties capable of meeting Incyte Genetics' sequencing needs. If third party
sequencing is needed, there is no assurance that such sequencing capacity would
be available, or if not available, that Incyte Genetics would have the resources
to build its own operations. Even if Incyte Genetics had sufficient resources,
this might cause significant delay in its ability to generate sequence and SNP
data or meet potential future obligations under database subscription
agreements.
Management of Incyte Genetics. Incyte Genetics has only recently been
formed and its management team is still being completed. Randal W. Scott,
President and Chief Scientific Officer of the Company, is also acting as Chief
Executive Officer of Incyte Genetics. Mark Bodmer, formerly Chief Executive
Officer of Hexagen, has been appointed President of Incyte Genetics. See
"--Factors Relating to Both Incyte General and Incyte Genetics--Dependence on
Key Employees" and "--Factors Relating to Incyte Genetics--Uncertain Effects of
the Hexagen Acquisition."
<PAGE>
ANNEX J: CERTAIN SCIENTIFIC TERMS
Bioinformatics: The application of computational tools (algorithmic,
database and hardware) to the understanding of complex
biological problems and to process, interpret and
integrate the very large quantities of biological
information.
Chromosome: DNA is tightly coiled and organized into discrete units,
known as chromosomes. Human DNA is organized into 23
chromosomes. Every cell within our body contains two pairs
of identical sets of chromosomes.
Clinical Trial: Any investigation in human subjects intended to discover
or verify the clinical, pharmacological and/or other
pharmacodynamic effects of an investigational product.
DNA: DNA or deoxyribonucleic acid is a linear strand of four
nucleotides: adenine (A), thymine (T), guanine (G) and
cytosine (C), also referred to as "bases". The linear
sequence of these nucleotides codes for all of the
information required for the functions of living
organisms, (the "genetic code"). Genomic DNA occurs as a
double-stranded molecule, where one strand is paired with
another, in a helical form (hence the term
"double-helix"). The nucleotide A in one strand is always
found paired with the nucleotide T in the other strand,
and the nucleotide C is always paired with the nucleotide
G. The human genome contains approximately three billion
base pairs.
Genes: Genes are the fundamental basis of heredity. They
represent discrete regions of the DNA, consisting of an
ordered sequence of nucleotides, which contain the
instructions for the production of proteins, which mediate
all the functions of an organism. Genes are also referred
to as the 'coding region' of DNA. The human genome is
estimated to contain 100,000 - 150,000 genes, representing
only about 5% of the three billion nucleotide bases in
DNA.
Genome: An organism's genome refers to its total complement of
DNA.
Genomics: Broadly defined as the discovery and analysis of the
structure (sequence), expression and function of all the
genes in the genome.
Genetics: The study of the heredity of genes, sequence diversity
between individuals and how such sequence variation
affects the function of the gene.
Gene mapping: Determination of the relative position of genes
on a DNA molecule and of the distance between neighboring
genes.
Pharmacogenomics: The application of genomics to discover genes and their
functions which mediate disease and drug response.
Pharmacogenetics: The application of Genetics to discover the effects that
gene sequence differences between individuals have on drug
response.
<PAGE>
Polymorphisms: DNA sequence differences in the same DNA region which
occur among individuals.
SNPs: Single Nucleotide Polymorphisms representing single base
variation at a particular position along the DNA sequence,
when comparing a DNA region from one individual with its
equivalent from another.
<PAGE>
PROXY PROXY
INCYTE PHARMACEUTICALS INC.
PROXY SOLICITED ON BEHALF OF THE BOARD OF DIRECTORS
FOR SPECIAL MEETING -- [MEETING DATE], 1998
ROY A. WHITFIELD, RANDAL W. SCOTT and DENISE M. GILBERT, or any of them, each
with the power of substitution, are hereby authorized to represent as proxies
and vote all shares of stock of Incyte Pharmaceuticals, Inc. (the "Company") the
undersigned is entitled to vote with respect to the proposals set forth below
and in the discretion of such proxies on all other matters that may properly be
presented for action at the Special Meeting of Stockholders of the Company to be
held at the [Stanford Park Hotel, 100 El Camino Real, Menlo Park,] California on
[DAY], [MEETING DATE], 1998 at [_____a.m.] or at any postponement or adjournment
thereof, and instructs said proxies to vote as follows:
Shares represented by this proxy will be voted as directed by the stockholder.
If no such directions are indicated, the proxies will have authority to vote FOR
proposals 1, 2, 3 and 4.
- ------------------------------------------------------------------------------
FOLD AND DETACH HERE
(continued and to be signed on the reverse side)
<PAGE>
<TABLE>
<CAPTION>
The Board of Directors recommends a vote FOR proposals 1, 2, 3 and 4.
Please mark your votes as
indicated in this example [X]
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
1. To approve the Incyte FOR AGAINST ABSTAIN 3. To approve the FOR AGAINST ABSTAIN
Genetics Stock amendment of the
Proposal, including Company's 1997
the amendment and Employee Stock
restatement of the Purchase Plan related
Company's Restated to the Incyte Genetics
Certificate of Stock Proposal.
Incorporation
2. To amend the 1991 FOR AGAINST ABSTAIN 4. To approve the FOR AGAINST ABSTAIN
Stock Plan related to amendment of the
the Incyte Genetics Company's 1993
Stock Proposal Director's Stock
Option Plan related to
the Incyte General
Stock Proposal.
</TABLE>
PLEASE MARK, SIGN, DATE AND
PROMPTLY RETURN THIS
PROXY IN THE ENCLOSED
ENVELOPE.
Signature(s)__________________________________________Dated:______________, 1998
Please sign exactly as your name or name(s) appear in this proxy. When signing
as attorney, executor, trustee or guardian, please give your full title as such.
If shares are held jointly, each holder should sign
- ------------------------------------------------------------------------------
FOLD AND DETACH HERE
