<PAGE>
AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON SEPTEMBER 3, 1998
REGISTRATION NO. 333-59271
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
------------------------
AMENDMENT NO. 1
TO
FORM S-1
REGISTRATION STATEMENT
UNDER
THE SECURITIES ACT OF 1933
------------------------
LIFECODES CORPORATION
(EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)
<TABLE>
<S> <C> <C>
DELAWARE 8071 52-1823048
(STATE OR OTHER JURISDICTION OF (PRIMARY STANDARD INDUSTRIAL (I.R.S. EMPLOYER
INCORPORATION OR ORGANIZATION) CLASSIFICATION CODE NUMBER) IDENTIFICATION NUMBER)
</TABLE>
------------------------
550 WEST AVENUE
STAMFORD, CONNECTICUT 06902
(203) 328-9500
(ADDRESS, INCLUDING ZIP CODE, AND TELEPHONE NUMBER,
INCLUDING AREA CODE, OF REGISTRANT'S PRINCIPAL EXECUTIVE OFFICES)
------------------------
WALTER O. FREDERICKS
PRESIDENT AND CHIEF EXECUTIVE OFFICER
LIFECODES CORPORATION
550 WEST AVENUE
STAMFORD, CONNECTICUT 06902
(203) 328-9500
(NAME, ADDRESS, INCLUDING ZIP CODE, AND TELEPHONE NUMBER,
INCLUDING AREA CODE, OF AGENT FOR SERVICE)
------------------------
Copies of all communications, including all communications sent to the agent for
service, should be sent to:
<TABLE>
<S> <C>
NORMAN J. FLEMING, ESQ. MITCHELL S. BLOOM, ESQ.
WIGGIN & DANA TESTA, HURWITZ & THIBEAULT, LLP
ONE CENTURY TOWER HIGH STREET TOWER
265 CHURCH STREET 125 HIGH STREET
NEW HAVEN, CONNECTICUT 06508 BOSTON, MASSACHUSETTS 02110
TELEPHONE: (203) 498-4400 TELEPHONE: (617) 248-7000
</TABLE>
------------------------
APPROXIMATE DATE OF COMMENCEMENT OF PROPOSED SALE TO THE PUBLIC: As soon as
practicable after the effective date of this Registration Statement.
If any of the securities being registered on this form are to be offered on
a delayed or continuous basis pursuant to Rule 415 under the Securities Act of
1933, check the following box: / /
If this form is filed to register additional securities for an offering
pursuant to Rule 462(b) under the Securities Act, please check the following box
and list the Securities Act registration statement number of the earlier
effective registration statement for the same offering: / /
If this form is a post-effective amendment filed pursuant to Rule 462(c)
under the Securities Act, check the following box and list the Securities Act
registration statement number of the earlier effective registration statement
for the same offering: / /
If this form is a post-effective amendment filed pursuant to Rule 462(d)
under the Securities Act, check the following box and list the Securities Act
registration statement number of the earlier effective registration statement
for the same offering: / /
If delivery of the prospectus is expected to be made pursuant to Rule 434,
check the following box: / /
------------------------
THE REGISTRANT HEREBY AMENDS THIS REGISTRATION STATEMENT ON SUCH DATE OR
DATES AS MAY BE NECESSARY TO DELAY ITS EFFECTIVE DATE UNTIL THE REGISTRANT SHALL
FILE A FURTHER AMENDMENT WHICH SPECIFICALLY STATES THAT THIS REGISTRATION
STATEMENT SHALL THEREAFTER BECOME EFFECTIVE IN ACCORDANCE WITH SECTION 8(A) OF
THE SECURITIES ACT OF 1933 OR UNTIL THE REGISTRATION STATEMENT SHALL BECOME
EFFECTIVE ON SUCH DATE AS THE COMMISSION, ACTING PURSUANT TO SAID SECTION 8(A),
MAY DETERMINE.
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
<PAGE>
EXPLANATORY NOTE
This Registration Statement contains two forms of prospectus: one to be
used in connection with an underwritten offering of Common Stock (the 'IPO
Prospectus') and one to be used in connection with the issuance of shares of
Common Stock pursuant to the acquisition by the Registrant of the outstanding
shares of GeneScreen Inc. (the 'Acquisition Prospectus'). The IPO Prospectus and
the Acquisition Prospectus will be identical in all respects except for the
alternate pages of the Acquisition Prospectus included herein each of which is
labeled 'Alternate Page for Acquisition Prospectus.'
<PAGE>
INFORMATION CONTAINED HEREIN IS SUBJECT TO COMPLETION OR AMENDMENT. A
REGISTRATION STATEMENT RELATING TO THESE SECURITIES HAS BEEN FILED WITH THE
SECURITIES AND EXCHANGE COMMISSION. THESE SECURITIES MAY NOT BE SOLD NOR MAY
OFFERS TO BUY BE ACCEPTED PRIOR TO THE TIME THE REGISTRATION STATEMENT BECOMES
EFFECTIVE. THIS PROSPECTUS SHALL NOT CONSTITUTE AN OFFER TO SELL OR THE
SOLICITATION OF ANY OFFER TO BUY NOR SHALL THERE BE ANY SALE OF THESE SECURITIES
IN ANY STATE IN WHICH SUCH OFFER, SOLICITATION OR SALE WOULD BE UNLAWFUL PRIOR
TO REGISTRATION OR QUALIFICATION UNDER THE SECURITIES LAWS OF ANY SUCH STATE.
SUBJECT TO COMPLETION, DATED SEPTEMBER 3, 1998
PROSPECTUS
3,200,000 SHARES
[LOGO]
COMMON STOCK
------------------------
Of the 3,200,000 shares of Common Stock offered hereby, 2,900,000 shares
are being offered by Lifecodes Corporation ('Lifecodes' or the 'Company') and
300,000 shares are being offered by a certain stockholder of the Company (the
'Selling Stockholder'). The Company will not receive any of the proceeds from
the sale of shares by the Selling Stockholders. See 'Principal and Selling
Stockholders.' Prior to this offering, there has been no public market for the
Common Stock of the Company. It is currently anticipated that the initial public
offering price of the Common Stock offered hereby will be between $10.00 and
$12.00 per share. See 'Underwriting' for a discussion of the factors considered
in determining the initial public offering price. The Common Stock has been
approved for quotation on the Nasdaq National Market, subject to official notice
of issuance, under the symbol 'LFCD.'
------------------------
THE COMMON STOCK OFFERED HEREBY INVOLVES A HIGH DEGREE OF RISK.
SEE 'RISK FACTORS' ON PAGES 6-14.
------------------------
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND
EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION NOR HAS THE
SECURITIES AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION
PASSED UPON THE ACCURACY OR ADEQUACY OF THIS PROSPECTUS. ANY
REPRESENTATION TO THE CONTRARY IS A CRIMINAL OFFENSE.
[CAPTION]
<TABLE>
UNDERWRITING PROCEEDS TO
PRICE TO DISCOUNTS AND PROCEEDS TO SELLING
PUBLIC COMMISSIONS(1) COMPANY(2) STOCKHOLDERS
<S> <C> <C> <C> <C>
Per Share.................... $ $ $ $
Total(3)..................... $ $ $ $
</TABLE>
(1) The Company and the Selling Stockholder have agreed to indemnify the
several Underwriters against certain liabilities, including liabilities
under the Securities Act of 1933, as amended. See 'Underwriting.'
(2) Before deducting expenses payable by the Company estimated at $1,200,000.
(3) Certain Selling Stockholders have granted to the Underwriters a 45-day
option to purchase up to 480,000 additional shares of Common Stock on the
same terms and conditions set forth above solely to cover over-allotments,
if any. If the Underwriters exercise this option in full, the total Price
to Public, Underwriting Discounts and Commissions, Proceeds to Company and
Proceeds to Selling Stockholders will be $ , $ , $ and
$ , respectively. See 'Underwriting.'
------------------------
The shares of Common Stock are offered by the several Underwriters named
herein, subject to prior sale, when, as and if accepted by them and subject to
certain conditions. The Underwriters reserve the right to withdraw, cancel or
modify such offer and to reject orders in whole or in part. It is expected that
the certificates for the shares of Common Stock will be available for delivery
at the offices of Volpe Brown Whelan & Company, LLC, One Maritime Plaza, San
Francisco, California, on or about , 1998.
VOLPE BROWN WHELAN & COMPANY
VECTOR SECURITIES INTERNATIONAL, INC.
ADVEST, INC.
THE DATE OF THIS PROSPECTUS IS , 1998
<PAGE>
[Map showing the locations of the Company's Testing Laboratories
and Primary Offices]
CERTAIN PERSONS PARTICIPATING IN THIS OFFERING MAY ENGAGE IN TRANSACTIONS THAT
STABILIZE, MAINTAIN OR OTHERWISE AFFECT THE PRICE OF THE COMMON STOCK, INCLUDING
BY ENTERING STABILIZING BIDS, EFFECTING SYNDICATE COVERING TRANSACTIONS OR
IMPOSING PENALTY BIDS. FOR A DESCRIPTION OF THESE ACTIVITIES, SEE
'UNDERWRITING.'
2
<PAGE>
PROSPECTUS SUMMARY
The following summary is qualified in its entirety by the more detailed
information, including information set forth in 'Risk Factors,' 'Unaudited Pro
Forma Condensed Combined Financial Data' and the Consolidated Financial
Statements, including Notes thereto, included elsewhere in this Prospectus.
Unless otherwise indicated, all information in this Prospectus has been adjusted
to give retroactive effect to the split of the Common Stock at the rate of
3.65-for-1, effected August 26, 1998, and assumes (i) the consummation of the
GeneScreen Acquisition described under the heading 'Business--Recent and Pending
Acquisitions' and '--GeneScreen Acquisition' to be completed contemporaneously
with the closing of this offering, (ii) the Underwriters' over-allotment option
is not exercised and (iii) the conversion of 21,500 shares of Series A
Convertible Preference Stock ('Preferred Stock') into 156,950 shares of Common
Stock at a rate of 7.3 shares of Common Stock for each share of Preferred Stock
upon the closing of this offering. This Prospectus contains forward-looking
statements which involve risks and uncertainties. The Company's actual results
may differ materially from those results discussed in those forward-looking
statements and from results historically experienced. Factors that might cause
such a difference include, but are not limited to, those discussed in 'Risk
Factors.'
THE COMPANY
Lifecodes is a leading provider of DNA testing services and related
products for human paternity and forensic identification ('identity testing')
and for genetic typing of potential donors and recipients of bone marrow and
organ transplants ('transplant testing'). Paternity testing seeks to establish
the correct identity of a child's parents when such matters are disputed.
Forensic testing seeks to link hair, saliva, blood or other biological specimens
found at a crime scene to an alleged suspect. Transplant testing detects the
genetic sequence of certain human leukocyte antigens ('HLA') contained in DNA
which are believed to be a principal determinant of whether a donor's bone
marrow or organ transplant may be rejected by the recipient's immune system
('rejection') or may attack the recipient's immune system ('graft vs. host
disease'). The Company is one of the largest providers of paternity, forensic
and transplant testing services in the United States and is one of the largest
providers of transplant testing in Germany. In addition to testing services, the
Company offers a product line consisting of reagents and a wide range of DNA
probes, which are sold principally in either standard configurations or
customized test kits.
Lifecodes was the first company to commercially offer DNA testing for
paternity and forensic identification. In 1987, the Company assisted law
enforcement officials in obtaining the first conviction in the United States
based on DNA testing. The Company's Cellmark subsidiary was the first and is one
of only two commercial forensic laboratories accredited by the American Society
of Crime Laboratory Directors for DNA testing and regularly performs casework
and provides expert DNA testimony in criminal cases nationwide. The Company's
HLA test kits are used by the Naval Medical Research Institute and by 15 of the
19 screening laboratories (including two of the Company's laboratories)
performing DNA testing for the National Marrow Donor Program, which together are
generally regarded as being among the most influential institutions worldwide in
setting transplant testing standards.
Historically, the Company has focused on developing and incorporating its
DNA technology into products to be sold as stand-alone test kits and to a lesser
extent as DNA testing services. Since 1997, the Company has emphasized offering
testing services to end-users of DNA testing information in an effort to meet
demand for an integrated DNA testing solution and to take advantage of access to
new DNA testing process technologies from Molecular Dynamics, Inc., Amersham
Pharmacia Biotech Inc. and Molecular Innovations, Inc. which the Company
believes, when fully developed, will improve the speed, quality and breadth of
information provided by its testing services at a reduced cost. In addition, the
Company believes this strategy will allow the Company to exploit opportunities
not otherwise available to it as a marketer of DNA testing products.
Since January 1, 1998, the Company has substantially increased its testing
service revenue base and expanded its market coverage and laboratory
infrastructure by completing the acquisitions of (i) National Legal Laboratories
('NLL'), the fifth largest paternity testing laboratory in the United States,
(ii) International Support for Bone Marrow Drives, Ltd. ('ISBMD'), one of the
largest providers of HLA testing services in Germany, (iii) Micro Diagnostics,
Inc. ('MDx'), a full service DNA testing laboratory and (iv) Helix Biotech Ltd.
3
<PAGE>
('Helix'), a full service DNA testing laboratory serving the Canadian market
(collectively, the 'Recent Acquisitions'). In addition, the Company has entered
into an agreement to acquire GeneScreen Inc. ('GeneScreen') for cash and stock
valued at $12.5 million (the 'GeneScreen Acquisition'). GeneScreen is a leading
provider of paternity testing services and had revenues of $11.2 million during
the year ended December 31, 1997. The GeneScreen Acquisition will close
contemporaneously with this offering. See 'Business--Recent and Pending
Acquisitions' and '--GeneScreen Acquisition.' The Company intends to increase
its revenue and profitability by leveraging its DNA testing process technology,
currently under development, across its existing and acquired laboratory
operations and those which it may acquire in the future and, to a lesser extent,
by taking advantage of operational efficiencies brought about as a result of a
larger laboratory infrastructure.
The Company's goal is to be the leading international supplier of
integrated DNA testing solutions. The Company's business strategy to meet this
goal consists of the following primary elements: (i) continuing to improve its
DNA testing process to increase the speed, quality and breadth of information
provided by its testing services and to lower its costs; (ii) pursuing strategic
acquisitions; (iii) expanding internationally through joint venture and
licensing arrangements; (iv) maintaining its industry leadership position by
working to set industry standards; and (v) extending the Company's technologies
into other diagnostic testing areas.
THE OFFERING
<TABLE>
<S> <C>
Common Stock being offered by:
The Company............................................ 2,900,000 shares
The Selling Stockholder................................ 300,000 shares
Common Stock to be outstanding after the offering........... 6,630,090 shares(1)
Use of proceeds............................................. For payment of the cash portion of the purchase
price of the GeneScreen Acquisition, repayment of
indebtedness, and for general corporate purposes,
including working capital and possible future
acquisitions. See 'Use of Proceeds.'
Proposed Nasdaq National Market symbol...................... LFCD
</TABLE>
- ------------------
(1) Based upon the number of shares outstanding on August 31, 1998. Does not
include: (i) 1,318,854 shares of Common Stock issuable upon the exercise of
stock options and warrants outstanding as of such date, of which 1,061,639
stock options and warrants were then exercisable; and (ii) 1,099,462
additional shares available for grant under the 1992 Employee Stock Option
Plan, the 1995 Employee Stock Option Plan and the 1998 Stock Plan. See
'Management--Stock Option Plans.'
4
<PAGE>
SUMMARY HISTORICAL CONSOLIDATED FINANCIAL DATA
<TABLE>
<CAPTION>
NINE MONTHS ENDED
FISCAL YEAR ENDED SEPTEMBER 30, JUNE 30,
--------------------------------------------------------- -----------------------
1993 1994 1995 1996 1997 1997 1998
--------- --------- --------- --------- --------- ----------- ---------
(UNAUDITED)
(IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA)
<S> <C> <C> <C> <C> <C> <C> <C>
STATEMENT OF OPERATIONS DATA:
Revenues........................... $ 2,402 $ 2,628 $ 3,534 $ 7,683 $ 15,065 $ 9,802 $ 16,519
Gross profit....................... 1,137 1,271 2,030 3,679 7,690 4,964 8,169
Income (loss) from operations...... (782) (205) 276 (334) 822 538 1,763
Net income (loss).................. (671) (391) 179 (576) 388 147 951
Net income (loss) per share
Basic............................ $ (0.56) $ (0.26) $ 0.12 $ (0.32) $ 0.18 $ 0.07 $ 0.39
Diluted.......................... $ (0.56) $ (0.26) $ 0.10 $ (0.32) $ 0.14 $ 0.05 $ 0.28
Weighted average common shares
outstanding
Basic............................ 1,199,627 1,498,807 1,555,053 1,803,761 2,159,902 2,161,946 2,426,504
Diluted.......................... 1,199,627 1,498,807 1,792,504 1,803,761 2,792,318 2,795,695 3,363,236
</TABLE>
<TABLE>
<CAPTION>
JUNE 30, 1998
-----------------------------------------
PRO FORMA
ACTUAL PRO FORMA(1) AS ADJUSTED(2)
------- ------------ --------------
(IN THOUSANDS)
<S> <C> <C> <C>
BALANCE SHEET DATA:
Cash and cash equivalents................................................ $ 1,285 $ 1,285 $ 22,549
Working capital.......................................................... 200 (193) 20,323
Total assets............................................................. 14,280 15,533 44,560
Total indebtedness(3).................................................... 3,750 4,400 4,232
Stockholders' equity..................................................... 4,124 4,626 32,102
</TABLE>
- ------------------
(1) Pro forma to reflect the acquisition of Helix as if it occurred on June 30,
1998. See 'Business--Recent and Pending Acquisitions.'
(2) Adjusted to reflect the consummation of the GeneScreen Acquisition and the
sale of 2,900,000 shares of Common Stock offered by the Company hereby at an
assumed initial public offering price of $11.00 per share and the
application of the estimated net proceeds therefrom. See 'Use of Proceeds'
and 'Capitalization.'
(3) Includes short-term and long-term borrowings and current maturities of
long-term debt including capital lease obligations. Also includes
approximately $931,000 of accounts receivable financing.
5
<PAGE>
RISK FACTORS
In addition to the other information in this Prospectus, the following
factors should be considered carefully in evaluating the Company and its
business before purchasing the shares of Common Stock offered hereby. This
Prospectus contains forward-looking statements which involve risks and
uncertainties. The Company's actual results may differ materially from those
results discussed in those forward-looking statements and from results
historically experienced. Factors that might cause such a difference include,
but are not limited to, those discussed in 'Risk Factors.'
Absence of Profits. After giving effect to the Recent and Pending
Acquisitions, the Company has, on a pro forma basis, incurred operating losses.
For the fiscal year ended September 30, 1997 and the nine months ended June 30,
1998, the Company incurred pro forma net losses of $1.3 million and $516,000,
respectively. The Company's ability to achieve profitability in the future will
depend on a variety of factors, including the Company's management of its
existing operations, the ability of the Company to successfully implement its
business strategy, the ability of the Company to integrate and increase the
profitability of recently acquired entities, the nature and extent of any future
acquisitions and general economic conditions. There can be no assurance that the
Company will be profitable in the future. See 'Management's Discussion and
Analysis of Financial Condition and Results of Operations,' 'Unaudited Pro Forma
Condensed Combined Financial Data' and the Consolidated Financial Statements and
Notes thereto, each included elsewhere in this Prospectus.
Fluctuations in Quarterly Operating Results. Variations in the Company's
results of operations have occurred from quarter to quarter and the Company may
experience significant fluctuations in results of operations on a quarter to
quarter basis in the future. Quarterly operating results will fluctuate due to
numerous factors, including: (i) the timing of the introduction and availability
of new or improved testing services and products; (ii) the timing and level of
expenditures associated with research and development activities; (iii)
seasonality in the Company's operating results; (iv) the Company's ability to
cost-effectively manage and integrate newly acquired entities; (v) variations in
laboratory efficiencies; (vi) the timing of establishment of strategic
technology licenses and the implementation of technology licenses under such
arrangements; (vii) changes in demand for its services and products based on
competition and changes in government regulation and other economic factors;
(viii) the timing of significant orders from customers; (ix) changes in pricing
and discounts; (x) variations in the mix of services and products sold; (xi) the
timing and level of expenditures associated with expansion of sales and
marketing activities and overall operations; and (xii) general economic
conditions. Many of these factors are difficult to forecast or are beyond the
Company's control, and these or other factors could have a material adverse
effect on the Company's business, financial condition and results of operations.
Specifically, the Company's operations are subject to certain seasonal and
market forces that are difficult for management to anticipate or control. In
particular, drives to find potential donors of bone marrow tend to occur in the
spring and fall with the result that the Company's second and fourth fiscal
quarters (winter and summer quarters) may not be as strong financially as its
first and third fiscal quarters. Furthermore, the Company generally provides
testing services as and when required by its customers and therefore does not
typically have significant backlog. Fluctuations in quarterly demand for the
Company's testing services and products may adversely affect the continuity of
the Company's laboratory operations, increase uncertainty in operational
planning and/or affect cash flows from operations. In addition, as a result of
these fluctuations, it is likely that in some future period the Company's
results will not meet the expectations of public market security analysts or
investors. In such event, the price of the Common Stock could be adversely
affected. See 'Management's Discussion and Analysis of Financial Condition and
Results of Operations--Quarterly Results of Operations.'
Management of Growth and Integration of Recently Completed and Pending
Acquisitions. Since January 1, 1998, the Company has completed four
acquisitions of businesses involved in providing laboratory services or
contracting for laboratory services in the fields of identity and transplant
testing. The Company is in the process of implementing a number of changes to
integrate these businesses into the Company, including but not limited to,
changing or eliminating management, implementing programs to reduce the cost of
purchased materials, implementing financial controls and consolidating
administrative functions. There can be no assurance that the Company will be
successful in implementing such changes or that such changes will be adequate to
enable the Company to generate profits from the historically unprofitable
operations acquired or to maintain the profitability of historically profitable
operations. In addition to these completed acquisitions, the GeneScreen
Acquisition, as well as the overall implementation of the Company's acquisition
strategy, will place significant
6
<PAGE>
strain on the Company's administrative, operational and financial resources and
increased demands on its systems and controls. The Company's ability to manage
its growth successfully will require it to continue to improve and expand such
systems and controls. The failure of the Company's management to manage growth
effectively may have a material adverse effect on the Company's business,
financial condition and results of operations.
Risks Related to Acquisition Strategy. A principal element of the
Company's strategy is to increase revenues and profitability through the
acquisition of laboratories engaged in DNA testing. The ability of the Company
to achieve this objective will depend upon a variety of factors, including
finding appropriate companies, acquiring such companies on commercially
reasonable terms and conditions, making such acquisitions profitable under the
Company's control, the integration of such companies into existing operations,
the hiring, training and retention of qualified personnel, and the availability
of capital necessary to make such acquisitions. Acquisitions involve a number of
risks, including diversion of management's attention, whether or not the target
is ultimately acquired, failure to retain key customers and employees,
unanticipated liabilities, and tax and accounting issues. In addition, the
Company competes for acquisition and expansion opportunities with a number of
companies, many of which have significantly greater financial and management
resources than does the Company. There can be no assurance that suitable
acquisition opportunities will be identified, that any such transactions can be
consummated, or that, if acquired, such new businesses can be integrated
successfully and profitably into the Company's operations. If the Company
consummates one or more significant acquisitions in which the consideration
consists of stock, or is financed with the net proceeds of the issuance of
stock, stockholders of the Company could suffer a significant dilution of their
equity interests. In addition, if the Company were to complete an acquisition
outside the United States, the Company's business may be subject to a variety of
risks affecting international operations, including difficulties in collecting
accounts receivable, potentially longer payment cycles, increased costs
associated with maintaining international marketing efforts, currency
fluctuations, changes in regulatory requirements, and difficulties in
enforcement of contractual obligations and intellectual property rights. There
can be no assurance that such factors would not have a material adverse effect
on the Company's business, financial condition and results of operations.
Uncertainties Relating to Technological Development and Improvements to DNA
Testing Process. Due to rapid product development and technological advancement
in the medical diagnostics and DNA testing industry, the Company's growth and
future operating results will depend, in significant part, upon its ability to
apply new technologies to automate and improve its DNA testing services and
modify its existing products to take advantage of new technologies. There can be
no assurance that the Company's development efforts will result in any
additional commercially viable or successful improvements to its testing
processes or products. Any potential improvements to the testing process or new
product will require substantial additional investment, laboratory development
and clinical testing, and possibly regulatory approvals, prior to
commercialization. The Company's inability to successfully develop improvements
to its testing processes or new products or to achieve market acceptance of such
improvements or new products could have a material adverse effect on the
Company's business, financial condition and results of operations. In addition,
the rapid product development and technological advancement in the medical
diagnostics and DNA testing industry could result in the Company's current or
future services or products becoming obsolete. The Company believes that its
future operating results will depend substantially upon its ability to overcome
significant technological challenges, successfully introduce new technologies
into its laboratories and to gain access to and successfully integrate such
technologies if developed by others. See 'Business--Testing Process and
Improvements.'
The Company is continuing its research and development activities with
respect to technology it has licensed from Molecular Dynamics, Inc. ('MDI'),
Amersham Pharmacia Biotech Inc. ('Amersham') and Molecular Innovations, Inc.
('Molecular Innovations') and technology it will gain access to pursuant to the
GeneScreen Acquisition. These technologies are currently at an early stage of
development. In order to fully develop and commercialize this technology, the
Company, alone or with others, must successfully develop, test, market and sell
DNA testing services based on this technology. The development of new DNA
testing technology is highly uncertain and subject to a number of significant
risks, including the possibilities that the potential improvements to the
testing process are found ineffective, fail to receive any necessary regulatory
approvals, are difficult or uneconomical to use on a large scale, fail to
achieve market acceptance or are precluded from commercialization by proprietary
rights of third parties. In addition, the improvements to the DNA testing
7
<PAGE>
process that the Company is pursuing will require extensive additional
development, testing and investment, as well as any regulatory approvals, prior
to commercialization. No assurance can be given that the Company's development
efforts will be successful, that required regulatory approvals will be obtained
or that any improvements to the DNA testing process, if introduced, will be
commercially successful. See 'Business-- Strategic Partnerships and
Relationships.'
Dependence on Licensed Technology. The Company's testing process and
related products incorporate technologies that are owned by third parties. As a
result, the Company's strategy for the improvement of its testing process and
the development and commercialization of related products depends on the
feasibility and continuity of arrangements with licensors. The Company has
obtained licenses for certain of these technologies and may be required to
obtain licenses for new technologies in the future. There can be no assurance
that the Company will be able to obtain or renew licenses for technology owned
by others on commercially reasonable terms, or at all, that it will be able to
develop alternative approaches if unable to obtain or renew licenses or that the
Company's current and future licenses will be adequate for the operation of the
Company's business. The failure to obtain or renew such licenses or identify and
implement alternative approaches could have a material adverse effect on the
Company's business, financial condition and results of operations. In
particular, the Company intends to improve its testing process by incorporating
the MDI Microarray system, which is comprised of a spotter and reader, and the
Amersham fluorescent dye technology, which is used to label probes used with the
MDI Microarray system. The Company, MDI and Amersham have entered into a
Technology Access Agreement covering the first phase of the Company's
development program. As the Company moves toward commercial use of the MDI
Microarray system, the Company will need to enter into further agreements with
Amersham and possibly MDI, including agreements regarding whether royalties must
be paid to MDI. The Company has also entered into a letter of intent with
Amersham regarding commercial use of the fluorescent dye technology, and is
currently negotiating a formal license agreement with Amersham. There can be no
assurance that the Company will be able to enter into additional definitive
agreements with MDI or Amersham on commercially acceptable terms, or at all.
Failure by the Company to maintain or finalize rights to such technology would
have a material adverse effect on the Company's business, financial condition
and results of operations. See 'Business--Patents and Proprietary Rights' and
'Business--Strategic Partnerships and Relationships.'
Reliance on Key Customer. During the fiscal year ended September 30, 1997
and nine months ended June 30, 1998, on a pro forma basis after giving effect to
the Recent and Pending Acquisitions as if they were consummated on October 1,
1996, Deutsche Knochenmarkspenderdatei gemeinnuetzige GmbH ('DKMS'), accounted
for approximately 15% and 12% of the Company's revenues, respectively. DKMS is a
German charitable foundation of which Prof. Dr. Gerhard Ehninger, a director of
the Company, is a founder and a member of its Board of Directors. See 'Certain
Transactions.' DKMS has utilized the Company to oversee the logistics, quality
and data management needed by DKMS or the organizers of its bone marrow specimen
collection drives. The Company does not have a written contract with DKMS to
provide testing services and there can be no assurance that DKMS will organize
bone marrow specimen drives in the future or that DKMS will continue to use the
Company to provide the testing services related to the specimen drives. The loss
of or substantial decrease in business from DKMS would have a material adverse
effect on the Company's business, financial condition and results of operations.
Uncertain Market Acceptance of DNA Typing for Bone Marrow and Organ
Transplants. The Company's DNA testing services and products are utilized to
type and screen the genetic sequence of certain human leukocyte antigens ('HLA')
of a donor in order to determine the compatibility of the donor's bone marrow or
organ to that of a potential recipient in a transplant procedure.
Incompatibility between the bone marrow or organ of the donor and the recipient
has been associated with the donated bone marrow or organ being rejected by the
recipient's immune system as well as with 'graft vs. host disease.' While
scientific evidence suggests that the HLA regions of DNA which have been
identified to date are indicative of compatibility between donor and recipient,
this evidence is not conclusive and research in this area is continuing.
Accordingly, there is a significant risk that the marketplace may not accept or
be receptive to the benefits of DNA typing for bone marrow and organ
transplants. Market acceptance of DNA typing and screening will depend upon the
ability of the Company and others to demonstrate both the scientific and
economic feasibility of DNA typing and its advantages over available
alternatives, including serology. There can be no assurance that DNA typing for
bone
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marrow and organ transplants will be accepted by the medical community or
generally. Failure of DNA typing to gain market acceptance would have a material
adverse effect on the Company's business, financial condition and results of
operations.
Dependence on Key Personnel; Ability to Attract and Retain Qualified
Personnel. The Company is highly dependent on the principal members of its
management and scientific staff, particularly its President and Chief Executive
Officer, Walter O. Fredericks, the loss of whose services might impede
achievement of its strategic objectives. The Company maintains 'key man' life
insurance on Mr. Fredericks in the amount of $2 million, of which the Company is
the sole beneficiary, but there can be no assurance that the proceeds will be
sufficient to offset the loss to the Company in the event of his death. The
Company does not maintain any insurance on the lives of its other senior
management or scientific staff. In addition, the Company has not entered into
employment agreements with any of its executive officers, nor has it entered
into noncompetition agreements with any such officers. The Company's success
will depend, in large part, on its ability to continue to attract, hire and
retain qualified senior management and scientific staff. There is intense
competition among major pharmaceutical and chemical companies, specialized
biotechnology firms and universities and other research institutions for
qualified personnel in the areas of the Company's activities. Loss of the
services of, or failure to hire and retain key scientific and technical
personnel could adversely affect the Company's business, financial condition and
results of operations. In addition, all of the stock options currently held by
many of the Company's key employees, including Mr. Fredericks, are vested.
Although the Company intends to grant additional stock options to key members of
management in the future, there can be no assurance that granting additional
shares of Common Stock or stock options will be sufficient to attract or retain
key employees.
Risks Related to International Sales. After giving effect to the Recent
and Pending Acquisitions, on a pro forma basis as if such acquisitions were
consummated on October 1, 1996, international sales accounted for approximately
21% and 19% of the Company's revenues for the fiscal year ended September 30,
1997 and the nine month period ended June 30, 1998, respectively. International
sales are subject to certain inherent risks, including difficulties in
collecting accounts receivable, potentially longer payment cycles, increased
costs associated with maintaining international marketing efforts, currency
fluctuations, changes in regulatory requirements, and difficulties in
enforcement of contractual obligations and intellectual property rights. Foreign
regulatory agencies often establish product standards different from those in
the United States and any inability to obtain or maintain foreign regulatory
approvals on a timely basis could have a material adverse effect on the
Company's business, financial condition and results of operations.
Dependence on Proprietary Technology; Uncertainty of Patent
Protection. The Company is the holder and the assignee of certain United States
patents covering genetic probe sequences and nucleic acid analysis methods
useful in the Company's DNA testing services and diagnostic test kits. However,
the issuance of a patent is not conclusive as to its validity or as to the
enforceable scope of the claims of the patent. There can be no assurance that
the Company's patents or any future patents will prevent other companies from
developing non-infringing similar or functionally equivalent testing services or
products or from successfully challenging the validity of the Company's patents.
Furthermore, there is no assurance that (i) any of the Company's future products
or processes will be patentable; (ii) any pending or additional patents will
issue to the Company in any appropriate jurisdiction; (iii) the Company's
processes or products will not infringe the patents of third parties; or (iv)
the Company will have the resources to defend against charges of infringement by
third parties or to protect its own patent rights. The inability of the Company
to protect its patent rights or infringement by the Company of the patent or
proprietary rights of others would have a material adverse effect on the
Company's business, financial condition and results of operations.
The Company's business consists of the sale of testing services and
products. In each area, the Company relies on a combination of patents,
trademarks, trade secrets, copyrights, and confidentiality agreements to protect
its proprietary technology, rights and know-how. The Company's success will
depend in part on its ability or the ability of its licensors or sub-licensors
to obtain patents, defend patents, maintain trade secrets, defend copyrights and
operate without infringing the proprietary rights of others, both in the United
States and in foreign countries. The position of companies relying upon
biotechnology is highly uncertain in general and involves complex legal and
factual issues, and no consistent policy has emerged regarding the breadth of
claims allowed in biotechnology patents. Although the Company and certain of the
Company's licensors and sub-licensors have filed patent applications relating to
technologies and discoveries used by the Company, there can be no assurance
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that patents will be issued as a result of such patent applications or that, if
issued, such patents will be sufficiently broad to afford protection against
competitors. The commercial success of the Company also will depend upon
avoiding the infringement of patents issued to third parties, obtaining licenses
to third parties' technologies and genetic discoveries and maintaining licenses
upon which certain of the Company's services are, or might be, based. In
particular, third parties, including potential competitors, have already filed
patent applications relating to a variety of genes and genetic mutations
underlying certain of the Company's services, and may in the future file
additional such patent applications. In the event that any such patents are
issued to such parties, such patents may preclude the Company, its licensors and
sub-licensors from providing DNA testing services and could require the Company
to enter into licenses with such parties or cease such activities. There can be
no assurance that any required licenses would be available on acceptable terms,
or at all.
Litigation, which could result in substantial cost to the Company, may be
necessary to determine the scope and validity of others' proprietary rights or
to enforce the Company's patent, copyright, trade secret and license and
sublicense rights. The failure by the Company to obtain any such licenses, if
required, and the Company's involvement in such litigation could have a material
adverse effect on the Company's business, financial condition and results of
operations.
The Company also relies on certain technologies, trade secrets and know-how
that are not patentable or proprietary and are available to the Company's
competitors. Although the Company has taken steps to protect its unpatented
technologies, trade secrets and know-how, in part through the use of
confidentiality agreements with its employees, consultants and certain of its
contractors, there can be no assurance that these agreements will not be
breached, that the Company would have adequate remedies for any breach or that
the Company's trade secrets will not otherwise become known or be independently
developed or discovered by competitors. See 'Business-- Patents and Proprietary
Rights.'
Competition. The Company competes in the medical diagnostics, laboratory,
biotechnology and medical services industries, each of which is characterized by
numerous competitors, extensive research and development efforts and rapid
technological progress. Among the Company's major competitors in the market for
DNA probe diagnostics products are The Perkin-Elmer Corporation, Roche Molecular
Systems, Inc. ('Roche'), Promega Corporation ('Promega'), Affymetrix, Inc.,
Myriad Genetics, Inc., Abbott Laboratories and Chiron Corporation. Many of these
competitors have substantially greater financial, technical and sales and
marketing resources than the Company. Other companies, including large
pharmaceutical and biotechnology companies, may enter the market for DNA probe
diagnostics or have already commenced research and development in the field.
Moreover, such competitors may offer broader product lines and have greater name
recognition than the Company, and may offer discounts as a competitive tactic.
In addition, competitive products may be designed, manufactured and marketed
more successfully than the Company's existing or potential products. Such
developments could render the Company's products less competitive or obsolete,
and could have a material adverse effect on the Company's business, financial
condition and results of operations.
In many instances, the Company's larger laboratory service competitors,
such as Laboratory Corporation of America Holdings, have substantially greater
financial, technical, research and other resources and larger, more established
marketing, sales, distribution and service organizations than the Company.
Certain competitors may also offer a broader array of testing services than the
Company. In addition, several development stage companies have entered the
market for DNA testing services and have test offerings that compete with or
will compete with those of the Company. The Company's future success will depend
in large part on its ability to maintain a competitive position in the quality
of service it provides to its laboratory service customers. The Company's
inability to consistently deliver accurate and timely services at a competitive
price could have a material adverse effect on the Company's business, financial
condition and results of operations.
The public segment of the forensics testing market includes the Federal
Bureau of Investigation (the 'FBI') as well as local and state law enforcement
agencies. Currently, the FBI and local and state law enforcement agencies
perform forensic testing in the United States and generally do not charge the
agencies that utilize their services. Most state and local criminal laboratories
also offer forensics testing at no charge to the law enforcement community in
their jurisdiction. See 'Business--Competition.'
Dependence on Single Source Suppliers. Certain key components of the
Company's testing process and products are currently provided to the Company by
single source suppliers. In particular, the Company's
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proposed improvements to its testing process will make it dependent upon
obtaining Microarray spotter and reader devices from MDI and fluorescent
detection dyes for the Microarray system currently provided by Amersham. See
'Business--Strategic Partnerships and Relationships' and '--Manufacturing.' In
the event that the Company is unable to obtain sufficient quantities of such
components on commercially reasonable terms, and in a timely manner, the Company
would not be able to complete development of the improvements to its testing
process on a timely and cost-competitive basis, which would have a material
adverse effect on the Company's business, financial condition and results of
operations. In addition, if any of the components of the Company's testing
process are no longer available in the marketplace, the Company may be forced to
further develop technology that incorporates alternate components. There can be
no assurance that such development would be successful or that, if developed by
the Company or licensed from third parties, such alternative components would
perform as required, or at all. Furthermore, interruptions in the supply of
certain components could also have a material adverse effect on the Company's
business, financial condition and results of operations.
Risks Related to Litigation. The Company is a party to litigation with
Promega relating to the infringement by the Company, between October 1990 and
June 1993, of a patent covering major DNA probes used in paternity and forensic
testing (the 'White Patent'). Promega was the exclusive sub-licensee of the
White Patent until June 1995 and the Company is currently the exclusive licensee
of this patent. The action regarding the Company's infringement of Promega's
sub-licensee patent rights during the period in question is currently in the
damage phase and is scheduled for trial without a jury in April 1999. Each party
has submitted an expert's report as to the amount of damages owed by the Company
to Promega. Promega's expert has estimated the damages to range from
approximately $900,000 to $1.3 million, while the Company's expert has estimated
the damages to range from approximately $100,000 to $900,000. Furthermore, if
the Company is adjudicated to have willfully infringed the patent, the court has
the authority to impose up to treble damages and require the Company to pay
Promega's attorneys' fees. The Company has established a reserve to cover the
impact of this litigation. Although the Company believes its reserve is adequate
to cover any potential damages, there can be no assurance that damages will not
substantially exceed the reserved amount or that the judgment will not have a
material adverse effect on the Company's financial condition. See
'Business--Legal Proceedings.'
Government Regulation. The Company's clinical laboratories, as well as
customers using its products for clinical use in the United States, are
regulated under the Clinical Laboratory Improvement Amendments of 1988, as
amended ('CLIA'). CLIA is intended to ensure the quality and reliability of
clinical laboratories in the United States by mandating specific standards in
the areas of personnel qualification, administration, participation in
proficiency testing, patient test management, quality control, quality assurance
and inspections. While the Company believes it is in material compliance with
CLIA requirements, there can be no assurance that the Company will be in
compliance with such requirements in the future. In addition, there can be no
assurance that clinical laboratories acquired by the Company will meet CLIA
requirements. If the acquired laboratories do not meet CLIA requirements, the
Company may be required to expend significant resources to bring them into
compliance, which could have a material adverse effect on the Company's
business, financial condition, and results of operations.
Unlike the Company's current testing services and products, which are
offered exclusively for non-medical database and legal uses, future products may
be offered by the Company for the detection of diseases in humans and animals.
The manufacture and sale of medical diagnostic devices intended for commercial
use in humans and animals are subject to extensive government regulation in the
United States and in other countries. The process of obtaining United States
Food & Drug Administration ('FDA'), Medicare and other required regulatory
approvals can be time-consuming, expensive and uncertain, frequently requiring
several years from the commencement of clinical trials to the receipt of
regulatory approval. There can be no assurance that the Company will be able to
obtain necessary regulatory approvals or clearances or comply with regulatory
requirements applicable to any such new products in the United States or
internationally on a timely basis, or at all. Further, there can be no assurance
that the FDA or other government or industry agency will not regulate the
Company's products or services in the future. In addition, the Company is
subject to extensive federal, state and local regulation, including regulation
under the Occupational Safety and Health Act, the Environmental Protection Act,
the Toxic Substances Control Act, the Resource Conservation and Recovery Act and
other laws, rules and regulations governing health care, clinical laboratory
activities, waste disposal, handling of toxic,
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dangerous or radioactive materials and other matters. Delays in receipt of or
failure to receive such approvals or clearances, the loss of previously received
approvals or clearances or failure to comply with existing or future regulatory
requirements could have a material adverse effect on the Company's business,
financial condition and results of operations. See 'Business--Government
Regulation.'
Product Liability Exposure; Inadequacy or Unavailability of Insurance. The
testing, manufacturing and marketing of the Company's products and services
entails an inherent risk of product liability claims. To date, the Company has
not experienced any product liability claims, but any such claims arising in the
future could have a material adverse effect on the Company's business, financial
condition and results of operations. The Company currently has $5 million of
product liability/clinical liability insurance coverage. Potential product
liability claims may exceed the amount of the Company's insurance coverage or
may be excluded from coverage under the terms of the policy. There can be no
assurance that the Company's insurance can be renewed at a cost and level of
coverage comparable to that then in effect. Any claims against the Company,
regardless of their merit or eventual outcome, could have a material adverse
effect upon the Company's business, financial condition and results of
operations.
Control by Management and Directors. After this offering, the executive
officers and directors of the Company (and their affiliates) will beneficially
own approximately 33.2% of the outstanding Common Stock (approximately 30.2% if
the Underwriters' over-allotment option is exercised in full). As a result,
while there is no agreement among the executive officers and directors of the
Company as to the voting of their Common Stock, if they vote together, they
could effectively control the outcome of matters requiring a stockholder vote,
including the election of directors, adopting or amending provisions of the
Company's Certificate of Incorporation and Bylaws, and approving mergers or
other similar transactions, such as sales of substantially all of the Company's
assets. Control by the executive officers and directors could have the effect of
discouraging certain types of transactions involving an actual or potential
change of control of the Company, including transactions in which the holders of
Common Stock might otherwise receive a premium for their shares over then
current market prices. In addition, the possibility of such persons exercising
such control may limit the price that certain investors may be willing to pay in
the future for shares of the Common Stock. Purchasers in this offering will
become minority stockholders of the Company and will be unable to control the
management or business policies of the Company. The Company's Certificate of
Incorporation does not provide for cumulative voting in the election of
directors. See 'Management' and 'Principal and Selling Stockholders.'
Future Capital Needs; Uncertainty of Availability of Additional
Financing. The Company believes that the anticipated net proceeds from this
offering, together with interest thereon and the Company's existing capital
resources, will be sufficient to fund its operations for at least the next
twelve months. However, the Company's future liquidity and capital requirements
will depend upon numerous factors, including the resources required to improve
its testing system, to consummate additional acquisitions which may be
undertaken, or to further develop its sales and marketing capabilities
domestically and internationally. There can be no assurance that the Company
will not require additional financing or will not in the future seek to raise
additional funds through equity or debt offerings, bank facilities, or other
sources of capital. Additional funding may not be available when needed or on
terms acceptable to the Company, which would have a material adverse effect on
the Company's business, financial condition and results of operations. See 'Use
of Proceeds' and 'Management's Discussion and Analysis of Financial Condition
and Results of Operations--Liquidity and Capital Resources.'
Potential Issuance of Preferred Stock; Anti-takeover Effects of Certificate
of Incorporation and Delaware Law. The Company's Certificate of Incorporation
authorizes the issuance of 1,000,000 shares of Preferred Stock with such
designations, rights and preferences as may be determined from time to time by
the Company's Board of Directors (the 'Board'), without any further vote or
action by the Company's stockholders. The rights of the holders of the Common
Stock will be subject to, and may be adversely affected by, the rights of the
holders of any Preferred Stock that may be issued in the future. The issuance of
Preferred Stock, while providing desirable flexibility in connection with
possible acquisitions and other corporate purposes, could have the effect of
making it more difficult for a third party to acquire a majority of the
outstanding voting stock of the Company, thereby delaying, deferring or
preventing a change in control of the Company. Furthermore, such Preferred Stock
may have other rights, including economic rights senior to the Common Stock, and
as a result, the issuance of such Preferred Stock could have a material adverse
effect on the market value of the Common Stock. Although the Company has no
present intention to issue any shares of its Preferred Stock, there can be no
assurance that the
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Company will not do so in the future. These provisions, as well as other
provisions contained in the Company's Certificate of Incorporation, may also
have the effect of discouraging, delaying or preventing a change in control of
the Company. See 'Description of Capital Stock.'
In addition, the Company's Certificate of Incorporation provides for a
staggered Board of Directors. Certain provisions of Delaware law applicable to
the Company could also delay or make more difficult a merger, tender offer or
proxy contest involving the Company, including Section 203 of the Delaware
General Corporation Law, which prohibits a Delaware corporation from engaging in
any business combination with any interested stockholder for a period of three
years unless certain conditions are met. The potential issuance of Preferred
Stock, the existence of a staggered Board of Directors, and provisions of
Delaware law could have the effect of delaying, deferring or preventing a change
in control of the Company, including without limitation, discouraging a proxy
contest, making more difficult the acquisition of a substantial block of the
Common Stock or limiting the price that investors might be willing to pay in the
future for shares of the Common Stock.
Broad Discretion as to Use of Proceeds. The Company has no current
specific plan for the use of a significant portion of the estimated net proceeds
from this offering. As a consequence, the Company's management will have the
discretion to allocate a large percentage of the net proceeds to uses that
stockholders may not consider desirable, and there can be no assurance that the
net proceeds can or will be invested to yield a significant return. See 'Use of
Proceeds.'
Year 2000 Risks. The Company has initiated communications with its
software vendors to determine the extent to which the Company is vulnerable to
those third parties' failure to remediate the Year 2000 issue. The Company
relies on the ability of its outside software vendors for remedial action. There
can be no assurance that the systems of these third party software vendors on
which the Company relies will be converted on a timely basis, or that a failure
to convert by another company, or a conversion that is incompatible with the
Company's systems, would not have a material adverse effect on the Company. The
total remaining cost of completion of the Company's Year 2000 compliance plan is
estimated to be less than $100,000 and will be funded through operating cash
flows. The costs of the project and the date on which the Company plans to
complete the Year 2000 modifications are based on management's best estimates,
which were derived utilizing numerous assumptions of future events, including
the continued availability of certain resources, third party modification plans
and other factors. However, there can be no assurance that these estimates will
be achieved and actual results could differ materially from those plans. Any
disruption of its operations caused by the computer systems of any of the
Company's vendors or customers could have a material adverse effect on the
Company's financial position or results of operations, including customer
satisfaction issues and potential lawsuits. In addition, there can be no
assurance that the Company will not experience significant cost overruns or
delays in connection with upgrading software or the programming of changes
required to address the Year 2000 issue. See 'Management's Discussion and
Analysis of Financial Condition and Results of Operations--Year 2000.'
Shares Eligible for Future Sale. Sales of a substantial number of shares
of the Common Stock in the public market following this offering, or the
perception that such sales could occur, could materially adversely affect the
prevailing market price of the Common Stock. Immediately after completion of
this offering, the Company will have 6,630,090 shares of Common Stock
outstanding, of which the 3,200,000 shares offered hereby and the 681,818 shares
issued pursuant to the GeneScreen Acquisition will be eligible for sale without
regard to volume or other limitations pursuant to Rule 144 ('Rule 144') under
the Securities Act of 1933, as amended (the 'Securities Act'), unless purchased
by 'affiliates' of the Company as that term is defined under Rule 144. The
Company, its executive officers, directors and certain stockholders, who in the
aggregate own beneficially 2,533,541 of the remaining outstanding shares of
Common Stock, have agreed pursuant to lock-up agreements that they will not sell
or otherwise dispose of any shares of Common Stock beneficially owned by them
(except for shares sold in this offering) for a period of 180 days from the date
of this Prospectus other than as bona fide gifts or as distributions to the
stockholders or limited partners of certain stockholders, provided that, in
either event, the transferee agrees to be bound by similar restrictions. Such
agreements provide that Volpe Brown Whelan & Company, LLC may, in its sole
discretion, and at any time or from time to time, without notice, release all or
any portion of the shares subject to these lock-up agreements. Upon the
expiration of these lock-up agreements, all of such outstanding shares will
become immediately eligible for sale in the public market, subject in some cases
to the volume and other restrictions of Rule 144 or Rule 701 under the
Securities Act. Promptly after the date of this Prospectus, the Company intends
to register on one or more registration
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statements on Form S-8 all shares of Common Stock issuable under its stock
option plans. Shares covered by such registration statements will be eligible
for sale in the public market after the effective date of such registration. In
addition, the holders of 467,491 shares of Common Stock (103,607 shares if the
Underwriters' over-allotment option is exercised in full) are entitled to
certain registration rights with respect to such shares. If such holders, by
exercising their registration rights, cause a large number of shares to be
registered and sold in the public market, such sales may have a material adverse
effect on the market price of the Common Stock. See 'Management--Executive
Compensation' and '--Stock Option Plans,' 'Description of Capital Stock' and
'Shares Eligible for Future Sale.'
No Prior Public Market; Possible Volatility of Stock Price. Prior to this
offering, there has been no public market for the Common Stock and there can be
no assurance that an active public market for the Common Stock will develop or
be sustained after this offering. The initial public offering price will be
determined through negotiations between the Company and the Underwriters and may
bear no relationship to the price at which the Common Stock will trade after the
closing of this offering. In addition, the securities markets have from time to
time experienced significant price and volume fluctuations that are unrelated to
the operating performance of particular companies. The market prices of the
common stock of many publicly held medical diagnostics companies have in the
past been, and may in the future be, especially volatile. Announcements of
technological innovations or new services or products by the Company or its
competitors, release of reports by securities analysts, developments or disputes
concerning patents or proprietary rights, regulatory developments, economic and
other external factors, as well as period-to-period fluctuations in the
Company's financial results, may have a significant impact on the market price
of the Common Stock. In the past, securities class action litigation has often
been instituted following periods of volatility in the market price of a
company's securities. Such litigation could result in substantial costs and a
diversion of management attention and resources, either of which could have a
material adverse effect on the Company's business, financial condition and
results of operations.
Immediate and Substantial Dilution. Purchasers of shares of Common Stock
in this offering will incur immediate and substantial dilution in the pro forma
net tangible book value per share from the public offering price. In addition,
investors purchasing shares in this offering will incur additional dilution to
the extent that Company stock options and warrants (whether currently
outstanding or subsequently issued or granted) are exercised. See 'Dilution.'
Lack of Dividends. The Company currently intends to retain all earnings,
if any, for future growth and, therefore, does not intend to pay cash dividends
on the Common Stock in the foreseeable future. See 'Dividend Policy.'
Benefits of the Offering to Current Stockholders. The completion of this
offering will provide significant benefits to the current stockholders of the
Company, including certain of its directors and executive officers. The Company
will not receive any of the proceeds from the sale of shares by the Selling
Stockholder. The completion of this offering will also create a public market
for the Common Stock and thereby may increase the market value of the investment
by current stockholders in the Company. Upon the closing of this offering, the
difference between the aggregate purchase price paid by the Company's current
stockholders for their shares and the aggregate market value of such shares will
be approximately $27.9 million (calculated on the basis of an assumed initial
public offering price of $11.00 per share). See 'Dilution,' 'Management' and
'Principal and Selling Stockholders.' In addition, Joseph I. Bishop, a director
of the Company, may sell up to 107,034 shares of Common Stock in this offering
if the Underwriters' overallotment option is exercised in full, resulting in a
profit to Mr. Bishop of approximately $1.1 million (calculated on the basis of
an assumed initial public offering price of $11.00 per share). See 'Principal
and Selling Stockholders.'
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THE COMPANY
Lifecodes Corporation was incorporated in New York in April 1982 and was
purchased by, and became a wholly-owned subsidiary of, Quantum Chemical
Corporation ('Quantum') in 1985. In September 1991, existing management and
stockholders acquired all of Quantum's interest in the Company and relocated the
Company to Stamford, Connecticut. The Company reincorporated in Delaware in
January 1993. In March 1996, the Company acquired Cellmark, a division of
Zeneca, plc. In February 1997, the Company, ISBMD and its founders formed
Medical Molecular Diagnostics GmbH ('MMD') to perform HLA testing in Germany. In
October 1997, the Company acquired a controlling interest in MMD.
In 1998, the Company has completed or has pending a number of acquisitions
as part of its strategic plan, including the recently completed acquisitions of
National Legal Laboratories (the 'NLL Acquisition'), International Support for
Bone Marrow Drives, Ltd. (the 'ISBMD Acquisition'), Micro Diagnostics, Inc. (the
'MDx Acquisition'), Helix Biotech Ltd. (the 'Helix Acquisition'), and the
pending acquisition of GeneScreen Inc. (the 'GeneScreen Acquisition,' and
together with the NLL Acquisition, the ISBMD Acquisition, the MDx Acquisition
and the Helix Acquisition, the 'Recent and Pending Acquisitions'). See
'Business--Recent and Pending Acquisitions' and '--GeneScreen Acquisition.'
The Company's principal executive offices are located at 550 West Avenue,
Stamford, Connecticut 06902 and its telephone number is (203) 328-9500.
USE OF PROCEEDS
The net proceeds to the Company from this offering, after deducting
underwriting discounts and commissions and estimated expenses payable by the
Company in connection with this offering, are estimated to be approximately
$28.5 million assuming an initial public offering price of $11.00 per share. The
Company will not receive any of the proceeds from the sales of Common Stock by
the Selling Stockholder. See 'Principal and Selling Stockholders.'
The Company intends to use the net proceeds of this offering as follows:
(i) to pay the $5.0 million cash portion of the purchase price of the GeneScreen
Acquisition; (ii) to repay approximately $2.25 million outstanding under the
Company's Credit Facility as of June 30, 1998; and (iii) to use the remainder of
the net proceeds for general corporate purposes, including working capital and
possible future acquisitions. The Company's Credit Agreement with First Union
National Bank ('First Union') dated as of March 31, 1998 provides for a $2.3
million term loan and a $1.0 million revolving loan (collectively, the 'Credit
Facility'). Interest on the term loan accrues at a fixed rate of 8.39%, while
interest on the revolving loan accrues at a floating rate equal to First Union's
prime rate, currently 8.5%. The term loan matures on March 1, 2001 while the
termination date for the revolving loan commitment is May 31, 1999. The Credit
Facility replaced a prior credit facility with First Union that was used
primarily for working capital purposes.
From time to time in the ordinary course of business, the Company evaluates
the potential acquisition of businesses and technologies that complement the
Company's business, for which a portion of the net proceeds may be used.
Currently, the Company does not have any commitments or agreements with respect
to any such acquisitions other than with respect to the GeneScreen Acquisition.
See 'Business--Recent and Pending Acquisitions' and '--GeneScreen Acquisition.'
Pending such uses, the net proceeds will be invested in short-term, investment
grade securities.
DIVIDEND POLICY
Lifecodes Corporation has never declared or paid any cash dividends on the
Common Stock and does not anticipate paying cash dividends on the Common Stock
in the foreseeable future. The payment of any future dividends will be at the
discretion of the Company's Board of Directors and will depend upon, among other
things, future earnings, operations, capital requirements, the general financial
condition of the Company, contractual restrictions and general business
conditions. In addition, the Credit Facility prohibits the payment of dividends
without the consent of First Union.
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CAPITALIZATION
The following table sets forth as of June 30, 1998: (i) the actual
capitalization of the Company as reflected in the Consolidated Financial
Statements; (ii) the pro forma capitalization of the Company after giving effect
to the Helix Acquisition; and (iii) the pro forma as adjusted capitalization of
the Company after giving effect to the GeneScreen Acquisition, the sale by the
Company of 2,900,000 shares of Common Stock in this offering at an assumed
initial public offering price of $11.00 per share and the application of the
estimated net proceeds therefrom (after deducting underwriting discounts and
commissions and estimated offering expenses) and the conversion of all shares of
Preferred Stock into shares of Common Stock upon the closing of this offering.
This table should be read in conjunction with 'Use of Proceeds,' 'Unaudited Pro
Forma Condensed Combined Financial Data,' 'Management's Discussion and Analysis
of Financial Condition and Results of Operations,' and the Consolidated
Financial Statements and Notes thereto, each included elsewhere in this
Prospectus.
<TABLE>
<CAPTION>
JUNE 30, 1998
--------------------------------------
PRO FORMA
ACTUAL PRO FORMA AS ADJUSTED
--------- --------- -----------
(IN THOUSANDS)
<S> <C> <C> <C>
Current portion of long-term debt(1).............................. $ 1,466 $ 1,766 $ 3,512
--------- --------- -----------
Long-term debt, less current portion(1)........................... 2,284 2,634 720
--------- --------- -----------
Stockholders' equity:
Preferred Stock, $10.00 par value; 1,000,000 shares authorized,
21,500 shares issued and outstanding, actual; 21,500 shares
issued and outstanding, pro forma; 0 shares issued and
outstanding, pro forma as adjusted. ......................... 215 215 --
Common Stock, $0.10 par value; 15,000,000 shares authorized,
2,698,003 shares issued and outstanding, actual; 2,822,103
shares issued and outstanding, pro forma; 6,630,090 shares
issued and outstanding, pro forma as adjusted(2). ........... 270 282 663
Additional paid-in capital...................................... 5,593 6,083 41,966
Accumulated other comprehensive income.......................... (3) (3) (3)
Notes receivable from stockholders.............................. (1,437) (1,437) (1,510)
Treasury stock.................................................. (4) (4) (4)
Accumulated deficit............................................. (510) (510) (9,010)
--------- --------- -----------
Total stockholders' equity................................... 4,124 4,626 32,102
--------- --------- -----------
Total capitalization....................................... $ 7,874 $ 9,026 $36,334
--------- --------- -----------
--------- --------- -----------
</TABLE>
- ------------------
(1) Includes capital lease obligations. Also includes approximately $931,000 of
accounts receivable financing.
(2) Based upon the number of shares outstanding on August 31, 1998. Does not
include: (i) 1,318,854 shares of Common Stock issuable upon the exercise of
stock options and warrants outstanding as of such date, or which 1,061,639
stock options and warrants were then exercisable; and (ii) 1,099,462
additional shares available for grant under the 1992 Employee Stock Option
Plan, the 1995 Employee Stock Option Plan and the 1998 Stock Plan. See
'Management--Stock Option Plans.'
16
<PAGE>
DILUTION
As of June 30, 1998, the pro forma net tangible book value of the Company,
as adjusted to reflect: (i) the completion Helix Acquisition and (ii) the
conversion of all of the Preferred Stock into Common Stock immediately prior to
the closing of this offering, was approximately $1.5 million, or $0.51 per share
of Common Stock. Pro forma net tangible book value per share represents the
amount of total stockholders' equity less intangible assets, exclusive of
patents and licenses, divided by the number of shares of Common Stock
outstanding on a pro forma basis at that date. After giving effect to (i) the
sale by the Company of 2,900,000 shares of Common Stock in this offering at an
assumed initial public offering price of $11.00 per share and the application of
the estimated net proceeds therefrom (after deducting underwriting discounts and
commissions and estimated offering expenses) and (ii) the completion of the
GeneScreen Acquisition, the pro forma net tangible book value of the Company at
June 30, 1998 would have been approximately $25.1 million or $3.79 per share,
representing an immediate increase in pro forma net tangible book value of $3.28
per share to existing shareholders and an immediate dilution in pro forma net
tangible book value per share of $7.21 per share to persons purchasing shares of
Common Stock in this offering. The following table illustrates this per share
dilution.
<TABLE>
<S> <C> <C>
Assumed initial public offering price per share....................................... $11.00
Net tangible book value per share as of June 30, 1998 based on the Consolidated
Financial Statements............................................................. 0.76
Decrease in net tangible book value per share as a result of completion of the Helix
Acquisition...................................................................... (0.25)
-----
Pro forma net tangible book value per share as of June 30, 1998(1).................. 0.51
Increase in pro forma net tangible book value per share as a result of the
GeneScreen Acquisition and the consummation of this offering..................... 3.28
-----
Pro forma net tangible book value per share after this offering....................... 3.79
------
Dilution per share to new investors................................................... $ 7.21
------
------
</TABLE>
The following table summarizes, on a pro forma basis as of June 30, 1998,
the differences between the number of shares of Common Stock purchased from the
Company, the total consideration paid to the Company, and the average price paid
per share by existing stockholders and by new investors in this offering.
<TABLE>
<CAPTION>
SHARES PURCHASED TOTAL CONSIDERATION
-------------------- ---------------------- AVERAGE PRICE
NUMBER PERCENT AMOUNT PERCENT PER SHARE
--------- ------- ----------- ------- -------------
<S> <C> <C> <C> <C> <C>
Existing stockholders(1)(2)............. 3,048,272 46.0% $ 5,885,456 13.0% $ 1.97
GeneScreen stockholders................. 681,818 10.3 7,500,000 16.5 $ 11.00
New investors in this offering.......... 2,900,000 43.7 31,900,000 70.5 $ 11.00
--------- ------- ----------- -------
Total.............................. 6,630,090 100.0% $45,285,456 100.0%
--------- ------- ----------- -------
--------- ------- ----------- -------
</TABLE>
- ------------------------
(1) Sales by the Selling Stockholder in this offering will cause the number of
shares held by existing stockholders to be reduced to 2,748,272 shares or
41.5% (2,632,156 shares or 39.7% if the Underwriters' over-allotment option
is exercised in full) of the total number of shares of Common Stock to be
outstanding after this offering, and will increase the number of shares held
by new investors to 3,200,000 shares or 48.3% (3,680,000 shares or 55.5% if
the Underwriters' over-allotment option is exercised in full) of the total
number of shares of Common Stock to be outstanding after this offering. See
'Principal and Selling Stockholders.'
(2) Based upon the number of shares outstanding on August 31, 1998.
The calculation of pro forma net tangible book value and the other
computations above assume no exercise of stock options or warrants outstanding
as of June 30, 1998. As of June 30, 1998, there were stock options and warrants
outstanding to purchase a total of 1,318,854 shares of Common Stock, of which
1,045,432 stock options and warrants were then exercisable. To the extent that
any of these stock options or warrants are exercised, there will be further
dilution to new investors. See 'Capitalization,' 'Management--Stock Option
Plans,' 'Description of Capital Stock,' 'Shares Eligible for Future Sale' and
the Notes to the Consolidated Financial Statements.
17
<PAGE>
SELECTED HISTORICAL CONSOLIDATED FINANCIAL DATA
The following table sets forth certain selected historical consolidated
financial and operating data of the Company as of the dates and for the periods
indicated. The statement of operations data for each of the three years in the
period ended September 30, 1997 and the nine month period ended June 30, 1998
and the balance sheet data as of September 30, 1996 and 1997 and June 30, 1998
have been derived from the Company's Consolidated Financial Statements included
elsewhere in this Prospectus. The balance sheet data as of September 30, 1993,
1994, 1995, and statement of operations data for the years ended September 30,
1993 and 1994 are derived from the audited Consolidated Financial Statements of
the Company which are not included herein. The consolidated balance sheet data
as of June 30, 1997 and statement of operations data for the nine months ended
June 30, 1997 are derived from the Company's unaudited Financial Statements
which are not included herein. In the opinion of management, the unaudited
Financial Statements include all adjustments (consisting of only normal
recurring adjustments) necessary for a fair presentation of the information set
forth herein. The results of operations for the nine months ended June 30, 1998
are not necessarily indicative of the results that may be expected for any other
interim period or the entire year. See 'The Company,' 'Management's Discussion
and Analysis of Financial Condition and Results of Operations' and Notes 1 and
13 of the Notes to the Consolidated Financial Statements. The following selected
combined financial and operating data is qualified by reference to, and should
be read in conjunction with, the Company's Consolidated Financial Statements and
Notes thereto, 'Management's Discussion and Analysis of Financial Condition and
Results of Operations' and the other financial information included elsewhere in
this Prospectus.
<TABLE>
<CAPTION>
NINE MONTHS ENDED
FISCAL YEAR ENDED SEPTEMBER 30, JUNE 30,
-------------------------------------------------------------- ----------------------
1993 1994 1995 1996 1997 1997 1998
---------- ---------- ---------- ---------- ---------- ---------- ---------
(IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA)
<S> <C> <C> <C> <C> <C> <C> <C>
STATEMENT OF OPERATIONS DATA:
Revenues............................... $ 2,402 $ 2,628 $ 3,534 $ 7,683 $ 15,065 $ 9,802 $ 16,519
Cost of revenues....................... 1,265 1,357 1,504 4,004 7,375 4,838 8,350
---------- ---------- ---------- ---------- ---------- ---------- ---------
Gross profit......................... 1,137 1,271 2,030 3,679 7,690 4,964 8,169
Other costs and expenses:
Selling, general and administrative
expenses........................... 1,215 799 1,085 3,295 5,968 3,754 5,482
Research and development expenses.... 704 677 669 718 900 672 924
---------- ---------- ---------- ---------- ---------- ---------- ---------
Income (loss) from operations.......... (782) (205) 276 (334) 822 538 1,763
Other income (expense):
Other income......................... 126 18 18 21 47 22 117
Interest expense..................... (114) (204) (115) (184) (308) (124) (178)
---------- ---------- ---------- ---------- ---------- ---------- ---------
Income (loss) before income taxes and
extraordinary item................... (770) (391) 179 (497) 561 436 1,702
Income taxes........................... 1 -- -- -- 173 289 751
Extraordinary item(1).................. 100 -- -- (79) -- -- --
---------- ---------- ---------- ---------- ---------- ---------- ---------
Net income (loss)...................... (671) (391) 179 (576) 388 147 951
---------- ---------- ---------- ---------- ---------- ---------- ---------
---------- ---------- ---------- ---------- ---------- ---------- ---------
Net income (loss) per share
Basic................................ $ (0.56) $ (0.26) $ 0.12 $ (0.32) $ 0.18 $ 0.07 $ 0.39
---------- ---------- ---------- ---------- ---------- ---------- ---------
---------- ---------- ---------- ---------- ---------- ---------- ---------
Diluted.............................. $ (0.56) $ (0.26) $ 0.10 $ (0.32) $ 0.14 $ 0.05 $ 0.28
---------- ---------- ---------- ---------- ---------- ---------- ---------
---------- ---------- ---------- ---------- ---------- ---------- ---------
Weighted average common shares
outstanding
Basic................................ 1,199,627 1,498,807 1,555,053 1,803,761 2,159,902 2,161,946 2,426,504
---------- ---------- ---------- ---------- ---------- ---------- ---------
---------- ---------- ---------- ---------- ---------- ---------- ---------
Diluted.............................. 1,199,627 1,498,807 1,792,504 1,803,761 2,792,318 2,795,695 3,363,236
---------- ---------- ---------- ---------- ---------- ---------- ---------
---------- ---------- ---------- ---------- ---------- ---------- ---------
</TABLE>
<TABLE>
<CAPTION>
SEPTEMBER 30, JUNE 30,
------------------------------------------ ----------------
1993 1994 1995 1996 1997 1997 1998
------ ------ ------ ------ ------ ------ -------
(IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C> <C>
BALANCE SHEET DATA:
Cash and cash equivalents..................................... $ 54 $ 218 $ 16 $ 760 $ 663 $ 369 $ 1,285
Working capital............................................... 95 296 533 369 128 1,737 200
Total assets.................................................. 1,749 1,989 2,351 4,715 7,511 6,214 14,280
Total indebtedness(2)......................................... 1,047 742 711 2,173 1,971 1,966 3,750
Stockholders' equity.......................................... 141 318 601 401 1,664 1,785 4,124
</TABLE>
- ------------------
(1) Extraordinary items relate to the gain (loss) on the extinguishment of debt.
(2) Includes short-term and long-term borrowings and current maturities of
long-term debt and includes capital lease obligations.
18
<PAGE>
UNAUDITED PRO FORMA CONDENSED COMBINED FINANCIAL DATA
Set forth below are the unaudited pro forma condensed combined balance
sheet as of June 30, 1998, and the unaudited pro forma condensed combined
statements of operations of the Company for the year ended September 30, 1997
and the nine month period ended June 30, 1998. The unaudited pro forma condensed
combined balance sheet and statements of operations give effect to the
consolidation of the Company with the Recent and Pending Acquisitions. The
unaudited pro forma condensed combined balance sheet as of June 30, 1998 gives
effect to the acquisitions of Helix and GeneScreen as if such transactions had
been consummated as of such date. The unaudited pro forma condensed combined
statements of operations for the year ended September 30, 1997 and nine months
ended June 30, 1998 give effect to the acquisitions of NLL, ISBMD, Helix and
GeneScreen had such transactions been consummated as of the beginning of the
fiscal year and period, respectively. The historical balance sheet as of June
30, 1998 and historical combined statements of operations for the year ended
September 30, 1997 and nine months ended June 30, 1998 of the Company reflect
the acquisition of MDx effective April 30, 1998, as discussed below. This
acquisition was accounted for as a pooling of interests and therefore all
historical financial information of the Company has been restated to reflect the
pooling as if it occurred as of the earliest financial period presented.
On February 6, 1998, the Company acquired substantially all of the assets
of NLL, a division of Group Benefit Services, Inc., for approximately $730,000
in cash and an aggregate of 14,600 shares of Common Stock. The NLL Acquisition
was accounted for under the purchase method of accounting. The cash portion of
the purchase price was financed primarily by borrowings. The excess of the
purchase price over the fair value of the net assets acquired was $786,000,
which has been recorded as goodwill and will be amortized over a 15-year period.
On April 3, 1998, the Company acquired all of the outstanding stock of
ISBMD for an aggregate of 365,000 shares of Common Stock. The ISBMD Acquisition
was accounted for under the purchase method of accounting. The excess of the
purchase price over the fair value of the net assets acquired was approximately
$1.2 million, which has been recorded as goodwill and will be amortized over a
15-year period.
Effective April 30, 1998, the Company acquired all of the outstanding
common stock of MDx and retired notes payable to stockholders of $775,000 and
advances from a related party aggregating $200,000 in exchange for 325,382
shares of Common Stock. The MDx Acquisition was accounted for as a pooling of
interests and, accordingly, the historical financial statements of the Company
as of June 30, 1998, and for the year ended September 30, 1997 and the nine
month period ended June 30, 1998 have been restated to include the operations of
the acquired company as if the pooling had been consummated as of the earliest
date presented.
In July 1998, the Company acquired certain assets and assumed certain
liabilities of Helix for $650,000 in cash payable over 26 months and an
aggregate of 124,100 shares of Common Stock. The Helix Acquisition will be
accounted for under the purchase method of accounting. The excess of the
purchase price over the fair value of the net assets acquired was approximately
$1.0 million which has been recorded as goodwill and will be amortized over a
15-year period.
In September 1998, the Company entered into an agreement to acquire the
common stock of GeneScreen. Existing Series A and B Preferred Stock of
GeneScreen as well as vested GeneScreen stock options are expected to be
converted to GeneScreen common stock prior to the acquisition. The closing of
the GeneScreen Acquisition is contingent upon the effectiveness of the
Registration Statement of which this Prospectus is a part. The obligation of the
Company to consummate the GeneScreen Acquisition is subject to the approval of
the transaction by the GeneScreen stockholders, the sale or spin-off by
GeneScreen of its Molecular Tool, Inc. subsidiary and additional customary
closing conditions. The preliminary aggregate purchase price is $12.5 million,
consisting of $5.0 million in cash and $7.5 million of Common Stock. The
purchase price is subject to certain net worth adjustments of the acquired
business from May 31, 1998 through the date of closing. The cash portion of the
purchase price will be financed from the net proceeds of this offering. See 'Use
of Proceeds.' The total purchase price will be allocated to the assets and
liabilities acquired based upon their relative fair values at the closing date,
a portion of which are based upon studies which are not yet complete. The
allocation of the purchase price reflected herein is subject to revision when
additional information from the studies become available. The Company does not
expect that the effects of the final allocation will differ materially from
those set forth herein. The Company estimates that approximately $8.5 million of
the purchase price will be allocated to purchased
19
<PAGE>
research and development and will be charged to operations simultaneously with
the closing of the acquisition. The excess of purchase price over the fair value
of the net assets acquired is estimated to be approximately $2.3 million, which
will be recorded as goodwill and will be amortized over a 15-year period.
The unaudited pro forma adjustments are based upon available information
and upon certain assumptions that the Company believes are reasonable. Final
adjustments may differ from the pro forma adjustments presented herein. The
Unaudited Pro Forma Condensed Combined Financial Data are not necessarily
indicative of the results that would have been achieved had such events occurred
as of the dates indicated or that may be achieved in the future. The Unaudited
Pro Forma Condensed Combined Financial Data should be read in conjunction with
the Consolidated Financial Statements and Notes thereto of the Company, the
financial statements and notes thereto of NLL, ISBMD, GeneScreen and MDx,
'Capitalization' and 'Management's Discussion and Analysis of Financial
Condition and Results of Operations,' each included elsewhere in this
Prospectus.
UNAUDITED PRO FORMA CONDENSED COMBINED BALANCE SHEET
JUNE 30, 1998
(IN THOUSANDS)
<TABLE>
<CAPTION>
HELIX GENESCREEN
LIFECODES HISTORICAL HISTORICAL PRO FORMA
HISTORICAL (a) (a)(b) ADJUSTMENTS
---------- ---------- ---------- -----------
<S> <C> <C> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents................................................... $ 1,285 $ -- $ 47 $ --
Accounts receivable, net.................................................... 3,718 -- 2,911 (620)(c)
Inventories................................................................. 1,455 62 593 --
Prepaid and other current assets............................................ 1,215 -- 114 --
---------- ----- ---------- -----------
Total current assets.......................................................... 7,673 62 3,665 (620)
Property and equipment, net................................................... 2,820 213 712 --
Deferred tax assets........................................................... 587 -- -- --
Intangible assets:
Goodwill and other intangible assets........................................ 2,078 -- 31 4,883(d)
Patents and licenses, net................................................... 1,015 -- 118 --
---------- ----- ---------- -----------
Total intangible assets....................................................... 3,093 -- 149 4,883
---------- ----- ---------- -----------
Other assets.................................................................. 107 -- 406 (406)(e)
---------- ----- ---------- -----------
Total assets.................................................................. $ 14,280 $275 $4,932 $ 3,857
---------- ----- ---------- -----------
---------- ----- ---------- -----------
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable and accrued expenses....................................... 5,329 55 1,467 (620)(c)
Acquisition payable......................................................... -- -- -- 5,000(f)
Current portion of long-term debt........................................... 1,466 -- 2,073 300(g)
Other....................................................................... 678 51 826 50(h)
---------- ----- ---------- -----------
Total current liabilities..................................................... 7,473 106 4,366 4,730
Long-term debt, net........................................................... 2,284 -- 8 350(g)
Other liabilities............................................................. 399 -- -- --
---------- ----- ---------- -----------
Total liabilities............................................................. 10,156 106 4,374 5,080
---------- ----- ---------- -----------
Stockholders' equity:
Preferred stock............................................................. 215 -- 52 (52)(i)
Common stock................................................................ 270 -- 26 54(i)
Additional paid-in capital.................................................. 5,593 -- 7,697 227(i)
Net equity of Helix......................................................... -- 169(j) -- (169)(i)(j)
Retained earnings (accumulated deficit)..................................... (510) -- (7,132) (1,368)(i)
Accumulated open comprehensive income....................................... (3) -- -- --
Less notes receivable from stockholders..................................... (1,437) -- (85) 85(i)
Less common stock in treasury at cost....................................... (4) -- -- --
---------- ----- ---------- -----------
Total stockholders' equity.................................................... 4,124 169 558 (1,223)
---------- ----- ---------- -----------
Total liabilities and stockholders' equity.................................... $ 14,280 $275 $4,932 $ 3,857
---------- ----- ---------- -----------
---------- ----- ---------- -----------
<CAPTION>
PRO FORMA
COMBINED
---------
<S> <<C>
ASSETS
Current assets:
Cash and cash equivalents................................................... $ 1,332
Accounts receivable, net.................................................... 6,009
Inventories................................................................. 2,110
Prepaid and other current assets............................................ 1,329
---------
Total current assets.......................................................... 10,780
Property and equipment, net................................................... 3,745
Deferred tax assets........................................................... 587
Intangible assets:
Goodwill and other intangible assets........................................ 6,992
Patents and licenses, net................................................... 1,133
---------
Total intangible assets....................................................... 8,125
---------
Other assets.................................................................. 107
---------
Total assets.................................................................. $23,344
---------
---------
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable and accrued expenses....................................... 6,231
Acquisition payable......................................................... 5,000
Current portion of long-term debt........................................... 3,839
Other....................................................................... 1,605
---------
Total current liabilities..................................................... 16,675
Long-term debt, net........................................................... 2,642
Other liabilities............................................................. 399
---------
Total liabilities............................................................. 19,716
---------
Stockholders' equity:
Preferred stock............................................................. 215
Common stock................................................................ 350
Additional paid-in capital.................................................. 13,517
Net equity of Helix......................................................... --
Retained earnings (accumulated deficit)..................................... (9,010)
Accumulated open comprehensive income....................................... (3)
Less notes receivable from stockholders..................................... (1,437)
Less common stock in treasury at cost....................................... (4)
---------
Total stockholders' equity.................................................... 3,628
---------
Total liabilities and stockholders' equity.................................... $23,344
---------
---------
</TABLE>
20
<PAGE>
UNAUDITED PRO FORMA CONDENSED COMBINED STATEMENT OF OPERATIONS
FOR THE YEAR ENDED SEPTEMBER 30, 1997
(IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA)
<TABLE>
<CAPTION>
NATIONAL LEGAL ISBMD HELIX GENESCREEN
LIFECODES HISTORICAL(k) HISTORICAL(b)(k) HISTORICAL(k) HISTORICAL(b)(k)
------------ ---------------- ----------------- ------------- ----------------
<S> <C> <C> <C> <C> <C>
Revenues............................. $ 15,065 $2,032 $ 4,824 $ 1,921 $ 11,217
Cost of revenues..................... 7,375 1,687 3,523 727 8,278
------------ ------ ------ ------ -------
Gross profit....................... 7,690 345 1,301 1,194 2,939
Other costs and expenses:
Selling, general and
administrative................... 5,968 674 871 1,394 3,833
Research and development........... 900 -- -- -- --
------------ ------ ------ ------ -------
Income (loss) from operations........ 822 (329) 430 (200) (894)
Other income (expense):
Other income....................... 47 6 37 -- 16
Interest expense................... (308) (47) -- (21) (23)
------------ ------ ------ ------ -------
Income (loss) before taxes........... 561 (370) 467 (221) (901)
------------ ------ ------ ------ -------
Income taxes (benefit)............... 174 (112) 191 -- --
------------ ------ ------ ------ -------
Net income (loss).................... $ 387 $ (258) $ 276 $ (221) $ (901)
------------ ------ ------ ------ -------
------------ ------ ------ ------ -------
Net income per share:
Basic.............................. $ 0.18
Diluted............................ 0.14
Average number of common shares and
dilutive common share equivalents
outstanding:
Basic.............................. 2,159,902
Diluted............................ 2,792,318
<CAPTION>
PRO FORMA
PRO FORMA LIFECODES AND
ADJUSTMENTS GENESCREEN
----------- -------------
<S> <C> <C>
Revenues............................. $(2,653)(c) $ 32,406
Cost of revenues..................... (2,653)(c) 18,937
----------- -------------
Gross profit....................... -- 13,469
Other costs and expenses:
Selling, general and
administrative................... 535(l) 13,275
Research and development........... -- 900
----------- -------------
Income (loss) from operations........ (535) (706)
Other income (expense):
Other income....................... -- 106
Interest expense................... (50)(m) (449)
----------- -------------
Income (loss) before taxes........... (585) (1,049)
----------- -------------
Income taxes (benefit)............... -- 253
----------- -------------
Net income (loss).................... $ (585) $ (1,302)
----------- -------------
----------- -------------
Net income per share:
Basic.............................. $ (0.39)
Diluted............................ (0.39)
Average number of common shares and
dilutive common share equivalents
outstanding:
Basic.............................. 3,345,420(o)
Diluted............................ 3,345,420(o)
</TABLE>
FOR THE NINE MONTH PERIOD ENDED JUNE 30, 1998
(IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA)
<TABLE>
<CAPTION>
NATIONAL LEGAL ISBMD HELIX GENESCREEN
LIFECODES HISTORICAL(n) HISTORICAL(b)(n) HISTORICAL(n) HISTORICAL(b)(n)
------------ ---------------- ----------------- ------------- ----------------
<S> <C> <C> <C> <C> <C>
Revenues............................ $ 16,519 $ 773 $ 3,273 $ 1,435 $ 10,552
Cost of revenues.................... 8,350 669 2,096 451 8,231
------------ ----- ------ ------ -------
Gross profit...................... 8,169 104 1,177 984 2,321
Other costs and expenses:
Selling, general and
administrative.................. 5,482 295 878 1,040 3,394
Research and development.......... 923 -- -- -- --
------------ ----- ------ ------ -------
Income (loss) from operations....... 1,764 (191) 299 (56) (1,073)
Other income (expense)............ 118 3 34 -- 8
Interest expense, net............. (178) (30) -- (10) (87)
------------ ----- ------ ------ -------
Income (loss) before taxes.......... 1,704 (218) 333 (66) (1,152)
------------ ----- ------ ------ -------
Income taxes (benefit).............. 752 -- (11) -- --
------------ ----- ------ ------ -------
Net income (loss)................... $ 952 $ (218) $ 344 $ (66) $ (1,152)
------------ ----- ------ ------ -------
------------ ----- ------ ------ -------
Net income per share:
Basic............................. $ 0.39
Diluted........................... 0.28
Average number of common shares and
dilutive common share equivalents
outstanding:
Basic............................. 2,426,504
Diluted........................... 3,363,236
<CAPTION>
PRO FORMA
PRO FORMA LIFECODES AND
ADJUSTMENTS GENESCREEN
----------- -------------
<S> <C> <C>
Revenues............................ $(2,421)(c) $ 30,131
Cost of revenues.................... (2,421)(c) 17,376
----------- -------------
Gross profit...................... -- 12,755
Other costs and expenses:
Selling, general and
administrative.................. 359(l) 11,448
Research and development.......... -- 923
----------- -------------
Income (loss) from operations....... (359) 384
Other income (expense)............ -- 163
Interest expense, net............. (17)(m) (322)
----------- -------------
Income (loss) before taxes.......... (376) 225
----------- -------------
Income taxes (benefit).............. -- 741
----------- -------------
Net income (loss)................... $ (376) $ (516)
----------- -------------
----------- -------------
Net income per share:
Basic............................. $ (0.15)
Diluted........................... (0.15)
Average number of common shares and
dilutive common share equivalents
outstanding:
Basic............................. 3,482,244(o)
Diluted........................... 3,482,244(o)
</TABLE>
(Footnotes on next page)
21
<PAGE>
(Footnotes from previous page)
- ------------------
(a) Reflects the Helix and GeneScreen Acquisitions as if they had occurred on
June 30, 1998.
(b) ISBMD and GeneScreen have different fiscal periods from the Company. For
financial reporting purposes, ISBMD and GeneScreen have a fiscal year ended
December 31, and the Company has a fiscal year ended September 30.
Consequently, ISBMD and GeneScreen have results of operations for the period
October 1, 1997 through December 31, 1997 that have been included in both
the unaudited pro forma results of operations for fiscal 1997 and the nine
month interim period ended June 30, 1998. ISBMD revenues and net income were
$1.3 million and $43,000, respectively, for the three month period ended
December 31, 1997. GeneScreen revenues and net loss for the three-month
period ended December 31, 1997 were $3.1 million and $930,000 respectively.
(c) Reflects the pro forma adjustments necessary to eliminate intercompany
transactions as follows:
<TABLE>
<CAPTION>
INTERCOMPANY ACCOUNTS RECEIVABLE/PAYABLE AS OF JUNE 30, 1998
- ----------------------------------------------------------------- --------------------
<S> <C> <C>
Helix............................................................ $ 56
GeneScreen....................................................... 564
-------
Total Intercompany Accounts Receivable/Payable................... $ 620
-------
-------
<CAPTION>
YEAR ENDED NINE MONTHS
INTERCOMPANY SALES/COST OF SALES SEPTEMBER 30, 1997 ENDED JUNE 30, 1998
- ----------------------------------------------------------------- -------------------- --------------------
<S> <C> <C>
ISBMD............................................................ $ 839 $ 530
Helix............................................................ 325 229
NLL.............................................................. 305 97
------- -------
1,469 856
GeneScreen....................................................... 1,184 1,565
------- -------
Total Intercompany Sales/Cost of Sales........................... $2,653 $2,421
------- -------
------- -------
</TABLE>
(d) Represents the estimated excess of purchase price over the fair value of the
net assets acquired as follows:
<TABLE>
<CAPTION>
HELIX GENESCREEN
---------------------------- ----------------------------
NET ASSETS PURCHASE PRICE NET ASSETS PURCHASE PRICE
ACQUIRED ALLOCATION ACQUIRED ALLOCATION
---------- -------------- ---------- --------------
<S> <C> <C> <C> <C>
Cash................................................. $ -- $ -- $ 47 $ 47
Accounts Receivable.................................. -- -- 2,911 2,911
Prepaid and Other Current Assets..................... -- -- 114 114
Inventories.......................................... 62 62 593 593
Property and Equipment............................... 213 213 712 712
Goodwill and Other Intangible Assets................. -- 1,034 149 3,997
In-Process R&D....................................... -- -- -- 8,500
----- ------- ---------- --------------
Total Assets....................................... 275 1,309 4,526 16,874
----- ------- ---------- --------------
Accounts Payable and Accrued Expenses................ 55 55 1,467 1,467
Current Portion of Long-Term Debt.................... -- -- 2,073 2,073
Other................................................ 51 51 826 826
Long-Term Debt....................................... -- -- 8 8
----- ------- ---------- --------------
Total Liabilities.................................. 106 106 4,374 4,374
----- ------- ---------- --------------
Net Assets......................................... $169 $1,203 $ 152 $ 12,500
----- ------- ---------- --------------
----- ------- ---------- --------------
</TABLE>
(e) Represents preadjustment for the sale or spin-off of Molecular Tool, Inc.
(f) Represents cash to be paid in conjunction with the GeneScreen Acquisition
which will close contemporaneously with this offering. Accordingly, a pro
forma adjustment has been made to reflect the $5.0 million due upon the
closing of this offering.
(g) Represents the cash portion of the Helix Acquisition, payable over 26 months
in equal monthly installments of $25,000.
(Footnotes continued on next page)
22
<PAGE>
(Footnotes continued from previous page)
(h) Represents estimated capitalized expenses incurred in connection with the
acquisitions of ISBMD, Helix and GeneScreen.
(i) Represents the elimination of the equity of Helix and GeneScreen as well as
the issuance of 124,100 shares of Common Stock in the Helix acquisition and
681,818 shares of Common Stock in the GeneScreen acquisition. The value of
the shares for Helix was based on an independent third party appraisal. The
estimated number of shares of Common Stock to be issued in the GeneScreen
acquisition is 681,818, which is based on a per share price of $11.00. The
actual number of shares of Common Stock to be issued will be based on the
initial public offering price. The calculation of the pro forma adjustments
for the elimination of the acquired companies' equity accounts and issuance
of the Common Stock is as follows:
<TABLE>
<CAPTION>
NET EQUITY PREFERRED COMMON PAID-IN NOTES ACCUMULATED
OF HELIX STOCK STOCK CAPITAL RECEIVABLE DEFICIT
---------- --------- ------ ------- ---------- -----------
<S> <C> <C> <C> <C> <C> <C>
Historical values...................... $ 169 $ 52 $ 26 $ 7,697 $(85) $(7,132)
---------- --------- ------ ------- ----- -----------
---------- --------- ------ ------- ----- -----------
Pro forma adjustments:
Eliminate equity accounts............ $ (169) $ (52) $(26) $(7,697) $ 85 $ 7,132
Common Stock issuance for Helix
(124,100).......................... 12 490
Common Stock issuance for GeneScreen
(681,818).......................... 68 7,434
In-process R&D....................... (8,500)
---------- --------- ------ ------- ----- -----------
Total pro forma adjustments............ $ (169) $ (52) $ 54 $ 227 $ 85 $(1,368)
---------- --------- ------ ------- ----- -----------
---------- --------- ------ ------- ----- -----------
</TABLE>
(j) The Helix Acquisition consists of the acquisition of only certain assets and
liabilities. Purchased assets exceeded liabilities assumed by approximately
$169,000 and have been reflected as 'Net equity of Helix' for pro forma
purposes only.
(k) Reflects the historical results of operations for the NLL, Helix, GeneScreen
and ISBMD acquisitions as if they had occurred on October 1, 1996.
(l) Reflects the increase in amortization expense relating to the estimated
goodwill and other intangibles for the NLL, Helix, GeneScreen and ISBMD
acquisitions computed as follows:
<TABLE>
<CAPTION>
PERIOD
-------------------------------------
YEAR ENDED
SEPTEMBER 30, NINE MONTHS ENDED
PRO FORMA ADJUSTMENT 1997 JUNE 30, 1998
- ----------------------------------------------------------------------- ---------------- -----------------
<S> <C> <C>
Goodwill--15 year life
NLL ($786,000)....................................................... $ 52 $ 39
Helix ($1,034,000)................................................... 70 53
ISBMD ($1,238,000)................................................... 83 62
GeneScreen ($2,348,000).............................................. 157 118
Workforce--10 year life
GeneScreen ($600,000)................................................ 60 45
Developed Technology--8 year life
GeneScreen ($900,000)................................................ 113 85
----- -----
Total.............................................................. 535 402
Less: Recorded by Company in period.................................... -- (43)
----- -----
Pro forma adjustment................................................... $535 $ 359
----- -----
----- -----
</TABLE>
(m) Pro forma adjustment represents incremental interest expense on $600,000 of
debt utilized to acquire NLL at the Company's current rate of interest of
8.39%.
(n) Reflects the historical results of operations for the NLL, Helix, GeneScreen
and ISBMD acquisitions as if they had occurred on October 1, 1997.
(Footnotes continued on next page)
23
<PAGE>
(Footnotes continued from previous page)
(o) The calculation of the weighted average shares for basic and dilutive
earnings per share utilized in the pro forma earnings per share for the year
ended September 30, 1997 and nine month period ended June 30, 1998 are as
follows:
<TABLE>
<CAPTION>
SEPTEMBER 30, JUNE 30,
1997 1998
------------- ---------
<S> <C> <C>
Basic:
Lifecodes historical.......................................................... 2,159,902 2,426,504
NLL........................................................................... 14,600 6,489
ISBMD......................................................................... 365,000 243,333
Helix......................................................................... 124,100 124,100
GeneScreen.................................................................... 681,818 681,818
------------- ---------
Pro forma basic............................................................... 3,345,420 3,482,244
------------- ---------
------------- ---------
</TABLE>
The Company had pro forma losses for the year ended September 30, 1997 and
nine month period ended June 30, 1998, therefore the weighted average
shares outstanding for dilutive earnings per share equaled the basic
pro forma weighted average shares.
24
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
OVERVIEW
Lifecodes is a leading provider of DNA testing services and related
products for human paternity and forensic identification and for genetic typing
of potential donors and recipients of bone marrow and organ transplants.
Paternity testing seeks to establish the correct identity of a child's parents
when such matters are disputed. Forensic testing seeks to link hair, saliva,
blood or other biological specimens found at a crime scene to an alleged
suspect. Transplant testing detects the genetic sequence of certain human
leukocyte antigens contained in DNA which are believed to be a principal
determinant of whether a donor's bone marrow or organ transplant may be rejected
by the recipient's immune system or may attack the recipient's immune system.
The Company is one of the largest providers of paternity, forensic and
transplant testing services in the United States and is one of the largest
providers of transplant testing in Germany. In addition to testing services, the
Company offers a product line consisting of reagents and a wide range of DNA
probes, which are sold principally in either standard configurations or
customized test kits.
The Company was incorporated in New York in April 1982 and was purchased
by, and became a wholly-owned subsidiary of, Quantum Chemical Corporation in
1985. In September 1991, management and certain investors acquired all of
Quantum's interest in the Company and relocated the Company to Stamford,
Connecticut. The Company reincorporated in Delaware in January 1993. In March
1996, the Company acquired Cellmark Diagnostics, Inc., a division of Zeneca,
plc. Cellmark is one of the two largest commercial forensic testing laboratories
in the United States and was the first and is one of only two commercial
laboratories accredited by the American Society of Crime Laboratory Directors
for DNA testing. The Company's services and products are marketed to each of the
paternity, forensic and transplant markets. For the fiscal year ended September
30, 1997 and the nine months ended June 30, 1998, the Company derived
approximately 33%, 25% and 42% and 37%, 15% and 48% of its revenues from the
paternity, forensic and transplant markets, respectively.
Historically, the Company has focused on developing and incorporating its
DNA technology into products to be sold as stand-alone test kits and to a lesser
extent as DNA testing services. Since 1997, the Company has emphasized offering
testing services to end-users of DNA testing information in an effort to meet
demand for an integrated DNA testing solution and to take advantage of access to
new DNA testing process technologies from Molecular Dynamics, Inc., Amersham
Pharmacia Biotech Inc. and Molecular Innovations, Inc. which the Company
believes, when fully developed, will improve the speed, quality and breadth of
information provided by its testing services at a reduced cost. In addition, the
Company believes this strategy will allow the Company to exploit opportunities
not otherwise available to it as a marketer of DNA testing products. As a
result, the Company expects testing services to generate an increasing
percentage of its future revenues.
RECENT AND PENDING ACQUISITIONS
Since January 1, 1998, the Company has substantially increased its testing
services revenue base and expanded its market coverage and laboratory
infrastructure by completing the acquisitions of National Legal Laboratories
(the 'NLL Acquisition'), International Support for Bone Marrow Drives, Ltd. (the
'ISBMD Acquisition'), Micro Diagnostics, Inc. (the 'MDx Acquisition') and Helix
Biotech Ltd. (the 'Helix Acquisition') (collectively, the 'Recent
Acquisitions'). In addition, the Company has entered into an agreement to
acquire GeneScreen Inc. contemporaneously with the closing of this offering (the
'GeneScreen Acquisition,' and together with the Recent Acquisitions, the 'Recent
and Pending Acquisitions'). See 'Business--Recent and Pending Acquisitions' and
'--GeneScreen Acquisition.'
National Legal Laboratories. In February 1998, the Company acquired
substantially all of the assets of National Legal Laboratories ('NLL'), a
division of Group Benefit Services, Inc., for a purchase price of $815,000,
consisting of approximately $732,000 in cash and an aggregate of 14,600 shares
of Common Stock. NLL is the fifth largest paternity testing laboratory in the
United States. NLL generated revenues of $2.0 million during the fiscal year
ended September 30, 1997. The acquisition of NLL was accounted for as a
purchase.
International Support for Bone Marrow Drives, Ltd. In April 1998, the
Company acquired all of the outstanding stock of International Support for Bone
Marrow Drives, Ltd. ('ISBMD') for a purchase price of $1.4 million, consisting
of an aggregate of 365,000 shares of Common Stock. ISBMD is one of the largest
providers of HLA testing services in Germany. ISBMD arranges HLA testing to be
performed for a large marrow
25
<PAGE>
donor database organization and contracts with a small group of specially
selected laboratories in Germany and the United States to perform both DNA and
serological HLA testing. ISBMD generated revenues of $4.8 million during the
year ended December 31, 1997. The acquisition of ISBMD was accounted for as a
purchase.
Micro Diagnostics, Inc. Effective April 1998, the Company acquired all of
the outstanding stock of Micro Diagnostics, Inc. ('MDx'), notes payable to
shareholders of $775,000 and advances from related party of $200,000 which were
converted into MDx stock at a rate of $5.00 per share, for an aggregate of
325,382 shares of Common Stock. MDx is a full service DNA testing laboratory.
MDx generated revenues of $3.0 million during the year ended December 31, 1997.
The acquisition of MDx was accounted for as a pooling of interests.
Helix Biotech Ltd. In July 1998, the Company acquired substantially all of
the assets of Helix Biotech Ltd. ('Helix') for a purchase price of $1.2 million,
consisting of $650,000 in cash payable over 26 months and an aggregate of
124,100 shares of Common Stock. Helix is a full service DNA identity testing
laboratory serving the Canadian market. Helix generated revenues of $1.9 million
during the fiscal year ended July 31, 1997. The acquisition of Helix was
accounted for as a purchase.
GeneScreen Inc. In September 1998, the Company entered into an agreement
with GeneScreen Inc. ('GeneScreen') whereby the Company agreed to acquire
substantially all of the stock of GeneScreen for cash and Common Stock. The
preliminary aggregate purchase price is $12.5 million, consisting of $5.0
million in cash and $7.5 million of Common Stock. GeneScreen is a leading
provider of paternity testing services, primarily to the public testing market.
The acquisition is expected to be completed contemporaneously with the closing
of this offering. GeneScreen generated revenues of $11.2 million during the year
ended December 31, 1997. The acquisition of GeneScreen is being accounted for as
a purchase.
In connection with the GeneScreen Acquisition, the Company is also
acquiring certain rights to a technology developed by GeneScreen referred to as
genetic bit analysis ('GBA') for paternity, transplant, forensic and
pharmacogenetic applications. GBA is a proprietary, single nucleotide
polymorphism that allows for the analysis of single base differences in a small
strand of DNA. While management believes GBA technology will prove to be of
value in the future, the Company will need to make further investments in this
technology to prepare it for commercialization. The technology is expected to
reach commercial feasibility in the second to third quarter of fiscal 2000. The
anticipated research and development costs necessary to bring the technology to
the market are approximately $2.0 million ($600,000 in fiscal 1998, $1.2 million
in fiscal 1999, and $200,000 in fiscal 2000). As a result, the Company expects
to incur a significant charge simultaneously with the completion of the
GeneScreen Acquisition from the write-off of the portion of the GeneScreen
purchase price that is deemed to be purchased research and development. This
write-off is expected to be approximately $8.5 million. In order to value the
in-process technology, forecasts of future revenue and expenses were used to
calculate debt-free cash flows over the technology's economic life with
consideration given to the required investments and resources necessary to bring
the technology to technological feasibility. These debt-free cash flows are then
used to calculate a net present value using the discounted cash flow method
under the Income Approach. The present value of this cash flow was discounted
at a rate of 24 percent to properly represent the relative risk associated with
this asset. In addition, it is expected that the restructuring of the Recent and
Pending Acquisitions will result in certain additional charges during the fourth
quarter of fiscal 1998 as a result of integrating selling and marketing
activities and streamlining operations. The Company also expects to record
approximately $2.4 million of goodwill that will be amortized over a 15-year
period. In addition, the Company expects to amortize approximately $1.5 million
of other intangible assets over an eight to ten year period.
Except for the MDx Acquisition, the Recent and Pending Acquisitions have
been or will be accounted for as purchases. As a result, the Company's
historical financial statements do not reflect the operating results for the
full historical periods of the Recent and Pending Acquisitions that are treated
as purchases but have been restated to include the results of MDx, which has
been accounted for as a pooling of interests. The Recent and Pending
Acquisitions that have been treated, for accounting purposes, as purchases will
cause the Company to incur significant future amortization expense associated
with the excess of the purchase price over the fair value of the net tangible
assets acquired.
26
<PAGE>
The Recent and Pending Acquisitions have resulted in a significant change
in the Company's financial profile. On a pro forma basis, after giving effect to
the Recent and Pending Acquisitions, the Company had revenues for the fiscal
year ended September 30, 1997 of $32.4 million and a net loss of $1.3 million,
compared to historical revenues of $15.1 million and net income of $400,000 in
the same period. In addition, the Company's pro forma revenues were $30.1
million and net loss was $500,000 for the nine months ended June 30, 1998,
compared to historical revenues of $16.5 million and net income of $1.0 million
for the same period.
IMPACT OF NEW TECHNOLOGY
In furtherance of the Company's strategic goal of improving the speed,
quality and breadth of information provided by its testing services and lowering
its costs, the Company has entered into a number of strategic technology access
relationships to implement the ongoing improvement of its testing process. In
January 1998, the Company entered into a technology access agreement to enable
the Company to utilize the MDI Microarray spotter and reader. In addition, in
March 1998, the Company entered into an agreement with Molecular Innovations for
exclusive rights to a technology developed to reduce the cost of preparing DNA
for testing. The Company is also negotiating with Amersham a sublicense
agreement pursuant to which the Company would acquire the right to use
Amersham's fluorescent detection dye technology in connection with the MDI
Microarray system for testing services in the areas of paternity, forensics and
tissue transplants. See 'Business-- Strategic Partnerships and Relationships'
and 'Risk Factors--Dependence on Licensed Technology.' The Company intends to
adapt its current DNA testing technology, and make improvements to its DNA
testing process, based on technology licensed or to be acquired from MDI,
Amersham, Molecular Innovations and GeneScreen. As a result, the Company expects
to incur a higher level of research and development spending during fiscal 1998,
1999 and 2000 than the Company experienced in fiscal 1996 and 1997.
RESULTS OF OPERATIONS
The following table sets forth, for the periods indicated, certain
financial data as a percentage of revenues:
<TABLE>
<CAPTION>
YEAR ENDED SEPTEMBER 30, NINE MONTHS ENDED JUNE 30,
----------------------------------------------- ------------------------------------
1993 1994 1995 1996 1997 1997 1998
---- ---- ---- ------- ------- ---------------- ----------------
<S> <C> <C> <C> <C> <C> <C> <C>
Revenues:
Service..................... 29% 27% 33% 52% 55% 53% 61%
Product and other........... 71 73 67 48 45 47 39
--- --- ---- ----- ----- --- ---
100 100 100 100 100 100 100
Cost of revenues:
Service..................... 17 14 12 33 35 35 37
Product and other........... 36 38 31 19 14 14 14
--- --- ---- ----- ----- --- ---
53 52 43 52 49 49 51
--- --- ---- ----- ----- --- ---
Gross profit................ 47 48 57 48 51 51 49
Other costs and expenses:
Selling, general and
administrative
expenses................. 51 30 31 43 40 38 33
Research and development
expenses................. 29 26 19 9 6 7 6
--- --- ---- ----- ----- --- ---
Income (loss) from
operations.................. (33) (8) 7 (4) 5 6 10
Other income (expense):
Other income................ 5 1 1 -- -- -- 1
Interest expense............ (5) (8) (3) (2) (2) (1) (1)
--- --- ---- ----- ----- --- ---
Income (loss) before income
taxes and extraordinary
item........................ (33) (15) 5 (6) 3 5 10
Income taxes.................. --- --- ---- ----- ----- --- ---
Extraordinary item............ 4 -- -- (1) 1 3 5
--- --- ---- ----- ----- --- ---
Net income (loss)............. (29)% (15)% 5% (7)% 2% 2% 5%
--- --- ---- ----- ----- --- ---
--- --- ---- ----- ----- --- ---
</TABLE>
27
<PAGE>
Nine Months Ended June 30, 1998 Compared With Nine Months Ended June 30, 1997
Revenues. Revenues increased to $16.5 million during the nine months ended
June 30, 1998 from $9.8 million during the nine months ended June 30, 1997, an
increase of $6.7 million or 68%. Service revenues increased to $10.1 million
from $5.2 million, an increase of $4.9 million or 94%. Product and other
revenues increased to $6.4 million from $4.6 million, an increase of $1.8
million or 39%. The growth of both service and product revenues was primarily
impacted by the growth in the volume of the Company's transplant testing
business and secondarily by continued growth of the volume of the Company's
paternity and forensic testing businesses and additional revenues resulting from
the ISBMD and NLL acquisitions. No new services or products were introduced
and no price increases were implemented during the period.
Cost of Revenues. Cost of revenues includes the cost of labor and
purchased chemicals and materials to produce reagents sold to other companies as
well as those used in the Company's own business. In addition, it also includes
the labor and outside services involved in obtaining and shipping specimens to
the Company's facilities, testing such specimens and returning results to the
appropriate party. Cost of revenues increased to $8.3 million during the nine
months ended June 30, 1998 compared to $4.8 million in the comparable period of
1997, an increase of $3.5 million or 73%. The cost of service revenues increased
to $6.1 million from $3.4 million, an increase of $2.7 million or 79%. The
increase in cost of service revenues is primarily attributable to growth in the
Company's service sales. The cost of product and other revenues increased to
$2.3 million from $1.4 million, an increase of $0.9 million or 64%.
Selling, General and Administrative Expenses. Selling, general and
administrative expenses, which include salaries, benefits, facility expenses and
other administrative overhead, increased to $5.5 million during the nine months
ended June 30, 1998 from $3.8 million during the nine months ended June 30,
1997, an increase of $1.7 million or 45%. This increase was due to the general
growth of the Company's business including increased expenses resulting from the
ISBMD and NLL acquisitions. Amortization of goodwill arising from acquisitions
is also included in selling, general and administrative expenses. During the
nine months ended June 30, 1998, such charges were approximately $43,000
compared to no such charges during the nine months ended June 30, 1997. Such
charges are expected to increase as the Company completes additional
acquisitions. As a percentage of revenues, selling, general and administrative
expenses were 33% compared to 38% in the comparable period last year. In
general, testing service businesses have lower selling, general and
administrative expenses as a percent of sales than do Lifecodes' product
business.
Research and Development Expenses. Research and development expenses
include salaries, benefits, facilities expenses, outside services and other
related costs incurred for the identification, creation and development of new
products and services. The Company expenses all research and development
expenses as incurred. Included in research and development expenses are
depreciation on certain equipment used for general research and development
purposes as well as prepaid licenses and expenses which are amortized over the
life of the agreement covering such licenses and expenses. Research and
development expenses increased to $923,000 during the nine months ended June 30,
1998 from $673,000 during the nine months ended June 30, 1997, an increase of
$250,000 or 37%. As a percentage of revenues, research and development expenses
were 6% during the nine months ended June 30, 1998 compared to 7% during the
nine months ended June 30, 1997. It is expected that a higher level of research
and development expenditures will be maintained for the next 18 to 24 months as
the Company completes the development of its micro-automation technology and
applies that technology to the GBA technology rights to be acquired in the
pending GeneScreen Acquisition.
Interest Expense. Interest expense increased to $178,000 during the nine
months ended June 30, 1998 from $124,000 during the nine months ended June 30,
1997, an increase of $54,000 or 44%. This increase was caused primarily by a
higher level of indebtedness outstanding during the period.
Income Taxes. Income tax expense increased to $752,000 during the nine
months ended June 30, 1998 from $289,000 during the nine months ended June 30,
1997. Income taxes in 1997 reflect the utilization of previously unrecognized
net operating loss carryforwards and the recording for the first time of a
deferred tax asset for future tax benefits of $555,000. In both 1997 and 1998,
the Company's MDx subsidiary was taxed as an S corporation. As a result, while
MDx has been consolidated for financial presentation purposes since its founding
in 1996, it has only been consolidated for income tax purposes since April 1998.
These circumstances cause the income tax provision in the Company's financial
statements to be larger than the statutory rate of
28
<PAGE>
approximately 40% (before other temporary or permanent differences) which
management expects to experience in the future.
Fiscal Year Ended September 30, 1997 Compared With Fiscal Year Ended September
30, 1996
Revenues. Revenues increased to $15.1 million during the fiscal year ended
September 30, 1997 from $7.7 million during the fiscal year ended September 30,
1996, an increase of $7.4 million or 96%. Service revenues increased to $8.3
million from $4.0 million, an increase of $4.3 million or 108%. Product and
other revenues increased to $6.8 million from $3.7 million, an increase of $3.1
million or 84%. The growth of both service and product revenues was primarily
impacted by the growth in the volume of the Company's transplant testing
business and secondarily by continued growth in the volume of the Company's
paternity and forensic testing businesses. No new services were introduced
during 1996 or 1997. New products introduced in 1996 represented approximately
5% of the revenues from product and other revenues. While no price increases
were implemented in products and other revenues in 1997, price increases in
certain testing services were offset by price decreases in other services during
the year.
Cost of Revenues. Cost of revenues increased to $7.4 million during the
fiscal year ended September 30, 1997 compared to $4.0 million in fiscal 1996, an
increase of $3.4 million or 85%. The cost of service revenues increased to $5.2
million from $2.6 million, an increase of $2.6 million or 100%. The increase in
cost of revenues is attributable to growth in the Company's service sales. The
cost of product and other revenues increased to $2.1 million from $1.4 million,
an increase of $700,000 or 50%. These costs increased less than the sales
increase due to the operating leverage inherent in the Company's batch
manufacturing processes.
Selling, General and Administrative Expenses. Selling, general and
administrative expenses increased to $6.0 million during the fiscal year ended
September 30, 1997 from $3.3 million during the fiscal year ended September 30,
1996, an increase of $2.7 million or 82%. As a percentage of revenues, selling,
general and administrative expenses decreased to 40% in fiscal 1997 from 43% in
fiscal 1996 principally as a result of the Company's increase in revenues.
Research and Development Expenses. Research and development expenses
increased to $900,000 during the fiscal year ended September 30, 1997 from
$718,000 during the fiscal year ended September 30, 1996, an increase of
$182,000 or 25%. The increase in research and development expenses was primarily
attributable to increased spending on the Company's technology for transplant
testing. As a percentage of revenues, research and development expenses were 6%
in fiscal 1997 compared to 9% in fiscal 1996 principally as a result of the
Company's increase in revenues.
Interest Expense. Interest expense increased to $308,000 during the fiscal
year ended September 30, 1997 from $183,000 during the fiscal year ended
September 30, 1996, an increase of $125,000 or 68%. This increase resulted
primarily from interest expense for a full year related to borrowings for the
acquisition of Cellmark in the middle of fiscal 1996 and to the use of accounts
receivable factoring and shareholder advances rather than equity financing at
MDx.
Income Taxes. Prior to fiscal 1997, the Company did not recognize the tax
benefits related to its net operating loss carryforwards due to the uncertainty
related to their realization. Accordingly, no income tax expense or benefit was
recognized in fiscal 1996. In fiscal 1997, the Company concluded that this
uncertainty had been resolved based on three consecutive years of profitable
operations. A deferred tax benefit of $555,000 was recorded in fiscal 1997 that
impacted income taxes recorded for the period.
Fiscal Year Ended September 30, 1996 Compared With Fiscal Year Ended September
30, 1995
Revenues. Revenues increased to $7.7 million during the fiscal year ended
September 30, 1996 from $3.5 million during the fiscal year ended September 30,
1995, an increase of $4.2 million or 120%. Service revenues increased to $4.0
million from $1.2 million, an increase of $2.8 million or 233%. Approximately
$1.8 million of this increase was attributable to Cellmark, which was acquired
in fiscal 1996, and approximately $622,000 of this increase was attributable to
MDx, which commenced operations in the second half of fiscal 1996. Product and
other revenues increased to $3.7 million from $2.4 million, an increase of $1.3
million or 54%. Revenues from new products introduced during 1996 represented
less than 4% of product and other revenues during the period. Both service and
product revenues were primarily impacted by the growth of the Company's
transplant testing business and secondarily by growth in the Company's paternity
and forensic testing businesses. There were no material price increases during
1996.
29
<PAGE>
Cost of Revenues. Cost of revenues increased to $4.0 million during the
fiscal year ended September 30, 1996 from $1.5 million during the fiscal year
ended September 30, 1995, an increase of $2.5 million or 167%. Cost of service
revenue increased to $2.6 million from $400,000, an increase of $2.2 million or
550%. Approximately $980,000 of this increase was attributable to Cellmark, and
approximately $802,000 of this increase was attributable to the start-up of MDx.
Cost of product and other revenues increased to $1.4 million from $1.1 million,
an increase of $300,000 or 27%.
Selling, General and Administrative Expenses. Selling, general and
administrative expenses increased to $3.3 million during the fiscal year ended
September 30, 1996 from $1.1 million during the fiscal year ended September 30,
1995, an increase of $2.2 million or 200%. Of this increase, approximately
$240,000 was attributable to management incentive compensation payments based on
profitability goals, approximately $850,000 was attributable to the selling,
general and administrative expenses resulting from the acquisition of Cellmark
and approximately $704,000 was attributable to the selling, general and
administrative expenses added by the start-up of MDx. As a percentage of
revenues, selling, general and administrative expenses were 43% during the
fiscal year ended September 30, 1996 compared to 31% during the fiscal year
ended September 30, 1995.
Research and Development Expenses. Research and development expenses
increased to $718,000 during the fiscal year ended September 30, 1996 from
$669,000 during the fiscal year ended September 30, 1995, an increase of $49,000
or 7%. As a percentage of revenues, research and development expenses were 9% in
fiscal 1996 compared to 19% in fiscal 1995.
Interest Expense. Interest expense increased to $183,000 during the fiscal
year ended September 30, 1996 from $115,000 during the fiscal year ended
September 30, 1995, an increase of $68,000 or 59%. This increase resulted
primarily from interest expense related to borrowing to fund the acquisition of
Cellmark and the start-up of MDx.
Income Taxes. No income tax expense was incurred during the fiscal years
ended September 30, 1996 or 1995 because the Company had not recognized the tax
benefit of net operating loss carryforwards in prior years due to the
uncertainty regarding their realization. Such benefits were recognized in fiscal
1995 and 1996 to the extent the Company had current period income.
QUARTERLY RESULTS OF OPERATIONS
Variations in the Company's results of operations have occurred from
quarter to quarter and the Company may experience significant fluctuations in
results of operations on a quarter to quarter basis in the future. Quarterly
operating results will fluctuate due to numerous factors, including: (i) the
timing of the introduction and availability of new or improved testing services
and products; (ii) the timing and level of expenditures associated with research
and development activities; (iii) seasonality in the Company's operating
results; (iv) the Company's ability to cost-effectively manage and integrate
newly acquired entities; (v) variations in laboratory efficiencies; (vi) the
timing of establishment of strategic technology licenses and the implementation
of technology licenses under such arrangements; (vii) changes in demand for its
services and products based on competition and changes in government regulation
and other economic factors; (viii) the timing of significant orders from
customers; (ix) changes in pricing and discounts; (x) variations in the mix of
services and products sold; (xi) the timing and level of expenditures associated
with expansion of sales and marketing activities and overall operations; and
(xii) general economic conditions. Many of these factors are difficult to
forecast or are beyond the Company's control, and these or other factors could
have a material adverse effect on the Company's business, financial condition
and results of operations. Specifically, the Company's operations are subject to
certain seasonal and market forces that are difficult for management to
anticipate or control. In particular, drives to find potential donors of bone
marrow tend to occur in the spring and fall with the result that the Company's
second and fourth fiscal quarters (winter and summer quarters) may not be as
strong financially as its first and third fiscal quarters. Furthermore, the
Company generally provides testing services as and when required by its
customers and therefore does not typically have significant backlog.
Fluctuations in quarterly demand for the Company's testing services and products
may adversely affect the continuity of the Company's laboratory operations,
increase uncertainty in operational planning and/or affect cash flows from
operations.
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LIQUIDITY AND CAPITAL RESOURCES
The Company has historically financed its growth and operations through
cash flows from operations, borrowings under its credit facilities and the
private sale of equity and debt securities.
The Company borrows funds pursuant to a Credit Agreement with First Union
National Bank ('First Union') dated as of March 31, 1998 that provides for a
$2.3 million term loan and a $1.0 million revolving loan (collectively, the
'Credit Facility'). Interest on the term loan accrues at a fixed rate of 8.39%,
while interest on the revolving loan accrues at a floating rate equal to First
Union's prime rate, currently 8.5%. The term loan matures on March 1, 2001 while
the termination date for the revolving loan commitment is May 31, 1999. The
Credit Facility replaced a prior credit facility with First Union that was used
primarily for working capital purposes. On June 30, 1998, the Company had
outstanding borrowings of $2.25 million under the term loan and $0 under the
revolving loan. The Company intends to use certain of the net proceeds of this
offering to repay all amounts due under the Credit Facility. See 'Use of
Proceeds.'
The Company is a party to litigation with Promega Corporation ('Promega')
relating to the infringement by the Company, between October 1990 and June 1993,
of a patent covering major DNA probes used in paternity and forensic testing.
The action regarding the Company's infringement of Promega's sub-licensee patent
rights during the period in question is currently in the damage phase and is
scheduled for trial without a jury in April 1999. Each party has submitted an
expert's report as to the amount of damages owed by the Company to Promega.
Promega's expert has estimated the damages to range from approximately $900,000
to $1.3 million, while the Company's expert has estimated the damages to range
from approximately $100,000 to $900,000. Furthermore, if the Company is
adjudicated to have willfully infringed the patent, the court has the authority
to impose up to treble damages and require the Company to pay Promega's
attorneys' fees. In the fiscal year ended September 30, 1997 the Company set
aside $684,000 in a reserve to address expenses associated with the potential
impact of this litigation. In December 1997, the Company set aside an additional
$125,000 for this reserve. As of June 30, 1998, the reserve was approximately
$755,000. Although the Company believes its reserve is adequate, there can be no
assurance that damages will not substantially exceed the reserved amount or that
the judgment will not have a material adverse effect on the Company's financial
condition. See 'Business-- Legal Proceedings.'
The Company's net cash generated by operating activities during the nine
months ended June 30, 1998 was $1,922,000 compared to a use of $486,000 for the
first nine months of fiscal 1997. The cash generated from operating activities
resulted from an increase in net income and in non-cash charges compared to the
first nine months of fiscal 1997. The $419,000 increase in the Company's
accounts receivable for the nine months ended June 30, 1998 is lower than
management expects in future periods because a portion of receivables growth
during this period arose from the cash acquisition of NLL and the stock
acquisition of ISBMD and are, according to generally accepted accounting
principles, not included in cash flows from operations. The Company's accounts
receivable turnover (measured using the most recent quarter's sales) declined
from 56 days in the third quarter of 1997 to 53 days in the third quarter of
1998. This decrease occurred despite the fact that the Company purchased all
previously sold MDx accounts receivable on April 30, 1998 and began funding MDx
receivables from its own financial resources after that date. The purchase of
the MDx accounts receivable was financed by a short term note to the former
owner which was recorded as an increase in accrued expenses and other current
liabilities. Since this note has a six month life, the increase in funds
provided from this source is not expected to persist in future periods.
The Company's net cash used in investing activities during the nine months
ended June 30, 1998 was $2.7 million compared to $602,000 during the nine months
ended June 30, 1997. In particular, net cash used in investing activities
increased by $702,000 related to the acquisition of NLL and $1.1 million related
to the acquisition of patents and licenses. While the Company has no
acquisitions planned other than those disclosed herein, future cash acquisitions
may create additional investment uses of cash which would have to be financed by
the Company. In addition, the Company's investment in patents and licenses is
expected to continue for another nine to twelve months as the Company completes
the program to develop micro-automation technology as described herein. Net cash
provided by financing activities increased primarily by additional bank
borrowings in the amount of $1.2 million which were used to finance investing
activities.
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The Company's net cash provided by operating activities during fiscal year
ended September 30, 1997 was $543,000 compared to a $439,000 for the prior
fiscal year. Generally, the cash used in operating activities results from
increased working capital requirements. During the fiscal year ended September
30, 1997, $684,000 of the $909,000 increase in accrued expenses and other
current liabilities was caused by the accrual for potential liabilities arising
out of the Company's dispute with Promega. In addition, the $1,196,000 increase
in the Company's accounts receivable was caused by increases in the Company's
sales volume. Measured on the basis of days of sales outstanding, accounts
receivable at September 30, 1997 represented approximately 76 days of sales
compared to 105 days of sales at September 30, 1996. The Company's net cash used
in investing activities during fiscal year ended September 30, 1997 was
$1,132,000 compared to $1,139,000 for the prior fiscal year. The use of cash for
both years primarily resulted from acquisitions and purchases of fixed assets.
Net cash provided by financing activities during fiscal year ended September 30,
1997 was $492,000 compared to $1,444,000 for the prior fiscal year. Net cash
provided by financing activities decreased primarily as a result of issuing less
debt to fund acquisitions and capital expenditures.
The Company's net cash provided by operating activities during the fiscal
year ended September 30, 1996 was $438,000 compared to $29,000 for the prior
fiscal year. Generally, the cash used in operating activities results from
increased working capital requirements. The $288,000 increase in the Company's
accounts receivable was caused by increases in the Company's sales volume.
Measured on the basis of days of sales outstanding, accounts receivable at
September 30, 1996 represented approximately 105 days of sales compared to 124
days of sales at September 30, 1995. The Company's net cash used in investing
activities during fiscal year ended Septembernb]30, 1996 was $1,139,000 compared
to $182,000 for the prior fiscal year. Net cash used in acquisitions increased
by $500,000, and net cash used in purchases of property and equipment increased
by $443,000. Net cash provided by financing activities during fiscal year ended
September 30, 1996 was $1,444,000 compared to a use of $49,000 for the prior
fiscal year. Net cash provided by financing activities increased primarily as a
result of issuing debt to finance the acquisition of Cellmark and the larger
level of purchases of property and equipment.
The Company believes that cash flows from operations, availability under
the Credit Facility, and the anticipated net proceeds of its initial public
offering will be adequate to fund its anticipated working capital requirements
for at least the next 12 months. In order to implement its growth strategy and
fund additional acquisitions, if any, the Company will require substantial
capital resources and may need to incur, from time to time, additional bank
indebtedness. The Company may also need to issue, in public or private
transactions, equity or debt securities, the availability and terms of which
will depend on market and other conditions. There can be no assurance that any
such additional financing will be available on terms acceptable to the Company,
if at all. See 'Risk Factors--Future Capital Needs; Uncertainty of Availability
of Additional Financing.'
INFLATION
To date, inflation has not had a material impact on the Company's
operations and financial results.
YEAR 2000
The Company has initiated communications with its software vendors to
determine the extent to which the Company is vulnerable to those third parties'
failure to remediate the Year 2000 issue. The Company relies on the ability of
its outside software vendors for remedial action. There can be no assurance that
the systems of these third party software vendors on which the Company relies
will be converted on a timely basis, or that a failure to convert by another
company, or a conversion that is incompatible with the Company's systems, would
not have a material adverse effect on the Company.
The Company will utilize internal and external resources to test, replace
and, if necessary, modify the software for Year 2000 compliance. The Company
plans to have all its critical hardware and software Year 2000 compliant not
later than June 30, 1999. The total remaining cost of completion of the
Company's Year 2000 compliance plan is estimated to be approximately $150,000,
representing approximately 50% of the Company's information technology budget
for the 12 months ending June 30, 1999, and will be funded through operating
cash flows. Some or all of this expense will be for new hardware and software,
which will be capitalized. The Company anticipates that expenses will be equally
divided between hardware and software costs. Any
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information technology systems discovered to be non-compliant with Year 2000
requirements will require modification or replacement, at additional cost to the
Company. To date, the Company has not incurred any costs, other than internal
staff time, related to the assessment and preliminary efforts in connection with
the Year 2000 project and the development of a remediation plan. The Company has
not deferred any information technology projects due to Year 2000 compliance
costs.
The costs of the project and the date on which the Company plans to
complete the Year 2000 modifications are based on management's best estimates,
which were derived utilizing numerous assumptions of future events, including
the continued availability of certain resources, third party modification plans
and other factors. However, there can be no assurance that these estimates will
be achieved and actual results could differ materially from those plans.
Specific factors that might cause such material differences include, but are not
limited to, the availability and cost of personnel trained in this area, the
ability to locate and correct all relevant software issues and similar
uncertainties. See 'Risk Factors--Year 2000 Risks.'
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BUSINESS
GENERAL
Lifecodes is a leading provider of DNA testing services and related
products for human paternity and forensic identification ('identity testing')
and for genetic typing of potential donors and recipients of bone marrow and
organ transplants ('transplant testing'). Paternity testing seeks to establish
the correct identity of a child's parents when such matters are disputed.
Forensic testing seeks to link hair, saliva, blood or other biological specimens
found at a crime scene to an alleged suspect. Transplant testing detects the
genetic sequence of certain human leukocyte antigens ('HLA') contained in DNA
which are believed to be a principal determinant of whether a donor's bone
marrow or organ transplant may be rejected by the recipient's immune system
('rejection') or may attack the recipient's immune system ('graft vs. host
disease'). The Company is one of the largest providers of paternity, forensic
and transplant testing services in the United States and is one of the largest
providers of transplant testing in Germany. In addition to testing services, the
Company offers a product line consisting of reagents and a wide range of DNA
probes, which are sold principally in either standard configurations or
customized test kits.
Lifecodes was the first company to commercially offer DNA testing for
paternity and forensic identification. In 1987, the Company assisted law
enforcement officials in obtaining the first conviction in the United States
based on DNA testing. The Company's Cellmark subsidiary was the first and is one
of only two commercial forensic laboratories accredited by the American Society
of Crime Laboratory Directors for DNA testing and regularly performs casework
and provides expert DNA testimony in criminal cases nationwide. The Company's
HLA test kits are used by the Naval Medical Research Institute and by 15 of the
19 screening laboratories (including two of the Company's laboratories)
performing DNA testing for the National Marrow Donor Program, which together are
generally regarded as being among the most influential institutions worldwide in
setting transplant testing standards.
Historically, the Company has focused on developing and incorporating its
DNA technology into products to be sold as stand-alone test kits and to a lesser
extent as DNA testing services. Since 1997, the Company has emphasized offering
testing services to end-users of DNA testing information in an effort to meet
demand for an integrated DNA testing solution and to take advantage of access to
new DNA testing process technologies from Molecular Dynamics, Inc., Amersham
Pharmacia Biotech Inc. and Molecular Innovations, Inc. which the Company
believes, when fully developed, will improve the speed, quality and breadth of
information provided by its testing services at a reduced cost. In addition, the
Company believes this strategy will allow the Company to exploit opportunities
not otherwise available to it as a marketer of DNA testing products.
INDUSTRY OVERVIEW
Technology
DNA (deoxyribonucleic acid) is the genetic material found in all living
organisms and contains the information that governs all cellular processes. In a
person, every cell contains identical DNA, which is obtained in equal amounts
from a person's biological mother and biological father. DNA is composed of four
chemical bases arranged in a strand, the order of which is unique to each
individual, with the exception of identical twins. A DNA molecule is composed of
two strands that combine in the form of a double helix based on the
complementary nature of their chemical building blocks or 'bases' and consists
of over three billion base pairs in each human cell. The two strands can
typically be separated by heating or by chemical means, but due to their
complementary nature, will flawlessly reform to their original orientation when
the separating agent is removed. DNA testing takes advantage of this strong
complementarity between DNA strands to locate the presence or absence of
specific DNA sequences in a test sample.
All DNA testing involves the isolation of DNA from a sample. Since DNA is
found in virtually all cells in the body, with the major exception of red blood
cells, samples are readily available. The amount of DNA needed for testing is as
little as that found in a few cells. Two primary approaches to DNA testing are
currently utilized. One approach, known as restriction fragment length
polymorphism ('RFLP') analysis, directly tests the DNA isolated from a sample.
The isolated DNA is cut into fragments by enzymes that recognize specific DNA
sequences and the fragments are separated by size. These fragments are then
separated into single strands and
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probes, generally labeled with a fluorescent chemical, are added. The labeled
probes recognize specific regions in the DNA and since the probe is
single-stranded, it binds with its complementary single strand and reforms the
DNA molecule. The chemical label allows the detection of where the probe bound
to the DNA and allows a determination of the size of the fragment identified.
Another approach, polymerase chain reaction ('PCR') analysis, replicates small
quantities of DNA by utilizing special enzymes. DNA is combined with primers,
single strand fragments which recognize specific regions, and enzymes to allow
defined regions of the DNA to be replicated. Once an appropriate number of
copies of DNA have been produced, a variety of detection methods can be used to
obtain a test result.
Prior to the advent of DNA testing technology, identity and transplant
testing were performed through the use of serology, which detects various
proteins found in blood. Although serological testing is typically 20 - 30% less
costly than DNA testing, serological testing has limited predictive power and is
based on measuring biological substances that are less stable than DNA. While
serological testing may provide greater than 95% certainty of identification in
paternity cases, DNA testing typically provides over 99.999% certainty when
identifying a particular individual. In transplant testing, DNA analysis enables
the detection of over 300 genetic differences that may contribute to transplant
incompatibility. One study reported that 48% of individuals deemed to be
compatible by serological testing were found to have one or more differences in
the most commonly studied genetic regions when DNA testing was used. The Company
believes that DNA testing is increasingly replacing serological testing because
it allows for more precise identification and matching, superior accuracy of
results, a broader range of information provided and less specimen degradation.
Markets
The market for nucleic acid diagnostic services (including both DNA and RNA
testing) is significant and growing. According to a market study by The Sage
Group, the global nucleic acid diagnostic services market was estimated to be
approximately $2.1 billion in 1997 and is expected to exceed $3 billion by the
year 2002. The nucleic acid diagnostics market includes testing for identity,
transplant compatibility, genetic diseases, infectious diseases, cancer and
others. According to the same market study, the markets for identity and
pre-transplant testing services using DNA and other technologies together
exceeded $400 million worldwide in 1997 and are growing as a result of emerging
medical technology and social trends. Although DNA testing has grown in many
areas, there have been several barriers to the wider use of DNA testing in the
marketplace. Historically, DNA testing has cost more than serology testing and
has taken longer to provide results. For instance, transplant serology tests can
generally be completed in two hours, while DNA testing currently takes up to
four days, thus preventing DNA testing from being widely used in solid organ
transplants where time is a critical factor. These issues have limited the
ability to economically provide the broad range of information available from
DNA testing. For example, only 10% of the specimens entered into the bone marrow
databases in the United States have been classified by DNA testing, although
this percentage has been increasing in recent years. The Company believes that
as DNA testing becomes more economical from a time and cost standpoint,
customers will utilize DNA testing solutions more broadly to obtain the greater
breadth of information and higher quality of results available from such
technology.
Identity Testing
Paternity Testing. Paternity testing is used in both the public and
private sectors to determine the parentage of a child. The public paternity
testing market involves tests ordered by state governmental agencies commonly
referred to as Child Support Enforcement Agencies ('CSEAs'). This market
developed largely in response to the requirements of such agencies to identify
an alleged father, in circumstances where a mother applies for public monetary
assistance or welfare, in order to compel the father to make child support
payments or to recoup any disbursements made for the benefit of the child. In
the United States, the Federal Government covers 90% of the laboratory costs
incurred in determining paternity as long as the CSEA abides by the specific
Federal regulations concerning enforcement. The Company believes that the growth
of paternity testing will continue in the United States due to various Federal
laws which contain financial penalties and incentives for states to obtain
definitive paternity evidence, either through voluntary admissions or
appropriate biological tests, in child support proceedings. In 1995, only
approximately 50% of illegitimate births had definitive paternity evidence. With
over one million illegitimate births annually in the United States, the Company
believes that the enforcement of this Federal legislation will increase the use
of DNA testing in the public paternity market. The
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private paternity testing market typically involves disputes over paternity in
which services are principally ordered through attorneys involved in resolving
such disputes.
Forensic Testing. Forensic testing is used to evaluate biological
specimens involved in a crime in order to identify the individual responsible
for the crime. In recent years, the acceptance of forensic DNA testing has
increased due to a number of high profile criminal cases. The growing
recognition of the effectiveness of DNA testing, combined with the high
percentage of repeat criminal offenders, has prompted the FBI and nearly every
state to establish a Convicted Felon Database Profiling program which would
allow law enforcement officials to search to see if DNA found at a crime scene
matches that of any felon in the database. Specifically, forty-eight states have
enacted legislation requiring persons convicted of felony sex offenses to
provide samples for DNA testing. Thirty-five of these states are currently
collecting such samples and thirty-two states have already started analyzing
those samples.
Transplant Testing
The two major markets for transplant testing worldwide are (i)
pre-transplant screening of potential donors, which consists of high volume
testing to classify and database each potential donor's human leukocyte antigens
('HLA') associated with organ rejection and (ii) clinical testing at transplant
centers to confirm donor/recipient compatibility and to diagnose and manage
organ rejection and other health issues faced by transplant recipients. The
Company believes that bone marrow transplants between two individuals are
increasing in number due to their established effectiveness in treating bone
marrow diseases such as leukemia. There is also anecdotal evidence indicating
that bone marrow transplants may affect tumor reduction in patients with breast
and other cancers, as well as provide therapeutic benefits in patients with
handicapped immune systems. According to a market research study, there were
over 17,000 bone marrow transplants worldwide between different individuals in
1997 and the number of such transplants has been increasing by approximately 16%
per year. In addition, according to a market research study, there were over
32,000 solid organ transplants worldwide in 1997 that required compatible donors
and recipients.
DNA testing is used in the transplant market to match potential bone marrow
and organ donors to recipients. Transplantation fails when the recipient's
immune system does not recognize the donated bone marrow or organ and rejects
it. The immune system recognizes HLA proteins on the surface of cells as part of
its defense mechanism. These HLA proteins vary greatly between individuals, and
the DNA that determines these protein differences can be tested to see whether
the donor matches the recipient. DNA probes that are designed to detect
differences in HLA DNA sequences provide a powerful tool to accurately type the
HLA features of cells. Tagged DNA probes are added to the DNA sample and they
bind tightly to specific HLA sequences. The HLA type is then determined by which
DNA probe bound to the sample.
Use of HLA testing may result in substantial cost savings to hospitals by
increasing the chance of a proper transplant match and therefore reducing the
probability of the need for additional transplants or expensive drug therapies
to prevent rejection of the donated bone marrow or organ. In the United States,
transplants between two individuals typically cost between $80,000 and $300,000,
in large part because physicians must manage not only the risk of donated bone
marrow being rejected, but also the risk that donated bone marrow may attack the
immune system of the recipient (graft vs. host disease). The Company believes
that access to a large number of HLA-typed individuals in order to find the most
compatible donor is a cost-effective way to manage these risks. DNA testing is
better suited to detect subtle genetic variations that impact organ rejection
than traditional serological testing methods. In addition to growth due to the
increased number of transplant procedures, the Company believes that HLA testing
will be used more extensively because scientists have recently discovered that
other portions of the HLA gene system may have important roles in many
nonmalignant diseases, the severity of infectious diseases and the occurrence of
toxic events after therapeutic interventions.
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STRATEGY
The Company's objective is to become the leading international provider of
integrated DNA testing solutions. The Company's strategy for achieving this
objective consists of the following principal elements:
o Continue to Improve DNA Testing Process. The Company intends to use
existing technology, as well as technology being developed through
its current collaborations, to lower costs and improve the quality,
speed and breadth of information provided by its testing services.
The Company is currently developing methods to automate and
miniaturize the DNA testing process and is acquiring additional
technology in this area pursuant to the GeneScreen Acquisition.
Automation is expected to lower labor costs while increasing
accuracy and speed while miniaturization is expected to lower
reagent costs. The Company believes that improvements in speed and
accuracy may permit it to set new standards and specifications,
thereby enhancing the Company's ability to win additional contracts
and further expand its business.
o Pursue Strategic Acquisitions. The Company has completed a number
of recent acquisitions and the pending GeneScreen Acquisition will
close contemporaneously with this offering. The Company intends to
continue to explore such opportunities to expand its market coverage
and laboratory infrastructure. The Company believes that there is an
opportunity to consolidate the industry and enhance laboratory
performance as many smaller laboratories do not have the automation,
information systems or implementation capabilities necessary to
serve larger customers.
o Expand Internationally. The Company believes that there are
substantial opportunities for growth in DNA testing outside the
United States. Due to its capability as a supplier of DNA testing
products, the Company intends to seek opportunities to enter into
joint venture and licensing arrangements in certain large countries
to broaden the base of users of the Company's technology and, where
appropriate, become a provider of testing services. The Company has
recently acquired entities with primary operations in Canada and
Germany and intends to pursue growth opportunities in other
international locations.
o Maintain Industry Leadership Position. The Company intends to
maintain its industry leadership position by working to set industry
standards. The Company's HLA test kits are currently used by the
Naval Medical Research Institute and by 15 of the 19 screening
laboratories (including two of the Company's laboratories)
performing DNA testing for the National Marrow Donor Program, which
together are generally regarded as being among the most influential
institutions worldwide in setting transplant testing standards.
Management is also active in other organizations that set industry
standards in the paternity testing market, such as the American
Association of Blood Banks. In addition, the Company is working with
various international groups to achieve a more uniform set of
testing standards and protocols for classifying potential bone
marrow donors around the world.
o Extend the Company's Technologies into Other Diagnostic Testing
Areas. Over the longer term, the Company believes that it can use
its DNA and related technology to develop other high volume genetic
tests such as those for childhood disorders, cancer risk indicators,
hematologic disorders and oncogene mutations. In addition, the
Company intends to investigate opportunities to expand its range of
testing capabilities and to provide DNA analysis in clinical
transplant centers and other settings.
SERVICES AND PRODUCTS
Services
The three general categories of DNA testing services provided by the
Company are as follows:
Paternity Testing Services. The Company offers a variety of paternity
tests, consisting primarily of a standard test involving the mother, child and
presumptive father. The Company also offers a non-maternal test in which only
the father and the child are tested, neo-natal and pre-natal tests, and a test
that uses samples collected from a child's grandparents to establish paternity.
Since we inherit our DNA from our parents, a child's DNA pattern is a
combination of that of both parents. Standard DNA testing is used to determine
paternity by matching
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the DNA pattern of the mother to those of the child, so that the patterns that
do not match the mother must therefore come from the father. The greater the
number of these DNA patterns that are matched between father and child, the
greater the certainty of paternity. In addition to providing DNA testing, the
Company also provides expert testimony in paternity cases.
Forensic Testing Services. The Company tests a variety of forensic samples
found at crime scenes, such as hair, blood, semen, saliva, skin, bone, muscle
tissue and urine. The Company has both the technological capability and
expertise required to test forensic specimens even in cases where the volume of
the specimen is small and where the specimen has been exposed to humidity and
temperature extremes that can reduce the amount of molecular material available
for testing. The Company also provides expert testimony in cases involving
forensic identity testing. Expert testimony is an important service in the
forensic testing market, as the expert witness is required to interpret both
laboratory methodology and statistics to a jury. Since the Company was one of
the first commercial entities in this field, Company experts have had extensive
experience in dealing with DNA data in such cases and have become recognized in
both lay and legal communities as credible and reliable witnesses.
Pre-Transplant Testing Services. The Company provides screening test
services for typing of bone marrow specimens through both DNA and serological
testing. Pre-transplant testing is generally provided to customer specifications
as to the level of detail and specificity in the test. The Company is able to
provide a wide range of pre-transplant tests due to its extensive selection of
DNA probes and primers. Since many pre-transplant specimens are collected in
large batches from drives sponsored by various organizations and since much of
this testing is still done by serological methods which require processing
within five to seven days, the Company believes it has a competitive advantage
due to its multiple laboratories that perform the testing and generate timely
results. Results are reported back to the central Company database, and
consolidated reports of specimens from each collecting organization and site are
distributed within seven to ten days.
The following chart summarizes the types of testing services offered by the
Company and each of its divisions:
<TABLE>
<CAPTION>
- ------------------------------------------------------------------------------------------------------
PATERNITY FORENSIC PRE-TRANSPLANT
-------------------------------------------------------------------------------------
FELON
DIVISION PRIVATE PUBLIC CASE WORK DATABASING DNA TESTING SEROLOGY
- ------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
United States
Cellmark X X X
GeneScreen X X X X X X
Lifecodes X X X
MDx X X X X X X
NLL X X
International
Helix X X X
ISBMD X X
MMD X
- ------------------------------------------------------------------------------------------------------
</TABLE>
Laboratory Operations
While each Company laboratory has minor variations in its operating
techniques, the principal elements involved in the performance of the Company's
DNA testing services are as follows:
Specimen Collection and Transportation. For paternity testing and
pre-transplant screening, the Company has established a network of hundreds of
collection sites and experienced specimen collection personnel to handle
specimen collection and transportation, since specimens are often not obtained
in the same location as the customer. In addition, the network of collection
sites allows the Company flexibility in scheduling remote
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collections within forty-eight to seventy-two hours after the request is made.
Specimens are generally fresh blood spotted on a specialized cardboard-like
paper or cells collected from the inside of the mouth on the cheek. Once the
donor has provided the specimen, a detailed information sheet about the donor is
completed and a picture is taken by a trained individual. These, along with the
specimen, are sealed in a tamper-proof box and delivered to the laboratory via
overnight courier or regular mail.
Specimen collection and transportation for forensics and felon databasing
is generally provided by the applicable law enforcement agency. Because of the
nature of the testing (e.g., murder scenes, rape victims), forensic specimens
are found in a variety of forms, including hair, blood, semen, saliva, skin,
bone, muscle tissue and urine.
Receiving and Accessioning. The Company receives specimens in its
restricted accessioning areas, where they are inspected for tampering and
checked for proper documentation. With the exception of forensic cases that
generally require specialized handling, specimens are identified and monitored
using unique bar-coded laboratory accessioning numbers.
Laboratory Handling. After a specimen is received by one of the Company's
laboratories, it is entered into a specialized, proprietary sample tracking
system. The system software has been specifically designed for the Company to
track a specimen from the time it enters the laboratory until it leaves as a
finished result. Upon entry into the laboratory, the biographical information
collected with each specimen is entered into the system. The system allows the
laboratory personnel to monitor the specimen at any time during the testing
process and to catalogue it upon completion into a library of thousands of other
specimens. Along with tracking specimens, the system aids in monitoring the
entire testing process in each of the Company's areas of testing. After testing
is completed and reviewed by the Company's Ph.D. level scientists, the system
accepts the information that is yielded from the DNA test patterns and
transforms it into numeric results, which are the end product that is reported
to the customer.
Data Review and Reporting of Results. Each test result undergoes several
independent levels of review before being reported by a certifying scientist. In
order to assure quality control, each Company laboratory carefully monitors the
accuracy and reliability of its test results through the use of both internal
and external quality assurance and quality control programs. The Company's staff
evaluates laboratory performance with open and blind quality control samples. In
addition, the Company is subject to frequent proficiency testing by various
certifying agencies that send their own open and blind samples to the Company's
laboratories. The Company is also subject to frequent inspections by certifying
agencies. See '--Government Regulation.'
Program Contracting. To increase its share of transplant testing services
outside the United States, the Company acquired ISBMD, a specialized service
organization which contracts to assist a charitable organization in Germany to
process specimens obtained for bone marrow screening analysis.
Products
In addition to its DNA testing services, the Company offers a broad array
of DNA testing products for identity and transplant testing. The Company's
products are generally sold to laboratories as standardized test kits containing
all of the components, including probes, reagents, buffers, standards and
controls necessary to perform certain standard DNA test procedures. Each test
kit also includes protocols and instructions for use. Customers can also
customize test kits by adding selected probes, reagents and other components.
The Company sells over 300 different individual DNA probes. Standard identity
test kits range in price from $90 to $550, while transplant test kits range in
price from $650 to $2,225. DNA probes generally range in price from $200 to $750
per vial.
The Company's products are typically sold pursuant to purchase orders
delivered by customers. The Company generally warrants that its products will
meet written specifications for a limited period of time set forth on the label
of the product. Certain other equipment and supplies are warranted for 90 days.
The Company maintains minimal inventory levels to meet customer demands and
generally operates without a significant backlog.
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TESTING PROCESS AND IMPROVEMENTS
Although the DNA testing methods used by the Company vary based upon the
type of DNA testing performed, the Company's DNA testing processes generally
utilize the following basic steps:
Extraction. Prior to testing a DNA sample, the DNA must be isolated or
extracted from the applicable sample, typically blood or tissue. Extraction
procedures generally involve numerous manual and labor intensive steps to
separate and extract the DNA from the sample. Isolation and extraction of DNA in
forensic testing, in particular, is a time consuming and challenging process,
due largely to the often small amount and poor condition of the sample.
Amplification. In order to provide that the DNA can be easily detected,
the extracted target DNA is copied (or amplified) using PCR. The Company
licenses this process on a non-exclusive basis from Roche. See '--Strategic
Partnerships and Relationships.' In this process, DNA primers are added to a
sample of DNA and the sample is subjected to multiple cycles of heating and
cooling which causes the primers to locate the DNA segments of interest and to
duplicate them in each heating/cooling cycle. After multiple cycles, this
process produces millions of copies of the DNA segment of interest, enabling the
measurement of the presence or absence of this segment.
Probes and Dyes. After the DNA has been extracted and amplified, the two
DNA strands are separated chemically and specific DNA probes are then added,
depending on the type of test to be performed. DNA probes are short,
synthetically-prepared sequences of single-stranded DNA which are complementary
to specific target DNA regions. The DNA probes seek out the sequence that they
complement and bind tightly to the target DNA. The DNA probe is tagged with a
fluorescent chemical or radioactive marker so that the binding of the DNA probe
to the target DNA can be easily detected through automated or other means.
Spotting and Reading. In order to read the results of a DNA test, the DNA
is measured by a process called gel electrophoresis, which involves placing the
specimen on a gelatin-like substance and running electric current through it to
separate strands of DNA by molecular weight. After the electrophoresis process
is performed, a laboratory technician can read and report the test results.
The Company intends to use its existing technology, as well as technology
being licensed from third parties and developed through its current
collaborations, to lower the costs and improve the quality, speed and breadth of
information provided by its testing services. The Company's goal is to develop
the first fully automated, miniaturized DNA testing system that will reduce the
amount of labor and the quantity of reagents used in the DNA testing process.
The Company believes that reducing costs and improving the speed and accuracy of
its testing services will provide it with a competitive advantage in the DNA
testing service market.
In order to meet this goal, the Company has entered into a series of
arrangements with key industry participants to gain access to new technologies.
In January 1998, the Company entered into a technology access agreement with MDI
to use MDI's Microarray spotter and reader in its DNA testing system for
research and development purposes. The Company believes that these two devices
are potentially capable of processing a substantially greater number of samples
per technician than possible using current labor-intensive manual methods. In
connection with this arrangement with MDI, the Company also entered into a
non-binding letter of intent with Amersham, a major shareholder of MDI, pursuant
to which it is intended that the Company would use certain fluorescent dyes
developed by Amersham on a co-exclusive basis with Amersham for human identity
testing and transplantation typing and on a non-exclusive basis for other
diagnostic testing. The Company believes these dyes, when used in conjunction
with its already developed probes and primers and MDI's Microarray spotter and
reader, will allow faster processing time, significant reduction in reagent
costs and improved quality of results. In addition, to attempt to reduce the
costs and time consuming nature of current DNA extraction techniques, the
Company, in March 1998, entered into an exclusive worldwide license to use,
manufacture and sell certain DNA extraction technology developed by Molecular
Innovations. The Company believes that the Molecular Innovations extraction
technology, when fully developed, may allow the Company to perform both DNA
extraction and PCR amplification in the same container without any human
intervention, thereby significantly reducing the manual steps and time necessary
to extract and amplify DNA using currently available methods. The agreement with
MDI requires the Company to pay a technology access fee and to pay for such
Microarray units and related supplies as the Company may purchase. The agreement
with Molecular
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Innovations requires the Company to pay a license fee and to pay for such kits
incorporating the Molecular Innovations technology and related services as the
Company may purchase, subject to a minimum purchase requirement for the first
year. Company management does not believe, however, that the minimum purchase
requirement represents a material financial commitment of the Company. See
'--Strategic Partnerships and Relationships.'
In connection with the GeneScreen Acquisition, the Company is acquiring
certain rights to GeneScreen's proprietary genetic bit analysis ('GBA')
technology. These rights are co-exclusive with Laboratory Corporation of America
Holdings for paternity and human identity testing in the United States and
exclusive for paternity, human identity and transplant testing outside the
United States and for all other animal identity testing worldwide. GBA is a
novel method of DNA testing that employs PCR amplification in a manner that
renders a yes/no answer, rather than a more complex subjective result and
permits the procedure to be performed in an automated and miniaturized system.
The Company intends to implement GBA as part of its proposed testing process
improvements to maximize the potential benefits of GBA and to realize its full
potential through miniaturization.
The Company is continuing its research and development activities with
respect to its already developed transplant probes and primers and the MDI,
Amersham, Molecular Innovations and GBA technology for human and animal identity
testing. This technology is currently at an early stage of development. In order
to fully develop and commercialize this technology, the Company, alone or with
others, must successfully develop, test, market and sell DNA testing services
based on this technology. The development of a new DNA testing process is highly
uncertain and subject to a number of significant risks, including the
possibilities that the potential test system is found ineffective, fails to
receive any necessary regulatory approvals, is difficult or uneconomical to use
on a large scale, fails to achieve market acceptance or is precluded from
commercialization by proprietary rights of third parties. The improvements to
the DNA testing process that the Company is pursuing will require extensive
additional development, testing and investment, as well as any regulatory
approvals, prior to commercialization. No assurance can be given that the
Company's development efforts will be successful, that required regulatory
approvals will be obtained or that any improvements to the DNA testing process,
if introduced, will be commercially successful. See 'Risk Factors--Uncertainties
Relating to Technological Development and Improvements to DNA Testing Process.'
RESEARCH AND DEVELOPMENT
The Company conducts the majority of its research and development
activities at its own facilities using Company personnel. Taking into account
the GeneScreen Acquisition, at August 31, 1998, the Company had 9 employees
principally engaged in research and development. Company-sponsored research and
development expenditures in fiscal 1995, 1996 and 1997 were approximately
$669,000, $718,000 and $900,000, respectively. The Company's principal research
and development programs are targeted at improving the Company's testing
services, expanding the range and improving the efficiency and utility of its
line of DNA probes and PCR primers. In addition, in 1998 the Company is devoting
significant effort to developing specialized reagent systems for the MDI
Microarray system.
The Company's research and development activities also include optimizing
and standardizing procedures, creating quality control and quality assurance
programs and ensuring that the results obtained through its laboratory services
are reproducible and accurate. Each of the Company's genetic testing services
undergoes an extensive development and testing process prior to its introduction
into the market. This process includes the verification and validation of the
service utilizing previously analyzed and characterized samples and establishing
written protocols and guidelines.
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RECENT AND PENDING ACQUISITIONS
Since its acquisition of Cellmark in March 1996, the Company has completed
five acquisitions and has pending an additional acquisition in order to
implement its goal of becoming the leading integrated international provider of
DNA testing services:
Recent Acquisitions
o MEDICAL MOLECULAR DIAGNOSTICS GMBH. In February 1997, the Company, ISBMD
and its founders formed Medical Molecular Diagnostics GmbH ('MMD') to
perform HLA testing in Germany. In October 1997, the Company acquired a
controlling interest in MMD. See 'Certain Transactions.' The primary
purpose of MMD is to expand the Company's geographic base and to service
samples originated by ISBMD.
o NATIONAL LEGAL LABORATORIES. In February 1998, the Company acquired
substantially all of the assets of National Legal Laboratories ('NLL'), a
division of Group Benefit Services, Inc., for approximately $730,000 in
cash and an aggregate of 14,600 shares of Common Stock. NLL is the fifth
largest paternity testing laboratory in the United States. NLL generated
revenues of $2.0 million during the year ended September 30, 1997.
o INTERNATIONAL SUPPORT FOR BONE MARROW DRIVES, LTD. In April 1998, the
Company acquired all of the outstanding stock of International Support
for Bone Marrow Drives, Ltd. ('ISBMD') for an aggregate of 365,000 shares
of Common Stock. ISBMD is one of the largest providers of HLA testing
services in Germany. ISBMD arranges HLA testing to be performed for a
large marrow donor database organization and contracts with a small group
of specially selected laboratories in Germany and the United States to
perform both DNA and serological HLA testing. ISBMD generated revenues of
$4.8 million during the year ended December 31, 1997.
o MICRO DIAGNOSTICS, INC. Effective April 1998, the Company acquired all
of the outstanding stock of Micro Diagnostics, Inc. ('MDx') for an
aggregate of 325,382 shares of Common Stock. MDx is a full service DNA
testing laboratory. MDx generated revenues of $3.0 million during the
year ended December 31, 1997.
o HELIX BIOTECH LTD. In July 1998, the Company acquired substantially all
of the assets of Helix Biotech Ltd. ('Helix') for $650,000 in cash,
payable over 26 months, and an aggregate of 124,100 shares of Common
Stock. Helix is a full service DNA identity testing laboratory serving
the Canadian market. Helix generated revenues of $1.9 million during the
year ended July 31, 1997.
Pending Acquisition
o GENESCREEN INC. In September 1998, the Company entered into an agreement
with GeneScreen Inc. ('GeneScreen') whereby the Company agreed to acquire
substantially all of the stock of GeneScreen for cash and Common Stock
having an aggregate value of $12.5 million. GeneScreen is a leading
provider of paternity testing services, primarily to the public testing
market. The acquisition is expected to be completed contemporaneously
with the closing of this offering. GeneScreen generated revenues of $11.2
million during the year ended December 31, 1997.
STRATEGIC PARTNERSHIPS AND RELATIONSHIPS
In furtherance of the Company's strategic goal of improving the speed,
quality, and breadth of information provided by its testing services and
lowering its costs, the Company has entered into a number of strategic
technology access relationships to implement the ongoing improvement of its
testing process. See '--Testing Process and Improvements.' These relationships
include the following:
Molecular Dynamics, Inc. and Amersham Pharmacia Biotech Inc.
In January 1998, the Company, MDI and Nycomed Amersham, plc (parent of
Amersham Pharmacia Biotech Inc.) entered into a Technology Access Agreement
relating to MDI's Microarray system, which is comprised of a spotter and reader.
Pursuant to this agreement, the Company obtained a license to purchase MDI
Microarray system units and related products for research, through July 15,
1999, in the fields of paternity, forensics and tissue transplants. The MDI
Microarray system spots DNA onto a glass slide or other substrate and scans
fluorescently-labeled probes hybridized or bound to the DNA. Until July 15,
1999, the Company will develop
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and sell products and test kits under such terms as may be agreed upon between
the Company and MDI. The Company is also permitted to perform tests using the
MDI Microarray system on a paid basis, from and after October 1, 1998, for the
National Marrow Donor Program and the United States Navy. After July 15, 1999,
the Company will be free to provide services to all of its customers. The
agreement calls for a technology access fee which includes delivery of one
Microarray unit. The unit has been delivered and all of that fee has been paid
except for $600,000, which will be due in 1999. Payments will also be required
if the Company purchases additional units or related supplies from MDI. Except
for confidentiality obligations and certain other specific provisions, the
agreement terminates on July 15, 1999. The Company is also negotiating with
Amersham a sublicense agreement pursuant to which the Company would acquire the
right, co-exclusive with Amersham, to use Amersham's fluorescent detection dye
technology in connection with the MDI Microarray system for testing services in
the areas of paternity, forensics and tissue transplants, although this
agreement has not been finalized and there can be no assurance that it will be
finalized in the near future, or at all.
Molecular Innovations, Inc.
In April 1998, the Company and Molecular Innovations entered into a
Purchase and License Agreement relating to Molecular Innovations' Xtra
technology. The Xtra technology, which is covered by pending patents, includes
nucleic acid binding material and a 96-well format for amplifications of DNA
samples. Pursuant to this agreement, the Company acquired an exclusive worldwide
license to make (under Molecular Innovations' authorization), use and sell
products and provide testing services incorporating the Xtra technology in the
fields of paternity, forensic and transplant testing. The agreement calls for a
license fee (which has been paid) and requires the Company to pay for such kits
incorporating the Molecular Innovations technology, and for such related
services as the Company may purchase, subject to a minimum order requirement for
the first year. The Company does not believe, however, that the minimum order
requirement represents a material financial commitment to the Company. The
agreement continues, in general, until five years after the first commercial
sale thereunder, or the expiration of all licensed patents related to the Xtra
technology.
Roche Molecular Systems, Inc.
The Company and Roche entered into a License Agreement in March 1997 and a
Parentage Testing Product Agreement in May 1998, each relating to Roche's PCR
technology. The PCR technology is used to amplify DNA samples so as to permit
detection by an automated system. Through the 1997 agreement, the Company
acquired a non-exclusive worldwide license to manufacture and sell PCR-based
products for HLA typing for organ transplants. Through the 1998 agreement, the
Company has a similar license for the paternity field. Under both agreements,
the Company uses and distributes to its affiliates such PCR-based products for
testing services in the licensed fields. Each agreement calls for a license
issuance fee (no material portion of which remains unpaid) and a royalty on net
sales of licensed products. Each agreement continues, in general, until the last
of the licensed patents expires.
SALES AND MARKETING
Testing Services. The Company has an internal sales force of 23 employees
and also utilizes two independent contractors to promote the Company's testing
services to commercial and governmental laboratories and agencies, as well as to
selected physicians and hospitals across the United States. Decision making in
the public paternity and forensic markets is generally decentralized, requiring
sales activity in each locality or jurisdiction. The Company sells its paternity
testing services in the public market to state agencies through (i) statewide
exclusive contracts or pricing agreements, (ii) statewide non-exclusive
contracts or pricing agreements and (iii) a purchase order or similar basis. The
Company sells its forensic testing services through similar means on a statewide
basis or to local law enforcement authorities or individual attorneys. In
addition to face-to-face sales calls, the Company uses direct mailings and
telemarketing to target groups of physicians, prosecutors and family welfare
agencies. In the even more decentralized private paternity market, the Company
relies primarily on telemarketing and the use of brokers to reach its main
source of referrals--attorneys and physicians. As the pre-transplant market is
more highly concentrated primarily in the hands of a few governmental and
not-for-profit entities, the Company targets its sales force toward key decision
makers at the largest customers such as the Naval Medical Research Institute and
the National Marrow Donor Program. The Company also participates in professional
meetings, sponsors educational forums and promotes the Company on its site on
the World Wide Web. In order to facilitate the marketing of its testing
services, the Company contracts
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with over 200 collection sites with available phlebotomists throughout the
country to assist its customers in collecting specimens. The phlebotomy service
is an important competitive tool in the public sector paternity market as the
convenience of local phlebotomists can influence a customer's decision about
where to send specimens if more than one laboratory is an approved provider.
During the fiscal year ended September 30, 1997 and nine months ended June
30, 1998, on a pro forma basis after giving effect to the Recent and Pending
Acquisitions as if they were consummated on October 1, 1996, DKMS accounted for
approximately 15% and 12% of the Company's revenues, respectively. DKMS is a
German charitable foundation of which Prof. Dr. Gerhard Ehninger, a director of
the Company, is a founder and a member of its Board of Directors. See 'Certain
Transactions.' DKMS has utilized the Company to oversee the logistics, quality
and data management needed by DKMS or the organizers of its bone marrow specimen
collection drives. The Company does not have a written contract with DKMS to
provide testing services and there can be no assurance that DKMS will organize
bone marrow specimen drives in the future or that DKMS will continue to use the
Company to provide the testing services related to the specimen drives. The loss
of or substantial decrease in business from DKMS would have a material adverse
effect on the Company's business, financial condition and results of operations.
Products. The Company also has seven employees engaged in selling and
marketing DNA testing products and also utilizes the services of one sales
representative in Europe. The Company currently sells its products outside the
United States through a network of approximately a dozen distributors located
worldwide. The Company's products are sold in the United States and Europe to
clinical, reference and hospital laboratories through its direct sales force,
with the exception of sales of paternity and forensic products in Europe, which
are sold through its distributor Cellmark UK, a division of Zeneca, plc.
International. Historically, export sales and foreign operations have not
been material to the Company. However, after giving effect to the Recent and
Pending Acquisitions, on a pro forma basis as if such acquisitions were
consummated on October 1, 1996, international sales accounted for approximately
21% and 19% of the Company's revenues for the fiscal year ended September 30,
1997 and the nine month period ended June 30, 1998, respectively. The Company's
international activities occur in three different forms: exports of products,
exports of services and the operation of international facilities. The Company
uses both distributors and a direct sales representative to sell products
internationally and, through ISBMD, sells testing services in Germany.
Management believes that the prices prevalent in the export markets for products
and services are generally comparable to those in the domestic market and,
therefore, the profitability of such sales is estimated to be comparable to
those made in the United States. Through the start-up of MMD and the acquisition
of Helix, the Company has also commenced the operation of facilities in
international markets. In general, management believes the losses incurred at
MMD have been typical of any start-up operation and that the profitability of
Helix is in line with the profitability of domestic operations with similar
pricing. Investors should be aware that international sales are subject to
certain inherent risks, including difficulties in collecting accounts
receivable, potentially longer payment cycles, increased costs associated with
maintaining international marketing efforts, currency fluctuations, changes in
regulatory requirements, and difficulties in enforcement of contractual
obligations and intellectual property rights. See 'Risk Factors--Risks Related
to International Sales.'
MANUFACTURING
The Company's products are manufactured, assembled and packaged at its
facility in Stamford, Connecticut. At August 31, 1998, the Company employed 8
people engaged in manufacturing and assembly operations. Certain of the
Company's paternity and transplant test kits also include reagents that the
Company purchases from third parties. In addition, certain of the Company's
transplant test kits include a license to use the PCR process for diagnostic use
which is covered by certain patents owned by Roche. See '--Strategic
Partnerships and Relationships.'
Of the components used in the Company's test kits, many are purchased from
third parties and are available from alternative suppliers. Several components,
however, are provided by single source suppliers and include certain probes,
light enhancing chemicals and substrates. The Company believes that in most of
these cases, alternative sources of supply are available or could be developed
within a reasonable period of time. To date, the Company has been able to obtain
adequate supplies of all necessary materials and components from its suppliers.
The Company maintains a strategic inventory of certain key components and raw
materials currently obtained from single-source suppliers; however, there can be
no assurance that such inventories would be adequate to meet
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the Company's production needs during any interruption of supply. The inability
to develop alternative supply sources, if required, or a reduction or stoppage
in supply could have a material adverse effect on the Company's business,
financial condition and results of operations. See 'Risk Factors--Dependence on
Single Source Suppliers.'
GENESCREEN ACQUISITION
Under the Agreement and Plan of Merger with GeneScreen, at the closing (the
'Closing Date'), GeneScreen shall merge with and into the Company, with the
Company being the surviving corporation (the 'Merger'), whereupon each share of
common stock of GeneScreen outstanding or deemed to be outstanding immediately
prior to the Merger (the 'GeneScreen Shares') shall be converted into the right
to receive a pro rata portion of the Merger Consideration (defined below). Upon
the conversion of and in consideration for all of the GeneScreen Shares, the
Company shall pay to the GeneScreen shareholders an aggregate purchase price of
$12.5 million payable as follows: $5.0 million in cash plus $7.5 million in
registered shares of Company common stock to be issued on the date of closing of
this offering (the 'Merger Consideration'); provided that 90% of all shares
issued to GeneScreen's shareholders shall be subject to a 180 day lock-up
agreement and that six key employees of GeneScreen shall have executed
non-competition agreements. See 'Shares Eligible for Future Sale.' The number of
shares will be determined by dividing $7.5 million by the price to the public in
this offering, except that for purposes of the calculation, the price of such
shares shall not exceed $16.44 per share. Payment of the cash portion of the
purchase price is subject to an escrow arrangment with regard to $3.5 million.
The escrow secures certain indemnification obligations of the GeneScreen
stockholders.
There will be an adjustment to the cash portion of the purchase price at
the time of the closing based upon changes to the GeneScreen balance sheet net
worth from May 31, 1998 to the close of business on the Closing Date. The
obligation of the Company to consummate the GeneScreen Acquisition is subject to
the approval of the transaction by the GeneScreen stockholders pursuant to
Delaware law, the sale (the 'MTI Sale') or spin-off by GeneScreen of its
Molecular Tool, Inc. ('MTI') subsidiary, and additional customary closing
conditions, such as: (i) satisfactory completion by the Company of its due
diligence, (ii) obtaining all approvals, consents and/or waivers, and (iii) no
adverse change in the business, assets, liabilities, operations, prospects,
properties or condition, financial or otherwise, of GeneScreen.
The Company has agreed until the sale of MTI, to provide financial
accommodations to GeneScreen. The Company agreed that from July 1, 1998 until
the earliest to occur of (i) the MTI Sale, or (ii) the GeneScreen Acquisition,
GeneScreen may defer further payment of accounts due to the Company, and may, in
accordance with its usual course of business, generate new accounts due to the
Company. At the Closing, accounts due to the Company through the date of Closing
will be treated as reductions to the balance sheet of the Company for purposes
of the closing adjustment. In addition, commencing July 1, 1998, the Company
advanced $150,000 to GeneScreen and the Company shall advance up to $150,000 per
month (not to exceed $600,000 in the aggregate), until the MTI Sale is
consummated.
COMPETITION
The Company competes in the medical diagnostics, laboratory, biotechnology
and medical services industries, each of which is characterized by numerous
competitors, extensive research and development efforts and rapid technological
progress. Among the Company's major competitors in the market for DNA probe
diagnostics products are Abbott Laboratories, Affymetrix, Inc., Chiron
Corporation, Myriad Genetics, Inc., The Perkin-Elmer Corporation, Promega
Corporation and Roche Molecular Systems, Inc. Many of these competitors have
substantially greater financial, technical and sales and marketing resources
than the Company. Other companies, including large pharmaceutical and
biotechnology companies, may enter the market for DNA probe diagnostics or have
already commenced research and development in the field. Moreover, such
competitors may offer broader product lines and have greater name recognition
than the Company, and may offer discounts as a competitive tactic. In addition,
competitive products may be designed, manufactured and marketed more
successfully than the Company's existing or potential products. Such
developments could render the Company's products less competitive or obsolete,
and could have a material adverse effect on the Company's business, financial
condition and results of operations.
In the laboratory service market there are numerous competitors, including
Laboratory Corporation of America, many of which have substantially greater
financial, technical, research and other resources and larger,
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more established marketing, sales, distribution and service organizations than
the Company. Certain competitors may also offer a broader array of services than
the Company. In addition, several development stage companies have entered the
market for DNA testing services and have test offerings that compete with or
will compete with those of the Company. The Company's future success will depend
in large part on its ability to maintain a competitive position in the quality
of service it provides to its laboratory service customers. If the Company is
unable to consistently deliver accurate and timely services at a competitive
price, such developments would have a material adverse effect on the Company's
business, financial condition and results of operations.
The public segment of the forensics testing market includes the FBI as well
as local and state law enforcement agencies. Currently the FBI and many state
and local criminal laboratories offer forensics testing at no charge to the law
enforcement community. However, FBI and state laboratories often have backlogs
of forensic casework that needs to be performed.
The Company relies on certain technologies that are not patentable or
proprietary and consequently may be available to the Company's competitors.
Competition may increase further as a result of the potential advances in the
technology underlying the services and products developed by the Company. The
Company also is aware that other companies have developed or may be developing
genetic testing and information technologies, services and products for
diagnostic purposes that are or may be competitive with the Company's services
and products. The Company also competes with others in acquiring products or
technology from research institutions or universities. Potential competitors may
be able to develop technologies that are as effective as, or more effective
than, those offered by the Company, which would render the Company's products or
services noncompetitive or obsolete and could have a material adverse effect on
the Company's business, financial condition and results of operations.
The important competitive factors in the Company's testing services
business are accuracy, response time and price. The important competitive
factors in the Company's products business are availability, accuracy and price.
PATENTS AND PROPRIETARY RIGHTS
The Company believes that intellectual property protection is important to
its business, and that the Company's success will depend in part on its ability
to maintain existing protection, obtain additional protection, and to avoid
infringing the proprietary rights of others.
The Company is the assignee of five issued U.S. patents and certain
corresponding foreign patents. In addition, the Company is the exclusive
licensee of three U.S. patents, two of which are worldwide and one of which
covers all of North, Central and South America and the Caribbean. The patents
issued or licensed to the Company cover genetic probe sequences and nucleic acid
analysis methods useful in the Company's DNA testing services and diagnostic
kits. The Company's U.S. patents expire between 2010 and 2014. The Company pays
royalties on its licensed patents to the University of Utah Research Foundation
(the 'University') for the two worldwide patent licenses and to Zeneca Limited
('Zeneca') for the third license. The amount of the royalties are based on a
percentage of net sales or, in the case of the University, an annual minimum
guaranteed amount of $25,000. The Company paid the University approximately
$37,500, $73,000 and $120,000 in royalties for the fiscal years ended September
30, 1995, 1996 and 1997, respectively. The Company has not yet paid any
royalties to Zeneca, but has accrued approximately $8,000 for such royalties.
The issuance of a patent is not conclusive as to its validity or as to the
enforceable scope of the claims of the patent. There is no assurance that the
Company's patents or any future patents will prevent other companies from
developing non-infringing similar or functionally equivalent products or from
successfully challenging the validity of the Company's patents. Furthermore,
there is no assurance that (i) any of the Company's future products or processes
will be patentable; (ii) any pending or additional patents will issue to the
Company in any appropriate jurisdiction; (iii) the Company's processes or
products will not infringe the patents of third parties; or (iv) the Company
will have the resources to defend against charges of infringement by third
parties, or to protect its own patent rights. The inability of the Company to
protect its patent rights or infringement by the Company of the patent or
proprietary rights of others could have a material adverse effect on the
Company's business, financial condition and results of operations. See 'Risk
Factors--Dependence on Proprietary Technology; Uncertainty of Patent
Protection.'
46
<PAGE>
The Company's business consists of the sale of testing services and
products. In each area, the Company relies on a combination of patents,
trademarks, trade secrets, copyrights and confidentiality agreements to protect
its proprietary technology, rights and know-how. The Company's success will
depend in part on its ability or the ability of its licensors or sub-licensors
to obtain patents, defend patents, maintain trade secrets, defend copyrights and
operate without infringing the proprietary rights of others, both in the United
States and in foreign countries. The position of companies relying upon
biotechnology is highly uncertain in general and involves complex legal and
factual issues, and no consistent policy has emerged regarding the breadth of
claims allowed in biotechnology patents. Although the Company and certain of the
Company's licensors and sub-licensors have filed patent applications relating to
technologies and discoveries used by the Company, there can be no assurance that
patents will be issued as a result of such patent applications or that, if
issued, such patents will be sufficiently broad to afford protection against
competitors. The commercial success of the Company also will depend upon
avoiding the infringement of patents issued to third parties, obtaining licenses
to third parties' technologies and genetic discoveries and maintaining licenses
upon which certain of the Company's services are, or might be, based. In
particular, third parties, including potential competitors, have already filed
patent applications relating to a variety of genes and genetic mutations
underlying certain of the Company's services, and may in the future file
additional such patent applications. In the event that any such patents are
issued to such parties, such patents may preclude the Company, its licensors and
sub-licensors from providing genetic testing services and could require the
Company to enter into licenses with such parties or cease such activities. There
can be no assurance that any required licenses would be available on acceptable
terms, or at all.
Litigation, which could result in substantial cost to the Company, may be
necessary to determine the scope and validity of others' proprietary rights or
to enforce the Company's patent, copyright, trade secret and license and
sublicense rights. The failure by the Company to obtain any such licenses, if
required, and the Company's involvement in such litigation, could have a
material adverse effect on the Company's business, financial condition and
results of operations.
The Company also relies on certain technologies, trade secrets and know-how
that are not patentable or proprietary and are available to the Company's
competitors. Although the Company has taken steps to protect its unpatented
technologies, trade secrets and know-how, in part through the use of
confidentiality agreements with its employees, consultants and certain of its
contractors, there can be no assurance that these agreements will not be
breached, that the Company would have adequate remedies for any breach or that
the Company's trade secrets will not otherwise become known or be independently
developed or discovered by competitors.
GOVERNMENT REGULATION
The Clinical Laboratory Improvement Act ('CLIA'), as amended in 1988,
provides for regulation of clinical laboratories by the United States Department
of Health and Human Services ('HHS'). These regulations mandate the
certification of all clinical laboratories performing tests on human specimens
for the purpose of providing information for the diagnosis, prevention or
treatment of any disease. These regulations also contain guidelines for the
qualifications, responsibilities, training, working conditions and oversight of
clinical laboratory employees. In addition, specific standards are imposed for
each type of test that is performed in a laboratory. Each of the Company's
laboratories requiring certification are certified under these regulations and
the Company believes that it is in substantial compliance with these guidelines.
CLIA, and the regulations promulgated thereunder, are enforced through quality
inspections of test methods, equipment, instrumentation, materials and supplies
on a bi-annual and 'spot' basis.
The Company's laboratories are licensed, accredited or regulated by various
trade, federal and state agencies. The Company has received accreditation from
HHS for laboratory services, and from the American Association of Blood Banks,
American Society of Crime Laboratory Directors, and the American Society of
Histocompatibility and Immunogenetics. The Company also possesses licenses in
the United States to operate a clinical laboratory from the states of New York,
Maryland and Pennsylvania and intends to seek approval from other states as
required. No assurance can be given that the Company will be able to obtain or
renew such approvals, licenses or accreditations on a timely basis or at all.
The loss of, or the failure to obtain, any required state license or CLIA
accreditation could have a material adverse effect on the Company's business,
financial condition and results of operations. In addition, the loss of, or a
failure to obtain accreditations from certain trade associations could adversely
affect the Company's competitive position and could, therefore, have a material
47
<PAGE>
adverse effect on the Company's business, financial condition and results of
operations. See 'Risk Factors-- Government Regulation.'
While the United States Food and Drug Administration (the 'FDA') does not
currently regulate the genetic tests underlying the Company's services if they
are performed in a CLIA certified clinical laboratory or the manufacture of the
Company's products, there can be no assurance that the FDA will not seek to
regulate such tests in the future. If, in the future, the FDA should determine
that the tests underlying the Company's services should be subject to FDA
approval, there can be no assurance that such approval would be received on a
timely basis or at all. Any change in CLIA or related regulations, or in the
interpretation thereof, or in the FDA's position on regulating the tests
underlying the Company's services, could have a material adverse effect on the
Company's business, financial condition and results of operations. Furthermore,
the Company does not have experience in obtaining FDA approval for the products
or services that it markets. Such approval, if required, would increase the
Company's costs of operations and increase the time required to introduce new
products to market.
The Company is subject to extensive federal, state and local regulation,
including regulation under the Occupational Safety and Health Act, the
Environmental Protection Act, the Toxic Substances Control Act, the Resource
Conservation and Recovery Act and other laws, rules and regulations governing
health care, clinical laboratory activities, waste disposal, handling of toxic,
dangerous or radioactive materials and other matters. Although the Company's
services are currently considered screening services under Medicare and are
therefore excluded from coverage under Medicare, if the Company implements its
current strategy and begins providing clinical transplant services or if the
Medicare regulations are changed, the Company's services may become subject to
laws, rules and regulations governing reimbursement and fraud and abuse, and
prohibiting the filing of false claims. These laws, rules and regulations
include 'anti-kickback' and 'Stark' laws, which contain extremely broad
proscriptions, the violation of which may result in exclusion from Medicare and
Medicaid and criminal and civil penalties. In addition, the Company is subject
to state laws, rules and regulations limiting certain financial relationships
between health care providers and physicians and other referral sources.
Although the Company believes that it is in substantial compliance with all
applicable laws, rules and regulations, there can be no assurance that the
Company will remain in compliance with applicable laws, rules and regulations or
that changes in, or new interpretations of, existing laws, rules and regulations
would not have a material adverse effect on the Company's business, financial
condition and results of operations.
The availability of genetic predisposition testing has raised certain
ethical, legal and social issues regarding the appropriate utilization and
confidentiality of information provided by such testing. The medical information
obtained or determined about an individual from the Company's services is of an
extremely sensitive nature. In providing its services, the Company is subject to
certain statutory, regulatory and common law requirements regarding the
confidentiality of such medical information. The Company monitors compliance
with applicable confidentiality requirements, and believes that it is in
substantial compliance with such requirements. Failure to comply with such
confidentiality requirements could result in material liability to the Company.
EMPLOYEES
Taking into account the GeneScreen Acquisition, as of August 31, 1998, the
Company employed 303 persons (including 129 GeneScreen employees), consisting of
179 in laboratory operations and genetic services, 81 in administration, 26 in
sales and marketing, 9 in research and development and 8 in manufacturing. None
of the Company's employees is represented by a labor union. The Company has
experienced no work stoppages and believes that its relations with its employees
are good.
48
<PAGE>
FACILITIES
The Company's executive offices and main manufacturing facilities are
located in an approximately 25,000 square foot facility located in Stamford,
Connecticut. The Company also leases facilities at the following locations:
<TABLE>
<CAPTION>
LOCATION USE SQUARE FOOTAGE
- ----------------------------------------------------- ------------------ --------------
<S> <C> <C>
Germantown, MD....................................... Laboratory/Office 16,300
East Lansing, MI..................................... Laboratory/Office 9,100
Dresden, Germany..................................... Laboratory 3,700
Nashville, TN........................................ Laboratory/Office 15,000
High Point, NC....................................... Office 650
Paterson, NJ......................................... Office 360
Buffalo, NY.......................................... Office 500
Rochester, NY........................................ Office 180
Richmond, British Columbia........................... Laboratory/Office 6,000
Oakville, Ontario.................................... Office 500
Montreal, Quebec..................................... Office 300
GeneScreen Facilities
Dallas, TX........................................... Laboratory/Office 19,200
Dayton, OH........................................... Laboratory/Office 12,500
Sacramento, CA....................................... Laboratory/Office 5,100
</TABLE>
The lease on the Company's Stamford, Connecticut facility expires in April
2002 and the Company's other facility leases expire at various times between
1998 and 2007.
LEGAL PROCEEDINGS
The Company is a party to the action captioned Promega Corporation v.
Lifecodes Corporation in the United States District Court for the District of
Utah, (Civil No. 2:93cv0184C). This case relates to the infringement by the
Company, between October 1990 and June 1993, of a patent covering major DNA
probes used in paternity and forensic testing (the 'White Patent'). Promega was
the exclusive sub-licensee of the White Patent until June 1995 and the Company
is currently the exclusive licensee of this patent. The action regarding the
Company's infringement of Promega's sub-licensee patent rights during the period
in question is currently in the damage phase and is scheduled for trial without
a jury in April 1999. Each party has submitted an expert's report as to the
amount of damages owed by the Company to Promega. Promega's expert has estimated
the damages to range from approximately $900,000 to $1.3 million, while the
Company's expert has estimated the damages to range from approximately $100,000
to $900,000. Furthermore, if the Company is adjudicated to have willfully
infringed the patent, the court has the authority to impose up to treble damages
and require the Company to pay Promega's attorneys' fees. As of June 30, 1998,
the Company has established a reserve of approximately $755,000 to cover the
impact of this litigation. Although the Company believes its reserve is adequate
to cover any potential damages, there can be no assurance that damages will not
substantially exceed the reserved amount or that the judgment will not have a
material adverse effect on the Company's financial condition. See 'Risk
Factors--Risks Related to Litigation.'
The Company also entered into arbitration with Promega to resolve
differences arising from interpretation of the sub-license agreement that
expired on July 1, 1995. Promega argued that their right to continue to sell DNA
probes covered by the White Patent survived the expiration of the contract
because they had modified, improved or enhanced the probes. In January 1996, the
arbitrator determined that Promega has non-exclusive rights to sell modified
probes based on the White Patent but that Promega has no rights to further
improve or modify the probes. The arbitration was confirmed by the United States
District Court for the District of Utah on July 16, 1996. The Company alleges
that in violation of the arbitrator's decision, Promega altered its probe
products and is selling improved, modified products and thus may be in contempt
of the Federal confirmation. The Federal Court that initially confirmed the
arbitrator's decision heard arguments on whether Promega violated the
arbitrator's order and whether an injunction should issue on June 1 and 2, 1998
and a decision is pending. If the Company prevails on the issues presented at
the June 1998 hearing, it intends to seek damages and sanctions for the
unauthorized sales made by Promega and to have Promega's non-exclusive license
voided.
49
<PAGE>
The Company is also a party to the action captioned Lifecodes Corporation
vs. Serological Services Limited in the Federal Court of Canada, Trial Division
(No. T-134-95). This case, which was commenced on January 24, 1995, relates to
the alleged infringement of a patent by Serological Services Limited ('SSL')
relating to a paternity testing technology. SSL has filed a Statement of Defense
and Counterclaim alleging that the patent in question is invalid and seeking
damages in the amount of Cdn. $2 million. The matter is currently pending before
the Trial Division of the Federal Court of Canada.
50
<PAGE>
MANAGEMENT
DIRECTORS AND EXECUTIVE OFFICERS
The following table sets forth, as of the date of this Prospectus, the
names, ages and other information concerning those persons who are or will be
directors and executive officers of the Company upon the closing of this
offering.
<TABLE>
<CAPTION>
NAME AGE POSITION
- ------------------------------------------ --- ---------------------------------------------------------------
<S> <C> <C>
Richard A. Sandberg....................... 56 Chairman of the Board, Acting Chief Financial Officer and
Director
Walter O. Fredericks...................... 58 President, Chief Executive Officer and Director
Ivan Balazs, Ph.D.(1)..................... 56 Vice President, Research and Director
Michael T. Petrillo....................... 33 Vice President, Sales and Marketing
Jacob Victor, Ph.D........................ 47 Vice President, Development
Michael L. Baird, Ph.D.................... 49 Vice President, Laboratory Operations
Dean L. Somer............................. 36 Controller, Treasurer and Secretary
Joseph I. Bishop(2)(3).................... 59 Director
Keith W. Brown(4)......................... 45 Director
Claude L. Buller.......................... 56 Director
Prof. Dr. Gerhard Ehninger................ 46 Director
Dean E. Fenton(2)(3)...................... 64 Director
John A. Hansen, M.D.(2)(3)(5)............. 55 Director
Ross V. Hickey, Jr........................ 63 Director
Milton Steele(6).......................... 50 Director
</TABLE>
- ------------------
(1) Effective upon the closing of this offering, Dr. Balazs will resign as a
Director of the Company.
(2) Member of the Audit Committee.
(3) Member of the Compensation Committee.
(4) Mr. Brown will join the Board upon the closing of this offering and the
consummation of the GeneScreen Acquisition.
(5) Dr. Hansen will join the Board upon the closing of this offering.
(6) Effective upon the closing of this offering, Mr. Steele will resign as a
Director of the Company.
Richard A. Sandberg has served as Chairman of the Board and Chief Financial
Officer since May 1997. From 1983 to 1998, he served in a variety of positions
including Chairman and Chief Executive Officer at DIANON Systems Inc., an
oncology marketing and database firm that he co-founded. He has been a
co-founder of a number of companies in the healthcare and database fields over
the last twenty years. Prior to starting his first company, Mr. Sandberg was
engaged in venture capital and corporate finance activities with Smith Barney &
Co. and a predecessor to Rothschild, Inc. in New York City. Mr. Sandberg
currently serves as a director of UroMed Corporation.
Walter O. Fredericks has served as President and Chief Executive Officer
and as a Director of the Company since 1988. Prior to joining Lifecodes, Mr.
Fredericks held sales, marketing and senior management positions with Johnson &
Johnson and Becton Dickinson. Mr. Fredericks is also a founder and Chairman of
Electronic Instruments International Inc., a privately-held electronics company
focused on the monitoring of high voltage power distribution.
Ivan Balazs, Ph.D. joined Lifecodes in 1983 as Director of Research and
Development. He has also served as Director of Clinical Services and Director of
Genetics. He was appointed Vice President, Research in 1991. Dr. Balazs is a
geneticist specializing in DNA testing and is the author of numerous scientific
publications in the field of DNA testing. Dr. Balazs has served as a Director of
the Company since 1991.
Michael T. Petrillo joined Lifecodes in 1992 as Technical Marketing
Specialist and was appointed Director, Sales and Marketing in 1993. He was
appointed Vice President, Sales and Marketing in 1996. His background
51
<PAGE>
includes over six years of sales and product management experience at CPG,
Applied Biosystems and International Biotechnologies.
Jacob Victor, Ph.D. joined Lifecodes in 1990 as Director, Medical Product
Development. He was appointed Vice President, Director of Product Development in
1991. Dr. Victor has broad experience in product development including six years
with Roche Diagnostics as Group Chief in their infectious disease group. Dr.
Victor served as a Director of the Company from October 1991 to April 1998.
Michael L. Baird, Ph.D. has been with Lifecodes since its inception in
1982. He was appointed Vice President, Laboratory Operations in 1992. Dr. Baird
serves as the primary expert witness for Lifecodes in court cases and testified
in the first case in the United States to result in a conviction utilizing DNA
technology.
Dean L. Somer joined Lifecodes in 1988 as Accounting Manager and was
appointed Controller and Treasurer in 1991. Mr. Somer was also appointed as
Secretary of the Company in July 1998. Prior to joining Lifecodes, Mr. Somer
worked for Oxford Energy Co., Ted Bates Worldwide and the Martin Segal Company.
Joseph I. Bishop has served as a Director of the Company since 1991. Mr.
Bishop is the founder and sole stockholder of Hydromotion, Inc., a manufacturer
of precision fluid valves, controls and hydraulics. In addition, Mr. Bishop is a
founder and director of New Century Bank.
Keith W. Brown has been the President and Chief Executive Officer of
GeneScreen Inc. since April 1988. Mr. Brown will join the Board and become a
Senior Vice President of Lifecodes upon the closing of this offering and the
consummation of the GeneScreen Acquisition.
Claude L. Buller has served as a Director of the Company since the sale of
his interest in ISBMD to the Company in April 1998 and also serves as a
consultant to the Company. Mr. Buller has been President, Chief Executive
Officer and a Director of Marco International, Inc., a privately-held
manufacturer of electronic components and assemblies since 1995. From November
1994 to June 1995 he served as President and Chief Executive Officer of VimRx
Pharmaceuticals, Inc., a biotechnology company, and from 1988 to 1994 he served
as President and Chief Executive Officer of Genetic Design, Inc., a paternity
testing laboratory.
Prof. Dr. Gerhard Ehninger has served as a Director of the Company since
the sale of his interest in ISBMD to the Company in April 1998 and also serves
as a consultant to the Company. Currently, he serves as Director, Medizinische
Klinik und Poliklinik I at the Universitatsklinikum Carl Gustav Carusin der
Technischen Universitat Dresden, in Germany. Dr. Ehninger is a founder and has
been a director since 1991 of Deutsche Knochenmarkspenderdatei GmbH, a private
charitable foundation creating a bone marrow registry in Germany.
Dean E. Fenton has served as a Director of the Company since November 1997.
He is a founding partner and has served as President of Prime Capital Management
Inc. ('Prime'), a venture capital firm specializing in technology investments,
since its formation in 1981. Mr. Fenton also serves as a director and general
partner of various private companies. Prime made its first investment in the
Company in 1991.
John A. Hansen, M.D. has served as head of the Human Immunogenetics Program
at the Fred Hutchinson Cancer Research Center in Seattle, Washington since 1993
and has served as a Professor of Medicine in the Division of Oncology at the
University of Washington since 1983. Dr. Hansen is currently the Chairman of the
National Marrow Donor Program and is a member of the editorial boards of
numerous professional publications and the author of over 300 articles in
immunogenetics and related fields.
Ross V. Hickey, Jr. has served as a Director of the Company since the sale
of his interest in Micro Diagnostics, Inc. to the Company in April 1998. Mr.
Hickey served as Chairman and Chief Executive Officer of Micro Diagnostics, Inc.
from March 1996 until the sale. Since 1970, Mr. Hickey has also been Chairman of
Century II Financial and Century II Corporation which are involved in financial
services to small businesses and retail pharmacies, and real estate investments.
Milton Steele has served as a Director of the Company since January 1998.
He joined FMC Corporation in 1977 and has been Division Manager of FMC
BioProducts since 1997. Prior to 1997, Mr. Steele spent 14 years in Asia, most
recently as General Manager of various FMC businesses in the Asia Pacific
region.
Executive officers of the Company are elected by the Board on an annual
basis and serve until their successors are duly elected and qualified. There are
no family relationships among any of the executive officers or directors of the
Company.
52
<PAGE>
BOARD CLASSIFICATION
Upon the closing of this offering, the Board will be divided into three
classes, with the members of each class of directors serving for staggered
three-year terms. Messrs. Fredericks, Brown and Hansen will serve in the class
the term of which expires in 1999; Messrs. Buller, Bishop and Fenton will serve
in the class the term of which expires in 2000; and Messrs. Ehninger, Hickey and
Sandberg will serve in the class the term of which expires in 2001. Upon the
expiration of the term of each class of directors, nominees for such class will
be elected for a three-year term at the next annual meeting of stockholders. The
Company's adoption of a classified Board of Directors could have the effect of
increasing the length of time necessary to change the composition of a majority
of the Board. In general, at least two annual meetings of stockholders will be
necessary for stockholders to effect a change in a majority of the members of
the Board. See 'Description of Capital Stock--Delaware Law and Certain
Provisions of the Company's Certificate of Incorporation and Bylaws.'
The General Corporation Law of Delaware permits a corporation, through its
Certificate of Incorporation, to eliminate the personal liability of its
directors to the corporation or its stockholders for monetary damages for breach
of fiduciary duty of loyalty and care as a director, with certain exceptions.
The exceptions include a breach of fiduciary duty of loyalty, acts or omissions
not in good faith or which involve intentional misconduct or knowing violation
of law, improper declarations of dividends, and transactions from which the
directors derived an improper personal benefit. The Company's Certificate of
Incorporation exonerates its directors from monetary liability to the fullest
extent permitted by this statutory provision but does not restrict the
availability of non-monetary and other equitable relief.
BOARD COMMITTEES
The Board has established an Audit Committee and a Compensation Committee.
The Audit Committee reviews the results and scope of the audit and other
services provided by the Company's independent accountants and is expected to
consist of Messrs. Bishop, Fenton and Hansen. The Compensation Committee will
approve salaries and certain incentive compensation for management and key
employees of the Company, will administer the 1992 Employee Stock Option Plan,
the 1995 Employee Stock Option Plan and the 1998 Stock Plan and will consist of
Messrs. Bishop, Fenton and Hansen.
DIRECTOR COMPENSATION
Directors who are also employees of the Company or one of its subsidiaries
will not receive additional compensation for serving as directors. Each director
who was a founder of the Company or who became an investor in the Company
through the acquisition of his business will receive a fee of $1,500 per meeting
attended, plus reimbursement of out of pocket expenses. Directors in this group
are Messrs. Bishop, Fenton, Hickey and Steele. Each director who is neither an
employee of the Company or one of its subsidiaries nor a founder or stockholder
of the Company through an acquisition (an 'Outside Director') receives an annual
retainer of $20,000, plus reimbursement of out of pocket expenses. Each Outside
Director also receives, upon joining the Board, a one-time five year option to
purchase 20,000 shares vesting 40% after the second anniversary of the date of
grant, 60% after the third anniversary of the date of grant, 80% after the
fourth anniversary of the date of grant and 100% after the fifth anniversary of
the date of grant. Directors are not compensated for service on committees of
the Board.
Mr. Buller and Prof. Dr. Ehninger are parties to Consulting Agreements with
the Company and are not paid Director fees. See 'Certain Transactions.'
COMPENSATION COMMITTEE INTERLOCKS AND INSIDER PARTICIPATION
During the fiscal year ended September 30, 1997, the Compensation Committee
consisted of three non-employee directors--Mr. Bishop, Theodore H. Elliott, Jr.
and Gerald A. Moss. Mr. Sandberg replaced Mr. Elliott as a member of the
Compensation Committee in October 1997 and Mr. Steele replaced Mr. Moss upon his
resignation from the Board effective January 1, 1998. Mr. Sandberg also serves
as Acting Chief Financial Officer of the Company. Upon consummation of this
offering, the Compensation Committee of the Board will consist of Messrs.
Bishop, Fenton and Hansen. No member of the Compensation Committee serves as a
member of the board of directors or compensation committee of any entity that
has one or more executive officers serving as a member of the Board or
Compensation Committee.
53
<PAGE>
EXECUTIVE COMPENSATION
The following table sets forth the annual and long-term compensation paid
or accrued by the Company and its subsidiaries to those persons who were (i) the
Chief Executive Officer and (ii) the other four most highly compensated
executive officers of the Company (collectively, the 'Named Executive
Officers'), for services rendered by them in all capacities in which they served
the Company and its subsidiaries during the fiscal year ended September 30,
1997.
SUMMARY COMPENSATION TABLE
<TABLE>
<CAPTION>
LONG-TERM
COMPENSATION
AWARDS
ANNUAL COMPENSATION ------------
---------------------------------------- SECURITIES
OTHER ANNUAL UNDERLYING ALL OTHER
NAME AND PRINCIPAL POSITION SALARY($) BONUS($) COMPENSATION(1) OPTIONS(2) COMPENSATION($)(3)
- -------------------------------------------- --------- -------- --------------- ------------ ------------------
<S> <C> <C> <C> <C> <C>
Walter O. Fredericks
President and Chief Executive Officer....... 197,637 90,000 -- -- 4,753
Michael T. Petrillo
Vice President, Sales and Marketing......... 88,750 161,882(4) -- -- 6,323
Ivan Balazs, Ph.D.
Vice President, Research.................... 106,916 44,000 -- -- 4,556
Jacob Victor, Ph.D.
Vice President, Development................. 94,277 25,000 -- -- 4,714
Michael L. Baird, Ph.D.
Vice President, Laboratory Operations....... 93,300 20,000 -- -- --
</TABLE>
- ------------------
(1) In accordance with the rules of the Securities and Exchange Commission,
other compensation in the form of perquisites and other personal benefits,
securities or property has been omitted for each of the Named Executive
Officers because such perquisites and other personal benefits, securities or
property constituted in the aggregate less than the lesser of $50,000 or 10%
of such person's salary and bonus shown in the table.
(2) The Company did not make any restricted stock awards, grant any stock
appreciation rights or stock options, or make any long-term incentive
payments during fiscal 1997 to the Named Executive Officers.
(3) All Other Compensation consists of matching contributions pursuant to the
Company's 401(k) plan.
(4) Amount consists of a $10,000 bonus for fiscal year 1997 and $151,882 in
commissions earned during fiscal year 1997.
The Company has a management incentive program which is administered by the
Board, pursuant to which full-time management and supervisory personnel are
eligible to receive cash bonuses based upon a percentage of base salary. The
bonus percentage varies based upon a combination of individual and divisional
objectives. Similarly, the Company has a sales incentive plan pursuant to which
sales employees are eligible for cash bonuses based upon achieving sales
targets.
Option Grants. No stock options were granted during fiscal 1997 to the
Named Executive Officers.
Option Exercises and Unexercised Option Holdings. The following table sets
forth information with respect to unexercised options to purchase the Company's
Common Stock held by the Named Executive Officers at September 30, 1997. No
options to purchase the Company's Common Stock were exercised during fiscal 1997
by such persons.
54
<PAGE>
AGGREGATED OPTION EXERCISES IN LAST FISCAL YEAR AND
FISCAL YEAR-END OPTION VALUES
<TABLE>
<CAPTION>
VALUE OF UNEXERCISED
NUMBER OF UNEXERCISED IN-THE-MONEY OPTIONS AT
SHARES OPTIONS AT FISCAL YEAR-END(#) FISCAL YEAR-END($)(1)
ACQUIRED ON VALUE ------------------------------ ----------------------------
NAME EXERCISE(#) REALIZED($) EXERCISABLE UNEXERCISABLE EXERCISABLE UNEXERCISABLE
- ------------------------------- ----------- ----------- ------------ -------------- ----------- -------------
<S> <C> <C> <C> <C> <C> <C>
Walter O. Fredericks........... -- -- 111,690 52,560 614,295 289,080
Michael T. Petrillo............ -- -- 40,442 14,308 242,652 85,848
Ivan Balazs, Ph.D.............. -- -- 51,830 17,520 310,980 105,120
Jacob Victor, Ph.D............. -- -- 55,480 17,520 332,880 105,120
Michael L. Baird, Ph.D......... -- -- 38,909 14,016 233,454 84,096
</TABLE>
- ------------------
(1) There was no public trading market for the Common Stock as of September 30,
1997. Accordingly, these values have been calculated by determining the
difference between the fair market value of the securities underlying the
option as of September 30, 1997 (calculated on the basis of the midpoint of
the assumed initial public offering price range of $11.00 per share) and the
exercise price of the Named Executive Officer's options.
TERMINATION OF EMPLOYMENT AND CHANGE OF CONTROL ARRANGEMENTS
The Company has not entered into any employment agreements with any of the
executives named in the Summary Compensation Table. Each of Messrs. Fredericks,
Balazs and Victor has entered into a severance agreement with the Company.
The severance agreements with Messrs. Fredericks, Balazs and Victor (the
'Senior Executive Officers') extended through December 31, 1994, with automatic
one-year extensions upon each anniversary date of such agreement unless the
Board gives at least 30 days' notice to the contrary. No such notice was given
in 1994, 1995, 1996 or 1997 with regard to the Senior Executive Officers and
their agreements were extended until December 31, 1998.
In the event a proposal is made to effect a 'change in control' (as defined
in the agreement), the Senior Executive Officers' agreements require each
executive to continue to render his services to the Company until such proposal
for a change in control is terminated or abandoned or until six months after a
change in control has occurred. A 'change in control' of the Company is defined
as (a) approval by the stockholders of the Company of (i) any consolidation or
merger of the Company or any subsidiary of the Company where (1) the
stockholders of the Company, immediately prior to such consolidation or merger,
would not, immediately after such consolidation or merger, hold more than 50% of
the combined voting power of the stock of the surviving entity, or (2) the
members of the Board, immediately prior to the consolidation or merger, would
not, immediately after the consolidation or merger, constitute a majority of the
Board of Directors of the corporation issuing cash or securities in the
consolidation or merger, or (ii) any sale, lease, exchange or other transfer of
all or substantially all of the assets of the Company; or (b) a change in the
majority of the Board with the result that those individuals constituting the
entire Board as of the date of the agreement (the 'Incumbent Directors') cease
to constitute a majority of the Board, unless the election of each new director
was approved by at least a majority of the remaining Incumbent Directors.
Each of the Senior Executive Officers' severance agreements provides for
the payment of severance benefits to the executive in the event of a
'termination' (as defined in the agreement). A 'termination' is defined as the
termination of such executive's employment by or consultancy with the Company at
any time from six months prior to a 'change in control' to two years following a
'change in control.' The Company may effect a 'termination' by terminating the
executive's employment with the Company for any reason other than 'cause' (as
defined in the agreement), 'disability' (as defined in the agreement), death, or
attainment of age 65. The executive may effect a 'termination' in the event
that, without the executive's consent, (i) the executive is assigned to any
duties or responsibilities that are inconsistent with his position, duties,
responsibilities or status immediately preceding such 'change in control,' or
any reduction of his responsibilities or position at the Company; (ii) the
executive's salary is reduced (except for across-the-board salary reductions
similarly affecting other executives); (iii) the executive's rate of incentive
compensation pursuant to any benefit plan is reduced by a
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<PAGE>
greater amount than the average reduction received by all participants in such
benefit plan; (iv) the executive is transferred to a location requiring a change
in his residence or there is a material increase in the amount of travel
required of the executive in connection with his employment by the Company; or
(v) the Company fails to use its best efforts to cause any successor to the
Company to assume the Company's obligations under the agreement. The executive
may also effect a 'termination' if he determines in good faith that, due to the
change in control, he is no longer able to effectively discharge his duties and
responsibilities, and such situation is not remedied by the Company within
thirty days of receiving notice of such situation by the executive.
Severance payments under the Senior Executive Officers' agreements will be
the greater of the executive's annual salary or annual consultancy payment in
effect immediately prior to a 'change in control' or 'termination,' and will be
payable in twelve, or at the executive's option, twenty-four monthly
installments. In addition, immediately prior to a 'change in control,' (i) all
outstanding options to buy Company stock held by the executive will become fully
vested and immediately exercisable, and (ii) any repurchase agreement or right
of first refusal agreement between the Company and the executive with respect to
the Company's stock will terminate and the executive's ownership of all shares
of the Company's stock will fully vest. Severance payments will be reduced by
any compensation received by the Senior Executive Officers from other
employment, except that the Company is required to provide a minimum of four
months severance payments.
The Senior Executive Officers are not entitled to any Severance Payments in
the event that (i) the Company terminates such executive's employment for
'cause' (as defined in each severance agreement), (ii) such executive becomes
disabled, or (iii) such executive refuses to resign as a director and/or officer
of the Company upon receiving a request to do so following a 'termination.'
STOCK OPTION PLANS
1998 Stock Plan
The 1998 Stock Plan (the 'Plan') permits the issuance of shares of
restricted common stock ('Restricted Shares') and the granting of options to
purchase shares of Common Stock, $.10 par value per share, of the Company
('Common Stock') to key employees, officers and directors of, and consultants or
advisors to, the Company and its subsidiaries. The maximum number of shares of
Common Stock that may be issued and sold under the Plan is 1,000,000 shares,
subject to proportionate adjustment in the event of (i) any increase or decrease
in the number of issued shares, (ii) the issuance of shares in exchange for a
different number or kind of shares or other securities of the Company, or (iii)
the distribution of additional shares or new or different shares or other
non-cash assets with respect to such shares of Common Stock or other securities
of the Company, resulting from any recapitalization, reclassification, stock
dividend, stock split, reverse stock split or other similar transaction.
Options granted pursuant to the Plan will be authorized by action of the
Board (or a Committee designated by the Board) and may be either incentive stock
options ('Incentive Stock Options') meeting the requirements of Section 422 of
the Code or non-statutory options which are not intended to meet the
requirements of Section 422 of the Code. The Plan also provides that each
director who is neither an employee of the Company nor a beneficial holder of
more than one percent of the outstanding Common Stock (an 'Outside Director')
receives, upon joining the Board, a one-time five year option to purchase 20,000
shares vesting 40% after the second anniversary of the date of grant, 60% after
the third anniversary of the date of grant, 80% after the fourth anniversary of
the date of grant and 100% on the fifth anniversary of the date of grant.
The Plan will be administered by the Board, which may delegate its powers
to a committee consisting of two or more non-employee directors (the
'Committee'). The Board or the Committee (if appointed) shall have full
authority to determine the individuals to whom Restricted Shares or stock
options will be granted, the timing of the option or Restricted Share grant, the
exercise price of the option and the number of Restricted Shares or shares
subject to the option. Any director to whom an option or stock grant is awarded
shall be ineligible to vote upon his or her option or stock grant, but such
option or stock grant may be awarded any such director by a vote of the
remainder of the directors, subject to certain limitations.
The exercise price for shares covered by an Incentive Stock Option shall
not be less than 100% of the fair market value (as defined in the Plan) of such
stock, at the time of grant of such option, or less than 110% of such fair
market value in the case of options granted to an employee, who at the time of
the grant, was the owner of
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<PAGE>
stock possessing more than 10% of the combined voting power of all classes of
stock of the Company ('10% Stockholder'), and in the case of a non-statutory
option shall not be less than 50% of fair market value. In the event of a
merger, reorganization or consolidation of the Company with one or more other
corporations (collectively, 'Merger') in which the Company is the surviving
entity, the exercise price of all such shares is subject to proportionate
adjustment to ensure that the aggregate exercise price after such Merger is the
same as before the Merger. Options granted under the Plan may provide for the
payment of the exercise price by delivery of cash or a check, shares of Common
Stock, or by any other means which the Board determines are consistent with the
purpose of the Plan and with applicable laws and regulations. All options must
expire no later than ten years (five years in the case of an Incentive Stock
Option granted to a 10% Stockholder) after the date on which the option is
granted. No option granted under the Plan shall be assignable or otherwise
transferable by the optionee except by will or by the laws of descent and
distribution or pursuant to a qualified domestic relations order.
At the time an award of Restricted Shares is made, the Board shall
establish a period of time (the 'Restricted Period') applicable to such award
that shall not be less than one year nor more than ten years. During the
Restricted Period, the holder of Restricted Shares shall generally have the
rights and privileges of a stockholder as to such Restricted Shares, including
the right to vote such Restricted Shares, except that (i) the employee shall not
be entitled to delivery of an unlegended certificate until the expiration or
termination of the Restricted Period; (ii) such Restricted Shares may not be
sold, transferred, assigned, pledged, or otherwise encumbered or disposed of
until the expiration of the Restricted Period; and (iii) the employee shall
forfeit all rights with respect to the Restricted Shares unless the employee has
remained a regular full-time employee of the Company or any of its subsidiaries,
or a consultant to the Company or a subsidiary under a post-employment
consulting arrangement, until the expiration or termination of the Restricted
Period. Such restrictions shall lapse upon the expiration or termination of the
Restricted Period and a stock certificate shall be issued for the appropriate
number of Restricted Shares.
As of the date hereof, no options or Restricted Shares have been granted
under the Plan.
1992 and 1995 Employee Stock Option Plans
The 1992 Employee Stock Option Plan and 1995 Employee Stock Option Plan
(the '1992 Plan' and the '1995 Plan,' respectively) permit the granting of
options to purchase shares of Common Stock and the granting of options with
stock appreciation rights ('SARs') to key employees of the Company. The maximum
number of shares of Common Stock and SARs which may be issued and sold are
686,200 shares under the 1992 Plan and 237,250 shares under the 1995 Plan,
subject to proportionate adjustment in the event of any changes in the
outstanding stock of the Company by reason of stock dividends, split-ups,
consolidations, recapitalizations, or reorganizations.
The 1992 Plan and the 1995 Plan are each administered by the Compensation
Committee appointed by the Board, which has full authority to determine the
individuals to whom stock options will be granted, the period within which each
option may be exercised, the exercise price of the option and the number of
shares subject to the option. Options granted may be either Incentive Stock
Options or non-statutory options which are not intended to meet the requirements
of Section 422 of the Code. An option may be granted to a member of the
Committee only by action of the Board and only if the Committee member is also
an employee of the Company.
The exercise price for all options shall not be less than 100% of the fair
market value (as defined therein) of such stock, at the time of grant of such
option, or less than 110% of such fair market value in the case of options
granted to an employee, who at the time of the grant, was the owner of stock
possessing more than 10% of the combined voting power of all classes of stock of
the Company ('10% Stockholder'). The aggregate fair market value of stock
subject to an Incentive Stock Option granted to an optionee in any calendar year
shall not exceed $100,000. Options granted under the 1992 Plan or the 1995 Plan
may provide for the payment of the exercise price by delivery of cash, a full
recourse promissory note, shares of Common Stock, or any combination thereof
unless the Committee requires payment in cash. All options must expire no later
than ten years (five years in the case of an Incentive Stock Option granted to a
10% Stockholder) after the date on which the option is granted. No option
granted under the 1992 Plan or the 1995 Plan is transferable by the optionee
except by will or by the laws of descent and distribution.
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<PAGE>
As of August 31, 1998, options covering 588,563 shares of Common Stock and
235,425 shares of Common Stock were outstanding under the 1992 Plan and the 1995
Plan, respectively. Of such shares, 433,073 and 133,700 were vested prior to
August 31, 1998. All stock options granted under the 1992 Plan and the 1995 Plan
which have not already vested shall become fully vested and exercisable upon
completion of this offering.
CERTAIN TRANSACTIONS
In April 1998, the Company acquired all of the issued and outstanding
shares of stock of ISBMD from Claude Buller and Gerhard Ehninger in exchange for
365,000 shares of Common Stock. Messrs. Buller and Ehninger joined the Company's
Board of Directors in April 1998 following the consummation of the transaction.
In connection with the acquisition of ISBMD by the Company, Messrs. Buller and
Ehninger executed and delivered non-recourse promissory notes in the amounts of
$541,392.28 and $632,072.14, respectively, representing advances previously made
to them by ISBMD. Interest on these notes accrues at eight percent (8%) per
annum until maturity. The notes are payable on demand after March 31, 2004 or
sooner upon an event of default and provide for recourse only to the 365,000
shares of Common Stock which is pledged to secure them. For these purposes, the
stock is valued at market price if the shares are publicly traded or at an
appraised value if privately held, but in no event less than $2.68 per share. To
the extent that a scheduled number of samples are generated for the Company and
its affiliates through ISBMD, the principal amount outstanding under each such
note will be reduced pursuant to a formula which allows for the forgiveness of
up to $50,000 per quarter beginning in 2001.
At the time of the ISBMD closing, each of Messrs. Buller and Ehninger
entered into a consulting agreement with the Company which provides for an
annual consulting fee in an amount equal to $100,000 per annum during the
initial two years of its term and $150,000 per annum for the next forty-eight
months if more than a set number of samples are obtained by ISBMD during the
first two years of the term of the consultancy. Dr. Ehninger is also a director
of DKMS, a private not-for-profit foundation that administers bone marrow donor
programs in Germany and which is the sole customer of ISBMD. During the year
ended December 31, 1997, ISBMD's revenues from services provided to DKMS were
$4.8 million. During the fiscal year ended September 30, 1997 and nine months
ended June 30, 1998, on a pro forma basis after giving effect to the Recent and
Pending Acquisitions as if they were consummated on October 1, 1996, DKMS
accounted for approximately 15% and 12% of the Company's revenues, respectively.
During fiscal 1997, Walter O. Fredericks, the Company's President and Chief
Executive Officer, acquired a forty percent (40%) interest in MMD, a German
corporation that has established laboratories in Dresden, Germany and performs
molecular HLA typing. As part of the investment agreement, Mr. Fredericks
assumed the role of managing director of MMD and obtained veto power on all
significant matters relating to its operations. In connection with his personal
investment in MMD, the Company loaned money to and received a promissory note
from Mr. Fredericks in the principal amount of $150,000 bearing interest at
eight percent (8%) per annum, interest payable annually and maturing on December
31, 2001. As of August 31, 1998, there was $104,098 outstanding under the
promissory note. The promissory note contains a put and call feature pursuant to
which either Mr. Fredericks or the Company has the right at any time to acquire
all of Mr. Fredericks' interest in MMD solely in exchange for the cancellation
of the promissory note. As security for payment of the principal amount, the
Company received a Notarial Deed transferring the Chief Executive Officer's
interest in MMD to the Company. During fiscal 1997, the Company made various
loans to MMD totaling $469,398. In exchange for this, the Company received a
promissory note in the principal amount of $350,000 bearing interest at eight
percent (8%) per annum, interest payable annually with a maturity date of
December 31, 2001, with the balance of $119,398 remaining as unsecured
short-term advances. In conjunction with the loan agreement, MMD qualified for
reimbursement from Saxony Redevelopment Bank estimated at approximately
$167,000. MMD has agreed to repay the Company any unsecured short-term advances
outstanding upon receipt and release of the development money. Each of Messrs.
Buller and Ehninger owns five percent (5%) of MMD. Through its acquisition of
ISBMD in April 1998, the Company's effective ownership interest in MMD increased
to ninety percent (90%) through the acquisition of ISBMD's interest in MMD.
In connection with the acquisition of MDx in April 1998, the Company
repurchased approximately $1.2 million of the accounts receivable of MDx from
Century II Corp., a company controlled by Ross V. Hickey, Jr., a director of the
Company. The amounts paid for the accounts receivable are payable to Century II
Corp. over
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a six month period without interest. As part of the MDx Acquisition, the Company
also agreed to repay certain advances made to it by Century II Corp. in the
aggregate amount of $200,000. In June 1998 the Company issued 27,809 shares of
Common Stock to repay the $200,000 advance in full.
In March 1997, the Company sold 3,650 shares of Common Stock to its
President and Chief Executive Officer, Walter O. Fredericks, at a price of $1.51
per share.
In September 1997, the Company sold to its Chairman and Chief Financial
Officer, Richard A. Sandberg, 80,300 shares of Common Stock with an estimated
fair value of $2.69 per share, for $2.60 per share. In return, the Company
received cash proceeds of $2,200 and a promissory note in the amount of $206,800
that bears interest at a rate of eight percent (8%) per annum. In accordance
with the terms of the note, the first installment of interest is due on
September 30, 1998 and the remaining interest and principal are due on September
30, 1999. As collateral for the note, the Company retains all of the shares of
Common Stock purchased by Mr. Sandberg. As of August 31, 1998, there was
$206,800 outstanding under the promissory note.
In June 1997, the Company loaned Michael T. Petrillo, its Vice President,
Sales and Marketing, $50,000 towards the purchase of a house. Mr. Petrillo
executed a promissory note that provides for interest accruing at a rate of
eight and one-half percent (8.5%) per annum. Mr. Petrillo is required to use
half of each quarterly sales bonus to pay down principal and interest under the
promissory note. Any balance remaining unpaid at June 30, 2000 shall become
immediately payable. The loan is secured by a pledge of Mr. Petrillo's stock
options and the shares of Common Stock underlying such options. As of August 31,
1998, there was $22,000 outstanding under the promissory note.
In January 1998, Mr. Fredericks exercised a stock option to purchase 54,750
shares of Common Stock at an aggregate exercise price of $82,500. In order to
pay for these shares, Mr. Fredericks executed a promissory note in the amount of
$82,500 that provides for interest accruing at a rate of eight percent (8%) per
annum. In accordance with the terms of the note, the first installment of
interest is due on January 2, 1999 and the remaining interest and principal are
due on January 2, 2000. As collateral for the note, the Company is retaining
36,500 of the shares of Common Stock exercised by Mr. Fredericks pursuant to the
option. As of August 31, 1998 there was $82,500 outstanding under the promissory
note. In addition, in July 1998 the Company advanced Mr. Fredericks $50,000
pursuant to a promissory note, of which $40,000 was outstanding at August 31,
1998. The amount outstanding bears interest at 8.5% per annum and is due on
October 6, 1998.
The Company is a party to Severance Agreements with Messrs. Fredericks,
Balazs and Victor. See 'Management--Employment, Termination of Employment and
Change of Control Arrangements' for a description of the terms of these
agreements.
In 1992, the Company signed a Research and Development Agreement with FMC
Corporation ('FMC') to conduct joint research and development programs designed
to expand the applications of DNA analysis products. Lifecodes provides the
primary facilities and the scientific and technical input. The Company and FMC
also entered into license agreements relating to technology arising from the
foregoing research and certain existing patent rights. FMC also contributed
$300,000 to the Company in consideration for 109,500 shares of Common Stock and
received certain options that have since expired unexercised. The Company also
purchases certain inventory items from FMC. During the fiscal years ended
September 30, 1995, 1996 and 1997 and the nine month period ended June 30, 1998,
the Company purchased inventory from FMC in the amount of approximately $60,000,
$95,000, $75,000 and $85,000 respectively. Milton Steele, a director of the
Company, is an employee of FMC. FMC is the Selling Stockholder in this offering.
See 'Principal and Selling Stockholders.'
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PRINCIPAL AND SELLING STOCKHOLDERS
The following table sets forth certain information regarding the beneficial
ownership of the Company's Common Stock as of the date of this Prospectus and as
adjusted to reflect the sale of the shares of Common Stock offered hereby by:
(i) each person known by the Company to be the beneficial owner of more than 5%
of the Company's Common Stock; (ii) each of the Company's directors; (iii) each
Named Executive Officer (see 'Management--Executive Compensation.'); (iv) all
directors and executive officers of the Company as a group; and (v) each Selling
Stockholder.
<TABLE>
<CAPTION>
BENEFICIAL OWNERSHIP BENEFICIAL OWNERSHIP
PRIOR TO THE OFFERING(1) AFTER OFFERING(1)(2)
-------------------------- -----------------------
NUMBER OF SHARES NUMBER OF
NAME OF BENEFICIAL OWNER(3) SHARES PERCENTAGE OFFERED(4) SHARES PERCENTAGE
- ---------------------------------------------- --------- ---------- ---------- --------- ----------
<S> <C> <C> <C> <C> <C>
Richard A. Sandberg(5)........................ 80,300 2.6% -- 80,300 1.2%
Walter O. Fredericks(6)....................... 586,301 18.2 -- 586,301 8.6
Ivan Balazs, Ph.D.(7)......................... 178,120 5.7 -- 178,120 2.7
Michael T. Petrillo(8)........................ 84,315 2.7 -- 84,315 1.3
Jacob Victor, Ph.D.(9)........................ 146,183 4.7 -- 146,183 2.2
Michael L. Baird, Ph.D.(10)................... 107,675 3.5 -- 107,675 1.6
Dean L. Somer(11)............................. 77,745 2.5 -- 77,745 1.2
Joseph I. Bishop(12).......................... 560,939 18.7 -- 560,939 8.7
Keith W. Brown(13)............................ 0 -- -- 0 --
Claude L. Buller(14).......................... 182,500 6.0 -- 182,500 2.8
Prof. Dr. Gerhard Ehninger(14)................ 182,500 6.0 -- 182,500 2.8
Dean E. Fenton(15)............................ 35,975 1.2 -- 35,975 *
John A. Hansen, M.D........................... 0 -- -- 0 --
Ross V. Hickey, Jr.(16)....................... 139,047 4.6 -- 139,047 2.1
Milton Steele(17)............................. 309,082 10.1 -- 9,082 *
Crossroads Constitution L.P.(18).............. 274,058 8.5 -- 274,058 4.0
FMC Corporation (19).......................... 309,082 10.1 300,000 9,082 *
Connecticut Innovations, Incorporated(20)..... 206,225 6.7 -- 206,225 3.1
Connecticut Development Authority(21)......... 184,264 5.7 -- 184,264 2.7
All directors and executive officers as a
group (15 persons)(22)...................... 2,690,557 74.3% 2,390,557 33.2%
</TABLE>
- ------------------
* Indicates less than 1%.
(1) Assumes conversion of all of the Company's outstanding Series A Convertible
Preference Stock on a 7.3 for one basis into Common Stock. Unless otherwise
indicated below, the persons and entities named in the table have sole
voting and investment power with respect to all shares beneficially owned.
Shares of Common Stock subject to options that are currently exercisable or
are exercisable within 60 days from the date of this Prospectus are deemed
to be outstanding and to be beneficially owned by the person holding such
options for the purpose of computing the percentage ownership of such
person but are not treated as outstanding for the purpose of computing the
percentage ownership of any other person.
(2) Assumes that the Underwriters' over-allotment option to purchase up to an
additional 480,000 shares from certain Selling Stockholders is not
exercised. Also assumes the issuance of 681,818 shares of Common Stock in
connection with the GeneScreen Acquisition.
(3) See 'Management--Executive Officers and Directors.' Unless otherwise
indicated, the address of each beneficial owner is c/o Lifecodes
Corporation, 550 West Avenue, Stamford, Connecticut 06902.
(Footnotes continued on next page)
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(Footnotes continued from previous page)
(4) If the Underwriters' exercise their over-allotment option to purchase up to
an additional 480,000 shares, then the following stockholders will sell up
to the following number of additional shares: Crossroads Constitution L.P.,
185,304 shares; Connecticut Development Authority, 129,305 shares; Joseph
I. Bishop, 107,034 shares; Connecticut Innovations, Incorporated, 49,275
shares; and FMC Corporation, 9,082 shares.
(5) The indicated shares are pledged to the Company as collateral for a
promissory note. See 'Certain Transactions.'
(6) Includes 171,733 shares issuable upon exercise of stock options. Also
includes 36,500 shares pledged to the Company as collateral for a
promissory note. See 'Certain Transactions.'
(7) Includes 87,600 shares issuable upon exercise of stock options.
(8) Includes 73,000 shares issuable upon exercise of stock options.
(9) Includes 73,000 shares issuable upon exercise of stock options.
(10) Includes 52,925 shares issuable upon exercise of stock options.
(11) Includes 65,335 shares issuable upon exercise of stock options.
(12) Includes 27,375 shares issuable upon exercise of warrants.
(13) Mr. Brown is President and Chief Executive Officer of GeneScreen and will
become a Senior Vice President of the Company upon consummation of the
GeneScreen Acquisition. See 'Business--Recent and Pending Acquisitions' and
'--GeneScreen Acquisition.'
(14) The indicated shares have been pledged to the Company to secure promissory
notes payable to the Company. See 'Certain Transactions.'
(15) Includes 24,324 shares issuable upon exercise of warrants exercisable
within 60 days.
(16) Includes 13,903 shares held by Century II Corp. of which Mr. Hickey is the
President.
(17) Consists of shares held by FMC, an entity of which Mr. Steele is a Division
Manager.
(18) Crossroads Constitution L.P.'s address is 190 Farmington Avenue,
Farmington, CT 06032. Includes 185,304 shares issuable upon exercise of
warrants exercisable within 60 days.
(19) FMC's address is 1735 Market Street, Philadelphia, PA 19103. Milton Steele,
a Director of the Company, is a Division Manager of FMC.
(20) Connecticut Innovations, Incorporated's address is 40 Cold Spring Road,
Rocky Hill, CT 06067. Consists of 156,950 shares issuable upon conversion
of 21,500 shares of Series A Convertible Preference Stock and 49,275 shares
issuable upon exercise of warrants exercisable within 60 days.
(21) The Connecticut Development Authority's address is 217 Washington Street,
Hartford, CT 06106. Consists of shares issuable upon exercise of warrants
exercisable within 60 days.
(22) Includes 523,593 shares issuable upon exercise of stock options and 51,699
shares issuable upon exercise of warrants exercisable within 60 days.
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DESCRIPTION OF CAPITAL STOCK
The authorized capital stock of the Company consists of 15,000,000 shares
of Common Stock, $.10 par value, and 1,000,000 shares of Preferred Stock, $10.00
par value. Immediately prior to the offering and taking into effect the issuance
of shares in the GeneScreen Acquisition, there were 3,730,090 shares of Common
Stock outstanding, held of record by 207 stockholders. The following summary of
certain terms of the Common Stock and Preferred Stock does not purport to be
complete and is subject to, and qualified in its entirety by, the provisions of
the Company's Amended and Restated Certificate of Incorporation (the
'Certificate of Incorporation') and Bylaws, which are included as exhibits to
the Registration Statement of which this Prospectus is a part, and the
provisions of applicable law.
COMMON STOCK
Holders of Common Stock have the right to cast one vote for each share held
of record on all matters submitted to a vote of holders of Common Stock,
including the election of directors. Holders of Common Stock are entitled to
receive such dividends, pro rata based on the number of shares held, when, as
and if declared by the Board, from funds legally available therefor, subject to
the rights of holders of any outstanding preferred stock. In the event of the
liquidation, dissolution or winding up of the affairs of the Company, all assets
and funds of the Company remaining after the payment of all debts and other
liabilities, subject to the rights of the holders of any outstanding preferred
stock, shall be distributed, among the holders of the Common Stock. Holders of
Common Stock are not entitled to preemptive, subscription, cumulative voting or
conversion rights, and there are no redemption or sinking fund provisions
applicable to the Common Stock.
PREFERRED STOCK
The Preferred Stock may be issued from time to time in one or more series
as determined by the Board. The Board is authorized to issue the shares of
Preferred Stock in one or more series and to fix the rights, preferences,
privileges and restrictions thereof, including dividend rights, dividend rates,
conversion rights, voting rights, terms of redemption, redemption prices,
liquidation preferences and the number of shares constituting any series or the
designation of such series, without further vote or action by the stockholders.
The issuance of such Preferred Stock may have the effect of delaying, deferring
or preventing a change in control of the Company without further action by the
stockholders and may adversely affect the voting and other rights of the holders
of Common Stock, including the loss of voting control to others. The Company
currently has no plan to issue any shares of Preferred Stock.
WARRANTS
As of August 31, 1998, the Company had warrants outstanding to purchase an
aggregate of 494,866 shares of Common Stock with exercise prices ranging from
$0.27 to $1.41 per share. These warrants are immediately exercisable and expire
at various times between 2001 and 2004. The exercise price and number of shares
issuable upon exercise are generally subject to adjustment in the event of a
stock dividend, reclassification, exchange, substitution, subdivision or reverse
stock split and such warrants contain anti-dilution protection in the event of
certain issuances of Common Stock below the respective exercise prices of the
warrants.
DELAWARE LAW AND CERTAIN PROVISIONS OF THE COMPANY'S CERTIFICATE OF
INCORPORATION AND BYLAWS
Certain provisions of the Company's Certificate of Incorporation and Bylaws
are intended to enhance the likelihood of continuity and stability in the Board
and in its policies, but might have the effect of delaying or preventing a
change in control of the Company and may make more difficult the removal of
incumbent directors or management even if such transactions could be beneficial
to the interests of stockholders. Set forth below is a summary description of
such provisions:
Authority to Issue Preferred Stock. The Company's Certificate of
Incorporation authorizes the Board, without stockholder approval, to
establish and to issue shares of one or more series of preferred stock,
each such series having such dividend rights, conversion rights, voting
rights, terms of redemption, liquidation preferences, the number of shares
constituting any series or designation of such series, and other rights as
may be fixed by the Board.
Staggered Board. The classification of the Board into three classes,
each with a three-year term, will have the effect of making it difficult
for stockholders to change the composition of the Board. At least two
annual meetings of stockholders generally will be required to effect a
change in the majority of the Board. Such a delay may help ensure that the
Company's directors, if confronted by a stockholder attempting to force a
proxy contest, a tender or exchange offer or an extraordinary corporate
transaction, would have sufficient time to review the proposal as well as
any available alternatives to the proposal and to act in what they believe
to be the best interests of the stockholders. The classification provisions
will apply to every
62
<PAGE>
election of directors, however, regardless of whether a change in the
composition of the Board would be beneficial to the Company and its
stockholders and whether a majority of the Company's stockholders believes
that such a change would be desirable.
Limitation of Director Liability. Section 102(b)(7) of the Delaware
General Corporation Law ('Section 102(b)') authorizes corporations to limit
or eliminate the personal liability of directors to corporations and their
stockholders for monetary damages for breach of directors' fiduciary duty
of care. Although Section 102(b) does not alter a director's duty of care,
it enables corporations to limit available relief to equitable remedies
such as injunction or rescission. The Company's Certificate of
Incorporation limits the liability of directors to the Company or its
stockholders to the fullest extent permitted by Section 102(b).
Specifically, directors of the Company will not be personally liable for
monetary damages for breach of a director's fiduciary duty as a director,
except for liability: (i) for any breach of the director's duty of loyalty
to the Company or its stockholders, (ii) for acts or omissions not in good
faith or which involve intentional misconduct or a knowing violation of
law, (iii) for unlawful payments of dividends or unlawful stock repurchases
or redemptions as provided in Section 174 of the Delaware General
Corporation Law (relating to certain unlawful dividends, stock purchases or
redemptions), or (iv) for any transaction from which the director derived
an improper personal benefit.
Indemnification. To the maximum extent permitted by law, the Company's
Certificate of Incorporation provides for mandatory indemnification of
directors and officers, and permits indemnification of employees and agents
of the Company against all expense, liability and loss to which they may
become subject or which they may incur as a result of being or having been
a director, officer, employee or agent of the Company. In addition, the
Company must advance or reimburse directors and officers, and may advance
employees and agents amounts for expenses incurred by them in connection
with indemnifiable claims.
Upon consummation of this offering, the Company will be subject to the
provisions of Section 203 ('Section 203') of the Delaware General Corporation
Law. Section 203 provides, with certain exceptions, that a Delaware corporation
may not engage in any of a broad range of business combinations with a person or
an affiliate or an associate of such person, who is an 'interested stockholder'
for a period of three years from the date that such person became an interested
stockholder unless: (i) the transaction resulting in a person becoming an
interested stockholder, or the business combination, is approved by the Board of
Directors of the corporation before the person becomes an interested
stockholder; (ii) upon consummation of the transaction which resulted in the
stockholder becoming an interested stockholder, the interested stockholder owned
at least 85% of the voting stock of the corporation oustanding at the time the
transaction is commenced, excluding for purposes of determining the number of
shares outstanding those shares owned (a) by persons who are directors and
officers and (b) by employee stock plans in which employee participants do not
have the right to determine confidentially whether shares held subject to the
plan will be tendered in a tender or exchange offer; or (iii) on or after the
date the person becomes an interested stockholder, the business combination is
approved by the corporation's board of directors and by the holders of at least
66 2/3% of the corporation's outstanding voting stock at an annual or special
meeting, excluding shares owned by the interested stockholder. Under Section
203, an 'interested stockholder' is defined as any person who is (x) the owner
of 15% or more of the outstanding voting stock of the corporation or (y) an
affiliate or associate of the corporation and who was the owner of 15% or more
of the outstanding voting stock of the corporation at any time within the
three-year period immediately prior to the date on which it is sought to be
determined whether such person is an interested stockholder.
The provisions of Section 203, together with the ability of the Board to
issue Preferred Stock without further stockholder action, could delay or
frustrate the removal of incumbent directors or a change in control of the
Company. The provisions also could discourage, impede or prevent a merger,
tender offer or proxy consent, even if such event would be favorable to the
interests of stockholders. The Company's stockholders, by adopting an amendment
to the Company's Certificate of Incorporation or Bylaws, may elect not to be
governed by Section 203 effective 12 months after such adoption. Neither the
Company's Certificate of Incorporation nor Bylaws currently exclude the Company
from the restrictions imposed by Section 203.
TRANSFER AGENT
American Stock Transfer & Trust Company, New York, New York, serves as
Transfer Agent and Registrar for the Common Stock.
63
<PAGE>
SHARES ELIGIBLE FOR FUTURE SALE
Upon completion of this offering, the Company will have 6,630,090 shares of
Common Stock outstanding (based upon shares of Common Stock outstanding as of
the date of this Prospectus, the conversion of all outstanding shares of Series
A Convertible Preference Stock, the issuance of 681,818 shares in the concurrent
offering pursuant to the GeneScreen Acquisition and assuming no exercise of
outstanding stock options). Of these shares, the 3,200,000 shares sold in this
offering will be freely tradable without restriction or further registration
under the Securities Act, except that any shares purchased by 'affiliates' of
the Company, as that term is defined in Rule 144 ('Rule 144') under the
Securities Act ('Affiliates'), may generally only be sold in compliance with the
limitations of Rule 144 described below. The remaining 2,748,272 shares of
Common Stock (the 'Restricted Shares') held by existing stockholders upon
completion of this offering, other than holders pursuant to the GeneScreen
Acquisition, will be 'restricted' securities within the meaning of Rule 144 and
may not be sold except in compliance with the registration requirements of the
Securities Act or an applicable exemption under the Securities Act, including an
exemption pursuant to Rule 144.
SALES OF RESTRICTED SHARES
Beginning 180 days after the date of this Prospectus, approximately
1,744,487 Restricted Shares subject to lock-up agreements (the 'Lock-up
Agreements') between the Underwriters and certain stockholders, including
officers and directors, will become eligible for sale in the public market
pursuant to Rule 144(k), Rule 144 or Rule 701. In addition, certain existing
holders of an aggregate of 467,491 shares of Common Stock have the right to
require registration of their shares under certain circumstances. However, such
stockholders and holders of Common Stock pursuant to the GeneScreen Acquisition
have entered into Lock-up Agreements with respect to all shares owned by them
and not sold in this offering, which provide that they will not sell or
otherwise dispose of any shares of Common Stock (except for shares sold in this
offering) without the prior written consent of Volpe Brown Whelan & Company, LLC
for a period of 180 days from the date of this Prospectus other than bona fide
gifts or distributions to the stockholders or limited partners of such
stockholders, provided that, in either event, the transferee agrees to be bound
by similar restrictions. Volpe Brown Whelan & Company, LLC may, in its sole
discretion, and at any time or from time to time, without notice, release all or
any portion of the securities subject to the Lock-up Agreements. See
'--Registration Rights' and 'Underwriting.'
In general, under Rule 144 as currently in effect, a person (or persons
whose shares are aggregated), including an Affiliate, who has beneficially owned
Restricted Shares for at least one year (including the holding period of certain
prior owners) is entitled to sell in 'brokers' transactions' or to market
makers, within any three-month period commencing 90 days after the Company
becomes subject to reporting requirements of Section 13 of the Exchange Act, a
number of such shares that does not exceed the greater of (i) one percent of the
then outstanding shares of Common Stock (approximately 66,300 shares immediately
after this offering) or (ii) the average weekly trading volume in the Common
Stock on the Nasdaq National Market during the four calendar weeks preceding the
date on which notice of such sale is filed. Sales under Rule 144 are also
subject to certain limitations on manner of sale, notice requirements and
availability of current public information about the Company. In addition, under
Rule 144(k), a person who is not an Affiliate and has not been an Affiliate for
at least three months prior to the sale and who has beneficially owned
Restricted Shares for at least two years may resell such shares without regard
to the limitations described above. In meeting the one and two year holding
periods described above, a holder of Restricted Shares can include the holding
periods of a prior owner who was not an Affiliate. Further, Rule 144A under the
Securities Act as currently in effect permits the immediate sale of restricted
shares to certain qualified institutional buyers without regard to the volume
restrictions described above.
STOCK OPTIONS
In general, under Rule 701 of the Securities Act as currently in effect,
any employee, consultant or advisor of the Company who purchased shares from the
Company in connection with a compensatory stock or option plan or other written
compensatory agreement is entitled to resell such shares without having to
comply with the public-information, holding-period, volume-limitation or notice
provisions of Rule 144, and Affiliates are entitled to sell their Rule 701
shares under Rule 144 without having to comply with Rule 144's holding period
restrictions, in each case commencing 90 days after the Company becomes subject
to the reporting requirements
64
<PAGE>
of Section 13 of the Exchange Act. Rule 701 is available for stockholders of the
Company as to all shares issued pursuant to exercise of options granted prior to
the offering.
As of the date of this Prospectus, the Board had authorized an aggregate of
up to 1,923,450 shares of Common Stock for issuance pursuant to the Company's
stock option plans. As of the date of this Prospectus, options to purchase a
total of 823,988 shares of Common Stock were outstanding; 257,215 of the shares
issuable pursuant to such options are not yet exercisable; and an additional
1,099,462 shares of Common Stock are available for future grants under the
Company's stock option plans. In addition, options to purchase 20,000 shares
will be granted as of the effective date of this offering at an exercise price
equal to the initial public offering price to John A. Hansen, M.D., who will
join the Board upon the closing of this offering. Dr. Hansen has executed a
Lock-up Agreement.
The Company intends to file one or more registration statements on Form S-8
under the Securities Act promptly after the date of this Prospectus to register
all shares of Common Stock subject to outstanding stock options and Common Stock
issuable pursuant to the Company's stock option plans. Such registration
statements are expected to become effective upon filing. Shares covered by these
registration statements will thereupon be eligible for sale in the public
markets, subject to the Lock-up Agreements, to the extent applicable.
LOCK-UP AGREEMENTS
Certain security holders and all officers and directors of the Company have
agreed, pursuant to the Lock-up Agreements, that they will not, without the
prior written consent of Volpe Brown Whelan & Company, LLC, offer, sell,
contract to sell or otherwise dispose of, directly or indirectly, any shares of
Common Stock beneficially owned by them (except for shares sold in this
offering) for a period of 180 days after the date of this Prospectus other than
bona fide gifts and distributions to the stockholders or limited partners of
such security holders, provided that, in either event, the transferee agrees to
be bound by similar restrictions.
REGISTRATION RIGHTS
Upon the expiration of the contractual lock-up period, certain security
holders of the Company (the 'Rights Holders') will be entitled to require the
Company to register under the Securities Act up to a total of 467,491 shares
(103,607 shares if the Underwriters' over-allotment option is exercised in full)
of outstanding Common Stock (the 'Registrable Shares') under the terms of
various agreements between the Company and the Rights Holders. The Company is
generally required to bear the expenses of all such registrations, except
underwriting discounts and commissions.
Prior to this offer, there has not been any public market for the
securities of the Company. No predictions can be made as to the effect, if any,
that market sales of shares or the availability of shares for sale will have on
the market price prevailing from time to time. Nevertheless, sales of
substantial amounts of Common Stock in the public market could materially
adversely affect the prevailing market price. See 'Risk Factors--Shares Eligible
for Future Sale.'
65
<PAGE>
UNDERWRITING
Subject to the terms and conditions of the Underwriting Agreement, the
Company has agreed to sell to each of the underwriters named below (the
'Underwriters'), and each of such Underwriters, for whom Volpe Brown Whelan &
Company, LLC, Vector Securities International, Inc. and Advest, Inc.
(collectively, the 'Representatives'), are acting as representatives, have
agreed severally to purchase from the Company, the respective number of shares
of Common Stock set forth opposite its name below. The Underwriters are
committed to purchase and pay for all shares if any shares are purchased.
<TABLE>
<CAPTION>
NUMBER
UNDERWRITERS OF SHARES
- -------------------------------------------------------------------------------------------- ---------
<S> <C>
Volpe Brown Whelan & Company, LLC...........................................................
Vector Securities International, Inc........................................................
Advest, Inc.................................................................................
---------
Total..................................................................................
---------
---------
</TABLE>
The Representatives have advised the Company that the Underwriters propose
to offer the shares of Common Stock to the public at the initial public offering
price set forth on the cover page of this Prospectus and to certain dealers at
such price less a concession not in excess of $ per share, of which $
per share may be reallowed to other dealers. After the initial public offering,
the public offering price, concession and reallowance to dealers may be reduced
by the Representatives. No such reduction shall change the amount of proceeds to
be received by the Company as set forth on the cover page of this Prospectus.
Certain Selling Stockholders have granted the Underwriters an option for 45
days after the date of this Prospectus to purchase, at the initial public
offering price less the underwriting discounts and commissions set forth on the
cover page of this Prospectus, up to 480,000 additional shares of Common Stock
at the same price per share as the Company and the Selling Stockholder receive
for the 3,200,000 shares of Common Stock offered hereby, solely to cover
over-allotments, if any. If the Underwriters exercise their over-allotment
option, the Underwriters have severally agreed, subject to certain conditions,
to purchase approximately the same percentage thereof that the number of shares
of Common Stock to be purchased by each of them, as shown in the foregoing
table, bears to the 3,200,000 shares of Common Stock offered hereby. The
Underwriters may exercise such option only to cover the over-allotments in
connection with the sale of the 3,200,000 shares of Common Stock offered hereby.
To the extent that the Underwriters exercise such over-allotment option in part,
such shares shall be purchased pro-rata among the individual Selling
Stockholders.
Certain of the Company's executive officers, directors and existing
stockholders owning in the aggregate 2,533,541 shares of Common Stock have
agreed not to offer, pledge, sell, contract to sell, make any short sale or
otherwise dispose of any shares of Common Stock, options to acquire shares of
Common Stock or securities convertible into or exchangeable for shares of Common
Stock, or any rights to purchase or acquire shares of Common Stock, during the
180 day period following the date of this Prospectus, without the prior written
consent of Volpe Brown Whelan & Company, LLC. The Company also has agreed not to
offer, sell, contract to sell or otherwise dispose of any shares of Common Stock
or any securities convertible into or exchangeable for shares of Common Stock,
or any rights to purchase or acquire shares of Common Stock, during the 180 day
period following the date of this Prospectus without the prior written consent
of Volpe Brown Whelan & Company, LLC, except for the granting of options
pursuant to the Plan or the issuance of shares of Common Stock upon the
66
<PAGE>
exercise of outstanding options or in connection with acquisitions. Volpe Brown
Whelan & Company, LLC, in its discretion, may waive the foregoing restrictions
in whole or in part, with or without a public announcement of such action. In
recent offerings in which it has served as lead manager of underwriters, Volpe
Brown Whelan & Company, LLC has consented to early releases from lock-up
agreements only in a limited number of circumstances, after considering all
circumstances that it deemed to be relevant. Volpe Brown Whelan & Company, LLC
will have, however, complete discretion in determining whether to consent to
early releases from the lock-up agreements delivered in connection with this
offering, and no assurance can be given that it will not consent to the early
release of all or a portion of the shares of Common Stock and options covered by
such lock-up agreements.
The Representatives have informed the Company that the Underwriters do not
intend to confirm sales to accounts over which the Underwriters have
discretionary authority.
Prior to this offering, there has been no public trading market for the
Common Stock. Consequently, the initial public offering price of the Common
Stock has been determined by negotiations between the Company and the
Representatives. Among the factors considered in such negotiations were the
results of operations of the Company in recent periods, the prospects for the
Company and the industry in which the Company competes, an assessment of the
Company's management, its financial condition, the prospects for future earnings
of the Company, the present state of the Company's development, the general
condition of the economy and the securities markets at the time of this offering
and the market prices of and demand for publicly traded stock of comparable
companies in recent periods.
In connection with this offering, certain Underwriters and selling group
members and their respective affiliates may engage in transactions that
stabilize, maintain or otherwise affect the market price of the Common Stock.
Such transactions may include stabilization transactions effected in accordance
with Rule 104 of Regulation M, pursuant to which such persons may bid for or
purchase Common Stock for the purpose of stabilizing its market price. The
Underwriters also may create a short position for the account of the
Underwriters by selling more Common Stock in connection with this offering than
they are committed to purchase from the Company, and in such case may purchase
Common Stock in the open market following completion of this offering to cover
all or a portion of such short position. The Underwriters also may cover all or
a portion of such short position, up to 480,000 shares, by exercising the
Underwriters' over-allotment option referred to above. In addition, Volpe Brown
Whelan & Company, LLC on behalf of the Underwriters, may impose 'penalty bids'
under the contractual arrangements with the Underwriters whereby it may reclaim
from an Underwriter (or dealer participating in this offering), for the account
of the other Underwriters, the selling concession with respect to Common Stock
that is distributed in this offering but subsequently purchased for the account
of the Underwriters in the open market. Any of the transactions described in
this paragraph may result in the maintenance of the price of the Common Stock at
a level above that which otherwise might prevail in the open market. None of the
transactions described in this paragraph is required, and, if they are
undertaken, they may be discontinued at any time.
The Company has agreed to indemnify the Underwriters against certain
liabilities that may be incurred in connection with this offering, including
liabilities under the Securities Act, or to contribute to payments that the
Underwriters may be required to make in respect thereof.
The foregoing contains a summary of the principal terms of the Underwriting
Agreement and does not purport to be complete. Reference is made to the copy of
the Underwriting Agreement filed as an exhibit to the Registration Statement of
which this Prospectus is a part.
LEGAL MATTERS
The validity of the Common Stock offered hereby will be passed upon for the
Company and the Selling Stockholders by Wiggin & Dana, New Haven, Connecticut.
Certain legal matters for the Underwriters will be passed upon by Testa, Hurwitz
& Thibeault, LLP, Boston, Massachusetts.
67
<PAGE>
EXPERTS
The consolidated financial statements of Lifecodes Corporation and
subsidiaries as of September 30, 1996 and 1997, and June 30, 1998, and for each
of the three years in the period ended September 30, 1997 and the nine month
period ended June 30, 1998, the financial statements of Micro Diagnostics, Inc.
as of December 31, 1996 and 1997 and for the years then ended, the financial
statements of International Support for Bone Marrow Drives, Ltd. as of December
31, 1997 and for the year then ended, the financial statements of GeneScreen
Inc. as of December 31, 1996, 1997 and for each of the three years in the period
ended December 31, 1997 included in this prospectus have been audited by
Deloitte & Touche LLP, independent auditors, as stated in their reports
appearing herein and have been so included in reliance upon the reports of such
firm given upon their authority as experts in accounting and auditing.
The financial statements of National Legal Laboratories as of September 30,
1997 and for the year then ended included in this prospectus have been audited
by Schlattman & Associates, P.C., independent auditors, as stated in their
report appearing herein and have been so included in reliance upon the report of
such firm given upon their authority as experts in accounting and auditing.
AVAILABLE INFORMATION
The Company has filed with the Securities and Exchange Commission (the
'Commission'), Washington, D.C., a Registration Statement under the Securities
Act of 1933, as amended, with respect to the Common Stock offered hereby. This
prospectus, which is part of the Registration Statement, does not contain all of
the information set forth in the Registration Statement, certain parts of which
are omitted in accordance with the rules and regulations of the Commission. For
further information with respect to the Company and the Common Stock, reference
is hereby made to the Registration Statement. Statements contained herein
concerning the provisions of any document are not necessarily complete, and in
each instance reference is made to the copy of such document filed as an exhibit
to the Registration Statement or otherwise filed with the Commission. Each such
statement is qualified in its entirety by such reference. The Registration
Statement, together with its exhibits and schedules, may be inspected and copied
at the Public Reference Section of the Commission at 450 Fifth Street, N.W.,
Washington, D.C. 20549 and at the regional offices of the Commission located at
500 West Madison Street, Chicago, Illinois 60661, and Seven World Trade Center,
New York, New York 10048. Copies of such material can be obtained from the
Public Reference Section of the Commission at prescribed rates by writing to the
Commission at 450 Fifth Street, N.W., Washington, D.C. 20549. The Commission
also maintains a site on the World Wide Web that contains all such material
filed electronically with the Commission at www.sec.gov.
68
<PAGE>
INDEX TO FINANCIAL STATEMENTS
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
LIFECODES CORPORATION AND SUBSIDIARIES
Independent Auditors' Report............................................................................ F-3
Consolidated Balance Sheets as of September 30, 1996 and 1997 and June 30, 1998 ........................ F-4
Consolidated Statements of Operations for the Years Ended September 30, 1995, 1996, 1997 and for the
Nine Month Periods Ended June 30, 1997 (unaudited) and June 30, 1998 ................................ F-5
Consolidated Statements of Stockholders' Equity for the Years Ended September 30, 1995, 1996, 1997 and
the Nine Month Period Ended June 30, 1998 ........................................................... F-6
Consolidated Statements of Cash Flows for the Years Ended September 30, 1995, 1996, 1997 and for the
Nine Month Periods Ended June 30, 1997 (Unaudited) and June 30, 1998 ................................ F-7
Notes to Consolidated Financial Statements.............................................................. F-8
MICRO DIAGNOSTICS, INC.
Independent Auditors' Report............................................................................ F-25
Balance Sheets as of December 31, 1996 and 1997 and March 31, 1998 (Unaudited).......................... F-26
Statements of Operations for the Years Ended December 31, 1996 and 1997 and for the Three Month Periods
Ended March 31, 1997 (Unaudited) and March 31, 1998 (Unaudited)...................................... F-27
Statements of Changes in Stockholders' Deficiency for the Years Ended December 31, 1996 and 1997 and for
the Three Month Period Ended March 31, 1998 (Unaudited).............................................. F-28
Statements of Cash Flows for the Years Ended December 31, 1996 and 1997 and for the Three Month Periods
Ended March 31, 1997 (Unaudited) and March 31, 1998 (Unaudited)...................................... F-29
Notes to Financial Statements........................................................................... F-30
INTERNATIONAL SUPPORT FOR BONE MARROW DRIVES, LTD.
Independent Auditors' Report............................................................................ F-36
Balance Sheets as of December 31, 1997 and March 31, 1998 (Unaudited)................................... F-37
Statements of Operations for the Year Ended December 31, 1997 and the Three Months Ended March 31, 1997
and 1998 (Unaudited)................................................................................. F-38
Statements of Stockholders' Deficit for the Year Ended December 31, 1997 and Three Months Ended March
31, 1998 (Unaudited)................................................................................. F-39
Statements of Cash Flows for the Year Ended December 31, 1997 and the Three Months Ended March 31, 1997
and 1998 (Unaudited)................................................................................. F-40
Notes to Financial Statements........................................................................... F-41
GENESCREEN INC. AND SUBSIDIARIES
Independent Auditors' Report............................................................................ F-44
Consolidated Balance Sheets as of December 31, 1996 and 1997, and June 30, 1998 (Unaudited)............. F-45
Consolidated Statements of Operations for the Years Ended December 31, 1995, 1996 and 1997, and for the
Six Months Ended June 30, 1997 (Unaudited) and 1998 (Unaudited)...................................... F-46
Consolidated Statements of Stockholders' Equity for the Years Ended December 31, 1995, 1996 and 1997,
and for the Six Months Ended June 30, 1998 (Unaudited)............................................... F-47
Consolidated Statements of Cash Flows for the Years Ended December 31, 1995, 1996 and 1997, and for the
Six Months Ended June 30, 1997 (Unaudited) and 1998 (Unaudited)...................................... F-48
Notes to Consolidated Financial Statements.............................................................. F-49
</TABLE>
F-1
<PAGE>
<TABLE>
<CAPTION>
PAGE
NATIONAL LEGAL LABORATORIES ----
<S> <C>
Independent Auditor's Report............................................................................ F-57
Balance Sheets as of September 30, 1997 and December 31, 1997 (Unaudited)............................... F-58
Statements of Operations for the Year Ended September 30, 1997 and the Three Months Ended December 31,
1997 (Unaudited)..................................................................................... F-59
Statements of Changes in Accumulated Deficit for the Year Ended September 30, 1997 and the Three Month
Period Ended December 31, 1997 (Unaudited)........................................................... F-60
Statements of Cash Flows for the Year Ended September 30, 1997 and the Three Months Ended December 31,
1997 (Unaudited)..................................................................................... F-61
Notes to Financial Statements........................................................................... F-62
</TABLE>
F-2
<PAGE>
INDEPENDENT AUDITORS' REPORT
To the Board of Directors of
Lifecodes Corporation
We have audited the accompanying consolidated balance sheets of Lifecodes
Corporation and subsidiaries (the 'Company') as of September 30, 1996 and 1997
and June 30, 1998, and the related statements of operations, stockholders'
equity, and cash flows for each of the three years in the period ended September
30, 1997 and for the nine month period ended June 30, 1998. These consolidated
financial statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on these consolidated 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 consolidated financial statements referred to above present
fairly, in all material respects, the consolidated financial position of the
Company as of September 30, 1996 and 1997 and June 30, 1998, and the
consolidated results of its operations and its cash flows for each of the three
years in the period ended September 30, 1997 and for the nine month period ended
June 30, 1998 in conformity with generally accepted accounting principles.
DELOITTE & TOUCHE LLP
/s/ DELOITTE & TOUCHE LLP
Stamford, Connecticut
August 25, 1998
F-3
<PAGE>
LIFECODES CORPORATION AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
SEPTEMBER 30, 1996 AND 1997 AND JUNE 30, 1998
<TABLE>
<CAPTION>
SEPTEMBER 30, SEPTEMBER 30, JUNE 30,
1996 1997 1998
------------- ------------- -----------
<S> <C> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents.......................................... $ 759,853 $ 662,839 $ 1,285,234
Accounts receivable (net of allowance for doubtful accounts of
$108,921, $181,490, and $234,077 for 1996, 1997 and 1998,
respectively).................................................... 1,214,379 2,242,118 3,718,303
Inventories........................................................ 877,642 1,502,358 1,455,260
Deferred offering costs............................................ -- -- 567,045
Prepaid expenses and other current assets.......................... 184,288 316,581 648,163
------------- ------------- -----------
Total current assets................................................. 3,036,162 4,723,896 7,674,005
Property and equipment--net.......................................... 1,366,778 1,461,781 2,820,209
Deferred tax assets.................................................. -- 555,421 587,321
Investment in and advances to affiliate--net......................... -- 474,718 --
Intangible assets:
Goodwill less accumulated amortization of $45,942.................. -- -- 2,077,549
Patents and licenses less accumulated amortization of $187,095,
$235,591, and $557,535 for 1996, 1997 and 1998, respectively..... 206,766 172,513 1,013,524
------------- ------------- -----------
Total intangible assets.............................................. 206,766 172,513 3,091,073
Other assets......................................................... 104,891 122,718 107,403
------------- ------------- -----------
Total assets......................................................... $ 4,714,597 $ 7,511,047 $14,280,011
------------- ------------- -----------
------------- ------------- -----------
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable................................................... $ 882,419 $ 1,405,004 $ 3,964,102
Accrued royalties.................................................. 52,059 152,348 291,451
Accrued litigation................................................. 7,033 721,033 810,133
Income taxes payable............................................... -- 440,601 --
Accrued benefits and compensation.................................. 408,977 561,369 351,253
Current maturities of debt......................................... 726,707 842,856 328,571
Capital lease obligations--current portion......................... 31,345 108,569 206,806
Accounts receivable financing...................................... -- -- 930,951
Deferred revenue................................................... 309,486 263,662 223,516
Other.............................................................. 248,825 100,839 366,778
------------- ------------- -----------
Total current liabilities............................................ 2,666,851 4,596,281 7,473,561
Long-term debt--net.................................................. 1,188,007 825,300 1,916,667
Obligations under capital lease...................................... 226,757 193,983 367,176
Other liabilities.................................................... 232,272 231,689 398,735
------------- ------------- -----------
Total liabilities.................................................... 4,313,887 5,847,253 10,156,139
------------- ------------- -----------
Commitments and contingencies
Stockholders' equity:
Preferred stock, $10 par value--authorized, 1,000,000 shares;
issued and outstanding, 21,500 shares............................ $ 215,000 $ 215,000 $ 215,000
Common stock, $0.10 par value--authorized, 15,000,000 shares;
issued, 1,869,380, 2,116,493 and 2,699,828 for 1996, 1997 and
1998, respectively............................................... 186,938 211,650 269,981
Additional paid-in capital......................................... 2,050,794 3,162,973 5,593,337
Accumulated deficit................................................ (2,050,529) (1,662,812) (509,844)
Accumulated other comprehensive income............................. -- -- (3,104)
Less notes receivable for common stock sold--80,300 shares and
135,050 for 1997 and 1998, respectively.......................... -- (227,017) (306,914)
Less notes receivable from stockholders collateralized by common
stock............................................................ -- -- (1,130,584)
Less common stock in treasury at cost--6,442, 16,425 and 1,825
shares, for 1996, 1997 and 1998, respectively.................... (1,493) (36,000) (4,000)
------------- ------------- -----------
Total stockholders' equity........................................... 400,710 1,663,794 4,123,872
------------- ------------- -----------
Total liabilities and stockholders' equity........................... $ 4,714,597 $ 7,511,047 $14,280,011
------------- ------------- -----------
------------- ------------- -----------
</TABLE>
See notes to consolidated financial statements.
F-4
<PAGE>
LIFECODES CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
FOR THE YEARS ENDED SEPTEMBER 30, 1995, 1996, AND 1997,
AND FOR THE NINE MONTH PERIODS ENDED JUNE 30, 1997 (UNAUDITED)
AND JUNE 30, 1998
<TABLE>
<CAPTION>
YEARS ENDED NINE MONTHS ENDED
----------------------------------------------- --------------------------
SEPTEMBER 30, SEPTEMBER 30, SEPTEMBER 30, JUNE 30, JUNE 30,
1995 1996 1997 1997 1998
------------- ------------- ------------- ----------- -----------
(UNAUDITED)
<S> <C> <C> <C> <C> <C>
Revenues:
Service................................... $ 1,178,400 $ 3,967,014 $ 8,258,819 $5,162,735 $10,128,022
Product and other revenues................ 2,356,010 3,716,273 6,806,277 4,639,581 6,390,734
------------- ------------- ------------- ----------- -----------
Total................................... 3,534,410 7,683,287 15,065,096 9,802,316 16,518,756
Cost of Revenues:
Service................................... 429,154 2,564,141 5,243,694 3,399,805 6,099,720
Product and other revenues................ 1,075,335 1,440,142 2,131,683 1,438,825 2,250,093
------------- ------------- ------------- ----------- -----------
Total................................... 1,504,489 4,004,283 7,375,377 4,838,630 8,349,813
------------- ------------- ------------- ----------- -----------
Gross Profit................................ 2,029,921 3,679,004 7,689,719 4,963,686 8,168,943
------------- ------------- ------------- ----------- -----------
Other Costs and Expenses:
Selling, general and administrative....... 1,084,755 3,295,040 5,967,802 3,752,794 5,482,383
Research and development.................. 669,392 717,839 900,404 672,989 923,489
------------- ------------- ------------- ----------- -----------
Total................................... 1,754,147 4,012,879 6,868,206 4,425,783 6,405,872
------------- ------------- ------------- ----------- -----------
Income (loss) from operations............... 275,774 (333,875) 821,513 537,903 1,763,071
------------- ------------- ------------- ----------- -----------
Other income (expense):
Other income.............................. 18,002 20,595 47,471 21,659 117,669
Interest expense.......................... (114,937) (183,496) (307,537) (123,555 ) (178,392)
------------- ------------- ------------- ----------- -----------
Total................................... (96,935) (162,901) (260,066) (101,896 ) (60,723)
------------- ------------- ------------- ----------- -----------
Income (loss) before income taxes and
extraordinary item........................ 178,839 (496,776) 561,447 436,007 1,702,348
Income taxes................................ -- -- 173,730 288,910 751,762
Extraordinary item--loss on early
extinguishment of debt.................... -- 78,837 -- -- --
------------- ------------- ------------- ----------- -----------
Net income (loss)........................... $ 178,839 $ (575,613) $ 387,717 $ 147,097 $ 950,586
------------- ------------- ------------- ----------- -----------
------------- ------------- ------------- ----------- -----------
Net income (loss) per share:
Basic..................................... 0.12 (0.32) 0.18 0.07 0.39
------------- ------------- ------------- ----------- -----------
------------- ------------- ------------- ----------- -----------
Diluted................................... 0.10 (0.32) 0.14 0.05 0.28
------------- ------------- ------------- ----------- -----------
------------- ------------- ------------- ----------- -----------
Average number of common shares and dilutive
common share equivalents outstanding:
Basic..................................... 1,555,053 1,803,761 2,159,902 2,161,946 2,426,504
------------- ------------- ------------- ----------- -----------
------------- ------------- ------------- ----------- -----------
Diluted................................... 1,792,504 1,803,761 2,792,318 2,795,695 3,363,236
------------- ------------- ------------- ----------- -----------
------------- ------------- ------------- ----------- -----------
</TABLE>
See notes to consolidated financial statements.
F-5
<PAGE>
LIFECODES CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
FOR THE YEARS ENDED SEPTEMBER 30, 1995, 1996, 1997 AND NINE MONTH PERIOD ENDED
JUNE 30, 1998
<TABLE>
<CAPTION>
ACCUMULATED
COMMON STOCK ADDITIONAL OTHER
PREFERRED --------------------- PAID-IN ACCUMULATED COMPREHENSIVE NOTES
STOCK SHARES AMOUNT CAPITAL DEFICIT INCOME RECEIVABLE
--------- --------- -------- ---------- ----------- ------------- -----------
<S> <C> <C> <C> <C> <C> <C> <C>
Balance, October 1, 1994....... $215,000 1,572,946 $157,295 $1,604,347 $(1,653,755) $ -- $ --
Net income................... -- -- -- -- 178,839 -- --
Reclassification of put
warrant obligation......... -- -- -- 100,000 -- -- --
Issuance of common stock..... -- 2,555 255 3,245 -- -- --
--------- --------- -------- ---------- ----------- ------------- -----------
Balance, September 30, 1995.... 215,000 1,575,501 157,550 1,707,592 (1,474,916 ) -- --
Net income................... -- -- -- -- (575,613 ) -- --
Issuance of common stock..... -- 293,879 29,388 327,764 -- -- --
Sale of treasury stock....... -- -- -- 15,438 -- -- --
--------- --------- -------- ---------- ----------- ------------- -----------
Balance, September 30, 1996.... 215,000 1,869,380 186,938 2,050,794 (2,050,529 ) -- --
Net income................... -- -- -- -- 387,717 -- --
Issuance of common stock..... -- 247,113 24,712 1,104,847 -- -- (227,017)
Sale of treasury stock....... -- -- -- 7,332 -- -- --
Purchase of treasury stock... -- -- -- -- -- -- --
--------- --------- -------- ---------- ----------- ------------- -----------
Balance, September 30, 1997.... 215,000 2,116,493 211,650 3,162,973 (1,662,812 ) -- (227,017)
Net income................... -- -- -- -- 950,586 -- --
Issuance of common stock..... -- 583,335 58,331 2,423,084 -- -- (79,897)
Sale of treasury stock....... -- -- -- 7,280 -- -- --
Foreign currency translation
adjustment................. -- -- -- -- -- (3,104) --
Loans to stockholders
collateralized by common
stock...................... -- -- -- -- -- -- --
Adjustment for pooling of
company with different
fiscal year-end............ -- -- -- -- 202,382 -- --
--------- --------- -------- ---------- ----------- ------------- -----------
Balance, June 30, 1998......... $215,000 2,699,828 $269,981 $5,593,337 $ (509,844 ) $(3,104) $ (306,914)
--------- --------- -------- ---------- ----------- ------------- -----------
--------- --------- -------- ---------- ----------- ------------- -----------
<CAPTION>
LOANS TO
STOCKHOLDERS TREASURY STOCK TOTAL
COLLATERALIZED BY ------------------- STOCKHOLDERS'
COMMON STOCK SHARES AMOUNT EQUITY
----------------- ------- -------- -------------
<S> <C> <C> <C> <C>
Balance, October 1, 1994....... $ -- 20,020 $ (4,655) $ 318,232
Net income................... -- -- -- 178,839
Reclassification of put
warrant obligation......... -- -- -- 100,000
Issuance of common stock..... -- -- -- 3,500
----------------- ------- -------- -------------
Balance, September 30, 1995.... -- 20,020 (4,655) 600,571
Net income................... -- -- -- (575,613)
Issuance of common stock..... -- -- -- 357,152
Sale of treasury stock....... -- (13,578) 3,162 18,600
----------------- ------- -------- -------------
Balance, September 30, 1996.... -- 6,442 (1,493) 400,710
Net income................... -- -- -- 387,717
Issuance of common stock..... -- -- -- 902,542
Sale of treasury stock....... -- (6,442) 1,493 8,825
Purchase of treasury stock... -- 16,425 (36,000) (36,000)
----------------- ------- -------- -------------
Balance, September 30, 1997.... -- 16,425 (36,000) 1,663,794
Net income................... -- -- -- 950,586
Issuance of common stock..... -- -- -- 2,401,518
Sale of treasury stock....... -- (14,600) 32,000 39,280
Foreign currency translation
adjustment................. -- -- -- (3,104)
Loans to stockholders
collateralized by common
stock...................... (1,130,584) -- -- (1,130,584)
Adjustment for pooling of
company with different
fiscal year-end............ -- -- -- 202,382
----------------- ------- -------- -------------
Balance, June 30, 1998......... $(1,130,584) 1,825 $ (4,000) $ 4,123,872
----------------- ------- -------- -------------
----------------- ------- -------- -------------
</TABLE>
See notes to consolidated financial statements.
F-6
<PAGE>
LIFECODES CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE YEARS ENDED SEPTEMBER 30, 1995, 1996, 1997 AND FOR THE NINE MONTH PERIOD
ENDED JUNE 30, 1997 (UNAUDITED) AND JUNE 30, 1998
<TABLE>
<CAPTION>
YEARS ENDED NINE MONTHS ENDED
--------------------------------------------- -------------------------
SEPTEMBER 30, SEPTEMBER 30, SEPTEMBER 30, JUNE 30, JUNE 30,
1995 1996 1997 1997 1998
------------- ------------- ------------- ----------- -----------
(UNAUDITED)
<S> <C> <C> <C> <C> <C>
Operating activities:
Net income (loss)................................ $ 178,839 $ (575,613) $ 387,717 $ 147,097 $ 950,586
Adjustments to reconcile net income to net cash
provided by operating activities:
Depreciation and amortization.................. 157,319 282,206 444,244 317,620 761,334
Amortization of debt discount.................. 20,213 115,205 105,149 105,149 --
Equity in net loss of affiliate................ -- -- 98,777 -- --
Loss on disposition of property and equipment.. -- -- 59,222 -- --
Increase in allowance for doubtful accounts.... 34,211 145,108 134,848 62,421 140,055
Increase in deferred tax asset................. -- -- (555,421) (7,015) --
Increase (decrease) in provision for inventory
obsolescence................................. (39,886) 2,044 -- (7,060) --
(Decrease) increase in deferred revenue........ (99,676) 135,433 (96,160) (164,579) (40,146)
Net change in operating assets and liabilities
(net of business acquisitions):
Increase in accounts receivable................ (286,086) (288,197) (1,196,541) (1,207,494) (419,072)
(Increase) decrease in inventories............. (297,158) (29,643) (624,715) (13,009) 103,036
Decrease (increase) in prepaid expenses and
other current assets......................... 49,914 (25,250) (129,713) (162,079) (264,888)
Increase in security deposits.................. -- (52,949) (25,899) -- --
Increase in accounts payable................... 150,509 461,903 556,538 388,067 389,337
Increase in accrued expenses and other current
liabilities.................................. 118,765 373,661 909,120 210,193 575,022
Decrease in deferred rent payable.............. (8,995) (8,994) (11,658) -- --
Increase (decrease) in other noncurrent
liabilities.................................. 50,768 (96,016) 47,070 (155,392) 167,036
Increase (decrease) in income taxes payable.... -- -- 440,601 -- (440,601)
------------- ------------- ------------- ----------- -----------
Net cash provided by (used in) operating
activities....................................... 28,737 438,898 543,179 (486,081) 1,921,699
------------- ------------- ------------- ----------- -----------
Investing actvities:
Acquisition of Cellmark Diagnostics.............. -- (500,000) -- -- --
Acquisition of interest in and advances to
Medical
Molecular Diagnostics.......................... -- -- (573,995) (373,495) --
Acquisition of National Legal Laboratories....... -- -- -- -- (701,528)
Purchases of property and equipment.............. (181,546) (624,742) (543,988) (227,804) (983,451)
Acquisition of patents and licenses.............. -- (14,560) (14,234) (559) (1,062,955)
------------- ------------- ------------- ----------- -----------
Net cash used in investing activities.............. (181,546) (1,139,302) (1,132,217) (601,858) (2,747,934)
------------- ------------- ------------- ----------- -----------
Financing activities:
Repayments of long-term debt..................... (52,197) (1,023,316) (1,198,344) (897,130) (3,137,370)
Proceeds from issuance of long-term debt......... -- 2,091,753 815,000 690,000 4,565,000
Proceeds from issuance of common stock........... 3,500 357,152 902,543 902,543 21,000
Payments for purchase of treasury stock.......... -- -- (36,000) -- --
Proceeds from sale of treasury stock............. -- 18,600 8,825 1,493 --
------------- ------------- ------------- ----------- -----------
Net cash (used in) provided by financing
activities....................................... (48,697) 1,444,189 492,024 696,906 1,448,630
------------- ------------- ------------- ----------- -----------
Net (decrease) increase in cash and cash
equivalents...................................... (201,506) 743,785 (97,014) (391,033) 622,395
Cash and cash equivalents, beginning............... 217,574 16,068 759,853 759,853 662,839
------------- ------------- ------------- ----------- -----------
Cash and cash equivalents, end..................... $ 16,068 $ 759,853 $ 662,839 $ 368,820 $ 1,285,234
------------- ------------- ------------- ----------- -----------
------------- ------------- ------------- ----------- -----------
Supplemental disclosures of cash flow information:
Cash paid during the period for interest......... $ 58,990 $ 160,939 $ 219,782 $ 105,615 $ 155,184
------------- ------------- ------------- ----------- -----------
------------- ------------- ------------- ----------- -----------
Cash paid during the period for income taxes..... $ -- $ -- $ 288,776 $ 87,726 $ 1,398,325
------------- ------------- ------------- ----------- -----------
------------- ------------- ------------- ----------- -----------
</TABLE>
See notes to consolidated financial statements.
F-7
<PAGE>
LIFECODES CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
YEARS ENDED SEPTEMBER 30, 1995, 1996 AND 1997 AND NINE MONTHS ENDED JUNE 30,
1998
1. ORGANIZATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Organization
Lifecodes Corporation ('Lifecodes' or the 'Company') is a leading provider
of DNA testing services and diagnostic test kits for human paternity and
forensic identification and for the genetic typing of potential donors and
recipients of bone marrow and other organ transplants. The Company's identity
testing services in the paternity and forensics areas seek to establish the
correct identity of a child's parents when such matters are disputed or seek to
link hair, saliva, blood or another biological specimen found at a crime scene
to an alleged felon. The Company's transplantation tests detect the genetic
sequence for certain human leukocyte antigens ('HLA') contained in DNA which are
the principal determinant whether a donor's bone marrow or organ transplant will
be rejected by the recipient's immune system.
Effective April 30, 1998, the Company acquired all of the outstanding
common stock of Micro Diagnostics, Inc. (MDx) and notes payable to MDx
stockholders and advances from a related party in exchange for 325,382 shares of
Lifecodes common stock. MDx is engaged principally in the business of providing
paternity, transplant and forensic testing services. The acquisition was
accounted for as a pooling of interests and, accordingly, the financial
statements for the years ended September 30, 1996 and 1997 have been restated to
include the accounts of the acquired company. MDx commenced operations during
March 1996.
MDx and the Company had different fiscal periods for financial reporting
purposes, MDx--December 31, and the Company--September 30. Consequently, the MDx
results of operations for the period October 1, 1996 through December 31, 1996
have been included in both the restated results of operations for fiscal 1996
and the nine month interim period ended June 30, 1997. MDx revenues and net loss
were $361,586 and $401,831 for the three month period ended December 31, 1996.
Additionally, the MDx results of operations for the period October 1, 1997
through December 31, 1997 have been included in both the restated results of
operations for fiscal 1997 and the nine month interim period ended June 30,
1998. MDx revenues and net loss were $1,220,438 and $202,382 for the three month
period ended December 31, 1997.
During March 1996, the Company acquired Cellmark Diagnostics ('Cellmark'),
a division of Zeneca plc, for $500,000. The acquisition has been accounted for
under the purchase method of accounting. Accordingly, the purchase price was
allocated to the net assets acquired based on their fair values. The fair value
of the net assets acquired exceeded the total cost by $185,799, which reduced
the fair value of the long-term assets acquired (property and equipment and
other assets).
Coincident with the Company's purchase of Cellmark, certain Cellmark
employees purchased 1,960 shares (19.6%) of Cellmark common stock from Lifecodes
for $98,000 (representing a price of $50 per share), through the issuance of
noninterest bearing, nonrecourse notes. The notes receivable offset the Cellmark
minority interest in the accompanying consolidated balance sheets. The notes are
to be paid within the 36-month period following the acquisition. Each Cellmark
common share is convertible into 43.65 Lifecodes common shares during the 36
month to 60 month period following the Cellmark acquisition. Upon termination of
employment, shares must be converted, subject to time frame restrictions, or
surrendered to the Company at their cost basis to the extent the note had not
been paid or at their cost basis plus 15% interest to the extent the note had
been paid.
During fiscal 1997, through an arrangement with the Company's Chief
Executive Officer, the Company acquired a 40 percent interest in Medical
Molecular Diagnostics GmbH ('MMD'). MMD's office and laboratory facilities are
located in Dresden, Germany, where it conducts transplant testing (See note 9).
During fiscal 1998, the Company increased its equity position in MMD to 60%
through the conversion of debt to equity and to 90% through the acquisition of
another company. Accordingly, MMD has been consolidated in the June 30, 1998
financial statements.
F-8
<PAGE>
LIFECODES CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
YEARS ENDED SEPTEMBER 30, 1995, 1996 AND 1997 AND NINE MONTHS ENDED JUNE 30,
1998
1. ORGANIZATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES--(CONTINUED)
In September, 1997, the Company established a new wholly-owned subsidiary,
Lifecodes Europe BVBA ('LC-Europe'), in Belgium. LC-Europe will function as a
distributor of the Company's products.
Principles of Consolidation
The consolidated financial statements include the accounts of the Company
and its subsidiaries. All material intercompany balances and transactions have
been eliminated. As of September 30, 1997, the Company accounted for its 40
percent interest in MMD using the equity method.
Financial Instruments
The Company's financial instruments consist primarily of cash and cash
equivalents, trade receivables, and trade payables. The carrying amounts of cash
and cash equivalents, investments, trade receivables, and trade payables
approximate fair value due to the short maturity of these instruments. The
carrying value of the term debt approximates fair value.
Cash and Cash Equivalents
The Company considers all investments purchased with an original maturity
of three months or less to be cash equivalents.
Revenue Recognition
Revenue is recognized when products are shipped to end users or to third
party foreign distributors. Revenue from service activities is recognized when
completed reports from the Company's service activities are provided to the
customer. Generally the Company's service business is conducted on a case by
case basis and cases, other than forensics, generally require less than four
weeks to complete. When prepayments are required or received prior to completing
services, such payments are recorded as deferred revenue until such services are
completed.
Inventories
Inventories are valued at the lower of cost or market. Cost is determined
for the various categories of inventory using the first-in, first-out method.
Depreciation and Amortization
Property and equipment is stated at cost less accumulated depreciation.
Depreciation is computed using straight-line or accelerated methods over the
estimated useful lives of the assets (five to ten years). Leasehold improvements
are amortized on a straight-line basis over the term of the lease which is not
in excess of the estimated useful life of the improvement. Purchased computer
software is being amortized over a period of three to five years.
F-9
<PAGE>
LIFECODES CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
YEARS ENDED SEPTEMBER 30, 1995, 1996 AND 1997 AND NINE MONTHS ENDED JUNE 30,
1998
1. ORGANIZATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES--(CONTINUED)
Patents and Licenses
The Company capitalized the costs of acquiring certain patent rights and
licenses on its products. These costs are being amortized on a straight-line
basis over the terms of the agreements (five to ten years).
Licenses and Royalties
Lifecodes has licensed its technology to certain companies in Canada and
United Kingdom under specific licensing agreements. Each of these agreements
contain minimum annual royalty requirements.
The Company also receives royalties under sublicense and distribution
agreements. These agreements stipulate the terms for computing the royalties due
to the Company based upon sales levels. The rates used to determine the
royalties range from 5 to 30 percent, depending on the agreement terms.
The Company earned $443,335, $388,960, $462,469, $358,000 (unaudited) and
$370,482 in royalties for the years ended September 30, 1995, 1996, and 1997,
and the nine months ended June 30, 1997 (unaudited) and June 30, 1998,
respectively. Revenue derived from royalties are included in product and other
revenues in the consolidated statements of operations.
Intangible Assets
Intangible assets are stated at cost and amortized using the straight-line
method over the assets' estimated useful lives, which range from 1.5 to fifteen
years. The Company evaluates the possible impairment of long-lived assets,
including intangible assets, whenever events or circumstances indicate that the
carrying value of the assets may not be recoverable by comparing the
undiscounted future cash flows with the carrying value of the asset. An
impairment loss would be computed based on the amount the carrying amount of the
asset exceeds its fair value.
Income Taxes
Deferred income taxes are provided for the temporary differences between
the financial reporting basis and the income tax basis of the Company's assets
and liabilities in accordance with Statement of Financial Accounting Standards
No. 109. Prior to the business combination, MDx was an S Corporation and,
consequently, was not subject to federal income taxes.
Deferred Revenues
Deferred revenues are recorded when payment for a product, service or
royalty obligation is received prior to the appropriate time to recognize
revenue from such product, service or royalty obligation. The principal sources
of deferred revenue are prepaid royalty payments and prepaid fees for testing
services.
Foreign Currency Translation
The financial statements of MMD and LC-Europe were prepared in their
respective local currencies and translated into U.S. dollars based on the
current exchange rate at the end of the period for the balance sheet and a
weighted-average rate for the period on the statement of operations. Translation
adjustments are reflected as accumulated other comprehensive income in
Stockholders' Equity and accordingly have no effect on net income.
Use of Estimates
The preparation of consolidated financial statements in conformity with
generally accepted accounting principles requires management to make estimates
and assumptions that affect the reported amount of assets and liabilities, the
disclosure of contingent assets and liabilities at the date of the financial
statements and the reported amounts of revenues and expenses during the
reporting period. Actual results could differ from those estimates.
F-10
<PAGE>
LIFECODES CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
YEARS ENDED SEPTEMBER 30, 1995, 1996 AND 1997 AND NINE MONTHS ENDED JUNE 30,
1998
1. ORGANIZATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES--(CONTINUED)
Comprehensive Income
Statement of Financial Accounting Standards No. 130, 'Reporting
Comprehensive Income' ('SFAS 130') was adopted by the Company. SFAS 130
establishes standards for reporting and display of comprehensive income and its
components. It requires that all items that are required to be recognized under
accounting standards as components of comprehensive income be reported in a
financial statement or financial statement footnote. Comprehensive income is
defined as 'the change in equity of a business during a period from transactions
and other events and circumstances from non-owner sources.' The only source of
other comprehensive income was a loss of $3,100 for the nine-month period ended
June 30, 1998 resulting from foreign currency translation.
Comprehensive income for the nine-month period ended June 30, 1998 was
$947,482. Comprehensive income for the year ended September 30, 1997 equaled net
income, as reported.
Supplemental Non-Cash Information
The following non-cash transactions occurred during the nine months ended
June 30, 1998 which are excluded from the consolidated statement of cash flows:
<TABLE>
<S> <C>
Common stock issued for acquisitions (379,600 shares)....... $1,434,000
Deferred offering costs incurred............................ $ 567,000
Conversion of notes payable and advances to related party
for stock................................................. $ 975,000
Sale of common stock for notes.............................. $ 80,000
</TABLE>
Reclassifications
Certain previously reported amounts have been reclassified to conform to
the 1998 financial statement presentation.
Interim Financial Statements
The accompanying consolidated statement of operations and consolidated
statement of cash flows for the nine months ended June 30, 1997 are unaudited
but, in the opinion of management, include all adjustments (consisting of only
normal, recurring adjustments) necessary for a fair presentation of results for
these interim periods. Results for interim periods are not necessarily
indicative of results for the entire year.
Stock Split
The accompanying consolidated financial statements retroactively reflect a
3.65 for one common stock split which the Company adopted in conjunction with an
increase in its authorized number of common shares to 15,000,000. Accordingly,
all common shares, options and warrants to acquire common shares and the
conversion terms of the preferred stock have been adjusted to reflect the stock
split.
2. ACCOUNTS RECEIVABLE
A summary of activity in the allowance for doubtful accounts is as follows:
<TABLE>
<CAPTION>
NINE MONTHS
YEAR ENDED SEPTEMBER 30, ENDED JUNE
------------------------------- 30,
1995 1996 1997 1998
------- -------- -------- -----------
<S> <C> <C> <C> <C>
Balance beginning of period........................... $30,621 $ 44,738 $108,921 $ 181,490
Provision charged to expense.......................... 34,211 145,108 134,848 140,055
Charge offs........................................... (20,094) (80,925) (62,279) (87,468)
------- -------- -------- -----------
Balance at end of period.............................. $44,738 $108,921 $181,490 $ 234,077
------- -------- -------- -----------
------- -------- -------- -----------
</TABLE>
F-11
<PAGE>
LIFECODES CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
YEARS ENDED SEPTEMBER 30, 1995, 1996 AND 1997 AND NINE MONTHS ENDED JUNE 30,
1998
3. INVENTORY
<TABLE>
<CAPTION>
SEPTEMBER 30, SEPTEMBER 30, JUNE 30,
1996 1997 1998
------------- ------------- -----------
<S> <C> <C> <C>
Inventory consists of the following:
Raw materials........................................... $ 198,504 $ 337,359 $ 105,027
Work-in-process......................................... 297,451 504,075 465,928
Finished goods.......................................... 381,687 660,924 884,305
------------- ------------- -----------
Total................................................ $ 877,642 $ 1,502,358 $ 1,455,260
------------- ------------- -----------
------------- ------------- -----------
</TABLE>
4. PROPERTY AND EQUIPMENT
Property and equipment consist of the following:
<TABLE>
<CAPTION>
SEPTEMBER 30, SEPTEMBER 30, JUNE 30,
1996 1997 1998
------------- ------------- -----------
<S> <C> <C> <C>
Leasehold improvements.................................... $ 796,501 $ 801,597 $ 1,135,917
Furniture, fixtures and equipment......................... 1,081,855 1,627,321 2,976,782
Computer software......................................... 92,908 27,613 92,825
------------- ------------- -----------
Total..................................................... 1,971,264 2,456,531 4,205,524
Less accumulated depreciation and amortization............ 604,486 994,750 1,385,315
------------- ------------- -----------
Property and equipment--net............................... $ 1,366,778 $ 1,461,781 $ 2,820,209
------------- ------------- -----------
------------- ------------- -----------
</TABLE>
Included in furniture, fixtures and equipment is $112,090, $115,287 and
$115,287 at September 30, 1996 and 1997, and June 30, 1998, respectively, which
is restricted under a research grant with the U.S. Department of Defense
('DOD'). Under the terms of the agreement, the DOD has funded this equipment to
complete various research projects. Based on the terms of the agreement, the
equipment may be returned to the DOD. A corresponding amount has been recorded
in other liabilities on the balance sheet.
5. LONG-TERM DEBT
Long-term debt consists of the following:
<TABLE>
<CAPTION>
SEPTEMBER 30, SEPTEMBER 30, JUNE 30,
1996 1997 1998
------------- ------------- -----------
<S> <C> <C> <C>
Promissory note, net of unamortized discount of $105,149
at September 30, 1996(a)................................ $ 194,851 -- --
Term note agreement(d).................................... 1,161,012 $ 993,156 $ 2,245,238
Demand notes(e)........................................... 500,000 675,000 --
Other..................................................... 58,851 -- --
------------- ------------- -----------
Total..................................................... 1,914,714 1,668,156 2,245,238
Less current maturities of long-term debt................. 726,707 842,856 328,571
------------- ------------- -----------
Long-term debt--net....................................... $ 1,188,007 $ 825,300 $ 1,916,667
------------- ------------- -----------
------------- ------------- -----------
</TABLE>
F-12
<PAGE>
LIFECODES CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
YEARS ENDED SEPTEMBER 30, 1995, 1996 AND 1997 AND NINE MONTHS ENDED JUNE 30,
1998
5. LONG-TERM DEBT--(CONTINUED)
- ------------------
(a) In December 1991, the Company issued a promissory note to an investor for
$300,000. The promissory note bore interest at the rate of 10 percent per
annum. The promissory note was due October 31, 1997. In connection with the
promissory note, the Company issued a detachable warrant to purchase 212,051
shares of common stock at $1.41 per share. The warrants contain
anti-dilution protection on stock sales below $1.41. The portion of the
proceeds allocable to the warrant was accounted for as additional paid-in
capital. The discount was recorded as additional interest expense over the
term of the promissory note.
On July 15, 1994, a twelve-month interest moratorium commencing January 1,
1994 was granted to the Company. The interest accumulated during the
moratorium was deferred until the maturity of the promissory note. In
connection with the moratorium, the Company granted to the investor a
ten-year warrant for 21,900 common shares at $0.27 per share. The promissory
note was discounted and additional paid-in capital was increased for the fair
value of the warrant. The discount was recorded as additional interest
expense over the remaining term of the promissory note.
At September 30, 1996, the principal outstanding under the promissory note
was $300,000. On August 29, 1997, the Company paid the outstanding principal.
(b) On March 6, 1992, the Company entered into a note purchase agreement (the
'Agreement') with Connecticut Innovations, Incorporated ('CII'). Pursuant to
the Agreement, as most recently amended August 2, 1993, the Company issued a
senior secured note due March, 1998 in the principal amount of $450,000,
bearing interest at the rate of 10 percent per annum, payable quarterly (the
'Senior Secured Note'). Under the terms of the Agreement, royalties were
also due to CII on a percentage of sales ranging from 2 to 5 percent or a
minimum quarterly guaranteed amount of $22,500, as to allow CII to receive a
return on investment of 25 percent compounded quarterly. On July 20, 1994,
CII granted the Company a full payment moratorium for the period December
1993 through May 1994. The interest accumulated during the moratorium is
deferred until maturity of the note. In connection with the moratorium, the
Company granted to CII a ten year warrant for 49,275 common shares at $0.27
per share. The warrants contain anti-dilution protection on stock sales
below $.27 and demand registration rights. The warrants contained CII's
standard terms, including anti-dilution protection and demand registration
rights. The Senior Secured Note was discounted and additional paid-in
capital was increased for the fair value of the warrant. The discount was
recorded as additional interest expense over the remaining term of the
Senior Secured Note.
On March 4, 1996, the Company paid the outstanding principal and related
interest and royalties totaling $622,171. The related unamortized debt
discount of $37,328 was recognized as a loss on the early extinguishment of
debt.
(c) On April 13, 1992, the Company entered into a note and warrant purchase
agreement in which a promissory note was issued to Connecticut Development
Authority ('CDA') for $300,000.
In connection with the note and warrant purchase agreement, the Company
issued to CDA a detachable stock subscription warrant to purchase 154,811
shares of common stock, at $1.37 per share, and entered into a warrant put
and call agreement, subject to the defined terms. The warrants included
anti-dilution protection for sales of common stock at prices below $1.37 per
share. The portion of the proceeds allocable to the warrant was accounted for
as additional paid-in capital. The resulting discount was recorded as
additional interest expense over the term of the promissory note. The warrant
put and call agreement contained specific terms whereby CDA was able to put
the warrants back to the Company for $100,000. During 1995, CDA waived its
right to put the warrants to the Company which resulted in the
reclassification of the put warrant obligation from liabilities to additional
paid in capital.
F-13
<PAGE>
LIFECODES CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
YEARS ENDED SEPTEMBER 30, 1995, 1996 AND 1997 AND NINE MONTHS ENDED JUNE 30,
1998
5. LONG-TERM DEBT--(CONTINUED)
The promissory note bore interest at the rate of 10 percent per annum, with
interest payable monthly, maturing on May 1, 1998. On July 11, 1994, CDA
granted the Company a full payment moratorium for the period May through July
1994 and requested interest payments only for the period August through
December 1994. The interest accumulated during the moratorium was deferred
until the maturity of the promissory note. In connection with the moratorium,
the Company granted to CDA a ten year warrant for 29,452 common shares at
$0.27 per share. The warrants carried all of CDA's standard terms, including
anti-dilution protection and demand registration rights. The promissory note
was discounted and additional paid-in capital was increased for the fair
value of the warrant. The discount was recorded as additional interest
expense over the remaining term of the promissory note.
On March 4, 1996, the Company paid the outstanding principal and related
interest totaling $201,886. The related unamortized debt discount relating to
the warrant and the interest moratorium of $41,509, has been recognized as a
loss on the early extinguishment of debt.
(d) On March 4, 1996 the Company entered into a term note agreement with First
Union Bank of Connecticut in which a promissory note was issued in the
principal amount of $1,175,000. The promissory note bears interest at a
fixed rate of 8.35% per annum. Interest and principal are payable monthly
and matures on August 1, 2003. In conjunction with this agreement, the
Company was additionally extended a $1,000,000 line of credit, which was
increased to $1,700,000 in March of 1998.
The promissory note is collateralized by a first lien on all Lifecodes assets
and contains a number of financial covenants. As of September 30, 1997, the
Company was in violation with certain debt covenants, for which the Company
received a waiver. As discussed further below, this debt was refinanced in
April, 1998.
In April, 1998, the Company entered into a term note agreement of $2,300,000
and a line of credit agreement of $1,000,000 with First Union National Bank
of Connecticut. The term note is payable in monthly installments through
March 1, 2001, with a final balloon payment on April 2, 2001, while the
termination date for the line of credit agreement is May 31, 1999. The
Company's interest rate on this term note is 8.39%, while interest on the
line of credit agreement accrues at a floting rate equal to First Union's
prime rate. In conjunction with the term note agreement, the Company
refinanced $1,120,000 of its line of credit advances into the term note
agreement. The promissory note is collateralized by a first lien an all
Lifecodes assets and contains a number of financial covenants. The Company
was in default of certain acquisition and capital structure covenants due to
recent and pending acquisitions and a public offering of its equity
securities. The Company has received waivers from the lender of these
covenants violations.
(e) During 1996 and 1997, MDx entered into demand notes with related parties of
approximately $800,000 and $815,000, respectively. At December 31, 1996 and
1997, there were $500,000 and $675,000 of demand notes outstanding,
respectively. The Company's interest rate for the notes payable was 12% for
all periods. The notes payable were converted to MDx common shares and were
exchanged for Lifecodes common stock in connection with the MDx acquisition.
(f) In March 1996, the Company entered into a term note agreement of $116,753
with One Lambda, Inc. The promissory note is payable in monthly installments
through September 1997. The balance at September 30, 1996 was $58,851. The
promissory note was collateralized by certain assets of the Company
purchased from One Lambda, Inc.
F-14
<PAGE>
LIFECODES CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
YEARS ENDED SEPTEMBER 30, 1995, 1996 AND 1997 AND NINE MONTHS ENDED JUNE 30,
1998
5. LONG-TERM DEBT--(CONTINUED)
Future principal payments under these loan agreements at September 30, 1997
and June 30, 1998 are as follows:
<TABLE>
<CAPTION>
SEPTEMBER 30, 1997 JUNE 30, 1998
------------------ -------------
AMOUNT AMOUNT
------------------ -------------
<S> <C> <C>
0 to 12 Months........................................... $ 842,856 $ 328,571
13 to 24 Months........................................... 167,856 328,571
25 to 36 Months........................................... 167,856 1,588,096
37 to 48 Months........................................... 167,856 0
49 to 60 Months........................................... 167,856 0
Thereafter................................................ 153,876 0
------------------ -------------
Total..................................................... $1,668,156 $ 2,245,238
------------------ -------------
------------------ -------------
</TABLE>
6. STOCKHOLDERS' EQUITY
PREFERRED STOCK
In September 1994, the Company sold to an investor 21,500 shares of
convertible senior preferred stock at $10.00 per share for cash proceeds of
$215,000. The preferred stock ranks senior to the Company's other equity
securities, converts into 7.3 shares of common stock for each share of
preferred, has voting power equivalent to the votes of the underlying common
stock and has full anti-dilution protection. The preferred stockholders have
agreed to convert to common stock upon completion of the Company's initial
public offering of common stock.
COMMON STOCK
In February 1996, the Company issued to investors and the chief executive
officer 160,702 and 21,900 shares, respectively, of common stock in accordance
with an agreement made in August 1993, which provided for the issuance of
additional shares of common stock if certain sales targets were not met by the
fiscal year ended September 30, 1996.
In September 1997, the Company sold to its Chairman 80,300 shares of common
stock with an estimated fair value of $2.69 per share for $2.60 per share. In
return, the Company received cash proceeds of $2,200 and a promissory note in
the amount of $206,800 which bears interest at a rate of 8% per annum. Per the
terms of the note the first installment of interest is due on September 30, 1998
and the remaining interest and principal are due on September 30, 1999. As
collateral for the note, the Company retains all of the shares of common stock
purchased by the Chairman. Additional paid-in capital was increased to recognize
the excess of fair value over the par value of the common shares. The difference
between the fair value of the common stock sold and its issuance proceeds was
recorded as compensation expense.
During 1992 and 1995, the Company implemented Stock Option Plans (the
'Plans') which provide for grants of incentive and nonstatutory options to
purchase up to 686,200 and 237,250 shares, respectively, of common stock at a
purchase price equal to the fair market value at the date of grant. All stock
options under the 1992 Plan were granted during 1992 through 1994. The options
expire between five and ten years from the date of grant. All stock options
under the 1995 Plan were granted during 1995 and expire five and ten years from
the date of grant. Subject to the terms of the Plan, the Company may repurchase
the shares issued at a price equal to the then fair market value. The Company
has elected to follow Accounting Principles Board Opinion No. 25, Accounting for
Stock Issued to Employees ('APB 25') and related interpretations in accounting
for its employee stock options. Under APB 25, because the exercise price of
employee stock options equaled the fair value of the underlying stock on the
date of grant, no compensation expense was recorded.
F-15
<PAGE>
LIFECODES CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
YEARS ENDED SEPTEMBER 30, 1995, 1996 AND 1997 AND NINE MONTHS ENDED JUNE 30,
1998
6. STOCKHOLDERS' EQUITY--(CONTINUED)
The Company applies Accounting Principles Board Opinion No. 25, 'Accounting
for Stock Issued to Employees' and other related interpretations in accounting
for its stock option plans. No compensation expense has been recognized for
these plans. Had compensation cost been determined based upon the fair value at
grant date consistent with the accounting methodology prescribed under SFAS No.
123, 'Accounting for Stock Based Compensation,' the Company's pro forma net
income (loss) and pro forma diluted earnings per share would have been reported
as follows:
<TABLE>
<CAPTION>
NINE MONTHS ENDED
YEAR ENDED SEPTEMBER 30, JUNE 30,
--------------------------------- -----------------------
1995 1996 1997 1997 1998
-------- --------- -------- ----------- --------
(UNAUDITED)
<S> <C> <C> <C> <C> <C>
Pro forma net income (loss).............. $138,956 $(598,001) $378,221 $ 140,025 $927,617
-------- --------- -------- ----------- --------
Pro forma diluted earnings (loss) per
share.................................. $ 0.08 $ (0.33) $ 0.14 $ 0.05 $ 0.28
-------- --------- -------- ----------- --------
</TABLE>
Upon completion of the Company's initial public offering, all unvested
options will immediately vest. Had the offering occurred on June 30, 1998, the
pro-forma impact to net income would have been a further reduction of
approximately $44,000. There were no options granted during 1996 or 1997. The
weighted average fair value of options granted during 1995 were estimated to be
$1.32 on the dates of grant using the Black-Scholes option-pricing model with
the following assumptions: volatility of 0%, risk free interest rate of 6.82%
and an expected life of 5 years, respectively.
As of June 30, 1998 the 823,988 stock options outstanding have exercise
prices between $1.37 and $2.97 and a weighted average remaining contractual life
of approximately 4.5 years.
The following summarizes the transactions pursuant to the Plans for the
years ended September 30, 1995, 1996, and 1997 and the nine months ended June
30, 1998:
<TABLE>
<CAPTION>
WEIGHTED
AVERAGE
SHARES OPTION PRICE
------- ------------
<S> <C> <C>
Balance at October 1, 1994........................................... 642,035 $ 1.41
Granted............................................................ 237,250 1.40
Canceled........................................................... (32,850) 1.37
------- ------
Balance at September 30, 1995........................................ 846,435 1.41
Exercised.......................................................... (1,205) 1.37
Canceled........................................................... (44,420) 1.37
------- ------
Balance at September 30, 1996........................................ 800,810 1.41
Exercised.......................................................... (5,110) 1.37
Canceled........................................................... (14,965) 1.37
Expired............................................................ (54,750) 1.51
------- ------
Balance at September 30, 1997........................................ 725,985 1.40
------- ------
Exercised.......................................................... (70,080) 1.48
Granted............................................................ 168,083 2.80
-------
Balance at June 30, 1998............................................. 823,988 1.68
-------
-------
Exerciseable at June 30, 1988........................................ 566,773 1.39
-------
-------
</TABLE>
F-16
<PAGE>
LIFECODES CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
YEARS ENDED SEPTEMBER 30, 1995, 1996 AND 1997 AND NINE MONTHS ENDED JUNE 30,
1998
6. STOCKHOLDERS' EQUITY--(CONTINUED)
Warrants
In connection with the issuance of the promissory note in 1991 referred to
in Note 5(a), the Company has granted warrants to purchase 212,051 shares of
common stock. The warrants expire May 1, 2002 and are exercisable at $1.41 a
share. The fair value of the warrants when issued was estimated to be $150,000.
In connection with the issuance of the promissory note in 1992 referred to
in Note 5(c), the Company has granted warrants to purchase 154,812 shares of
common stock. The warrants expire April 13, 2000 and are exercisable at $1.37
per share. The fair value of the warrants when issued was estimated to be
$100,000.
In connection with interest and principal moratoriums in 1994 for debt
referred to in Note 5(a), (b) and (c), the Company has granted warrants to
purchase 100,628 shares of common stock. The warrants expire on September 26,
2004 and are exercisable at $0.27 per share. The fair value of the warrants when
issued was estimated to be $126,817.
On February 24, 1994, the Company issued a five-year stock warrant to an
investor for 27,375 common shares at the warrant price of $1.37 per share in
connection with the issuance of a short-term promissory note that has since been
paid. The fair value of the warrant when issued was estimated to be $19,650.
Earnings Per Common Share
The following table represents the computation of basic and diluted
earnings per common share:
<TABLE>
<CAPTION>
YEARS ENDED NINE MONTHS NINE MONTHS
----------------------------------------------- ENDED ENDED
SEPTEMBER 30, SEPTEMBER 30, SEPTEMBER 30, JUNE 30, JUNE 30,
1995 1996 1997 1997 1998
------------- ------------- ------------- ----------- -----------
(UNAUDITED)
<S> <C> <C> <C> <C> <C>
Basic Earnings (Loss) per Share:
Net income (net loss)................. $ 178,839 $(575,613) $ 387,717 $ 147,097 $ 950,586
------------- ------------- ------------- ----------- -----------
------------- ------------- ------------- ----------- -----------
Weighted average common shares
outstanding......................... 1,555,053 1,803,761 2,159,902 2,161,946 2,426,504
------------- ------------- ------------- ----------- -----------
Basic earnings (loss) per common
share............................... $ 0.12 $ (0.32) $ 0.18 $ 0.07 $ 0.39
------------- ------------- ------------- ----------- -----------
------------- ------------- ------------- ----------- -----------
Diluted Earnings per Share:
Net income (net loss)................. $ 178,839 $(575,613) $ 387,717 $ 147,097 $ 950,586
------------- ------------- ------------- ----------- -----------
------------- ------------- ------------- ----------- -----------
Weighted average common shares
outstanding......................... 1,555,053 1,803,761 2,159,902 2,161,946 2,426,504
Common stock equivalents(1)........... 80,501 -- 475,466 476,799 779,782
Assumed conversion of preferred
stock............................... 156,950 -- 156,950 156,950 156,950
------------- ------------- ------------- ----------- -----------
Total weighted average common
shares.............................. 1,792,504 1,803,761 2,792,318 2,795,695 3,363,236
------------- ------------- ------------- ----------- -----------
Diluted earnings (loss) per common
share............................... $ 0.10 $ (0.32) $ 0.14 $ 0.05 $ 0.28
------------- ------------- ------------- ----------- -----------
------------- ------------- ------------- ----------- -----------
</TABLE>
- ------------------
(1) Includes 85,527 and 84,253 shares for the conversion of Cellmark stock to
the Company's common stock for the year and nine month period ended
September 30 and June 30, 1997 and for the nine month period ended June 30,
1998, respectively.
F-17
<PAGE>
LIFECODES CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
YEARS ENDED SEPTEMBER 30, 1995, 1996 AND 1997 AND NINE MONTHS ENDED JUNE 30,
1998
7. INCOME TAXES
There was no income tax expense or benefit recorded in the years ended
September 30, 1995 and 1996. The Company recorded a provision for income taxes
in the year ended September 30, 1997 and the nine month periods ended June 30,
1997 (unaudited) and June 30, 1998 of $173,730, $288,910 (unaudited) and
$751,762, respectively.
The tax effects of temporary differences that give rise to significant
portions of deferred tax assets are as follows:
<TABLE>
<CAPTION>
SEPTEMBER 30,
-------------------- JUNE 30,
1996 1997 1998
-------- -------- --------
<S> <C> <C> <C>
Net operating loss carryforwards......................... $316,901 $116,153 112,600
Federal business credit carryforwards.................... 189,114 -- --
Accrued liabilities...................................... -- 325,114 341,005
Depreciation and amortization............................ 20,000 131,689 82,844
Allowance for doubtful accounts.......................... 43,568 90,890 121,680
Other.................................................... -- 4,175 41,792
-------- -------- --------
569,583 668,021 699,921
Less valuation allowance................................. (569,583) (112,600) (112,600)
-------- -------- --------
Deferred tax asset, net.................................. $ -- $555,421 $587,321
-------- -------- --------
-------- -------- --------
</TABLE>
The Company recorded a valuation allowance with respect to the tax benefits
and loss carryforwards recorded as a deferred tax asset at September 30, 1996
due to the uncertainty of their ultimate realization. At September 30, 1997 and
June 30, 1998 the valuation allowance relates to the state net operating loss
carryforwards of MDx which was an S corporation for federal income tax purposes.
The valuation allowance was established by MDx due to the uncertainty of the
realization of the state loss carryforwards.
The provision for income taxes is different from the amount computed using
applicable statutory federal rates for the following reasons:
<TABLE>
<CAPTION>
NINE
MONTHS NINE
ENDED MONTHS
YEAR ENDED SEPTEMBER 30, JUNE 30, ENDED
------------------------------ 1997 JUNE 30,
1995 1996 1997 (UNAUDITED) 1998
------- --------- -------- ----------- --------
<S> <C> <C> <C> <C> <C>
Income taxes (benefit) at federal statutory rates...... $60,805 $(195,708) $190,893 $ 148,242 $578,798
Adjustment due to:
S Corporation status of MDx.......................... -- $ 299,841 $341,455 $ 313,299 $162,306
Utilization of net operating loss carryforwards...... (29,000) (199,737) (260,648) (69,037) --
Utilization of general business credits.............. -- -- (189,114) (189,114) (28,280)
State taxes, net of Federal benefit.................. -- 41,347 99,132 85,520 48,616
Other................................................ (31,805) 54,257 (7,988) -- (9,678)
------- --------- -------- ----------- --------
Income taxes........................................... $ -- $ -- $173,730 $ 288,910 $751,762
------- --------- -------- ----------- --------
------- --------- -------- ----------- --------
</TABLE>
8. RELATED PARTY TRANSACTIONS
In April 1992, the Company signed an agreement with FMC Corporation to
conduct joint research and development programs designed to expand the
applications of DNA analysis products to both the research and identity markets.
Lifecodes provides the primary facilities and the scientific and/or technical
effort as set forth in the agreement. FMC Corporation initially contributed
$300,000 of equity capital and received 109,500 shares at $2.74 per share and
options to purchase 109,500 shares that have since expired. For each year ended
September 30, 1995, 1996 and 1997, Lifecodes recognized $45,000, $22,500 and
$22,500, respectively, of
F-18
<PAGE>
LIFECODES CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
YEARS ENDED SEPTEMBER 30, 1995, 1996 AND 1997 AND NINE MONTHS ENDED JUNE 30,
1998
8. RELATED PARTY TRANSACTIONS--(CONTINUED)
research funding under this agreement. The Company also purchases certain
inventory items from FMC during fiscal 1995, 1996, 1997, and for the nine month
periods ended June 30, 1997 (unaudited) and June 30, 1998, which amounted to
$59,494, $94,113, $74,962, $46,680 (unaudited) and $84,752, respectively.
During 1995 and 1996, the Company provided management services to an entity
in which the Chief Executive Officer and other investors of the Company own an
interest. Services include accounting, purchasing, administration, and rental of
office space. During 1996, the Company made various loans to this entity. As of
December 31, 1996, all outstanding loans as of September 30, 1996 were paid. For
the year ended September 30, 1996, the Company received $56,800 in management
fees and rent which are reflected in the accompanying statement of operations as
reductions in expense.
Prior to the business combination, MDx sold all its eligible accounts
receivable with limited recourse to Century II, Corp., whose chairman at that
time was also MDx's Chairman and shareholder. At December 31, 1996, and December
31, 1997, $375,306, and $766,430 of receivables, respectively, were sold and
were reflected as reductions of trade accounts receivable. Fees and discounting
expense were recorded as operating expenses and totaled approximately $19,616
and 1996, and $117,712 in 1997. At April 30, 1998, MDx repurchased all remaining
accounts receivable from Century II, Corp. aggregating $1,117,141 in exchange
for a demand note which is due and payable in six monthly installments
commencing June 1998. The balance outstanding at June 30, 1998 was $930,951.
Prior to the business combination, MDx used Century II Staffing, Inc. as
its provider for the provision of employees and services incidental to employee
payroll, benefits, supervision and management. Century II Staffing, Inc. was
owned by MDx's Chairman until January 1, 1997 when it was sold to an unrelated
party. Total expenses incurred with Century II Staffing, Inc. for the leased
employees were $506,695 in 1996 and $1,479,476 in 1997 and $845,233 for the six
month period ended March 31, 1998.
In April 1998, the Company acquired all of the outstanding shares of ISBMD
stock for 365,000 shares of Common Stock. The two former ISBMD shareholders
joined the Company's Board of Directors in April 1998 following the consummation
of the transaction. In connection with the acquisition of ISBMD by the Company,
each of these individuals executed and delivered non-recourse promissory notes
in the amounts of $541,392 and $566,628, respectively, representing advances
previously made to them by ISBMD. Interest on these notes accrues at eight
percent (8%) per annum until maturity. The notes are payable on demand after
March 31, 2004 or sooner upon an event of default and provide for recourse only
to the 365,000 shares of Common Stock which are pledged to secure them. The
notes receivable have been classified as contra equity in the accompanying
balance sheet. To the extent that a scheduled number of tests are generated for
the Company and its affiliates through ISBMD, the principal amount outstanding
under each such note will be reduced pursuant to a formula which allows for the
forgiveness of up to $50,000 per quarter beginning in 2001.
At the time of the ISBMD closing, each of these individuals entered into a
consulting agreement with the Company which provides for an annual consulting
fee in an amount equal to $100,000 per annum during the initial two years of its
term and $150,000 per annum for the next forty-eight months if more than a set
number of tests are obtained by ISBMD during the first two years of the term of
the consultancy. Consulting fees under these agreements aggregated $50,200
during the period April 1, 1998 (date of acquisition) to June 30, 1998.
One of ISBMD's former owners is a director of Deutsche
Knochenmarkspenderdatei gemeinnuetzige GMBH ('DKMS'). ISBMD's sole source of
revenue is from services provided to DKMS. Amounts receivable from DKMS as of
June 30, 1998 was $499,134. Revenue during the period April 1, 1998 (date of
acquisition) to June 30, 1998 was $1,015,163.
F-19
<PAGE>
LIFECODES CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
YEARS ENDED SEPTEMBER 30, 1995, 1996 AND 1997 AND NINE MONTHS ENDED JUNE 30,
1998
9. INVESTMENT IN AND ADVANCES TO AFFILIATE
During fiscal 1997, through an arrangement with its Chief Executive
Officer, the Company acquired a 40 percent interest in Medical Molecular
Diagnostics GmbH ('MMD'). As part of the investment agreement, the Chief
Executive Officer assumed the role of managing director of MMD and obtained veto
power on all significant matters relating to its operations. The Company
received a promissory note from its Chief Executive Officer in the principal
amount of $150,000 bearing interest at 8% per annum, interest receivable
annually and maturing on December 31, 2001. The promissory note contains a put
and call feature set forth in the agreement. As security for the payment of the
principal amount, the Company entered into an agreement transferring the Chief
Executive Officer's business interest in MMD to the Company. As of September 30,
1997, the outstanding principal on the note was $104,097.
During fiscal 1997, the Company made various loans to MMD totaling
$469,398. In return, the Company received a promissory note in the principal
amount of $350,000, bearing interest at 8% per annum, interest receivable
annually and maturing on December 31, 2001 with the balance of $119,398
remaining as unsecured short-term advances. In conjunction with the loan
agreement MMD qualified for reimbursement from Saxony Redevelopment Bank
estimated at approximately $150,000. MMD has agreed to repay the Company any
unsecured short-term advances outstanding upon receipt and release of the
development money.
At September 30, 1997, the Company had a trade receivable of $87,351 due
from MMD which is included in accounts receivable on the consolidated balance
sheet. Effective October 1, 1997, the Company increased its interest to 60
percent through the conversion of debt to equity. Through its acquisition of
ISBMD, the Company increased its ownership of MMD to 90%.
10. EMPLOYEE BENEFIT PLAN
Effective October 1, 1991, the Company established a retirement plan
pursuant to Section 401(k) of the Internal Revenue Code, whereby employees over
the age of 21 years with at least 12 months of service are eligible to
contribute a percentage of their compensation to the plan, but not in excess of
the maximum allowed under the Code. The Plan provides for a discretionary
matching contribution by the Company. During the years ended September 30, 1996
and 1997, and the nine months ended June 30, 1997 (unaudited) and June 30, 1998
the Company's expense relating to the matching contributions amounted to
$47,796, $142,462, $71,587 (unaudited) and $78,653, respectively. There was no
matching contribution in 1995.
11. COMMITMENTS AND CONTINGENCIES
OPERATING LEASES
Office Space and Laboratory Facilities
The Company has long-term operating leases for office space and laboratory
facilities in Stamford, Connecticut, Germantown, Maryland, Nashville, Tennessee,
Buffalo, New York and Rochester, New York. The leases provide for monthly rental
payments and, in addition, the Company is responsible for certain building and
operating expenses of such facilities based upon its proportionate share of
occupancy.
Equipment and Automobiles
The Company also leases certain office equipment and automobiles under
operating leases which expire at various dates through 1999.
During September 1997, the Company entered into an agreement to amend its
long-term operating lease for approximately 7,595 square feet of new office
space in Stamford, Connecticut. The additional space is scheduled for occupancy
September 1, 1998, pending completion of construction. Commencing on the second
month
F-20
<PAGE>
LIFECODES CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
YEARS ENDED SEPTEMBER 30, 1995, 1996 AND 1997 AND NINE MONTHS ENDED JUNE 30,
1998
11. COMMITMENTS AND CONTINGENCIES--(CONTINUED)
anniversary of the commencement date through and including April 30, 2002, the
fixed annual rent will be increased by $106,880 per annum.
Office Space and Laboratory Facilities
On August 12, 1997, Cellmark Diagnostics extended the operating lease for
office space and laboratory facilities in Germantown, Maryland to November 2007.
Per terms of the new agreement, the available space will be increased from 8,956
to 16,361 square feet upon completion of scheduled leasehold improvements
commencing in December 1997. The Landlord granted an improvement allowance of
$196,332 to revitalize and expand the current facilities. A deferred liability
was recorded in the amount of this improvement allowance which is being
amortized against rent expense on a straight-line basis over the term of the
lease. Rent expense is being charged to operations on a straight-line basis over
the term of the lease.
Future minimum rental payments for office space, equipment and automobiles
under the above leases, are as follows:
<TABLE>
<CAPTION>
YEAR ENDING SEPTEMBER 30,
- ------------------------------------------------------------
<S> <C>
1998........................................................ $ 861,644
1999........................................................ 975,341
2000........................................................ 788,395
2001........................................................ 904,045
2002........................................................ 732,969
----------
Total future minimum lease payments......................... $4,262,394
----------
----------
</TABLE>
Additional rental commitments attributable to leases assumed in the NLL,
ISBMD, and MMD acquisitions as well as new leases entered into and/or amended
during the nine months ended June 30, 1998 will have the effect of increasing
the rental commitments for the years ending September 30, 1998, 1999, 2000,
2001, 2002 and thereafter by $41,477, $170,459, $403,011, $163,151, $1,108, and
$2,670,594, respectively.
Annual rent expense under these leases for the years ended September 30,
1995, 1996 and 1997 and the nine months ended June 30, 1997 (unaudited) and June
30, 1998 were $288,315, $588,152, $770,444, $528,000 (unaudited) and $602,859,
respectively.
CAPITAL LEASES
The Company leases certain machinery and equipment costing $343,184,
$402,171 and $806,133 at September 30, 1996 and 1997, and June 30, 1998,
respectively, under capital lease agreements. Accumulated depreciation on this
equipment was $68,317, $176,517 and $231,888 at September 30, 1996 and 1997 and
June 30, 1998, respectively.
F-21
<PAGE>
LIFECODES CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
YEARS ENDED SEPTEMBER 30, 1995, 1996 AND 1997 AND NINE MONTHS ENDED JUNE 30,
1998
11. COMMITMENTS AND CONTINGENCIES--(CONTINUED)
Minimum lease payments, including interest, under these capital leases at
June 30, 1998 are as follows:
<TABLE>
<CAPTION>
YEAR ENDING JUNE 30, AMOUNT
- -------------------------------------------------------------- --------
<S> <C>
1999.......................................................... $261,548
2000.......................................................... 244,599
2001.......................................................... 143,537
2002.......................................................... 80,200
--------
Total minimum lease payments.................................. 729,884
Less amounts representing interest............................ 155,902
--------
Present value of future minimum lease payments................ 573,982
Less current portion of obligations........................... 206,806
--------
Obligations under capital leases, net of current portion...... $367,176
--------
--------
</TABLE>
On December 9, 1991, the Company purchased certain patent rights and
licenses from Genmark and the University of Utah Research Foundation (the
'University'). The patent rights purchased allow for the commercial development,
use and sale of the patent rights.
Included as part of the patent rights acquired are certain sublicense and
distribution agreements assumed by the Company, which provide for royalty
payments to be made to the Company based on net sales, as defined. In addition,
Lifecodes has assumed the responsibility to pay the annual royalties due to the
University over the life of the patent rights of seventeen years. The royalties
are based upon a percentage of sales or a minimum guaranteed amount of $25,000
per year. For the years ended September 30, 1995, 1996 and 1997 and nine months
ended June 30, 1997 (unaudited) and June 30, 1998, Lifecodes paid $37,539,
$72,968, $119,638, $101,778 (unaudited) and $54,520, respectively, in royalties
to the University.
On August 26, 1997, the MDx entered into a Licensing Agreement with Roche
Molecular Service Sublicense Agreement with PE Applied Biosystems to perform
PCR-based forensic testing. The sublicense agreement assumed by the Company
provides for royalty payments to be made by the Company based on net sales, as
defined. On September 10, 1997, MDx entered into a Licensing Agreement with
Roche Molecular Systems to perform PCR-based paternity testing. The license
agreement assumed by the Company, provides for royalty payments to be made by
the Company based on net sales, as defined.
The Company has claims against it arising out of the conduct of its
business. The ultimate resolution of such matters, in the opinion of management,
will not have a material effect on Lifecodes' financial statements. At June 30,
1998, the Company has accrued approximately $810,000 for domestic and foreign
litigation.
The Company has entered into agreements with five key executives and the
Chief Executive Officer to provide them with certain compensation and benefits,
including up to one year's salary upon termination. As of June 30, 1998, the
Company's total potential payments under such severence agreements is
approximately $600,000.
12. RECENT ACCOUNTING PRONOUNCEMENTS
Statements of Financial Accounting Standards No. 131, 'Disclosures About
Segments of an Enterprise and Related Information' (SFAS 131), was issued in
June 1997.
SFAS 131 establishes the way that public business enterprises report
information about operating segments in annual financial statements and requires
that those enterprises report selected information about segments in interim
financial reports issued to stockholders. It also establishes standards for
related disclosures about products and services, geographic areas and major
customers. This statement is effective for financial statements beginning after
December 15, 1997. As the Company operates in a single segment the
implementation of this standard is not expected to have a material effect on the
Company.
F-22
<PAGE>
LIFECODES CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
YEARS ENDED SEPTEMBER 30, 1995, 1996 AND 1997 AND NINE MONTHS ENDED JUNE 30,
1998
13. ACQUISITIONS
In February 1998, the Company acquired substantially all the assets of
National Legal Laboratories ('NLL'), a division of Group Benefit Services, Inc.
for cash and 14,600 shares of common stock the value of which aggregated
$815,000, including closing costs of approximately $43,000. The value ascribed
to the stock issued amounted to approximately $39,000. NLL is a paternity
testing laboratory, with contracts in seven Midwestern and Eastern states. NLL
is located in Okemos, Michigan. The acquisition was accounted for using the
purchase method. Goodwill arising from this transaction amounted to
approximately $786,000 and will be amortized over 15 years. Operations of NLL
have been consolidated with the Company since the date of acquisition.
In April 1998, the Company acquired all of the outstanding stock of
International Support for Bone Marrow Drives, Ltd. ('ISBMD'), a provider of HLA
testing services in Germany for 365,000 shares of common stock, the value of
which aggregated $1,433,000 which includes approximately $39,000 of closing
costs. ISBMD arranges HLA testing to be performed for large marrow donor
database organizations and contracts with a small group of specially selected
laboratories in Germany and the United States to perform both DNA and
serological HLA testing. The acquisition was accounted for using the purchase
method. Goodwill arising from this transaction amounted to approximately
$1,238,000 and will be amortized over 15 years. Operations of ISBMD have been
consolidated with the Company since the date of acquisition.
In July 1998, the Company acquired substantially all of the assets of Helix
Biotech Ltd. for cash and 124,000 shares of common stock the value of which
aggregated $1,203,000, including closing costs of approximately $50,000. The
value ascribed to the stock issued amounted to approximately $503,000. Helix is
a full service DNA testing laboratory servicing the Canadian market. The
acquisition will be accounted for using the purchase method. In addition,
Lifecodes may make monthly payments of $57,000 per month for up to 36 months
depending upon the occurrence of certain events as set forth in the agreement.
These contingent payments have not been considered in determining the aggregate
purchase price of Helix as the Company believes the likelihood of the events
requiring payment of the amount are remote. Such payments will be accounted for
as additional goodwill when and if it is likely such payments will be made.
Goodwill arising as a result of this transaction amounted to approximately
$1,034,000 and will be amortized over 15 years.
In September 1998, the Company entered into an agreement with GeneScreen
Inc. ('GeneScreen') of Dallas, Texas whereby the Company agreed to acquire the
capital stock of GeneScreen for cash and Company stock valued at $12.5 million.
The purchase price consists of $5 million in cash and $7.5 million in stock, the
number of shares of which will be based on the Company's initial public offering
price. The Company estimates that approximately $8.5 million of the purchase
price will be allocated to purchased research and development and will be
charged to operations simultaneously with the closing of the acquisition. The
excess of purchase price over the fair value of assets acquired is estimated to
be approximately $2.4 million, which will be recorded as goodwill and amortized
over 15 years. GeneScreen is a provider of paternity testing services, primarily
to the public testing market. The closing of the transaction is contingent upon
the completion of an underwritten public offering of the Company's common stock.
The obligation of the Company to consummate the GeneScreen acquisition is
subject to the approval of the GeneScreen stockholders, the sale or spin-off by
GeneScreen of its Molecular Tool, Inc. subsidiary and additional customary
closing conditions. The acquisition of GeneScreen will be accounted for using
the purchase method.
The unaudited pro-forma results of operations for the current period as
well as the prior period have been set forth below as though the ISBMD, NLL and
MMD acquisitions had occurred at the beginning of each of the respective
periods. For fiscal year ended September 30, 1997, the Company, through its
chief executive officer, had a 40% equity interest in MMD. In October 1997 this
equity interest was increased to 60% through the conversion of certain debt and
was further increased to 90% with the acquisition of ISBMD which itself owned a
F-23
<PAGE>
LIFECODES CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
YEARS ENDED SEPTEMBER 30, 1995, 1996 AND 1997 AND NINE MONTHS ENDED JUNE 30,
1998
13. ACQUISITIONS--(CONTINUED)
30% equity interest in MMD. The unaudited pro-forma results below assume the 90%
interest was in place for all periods.
<TABLE>
<CAPTION>
YEAR ENDED NINE MONTHS
SEPTEMBER 30, ENDED
1997 JUNE 30, 1998
------------- -------------
(UNAUDITED) (UNAUDITED)
<S> <C> <C>
Revenues................................................................. $ 20,488,000 $19,936,000
------------- -----------
------------- -----------
Income before income taxes............................................... $ 413,000 $ 1,699,000
------------- -----------
------------- -----------
Net income............................................................... $ 160,000 $ 958,000
------------- -----------
------------- -----------
Net income per share
--Basic................................................................ $ .06 $ .36
--Diluted.............................................................. $ .05 $ .27
</TABLE>
* * * * * *
F-24
<PAGE>
INDEPENDENT AUDITORS' REPORT
Micro Diagnostics, Inc.
Nashville, Tennessee
We have audited the accompanying balance sheets of Micro Diagnostics, Inc. (the
'Company') as of December 31, 1996 and 1997, and the related statements of
operations, stockholders' deficiency, and cash flows for the years then ended.
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, such financial statements present fairly, in all material
respects, the financial position of the Company at December 31, 1996 and 1997,
and the results of its operations and its cash flows for the years then ended in
conformity with generally accepted accounting principles.
/s/ DELOITTE & TOUCHE LLP
- -----------------------------------
DELOITTE & TOUCHE LLP
Nashville, Tennessee
May 22, 1998
F-25
<PAGE>
MICRO DIAGNOSTICS, INC.
BALANCE SHEETS
DECEMBER 31, 1996 AND 1997 AND MARCH 31, 1998 (UNAUDITED)
<TABLE>
<CAPTION>
DECEMBER 31,
------------------------- MARCH 31,
1996 1997 1998
---------- ----------- -----------
(UNAUDITED)
(NOTE 11)
<S> <C> <C> <C>
ASSETS
Current assets:
Cash................................................................ $ 848 $ 47,431 $ 39,889
Inventories......................................................... 93,847 249,918 184,346
Prepaid expenses and other current assets........................... 7,967 5,509 21,153
---------- ----------- -----------
Total current assets.................................................. 102,662 302,858 245,388
Property and equipment--net (Note 2).................................. 467,864 527,013 615,492
Other assets--net (Note 3)............................................ 40,749 32,677 31,303
---------- ----------- -----------
Total................................................................. $ 611,275 $ 862,548 $ 892,183
---------- ----------- -----------
---------- ----------- -----------
LIABILITIES AND STOCKHOLDERS' DEFICIENCY
Current liabilities:
Accounts payable.................................................... $ 324,825 $ 607,837 $ 522,045
Accrued expenses and other current liabilities...................... 51,384 94,629 119,908
Current portion of obligations under capital lease (Note 8)......... 31,345 68,480 74,821
Notes payable (Note 4).............................................. 558,851 675,000 775,000
Deferred revenue (Note 2)........................................... -- -- 99,000
Advances from related party (Note 7)................................ -- -- 150,000
---------- ----------- -----------
Total current liabilities............................................. 966,405 1,445,946 1,740,774
Obligations under capital lease (Note 8).............................. 226,757 157,987 138,345
---------- ----------- -----------
Total liabilities..................................................... 1,193,162 1,603,933 1,879,119
Commitments and contingencies (Note 8)
Stockholders' deficiency (Note 6):
Common stock--no par value; 200,000, 1,000,000 and 1,000,000 shares
authorized at December 31, 1996, 1997, and March 31, 1998
respectively; 100,000, 273,000 and 273,000 shares issued and
outstanding at December 31, 1996, 1997 and March 31, 1998,
respectively..................................................... 300,000 1,165,000 1,165,000
Notes receivable from stock sales................................... -- (20,217) (18,928)
Accumulated deficit................................................. (881,887) (1,886,168) (2,133,008)
---------- ----------- -----------
Total stockholders' deficiency........................................ (581,887) (741,385) (986,936)
---------- ----------- -----------
Total................................................................. $ 611,275 $ 862,548 $ 892,183
---------- ----------- -----------
---------- ----------- -----------
</TABLE>
See notes to financial statements.
F-26
<PAGE>
MICRO DIAGNOSTICS, INC.
STATEMENTS OF OPERATIONS
YEARS ENDED DECEMBER 31, 1996 AND 1997 AND
FOR THE THREE MONTH PERIODS ENDED MARCH 31, 1997 (UNAUDITED)
AND MARCH 31, 1998 (UNAUDITED)
<TABLE>
<CAPTION>
(NOTE 11)
YEARS ENDED THREE MONTHS ENDED
DECEMBER 31, MARCH 31,
---------------------- --------------------------
1996 1997 1997 1998
-------- ---------- ----------- -----------
(UNAUDITED) (UNAUDITED)
<S> <C> <C> <C> <C>
Revenues (Note 9)............................................ $621,904 $2,963,633 $ 372,268 $ 773,932
Cost of revenues............................................. 797,925 2,601,818 413,477 697,050
-------- ---------- ----------- -----------
Gross (loss) profit..................................... (176,021) 361,815 (41,209) 76,882
Selling, general and administrative expenses................. 669,933 1,286,911 243,821 296,821
-------- ---------- ----------- -----------
Loss from operations......................................... 845,954 925,096 285,030 219,939
-------- ---------- ----------- -----------
Other income (expense):
Interest expense........................................... (38,553) (83,234) (16,665) (27,932)
Other income............................................... 2,620 4,049 711 1,031
-------- ---------- ----------- -----------
Net loss..................................................... $881,887 $1,004,281 $ 300,984 $ 246,840
-------- ---------- ----------- -----------
-------- ---------- ----------- -----------
</TABLE>
See notes to financial statements.
F-27
<PAGE>
MICRO DIAGNOSTICS, INC.
STATEMENTS OF CHANGES IN STOCKHOLDERS' DEFICIENCY (NOTE 6)
YEARS ENDED DECEMBER 31, 1996 AND 1997 AND
FOR THE THREE MONTH PERIOD ENDED MARCH 31, 1998 (UNAUDITED)
<TABLE>
<CAPTION>
NOTES
COMMON STOCK RECEIVABLE
--------------------- FROM STOCK ACCUMULATED
SHARES AMOUNT SALES DEFICIT TOTAL
------- ---------- ---------- ----------- -----------
<S> <C> <C> <C> <C> <C>
Issuance of common stock...................... 100,000 $ 300,000 $ -- $ -- $ 300,000
Net loss.................................... -- -- -- (881,887) (881,887)
------- ---------- ---------- ----------- -----------
Balance, December 31, 1996.................... 100,000 300,000 -- (881,887) (581,887)
Issuance of common stock.................... 173,000 865,000 -- -- 865,000
Notes receivable from stock sales........... -- -- (20,217) -- (20,217)
Net loss.................................... -- -- -- (1,004,281) (1,004,281)
------- ---------- ---------- ----------- -----------
Balance, December 31, 1997.................... 273,000 1,165,000 (20,217) (1,886,168) (741,385)
Payment received for notes receivable
(unaudited).............................. -- -- 1,289 -- 1,289
Net loss (unaudited)........................ -- -- -- (246,840) (246,840)
------- ---------- ---------- ----------- -----------
Balance, March 31, 1998 (unaudited) (Note
11)......................................... 273,000 $1,165,000 $(18,928) $(2,133,008) $ (986,936)
------- ---------- ---------- ----------- -----------
------- ---------- ---------- ----------- -----------
</TABLE>
See notes to financial statements.
F-28
<PAGE>
MICRO DIAGNOSTICS, INC.
STATEMENTS OF CASH FLOWS
YEARS ENDED DECEMBER 31, 1996 AND 1997 AND
FOR THE THREE MONTH PERIODS ENDED MARCH 31, 1997 (UNAUDITED)
AND MARCH 31, 1998 (UNAUDITED)
<TABLE>
<CAPTION>
(NOTE 11)
YEARS ENDED DECEMBER 31, THREE MONTHS ENDED MARCH 31,
------------------------ ---------------------------
1996 1997 1997 1998
--------- ----------- ----------- -----------
(UNAUDITED) (UNAUDITED)
<S> <C> <C> <C> <C>
Operating activities:
Net loss.................................................. $(881,887) $(1,004,281) $(300,984) $(246,840)
Adjustments to reconcile net loss to net cash used in
operating activities:
Depreciation and amortization.......................... 96,552 219,831 45,141 46,419
Noncash interest expense............................... 14,118 -- -- --
Net change in assets and liabilities:
(Increase) decrease in inventories..................... (93,847) (156,071) (13,197) 65,572
(Increase) decrease in prepaid expenses and other
current assets....................................... (7,967) 2,458 (2,834) (15,644)
Decrease (increase) in other assets.................... (43,037) 2,580 2,580 --
Increase (decrease) in accounts payable................ 324,825 283,012 (39,964) (85,792)
Increase (decrease) in accrued expenses and other
current liabilities.................................. 51,384 43,245 (45,005) 25,279
Advances from related party............................ -- -- -- 150,000
--------- ----------- ----------- -----------
Net cash used in operating activities................ (539,859) (609,226) (354,263) (61,006)
Investing activities:
Purchases of property and equipment....................... (318,144) (273,488) (51,046) (34,524)
Financing activities:
Proceeds from notes payable............................... 916,753 815,000 90,000 100,000
Proceeds from issuance of common stock.................... 300,000 844,783 750,000 1,289
Payments on notes payable................................. (357,902) (698,851) (290,000) --
Payments on capital lease obligations..................... -- (31,635) (19,308) (13,301)
--------- ----------- ----------- -----------
Net cash provided by financing activities............ 858,851 929,297 530,692 87,988
--------- ----------- ----------- -----------
Net increase (decrease) in cash............................. 848 46,583 125,383 (7,542)
Cash, beginning of year..................................... -- 848 848 47,431
--------- ----------- ----------- -----------
Cash, end of year........................................... $ 848 $ 47,431 $ 126,231 $ 39,889
--------- ----------- ----------- -----------
--------- ----------- ----------- -----------
Supplemental disclosures of cash flow information-- cash
paid during the year for interest......................... $ 13,500 $ 82,330 $ 11,450 $ 27,932
--------- ----------- ----------- -----------
--------- ----------- ----------- -----------
Supplemental disclosures of noncash flow information:
Purchase of property and equipment included in obligations
under capital lease.................................... $ 243,984 $ -- $ -- $ --
--------- ----------- ----------- -----------
--------- ----------- ----------- -----------
Common stock issued in exchange for notes receivable...... $ -- $ 23,000 $ -- $ --
--------- ----------- ----------- -----------
--------- ----------- ----------- -----------
Nonmonetary assets exchanged.............................. $ -- $ -- $ -- $ 99,000
--------- ----------- ----------- -----------
--------- ----------- ----------- -----------
</TABLE>
See notes to financial statements.
F-29
<PAGE>
MICRO DIAGNOSTICS, INC.
NOTES TO FINANCIAL STATEMENTS
YEARS ENDED DECEMBER 31, 1996 AND 1997 AND THE THREE MONTH PERIODS ENDED MARCH
31, 1997 (UNAUDITED) AND MARCH 31, 1998 (UNAUDITED)
1. ORGANIZATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Organization
Micro Diagnostics, Inc. (the 'Company') was incorporated in January 1996.
The Company provides serologic and DNA testing services in the areas of 1)
paternity testing for state, county and municipal child support agencies, 2)
forensics casework testing for state and municipal law enforcement agencies, 3)
convicted felon database profiling for state law enforcement agencies and 4)
bone marrow donor screening for hospitals and donor centers throughout the
United States and in certain foreign locations. The Company is accredited by the
American Association of Blood Banks for paternity testing, the American Society
for Histocompatibility and Immunogenetics for serologic and DNA based HLA
testing, the National Forensic Sciences Training Center for DNA based forensic
testing and by the Department of Health and Human Services, Health Care
Financing Administration under the Clinical Laboratory Improvement Amendments
Public Law 100-578 for interstate transportation of clinical samples. In
addition, the Company is licensed by the Department of Health of the State of
New York to perform DNA based paternity, forensic and HLA testing.
Effective April 30, 1998, all of the Company's outstanding shares were
acquired by Lifecodes Corporation ('Lifecodes'). The Company's shareholders
received one Lifecodes' share for every 5.25 shares of the Company's stock.
Notes payable to shareholders and advances from related party were converted to
the Company's common stock at an exchange price of $5 per share and were
included in the acquisition by Lifecodes. A total of 89,143 Lifecodes shares
were issued in the transaction. The acquisition will be accounted for as a
pooling of interests.
Inventories
Inventories, consisting principally of raw materials, are valued at the
lower of cost or market. Cost is determined using the first-in, first-out
method.
Depreciation and Amortization
Property and equipment is stated at cost less accumulated depreciation.
Depreciation is computed using an accelerated method over the estimated useful
lives of the assets (five to seven years). Leasehold improvements are amortized
on a straight-line basis over the term of the lease which is not in excess of
the estimated useful life of the improvement.
Other Assets
Other assets, which consist primarily of organization costs, are generally
being amortized over five years. The AICPA recently issued Statement of Position
98-5 ('SOP 98-5'), Reporting on the Costs of Start-Up Activities, which the
Company is required to adopt effective January 1, 1999. SOP 98-5 requires that
costs of start-up activities, including organization costs, be expensed as
incurred. The adoption of SOP 98-5 on January 1, 1999 will result in the
write-off of organization costs expected to approximate $14,000.
Use of Estimates
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amount of assets and liabilities, the
disclosure of contingent assets and liabilities at the date of the financial
statements and the reported amounts of revenues and expenses during the
reporting period. Actual results could differ from those estimates.
F-30
<PAGE>
MICRO DIAGNOSTICS, INC.
NOTES TO FINANCIAL STATEMENTS--(CONTINUED)
YEARS ENDED DECEMBER 31, 1996 AND 1997 AND THE THREE MONTH PERIODS ENDED MARCH
31, 1997 (UNAUDITED) AND MARCH 31, 1998 (UNAUDITED)
1. ORGANIZATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES--(CONTINUED)
Revenue Recognition
Revenue is recognized when testing services are provided to the customer.
Income Taxes
The Company has elected to be taxed as an S Corporation under provisions of
the Internal Revenue Code. Accordingly, the current federal taxable income of
the Company is allocated to the stockholders who are responsible for the payment
of federal taxes thereon. State income taxes are accounted for in accordance
with SFAS No. 109, Accounting for Income Taxes. Under SFAS No. 109, the asset
and liability approach requires recognition of deferred tax assets and
liabilities for expected future tax consequences of temporary differences
between the carrying amounts and the tax bases of assets and liabilities.
Accounting for Stock-Based Compensation
The Company accounts for its stock-based compensation arrangements under
the provisions of SFAS No. 123, Accounting for Stock-Based Compensation, whereby
companies may elect to account for stock-based compensation using a fair value
based method or the intrinsic value method prescribed in Accounting Principles
Board ('APB') Opinion No. 25, Accounting for Stock Issued to Employees. SFAS No.
123 requires that companies electing to use the intrinsic value method make pro
forma disclosure of net income as if the fair value based method of accounting
had been applied.
2. PROPERTY AND EQUIPMENT
Property and equipment consists of the following:
<TABLE>
<CAPTION>
1996 1997
-------- --------
<S> <C> <C>
Leasehold improvements.......................................................... $ 4,030 $ 6,935
Furniture, fixtures and equipment............................................... 314,114 584,697
Furniture, fixtures and equipment under capital lease........................... 243,984 243,984
-------- --------
Total......................................................................... 562,128 835,616
Less accumulated depreciation and amortization................................ 94,264 308,603
-------- --------
Property and equipment--net................................................... $467,864 $527,013
-------- --------
-------- --------
</TABLE>
Included in furniture, fixtures and equipment is $99,000 of lab equipment
at March 31, 1998 which is restricted under an agreement with an unrelated
party. Under the terms of the agreement, the Company will test and evaluate the
equipment for the unrelated party. Based on the terms of the agreement, the
equipment may be returned to the unrelated party. A corresponding amount has
been recorded in deferred revenue on the balance sheet as of March 31, 1998.
3. OTHER ASSETS
Other assets consist of the following:
<TABLE>
<CAPTION>
1996 1997
-------- --------
<S> <C> <C>
Organizational costs--net of accumulated amortization of $2,288 and $7,780 at
December 31, 1996 and 1997, respectively...................................... $ 25,169 $ 19,677
Security deposits............................................................... 15,580 13,000
-------- --------
Other assets--net............................................................... $ 40,749 $ 32,677
-------- --------
</TABLE>
F-31
<PAGE>
MICRO DIAGNOSTICS, INC.
NOTES TO FINANCIAL STATEMENTS--(CONTINUED)
YEARS ENDED DECEMBER 31, 1996 AND 1997 AND THE THREE MONTH PERIODS ENDED MARCH
31, 1997 (UNAUDITED) AND MARCH 31, 1998 (UNAUDITED)
4. NOTES PAYABLE
Notes payable consist of the following:
<TABLE>
<CAPTION>
1996 1997
-------- --------
<S> <C> <C>
Demand notes from stockholders.................................................. $500,000 $675,000
Term note agreement............................................................. 58,851 --
-------- --------
Notes payable................................................................... $558,851 $675,000
-------- --------
-------- --------
</TABLE>
The Company's interest rate for demand notes from shareholders was 12% as
of December 31, 1996 and 1997. The notes can be converted to common stock at the
conversion rate of 1 share for each $5 of notes outstanding.
The notes were subsequently converted into the Company's common stock at
the rate of $5 per share and exchanged for Lifecodes shares in connection with
the acquisition discussed in Note 1.
In March 1996, the Company entered into a term note agreement of $116,753
with One Lambda, Inc. The term note agreement was payable in monthly
installments through September 1997. The term note agreement was collateralized
by certain assets of the Company purchased from One Lambda, Inc.
5. INCOME TAXES
Deferred income tax assets as of December 31, 1996 and 1997 were
approximately $52,700 and $112,600, respectively, consisting primarily of net
operating loss carryforwards. The Company recorded a valuation allowance of
approximately $52,700 and $112,600 during 1996 and 1997, respectively, for the
full amount of the deferred tax assets due to the uncertainty of their
realization. At December 31, 1996 and 1997, the Company had approximately
$869,000 and $1,848,000, respectively, of net operating loss carryforwards for
state tax purposes which begin to expire in 2011.
6. STOCKHOLDERS' DEFICIENCY
Common Stock
From time to time the Company offers shares of common stock to its
employees, officers, directors and outside investors. The amounts disclosed in
the table below and throughout the accompanying financial statements and notes
thereto reflect a 100:1 stock split that occurred in October 1996.
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
--------------------------------------------------------------
1996 1997
----------------------------- -----------------------------
AVERAGE AVERAGE
SHARES PRICE PROCEEDS SHARES PRICE PROCEEDS
------ ------- -------- ------ ------- --------
<S> <C> <C> <C> <C> <C> <C>
Employees............................... 20,000 $ -- $ -- 23,000 $5.00 $115,000
President............................... 20,000 -- -- -- -- --
Chairman................................ 30,000 5.00 150,000 80,000 5.00 400,000
Investors............................... 30,000 5.00 150,000 70,000 5.00 350,000
-------- --------
$300,000 $865,000
-------- --------
-------- --------
</TABLE>
The shares issued to the President and an employee in 1996 were issued in
accordance with the original incorporation agreement. All subsequent shares were
issued for $5.00 per share upon authorization by the Board of Directors.
F-32
<PAGE>
MICRO DIAGNOSTICS, INC.
NOTES TO FINANCIAL STATEMENTS--(CONTINUED)
YEARS ENDED DECEMBER 31, 1996 AND 1997 AND THE THREE MONTH PERIODS ENDED MARCH
31, 1997 (UNAUDITED) AND MARCH 31, 1998 (UNAUDITED)
6. STOCKHOLDERS' DEFICIENCY--(CONTINUED)
Included in stockholders' deficiency at December 31, 1997 is $20,217 of
notes receivable from shareholders taken in connection with such shareholders'
purchase of the Company's common stock during 1997. The notes are full recourse
promissory notes bearing interest at 8% and are collateralized by the stock
issued. Interest is payable weekly and principal is due from June 1997 through
June 2001.
Stock Options
In 1997, the Board of Directors adopted a stock option plan and awarded
23,000 warrants to senior management. Each warrant entitles the holder to
purchase one share of common stock at a price of $.01 subject to certain
conditions as described in the stock option plan. The warrants were to expire on
June 30, 2007. Compensation expense related to such warrants was not material to
the financial statements for the year ended December 31, 1997.
In April 1998, the Company rescinded the 23,000 warrants. Accordingly, the
pro forma effect of disclosures required by SFAS No. 123 was not material to the
financial statements for the year ended December 31, 1997.
7. RELATED PARTY TRANSACTIONS
In June 1996, the Company entered into an agreement to sell all its
eligible accounts receivable, with limited recourse, to Century II Corp., whose
Chairman is also the Company's Chairman and shareholder. At December 31, 1996
and 1997, $375,306 and $764,430 of outstanding receivables, respectively, were
sold under the agreement and were reflected as reductions of trade accounts
receivable. Fees and discounting expense were recorded as operating expenses and
totaled approximately $19,616 in 1996 and $117,712 in 1997. In March and April
1998, Century II Corp. provided $150,000 and $50,000, respectively, of advances
to the Company (See Note 10).
The Company uses Century II Staffing, Inc. as its provider of employees and
services incidental to employee payroll, benefits, supervision and management.
Century II Staffing, Inc. was owned by the Company's Chairman until January 1,
1997 when it was sold to an unrelated party. Total expenses paid to Century II
Staffing, Inc. for the leased employees and related services were $506,692 and
$1,479,476 in 1996 and 1997, respectively.
8. COMMITMENTS AND CONTINGENCIES
Operating Leases
Office Space and Laboratory Facilities--The Company has operating leases
for office space and laboratory facilities in Nashville, Tennessee, Buffalo, New
York and Rochester, New York. Lease terms generally cover periods from one year
to five years. The leases provide for monthly rental payments and, in addition,
the Company is responsible for certain building and operating expenses of such
facilities based upon its proportionate share of occupancy.
F-33
<PAGE>
MICRO DIAGNOSTICS, INC.
NOTES TO FINANCIAL STATEMENTS--(CONTINUED)
YEARS ENDED DECEMBER 31, 1996 AND 1997 AND THE THREE MONTH PERIODS ENDED MARCH
31, 1997 (UNAUDITED) AND MARCH 31, 1998 (UNAUDITED)
8. COMMITMENTS AND CONTINGENCIES--(CONTINUED)
Future minimum rental payments for office space and laboratory facilities
under these leases at December 31, 1997, are as follows:
<TABLE>
<CAPTION>
YEAR ENDING DECEMBER 31, AMOUNT
- -------------------------------------------------------------------------------- ----------
<S> <C>
1998............................................................................ $ 155,345
1999............................................................................ 150,895
2000............................................................................ 23,130
2001............................................................................ 138,780
2002............................................................................ 138,780
Thereafter...................................................................... 393,210
----------
Total future minimum lease payments............................................. $1,000,140
----------
----------
</TABLE>
Annual rent expense under these leases for the years ended December 31,
1996 and 1997 was $125,298 and $155,255, respectively.
Capital Leases
In connection with the operating lease of the Nashville, Tennessee
facility, the Company received the use of furniture, fixtures and equipment
which the Company has capitalized totaling $243,984 at December 31, 1996 and
1997. Accumulated depreciation on the furniture, fixtures and equipment was
$51,365 and $132,468 at December 31, 1996 and 1997, respectively. These amounts
are included in property and equipment (See Note 2).
Future minimum lease payments, including interest, under these capital
leases at December 31, 1997 are as follows:
<TABLE>
<CAPTION>
YEAR ENDING DECEMBER 31, AMOUNT
- ---------------------------------------------------------------------------------- --------
<S> <C>
1998.............................................................................. $ 92,263
1999.............................................................................. 96,375
2000.............................................................................. 80,312
--------
Total future minimum lease payments............................................... 268,950
Less amount representing interest................................................. (42,483)
--------
Present value of net minimum lease payments....................................... 226,467
Less current maturities........................................................... (68,480)
--------
Long-term obligations under capital lease......................................... $157,987
--------
--------
</TABLE>
Patent and License Agreement
On August 26, 1997, the Company entered into a Commercial Service
Sublicense Agreement with PE Applied Biosystems to perform PCR-based forensic
testing. The sublicense agreement assumed by the Company provides for royalty
payments to be made by the Company based on net sales, as defined.
On September 10, 1997, the Company entered into a Licensing Agreement with
Roche Molecular Systems, Inc. to perform PCR-based paternity testing. The
license agreement assumed by the Company provides for royalty payments to be
made by the Company based on net sales, as defined.
F-34
<PAGE>
MICRO DIAGNOSTICS, INC.
NOTES TO FINANCIAL STATEMENTS--(CONTINUED)
YEARS ENDED DECEMBER 31, 1996 AND 1997 AND THE THREE MONTH PERIODS ENDED MARCH
31, 1997 (UNAUDITED) AND MARCH 31, 1998 (UNAUDITED)
8. COMMITMENTS AND CONTINGENCIES--(CONTINUED)
Compensation Agreements
In January 1996, the Company entered into agreements with two key
executives to provide them with certain compensation and benefits, including up
to six months' salary upon termination. All agreements are similar in nature and
were approved by the Board of Directors in March 1996.
9. MAJOR CUSTOMERS
The Company had one major customer in 1996 and two major customers in 1997,
which individually accounted for 10% or more of net sales. Net sales to these
customer(s) represented approximately 54% and 39% of net sales for the years
ended December 31, 1996 and 1997, respectively.
10. SUBSEQUENT EVENTS
During April 1998, the Company rescinded all of its 23,000 outstanding
common stock warrants (See Note 6).
Effective April 30, 1998, the Company repurchased accounts receivable that
it had sold previously to Century II Corp. (See Note 7). The receivables were
purchased at their net invoice value of $1,117,141 and had no statement of
operations impact. In addition, the Company issued a $200,000 demand note to
Century II Corp. for advances received previously.
Effective April 30, 1998, the Company was acquired by Lifecodes in which
the Company was merged directly into Lifecodes (See Note 1).
11. UNAUDITED FINANCIAL STATEMENTS
The balance sheet of the Company as of March 31, 1998, and the statements
of operations, stockholders' deficiency, and cash flows for the quarters ended
March 31, 1998 and 1997 have been prepared by the Company without an audit.
Accordingly, they do not include all of the information and footnotes required
by generally accepted accounting principles for complete financial statements.
In the opinion of management, all adjustments (which include only normal
recurring adjustments) considered necessary for a fair presentation have been
included. Operating results for the quarter ended March 31, 1998 are not
necessarily indicative of the results that may be expected for the full year.
* * * * * *
F-35
<PAGE>
INDEPENDENT AUDITORS' REPORT
International Support for Bone Marrow Drives, Ltd.
We have audited the accompanying balance sheet of International Support for Bone
Marrow Drives, Ltd. (the 'Company') as of December 31, 1997, and the related
statements of operations, stockholders' deficit and cash flows for the year
ended. 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 audit.
We conducted our audit 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 audit provides a reasonable basis for our opinion.
In our opinion, such financial statements present fairly, in all material
respects, the financial position of International Support of Bone Marrow Drives,
Ltd. as of December 31, 1997, and the results of its operations and its cash
flows for the year then ended in conformity with generally accepted accounting
principles.
DELOITTE & TOUCHE LLP
/s/ DELOITTE & TOUCHE LLP
Raleigh, North Carolina
June 19, 1998
F-36
<PAGE>
INTERNATIONAL SUPPORT FOR BONE MARROW DRIVES, LTD.
BALANCE SHEETS
DECEMBER 31, 1997 AND MARCH 31, 1998 (UNAUDITED)
<TABLE>
<CAPTION>
DECEMBER 31, 1997 MARCH 31, 1998
----------------- --------------
(UNAUDITED)
<S> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents................................................... $ 526,847 $ 406,427
Accounts receivable from related party...................................... 591,540 898,919
Refundable income taxes..................................................... 0 21,960
Prepaid expenses and other current assets................................... 6,906 6,906
----------------- --------------
Total current assets..................................................... 1,125,293 1,334,212
Deferred tax assets........................................................... 31,900 31,900
----------------- --------------
Total assets.................................................................. $ 1,157,193 $ 1,366,112
----------------- --------------
----------------- --------------
LIABILITIES AND STOCKHOLDERS' DEFICIT
Current liabilities:
Accounts payable............................................................ $ 1,327,844 $ 2,271,301
Accrued expenses............................................................ 68,017 7,760
Income taxes payable........................................................ 136,977 0
----------------- --------------
Total current liabilities................................................ 1,532,838 2,279,061
----------------- --------------
Commitments and Contingencies
Stockholders' deficit:
Common stock ($1 par value, 100,000 shares authorized, 200 shares issued and
outstanding)............................................................. 200 200
Retained earnings........................................................... 154,255 194,871
Notes receivable--stockholders.............................................. (530,100) (1,108,020)
----------------- --------------
Total stockholders' deficit.............................................. (375,645) (912,949)
----------------- --------------
Total liabilities and stockholders' deficit................................... $ 1,157,193 $ 1,366,112
----------------- --------------
----------------- --------------
</TABLE>
See notes to financial statements.
F-37
<PAGE>
INTERNATIONAL SUPPORT FOR BONE MARROW DRIVES, LTD.
STATEMENTS OF OPERATIONS
FOR THE YEAR ENDED DECEMBER 31, 1997, AND THE
THREE MONTHS ENDED MARCH 31, 1997 AND 1998 (UNAUDITED)
<TABLE>
<CAPTION>
THREE MONTHS ENDED
YEAR ENDED --------------------------------
DECEMBER 31, 1997 MARCH 31, 1997 MARCH 31, 1998
----------------- -------------- --------------
(UNAUDITED) (UNAUDITED)
<S> <C> <C> <C>
Revenues from related party................................... $ 4,824,421 $704,722 $1,766,038
Cost of revenues.............................................. 3,523,032 482,270 1,298,088
----------------- -------------- --------------
Gross profit............................................. 1,301,389 222,452 467,950
Other costs and expenses:
General and administrative.................................. 737,753 246,806 423,010
Equity in losses on investment in Medical Molecular
Diagnostics GmbH......................................... 68,975 0 0
Write off of amounts due from related party,
Marco International, Inc................................. 64,500 63,108 0
----------------- -------------- --------------
Income (loss) from operations................................. 430,161 (87,372) 44,940
Other income--net:
Interest income............................................. 34,944 18,366 20,676
Other income................................................ 2,500 2,500 0
----------------- -------------- --------------
Income (loss) before income taxes............................. 467,605 (66,506) 65,616
Provision for income taxes (income tax benefit)............... 190,900 (27,100) 25,000
----------------- -------------- --------------
Net income (loss)............................................. $ 276,705 $(39,406) $ 40,616
----------------- -------------- --------------
----------------- -------------- --------------
</TABLE>
See notes to financial statements.
F-38
<PAGE>
INTERNATIONAL SUPPORT FOR BONE MARROW DRIVES, LTD.
STATEMENTS OF STOCKHOLDERS' DEFICIT
FOR THE YEAR ENDED DECEMBER 31, 1997 AND THREE MONTHS ENDED MARCH 31, 1998
(UNAUDITED)
<TABLE>
<CAPTION>
COMMON STOCK NOTES TOTAL
---------------- ACCUMULATED RECEIVABLE-- STOCKHOLDERS'
SHARES AMOUNT DEFICIT STOCKHOLDERS DEFICIT
------ ------ ----------- ------------ -------------
<S> <C> <C> <C> <C> <C>
Balance, January 1, 1997............................ 200 $200 $(122,450) $ (230,293) $(352,543)
Net income........................................ 276,705 276,705
Increase in notes receivable--stockholders........ (299,807) (299,807)
------ ------ ----------- ------------ -------------
Balance, December 31, 1997.......................... 200 200 154,255 (530,100) (375,645)
Net income (unaudited)............................ 40,616 40,616
Increase in notes receivable--stockholders
(unaudited).................................... (577,920) (577,920)
------ ------ ----------- ------------ -------------
Balance, March 31, 1998 (unaudited)................. 200 $200 $ 194,871 $ (1,108,020) $(912,949)
------ ------ ----------- ------------ -------------
------ ------ ----------- ------------ -------------
</TABLE>
See notes to financial statements.
F-39
<PAGE>
INTERNATIONAL SUPPORT FOR BONE MARROW DRIVES, LTD.
STATEMENTS OF CASH FLOWS
FOR THE YEAR ENDED DECEMBER 31, 1997,
AND THE THREE MONTHS ENDED MARCH 31, 1997 AND 1998 (UNAUDITED)
<TABLE>
<CAPTION>
THREE MONTHS ENDED
YEAR ENDED --------------------------
DECEMBER 31, MARCH 31, MARCH 31,
1997 1997 1998
------------ ----------- -----------
(UNAUDITED) (UNAUDITED)
<S> <C> <C> <C>
Operating activities:
Net income (loss).................................................... $ 276,705 $ (39,406) $ 40,616
Adjustments to reconcile net income to net cash provided by operating
activities:
Equity in loss on investment in Medical Molecular Diagnostics
GmbH............................................................ 68,975 0
Write-off of amounts due from related party,
Marco International, Inc........................................ 64,500 63,018 0
Deferred income tax benefit....................................... (28,100) 0 0
Net change in operating assets and liabilities:
Increase in accounts receivable from related party.............. (77,313) (45,851) (307,379)
Increase in refundable income taxes............................. 0 0 (21,960)
Increase in prepaid expenses and other current assets........... (6,381) (6,381) 0
Increase (decrease) in accounts payable......................... 80,839 (72,675) 943,457
Increase (decrease) in accrued expenses and other current
liabilities.................................................. 57,373 20,431 (60,257)
Increase (decrease) in accrued income taxes..................... 108,009 (76,107) (136,977)
------------ ----------- -----------
Net cash provided by (used in) operating activities.................... 544,607 (156,971) 457,500
------------ ----------- -----------
Investing activities:
Investment in Medical Molecular Diagnostics GmbH..................... (68,975) (21,904) 0
Loans provided to Marco International, Inc.--related party........... (64,500) (63,018) 0
------------ ----------- -----------
Net cash used in investing activities.................................. (133,475) (84,922) 0
------------ ----------- -----------
Financing activities--Loans provided to stockholders................... (299,807) (67,939) (577,920)
------------ ----------- -----------
Net increase (decrease) in cash and cash equivalents................... 111,325 (309,832) (120,420)
Cash and cash equivalents, beginning................................... 415,522 415,522 526,847
------------ ----------- -----------
Cash and cash equivalents, end......................................... $ 526,847 $ 105,690 $ 406,427
------------ ----------- -----------
------------ ----------- -----------
Supplemental disclosures of cash flow information:
Cash paid during the period for interest............................. $ 0 $ 0 $ 0
Cash paid during the period for income taxes......................... $ 81,340 $ 5,250 $ 184,000
</TABLE>
See notes to financial statements.
F-40
<PAGE>
INTERNATIONAL SUPPORT FOR BONE MARROW DRIVES, LTD.
NOTES TO FINANCIAL STATEMENTS
YEAR ENDED DECEMBER 31, 1997
AND THREE MONTHS ENDED MARCH 31, 1998 AND 1997 (UNAUDITED)
1. ORGANIZATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Organization--International Support for Bone Marrow Drives, Ltd. ('ISBMD'
or the 'Company') is a provider of genetic typing of potential donors of bone
marrow. The Company is headquartered in High Point, North Carolina with
operations in the United States and Germany.
Cash and Cash Equivalents--The Company considers all investments purchased with
an original maturity of three months or less to be cash equivalents.
Investment in Affiliate--The Company's investment in Medical Molecular
Diagnostics GmbH ('MMD') is accounted for by the equity method. Beginning in
October 1997, the Company's ownership percentage in MMD exceeded 20%.
Revenue Recognition--Revenue is recognized when results are shipped and/or
services are provided to the customer.
Income Taxes--Deferred income taxes are provided for the temporary
differences between the financial reporting basis and the income tax basis of
the Company's assets and liabilities in accordance with Statement of Financial
Accounting Standards No. 109.
Use of Estimates--The preparation of financial statements in conformity
with generally accepted accounting principles requires management to make
estimates and assumptions that affect the reported amount of assets and
liabilities, the disclosure of contingent assets and liabilities at the date of
the financial statements and the reported amounts of revenues and expenses
during the reporting period. Actual results could differ from those estimates.
Interim Financial Statements--The accompanying balance sheet as of March
31, 1998 and the statements of operations and cash flows for the three months
ended March 31, 1997 and 1998 are unaudited but, in the opinion of management,
include all adjustments (consisting of normal, recurring adjustments) necessary
for a fair presentation of results for these interim periods. Results for
interim periods are not necessarily indicative of results for the entire year.
2. RELATED PARTY TRANSACTIONS
Professor Dr. Gerhard Ehninger, one of the 50% owners of the Company, is a
director of Deutsche Knochenmarkspenderdatei gemeinnuetzige GMBH ('DKMS').
ISBMD's revenues from services provided to DKMS were $4,824,421 and $1,766,038,
representing 100% of net sales, for the year ended December 31,1997 and the
three months ended March 31,1998, respectively. Amounts receivable from DKMS as
of December 31, 1997 and March 31, 1998 were $591,549 and $898,919,
respectively. Consulting fees of $24,000 and $6,000 were paid in 1997 and the
period ended March 31, 1998 respectively, to Claudia Rutt, Director, of DKMS.
Consulting fees were paid in 1997 to Claude L. Buller and Professor Dr.
Gerhard Ehninger, each 50% owner of the Company, of $213,800 and $81,205,
respectively. For the three months ended March 31,1998, Mr. Buller and Professor
Dr. Ehninger received $147,547 and $179,920, respectively. In addition,
consulting fees relating to services provided by Ulf Ehninger, nephew of
Professor Dr. Gerhard Ehninger, in 1997 of $38,033 remained in accrued expenses
at December 31, 1997. For the three months ended March 31, 1998, Ulf Ehninger
earned $16,570.
During 1997, the Company loaned $299,807 to Mr. Buller at 8% interest. The
total notes receivable of $530,100 as of December 31, 1997 were secured by
Lifecodes Corporation ('Lifecodes') stock subsequent to year end (see Note 7).
Notes receivable from Professor Dr. Ehninger were $0 as of December 31, 1997.
During the three months ended March 31, 1998, the Company loaned Mr. Buller and
Professor Dr. Gerhard $11,292 and $566,628, respectively. The entire notes
receivable amount is subject to forgiveness if certain post acquisition
operational results are met.
F-41
<PAGE>
INTERNATIONAL SUPPORT FOR BONE MARROW DRIVES, LTD.
NOTES TO FINANCIAL STATEMENTS--(CONTINUED)
YEAR ENDED DECEMBER 31, 1997
AND THREE MONTHS ENDED MARCH 31, 1998 AND 1997 (UNAUDITED)
2. RELATED PARTY TRANSACTIONS--(CONTINUED)
Loans were made to Marco International, Inc. ('Marco') in the amount of
$64,500 during 1997. The notes had an imputed interest rate of 8% but no
interest income was accrued during 1997 due to valuation issues. Marco is a
related party as Mr. Buller is the president of Marco and became a controlling
stockholder of Marco on April 1, 1997. These loans were written off as of
December 31, 1997 due to deemed insolvency of Marco. As of December 31, 1996,
loan to Marco aggregating $440,107 of principal and accrued interest were
written off due to the insolvency of Marco.
3. INVESTMENT IN AND ADVANCES TO AFFILIATE
In October, 1997, the Company invested $47,071 in MMD (see Note 1),
increasing its ownership interest to approximately 30%. The Company's share of
MMD's losses for 1997 exceeded the Company's investment in MMD. Therefore, the
investment in MMD as of December 31, 1997 is $0 as the Company is not committed
beyond its original investment. Certain owners of MMD are also owners of the
Company or officers of Lifecodes.
4. INCOME TAXES
The components of income tax expense (benefits) is as follows:
<TABLE>
<CAPTION>
PERIOD ENDED
---------------------------
DECEMBER 31, MARCH 31,
1997 1998
------------ -----------
(UNAUDITED)
<S> <C> <C>
Current:
Federal.......................................................... $195,900 $23,300
State............................................................ 23,100 1,700
------------ -----------
Total.............................................................. 219,000 25,000
Deferred benefit................................................... (28,100) --
------------ -----------
Income tax expense (benefit)....................................... $190,900 $25,000
------------ -----------
------------ -----------
</TABLE>
The provision for income taxes is different from the amount computed using
the applicable statutory federal rate of 34% as follows:
<TABLE>
<CAPTION>
PERIOD ENDED
---------------------------
DECEMBER 31, MARCH 31,
1997 1998
------------ -----------
(UNAUDITED)
<S> <C> <C>
Income taxes at federal statutory rate............................. $159,000 $23,400
Adjustment due to:
State taxes, net of Federal benefit.............................. 15,200 1,200
Other............................................................ 16,700 400
------------ -----------
Income tax expense (benefit)....................................... $190,900 $25,000
------------ -----------
------------ -----------
</TABLE>
The tax effect of temporary differences that give rise to deferred tax
assets as of December 31, 1997 and March 31, 1998 primarily related to losses on
its investment in MMD and certain interest that are not currently deductible.
F-42
<PAGE>
INTERNATIONAL SUPPORT FOR BONE MARROW DRIVES, LTD.
NOTES TO FINANCIAL STATEMENTS--(CONTINUED)
YEAR ENDED DECEMBER 31, 1997
AND THREE MONTHS ENDED MARCH 31, 1998 AND 1997 (UNAUDITED)
5. COMMITMENTS AND CONTINGENCIES
Operating Leases
Office Space and Equipment--The Company has operating leases for office
space and office equipment in High Point, NC. The leases provide for monthly
rental payments and, in addition, the Company is responsible for certain
building and operating expenses of such facilities based upon its proportionate
share of occupancy. The leases expire in June 1998. Future committed lease
payments are $3,150.
Annual rent expense under these leases for the year ended December 31, 1997
was $8,163.
6. RECENT ACCOUNTING PRONOUNCEMENTS
Statements of Financial Accounting Standards No. 130, 'Reporting
Comprehensive Income' ('SFAS 130'), and No. 131, 'Disclosures About Segments of
an Enterprise and Related Information' (SFAS 131), were issued in June 1997.
SFAS 130 establishes standards for reporting and display of comprehensive
income and its components in a full set of general purpose financial statements.
It requires that all items that are required to be recognized under accounting
standards as components of comprehensive income be reported in a financial
statement that is displayed with the same prominence as the other financial
statements. Comprehensive income is defined as 'the change in equity of a
business during a period from transactions and other events and circumstances
from non-owner sources.' It includes all changes in equity during a period,
except those resulting from investments by owners and distributions to owners.
This statement is effective for fiscal years beginning after December 15, 1997.
SFAS 131 establishes the way that public business enterprises report
information about operating segments in annual financial statements and requires
that those enterprises report selected information about segments in interim
financial reports issued to stockholders. It also establishes standards for
related disclosures about products and services, geographic areas and major
customers. This statement is effective for financial statements beginning after
December 15, 1997.
As the Company does not have material changes in equity and operates in a
single segment, the implementation of both these standards are not expected to
have a material effect on the Company.
7. SUBSEQUENT EVENTS
In April 1998, Lifecodes acquired all of the outstanding stock of ISBMD.
Prior to the acquisition, Lifecodes laboratories processed less than 10% of the
specimens originated by ISBMD. Lifecodes laboratories are now performing an
increasing share of this testing.
* * * * * * *
F-43
<PAGE>
INDEPENDENT AUDITORS' REPORT
To the Board of Directors
and Stockholders of GeneScreen Inc.:
We have audited the accompanying consolidated balance sheets of GeneScreen Inc.
and subsidiaries (the 'Company') at December 31, 1996 and 1997, and the related
consolidated statements of 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, such consolidated financial statements present fairly, in all
material respects, the financial position of GeneScreen Inc. and subsidiaries at
December 31, 1996 and 1997, and the results of their operations and their cash
flows for each of the three years in the period ended December 31, 1997, in
conformity with generally accepted accounting principles.
/s/ DELOITTE & TOUCHE LLP
Dallas, Texas
May 26, 1998
F-44
<PAGE>
GENESCREEN INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
DECEMBER 31, JUNE 30,
------------------------ -----------
1996 1997 1998
---------- ---------- -----------
(UNAUDITED)
<S> <C> <C> <C>
ASSETS
Current Assets:
Cash.............................................................................. $ 509,841 $ 22,268 $ 46,963
Accounts receivable--net (Notes 4 and 7).......................................... 1,305,245 2,251,013 2,910,738
Laboratory materials and supplies (Note 7)........................................ 221,951 334,630 592,556
Prepaids and other assets......................................................... 17,173 5,581 114,266
---------- ---------- -----------
Total current assets...................................................... 2,054,210 2,613,492 3,664,523
Property And Equipment--Net (Notes 5 and 7)......................................... 752,094 850,016 711,592
Deferred Production Process Costs--Net (Note 3)..................................... 171,257 40,515 30,467
Intangible Assets--Net (Note 6)..................................................... 210,963 133,848 118,613
Investment In Discontinued Operations (Note 2)...................................... 1,217,635 708,477 406,317
---------- ---------- -----------
Total............................................................................... $4,406,159 $4,346,348 $ 4,931,512
---------- ---------- -----------
---------- ---------- -----------
LIABILITIES AND STOCKHOLDERS' EQUITY
Current Liabilities:
Note payable--bank (Note 7)....................................................... $ -- $1,000,000 $ 1,250,000
Current portion of long--term debt (Note 7)....................................... 176,258 -- 823,526
Accounts payable.................................................................. 498,614 1,204,586 1,467,278
Accrued compensation.............................................................. 228,881 251,758 82,400
Other accrued liabilities (Note 8)................................................ 342,079 349,776 629,608
Deferred revenue.................................................................. 76,979 142,917 112,682
---------- ---------- -----------
Total current liabilities................................................. 1,322,811 2,949,037 4,365,494
Long-term Debt And Other--Net of current portion (Note 7)........................... 87,285 8,250 8,250
Commitments And Contingencies (Note 8)..............................................
Stockholders' Equity (Notes 10 and 11):
Convertible preferred stock, Series A, $.05 par value; 350,000 shares authorized,
issued and outstanding (liquidation preference of $1,289,000 at December 31,
1997, and $1,324,000 at June 30, 1998)......................................... 17,500 17,500 17,500
Convertible preferred stock, Series B, $.05 par value; 700,000 shares authorized;
691,723 shares issued and outstanding (liquidation preference of $2,450,000 at
December 31, 1997, and $2,541,000 at
June 30, 1998)................................................................. 34,586 34,586 34,586
Common stock, $.01 par value; 10,000,000 shares authorized; 2,618,817 shares
issued at December 31, 1996, and 2,619,497 shares issued at December 31, 1997,
and June 30, 1998.............................................................. 26,188 26,196 26,196
Additional paid-in capital.......................................................... 7,695,236 7,695,408 7,695,408
Accumulated deficit................................................................. (4,652,447) (6,299,290) (7,130,583)
Treasury stock--53 common shares.................................................... (22) (22)
Notes receivable--stockholders...................................................... (125,000) (85,317) (85,317)
---------- ---------- -----------
Total stockholders' equity..................................................... 2,996,063 1,389,061 557,768
---------- ---------- -----------
Total............................................................................... $4,406,159 $4,346,348 $ 4,931,512
---------- ---------- -----------
---------- ---------- -----------
</TABLE>
See notes to consolidated financial statements.
F-45
<PAGE>
GENESCREEN INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
<TABLE>
<CAPTION>
YEARS ENDED SIX MONTHS ENDED
-------------------------------------------- --------------------------
DECEMBER 31, DECEMBER 31, DECEMBER 31, JUNE 30, JUNE 30,
1995 1996 1997 1997 1998
------------ ------------ ------------ ----------- -----------
(UNAUDITED) (UNAUDITED)
<S> <C> <C> <C> <C> <C>
Net revenues:
Paternity testing...................... $6,565,905 $6,675,218 $ 7,727,082 $ 3,634,129 $ 5,472,419
Genetic testing........................ 725,444 1,875,732 3,283,478 1,477,985 1,805,833
Forensic testing....................... 136,622 276,996 206,013 112,629 132,837
------------ ------------ ------------ ----------- -----------
Total net revenues............. 7,427,971 8,827,946 11,216,573 5,224,743 7,411,089
Costs and expenses:
Cost of testing revenues:
Salaries and benefits............... 1,650,128 1,790,973 2,523,149 1,011,342 1,705,978
Laboratory supplies................. 1,679,043 2,524,431 3,676,343 1,529,702 2,614,397
Drawing costs....................... 865,781 1,023,146 1,432,954 629,836 1,123,948
Royalties........................... 7,232 59,216 60,388 29,029 62,917
Depreciation--lab equipment......... 118,733 143,000 264,793 124,740 140,362
Facility allocation................. 236,858 227,797 320,587 146,309 196,477
------------ ------------ ------------ ----------- -----------
Total cost of testing
revenues..................... 4,557,775 5,768,563 8,278,214 3,470,958 5,844,079
Operating expenses:
Research and development (Note 3)... 101,106 -- 651,595 267,427 12,882
Other salaries and benefits......... 1,439,554 1,552,883 1,645,519 866,814 1,089,698
Advertising and marketing........... 100,188 104,863 187,792 74,415 125,509
General and administrative.......... 660,648 908,610 1,129,522 556,072 614,557
Depreciation--non-lab
equipment......................... 50,885 52,345 105,682 50,738 56,107
Amortization--intangible assets..... 189,441 202,225 113,128 58,505 44,228
------------ ------------ ------------ ----------- -----------
Total operating expenses....... 2,541,822 2,820,926 3,833,238 1,873,971 1,942,981
------------ ------------ ------------ ----------- -----------
Total costs and expenses..... 7,099,597 8,589,489 12,111,452 5,344,929 7,787,060
------------ ------------ ------------ ----------- -----------
Operating income (loss).................. 328,374 238,457 (894,879) (120,186) (375,971)
Other income (expense):
Interest expense....................... (87,953) (38,174) (22,597) (8,132) (77,362)
Rent and other income.................. -- 40,190 16,486 9,979 3,376
------------ ------------ ------------ ----------- -----------
Total other income
(expense)................. (87,953) 2,016 (6,111) 1,847 (73,986)
------------ ------------ ------------ ----------- -----------
Income (loss) from continuing operations
before extraordinary
item................................... 240,421 240,473 (900,990) (118,339) (449,957)
Loss on discontinued operations (Note
2)..................................... -- (838,741) (768,212) (338,786) (381,336)
------------ ------------ ------------ ----------- -----------
Income (loss) before extraordinary
item................................... 240,421 (598,268) (1,669,202) (457,125) (831,293)
Extraordinary item--Gain on early
extinguishment of debt................. -- -- 22,359 -- --
------------ ------------ ------------ ----------- -----------
Net income (loss)........................ $ 240,421 $ (598,268) $ (1,646,843) $ (457,125) $ (831,293)
------------ ------------ ------------ ----------- -----------
------------ ------------ ------------ ----------- -----------
</TABLE>
See notes to consolidated financial statements.
F-46
<PAGE>
GENESCREEN INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
<TABLE>
<CAPTION>
CONVERTIBLE PREFERRED STOCK
-------------------------------------
SERIES A SERIES B COMMON STOCK ADDITIONAL
----------------- ----------------- ------------------- PAID-IN ACCUMULATED
SHARES AMOUNT SHARES AMOUNT SHARES AMOUNT CAPITAL DEFICIT
------- ------- ------- ------- --------- ------- ---------- -----------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Balance at January 1, 1995............ 350,000 $17,500 -- $ -- 1,660,783 $16,608 $4,769,905 $(4,294,600)
Exercise of common stock options.... 30 15
Net income.......................... 240,421
------- ------- ------- ------- --------- ------- ---------- -----------
Balance at December 31, 1995.......... 350,000 17,500 -- -- 1,660,813 16,608 4,769,920 (4,054,179)
Issuance of Series B convertible
preferred stock (Note 2):
Acquisition of net assets........ 243,902 12,195 787,805
For cash......................... 447,821 22,391 1,431,660
Issuance of common stock:
Acquisition of net assets (Note
2)............................. 906,284 9,063 580,022
Exercise of common stock
options........................ 1,720 17 1,329
Exercise of common stock
warrants....................... 50,000 500 124,500
Net loss............................ (598,268)
------- ------- ------- ------- --------- ------- ---------- -----------
Balance at December 31, 1996.......... 350,000 17,500 691,723 34,586 2,618,817 26,188 7,695,236 (4,652,447)
Exercise of common stock warrants... 732 8 172
Purchase of treasury stock.......... (52)
Collections on note receivable from
shareholders.....................
Net loss............................ (1,646,843)
------- ------- ------- ------- --------- ------- ---------- -----------
Balance at December 31, 1997.......... 350,000 17,500 691,723 34,586 2,619,497 26,196 7,695,408 (6,299,290)
Net loss (unaudited)................ (831,293)
------- ------- ------- ------- --------- ------- ---------- -----------
Balance at June 30, 1998
(unaudited)......................... 350,000 $17,500 691,723 $34,586 2,619,497 $26,196 $7,695,408 $(7,130,583)
------- ------- ------- ------- --------- ------- ---------- -----------
------- ------- ------- ------- --------- ------- ---------- -----------
<CAPTION>
NOTES
TREASURY RECEIVABLE--
STOCK STOCKHOLDERS TOTAL
-------- ----------- ----------
<S> <C> <C> <C>
Balance at January 1, 1995............ $ -- $ -- $ 509,413
Exercise of common stock options.... 15
Net income.......................... 240,421
-------- ----------- ----------
Balance at December 31, 1995.......... -- -- 749,849
Issuance of Series B convertible
preferred stock (Note 2):
Acquisition of net assets........ 800,000
For cash......................... 1,454,051
Issuance of common stock:
Acquisition of net assets (Note
2)............................. 589,085
Exercise of common stock
options........................ 1,346
Exercise of common stock
warrants....................... (125,000) --
Net loss............................ (598,268)
-------- ----------- ----------
Balance at December 31, 1996.......... -- (125,000) 2,996,063
Exercise of common stock warrants... 180
Purchase of treasury stock.......... (22) (22)
Collections on note receivable from
shareholders..................... 39,683 39,683
Net loss............................ (1,646,843)
-------- ----------- ----------
Balance at December 31, 1997.......... (22) (85,317) 1,389,061
Net loss (unaudited)................ (831,293)
-------- ----------- ----------
Balance at June 30, 1998
(unaudited)......................... $(22) $ (85,317) $ 557,768
-------- ----------- ----------
-------- ----------- ----------
</TABLE>
See notes to consolidated financial statements.
F-47
<PAGE>
GENESCREEN INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
YEARS ENDED SIX MONTHS ENDED
-------------------------------------------- --------------------------
DECEMBER 31, DECEMBER 31, DECEMBER 31, JUNE 30, JUNE 30,
1995 1996 1997 1997 1998
------------ ------------ ------------ ----------- -----------
(UNAUDITED) (UNAUDITED)
<S> <C> <C> <C> <C> <C>
Operating activities:
Net income (loss):
Continuing operations.................. $ 240,421 $ 240,473 $ (900,990) $ (118,339 ) $(449,957)
Discontinued operations................ (838,741 ) (768,212) (338,786 ) (381,336)
Noncash items in net income:
Depreciation and amortization.......... 359,059 397,570 483,603 233,683 240,697
Gain on early extinguishment of debt... 22,359
Write-off of deferred production
costs................................ 106,020 88,764
Cash from (used for) operating working
capital:
Accounts receivable.................... (194,339) (9,106 ) (945,768) (283,140 ) (659,725)
Laboratory supplies.................... (48,330) (49,393 ) (112,679) (257,926)
Prepaids and other assets.............. 17,088 (9,748 ) 11,592 11,078 (108,685)
Accounts payable....................... (80,927) 123,167 705,972 370,596 262,692
Accrued liabilities.................... 263,950 30,235 30,574 (18,800 ) 110,473
Deferred revenue....................... (4,462) 8,685 65,938 21,469 (30,235)
Discontinued operations items--net..... 735,112 786,753 336,085 381,336
------------ ------------ ------------ ----------- -----------
Net cash from (used for) operating
activities............................... 552,460 628,254 (514,838) 302,610 (892,666)
------------ ------------ ------------ ----------- -----------
Investing activities:
Additions to property and equipment...... (149,602) (487,270 ) (486,938) (291,614 ) (58,046)
Additions to deferred production process
costs and intangible assets............ (184,042 ) (11,291) (10,558 ) (18,945)
Acquisition of MTool (Note 2)............ (235,771 )
Advances to MTool........................ (327,891 ) (259,054) (101,001 ) (79,174)
------------ ------------ ------------ ----------- -----------
Net cash used for investing activities..... (149,602) (1,234,974 ) (757,283) (403,173 ) (156,165)
------------ ------------ ------------ ----------- -----------
Financing activities:
Borrowings (net payments) under line of
credit................................. (240,000) (80,000 ) 1,000,000 250,000
Borrowings from shareholders............. 823,526
Payments on long-term obligations........ (225,483) (308,234 ) (255,293) (108,945 )
Issuance of common stock and Series B
convertible preferred stock (Note 2)... 1,454,051
Exercise of common stock options......... 15 1,346 180
Buyback of common stock.................. (22)
Collections on notes receivable from
shareholders........................... 39,683 23,686
------------ ------------ ------------ ----------- -----------
Net cash from (used for) financing
activities............................... (465,468) 1,067,163 784,548 (85,259 ) 1,073,526
------------ ------------ ------------ ----------- -----------
Net increase (decrease) in cash............ (62,610) 460,443 (487,573) (185,822 ) 24,695
Cash:
Beginning of period...................... 112,008 49,398 509,841 509,841 22,268
------------ ------------ ------------ ----------- -----------
End of period............................ $ 49,398 $ 509,841 $ 22,268 $ 324,019 $ 46,963
------------ ------------ ------------ ----------- -----------
------------ ------------ ------------ ----------- -----------
Supplemental information:
Interest paid............................ $ 88,139 $ 38,723 $ 24,265 $ -- $ --
------------ ------------ ------------ ----------- -----------
------------ ------------ ------------ ----------- -----------
Income taxes paid........................ $ 8,000 $ 9,110 $ 13,000 $ -- $ --
------------ ------------ ------------ ----------- -----------
------------ ------------ ------------ ----------- -----------
Noncash investing and financing
activities:
Acquisition of net assets for common
stock and Series B convertible
preferred stock (Note 2)............. $ -- $ 1,389,085 $ -- $ -- $ --
------------ ------------ ------------ ----------- -----------
------------ ------------ ------------ ----------- -----------
Exercise of common stock warrants for
notes receivable (Note 10)........... $ -- $ 125,000 $ -- $ -- $ --
------------ ------------ ------------ ----------- -----------
------------ ------------ ------------ ----------- -----------
</TABLE>
See notes to consolidated financial statements.
F-48
<PAGE>
GENESCREEN INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
YEARS ENDED DECEMBER 31, 1995, 1996 AND 1997, AND
SIX MONTHS ENDED JUNE 30, 1997 (UNAUDITED) AND 1998 (UNAUDITED)
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Organization and Business GeneScreen Inc. ('GeneScreen') operates genetic
testing laboratories in Dallas, Texas; Dayton, Ohio (acquired in 1992); and
Sacramento, California (acquired in 1994). GeneScreen performs paternity
testing, forensic identification testing to assist in criminal investigations
and medical genetic testing using technologies developed at the University of
Texas Southwestern Medical Center and other medical research facilities.
GeneScreen's primary source of revenue represents paternity testing under
contracts with several state government agencies.
During 1996, GeneScreen acquired all of the members' capital of Molecular
Tool, LLC ('MTool') of Baltimore, Maryland, through issuance of common and
preferred stock. MTool performs research and development activities for third
parties under contract and for its own account and has developed and patented a
proprietary technology called genetic bit analysis ('GBA(Registered)') for the
analysis of DNA. This technology could be used in new areas of testing,
including animal and plant testing, and in a product format. On May 26, 1998,
the board of directors approved a plan to sell the MTool assets (see Note 2).
Consolidated Financial Statements include the accounts of GeneScreen and
its wholly owned subsidiaries, GeneScreen of Texas, Inc. (established in 1995)
and MTool (collectively referred to as the 'Company'), from the date of its
acquisition. Significant intercompany balances and transactions are eliminated
in consolidation. Financial statement preparation requires management to make
estimates and assumptions that affect the reported amounts of assets and
liabilities and disclosure of contingencies at the date of the financial
statements and the reported amounts of revenues and expenses during the
reporting period. Differences from those estimates are recognized in the period
they become known.
Laboratory Materials and Supplies are stated at the lower of cost or
market. Cost is determined by the first-in, first-out ('FIFO') method.
Property and Equipment are stated at cost less accumulated depreciation and
amortization. Depreciation and amortization for financial statement purposes are
provided by the straight-line method over the various estimated useful lives of
the property and equipment, which range from two to seven years.
Deferred Production Process Costs represent direct project costs incurred
in 1996 to ready prototype tests using GBA technology of MTool (see Note 2) for
high-volume production of specific testing revenues at specified quality levels
reasonably expected to be realized by 1997, and are stated net of accumulated
amortization. Amortization, which begins upon production of specific testing
revenues, is provided based on the greater of the ratio of current tests
processed to the estimated total tests for that particular testing process or
the straight-line method over the remaining estimated economic life of the
testing process of 36 months.
Intangible Assets are amortized on a straight-line basis over the estimated
lives as follows: costs of obtaining certain patented and unpatented testing
technologies in 1987 (ten years), assigned costs of noncompete contracts with
former owners (the contract lives of 30 to 60 months) and goodwill from
acquisitions in 1994 and 1996 (five to six years).
Financial Instruments consist of cash, accounts and notes receivable,
payables and notes payable, the carrying values of which are a reasonable
estimate of their fair values due to their short maturities or current interest
rates.
Paternity and Genetic Testing Revenues, primarily under contracts, are
recognized on a percentage-of-completion basis. Percentage of completion for
tests in process is estimated by relating labor and supplies costs expended to
date to expected total labor and supplies costs. Deferred revenue represents the
unearned portion of payments received in advance related to tests in process.
Other testing revenues are recognized when tests results are delivered.
F-49
<PAGE>
GENESCREEN INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
YEARS ENDED DECEMBER 31, 1995, 1996 AND 1997, AND
SIX MONTHS ENDED JUNE 30, 1997 (UNAUDITED) AND 1998 (UNAUDITED)
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES--(CONTINUED)
Research and Development costs are expensed as incurred, and the amounts in
operating expenses represent in 1997 and in the 1998 period (unaudited)
primarily production process costs that do not satisfy capitalization criteria.
The results of operations for the acquired MTool research and development
facility to be sold are reported as discontinued operations (see Note 2).
Stock-Based Compensation arising from stock option grants is accounted for
by the intrinsic value method under Accounting Principles Board Opinion No. 25
('APB No. 25'). Statement of Financial Accounting Standards ('SFAS') No. 123 was
effective for GeneScreen beginning January 1, 1996, and encourages (but does not
require) compensation cost of stock-based compensation arrangements with
employees to be measured based on the fair value of the equity instrument
awarded. As permitted by SFAS No. 123, GeneScreen applies APB No. 25 to its
stock-based compensation awards to employees and discloses the required pro
forma effect on net income.
Unaudited Interim Financial Information at June 30, 1998, and for the six
months ended June 30, 1997 and 1998, have been prepared on the same basis as the
audited financial statements presented. In the opinion of management, such
unaudited information includes all adjustments, consisting only of normal
recurring adjustments, necessary for a fair presentation of this interim
information. The results of the six months ended June 30, 1998, are not
necessarily indicative of future results.
New Accounting Standards In June 1997, the Financial Accounting Standards
Board (the 'FASB') issued SFAS No. 130, 'Reporting Comprehensive Income,' which
establishes standards for the reporting and display of comprehensive income and
its components in the financial statements, and is effective for fiscal years
beginning after December 15, 1997. In June 1997, the FASB also issued SFAS No.
131, 'Disclosure About Segments of an Enterprise and Related Information,' which
establishes standards for the way public companies disclose information about
operating segments, products and services, geographic areas and major customers,
and is effective for periods beginning after December 31, 1997. The Company
believes initial adoption of these standards will not have a material impact on
its financial statements. Also, in April 1998, the AICPA issued Statement of
Position ('SOP') 98-5, 'Reporting on the Costs of Start-Up Activities,' which
requires the costs of such activities, including the initiation of a new
process, to be expensed as incurred; see Note 3 for the Company's application of
this SOP.
2. ACQUISITION AND DISCONTINUED OPERATIONS OF MTOOL
Effective February 26, 1996, GeneScreen acquired all of the members'
capital of MTool for $300,000 cash, 906,284 shares of GeneScreen common stock
valued at $589,085, 243,902 shares of GeneScreen Series B convertible preferred
stock valued at $800,000, and $39,400 of acquisition costs paid in cash. This
transaction was accounted for by the purchase method, with the total purchase
price allocated to the identifiable assets acquired and liabilities assumed in
proportion to their fair values, as follows:
<TABLE>
<S> <C>
Current assets acquired (including cash of $103,629)...................................... $ 505,383
Property and equipment acquired........................................................... 532,597
Current liabilities assumed............................................................... (254,996)
Contracts and license acquired (includes $168,093 for 1996 contracts)..................... 345,501
Goodwill.................................................................................. 600,000
------------
Net assets acquired....................................................................... $ 1,728,485
------------
------------
</TABLE>
In conjunction with the acquisition, GeneScreen also raised $1,454,051 (net
of issuance costs of $14,802) in proceeds from the sale of 447,821 shares of
Series B convertible preferred stock, priced at $3.28 per share.
F-50
<PAGE>
GENESCREEN INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
YEARS ENDED DECEMBER 31, 1995, 1996 AND 1997, AND
SIX MONTHS ENDED JUNE 30, 1997 (UNAUDITED) AND 1998 (UNAUDITED)
2. ACQUISITION AND DISCONTINUED OPERATIONS OF MTOOL--(CONTINUED)
On May 26, 1998, the board of directors approved a plan to sell the MTool
assets, except that the Company will retain certain rights to the GBA technology
of MTool to permit the Company to continue implementation of the GBA testing
processes. A sale consistent with this plan is currently being negotiated. Under
these negotiations, the Company expects to realize a gain from the MTool sale
and would distribute a substantial portion of the proceeds to its current
stockholders. Accordingly, the accompanying financial statements include the
Company's investment in MTool on the equity basis and MTool's operations as
discontinued operations.
The Company's investment, on the equity basis, in the net assets of MTool
for December 31, 1996 and 1997, and June 30, 1998, is based on the following:
<TABLE>
<CAPTION>
DECEMBER 31, JUNE 30,
---------------------- -----------
1996 1997 1998
---------- -------- -----------
(UNAUDITED)
<S> <C> <C> <C>
MTool's net assets:
Current assets................................................. $ 598,601 $190,914 $ 209,342
Property and equipment......................................... 245,814 150,885 92,451
Intangible assets--net......................................... 687,008 517,856 433,281
Current liabilities............................................ (313,788) (151,178) (328,757)
---------- -------- -----------
Total............................................................ $1,217,635 $708,477 $ 406,317
---------- -------- -----------
---------- -------- -----------
</TABLE>
Revenues and expenses for the MTool research and development facility for
December 31, 1996 and 1997, and June 30, 1997 and 1998, are as follows:
<TABLE>
<CAPTION>
YEAR ENDED SIX MONTHS ENDED
DECEMBER 31, JUNE 30,
------------------------ --------------------------
1996 1997 1997 1998
---------- ---------- ----------- -----------
(UNAUDITED) (UNAUDITED)
<S> <C> <C> <C> <C>
Research and development revenue................ $1,399,696 $1,126,066 $ 642,832 $ 436,120
Operating expenses:
Cost of revenue............................... 1,435,363 1,332,678 699,548 546,954
General and administrative.................... 258,826 137,761 128,587 31,910
Patent legal fees............................. 124,120 172,853 48,316 120,696
Depreciation and amortization................. 419,579 282,621 129,108 132,612
---------- ---------- ----------- -----------
Total operating expenses........................ 2,237,888 1,925,913 1,005,559 832,172
Other income (expense).......................... (549) 31,635 23,941 14,716
---------- ---------- ----------- -----------
Net loss........................................ $ (838,741) $ (768,212) $ (338,786) $(381,336)
---------- ---------- ----------- -----------
---------- ---------- ----------- -----------
</TABLE>
3. GBA PRODUCTION PROCESS COSTS
Deferred production process costs at December 31, 1996 and 1997, and June
30, 1998, consist of the following:
<TABLE>
<CAPTION>
DECEMBER 31, JUNE 30,
---------------------- -----------
1996 1997 1998
---------- -------- -----------
(UNAUDITED)
<S> <C> <C> <C>
Capitalizable costs.............................................. $ 184,042 $ 88,581 $ 88,581
Less accumulated amortization.................................... 12,785 48,066 58,114
---------- -------- -----------
Net carrying value............................................... $ 171,257 $ 40,515 $ 30,467
---------- -------- -----------
---------- -------- -----------
</TABLE>
F-51
<PAGE>
GENESCREEN INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
YEARS ENDED DECEMBER 31, 1995, 1996 AND 1997, AND
SIX MONTHS ENDED JUNE 30, 1997 (UNAUDITED) AND 1998 (UNAUDITED)
3. GBA PRODUCTION PROCESS COSTS--(CONTINUED)
Capitalizable costs represent direct project costs incurred in 1996 to
ready prototypes using GBA technology of MTool (see Note 2) for specific testing
applications reasonably expected to generate revenues in 1997. At December 31,
1996, $106,020 of such costs relate to the development project for paternity
testing applications, which amount was written off in 1997 when revenue
generation status was not achieved. This write-off is included with research and
development expense amounts in 1997 that consist primarily of further production
process costs to use GBA technology in paternity testing; such development costs
have continued to be incurred and expensed in the 1998 period (unaudited). The
remaining net carrying value of capitalized costs at December 31, 1997, and
March 31, 1998 (unaudited) relate to revenue generating projects. SOP 98-5,
'Reporting on the Costs of Start-Up Activities' (Note 1), is effective for the
Company beginning January 1, 1999. Application of this SOP will not have a
material impact on the Company's financial statements in view of the above
circumstances that resulted in the write-off in 1997 and the cessation of
capitalizing such costs in 1997 and 1998.
4. ACCOUNTS RECEIVABLE AND CREDIT RISKS
Accounts receivable at December 31, 1996 and 1997, and June 30, 1998,
consist of the following:
<TABLE>
<CAPTION>
DECEMBER 31, JUNE 30,
------------------------ -----------
1996 1997 1998
---------- ---------- -----------
(UNAUDITED)
<S> <C> <C> <C>
Billed trade receivables...................................... $1,241,945 $1,538,200 $ 1,770,090
Accrued revenues on tests completed........................... 535,386 777,001
Accrued revenues on tests in process.......................... 130,760 240,527 450,476
Other......................................................... 3,376
---------- ---------- -----------
Total......................................................... 1,372,705 2,314,113 3,000,943
Less allowance for doubtful accounts.......................... 67,460 63,100 90,205
---------- ---------- -----------
Accounts receivable--net...................................... $1,305,245 $2,251,013 $ 2,910,738
---------- ---------- -----------
---------- ---------- -----------
</TABLE>
GeneScreen's accounts receivable is primarily composed of amounts owed by
private institutions. GeneScreen performs periodic credit evaluations of its
customers' financial condition and generally does not require a deposit from
government agencies or private institutions. GeneScreen believes private pay
accounts for paternity testing represent the most significant credit risk and
generally requires a deposit for all or a portion of the services to be
rendered. Credit losses have consistently been within management's expectations.
5. PROPERTY AND EQUIPMENT
Property and equipment at December 31, 1996 and 1997, and June 30, 1998,
consist of the following:
<TABLE>
<CAPTION>
DECEMBER 31, JUNE 30,
------------------------ -----------
1996 1997 1998
---------- ---------- -----------
(UNAUDITED)
<S> <C> <C> <C>
Laboratory and office equipment............................... $1,474,554 $1,879,356 $ 1,924,906
Leasehold improvements........................................ 87,619 151,954 151,945
---------- ---------- -----------
Total......................................................... 1,562,173 2,031,310 2,076,851
Less accumulated depreciation and amortization................ 810,079 1,181,294 1,365,259
---------- ---------- -----------
Property and equipment--net................................... $ 752,094 $ 850,016 $ 711,592
---------- ---------- -----------
---------- ---------- -----------
</TABLE>
F-52
<PAGE>
GENESCREEN INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
YEARS ENDED DECEMBER 31, 1995, 1996 AND 1997, AND
SIX MONTHS ENDED JUNE 30, 1997 (UNAUDITED) AND 1998 (UNAUDITED)
6. INTANGIBLE ASSETS
Intangible assets at December 31, 1996 and 1997, and June 30, 1998, consist
of the following:
<TABLE>
<CAPTION>
DECEMBER 31, JUNE 30,
---------------------- -----------
1996 1997 1998
---------- -------- -----------
(UNAUDITED)
<S> <C> <C> <C>
Technologies acquired and technology license..................... $ 200,000 $200,000 $ 215,000
Noncompete contracts (amortized fully in 1997)................... 394,850 -- --
Goodwill......................................................... 257,502 257,503 257,503
---------- -------- -----------
852,352 457,503 472,503
Less accumulated amortization.................................... 641,389 323,655 353,890
---------- -------- -----------
Intangible assets--net........................................... $ 210,963 $133,848 $ 118,613
---------- -------- -----------
---------- -------- -----------
</TABLE>
7. CREDIT FACILITY AND DEBT
In 1997, the Company renewed its existing revolving line of credit
agreement for borrowings of up to $1,000,000, subject to borrowing base
requirements and interest at prime plus 1% (9.5% at December 31, 1997) payable
monthly, and collateralized by accounts receivable, inventory, equipment and
intangibles. In January 1998, this line of credit was increased by $250,000.
Long-term debt and other at December 31, 1996 and 1997, and June 30, 1998,
consists of the following:
<TABLE>
<CAPTION>
DECEMBER 31, JUNE 30,
---------------------- -----------
1996 1997 1998
---------- -------- -----------
(UNAUDITED)
<S> <C> <C> <C>
Note payable to former owners, due in quarterly principal
installments of $63,500. Paid in 1997.......................... $ 219,500 $ -- $ --
Note payable to bank in monthly principal installments of $3,889.
Paid in 1997................................................... 34,758 -- --
Notes payable to shareholders bearing interest at 18%, due April
30, 1999....................................................... -- -- 823,526
Deferred rent (Note 8)........................................... 9,285 8,250 8,250
---------- -------- -----------
Total............................................................ 263,543 8,250 831,776
Less current portion............................................. 176,258 -- 823,526
---------- -------- -----------
Long-term debt and other--net of current portion................. $ 87,285 $ 8,250 $ 8,250
---------- -------- -----------
---------- -------- -----------
</TABLE>
8. COMMITMENTS AND CONTINGENCIES
Leases
The Company leases its facilities under noncancelable operating leases with
options to renew. Future minimum rental payments as of December 31, 1997, under
the leases are as follows:
<TABLE>
<S> <C>
1998.............................................................................. $ 216,209
1999.............................................................................. 214,418
2000.............................................................................. 233,762
2001.............................................................................. 204,041
2002.............................................................................. 87,861
----------
$ 956,291
----------
----------
</TABLE>
F-53
<PAGE>
GENESCREEN INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
YEARS ENDED DECEMBER 31, 1995, 1996 AND 1997, AND
SIX MONTHS ENDED JUNE 30, 1997 (UNAUDITED) AND 1998 (UNAUDITED)
8. COMMITMENTS AND CONTINGENCIES--(CONTINUED)
The Company recognizes rent expense on a straight-line basis over the
initial and renewal terms of the leases and has recorded a liability of $9,485
and $8,250 at December 31, 1996 and 1997, respectively, and $8,250 at June 30,
1998 (unaudited), for deferred rent, which is included in long-term debt on the
accompanying balance sheet. Rent expense in 1995, 1996 and 1997 was $170,227,
$159,232 and $227,369, respectively.
Self-Insurance Reserve
The Company is self-insured for the risk of loss relating to certain
litigation claims that might arise from the Company's testing results. However,
due to provisions in certain service contracts, the Company is insured for
claims arising from testing performed under the Texas, Ohio and Arizona
contracts. Insurance coverage began in 1995 for testing under the Texas contract
and in 1997 for testing under the Ohio and Arizona contracts. Management
estimates future litigation costs based on historical litigation experience. The
accrued litigation reserve for the self-insured risk at December 31, 1996 and
1997, was $209,679 and $173,783, respectively, and $171,213 at June 30, 1998
(unaudited).
Employment Contracts
Under employment contracts with two individuals, the Company is
contingently liable through December 31, 2001, for minimum payments in the event
of involuntary termination or death of those individuals. This total contingency
at December 31, 1997, is $785,562, and is reduced by defined compensation
payments in the future.
9. INCOME TAXES
Net deferred tax assets consist of the following at December 31, 1996 and
1997:
<TABLE>
<CAPTION>
DECEMBER 31,
------------------------
1996 1997
---------- ----------
<S> <C> <C>
Current:
Allowances and accruals, not currently deductible........... $ 19,923 $ 168,911
Valuation allowance......................................... (19,923) (168,911)
---------- ----------
Net current asset................................... $ -- $ --
---------- ----------
---------- ----------
Long-term:
Depreciation and amortization, not currently deductible..... $ 179,128 $ (318,075)
Deferred production process costs deducted for tax
purposes................................................. -- 13,775
Allowances and accruals, not currently deductible........... (46,755) 8,777
Other....................................................... 11,174 14,227
Net operating loss carryforward............................. 1,330,574 1,912,724
---------- ----------
1,474,121 1,631,428
Valuation allowance......................................... (1,474,121) (1,631,428)
---------- ----------
Net long-term assets................................ $ -- $ --
---------- ----------
---------- ----------
</TABLE>
At December 31, 1997, net operating loss carryforwards of approximately
$5,039,000 for income tax reporting purposes, begin expiring in 2003. The Tax
Reform Act of 1986 imposed a limitation on the use of tax loss carryforwards
following certain actual or deemed ownership changes. As a result of an equity
financing in a prior year, GeneScreen sustained a 'deemed change in ownership,'
which limits the amount of tax losses
F-54
<PAGE>
GENESCREEN INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
YEARS ENDED DECEMBER 31, 1995, 1996 AND 1997, AND
SIX MONTHS ENDED JUNE 30, 1997 (UNAUDITED) AND 1998 (UNAUDITED)
9. INCOME TAXES--(CONTINUED)
available for use in any given year. GeneScreen does not believe the tax loss
limitation will have a material adverse effect on the use of its net operating
loss carryforwards.
10. STOCKHOLDERS' EQUITY
Preferred Stock
The Company is authorized to issue a total of 5,000,000 shares of various
series of preferred stocks. The Series A and Series B Preferred Stocks are
convertible into common stock on a 1-for-1 basis, subject to adjustment for
dilution, are entitled to vote with common stock on the basis of common shares
into which they are convertible, and provide for noncumulative annual dividends
at rates of $.20 and $.26 per share, respectively, when and if declared.
The Series A and Series B Preferred Stocks may be redeemed in whole or in
part, at the Company's option, at any time beginning after March 31, 1999, and
January 31, 2003, respectively. The per-share redemption price for Series A is
$2.50 plus $.20 for each year outstanding since February 1992. The per-share
redemption price for Series B is $3.28 plus $.02 for each month outstanding
since February 1996. For both series, the liquidation value is computed in the
same manner as redemption price. The Series A and Series B Preferred Stocks have
a liquidation preference over common stock.
All shares of the Series A and Series B Preferred Stocks will automatically
convert to common stock upon the sale of the Company's common stock pursuant to
a public offering, subject to certain offering criteria. At December 31, 1997,
the Company had reserved approximately 1,050,000 shares of common stock for
issuance upon conversion of all preferred stock.
Common Stock Warrants
Warrants to purchase 50,000 shares of common stock at $2.50 per share,
granted in 1992 to the former owners of an acquired business, were outstanding
at December 31, 1995. These warrants were exercised in 1996 for receivables
totaling $125,000, which are classified as a reduction of stockholders' equity,
of which $39,683 was received in 1997. The balance in notes receivable bears
interest at the prime rate and is payable in quarterly principal installments of
$5,332 plus interest through December 31, 2001.
11. STOCK OPTION PLAN
Under the Stock Option Plan (the 'Plan'), options to purchase up to 686,667
shares of common stock may be granted to certain key employees and officers of
the Company. Options are exercisable immediately and expire no later than ten
years from the date of grant. The Board may determine the individuals to whom
and the time at which options shall be granted and the number of shares of
common stock covered by each option. The option price per share will be
determined by the Board but may not be less than 85% of the fair value of the
common stock on the date of grant. Common stock issued related to the options is
subject to repurchase by GeneScreen upon termination of employment. The
percentage of stock eligible for repurchase will decrease ratably over a period
varying from three to five years from the date of grant. Options for stock no
longer eligible for repurchase are considered vested.
F-55
<PAGE>
GENESCREEN INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
YEARS ENDED DECEMBER 31, 1995, 1996 AND 1997, AND
SIX MONTHS ENDED JUNE 30, 1997 (UNAUDITED) AND 1998 (UNAUDITED)
11. STOCK OPTION PLAN--(CONTINUED)
The following information summarizes the shares subject to options:
<TABLE>
<CAPTION>
WEIGHTED
AVERAGE
EXERCISE
NUMBER OF SHARES PRICE PER SHARE
-------------------- ---------------
1996 1997 1996 1997
-------- -------- ---- ----
<S> <C> <C> <C> <C>
Options outstanding, beginning of year.................. 340,144 574,044 $.21 $.45
Granted................................................. 238,800 6,000 .80 .80
Exercised............................................... (1,720) (732) .78 .24
Terminated.............................................. (3,180) (1,635) .79 .76
-------- --------
Options outstanding, end of year........................ 574,044 577,677 .45 .45
-------- --------
-------- --------
Options vested, end of year............................. 395,816 455,903 .30 .36
-------- --------
-------- --------
Reserved for future options at December 31, 1997........ 108,257
--------
--------
</TABLE>
The following table summarizes additional information about stock options
outstanding and vested at December 31, 1997:
<TABLE>
<CAPTION>
OPTIONS OUTSTANDING OPTIONS VESTED
-------------------------------------- ----------------------
WEIGHTED
AVERAGE WEIGHTED WEIGHTED
RANGE OF REMAINING AVERAGE AVERAGE
EXERCISE NUMBER OF CONTRACTUAL EXERCISE NUMBER OF EXERCISE
PRICES SHARES LIFE PRICE SHARES PRICE
- ------------- --------- ----------- -------- --------- --------
<S> <C> <C> <C> <C> <C>
$.12 169,828 3.7 $.12 169,828 $.12
.25 140,000 4.0 .25 140,000 .25
.50 29,250 6.2 .50 21,880 .50
.80 238,600 8.0 .80 124,195 .80
--------- ---------
$.12 to $.80 577,678 5.7 .45 455,903 .36
--------- ---------
--------- ---------
</TABLE>
The Company applies the provisions of APB No. 25 and related
Interpretations in accounting for its stock option plan. Accordingly, no
compensation cost has been recognized for its stock option plan. Had
compensation cost for the Company's stock option plan been determined based on
the fair value at the grant dates for awards under the plan in 1996 and 1997
consistent with the method prescribed by SFAS No. 123, the Company's pro forma
net loss would have been $613,000 and $1,647,000 in 1996 and 1997, respectively,
and $832,000 in the 1998 period (unaudited).
In the pro forma calculations, the weighted average fair value of options
granted in 1996 and 1997 was estimated at $.24 and $.22, respectively. The fair
value of each option grant is estimated on the date of grant using the
Black-Scholes option-pricing model with the following weighted average
assumptions used for grants in 1997: risk-free interest rate of 5.9% and 5.5% in
1996 and 1997, respectively, expected lives of six years, no divided yield and
no expected volatility (because the Company's stock is not publicly traded).
12. SUBSEQUENT FINANCING AND SALE OF THE COMPANY
On May 26, 1998, the board of directors approved a plan for the Company's
stockholders to sell their GeneScreen stock to Lifecodes Corporation. As part of
this sale, the Company expects that the Series A and B Preferred Stocks
outstanding and the common stock options vested will be converted to the
Company's common stock. This sale is contingent, among other things, on the sale
of MTool or the distribution of the shares of MTool to the Company's
shareholders, as discussed in Note 2. In July 1998, Lifecodes agreed to advance
the Company up to $600,000. Borrowing under this agreement will be due at the
earlier of the sale of the Company to Lifecodes, the sale of MTool, or February
28, 1999.
******
F-56
<PAGE>
INDEPENDENT AUDITORS' REPORT
To the Board of Directors of
National Legal Laboratories
We have audited the accompanying balance sheet of National Legal Laboratories (a
separate Division of a Michigan Corporation) as of September 30, 1997 and the
related statements of income, retained earnings, and cash flows for the year
then ended. These financial statements are the responsibility of the Company's
management. Our responsibility is to express an opinion on these consolidated
financial statements based on our audit.
We conducted our audit 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 audit provides a reasonable basis for our opinion.
In our opinion, regarding the current year end, the financial statements present
fairly, in all material respects, the financial position of National Legal
Laboratories, as of September 30, 1997, and the results of its operations and
its cash flows for the year then ended in conformity with generally accepted
accounting principles.
SCHLATTMAN & ASSOCIATES, P.C.
- ---------------------------------------
Certified Public Accountants
Mason, Michigan
February 20, 1998
F-57
<PAGE>
NATIONAL LEGAL LABORATORIES
BALANCE SHEETS
SEPTEMBER 30, 1997 AND DECEMBER 31, 1997 (UNAUDITED)
<TABLE>
<CAPTION>
SEPTEMBER 30, 1997 DECEMBER 31, 1997
------------------ -----------------
(UNAUDITED)
<S> <C> <C>
ASSETS
Current assets:
Cash..................................................................... $ 182,688 $ 142,670
Accounts receivable--trade............................................... 222,368 301,085
Accounts receivable--other............................................... 44,801 63,883
Work-in-progress......................................................... 29,535 29,535
Prepaid expenses and other............................................... 44,197 81,818
------------------ -----------------
Total current assets....................................................... 523,589 618,991
------------------ -----------------
Property, plant and equipment:
Vehicles................................................................. 55,153 55,153
Equipment................................................................ 470,960 470,960
Furniture................................................................ 41,633 41,633
Leasehold improvements................................................... 39,205 39,205
------------------ -----------------
Total...................................................................... 606,951 606,951
Accumulated depreciation................................................... (372,278) (390,563)
------------------ -----------------
Total, net................................................................. 234,673 216,388
------------------ -----------------
Other assets--Loans to officers............................................ 125,000 125,000
------------------ -----------------
Total assets............................................................... $ 883,262 $ 960,379
------------------ -----------------
------------------ -----------------
LIABILITIES AND STOCKHOLDERS' DEFICIENCY
Current liabilities:
Accounts payable......................................................... $ 294,101 $ 343,082
Accrued liabilities...................................................... 41,249 18,242
Current portion of long-term debt........................................ 129,881 129,881
------------------ -----------------
Total current liabilities.................................................. 465,231 491,205
------------------ -----------------
Long-term liabilities--Notes payable-net of current portion................ 435,366 596,674
------------------ -----------------
Total liabilities.......................................................... 900,597 1,087,879
------------------ -----------------
Stockholders' deficiency:
Common stock, no par value--50,000 shares authorized, 3,000 shares issued
and outstanding....................................................... 3,000 3,000
Accumulated deficit...................................................... (20,335) (130,500)
------------------ -----------------
Total stockholders' deficiency............................................. (17,335) (127,500)
------------------ -----------------
Total liabilities and stockholders' deficiency............................. $ 883,262 $ 960,379
------------------ -----------------
------------------ -----------------
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-58
<PAGE>
NATIONAL LEGAL LABORATORIES
STATEMENTS OF OPERATIONS
FOR THE YEAR ENDED SEPTEMBER 30, 1997
AND THE THREE MONTHS ENDED DECEMBER 31, 1997 (UNAUDITED)
<TABLE>
<CAPTION>
THREE MONTHS
YEAR ENDED ENDED
SEPTEMBER 30, DECEMBER 31,
1997 1997
------------- -------------
(UNAUDITED)
<S> <C> <C>
Revenues:
Lab.............................................................................. $ 2,034,720 $ 558,876
Less: refunds.................................................................... (2,994) (1,314)
------------- -------------
Total revenues................................................................ 2,031,726 557,562
Cost of revenues................................................................... 1,686,847 501,612
------------- -------------
Gross margin.................................................................. 344,879 55,950
Selling and administrative expenses................................................ 720,831 210,332
------------- -------------
Loss from operations............................................................... 375,952 154,382
Other income:
Interest income.................................................................. 4,402 2,100
Other............................................................................ 1,669 --
------------- -------------
Loss before income taxes........................................................... 369,881 152,282
Income tax benefits................................................................ 111,674 42,117
------------- -------------
Net loss........................................................................... $ 258,207 $ 110,165
------------- -------------
------------- -------------
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-59
<PAGE>
NATIONAL LEGAL LABORATORIES
STATEMENTS OF CHANGES IN ACCUMULATED DEFICIT
FOR THE YEAR ENDED SEPTEMBER 30, 1997
AND THE THREE MONTH PERIOD ENDED DECEMBER 31, 1997 (UNAUDITED)
<TABLE>
<CAPTION>
YEAR THREE MONTHS
ENDED ENDED
SEPTEMBER 30, DECEMBER 31,
1997 1997
------------- ------------
(UNAUDITED)
<S> <C> <C>
Accumulated Deficit, Beginning...................................................... $ 237,872 $ (20,335)
Net Loss............................................................................ 258,207 110,165
------------- ------------
Accumulated Deficit, Ending......................................................... $ (20,335) $ (130,500)
------------- ------------
------------- ------------
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-60
<PAGE>
NATIONAL LEGAL LABORATORIES
STATEMENTS OF CASH FLOWS
FOR THE YEAR ENDED SEPTEMBER 30, 1997 AND
THE THREE MONTHS ENDED DECEMBER 31, 1997 (UNAUDITED)
<TABLE>
<CAPTION>
SEPTEMBER 30, DECEMBER 31,
1997 1997
------------- ------------
(UNAUDITED)
<S> <C> <C>
Operating Activities:
Net loss.......................................................................... $(258,207) $ (110,165)
Adjustments to reconcile net income to net cash provided by operating
activities:
Depreciation................................................................. 57,000 18,285
Increase in accounts receivable.............................................. (154,567) (78,717)
Increase in work-in-progress................................................. (1,171) --
Increase in prepaid and other assets......................................... (24,535) (56,703)
Increase in accounts payable................................................. 238,041 48,981
Decrease in accrued liabilities.............................................. (2,004) (23,007)
------------- ------------
Net cash used in operating activities............................................... (145,443) (201,326)
------------- ------------
Investing Activities:
Acquisition of property, plant and equipment...................................... (219,296) --
------------- ------------
Net cash used in investing activities............................................... (219,296) --
------------- ------------
Financing Activities:
Proceeds from issuance of debt.................................................... 1,044,576 169,416
Retirement of debt................................................................ (563,081) (8,108)
------------- ------------
Net cash provided by financing activities........................................... 481,495 161,308
------------- ------------
Net increase (decrease) in cash and cash equivalents................................ 116,756 (40,018)
Cash and cash equivalents, beginning................................................ 65,932 182,688
------------- ------------
Cash and cash equivalents, end...................................................... $ 182,688 $ 142,670
------------- ------------
------------- ------------
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-61
<PAGE>
NATIONAL LEGAL LABORATORIES
NOTES TO FINANCIAL STATEMENTS
SEPTEMBER 30, 1997
1. NATURE OF BUSINESS
Organization
National Legal Laboratories, Inc. is a division of Group Benefit Services,
Inc. This entity performs paternity testing for state governments and private
individuals. The accompanying financial statements were prepared from the
accounting records maintained by National Legal Laboratories, Inc., a division
of Group Benefit Services, Inc., which are maintained separate from Group
Benefit Services, Inc.
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
The accounting policies of National Legal Laboratories, (the 'Company') are
as follows:
Income Recognition
Revenues are recognized as the testing and drawing services are performed.
Bad Debts
Bad debts are written off on a direct write off basis.
Inventories
Inventories are stated at the lower of cost or market.
Property and Equipment
Property and equipment are stated at cost, less accumulated depreciation.
Depreciation is calculated over the estimated life of the asset using rates
stipulated under the tax code. The annual provisions for depreciation are
computed using the following range of lives:
<TABLE>
<S> <C>
Leasehold Improvements........................................................ Life of lease
Furniture and Fixtures........................................................ 7 years
Equipment..................................................................... 5 years
</TABLE>
Upon disposition, the cost of the asset and the related accumulated
depreciation are eliminated from the accounts and any gain or loss is included
in the determination of net income.
Federal Income Taxes
Federal income tax is calculated using the rates provided in the tax laws.
Deferred tax assets and liabilities, if any, are determined based upon the
difference between the financial statement and tax basis of assets and
liabilities using currently enacted tax rates. The operations of National Legal
Laboratories, Inc. are consolidated with Group Benefit Services, Inc. for income
tax filing purposes. For financial statement reporting purposes, the tax
provision (benefit) has been calculated on a separate return basis.
Common Stock
Common stock consists of 50,000 shares authorized with 3,000 shares issued
and outstanding.
Use of Estimates
The preparation of financial statements in accordance with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amount of assets and liabilities at the
date of the financial statements, as well as revenues and expenses reported for
the periods presented. The Company regularly assess these estimates and, while
actual results may differ, management believes that the estimates are
reasonable.
F-62
<PAGE>
NATIONAL LEGAL LABORATORIES
NOTES TO FINANCIAL STATEMENTS--(CONTINUED)
SEPTEMBER 30, 1997
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES--(CONTINUED)
Management Fees
Certain members of management are shared with Group Benefit Service, Inc.
who also pay the related salaries and benefits. National Legal Labs, Inc. is
charged a fixed $10,500 per month management fee for such services which is
reflected in selling and administrative expenses. There are no other cost
sharing arrangements with the Company and Group Benefits Services, Inc.
Recent Accounting Pronouncements
Statements of Financial Accounting Standards No. 130, 'Reporting
Comprehensive Income' ('SFAS 130'), and No. 131, 'Disclosures About Segments of
an Enterprise and Related Information' ('SFAS 131'), were issued in June 1997.
SFAS 130 establishes standards for reporting and display of comprehensive
income and its components in a full set of general purpose financial statements.
It requires that all items that are required to be recognized under accounting
standards as components of comprehensive income be reported in a financial
statement that is displayed with the same prominence as the other financial
statements. Comprehensive income is defined as 'the change in equity of a
business during a period from transactions and other events and circumstances
from non-owner sources.' It includes all changes in equity during a period,
except those resulting from investments by owners and distributions to owners.
This statement is effective for fiscal years beginning after December 15, 1997.
SFAS 131 establishes the way that public business enterprises report
information about operating segments in annual financial statements and requires
that those enterprises report selected information about segments in interim
financial reports issued to stockholders. It also establishes standards for
related disclosures about products and services, geographic areas and major
customers. This statement is effective for financial statements beginning after
December 15, 1997.
As the Company does not have material changes in equity other than from
investments by owners and distributions to owners and operates in a single
segment the implementation of both these standards are not expected to have a
material effect on the Company.
3. NOTES PAYABLE
<TABLE>
<CAPTION>
Notes payable at September 30, 1997 consist of the following:
SEPTEMBER 30,
1997
-------------
<S> <C>
Note payable to bank with monthly payments of $467, (including principal and
interest at 7.858%).................................................................... $ 10,003
Line of credit with bank, secured by the assets of the company; maximum amount of line
$97,000 at .5% above prime............................................................. 97,000
Note payable to bank with monthly payments of $327, (including principal and interest at
10.75%) secured by equipment........................................................... 9,058
Note payable to creditor with monthly payments of $1,742, (including principal and
interest at 16.25%) secured by equipment............................................... 69,685
Note payable to creditor with monthly payments of $1,705, (including principal and
interest at 16.25%) secured by equipment............................................... 68,993
Note payable to creditor with monthly payments of $1,388, (including principal and
interest at 18.25%) secured by equipment............................................... 51,192
Line of credit with creditor secured by assets of the company. Maximum amount of credit
$300,000 at 10% above prime............................................................ 159,316
Line of credit with employee............................................................. 100,000
-------------
565,247
Less Current Portion..................................................................... 129,881
-------------
Total.................................................................................... $ 435,366
-------------
-------------
</TABLE>
F-63
<PAGE>
NATIONAL LEGAL LABORATORIES
NOTES TO FINANCIAL STATEMENTS--(CONTINUED)
SEPTEMBER 30, 1997
3. NOTES PAYABLE--(CONTINUED)
All of the above notes payable to a bank were guaranteed by the
shareholders.
Future minimum payments under loan agreements at September 30, 1997 are as
follows:
<TABLE>
<CAPTION>
YEAR ENDING SEPTEMBER 30,
- --------------------------------------------------------------------------------------------
<S> <C>
1999........................................................................................ $200,388
2000........................................................................................ 40,982
2001........................................................................................ 45,492
2002........................................................................................ 148,504
--------
$435,366
--------
--------
</TABLE>
4. COMMITMENTS AND CONTINGENCIES
The Company currently pays $6,487 a month for a lease at its current
location. The lease expires on July 31, 1998.
5. CASH FLOW INFORMATION
The Company considers all short-term investments with an original maturity
of three months or less to be cash equivalents.
Cash paid for interest and income taxes for 1997 was as follows:
<TABLE>
<CAPTION>
1997
-------
<S> <C>
Interest................................................................. $50,137
-------
Income Taxes............................................................. $ 0
-------
-------
</TABLE>
6. ECONOMIC DEPENDENCY
The National Legal Laboratories division, performs laboratory work
primarily for the Michigan Department of Social Services under a contract which
requires renewal under a bid process every three years. The contract was renewed
and expires on September 30, 1998, with one year renewable options for two
additional years. The revenues under this contract amounted to $756,570 for the
year ended September 30, 1997 representing 37% of the total revenues received in
1997.
The Company has become an authorized vendor with the States of Illinois,
Wisconsin, Minnesota, Indiana, Pennsylvania and the City of Baltimore.
7. BENEFIT PLANS
The Company adopted a 401(k) pension plan in 1995 and contributed $3,424 in
1997. Employees must be employed for one year before they are eligible to
participate. Contributions are matched by the Company based on a percentage of
income contributed by each employee.
An employee must be employed by the Company for 6 years before they are
fully vested in Company matching contributions.
The Company adopted a cafeteria benefit plan in 1995. The Company allocates
from their funds $214 per month for each employee. The employees may choose from
several different options. Any monies not used at the end of the year are
forfeited back to the Company. If the employee chooses options that exceed their
allotment, the excess is deducted from their wages.
F-64
<PAGE>
NATIONAL LEGAL LABORATORIES
NOTES TO FINANCIAL STATEMENTS--(CONTINUED)
SEPTEMBER 30, 1997
8. RELATED PARTIES
Certain officers and directories of National Legal Laboratories are also
officers and directors of the parent company Group Benefit Services, Inc. and
other assorted ventures (Group Benefit Services Care, Inc., J & D Associates,
and School Administrative Services). These officers and directors have
significant stockholdings/ownership in all companies and/or partnerships.
9. SUBSEQUENT EVENT
This division was sold to a third party in February, 1998 for stock and
assets. The estimated proceeds to be recognized from this sale are $771,744.
* * * * * *
F-65
<PAGE>
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
NO DEALER, SALESPERSON OR OTHER INDIVIDUAL HAS BEEN AUTHORIZED TO GIVE ANY
INFORMATION OR TO MAKE ANY REPRESENTATIONS IN CONNECTION WITH THIS OFFERING
OTHER THAN THOSE CONTAINED IN THIS PROSPECTUS, AND, IF GIVEN OR MADE, SUCH
INFORMATION OR REPRESENTATION MUST NOT BE RELIED UPON AS HAVING BEEN AUTHORIZED
BY THE COMPANY, THE SELLING STOCKHOLDERS, THE UNDERWRITERS OR ANY DEALER OR
AGENT. THIS PROSPECTUS DOES NOT CONSTITUTE AN OFFER TO SELL OR THE SOLICITATION
OF ANY OFFER TO BUY THE COMMON STOCK TO ANY PERSON IN ANY JURISDICTION WHERE, OR
IN ANY CIRCUMSTANCE IN WHICH, SUCH OFFER OR SOLICITATION MAY NOT LEGALLY BE
MADE. NEITHER THE DELIVERY OF THIS PROSPECTUS NOR ANY SALE MADE HEREUNDER SHALL,
UNDER ANY CIRCUMSTANCES, CREATE ANY IMPLICATION THAT THERE HAS NOT BEEN ANY
CHANGE IN THE AFFAIRS OF THE COMPANY OR THE INFORMATION SET FORTH IN THE
PROSPECTUS IS CORRECT AS OF ANY TIMES SUBSEQUENT TO THE DATE OF THIS PROSPECTUS.
------------------------
TABLE OF CONTENTS
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
Prospectus Summary............................. 3
Risk Factors................................... 6
The Company.................................... 15
Use of Proceeds................................ 15
Dividend Policy................................ 15
Capitalization................................. 16
Dilution....................................... 17
Selected Historical Consolidated Financial
Data......................................... 18
Unaudited Pro Forma Condensed Combined
Financial Data............................... 19
Management's Discussion and Analysis of
Financial Condition and Results of
Operations................................... 25
Business....................................... 34
Management..................................... 51
Certain Transactions........................... 58
Principal and Selling Stockholders............. 60
Description of Capital Stock................... 62
Shares Eligible for Future Sale................ 64
Underwriting................................... 66
Legal Matters.................................. 67
Experts........................................ 68
Available Information.......................... 68
Index to Financial Statements.................. F-1
</TABLE>
------------------------
UNTIL , 1998 (25 DAYS AFTER THE DATE OF
THIS PROSPECTUS), ALL DEALERS EFFECTING TRANSACTIONS IN THE COMMON STOCK,
WHETHER OR NOT PARTICIPATING IN THIS DISTRIBUTION, MAY BE REQUIRED TO DELIVER A
PROSPECTUS. THIS DELIVERY REQUIREMENT IS IN ADDITION TO THE OBLIGATION OF
DEALERS TO DELIVER A PROSPECTUS WHEN ACTING AS UNDERWRITERS AND WITH RESPECT TO
THEIR UNSOLD ALLOTMENTS OR SUBSCRIPTIONS.
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
3,200,000 SHARES
[LOGO]
COMMON STOCK
------------------------
PROSPECTUS
, 1998
------------------------
VOLPE BROWN WHELAN & COMPANY
VECTOR SECURITIES INTERNATIONAL, INC.
ADVEST, INC.
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
<PAGE>
(ALTERNATE PAGE FOR ACQUISITION PROSPECTUS)
INFORMATION CONTAINED HEREIN IS SUBJECT TO COMPLETION OR AMENDMENT. A
REGISTRATION STATEMENT RELATING TO THESE SECURITIES HAS BEEN FILED WITH THE
SECURITIES AND EXCHANGE COMMISSION. THESE SECURITIES MAY NOT BE SOLD NOR MAY
OFFERS TO BUY BE ACCEPTED PRIOR TO THE TIME THE REGISTRATION STATEMENT BECOMES
EFFECTIVE. THIS PROSPECTUS SHALL NOT CONSTITUTE AN OFFER TO SELL OR THE
SOLICITATION OF ANY OFFER TO BUY NOR SHALL THERE BE ANY SALE OF THESE SECURITIES
IN ANY STATE IN WHICH SUCH OFFER, SOLICITATION OR SALE WOULD BE UNLAWFUL PRIOR
TO REGISTRATION OR QUALIFICATION UNDER THE SECURITIES LAWS OF ANY SUCH STATE.
SUBJECT TO COMPLETION, DATED SEPTEMBER 3, 1998
PROSPECTUS
681,818 SHARES
[LOGO]
COMMON STOCK
------------------------
All of the 681,818 shares of Common Stock offered hereby are being offered
by Lifecodes Corporation (the 'Company') pursuant to an Agreement and Plan of
Merger (the 'Plan of Merger') between the Company and GeneScreen Inc.
('GeneScreen') and certain stockholders of GeneScreen. Pursuant to the Plan of
Merger, the Company is acquiring all of the issued and outstanding capital stock
of GeneScreen in consideration for $5.0 million in cash, subject to certain
post-closing adjustments, and the number of shares equal to $7.5 million divided
by $ , the price to public in the Company's concurrent initial public
offering (the 'IPO'). Prior to this offering and the concurrent IPO, there has
been no public market for the Common Stock of the Company. It is currently
anticipated that the initial public offering price of the Common Stock offered
in the IPO will be between $10 and $12 per share. The Common Stock has been
approved for quotation on the Nasdaq National Market, subject to official notice
of issuance, under the symbol 'LFCD.'
------------------------
THE COMMON STOCK OFFERED HEREBY INVOLVES A HIGH DEGREE OF RISK.
SEE 'RISK FACTORS' ON PAGES 6-14.
------------------------
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND
EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION NOR HAS THE
SECURITIES AND EXCHANGE COMMISSION OR ANY STATE SECURITIES
COMMISSION PASSED UPON THE ACCURACY OR ADEQUACY OF THIS
PROSPECTUS. ANY REPRESENTATION TO THE CONTRARY IS A CRIMINAL
OFFENSE.
------------------------
THE DATE OF THIS PROSPECTUS IS , 1998
<PAGE>
(ALTERNATE PAGE FOR ACQUISITION PROSPECTUS)
[Map showing the locations of the Company's Testing Laboratories
and Primary Offices]
CERTAIN PERSONS PARTICIPATING IN THE IPO MAY ENGAGE IN TRANSACTIONS THAT
STABILIZE, MAINTAIN OR OTHERWISE AFFECT THE PRICE OF THE COMMON STOCK, INCLUDING
BY ENTERING STABILIZING BIDS, EFFECTING SYNDICATE COVERING TRANSACTIONS OR
IMPOSING PENALTY BIDS. FOR A DESCRIPTION OF THESE ACTIVITIES, SEE 'CONCURRENT
INITIAL PUBLIC OFFERING.'
2
<PAGE>
(ALTERNATE PAGE FOR ACQUISITION PROSPECTUS)
PROSPECTUS SUMMARY
The following summary is qualified in its entirety by the more detailed
information, including information set forth in 'Risk Factors,' 'Unaudited Pro
Forma Condensed Combined Financial Data,' and the Consolidated Financial
Statements, including Notes thereto, included elsewhere in this Prospectus.
Unless otherwise indicated, all information in this Prospectus has been adjusted
to give retroactive effect to the split of the Common Stock at the rate of
3.65-for-1, effected August 26, 1998, and assumes (i) the consummation of the
GeneScreen Acquisition described under the heading 'Business--Recent and Pending
Acquisitions' and '-- GeneScreen Acquisition.' to be completed contemporaneously
with the closing of this offering and the Company's initial public offering of
2,900,000 shares of Common Stock at an initial public offering price of
$ , (ii) the Underwriters' over-allotment option is not exercised and
(iii) the conversion of 21,500 shares of Series A Convertible Preference Stock
('Preferred Stock') into 156,950 shares of Common Stock at a rate of 7.3 shares
of Common Stock for each share of Preferred Stock upon the closing of this
offering. This Prospectus contains forward-looking statements which involve
risks and uncertainties. The Company's actual results may differ materially from
those results discussed in those forward-looking statements and from results
historically experienced. Factors that might cause such a difference include,
but are not limited to, those discussed in 'Risk Factors.'
THE COMPANY
Lifecodes is a leading provider of DNA testing services and related
products for human paternity and forensic identification ('identity testing')
and for genetic typing of potential donors and recipients of bone marrow and
organ transplants ('transplant testing'). Paternity testing seeks to establish
the correct identity of a child's parents when such matters are disputed.
Forensic testing seeks to link hair, saliva, blood or other biological specimens
found at a crime scene to an alleged suspect. Transplant testing detects the
genetic sequence of certain human leukocyte antigens ('HLA') contained in DNA
which are believed to be a principal determinant of whether a donor's bone
marrow or organ transplant may be rejected by the recipient's immune system
('rejection') or may attack the recipient's immune system ('graft vs. host
disease'). The Company is one of the largest providers of paternity, forensic
and transplant testing services in the United States and is one of the largest
providers of transplant testing in Germany. In addition to testing services, the
Company offers a product line consisting of reagents and a wide range of DNA
probes, which are sold principally in either standard configurations or
customized test kits.
Lifecodes was the first company to commercially offer DNA testing for
paternity and forensic identification. In 1987, the Company assisted law
enforcement officials in obtaining the first conviction in the United States
based on DNA testing. The Company's Cellmark subsidiary was the first and is one
of only two commercial forensic laboratories accredited by the American Society
of Crime Laboratory Directors for DNA testing and regularly performs casework
and provides expert DNA testimony in criminal cases nationwide. The Company's
HLA test kits are used by the Naval Medical Research Institute and by 15 of the
19 screening laboratories (including two of the Company's laboratories)
performing DNA testing for the National Marrow Donor Program, which together are
generally regarded as being among the most influential institutions worldwide in
setting transplant testing standards.
Historically, the Company has focused on developing and incorporating its
DNA technology into products to be sold as stand-alone test kits and to a lesser
extent as DNA testing services. Since 1997, the Company has emphasized offering
testing services to end-users of DNA testing information in an effort to meet
demand for an integrated DNA testing solution and to take advantage of access to
new DNA testing process technologies from Molecular Dynamics, Inc., Amersham
Pharmacia Biotech Inc. and Molecular Innovations, Inc. which the Company
believes, when fully developed, will improve the speed, quality and breadth of
information provided by its testing services at a reduced cost. In addition, the
Company believes this strategy will allow the Company to exploit opportunities
not otherwise available to it as a marketer of DNA testing products.
Since January 1, 1998, the Company has substantially increased its testing
service revenue base and expanded its market coverage and laboratory
infrastructure by completing the acquisitions of (i) National Legal Laboratories
('NLL'), the fifth largest paternity testing laboratory in the United States,
(ii) International Support for Bone Marrow Drives, Ltd. ('ISBMD'), one of the
largest providers of HLA testing services in Germany,
3
<PAGE>
(ALTERNATE PAGE FOR ACQUISITION PROSPECTUS)
(iii) Micro Diagnostics, Inc. ('MDx'), a full service DNA testing laboratory and
(iv) Helix Biotech Ltd. ('Helix'), a full service DNA testing laboratory serving
the Canadian market (collectively, the 'Recent Acquisitions'). In addition, the
Company has entered into an agreement to acquire GeneScreen Inc. ('GeneScreen')
for cash and stock valued at $12.5 million (the 'GeneScreen Acquisition').
GeneScreen is a leading provider of paternity testing services and had revenues
of $11.2 million during the year ended December 31, 1997. The GeneScreen
Acquisition will close contemporaneously with this offering. See
'Business--Recent and Pending Acquisitions' and '--GeneScreen Acquisition.' The
Company intends to increase its revenue and profitability by leveraging its DNA
testing process technology currently under development across its existing and
acquired laboratory operations and those which it may acquire in the future and,
to a lesser extent, by taking advantage of operational efficiencies brought
about as a result of a larger laboratory infrastructure.
The Company's goal is to be the leading international supplier of
integrated DNA testing solutions. The Company's business strategy to meet this
goal consists of the following primary elements: (i) continuing to improve its
DNA testing process to increase the speed, quality and breadth of information
provided by its testing services and to lower its costs; (ii) pursuing strategic
acquisitions; (iii) expanding internationally through joint venture and
licensing arrangements; (iv) maintaining its industry leadership position by
working to set industry standards; and (v) extending the Company's technologies
into other diagnostic testing areas.
THE OFFERING
<TABLE>
<S> <C>
Common Stock being offered by:
The Company.......................... 681,818 shares
Common Stock to be outstanding after the
offering................................ 6,630,090 shares(1)
Use of proceeds........................... The Company will not receive any cash proceeds from the sale of
shares hereunder. See 'Use of Proceeds.'
Proposed Nasdaq National Market symbol.... LFCD
</TABLE>
- ------------------
(1) Based upon the number of shares outstanding on August 31, 1998. Does not
include: (i) 1,318,854 shares of Common Stock issuable upon the exercise of
stock options and warrants outstanding as of such date, of which 1,061,639
stock options and warrants were then exercisable; and (ii) 1,099,462
additional shares available for grant under the 1992 Employee Stock Option
Plan, the 1995 Employee Stock Option Plan and the 1998 Stock Plan. See
'Management--Stock Option Plans.'
4
<PAGE>
(ALTERNATE PAGE FOR ACQUISITION PROSPECTUS)
SUMMARY HISTORICAL CONSOLIDATED FINANCIAL DATA
<TABLE>
<CAPTION>
NINE MONTHS ENDED
FISCAL YEAR ENDED SEPTEMBER 30, JUNE 30,
--------------------------------------------------------- -----------------------
1993 1994 1995 1996 1997 1997 1998
--------- --------- --------- --------- --------- ----------- ---------
(UNAUDITED)
(IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA)
<S> <C> <C> <C> <C> <C> <C> <C>
STATEMENT OF OPERATIONS DATA:
Revenues........................... $ 2,402 $ 2,628 $ 3,534 $ 7,683 $ 15,065 $ 9,802 $ 16,519
Gross profit....................... 1,137 1,271 2,030 3,679 7,690 4,964 8,169
Income (loss) from operations...... (782) (205) 276 (334) 822 538 1,763
Net income (loss).................. (671) (391) 179 (576) 388 147 951
Net income (loss) per share
Basic............................ $ (0.56) $ (0.26) $ 0.12 $ (0.32) $ 0.18 $ 0.07 $ 0.39
Diluted.......................... $ (0.56) $ (0.26) $ 0.10 $ (0.32) $ 0.14 $ 0.05 $ 0.28
Weighted average common shares
outstanding
Basic............................ 1,199,627 1,498,807 1,555,053 1,803,761 2,159,902 2,161,946 2,426,504
Diluted.......................... 1,199,627 1,498,807 1,792,504 1,803,761 2,792,318 2,795,695 3,363,236
</TABLE>
<TABLE>
<CAPTION>
JUNE 30, 1998
-----------------------------------------
PRO FORMA
ACTUAL PRO FORMA(1) AS ADJUSTED(2)
------- ------------ --------------
(IN THOUSANDS)
<S> <C> <C> <C>
BALANCE SHEET DATA:
Cash and cash equivalents................................................ $ 1,285 $ 1,285 $ 22,549
Working capital.......................................................... 200 (193) 20,323
Total assets............................................................. 14,280 15,533 44,560
Total indebtedness(3).................................................... 3,750 4,400 4,232
Stockholders' equity..................................................... 4,124 4,626 32,102
</TABLE>
- ------------------
(1) Pro forma to reflect the acquisition of Helix as if it occurred on June 30,
1998. See 'Business--Recent and Pending Acquisitions.'
(2) Adjusted to reflect the consummation of the GeneScreen Acquisition and the
sale of 2,900,000 shares of Common Stock offered by the Company in the IPO
at an assumed initial public offering price of $11.00 per share and the
application of the estimated net proceeds therefrom. See 'Capitalization.'
(3) Includes short-term and long-term borrowings and current maturities of
long-term debt including capital lease obligations. Also includes
approximately $931,000 of accounts receivable financing.
5
<PAGE>
(ALTERNATE PAGE FOR ACQUISITION PROSPECTUS)
dangerous or radioactive materials and other matters. Delays in receipt of or
failure to receive such approvals or clearances, the loss of previously received
approvals or clearances or failure to comply with existing or future regulatory
requirements could have a material adverse effect on the Company's business,
financial condition and results of operations. See 'Business--Government
Regulation.'
Product Liability Exposure; Inadequacy or Unavailability of Insurance. The
testing, manufacturing and marketing of the Company's products and services
entails an inherent risk of product liability claims. To date, the Company has
not experienced any product liability claims, but any such claims arising in the
future could have a material adverse effect on the Company's business, financial
condition and results of operations. The Company currently has $5 million of
product liability/clinical liability insurance coverage. Potential product
liability claims may exceed the amount of the Company's insurance coverage or
may be excluded from coverage under the terms of the policy. There can be no
assurance that the Company's insurance can be renewed at a cost and level of
coverage comparable to that then in effect. Any claims against the Company,
regardless of their merit or eventual outcome, could have a material adverse
effect upon the Company's business, financial condition and results of
operations.
Control by Management and Directors. After this offering, the executive
officers and directors of the Company (and their affiliates) will beneficially
own approximately 33.2% of the outstanding Common Stock (approximately 30.2% if
the Underwriters' over-allotment option is exercised in full). As a result,
while there is no agreement among the executive officers and directors of the
Company as to the voting of their Common Stock, if they vote together, they
could effectively control the outcome of matters requiring a stockholder vote,
including the election of directors, adopting or amending provisions of the
Company's Certificate of Incorporation and Bylaws, and approving mergers or
other similar transactions, such as sales of substantially all of the Company's
assets. Control by the executive officers and directors could have the effect of
discouraging certain types of transactions involving an actual or potential
change of control of the Company, including transactions in which the holders of
Common Stock might otherwise receive a premium for their shares over then
current market prices. In addition, the possibility of such persons exercising
such control may limit the price that certain investors may be willing to pay in
the future for shares of the Common Stock. Purchasers in this offering will
become minority stockholders of the Company and will be unable to control the
management or business policies of the Company. The Company's Certificate of
Incorporation does not provide for cumulative voting in the election of
directors. See 'Management' and 'Principal and Selling Stockholders.'
Future Capital Needs; Uncertainty of Availability of Additional
Financing. The Company believes that the anticipated net proceeds from the IPO,
together with interest thereon and the Company's existing capital resources,
will be sufficient to fund its operations for at least the next twelve months.
However, the Company's future liquidity and capital requirements will depend
upon numerous factors, including the resources required to improve its testing
system, to consummate additional acquisitions which may be undertaken, or to
further develop its sales and marketing capabilities domestically and
internationally. There can be no assurance that the Company will not require
additional financing or will not in the future seek to raise additional funds
through equity or debt offerings, bank facilities, or other sources of capital.
Additional funding may not be available when needed or on terms acceptable to
the Company, which would have a material adverse effect on the Company's
business, financial condition and results of operations. See 'Use of Proceeds'
and 'Management's Discussion and Analysis of Financial Condition and Results of
Operations--Liquidity and Capital Resources.'
Potential Issuance of Preferred Stock; Anti-takeover Effects of Certificate
of Incorporation and Delaware Law. The Company's Certificate of Incorporation
authorizes the issuance of 1,000,000 shares of Preferred Stock with such
designations, rights and preferences as may be determined from time to time by
the Company's Board of Directors (the 'Board'), without any further vote or
action by the Company's stockholders. The rights of the holders of the Common
Stock will be subject to, and may be adversely affected by, the rights of the
holders of any Preferred Stock that may be issued in the future. The issuance of
Preferred Stock, while providing desirable flexibility in connection with
possible acquisitions and other corporate purposes, could have the effect of
making it more difficult for a third party to acquire a majority of the
outstanding voting stock of the Company, thereby delaying, deferring or
preventing a change in control of the Company. Furthermore, such Preferred Stock
may have other rights, including economic rights senior to the Common Stock, and
as a result, the issuance of such Preferred Stock could have a material adverse
effect on the market value of the Common Stock. Although the Company has no
present intention to issue any shares of its Preferred Stock, there can be no
assurance that the Company will not do so in the future. These provisions, as
well as other provisions contained in the Company's
12
<PAGE>
(ALTERNATE PAGE FOR ACQUISITION PROSPECTUS)
Certificate of Incorporation, may also have the effect of discouraging, delaying
or preventing a change in control of the Company. See 'Description of Capital
Stock.'
In addition, the Company's Certificate of Incorporation provides for a
staggered Board of Directors. Certain provisions of Delaware law applicable to
the Company could also delay or make more difficult a merger, tender offer or
proxy contest involving the Company, including Section 203 of the Delaware
General Corporation Law, which prohibits a Delaware corporation from engaging in
any business combination with any interested stockholder for a period of three
years unless certain conditions are met. The potential issuance of Preferred
Stock, the existence of a staggered Board of Directors, and provisions of
Delaware law could have the effect of delaying, deferring or preventing a change
in control of the Company, including without limitation, discouraging a proxy
contest, making more difficult the acquisition of a substantial block of the
Common Stock or limiting the price that investors might be willing to pay in the
future for shares of the Common Stock.
Year 2000 Risks. The Company has initiated communications with its
software vendors to determine the extent to which the Company is vulnerable to
those third parties' failure to remediate the Year 2000 issue. The Company
relies on the ability of its outside software vendors for remedial action. There
can be no assurance that the systems of these third party software vendors on
which the Company relies will be converted on a timely basis, or that a failure
to convert by another company, or a conversion that is incompatible with the
Company's systems, would not have a material adverse effect on the Company. The
total remaining cost of completion of the Company's Year 2000 compliance plan is
estimated to be less than $100,000 and will be funded through operating cash
flows. The costs of the project and the date on which the Company plans to
complete the Year 2000 modifications are based on management's best estimates,
which were derived utilizing numerous assumptions of future events, including
the continued availability of certain resources, third party modification plans
and other factors. However, there can be no assurance that these estimates will
be achieved and actual results could differ materially from those plans. Any
disruption of its operations caused by the computer systems of any of the
Company's vendors or customers could have a material adverse effect on the
Company's financial position or results of operations, including customer
satisfaction issues and potential lawsuits. In addition, there can be no
assurance that the Company will not experience significant cost overruns or
delays in connection with upgrading software or the programming of changes
required to address the Year 2000 issue. See 'Management's Discussion and
Analysis of Financial Condition and Results of Operations--Year 2000.'
Shares Eligible for Future Sale. Sales of a substantial number of shares
of the Common Stock in the public market following this offering, or the
perception that such sales could occur, could materially adversely affect the
prevailing market price of the Common Stock. Immediately after completion of
this offering, the Company will have 6,630,090 shares of Common Stock
outstanding, of which the 681,818 shares offered hereby and the 3,200,000 shares
offered pursuant to the concurrent IPO will be eligible for sale without regard
to volume or other limitations pursuant to Rule 144 ('Rule 144') under the
Securities Act of 1933, as amended (the 'Securities Act'), unless purchased by
'affiliates' of the Company as that term is defined under Rule 144. The Company,
its executive officers, directors and certain stockholders, who in the aggregate
own 2,533,541 of the remaining outstanding shares of Common Stock, have agreed
pursuant to lock-up agreements that they will not sell or otherwise dispose of
any shares of Common Stock beneficially owned by them (except for shares sold in
this offering) for a period of 180 days from the date of this Prospectus other
than as bona fide gifts or as distributions to the stockholders or limited
partners of certain stockholders, provided that, in either event, the transferee
agrees to be bound by similar restrictions. Such agreements provide that Volpe
Brown Whelan & Company, LLC may, in its sole discretion, and at any time or from
time to time, without notice, release all or any portion of the shares subject
to these lock-up agreements. Upon the expiration of these lock-up agreements,
all of such outstanding shares will become immediately eligible for sale in the
public market, subject in some cases to the volume and other restrictions of
Rule 144 or Rule 701 under the Securities Act. Promptly after the date of this
Prospectus, the Company intends to register on one or more registration
statements on Form S-8 all shares of Common Stock issuable under its stock
option plans. Shares covered by such registration statements will be eligible
for sale in the public market after the effective date of such registration. In
addition, the holders of 467,491 shares of Common Stock (103,607 shares if the
Underwriters' over-allotment option is
13
<PAGE>
(ALTERNATE PAGE FOR ACQUISITION PROSPECTUS)
exercised in full) are entitled to certain registration rights with respect to
such shares. If such holders, by exercising their registration rights, cause a
large number of shares to be registered and sold in the public market, such
sales may have a material adverse effect on the market price of the Common
Stock. See 'Management-- Executive Compensation' and '--Stock Option Plans,'
'Description of Capital Stock' and 'Shares Eligible for Future Sale.'
No Prior Public Market; Possible Volatility of Stock Price. Prior to this
offering, there has been no public market for the Common Stock and there can be
no assurance that an active public market for the Common Stock will develop or
be sustained after this offering. The initial public offering price will be
determined through negotiations between the Company and the Underwriters and may
bear no relationship to the price at which the Common Stock will trade after the
closing of this offering. In addition, the securities markets have from time to
time experienced significant price and volume fluctuations that are unrelated to
the operating performance of particular companies. The market prices of the
common stock of many publicly held medical diagnostics companies have in the
past been, and may in the future be, especially volatile. Announcements of
technological innovations or new services or products by the Company or its
competitors, release of reports by securities analysts, developments or disputes
concerning patents or proprietary rights, regulatory developments, economic and
other external factors, as well as period-to-period fluctuations in the
Company's financial results, may have a significant impact on the market price
of the Common Stock. In the past, securities class action litigation has often
been instituted following periods of volatility in the market price of a
company's securities. Such litigation could result in substantial costs and a
diversion of management attention and resources, either of which could have a
material adverse effect on the Company's business, financial condition and
results of operations.
Immediate and Substantial Dilution. Purchasers of shares of Common Stock
in this offering will incur immediate and substantial dilution in the pro forma
net tangible book value per share from the public offering price. In addition,
investors purchasing shares in this offering will incur additional dilution to
the extent that Company stock options and warrants (whether currently
outstanding or subsequently issued or granted) are exercised. See 'Dilution.'
Lack of Dividends. The Company currently intends to retain all earnings,
if any, for future growth and, therefore, does not intend to pay cash dividends
on the Common Stock in the foreseeable future. See 'Dividend Policy.'
14
<PAGE>
(ALTERNATE PAGE FOR ACQUISITION PROSPECTUS)
THE COMPANY
Lifecodes Corporation was incorporated in New York in April 1982 and was
purchased by, and became a wholly-owned subsidiary of, Quantum Chemical
Corporation ('Quantum') in 1985. In September 1991, existing management and
stockholders acquired all of Quantum's interest in the Company and relocated the
Company to Stamford, Connecticut. The Company reincorporated in Delaware in
January 1993. In March 1996, the Company acquired Cellmark, a division of
Zeneca, plc. In February 1997, the Company, ISBMD and its founders formed
Medical Molecular Diagnostics GmbH ('MMD') to perform HLA testing in Germany. In
October 1997, the Company acquired a controlling interest in MMD.
In 1998, the Company has completed or has pending a number of acquisitions
as part of its strategic plan, including the recently completed acquisitions of
National Legal Laboratories (the 'NLL Acquisition'), International Support for
Bone Marrow Drives, Ltd. (the 'ISBMD Acquisition'), Micro Diagnostics, Inc. (the
'MDx Acquisition'), Helix Biotech Ltd. (the 'Helix Acquisition'), and the
pending acquisition of GeneScreen Inc. (the 'GeneScreen Acquisition,' and
together with the NLL Acquisition, the ISBMD Acquisition, the MDx Acquisition
and the Helix Acquisition, the 'Recent and Pending Acquisitions'). See
'Business--Recent and Pending Acquisitions' and '--GeneScreen Acquisition.'
The Company's principal executive offices are located at 550 West Avenue,
Stamford, Connecticut 06902 and its telephone number is (203) 328-9500.
USE OF PROCEEDS
The Company will not receive any cash proceeds from the offering of shares
pursuant to the GeneScreen Acquisition. The net proceeds to the Company from the
concurrent IPO, after deducting underwriting discounts and commissions and
estimated expenses payable by the Company in connection with such offering, are
estimated to be approximately $28.5 million assuming an initial public offering
price of $11.00 per share. The Company will not receive any of the proceeds from
the sales of Common Stock by the Selling Stockholders. See 'Principal and
Selling Stockholders.'
From time to time in the ordinary course of business, the Company evaluates
the potential acquisition of businesses and technologies that complement the
Company's business, for which a portion of the net proceeds may be used.
Currently, the Company does not have any commitments or agreements with respect
to any such acquisitions other than with respect to the GeneScreen Acquisition.
See 'Business--Recent and Pending Acquisitions' and '--GeneScreen Acquisition.'
Pending such uses, the net proceeds will be invested in short-term, investment
grade securities.
DIVIDEND POLICY
Lifecodes Corporation has never declared or paid any cash dividends on the
Common Stock and does not anticipate paying cash dividends on the Common Stock
in the foreseeable future. The payment of any future dividends will be at the
discretion of the Company's Board of Directors and will depend upon, among other
things, future earnings, operations, capital requirements, the general financial
condition of the Company, contractual restrictions and general business
conditions. In addition, the Company's credit facility prohibits the payment of
dividends without the consent of First Union National Bank.
15
<PAGE>
(ALTERNATE PAGE FOR ACQUISITION PROSPECTUS)
PRINCIPAL AND SELLING STOCKHOLDERS
The following table sets forth certain information regarding the beneficial
ownership of the Company's Common Stock as of the date of this Prospectus and as
adjusted to reflect the sale of the shares of Common Stock offered hereby by:
(i) each person known by the Company to be the beneficial owner of more than 5%
of the Company's Common Stock; (ii) each of the Company's directors; (iii) each
Named Executive Officer (see 'Management--Executive Compensation.'); (iv) all
directors and executive officers of the Company as a group; and (v) each Selling
Stockholder in the concurrent IPO.
<TABLE>
<CAPTION>
BENEFICIAL OWNERSHIP BENEFICIAL OWNERSHIP
PRIOR TO THE OFFERING(1) AFTER OFFERING(1)(2)
-------------------------- -----------------------
NUMBER OF IPO SHARES NUMBER OF
NAME OF BENEFICIAL OWNER(3) SHARES PERCENTAGE OFFERED(4) SHARES PERCENTAGE
- --------------------------------------------- --------- ---------- ---------- --------- ----------
<S> <C> <C> <C> <C> <C>
Richard A. Sandberg(5)....................... 80,300 2.6% -- 80,300 1.2%
Walter O. Fredericks(6)...................... 586,301 18.2 -- 586,301 8.6
Ivan Balazs, Ph.D.(7)........................ 178,120 5.7 -- 178,120 2.7
Michael T. Petrillo(8)....................... 84,315 2.7 -- 84,315 1.3
Jacob Victor, Ph.D.(9)....................... 146,183 4.7 -- 146,183 2.2
Michael L. Baird, Ph.D.(10).................. 107,675 3.5 -- 107,675 1.6
Dean L. Somer(11)............................ 77,745 2.5 -- 77,745 1.2
Joseph I. Bishop(12)......................... 560,939 18.7 -- 560,939 8.7
Keith W. Brown(13)........................... 0 -- -- 0 --
Claude L. Buller(14)......................... 182,500 6.0 -- 182,500 2.8
Prof. Dr. Gerhard Ehninger(14)............... 182,500 6.0 -- 182,500 2.8
Dean E. Fenton(15)........................... 35,975 1.2 -- 35,975 *
John A. Hansen, M.D.......................... 0 -- -- 0 --
Ross V. Hickey, Jr.(16)...................... 139,047 4.6 -- 139,047 2.1
Milton Steele(17)............................ 309,082 10.1 -- 9,082 *
Crossroads Constitution L.P.(18)............. 274,058 8.5 -- 274,058 4.0
FMC Corporation (19)......................... 309,082 10.1 300,000 9,082 *
Connecticut Innovations, Incorporated(20).... 206,225 6.7 -- 206,225 3.1
Connecticut Development Authority(21)........ 184,264 5.7 -- 184,264 2.7
All directors and executive officers as a
group (15 persons)(22)..................... 2,690,557 74.3% 2,390,557 33.2%
</TABLE>
- ------------------
* Indicates less than 1%.
(1) Assumes conversion of all of the Company's outstanding Series A Convertible
Preference Stock on a 7.3 for one basis into Common Stock. Unless otherwise
indicated below, the persons and entities named in the table have sole
voting and investment power with respect to all shares beneficially owned.
Shares of Common Stock subject to options that are currently exercisable or
are exercisable within 60 days from the date of this Prospectus are deemed
to be outstanding and to be beneficially owned by the person holding such
options for the purpose of computing the percentage ownership of such
person but are not treated as outstanding for the purpose of computing the
percentage ownership of any other person.
(2) Assumes that the Underwriters' over-allotment option to purchase up to an
additional 480,000 shares from certain Selling Stockholders is not
exercised. Also assumes the issuance of 681,818 shares of Common Stock in
connection with the GeneScreen Acquisition.
(3) See 'Management--Executive Officers and Directors.' Unless otherwise
indicated, the address of each beneficial owner is c/o Lifecodes
Corporation, 550 West Avenue, Stamford, Connecticut 06902.
(Footnotes continued on next page)
60
<PAGE>
(ALTERNATE PAGE FOR ACQUISITION PROSPECTUS)
SHARES ELIGIBLE FOR FUTURE SALE
Upon completion of this offering, the Company will have 6,630,090 shares of
Common Stock outstanding (based upon shares of Common Stock outstanding as of
the date of this Prospectus, the conversion of all outstanding shares of Series
A Convertible Preference Stock, the issuance of 681,818 shares in this offering
pursuant to the GeneScreen Acquisition and assuming no exercise of outstanding
stock options). Of these shares, the 3,200,000 shares sold in the concurrent IPO
will be freely tradable without restriction or further registration under the
Securities Act, except that any shares purchased by 'affiliates' of the Company,
as that term is defined in Rule 144 ('Rule 144') under the Securities Act
('Affiliates'), may generally only be sold in compliance with the limitations of
Rule 144 described below. The remaining 2,748,272 shares of Common Stock (the
'Restricted Shares') held by existing stockholders upon completion of this
offering, other than holders pursuant to the GeneScreen Acquisition, will be
'restricted' securities within the meaning of Rule 144 and may not be sold
except in compliance with the registration requirements of the Securities Act or
an applicable exemption under the Securities Act, including an exemption
pursuant to Rule 144.
SALES OF RESTRICTED SHARES
Beginning 180 days after the date of this Prospectus, approximately
1,744,487 Restricted Shares subject to lock-up agreements (the 'Lock-up
Agreements') between the Underwriters and certain stockholders, including
officers and directors, will become eligible for sale in the public market
pursuant to Rule 144(k), Rule 144 or Rule 701. In addition, certain existing
holders of an aggregate of 467,491 shares of Common Stock have the right to
require registration of their shares under certain circumstances. However, such
stockholders and holders of Common Stock pursuant to the GeneScreen Acquisition
have entered into Lock-up Agreements with respect to all shares owned by them
and not sold in this offering, which provide that they will not sell or
otherwise dispose of any shares of Common Stock (except for shares sold in this
offering) without the prior written consent of Volpe Brown Whelan & Company, LLC
for a period of 180 days from the date of this Prospectus other than bona fide
gifts or distributions to the stockholders or limited partners of such
stockholders, provided that, in either event, the transferee agrees to be bound
by similar restrictions. Volpe Brown Whelan & Company, LLC may, in its sole
discretion, and at any time or from time to time, without notice, release all or
any portion of the securities subject to the Lock-up Agreements. See
'--Registration Rights' and 'Concurrent Initial Public Offering.'
In general, under Rule 144 as currently in effect, a person (or persons
whose shares are aggregated), including an Affiliate, who has beneficially owned
Restricted Shares for at least one year (including the holding period of certain
prior owners) is entitled to sell in 'brokers' transactions' or to market
makers, within any three-month period commencing 90 days after the Company
becomes subject to reporting requirements of Section 13 of the Exchange Act, a
number of such shares that does not exceed the greater of (i) one percent of the
then outstanding shares of Common Stock (approximately 66,300 shares immediately
after this offering) or (ii) the average weekly trading volume in the Common
Stock on the Nasdaq National Market during the four calendar weeks preceding the
date on which notice of such sale is filed. Sales under Rule 144 are also
subject to certain limitations on manner of sale, notice requirements and
availability of current public information about the Company. In addition, under
Rule 144(k), a person who is not an Affiliate and has not been an Affiliate for
at least three months prior to the sale and who has beneficially owned
Restricted Shares for at least two years may resell such shares without regard
to the limitations described above. In meeting the one and two year holding
periods described above, a holder of Restricted Shares can include the holding
periods of a prior owner who was not an Affiliate. Further, Rule 144A under the
Securities Act as currently in effect permits the immediate sale of restricted
shares to certain qualified institutional buyers without regard to the volume
restrictions described above.
STOCK OPTIONS
In general, under Rule 701 of the Securities Act as currently in effect,
any employee, consultant or advisor of the Company who purchased shares from the
Company in connection with a compensatory stock or option plan or other written
compensatory agreement is entitled to resell such shares without having to
comply with the public-information, holding-period, volume-limitation or notice
provisions of Rule 144, and Affiliates are entitled to sell their Rule 701
shares under Rule 144 without having to comply with Rule 144's holding period
restrictions, in each case commencing 90 days after the Company becomes subject
to the reporting requirements
64
<PAGE>
(ALTERNATE PAGE FOR ACQUISITION PROSPECTUS)
CONCURRENT INITIAL PUBLIC OFFERING
Subject to the terms and conditions of the Underwriting Agreement, the
Company has agreed to sell to each of the underwriters named below (the
'Underwriters'), and each of such Underwriters, for whom Volpe Brown Whelan &
Company, LLC, Vector Securities International, Inc. and Advest, Inc.
(collectively, the 'Representatives'), are acting as representatives, have
agreed severally to purchase from the Company, the respective number of shares
of Common Stock set forth opposite its name below. The Underwriters are
committed to purchase and pay for all shares if any shares are purchased.
<TABLE>
<CAPTION>
NUMBER
UNDERWRITERS OF SHARES
- -------------------------------------------------------------------------------------------- ---------
<S> <C>
Volpe Brown Whelan & Company, LLC...........................................................
Vector Securities International, Inc........................................................
Advest, Inc.................................................................................
---------
Total..................................................................................
---------
---------
</TABLE>
The Representatives have advised the Company that the Underwriters propose
to offer the shares of Common Stock to the public at the initial public offering
price set forth on the cover page of this Prospectus and to certain dealers at
such price less a concession not in excess of $ per share, of which $
per share may be reallowed to other dealers. After the initial public offering,
the public offering price, concession and reallowance to dealers may be reduced
by the Representatives. No such reduction shall change the amount of proceeds to
be received by the Company as set forth on the cover page of this Prospectus.
Certain Selling Stockholders have granted the Underwriters an option for 45
days after the date of this Prospectus to purchase, at the initial public
offering price less the underwriting discounts and commissions set forth on the
cover page of this Prospectus, up to 480,000 additional shares of Common Stock
at the same price per share as the Company and the Selling Stockholders receive
for the 3,200,000 shares of Common Stock offered hereby, solely to cover
over-allotments, if any. If the Underwriters exercise their over-allotment
option, the Underwriters have severally agreed, subject to certain conditions,
to purchase approximately the same percentage thereof that the number of shares
of Common Stock to be purchased by each of them, as shown in the foregoing
table, bears to the 3,200,000 shares of Common Stock offered hereby. The
Underwriters may exercise such option only to cover the over-allotments in
connection with the sale of the 3,200,000 shares of Common Stock offered hereby.
To the extent that the Underwriters exercise such over-allotment option in part,
such shares shall be purchased pro-rata among the Company and the individual
Selling Stockholders.
Certain of the Company's executive officers, directors and existing
stockholders owning in the aggregate 2,533,541 shares of Common Stock have
agreed not to offer, pledge, sell, contract to sell, make any short sale or
otherwise dispose of any shares of Common Stock, options to acquire shares of
Common Stock or securities convertible into or exchangeable for shares of Common
Stock, or any rights to purchase or acquire shares of Common Stock, during the
180 day period following the date of this Prospectus, without the prior written
consent of Volpe Brown Whelan & Company, LLC. The Company also has agreed not to
offer, sell, contract to sell or otherwise dispose of any shares of Common Stock
or any securities convertible into or exchangeable for shares of Common Stock,
or any rights to purchase or acquire shares of Common Stock, during the 180 day
period following the date of this Prospectus without the prior written consent
of Volpe Brown Whelan & Company, LLC, except for the granting of options
pursuant to the Plan or the issuance of shares of Common Stock upon the
66
<PAGE>
(ALTERNATE PAGE FOR ACQUISITION PROSPECTUS)
exercise of outstanding options or in connection with acquisitions. Volpe Brown
Whelan & Company, LLC, in its discretion, may waive the foregoing restrictions
in whole or in part, with or without a public announcement of such action. In
recent offerings in which it has served as lead manager of underwriters, Volpe
Brown Whelan & Company, LLC has consented to early releases from lock-up
agreements only in a limited number of circumstances, after considering all
circumstances that it deemed to be relevant. Volpe Brown Whelan & Company, LLC
will have, however, complete discretion in determining whether to consent to
early releases from the lock-up agreements delivered in connection with this
offering, and no assurance can be given that it will not consent to the early
release of all or a portion of the shares of Common Stock and options covered by
such lock-up agreements.
The Representatives have informed the Company that the Underwriters do not
intend to confirm sales to accounts over which the Underwriters have
discretionary authority.
Prior to this offering, there has been no public trading market for the
Common Stock. Consequently, the initial public offering price of the Common
Stock has been determined by negotiations between the Company and the
Representatives. Among the factors considered in such negotiations were the
results of operations of the Company in recent periods, the prospects for the
Company and the industry in which the Company competes, an assessment of the
Company's management, its financial condition, the prospects for future earnings
of the Company, the present state of the Company's development, the general
condition of the economy and the securities markets at the time of this offering
and the market prices of and demand for publicly traded stock of comparable
companies in recent periods.
In connection with this offering, certain Underwriters and selling group
members and their respective affiliates may engage in transactions that
stabilize, maintain or otherwise affect the market price of the Common Stock.
Such transactions may include stabilization transactions effected in accordance
with Rule 104 of Regulation M, pursuant to which such persons may bid for or
purchase Common Stock for the purpose of stabilizing its market price. The
Underwriters also may create a short position for the account of the
Underwriters by selling more Common Stock in connection with this offering than
they are committed to purchase from the Company, and in such case may purchase
Common Stock in the open market following completion of this offering to cover
all or a portion of such short position. The Underwriters also may cover all or
a portion of such short position, up to 480,000 shares, by exercising the
Underwriters' over-allotment option referred to above. In addition, Volpe Brown
Whelan & Company, LLC on behalf of the Underwriters, may impose 'penalty bids'
under the contractual arrangements with the Underwriters whereby it may reclaim
from an Underwriter (or dealer participating in this offering), for the account
of the other Underwriters, the selling concession with respect to Common Stock
that is distributed in this offering but subsequently purchased for the account
of the Underwriters in the open market. Any of the transactions described in
this paragraph may result in the maintenance of the price of the Common Stock at
a level above that which otherwise might prevail in the open market. None of the
transactions described in this paragraph is required, and, if they are
undertaken, they may be discontinued at any time.
The Company has agreed to indemnify the Underwriters against certain
liabilities that may be incurred in connection with this offering, including
liabilities under the Securities Act, or to contribute to payments that the
Underwriters may be required to make in respect thereof.
The foregoing contains a summary of the principal terms of the Underwriting
Agreement and does not purport to be complete. Reference is made to the copy of
the Underwriting Agreement filed as an exhibit to the Registration Statement of
which this Prospectus is a part.
LEGAL MATTERS
The validity of the Common Stock offered hereby will be passed upon for the
Company by Wiggin & Dana, New Haven, Connecticut.
67
<PAGE>
(ALTERNATE PAGE FOR ACQUISITION PROSPECTUS)
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
NO DEALER, SALESPERSON OR OTHER INDIVIDUAL HAS BEEN AUTHORIZED TO GIVE ANY
INFORMATION OR TO MAKE ANY REPRESENTATIONS IN CONNECTION WITH THIS OFFERING
OTHER THAN THOSE CONTAINED IN THIS PROSPECTUS, AND, IF GIVEN OR MADE, SUCH
INFORMATION OR REPRESENTATION MUST NOT BE RELIED UPON AS HAVING BEEN AUTHORIZED
BY THE COMPANY, THE SELLING STOCKHOLDERS, THE UNDERWRITERS OR ANY DEALER OR
AGENT. THIS PROSPECTUS DOES NOT CONSTITUTE AN OFFER TO SELL OR THE SOLICITATION
OF ANY OFFER TO BUY THE COMMON STOCK TO ANY PERSON IN ANY JURISDICTION WHERE, OR
IN ANY CIRCUMSTANCE IN WHICH, SUCH OFFER OR SOLICITATION MAY NOT LEGALLY BE
MADE. NEITHER THE DELIVERY OF THIS PROSPECTUS NOR ANY SALE MADE HEREUNDER SHALL,
UNDER ANY CIRCUMSTANCES, CREATE ANY IMPLICATION THAT THERE HAS NOT BEEN ANY
CHANGE IN THE AFFAIRS OF THE COMPANY OR THE INFORMATION SET FORTH IN THE
PROSPECTUS IS CORRECT AS OF ANY TIMES SUBSEQUENT TO THE DATE OF THIS PROSPECTUS.
------------------------
TABLE OF CONTENTS
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
Prospectus Summary............................. 3
Risk Factors................................... 6
The Company.................................... 15
Use of Proceeds................................ 15
Dividend Policy................................ 15
Capitalization................................. 16
Dilution....................................... 17
Selected Historical Consolidated Financial
Data......................................... 18
Unaudited Pro Forma Condensed Combined
Financial Data............................... 19
Management's Discussion and Analysis of
Financial Condition and Results of
Operations................................... 25
Business....................................... 34
Management..................................... 51
Certain Transactions........................... 58
Principal and Selling Stockholders............. 60
Description of Capital Stock................... 62
Shares Eligible for Future Sale................ 64
Concurrent Initial Public Offering............. 66
Legal Matters.................................. 67
Experts........................................ 68
Available Information.......................... 68
Index to Financial Statements.................. F-1
</TABLE>
------------------------
UNTIL , 1998 (25 DAYS AFTER THE DATE OF
THIS PROSPECTUS), ALL DEALERS EFFECTING TRANSACTIONS IN THE COMMON STOCK,
WHETHER OR NOT PARTICIPATING IN THIS DISTRIBUTION, MAY BE REQUIRED TO DELIVER A
PROSPECTUS. THIS DELIVERY REQUIREMENT IS IN ADDITION TO THE OBLIGATION OF
DEALERS TO DELIVER A PROSPECTUS WHEN ACTING AS UNDERWRITERS AND WITH RESPECT TO
THEIR UNSOLD ALLOTMENTS OR SUBSCRIPTIONS.
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
681,818 SHARES
[LOGO]
COMMON STOCK
------------------------
PROSPECTUS
, 1998
------------------------
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
<PAGE>
PART II
INFORMATION NOT REQUIRED IN PROSPECTUS
ITEM 13. OTHER EXPENSES OF ISSUANCE AND DISTRIBUTION
The expenses payable by the Company in connection with the distribution of
the securities being registered hereby are as follows (asterisks indicate an
estimate):
<TABLE>
<CAPTION>
AMOUNT
- ------------------------------------------------------------
<S> <C>
SEC Registration Fee........................................ $ 18,049
NASD Filing Fee............................................. $ 5,734
Printing and Engraving Expenses............................. $ 150,000*
Accounting Fees and Expenses................................ $ 605,000*
Legal Fees and Expenses..................................... $ 300,000*
Blue Sky Fees and Expenses.................................. $ 15,000*
NASDAQ Listing Fee.......................................... $ 75,000*
Registrar and Transfer Agent Fees........................... $ 10,000*
Miscellaneous Expenses...................................... $ 21,217*
----------
Total.................................................. $1,200,000*
----------
----------
</TABLE>
All of the foregoing expenses are being borne by the Company. None of the
expenses are being borne by the Selling Stockholders.
ITEM 14. INDEMNIFICATION OF DIRECTORS AND OFFICERS
Section 145 of the General Corporation Law of the State of Delaware
('Section 145') permits a Delaware corporation to indemnify any person who was
or is a party or is threatened to be made a party to any threatened, pending, or
completed action, suit, or proceeding, whether civil, criminal, administrative,
or investigative (other than an action by or in the right of the corporation) by
reason of the fact that such person is or was a director, officer, employee, or
agent of the corporation, or is or was serving at the request of the corporation
as a director, officer, employee, or agent of another corporation, partnership,
joint venture, trust, or other enterprise, against expenses (including
attorney's fees), judgments, fines, and amounts paid in settlement actually and
reasonably incurred by such person in connection with such action, suit, or
reasonably incurred by such person in connection with such action, suit, or
proceeding if such person acted in good faith and in a manner such person
reasonably believed to be in or not opposed to the best interests of the
corporation, and, with respect to any criminal action or proceeding, had no
reasonable cause to believe such person's conduct was unlawful.
In the case of an action by or in the right of the corporation, Section 145
permits the corporation to indemnify any person who was or is a party or is
threatened to be made a party to any threatened, pending, or completed action or
suit by or in the right of the corporation to procure a judgment in its favor by
reason of the fact that such person is or was a director, officer, employee, or
agent of the corporation, or is or was serving at the request of the corporation
as a director, officer, employee, or agent of another corporation, partnership,
joint venture, trust, or other enterprise against expenses (including attorneys'
fees) actually and reasonably incurred by such person in connection with the
defense or settlement of such action or suit if he acted in good faith and in a
manner such person reasonably believed to be in or not opposed to the best
interests of the corporation. No indemnification may be made in respect to any
claim, issue, or matter as to which such person shall have been adjudged to be
liable to the corporation unless and only to the extent that the Court of
Chancery or the court in which such action or suit was brought shall determine
upon application that, despite the adjudication of liability but in view of all
the circumstances of the case, such person is fairly and reasonably entitled to
indemnify for such expenses which the Court of Chancery or such other court
shall deem proper.
To the extent that a director, officer, employee, or agent of a corporation
has been successful on the merits or otherwise in defense of any action, suit,
or proceeding referred to in the preceding two paragraphs, Section 145
II-1
<PAGE>
requires that such person be indemnified against expenses (including attorneys'
fees) actually and reasonably incurred by such person in connection therewith.
Section 145 provides that expenses (including attorneys' fees) incurred by
an officer or director in defending any civil, criminal, administrative, or
investigative action, suit, or proceeding may be paid by the corporation in
advance of the final disposition of such action, suit, or proceeding upon
receipt of an undertaking by or on behalf of such director or officer to repay
such amount if it shall ultimately be determined that such person is not
entitled to by indemnified by the corporation as authorized in Section 145.
Article Seventh of the Company's Amended and Restated Certificate of
Incorporation eliminates the personal liability of the directors of the Company
to the Company or its stockholders for monetary damages for breach of fiduciary
duty as directors, with certain exceptions. Article Fifth requires
indemnification of directors and officers of the Company, and for advancement of
litigation expenses to the fullest extent permitted by Section 145.
ITEM 15. RECENT SALES OF UNREGISTERED SECURITIES
The following discussion does not give effect to the stock split of the
Company's Common Stock effected immediately prior to the offering. During the
past three years, the Company has sold and issued the following unregistered
securities:
In February 1996, the Company issued an aggregate of 50,028 shares of
Common Stock to Walter O. Fredericks, Joseph I. Bishop and FMC Corporation
without additional consideration under the terms of a 1993 agreement
requiring the Company to meet a specific sales target.
In May and August of 1996, the Company issued an aggregate of 1,160
shares of Common Stock to certain of its employees at prices ranging from
$5.00 per share to $5.36 per share.
In August, October and November 1996 and September and November 1997
and January 1998, the Company issued an aggregate of 22,430 shares of
Common Stock to employees upon the exercise of various stock options
pursuant to the 1992 Plan and the 1995 Plan each at an exercise price of
$5.00 per share.
In March 1997, the Company issued an aggregate of 6,770 shares of
Common Stock to certain of its employees pursuant to a Section423 Stock
Purchase Plan for $5.00 per share.
In September 1997, the Company issued 22,000 shares of Common Stock to
its Chairman of the Board and Chief Financial Officer, Richard A. Sandberg
for $9.50 per share in cash and promissory notes. See 'Certain
Transactions.'
In April 1998, the Company issued an aggregate of 100,000 shares of
Common Stock to Gerhard Ehninger and Claude L. Buller, the stockholders of
International Support for Bone Marrow Drives, Ltd., under the terms of
Agreement and Plan of Reorganization dated April 3, 1998 among the Company,
Gerhard Ehninger and Claude L. Buller.
In May 1998, the Company issued an aggregate of 89,143 shares of
Common Stock to the stockholders of Micro Diagnostics, Inc. under the terms
of an Agreement and Plan of Merger dated as of April 30, 1998 among the
Company's subsidiary, Genomics International Corporation, and Ross Hickey,
Deborah Torgersen and L. Brian Whitfield.
In May 1998, the Company issued an aggregate of 4,000 shares of Common
Stock to Group Benefit Services, Inc. under the terms of an Asset Purchase
Agreement dated as of January 26, 1998 between the Company's subsidiary,
Genomics International Corporation and Group Benefit Services, Inc.
In July 1998, the Company issued an aggregate of 34,000 shares of
Common Stock to Helix BioPharma Corp. under the terms of an Asset Purchase
Agreement dated July 10, 1998 among the Company, 3018524 Nova Scotia ULC
and Helix BioPharma Corp.
In August 1998, the Company issued an aggregate of 17,462 shares of
Common Stock to employees at its Cellmark Diagnostics, Inc. ('Cellmark')
subsidiary in exchange for 1,460 shares of Cellmark common stock issued
pursuant to the acquisition of Cellmark in March 1996.
II-2
<PAGE>
The above transactions were private transactions not involving a public
offering and were exempt from the registration provisions of the Securities Act
of 1933, as amended, pursuant to Section 4(2) thereof. The sales of securities
were without the use of an underwriter, and the certificates evidencing the
shares bear a restrictive legend permitting the transfer thereof only upon
registration of the shares or an exemption under the Securities Act of 1933, as
amended.
ITEM 16. EXHIBITS AND FINANCIAL STATEMENT SCHEDULES
(a) Exhibits
<TABLE>
<S> <C> <C>
1.1 -- Form of Underwriting Agreement+
2.1 -- Letter of Intent dated July 13, 1998 between the Company and GeneScreen Inc.+
2.2 -- Letter Agreement between the Company and GeneScreen Inc.
2.3 -- Agreement and Plan of Merger dated as of August 31, 1998 by and among the Company, GeneScreen Inc.,
Sandpiper Ventures LLC and certain stockholders of GeneScreen Inc.
3.1 -- Form of Amended and Restated Certificate of Incorporation+
3.2 -- Amended and Restated By-Laws+
4.1 -- Form of Common Stock Certificate
5.1 -- Opinion of Wiggin & Dana*
10.1 -- Lifecodes Corporation 1992 Employee Stock Option Plan+
10.2 -- Lifecodes Corporation 1995 Employee Stock Option Plan+
10.3 -- Lifecodes Corporation 1998 Stock Plan+
10.4 -- Executive Severance Agreement dated January 2, 1992 between the Registrant and Walter O. Fredericks+
10.5 -- Executive Severance Agreement dated January 2, 1992 between the Registrant and Ivan Balazs+
10.6 -- Executive Severance Agreement dated January 2, 1992 between the Registrant and Jacob Victor+
10.7 -- Consulting Agreement dated April 3, 1998 between International Support for Bone Marrow Drives, Ltd.
('ISBMD') and Claude L. Buller+
10.8 -- Consulting Agreement dated April 3, 1998 between ISBMD and Gerhard Ehninger+
10.9 -- Promissory Note from Claude L. Buller to ISBMD+
10.10 -- Amended and Restated Promissory Note from Gerhard Ehninger to ISBMD
10.11 -- Stock Pledge Agreement dated April 3, 1998 between Claude L. Buller and ISBMD+
10.12 -- Stock Pledge Agreement dated April 3, 1998 between Gerhard Ehninger and ISBMD+
10.13 -- Non-Recourse Promissory Note and Agreement dated December 19, 1996 between the Registrant and Walter
O. Fredericks+
10.14 -- Advance on Sales Bonuses dated June 1, 1997 from Michael Petrillo to the Registrant+
10.15 -- Promissory Note dated September 30, 1997 from Richard A. Sandberg to the Registrant+
10.16 -- Promissory Note dated October 1, 1997 from Medical Molecular Diagnostics, GmbH to the Registrant+
10.17 -- Full Recourse Promissory Note dated January 2, 1998 from Walter O. Fredericks to the Registrant+
10.18 -- Letter Agreement dated February 26, 1997 between the Registrant and Roche Molecular Systems, Inc.+
10.19 -- License Agreement effective as of April 1, 1997 by and among the Registrant, F. Hoffmann-LaRoche Ltd.
and Roche Molecular Systems, Inc. (Certain portions of this exhibit have been omitted based upon a
request for confidential treatment. The omitted portions have been filed separately with the
Commission.)+
10.20 -- Technology Access Agreement dated January 15, 1998 among the Registrant and Nycomed Amersham plc and
Molecular Dynamics, Inc. (Certain portions of this exhibit have been omitted based upon a request for
confidential treatment. The omitted portions have been filed separately with the Commission.)+
</TABLE>
II-3
<PAGE>
<TABLE>
<S> <C> <C>
10.21 -- Letter of Intent dated January 15, 1998 between the Registrant and Nycomed Amersham plc (Certain
portions of this exhibit have been omitted based upon a request for confidential treatment. The
omitted portions have been filed separately with the Commission.)+
10.22 -- Parentage Testing Product Agreement effective April 1, 1998 by and among the Registrant, Roche
Molecular Systems, Inc., and F. Hoffman-La Roche, Ltd. (Certain portions of this exhibit have been
omitted based upon a request for confidential treatment. The omitted portions have been filed
separately with the Commission.)+
10.23 -- Purchase and License Agreement dated April 20, 1998 between the Registrant and Molecular Innovations,
Inc. (Certain portions of this exhibit have been omitted based upon a request for confidential
treatment. The omitted portions have been filed separately with the Commission.)+
10.24 -- Stock Purchase Agreement dated September 30, 1997 between the Registrant and Richard Sandberg+
10.25 -- Stock Warrant Agreement dated April 13, 1992 between the Registrant and the Connecticut Development
Authority+
10.26 -- Stock Warrant Agreement dated August 1, 1994 between the Registrant and the Connecticut Development
Authority+
10.27 -- Stock Warrant Agreement dated August 1, 1994 between the Registrant and Crossroads Constitution,
L.P.+
10.28 -- Stock Warrant Agreement dated December 9, 1991 between the Registrant and Crossroads Constitution,
L.P.+
10.29 -- Stock Warrant Agreement dated August 1, 1994 between the Registrant and Dean Fenton+
10.30 -- Stock Warrant Agreement dated December 9, 1991 between the Registrant and Dean Fenton+
10.31 -- Stock Warrant Agreement dated August 1, 1994 between the Registrant and Theodore Elliott+
10.32 -- Stock Warrant Agreement dated December 9, 1991 between the Registrant and Theodore Elliott+
10.33 -- Stock Warrant Agreement dated September 26, 1994 between the Registrant and Connecticut Innovations,
Inc.+
10.34 -- Form of Agreement with Cellmark Employees
10.35 -- Stock Warrant Agreement dated February 24, 1994 between the Registrant and Joseph Bishop+
10.36 -- Lease Agreement, as amended, dated December 15, 1991 by and between the Registrant and RM Stamford
Realty Associates, successor-in-interest to Robert Martin Company.+
10.37 -- Promissory Note from Walter O. Fredericks to the Registrant
21.1 -- Subsidiaries of the Registrant+
23.1 -- Consent of Wiggin & Dana (included in Exhibit 5.1)
23.2 -- Consent of Deloitte & Touche LLP
23.3 -- Consent of Schlattman & Associates, P.C.
24.1 -- Power of Attorney (included on signature page)+
27.1 -- Financial Data Schedule
99.1 -- Consent of John Hansen M.D.+
99.2 -- Consent of Keith W. Brown+
</TABLE>
- ------------------
* To be filed by amendment.
+ Previously filed.
(b) Financial Statement Schedules
None.
II-4
<PAGE>
ITEM 17. UNDERTAKINGS
The undersigned registrant hereby undertakes to provide to the underwriter
at the closing specified in the underwriting agreements, certificates in such
denominations and registered in such names as required by the underwriter to
permit prompt delivery to each purchaser.
Insofar as indemnification for liabilities arising under the Securities Act
of 1933 may be permitted to directors, officers and controlling persons of the
registrant pursuant to the foregoing provisions, or otherwise, the registrant
has been advised that in the opinion of the Securities and Exchange Commission
such indemnification is against public policy as expressed in the Act and is,
therefore, unenforceable. In the event that a claim for indemnification against
such liabilities (other than the payment by the registrant of expenses incurred
or paid by a director, officer or controlling person of the registrant in the
successful defense of any action, suit or proceeding) is asserted by such
director, officer or controlling person in connection with the securities being
registered, the registrant will, unless in the opinion of its counsel the matter
has been settled by controlling precedent, submit to a court of appropriate
jurisdiction the question whether such indemnification by it is against public
policy as expressed in the Act and will be governed by the final adjudication of
such issue.
The undersigned registrant hereby undertakes that:
(1) For determining any liability under the Securities Act of 1933,
the information omitted from the form of prospectus filed as part of this
registration statement in reliance upon Rule 430A and contained in a form
of prospectus filed by the registrant pursuant to Rule 424(b)(1) or (4), or
497(h) under the Securities Act shall be deemed to be a part of this
registration statement as of the time it was declared effective.
(2) For the purpose of determining any liability under the Securities
Act of 1933, each post-effective amendment that contains a form of
prospectus shall be deemed to be a new registration statement relating to
the securities offered therein, and the offering of such securities at that
time shall be deemed to be the initial bona fide offering thereof.
II-5
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933, the registrant
has duly caused this registration statement to be signed on its behalf by the
undersigned, thereunto duly authorized, in the City of Stamford, State of
Connecticut on September 2, 1998.
LIFECODES CORPORATION
(Registrant)
By: /s/ WALTER O. FREDERICKS
----------------------------------
Name: Walter O. Fredericks
Title: President and Chief Executive
Officer
Pursuant to the requirements of the Securities Act of 1933, this
registration statement has been signed by the following persons in the
capacities and on the dates indicated.
<TABLE>
<CAPTION>
SIGNATURE TITLE DATE
- ------------------------------------------ ------------------------------------------- -------------------
<S> <C> <C>
/s/ RICHARD A. SANDBERG Chairman, Chief Financial Officer September 2, 1998
- ------------------------------------------ and Director (Principal Financial Officer)
Richard A. Sandberg
/s/ WALTER O. FREDERICKS President, Chief Executive Officer September 2, 1998
- ------------------------------------------ and Director (Principal Executive Officer)
Walter O. Fredericks
/s/ IVAN BALAZS, PH.D.* Vice President--Research & Development and September 2, 1998
- ------------------------------------------ Director
Ivan Balazs, Ph.D.
/s/ JOSEPH I. BISHOP* Director September 2, 1998
- ------------------------------------------
Joseph I. Bishop
/s/ CLAUDE L. BULLER* Director September 2, 1998
- ------------------------------------------
Claude L. Buller
/s/ PROF. DR. GERHARD EHNINGER* Director September 2, 1998
- ------------------------------------------
Prof. Dr. Gerhard Ehninger
/s/ DEAN E. FENTON* Director September 2, 1998
- ------------------------------------------
Dean E. Fenton
</TABLE>
II-6
<PAGE>
<TABLE>
<C> <S> <C>
/s/ MILTON STEELE* Director September 2, 1998
- ------------------------------------------
Milton Steele
/s/ ROSS V. HICKEY JR.* Director September 2, 1998
- ------------------------------------------
Ross V. Hickey Jr.
/s/ DEAN L. SOMER Controller, Treasurer and Secretary September 2, 1998
- ------------------------------------------ (Principal Accounting Officer)
Dean L. Somer
*By: /s/ WALTER O. FREDERICKS
-------------------------------------
Walter O. Fredericks
Attorney-in-Fact
</TABLE>
II-7
<PAGE>
EXHIBIT INDEX
<TABLE>
<CAPTION>
EXHIBIT SEQUENTIAL
NUMBER DESCRIPTION PAGE NO.
- ------ ---------------------------------------------------------------------------------------------- -----------
<S> <C> <C> <C>
1.1 -- Form of Underwriting Agreement+
2.1 -- Letter of Intent dated July 13, 1998 between the Company and GeneScreen Inc.+
2.2 -- Letter Agreement between the Company and GeneScreen Inc.
2.3 -- Agreement and Plan of Merger dated as of August 31, 1998 by and among the Company,
GeneScreen Inc., Sandpiper Ventures LLC and certain stockholders of GeneScreen Inc.
3.1 -- Form of Amended and Restated Certificate of Incorporation+
3.2 -- Amended and Restated By-Laws+
4.1 -- Form of Common Stock Certificate
5.1 -- Opinion of Wiggin & Dana*
10.1 -- Lifecodes Corporation 1992 Employee Stock Option Plan+
10.2 -- Lifecodes Corporation 1995 Employee Stock Option Plan+
10.3 -- Lifecodes Corporation 1998 Stock Plan+
10.4 -- Executive Severance Agreement dated January 2, 1992 between the Registrant and Walter O.
Fredericks+
10.5 -- Executive Severance Agreement dated January 2, 1992 between the Registrant and Ivan
Balazs+
10.6 -- Executive Severance Agreement dated January 2, 1992 between the Registrant and Jacob
Victor+
10.7 -- Consulting Agreement dated April 3, 1998 between International Support for Bone Marrow
Drives, Ltd. ('ISBMD') and Claude L. Buller+
10.8 -- Consulting Agreement dated April 3, 1998 between ISBMD and Gerhard Ehninger+
10.9 -- Promissory Note from Claude L. Buller to ISBMD+
10.10 -- Amended and Restated Promissory Note from Gerhard Ehninger to ISBMD
10.11 -- Stock Pledge Agreement dated April 3, 1998 between Claude L. Buller and ISBMD+
10.12 -- Stock Pledge Agreement dated April 3, 1998 between Gerhard Ehninger and ISBMD+
10.13 -- Non-Recourse Promissory Note and Agreement dated December 19, 1996 between the
Registrant and Walter O. Fredericks+
10.14 -- Advance on Sales Bonuses dated June 1, 1997 from Michael Petrillo to the Registrant+
10.15 -- Promissory Note dated September 30, 1997 from Richard A. Sandberg to the Registrant+
10.16 -- Promissory Note dated October 1, 1997 from Medical Molecular Diagnostics, GmbH to the
Registrant+
10.17 -- Full Recourse Promissory Note dated January 2, 1998 from Walter O. Fredericks to the
Registrant+
10.18 -- Letter Agreement dated February 26, 1997 between the Registrant and Roche Molecular
Systems, Inc.+
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
EXHIBIT SEQUENTIAL
NUMBER DESCRIPTION PAGE NO.
- ------ ---------------------------------------------------------------------------------------------- -----------
<S> <C> <C> <C>
10.19 -- License Agreement effective as of April 1, 1997 by and among the Registrant, F.
Hoffmann-LaRoche Ltd. and Roche Molecular Systems, Inc. (Certain portions of this
exhibit have been omitted based upon a request for confidential treatment. The omitted
portions have been filed separately with the Commission.)+
10.20 -- Technology Access Agreement dated January 15, 1998 among the Registrant and Nycomed
Amersham plc and Molecular Dynamics, Inc. (Certain portions of this exhibit have been
omitted based upon a request for confidential treatment. The omitted portions have been
filed separately with the Commission.)+
10.21 -- Letter of Intent dated January 15, 1998 between the Registrant and Nycomed Amersham plc
(Certain portions of this exhibit have been omitted based upon a request for
confidential treatment. The omitted portions have been filed separately with the
Commission.)+
10.22 -- Parentage Testing Product Agreement effective April 1, 1998 by and among the Registrant,
Roche Molecular Systems, Inc., and F. Hoffman-La Roche, Ltd. (Certain portions of this
exhibit have been omitted based upon a request for confidential treatment. The omitted
portions have been filed separately with the Commission.)+
10.23 -- Purchase and License Agreement dated April 20, 1998 between the Registrant and Molecular
Innovations, Inc. (Certain portions of this exhibit have been omitted based upon a
request for confidential treatment. The omitted portions have been filed separately with
the Commission.)+
10.24 -- Stock Purchase Agreement dated September 30, 1997 between the Registrant and Richard
Sandberg+
10.25 -- Stock Warrant Agreement dated April 13, 1992 between the Registrant and the Connecticut
Development Authority+
10.26 -- Stock Warrant Agreement dated August 1, 1994 between the Registrant and the Connecticut
Development Authority+
10.27 -- Stock Warrant Agreement dated August 1, 1994 between the Registrant and Crossroads
Constitution, L.P.+
10.28 -- Stock Warrant Agreement dated December 9, 1991 between the Registrant and Crossroads
Constitution, L.P.+
10.29 -- Stock Warrant Agreement dated August 1, 1994 between the Registrant and Dean Fenton+
10.30 -- Stock Warrant Agreement dated December 9, 1991 between the Registrant and Dean Fenton+
10.31 -- Stock Warrant Agreement dated August 1, 1994 between the Registrant and Theodore
Elliott+
10.32 -- Stock Warrant Agreement dated December 9, 1991 between the Registrant and Theodore
Elliott+
10.33 -- Stock Warrant Agreement dated September 26, 1994 between the Registrant and Connecticut
Innovations, Inc.+
10.34 -- Form of Agreement with Cellmark Employees
10.35 -- Stock Warrant Agreement dated February 24, 1994 between the Registrant and Joseph
Bishop+
10.36 -- Lease Agreement, as amended, dated December 15, 1991 by and between the Registrant and
RM Stamford Realty Associates, successor-in-interest to Robert Martin Company.+
10.37 -- Promissory Note from Walter O. Fredericks to the Registrant
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
EXHIBIT SEQUENTIAL
NUMBER DESCRIPTION PAGE NO.
- ------ ---------------------------------------------------------------------------------------------- -----------
<S> <C> <C> <C>
21.1 -- Subsidiaries of the Registrant+
23.1 -- Consent of Wiggin & Dana (included in Exhibit 5.1)
23.2 -- Consent of Deloitte & Touche LLP
23.3 -- Consent of Schlattman & Associates, P.C.
24.1 -- Power of Attorney (included on signature page)+
27.1 -- Financial Data Schedule
99.1 -- Consent of John Hansen M.D.+
99.2 -- Consent of Keith W. Brown+
</TABLE>
- ------------------
* To be filed by amendment.
+ Previously filed.
<PAGE>
Lifecodes Corporation
550 West Avenue
Stamford, CT 06902
July 13, 1998
Mr. Keith W. Brown
President and CEO
GeneScreen Inc.
2600 Stemmons Freeway, Suite 133
Dallas, TX 75207
Dear Keith:
Lifecodes Corporation (the "Purchaser") and GeneScreen Inc.
(the "Company") are contemporaneously herewith executing a letter of intent
(the "Letter of Intent") regarding the Merger of the Company with and into the
Purchaser (the "Merger").
The Company is also pursuing, with regard to its subsidiary,
Molecular Tool, Inc. ("MTI"), either (i) selling MTI (the "MTI Sale") or (ii)
spinning off the stock of MTI to the Company's shareholders (the "MTI
Spinoff").
Until the MTI Sale, the Company may require funds for the
cash needs of MTI ("MTI Funding"). On an interim basis, Purchaser has
provided, and intends to provide, financial accommodations relating to the MTI
Funding, in accordance with the following, but contingent upon negotiation and
execution of definitive terms, conditions and documents acceptable to
Purchaser and the Company and upon the resolution of Purchaser's satisfaction
of all legal, accounting and tax to issues relevant hereto:
(a) On June 30, 1998, the Company paid $499,462.02 to Purchaser in
respect of accounts owed to Purchaser by the Company.
(b) From July 1, 1998 until the earliest to occur of (i) the MTI Sale, or
(ii) the Merger, the Company may defer further payment of accounts
due to Purchaser, and may, in accordance with its usual course of
business, generate new accounts due to Purchaser and defer payment of
such accounts until the Merger or the abandonment.
(c) Upon consummation of the Merger, accounts due to the Purchaser
through the date of the Merger will be treated as reductions to the
balance sheet of the Company for purposes of the closing adjustment
contemplated by paragraph 2 of the Letter of Intent.
<PAGE>
Mr. Keith W. Brown
July 10, 1998
Page 2
(d) On July 1, 1998, Purchaser advanced $150,000 to the Company and will
continue to advance up to $150,000 per month for up to three (3)
additional months (to a maximum of up to $600,000), or such earlier
date as the MTI Sale is consummated (the "Funding Completion Date").
Accordingly, up to $600,000 may be disbursed from either the
Purchaser's general funds or the cash escrow contemplated by the
Letter of Intent (the "Escrow Account") for the purpose of providing
MTI Funding (the "MTI Loan"). All disbursements of the MTI Loan shall
be loans from Purchaser to MTI and the Company. The parties agree
that the Escrow Account is of significant benefit to Purchaser and
that Purchaser's consent to the disbursement thereof constitutes
substantial consideration for the rights of Purchaser outlined in
this letter.
(e) If the Merger closes prior to the closing of the MTI Sale, the MTI
Loan shall be due and payable by way of a reduction of the cash
portion of the consideration payable to stockholders of the Company
in the Merger (the "Merger Consideration"). Any advances made to MTI
subsequent to the effective time of the Merger will be advanced from
the Escrow Account, further reducing the Merger Consideration unless
(and except to the extent) repaid by MTI prior to the earlier of
February 28, 1999 or the date the MTI Sale is consummated. If the MTI
Sale closes prior to the effective time of the Merger, the MTI Loan
shall be due and payable upon the earlier of (i) February 28, 1999,
or (ii) the date the Merger is consummated, in cash in the case of
(i) or by way of a reduction of the cash portion of the Merger
Consideration in the case of (ii). If the Merger does not close prior
to December 31, 1998, the MTI Loan will be due and payable on
February 28, 1999 in cash.
(f) The MTI Loan is evidenced by a promissory note, dated as of July 1,
1998, and secured by a security interest and pledge in all of the
shares of MTI stock as set forth in a stock pledge agreement, dated
as of July 1, 1998.
(g) If the Company or MTI does not repay the MTI Loan within ten (10)
days of its due date, Purchaser may, at its option, either foreclose
on its security interest in all of the shares of MTI and take title
to all of the shares, free and clear from all encumbrances or (ii)
enforce payment of the unpaid MTI Loan from the Company or MTI.
(h) If MTI does not repay the MTI Loan to Purchaser, Purchaser shall have
no liability to the Company or its shareholders for any amount by
which the Escrow Account was diminished by reason of the MTI Loan.
<PAGE>
Mr. Keith W. Brown
July 10, 1998
Page 3
This letter contains an outline of terms only and is not legally binding.
Accordingly, if for any reason the transactions hereby contemplated are not
consummated, no party shall be entitled to any form of legal, equitable or
injunctive damages
Very truly yours,
LIFECODES CORPORATION
By /s/ Walter Fredericks
---------------------------
Walter Fredericks
Its President and CEO
Agreed to and accepted
This 13th day of July, 1998.
GENESCREEN INC.
By /s/ Keith Brown
-----------------------
Keith Brown
Its President and CEO
<PAGE>
AGREEMENT AND PLAN OF MERGER
BY AND AMONG
LIFECODES CORPORATION
(the Purchaser)
AND
THOSE INDIVIDUALS LISTED IN EXHIBIT A
ANNEXED HERETO
(the Key Stockholders)
AND
GENESCREEN INC.
(the Company)
AND
SANDPIPER VENTURES LLC
(the Stockholders' Representative)
As of August 31, 1998
<PAGE>
This Agreement and Plan of Merger ("Agreement") is made as of August
31, 1998, by and among Lifecodes Corporation, a Delaware corporation (the
"Purchaser"); those individuals listed in Exhibit A attached hereto
(collectively, the "Key Stockholders"), being the owners of a majority of the
outstanding capital stock of GeneScreen Inc., a Delaware corporation (the
"Company"); the Company; and Sandpiper Ventures LLC, in its capacity as the
representative of certain stockholders of the Company (the "Stockholders'
Representative").
W I T N E S S E T H
WHEREAS, the Purchaser desires to merge the Company with and into the
Purchaser, and the Company and the Key Stockholders desire to have the Company
merge with and into the Purchaser upon the terms and conditions set forth
herein and in accordance with the laws of the State of Delaware;
WHEREAS, this Agreement contemplates a tax-free merger of the Company
with and into the Purchaser in a reorganization pursuant to IRC Section
368(a)(1)(A);
WHEREAS, the Company and the Purchaser expect that the Merger will
further certain of their business objectives (including, without limitation,
expansion of the Purchaser's business and customer base, increase in revenues
and value of the enterprise);
NOW, THEREFORE, the Purchaser, Key Stockholders and Company adopt
this plan and agree as follows:
1. DEFINITIONS.
For purposes of this Agreement, the terms listed in Exhibit B
attached hereto shall have the meanings specified or referred to therein.
2. THE MERGER; CLOSING, CONVERSION OF SHARES.
2.1 MERGER. Subject to the terms and conditions of this Agreement, at
the Effective Time the Company shall be merged with and into the Purchaser and
the separate corporate existence of the Company shall thereupon cease (the
"Merger"). The Purchaser shall be the surviving corporation in the Merger
(sometimes hereinafter referred to as the "Surviving Corporation") and shall
continue to be governed by the laws of the State of Delaware, and the separate
corporate existence of the Purchaser with its corporate name, rights,
privileges, powers, immunities, purposes and franchises shall continue
unaffected by the Merger.
2.2 CLOSING. The closing of the Merger, including conversion of the
GeneScreen Stock for Lifecodes Stock plus payment of the Cash Component, and
the other Contemplated Transactions (the "Closing") provided for in this
Agreement will take place at the offices of the Purchaser's counsel, Wiggin &
Dana, Three Stamford Plaza, 301 Tresser Blvd., Stamford, Connecticut 06901, at
10:00 a.m. (local time) on the date of, and simultaneous with, the closing of
the Purchaser's IPO (i.e., after such time as the Securities and Exchange
Commission declares the Purchaser's IPO to be effective, is presently
anticipated to be on or about September 30,
1
<PAGE>
1998), provided that the Purchaser may, in its sole discretion, extend the
date of Closing until November 30, 1998 if the IPO has not closed, or at such
other time and place as the parties may agree in writing. Subject to the
provisions of Section 10, failure to consummate the transactions provided for
in this Agreement on the date and time and at the place determined pursuant to
this Section 2.2 will not result in the termination of this Agreement and will
not relieve any party of any obligation under this Agreement.
2.3 EFFECTIVE TIME. If all of the conditions to the Merger set forth
in Sections 7 and 8 shall have been fulfilled or waived in accordance herewith
and this Agreement shall not have been terminated in accordance with Section
10, the parties hereto shall promptly cause a Certificate of Merger meeting
the requirements of Section 251 of the Delaware General Corporation Law, in
the form attached hereto as Exhibit C, to be properly executed and filed on
the Closing Date. The Merger shall become effective at the time (the
"Effective Time") of the filing of the Certificate of Merger in accordance
with the Delaware General Corporation Law or at such later time as the parties
hereto shall have agreed upon and designated in such filing as the effective
time of the Merger.
2.4 MERGER CONSIDERATION. The aggregate amount of cash and securities
to be paid to the Stockholders upon the conversion of, and as consideration
for all of, the issued and outstanding shares of the GeneScreen Stock at the
Effective Time shall equal $12,500,000 (the "Merger Consideration") subject to
adjustment as described in Sections 2.9 and 2.11 below. The Merger
Consideration shall be comprised of (a) that number of shares of Lifecodes
Stock having an aggregate value of $7,500,000 based upon the gross price per
share of Lifecodes Stock to the public in Purchaser's "IPO" but not more than
$60 per share based on the Purchaser's capitalization on June 1, 1998 (the
"Equity Component"), plus (b) an aggregate of $5,000,000 (the "Cash
Component"). Notwithstanding the foregoing, $3,500,000 of the Cash Component
(the "Escrow Amount") shall be held in two separate and distinct escrows (the
"Escrows") with the Escrow Agent to satisfy the Stockholders' indemnity
obligations under Section 11.2 of this Agreement pursuant to the terms of an
escrow agreement substantially in the form attached hereto as Exhibit D (the
"Escrow Agreement"). The Escrow Amount shall be divided as follows: (i)
$2,500,000 of the Escrow Amount (the "General Escrow Amount") shall be held to
satisfy the Stockholders' indemnity obligations other than the Stockholders'
Tax Indemnity and any breach of any Tax Representation; and $1,000,000 of the
Escrow Amount (the "Tax Escrow Amount") shall be held to satisfy the
Stockholders' Tax Indemnity and any breach of any Tax Representation.
2.5 CLOSING OBLIGATIONS. At the Closing:
(a) The Company and each of the Key Stockholders will deliver to the
Purchaser:
(i) non-competition agreements for each of the individuals
listed on Exhibit E-1 substantially in the form attached hereto as Exhibit E-2
("Non-Competition Agreements");
(ii) a certificate of the Company representing and warranting
to the Purchaser that each of the representations and warranties in this
Agreement of the Company was accurate in all respects as of the date of this
Agreement and is accurate in all material respects as of the
2
<PAGE>
Closing Date as if made on the Closing Date (giving full effect to any
supplements to the Disclosure Letter that were delivered by the Company to the
Purchaser prior to the Closing Date in accordance with Section 5.5);
(iii) an opinion of Worsham, Forsythe & Wooldridge, L.L.P.,
counsel for the Company and the Key Stockholders, substantially in the form
attached hereto as Exhibit F;
(iv) lockup agreements from at least 90% in interest of the
Stockholders substantially in the form attached hereto as Exhibit G
(collectively, "Lockup Agreements"); and
(v) the Escrow Agreement.
(b) The Purchaser will deliver the Escrow Amount to the Escrow Agent
and the balance of the Merger Consideration to the Exchange Agent.
(c) The Purchaser will deliver to the Stockholders' Representative:
(i) a certificate executed by the Purchaser to the effect
that each of the Purchaser's representations and warranties in this Agreement
was accurate in all respects as of the date of this Agreement and is accurate
in all material respects as of the Closing Date as if made on the Closing
Date;
(ii) an opinion of Wiggin & Dana, counsel for the Purchaser,
substantially in the form attached hereto as Exhibit H; and
(iii) the Escrow Agreement.
2.6 CERTIFICATE OF INCORPORATION. The Certificate of Incorporation of
the Purchaser in effect immediately prior to the Effective Time shall
thereafter continue in full force and effect as the Certificate of
Incorporation of the Surviving Corporation until duly amended in accordance
with its terms or by law.
2.7 BY-LAWS. The By-Laws of the Purchaser in effect immediately prior
to the Effective Time shall be the By-Laws of the Surviving Corporation until
duly amended in accordance with their terms or by law.
2.8 MANNER OF CONVERSION. The manner of converting shares of the
Company in the Merger shall be as follows:
(a) At the Effective Time, each of the issued and outstanding shares
of GeneScreen Stock immediately prior to the Effective Time (the "GeneScreen
Shares") shall, by virtue of the Merger and without any action on the part of
the holder thereof, be converted into (i) cash in an amount equal to the Cash
Component divided by the total number of GeneScreen Shares; and (ii) the
number of shares of Lifecodes Stock equal to the Equity Component divided by
the total number of GeneScreen Shares; provided that no fraction of a share of
Lifecodes Stock shall be issued; and provided, further, that each
Stockholder's entitlement to the Merger Consideration shall be determined in
accordance with the rights and preferences of each class and series of
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capital stock of the Company in accordance with the terms of its
Organizational Documents. Each holder of a certificate or certificates
representing GeneScreen Shares issued and outstanding at the Effective Time
who would otherwise be entitled to receive a fractional share of Lifecodes
Stock (after taking into account all GeneScreen Shares then held by such
holder) shall upon surrender of such certificate or certificates receive the
nearest whole number of shares of Lifecodes Stock (i.e., shall be rounded up
or rounded down to the nearest whole share, as the case may be).
(b) From and after the Closing, the Stockholders shall surrender to
the Exchange Agent certificates representing all of the shares of GeneScreen
Stock held by them or affidavits of lost certificates and indemnity agreements
in form and substance reasonably satisfactory to the Purchaser, the
Purchaser's counsel and the Exchange Agent. Upon surrender of such
certificates or other documents by the Exchange Agent to the Purchaser, the
Stockholder shall be entitled to receive in exchange therefor, as soon as
practicable after the adjustments (if any) contemplated by Section 2.11 hereof
have been made, the proportionate share of the Merger Consideration less the
Escrow Amount. Within ten (10) days of the Effective Date, the Surviving
Corporation shall mail to the holders of the Dissenters' Shares the notice
required under Section 262 of the Delaware General Corporation Law. Until so
surrendered in exchange, each certificate theretofore representing shares of
GeneScreen Stock shall represent solely (i) the right to receive a
proportionate share of the Merger Consideration, or (ii) in the case of
Dissenters' Shares, the right to seek appraisals pursuant to Section 262 of
the Delaware General Corporation Law.
(c) If any certificate evidencing shares of Lifecodes Stock is to be
registered in any name other than that in which the certificate surrendered in
exchange therefor is registered, it shall be a condition of such registration
that the certificate so surrendered shall be properly endorsed and otherwise
in proper form for transfer, as reasonably determined by the Purchaser and the
Exchange Agent, and that the person requesting such exchange either pay to the
Purchaser any transfer or other Taxes required by reason of the issuance of a
certificate for shares of Lifecodes Stock in any name other than that of the
registered holder of the certificate surrendered or otherwise required to
establish to the satisfaction of the Purchaser that such Tax has been paid or
is not payable.
(d) The stock transfer books of the Company will be closed as of the
Effective Time and after the Effective Time there will be no transfers, or
registration thereof, on the stock transfer books of the Company or the
Surviving Corporation of the GeneScreen Shares which were issued and
outstanding immediately prior to the Effective Time. At the Effective Time,
all GeneScreen Shares, by virtue of the Merger and without any action on the
part of the holders thereof, shall no longer be outstanding and shall be
cancelled and retired and shall cease to exist, and each holder of a
certificate representing any such GeneScreen Shares shall thereafter cease to
have any rights with respect to such GeneScreen Shares, except the right of
holders to receive a proportionate share of the Merger Consideration, upon the
surrender of such certificate in accordance with this Section 2.8, or in the
case of Dissenters' Shares, the right to seek appraisals pursuant to Section
262 of the Delaware General Corporation Law.
(e) All of the shares of Lifecodes Stock and rights to receive cash,
into which and for which GeneScreen Shares shall have been exchanged pursuant
to this Section 2.8 shall be
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deemed to have been issued in full satisfaction of all rights pertaining to
such exchanged GeneScreen Shares.
(f) Any portion of the Merger Consideration that remains
undistributed by the Exchange Agent to the Stockholders one year after the
Effective Time shall be delivered to the Purchaser, upon request, and any
Stockholders who have not theretofore complied with this Section 2.8 shall
thereafter look only to the Purchaser for the Merger Consideration and any
dividends or other distributions with respect to Lifecodes Stock to which they
are entitled pursuant to Section 2.10.
2.9 APPRAISAL RIGHTS
(a) Each of the GeneScreen Shares held by Stockholders who shall have
properly exercised appraisal rights with respect thereto under Section 262 of
the Delaware General Corporation Law ("Dissenters' Shares") (the holders of
all other outstanding shares of GeneScreen Stock shall be referred to herein
as the "Exchanging Stockholders") shall not be converted into the Merger
Consideration, but shall entitle the holder thereof to receive payment of the
appraised value of such shares in accordance with the provisions of the
Delaware General Corporation Law, except that any Dissenters' Shares held by a
Stockholder who shall thereafter fail to perfect or who, with the written
approval of the Surviving Corporation, withdraws his or her demand for
appraisal of such Shares shall then be deemed to have been converted, as of
the Effective Date, into the right to receive the amount of Merger
Consideration such Stockholder otherwise would have been entitled to receive.
(b) Each of the Key Stockholders hereby expressly waives any
dissenter's or appraisal rights he or she may have under Delaware corporate
law in respect of the Merger.
2.10 DIVIDENDS. No dividends or other distributions declared after
the Effective Time with respect to the Lifecodes Stock and payable to holders
of record thereof after the Effective Time shall be paid to the holder of any
unsurrendered certificate with respect to the GeneScreen Shares represented
thereby until the holder of record shall surrender such certificate to the
Exchange Agent. Subject to the effect, if any, of applicable law, after the
subsequent surrender and exchange of a certificate, the holder thereof shall
be entitled to receive any such dividends or other distributions, without any
interest thereon, which theretofore became payable with respect to the
GeneScreen Shares represented by such certificate.
2.11 ADJUSTMENTS TO MERGER CONSIDERATION.
(a) The Merger Consideration is based in part on the premise that the
Net Worth (as defined in Section 2.11(b)(i) below) as reflected in the balance
sheet of the Company as of the close of business on the Closing Date will be
at least $109,099.70. Within ten (10) days after the Closing Date, the
Purchaser will prepare and deliver to the Stockholders' Representative a
balance sheet (the "Draft Closing Date Balance Sheet") of the Company as of
the close of business on the Closing Date and statements of operations and
cash flow for the period then ending (collectively, the "Closing Financial
Statements"). The Merger Consideration adjustment described below shall be
based upon changes from the balance sheet of the Company as of May
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31, 1998, which is set forth in Exhibit I and which reflects certain agreed
adjustments to such balance sheet (the "Agreed Latest Balance Sheet"). The
Closing Financial Statements shall be: (i) determined on a pro forma basis as
though the parties had not consummated the Contemplated Transactions, but as
if the fiscal year had then ended; (ii) prepared in accordance with GAAP
applied on a basis consistent with the preparation of the Agreed Latest
Balance Sheet; and (iii) reviewed by Deloitte & Touche LLP, the Purchaser's
and the Company's certified public accountants. Notwithstanding the foregoing,
the amount of any balance sheet reserves affecting the Closing Financial
Statements shall not be less than the amount of such reserves reflected in the
Agreed Latest Balance Sheet.
(b) The Purchaser also will prepare and deliver to the Stockholders'
Representative, along with the Draft Closing Date Balance Sheet, a draft
calculation of the adjustment to the Merger Consideration as determined below
(the "Draft Adjustment Calculation"). The Merger Consideration will be
adjusted as follows:
(i) The "Net Worth" shall mean (A) the total assets indicated
on the applicable balance sheet, less any amount reflected therein for amounts
owed to the Company by the Stockholders, less (B) the sum of the accounts
payable, accrued wages and related amounts and other accrued liabilities
indicated on such balance sheet. The Net Worth reflected in the Agreed Latest
Balance Sheet is $109,099.70. Notwithstanding the foregoing, the Merger
Consideration shall be reduced by the following amounts unless such amounts
have already been taken into account in determining Net Worth (1) by one-half
(1/2) of the present value amount (agreed to by the Company and the Purchaser)
or such other amount as may be required to fully liquidate and settle certain
bonus and severance commitments made by the Company (to the extent such
obligations have not been settled, paid and released prior to the Closing
Date), (2) for obligations for arms-length loans made to the Company after
March 31, 1998 but before Closing outstanding on the Closing Date, (3) for
liability for interim financing outstanding on the Closing Date and accounts
payable over 60 days, (4) for any advances or other financial accommodations
made to the Company or MTI by the Purchaser outstanding on the Closing Date,
(5) all professional fees (including without limitation, attorneys',
accountant's appraiser's and finder's fees and transaction bonuses incurred by
the Company or Stockholders in connection with the execution of this Agreement
and consummation of the Contemplated Transactions, and (6) any fees or costs
incurred in terminating any agreement or contracts provided for in this
Agreement.
(ii) To the extent the Net Worth calculated from the Draft
Closing Balance Sheet is less than $109,099.70, the Cash Component of the
Merger Consideration (other than the Cash Component being held pursuant to the
Escrow Agreement which shall be $3,500,000) shall be reduced by such amount to
the extent available and then, if necessary, the Equity Component shall be
reduced by the balance of such amount.
(iii) To the extent the Net Worth calculated from the Draft
Closing Balance Sheet is more than $109,099.70, the Cash Component of the
Merger Consideration shall be increased by such amount to the extent available
and then, if necessary, to the Equity Component shall be reduced by the
balance of such amount.
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(c) If the Stockholders' Representative has an objection to the Draft
Closing Date Balance Sheet or the Draft Adjustment Calculation, the
Stockholders' Representative will deliver to the Purchaser a detailed
statement describing its objections within fifteen (15) days after receiving
the Draft Closing Date Balance Sheet and the Draft Adjustment Calculation. The
Purchaser and the Stockholders' Representative will use reasonable efforts to
resolve between themselves their respective objections. If the Purchaser and
the Stockholders' Representative do not reach a final resolution within thirty
(30) days after the Purchaser has received the Stockholders' Representative's
statement of objections, such dispute shall be referred to the American
Arbitration Association ("AAA") in Wilmington, Delaware for resolution. The
resolution of the remaining objections by the AAA will be in writing and will
be conclusive and binding upon the parties. The Purchaser will revise the
Draft Closing Date Balance Sheet and the Draft Adjustment Calculation as
appropriate to reflect the resolutions of all objections thereto pursuant to
this Section 2.11(c). The "Closing Date Balance Sheet" and the "Adjustment
Calculation" shall mean, respectively, the Draft Closing Date Balance Sheet
and the Draft Adjustment Calculation, together with any revisions thereto
pursuant to this Section 2.11(c).
(d) The Purchaser will make the work papers and supporting materials
used in the Company's preparation of the Draft Closing Date Balance Sheet and
the Draft Adjustment Calculation, along with the books, records and personnel
of the Company, available to the Stockholders' Representative at reasonable
times and upon reasonable notice at any time during the Stockholders'
Representative's review of the Draft Closing Date Balance Sheet and the Draft
Adjustment Calculation and the resolution by the parties of any objections
thereto. The Stockholders' Representative shall make the work papers and
supporting materials used in the Stockholders' review of the Financial
Statements available to the Purchaser and its Representatives at reasonable
times and upon reasonable notice at any time during the Purchaser's
preparation of the Closing Financial Statements and the Draft Adjustment
Calculation and the resolution by the parties of any objections thereto.
(e) The Stockholders and the Purchaser each will pay one-half of the
fees and expenses of the AAA to which any unresolved objections are submitted
pursuant to the foregoing unless otherwise reasonably determined and directed
the AAA; provided, however, that the Stockholders' obligations to pay such
fees and expenses shall be limited to and payable only from funds available in
the Escrow.
(f) If the Merger Consideration as finally determined pursuant to
this Section 2.11 is greater than $12,500,000, the Purchaser shall, within
three (3) business days after the Merger Consideration is finally determined
pursuant to this Section 2.11 pay to the Exchange Agent for the benefit of the
Stockholders and as additional Merger Consideration an amount in U.S. Dollars
(by wire transfer of immediately available funds to the account specified by
the Exchange Agent) equal to the difference between the Merger Consideration
and $12,500,000, plus interest on such difference at the rate of 1% over One
Month LIBOR for the period from (and including) the Closing Date to (but
excluding) the date of such payment, such interest to be calculated on the
basis of actual days elapsed and a year of three hundred sixty (360) days. In
no event shall the Purchaser be required to pay more than $1,250,000 above
$12,500,000.
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(g) If the Merger Consideration is less than $12,500,000, within
three (3) business days after the Merger Consideration is finally determined
pursuant to this Section 2.11, the Stockholders' Representative shall cause
the Exchange Agent to pay to the Purchaser by wire transfer of immediately
available funds to the account specified by the Purchaser an amount in U.S.
Dollars equal to the amount of such adjustment plus interest on such amount at
the rate of 1% over One Month LIBOR for the period from (and including) the
Closing Date to (but excluding) the date of such payment, such interest to be
calculated on the basis of actual days elapsed and a year of three hundred
sixty (360) days.
3. REPRESENTATIONS AND WARRANTIES OF THE COMPANY.
The Company represents and warrants to the Purchaser on behalf of
itself and MT Human (as hereinafter defined) as follows:.
3.1 ORGANIZATION AND GOOD STANDING.
(a) The Company is a corporation duly organized, validly existing,
and in good standing under the laws of the State of Delaware and the Company
has full corporate power and authority to conduct its business as it is now
being conducted, to own or use the properties and assets that it purports to
own or use, and to perform all its obligations under Applicable Contracts.
Except as set forth in Part 3.1(a) of the Disclosure Letter, the Company is
duly qualified to do business as a foreign corporation and is in good standing
under the laws of each state or other jurisdiction in which either the
ownership or use of the properties owned or used by it, or the nature of the
activities conducted by it, requires such qualification.
(b) The Company has delivered to the Purchaser copies of the
Organizational Documents of the Company, as currently in effect.
(c) Except as set forth in Part 3.1(c) of the Disclosure Letter, the
Company has (i) no subsidiaries; (ii) no Related Persons; and (iii) not
contracted, nor is it otherwise under any obligation, to purchase or subscribe
for any interest in, advance or loan monies, or in any way make investments in
or incur obligations with respect to, any Person. Each of the entities listed
in Part 3.1(c) of the Disclosure Letter in respect to clause (i) above (the
"Affiliates") is duly organized, validly existing, and in good standing under
the laws of the jurisdiction set forth in Part 3.1(c) of the Disclosure
Schedule, and has full corporate power and authority to conduct its business
as it is now being conducted, to own or use the properties and assets that it
purports to own or use, and to perform all its obligations. Each of the
Affiliates is duly qualified to do business as a foreign corporation and is in
good standing under the laws of each state or other jurisdiction in which
either the ownership or use of the properties owned or used by it, or the
nature of the activities conducted by it, requires such qualification. Except
as set forth in Part 3.1(c) of the Disclosure Letter, the Company owns all of
the issued and outstanding capital stock of each of the Affiliates.
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3.2 AUTHORITY; NO CONFLICT.
(a) This Agreement constitutes the legal, valid, and binding
obligation of the Company and the Key Stockholders, enforceable against the
Company and the Key Stockholders in accordance with its terms. Upon the
execution and delivery by the Company of the Escrow Agreement and the other
documents or instruments described herein (the "Company's Closing Documents"),
the Company's Closing Documents will constitute the legal, valid, and binding
obligations of the Company, enforceable against the Company in accordance with
their respective terms. Upon the execution and delivery by the Key
Stockholders of the Noncompetition Agreements (if applicable), the Lockup
Agreements, the Escrow Agreement and the other documents or instruments
described herein (the "Key Stockholders' Closing Documents"), the Key
Stockholders' Closing Documents will constitute the legal, valid, and binding
obligations of each of the Key Stockholders, enforceable against such Persons
in accordance with their respective terms. Each of the Company and the Key
Stockholders has the power, authority, and capacity to execute and deliver
this Agreement and the Company's Closing Documents or the Key Stockholders'
Closing Documents, as the case may be, and to perform their obligations under
this Agreement and the Company's Closing Documents or the Key Stockholders'
Closing Documents, as the case may be.
(b) Except as set forth in Part 3.2 of the Disclosure Letter, neither
the execution nor delivery of this Agreement nor the consummation or
performance of any of the Contemplated Transactions will, directly or
indirectly (with or without notice or lapse of time):
(i) contravene, conflict with, or result in a violation of
(A) any provision of the Organizational Documents of the Company, or (B) any
resolution adopted by the board of directors or the stockholders of the
Company;
(ii) contravene, conflict with, or result in a violation of,
or give any Governmental Body or other Person the right to challenge any of
the Contemplated Transactions or to exercise any remedy or obtain any relief
under, any Legal Requirement or any Order to which the Key Stockholders, the
Company, or any of the assets owned or used by the Company, may be subject;
(iii) contravene, conflict with, or result in a violation of
any of the terms or requirements of, or give any Governmental Body the right
to revoke, withdraw, suspend, cancel, terminate, or modify, any Governmental
Authorization that is held by the Company or that otherwise relates to the
business of, or any of the assets owned or used by, the Company;
(iv) cause the Purchaser or the Company to become subject to,
or to become liable for the payment of, any Tax;
(v) cause any of the assets owned by the Company to be
reassessed or revalued by any Taxing Authority or other Governmental Body;
(vi) contravene, conflict with, or result in a violation or
breach of any provision of, or give any Person the right to declare a default
or exercise any remedy under, or to accelerate
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the maturity or performance of, or to cancel, terminate, or modify, any
Material Applicable Contract; or
(vii) result in the imposition or creation of any Encumbrance
upon or with respect to any of the assets owned or used by the Company.
Except as set forth in Part 3.2 of the Disclosure Letter, the Company
will not be required to give any notice to or obtain any Consent from any
Person in connection with the execution and delivery of this Agreement or the
consummation or performance of any of the Contemplated Transactions.
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3.3 CAPITALIZATION. The authorized equity securities of the Company
consist of 5,000,000 shares of preferred stock, $0.05 par value per share, of
which 350,000 shares have been designated as Series A Preferred Stock and
700,000 shares have been designated as Series B Preferred Stock and 10,000,000
shares of common stock, $0.01 par value per share (collectively, the
"GeneScreen Stock"), of which 350,000 shares of Series A Preferred Stock,
691,723 shares of Series B Preferred Stock and 2,620,493 shares of Common
Stock are issued and outstanding. Except as set forth in Part 3.3 of the
Disclosure Letter, the Stockholders are and will be on the Closing Date the
record and beneficial owner and holder of all the number of shares set forth
opposite their names on Exhibit J, in each case, free and clear of all
Encumbrances. Except as set forth in Part 3.3 of the Disclosure Letter, there
are no: (i) shares of capital stock or other voting securities of the Company,
(ii) securities of the Company convertible into or exchangeable for shares of
capital stock or voting securities of the Company, (iii) options, warrants,
exchange rights, subscription rights or other Contracts relating to the
issuance, sale, or transfer of any equity securities or other securities of
the Company or securities convertible into or exchangeable for equity
securities or other securities of the Company or (iv) any Contracts to grant,
or enter into any such option, warrant, call, right, commitment or agreement
(the items in clauses (i), (ii), (iii) and (iv) being referred to collectively
as the "Company Securities"). Except as set forth in Part 3.3 of the
Disclosure Letter, there are no outstanding obligations of the Company to
repurchase, redeem or otherwise acquire, any Company Securities. All of the
outstanding equity securities of the Company have been duly authorized and
validly issued and are fully paid and nonassessable. None of the outstanding
equity securities or other securities of the Company was issued in violation
of the Securities Act or any other Legal Requirement. Except as set forth in
Part 3.3 of the Disclosure Letter, the Company does not own, or have any
Contract to acquire, any equity securities or other securities of any Person
or any direct or indirect equity or ownership interest in any other business.
The GeneScreen Stock being converted pursuant to the Merger hereunder
represents 100% of the capital stock of all classes of the Company. The
Company's MT Human ID, Inc. subsidiary ("MT Human") has no assets or
liabilities (contingent or otherwise), nor has it conducted any business,
except as set forth in Part 3.3 of the Disclosure Letter. There are no
stockholders in the Company other than the Stockholders. The Key Stockholders
own and hold a majority of the outstanding shares of GeneScreen Stock. At the
Effective Time there will be no Stockholders of the Company other than the
Stockholders and the holders of outstanding options to acquire capital stock
of the Company disclosed in Part 3.3 of the Disclosure Letter who exercise, or
are deemed to have exercised, such options at or prior to the Effective Time.
3.4 FINANCIAL STATEMENTS. The Company has delivered to the Purchaser:
(a) audited balance sheets of the Company as at December 31 in each of the
years 1992 through 1996, and the related audited consolidated statements of
income, changes in stockholders' equity, and cash flow for each of the fiscal
years then ended, together with the report thereon of Deloitte & Touche LLP,
independent certified public accountants, (b) audited balance sheets of the
Company as at December 31, 1997 (including the notes thereto, the "Balance
Sheet"), and the related consolidated statements of income, changes in
stockholders' equity, and cash flow for the fiscal year then ended, together
with the report thereon of Deloitte & Touche LLP, independent certified public
accountants, and (c) reviewed balance sheet of the Company as at March 31,
1998 and June 30, 1998 (the "Interim Balance Sheet") and the related reviewed
consolidated
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statements of income, changes in stockholders' equity, and cash flow for the
three and six months then ended, including in each case the notes thereto.
Such financial statements and notes fairly present, in all material respects,
the financial condition and the results of operations, changes in
stockholders' equity, and cash flow of the Company as at the respective dates
of and for the periods referred to in such financial statements, all in
accordance with GAAP, subject, in the case of interim financial statements, to
normal recurring year-end adjustments (the effect of which will not,
individually or in the aggregate, be materially adverse) and the absence of
notes (that, if presented, would not differ materially from those included in
the Balance Sheet); except as disclosed in such financial statements, the
financial statements referred to in this Section 3.4 reflect the consistent
application of such accounting principles throughout the periods involved. No
financial statements of any Person other than the Company and the subsidiaries
listed in Part 3.1(c) of the Disclosure Letter are required by GAAP to be
included in the consolidated financial statements of the Company.
3.5 BOOKS AND RECORDS. The books of account, minute books, stock
record books, and other records of the Company, all of which have been made
available to the Purchaser, are complete and correct in all material respects,
and reflect the maintenance of an adequate system of internal controls. The
minute book of the Company contains accurate and complete records of all
meetings held of, and corporate action taken by, the stockholders, the Boards
of Directors, and committees of the Board of Directors of the Company, and no
meeting of any such stockholders, Board of Directors, or committee has been
held for which minutes have not been prepared and are not contained in such
minute books.
3.6 TITLE TO PROPERTIES; ENCUMBRANCES. Part 3.6 of the Disclosure
Letter contains a complete and accurate list of all real property, leaseholds,
or other interests therein owned by the Company. The Company owns (with good
and marketable title in the case of real property, subject only to the matters
permitted by the following sentence) all the properties and assets (whether
real, personal, or mixed and whether tangible or intangible) that it purports
to own, including all of the properties and assets reflected in the Balance
Sheet and the Interim Balance Sheet (except for assets held under capitalized
leases disclosed or not required to be disclosed in Part 3.6 of the Disclosure
Letter and personal property sold since the date of the Balance Sheet and the
Interim Balance Sheet, as the case may be, in the Ordinary Course of
Business), and all of the properties and assets purchased or otherwise
acquired by the Company since the date of the Balance Sheet (except for
personal property acquired and sold since the date of the Balance Sheet in the
Ordinary Course of Business and consistent with past practice), which
subsequently purchased or acquired properties and assets (other than inventory
and short-term investments) are listed in Part 3.6 of the Disclosure Letter.
All properties and assets reflected in the Balance Sheet and the Interim
Balance Sheet are free and clear of all Encumbrances and are not, in the case
of real property, subject to any rights of way, building use restrictions,
exceptions, variances, reservations, or limitations of any nature except, with
respect to all such properties and assets, (a) mortgages or security interests
shown on the Balance Sheet or the Interim Balance Sheet as securing specified
liabilities or obligations, with respect to which no default (or event that,
with notice or lapse of time or both, would constitute a default) exists, (b)
mortgages or security interests incurred in connection with the purchase of
property or assets after the date of the Interim Balance Sheet (such mortgages
and security interests being limited to the property or assets so acquired),
with respect to which no default (or event that, with notice or
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lapse of time or both, would constitute a default) exists, and (c) liens for
current Taxes not yet due, (d) defects, irregularities and deficiencies in
title that do not impair the use of such property for the purposes for which
such property is held by the Company in any material respect, (e) Encumbrances
disclosed in Part 3.6 of the Disclosure Letter; and (f) Encumbrances that
individually or in the aggregate would not have a Material Adverse Effect on
the Company or any of its assets.
3.7 CONDITION AND SUFFICIENCY OF ASSETS. The buildings, plants,
structures, and equipment of the Company are structurally sound, are in good
operating condition and repair in all material respects, and are adequate for
the uses to which they are being put, and none of such buildings, plants,
structures, or equipment is in need of maintenance or repairs except for
ordinary, routine maintenance and repairs that are not material in nature or
cost. The building, plants, structures, and equipment of the Company are
sufficient for the continued conduct of the Company's business after the
Closing in substantially the same manner as conducted prior to the Closing.
3.8 ACCOUNTS RECEIVABLE. All accounts receivable of the Company that
are reflected on the Balance Sheet or the Interim Balance Sheet or on the
accounting records of the Company as of the Closing Date (collectively, the
"Accounts Receivable") represent or will represent valid obligations arising
from sales actually made or services actually performed in the Ordinary Course
of Business. Unless paid prior to the Closing Date, the Accounts Receivable
are or will be as of the Closing Date current and collectible net of the
respective reserves shown on the Balance Sheet or the Interim Balance Sheet or
on the accounting records of the Company as of the Closing Date (which
reserves are adequate and calculated consistent with past practice and, in the
case of the reserve as of the Closing Date, will not represent a greater
percentage of the Accounts Receivable as of the Closing Date than the reserve
reflected in the Interim Balance Sheet represented of the Accounts Receivable
reflected therein and will not represent an adverse change in the composition
of such Accounts Receivable in terms of aging). Subject to such reserves, each
of the Accounts Receivable either has been or will be collected in full,
without any set-off, within ninety days after the day on which it first
becomes due and payable or with respect to receivables from Governmental
Bodies or collected through insurance carriers, within 180 days after the day
on which it first becomes due and payable provided, however, that no
representation is made as to any Accounts Receivable owed by Purchaser. There
is no contest, claim, or right of set-off, other than returns in the Ordinary
Course of Business, under any Contract with any obligor of an Accounts
Receivable relating to the amount or validity of such Accounts Receivable.
Part 3.8 of the Disclosure Letter contains a complete and accurate list of all
Accounts Receivable as of the date of the Interim Balance Sheet, which list
sets forth the aging of such Accounts Receivable.
3.9 INVENTORY. All inventory of the Company, whether or not reflected
in the Balance Sheet or the Interim Balance Sheet, consists of a quality and
quantity usable and salable in the Ordinary Course of Business in all material
respects, except for obsolete items and items of below-standard quality, all
of which have been written off or written down to net realizable value in the
Balance Sheet or the Interim Balance Sheet or on the accounting records of the
Company as of the Closing Date, as the case may be. All inventories not
written off have been priced at the lower of cost or market on a first in,
first out basis. The quantities of each item of inventory
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(whether raw materials, work-in-process, or finished goods) are not excessive,
but are reasonable in the present circumstances of the Company.
3.10 NO UNDISCLOSED LIABILITIES. Except as set forth in Part 3.10 of
the Disclosure Letter, the Company has no liabilities or obligations of any
nature (whether known or unknown and whether absolute, accrued, contingent, or
otherwise) except for liabilities or obligations reflected or reserved against
in the Balance Sheet or the Interim Balance Sheet, current liabilities
incurred in the Ordinary Course of Business since the respective dates
thereof, and liabilities, which individually or in the aggregate would not
have a Material Adverse Effect
3.11 TAXES.
(a) The Company has filed or caused to be filed within the allowable
time periods all Tax Returns that are or were required to be filed by or with
respect to it pursuant to applicable Legal Requirements in all material
respects. The Company has delivered or made available to the Purchaser copies
of, and Part 3.11 of the Disclosure Letter contains a complete and accurate
list of, all such Tax Returns filed since January 1, 1993. The Company has
paid, or made provision for the payment of, all Taxes that have or may have
become due pursuant to those Tax Returns or otherwise, or pursuant to any
assessment received by the Company, except such Taxes, if any, as are listed
in Part 3.11 of the Disclosure Letter and are being contested in good faith
and as to which adequate reserves (determined in accordance with GAAP) have
been provided in the Balance Sheet and the Interim Balance Sheet.
(b) The United States Federal and state income Tax Returns of the
Company have not been audited by the IRS or relevant state Tax Authorities and
the Company has no tolling agreements with the IRS. Part 3.11 of the
Disclosure Letter contains a complete and accurate list of all audits of all
Tax Returns, including a reasonably detailed description of the nature and
outcome of each audit. All deficiencies proposed as a result of such audits
have been paid, reserved against, settled, or, as described in Part 3.11 of
the Disclosure Letter, are being contested in good faith by appropriate
proceedings. Part 3.11 of the Disclosure Letter describes all adjustments to
the United States Federal income Tax Returns filed by the Company for all
taxable years since 1993, and the resulting deficiencies proposed by the IRS.
Except as described in Part 3.11 of the Disclosure Letter, neither the
Stockholders nor the Company has given or been requested to give waivers or
extensions (or is or would be subject to a waiver or extension given by any
other Person) of any statute of limitations relating to the payment of Taxes
for which Stockholders or the Company may be liable.
(c) The charges, accruals, and reserves with respect to Taxes on the
books of the Company are adequate (determined in accordance with GAAP) and are
at least equal to the Company's liability for Taxes. There exists no proposed
tax assessment against the Company except as disclosed in the Balance Sheet or
in Part 3.11 of the Disclosure Letter. No consent to the application of IRC
Section 341(f)(2) has been filed with respect to any property or assets held,
acquired, or to be acquired by the Company. All Taxes that the Company is or
was required by Legal Requirements to withhold or collect have been duly
withheld or collected in all material respects and, to the extent required,
have been paid to the proper Governmental Body or other Person.
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(d) All Tax Returns filed by (or that include on a consolidated
basis) the Company are true, correct, and complete in all material respects.
There is no tax sharing agreement that will require any payment by the Company
after the date of this Agreement. The Company is not and has never been a
"Subchapter S" corporation as defined in the IRC.
3.12 NO MATERIAL ADVERSE CHANGE. Except as disclosed in Part 3.12 of
the Disclosure Letter, since the date of the Balance Sheet, there has not been
any material adverse change in the business, operations, properties, assets,
or condition of the Company, and to the Company's Knowledge, no event has
occurred or circumstance exists that may result in such a material adverse
change.
3.13 EMPLOYEE BENEFITS.
(a) As used in this Section 3.13, the following terms have the
meanings set forth below:
"Company Other Benefit Obligation" means an Other Benefit Obligation
owed, adopted, or followed by the Company or an ERISA Affiliate of the
Company.
"Company Plan" means all Plans of which the Company or an ERISA
Affiliate of the Company is or, within five (5) years prior to the Closing,
was a Plan Sponsor, or to which the Company or an ERISA Affiliate of the
Company otherwise contributes or, within five (5) years prior to the closing,
has contributed, or in which the Company or, within five (5) years prior to
the Closing, an ERISA Affiliate of the Company otherwise participates or has
participated. All references to Plans are to Company Plans unless the context
requires otherwise.
"Company VEBA" means a VEBA whose members include employees of the
Company or any ERISA Affiliate of the Company.
"ERISA Affiliate" means, with respect to the Company, any other
person that, together with the Company, would be treated as a single employer
under IRC Section 414.
"Multi-Employer Plan" has the meaning given in ERISA Section 3(37)(A).
"Other Benefit Obligations" means all obligations, arrangements, or
customary practices to provide benefits, other than salary or fees paid in
cash, as compensation for services rendered, to present or former directors,
employees, or agents, other than obligations, arrangements, and practices that
are Plans. Other Benefit Obligations include consulting agreements under which
the compensation paid does not depend upon the amount of service rendered,
sabbatical policies, severance payment policies, and fringe benefits within
the meaning of IRC Section 132.
"PBGC" means the Pension Benefit Guaranty Corporation or any
successor thereto.
"Pension Plan" has the meaning given in ERISA Section 3(2)(A).
"Plan" has the meaning given in ERISA Section 3(3).
"Plan Sponsor" has the meaning given in ERISA Section 3(16)(B).
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"Qualified Plan" means any Plan that meets or purports to meet the
requirements of IRC Section 401(a).
"Title IV Plans" means all Pension Plans that are subject to Title IV
of ERISA, 29 U.S.C. Section 1301 et seq., other than Multi-Employer Plans.
"VEBA" means a voluntary employees' beneficiary association under IRC
Section 501(c)(9).
"Welfare Plan" has the meaning given in ERISA Section 3(1).
(b) (i) Part 3.13(b)(i) of the Disclosure Letter contains a complete
and accurate list of all Company Plans, Company Other Benefit Obligations, and
Company VEBAs, and identifies as such all Company Plans that are (A) defined
benefit Pension Plans, (B) Qualified Plans, (C) Title IV Plans, or (D)
Multi-Employer Plans.
(ii) Part 3.13(b)(ii) of the Disclosure Letter contains a
complete and accurate list of (A) all ERISA Affiliates of the Company, and (B)
all Plans of which any such ERISA Affiliate is a Plan Sponsor, participates,
or has current or future benefit obligations.
(iii) The Company maintains no Welfare Plans which provide
for post-retirement benefits other than continuation coverage required
pursuant to the Consolidated Omnibus Budget Reconciliation Act of 1985
("COBRA"). The Company has not maintained or contributed to any VEBAs.
(iv) Part 3.13(b)(iv) of the Disclosure Letter sets forth the
financial cost of all obligations owed under any Company Plan or Company Other
Benefit Obligation for any non-Qualified Plan.
(c) The Company has delivered to the Purchaser:
(i) all documents that set forth the terms of each Company
Plan, Company Other Benefit Obligation, or Company VEBA and of any related
trust, and all plan descriptions and summary plan descriptions of Company
Plans, Company Other Benefit Obligations, and Company VEBAs;
(ii) all personnel, payroll, and employment manuals and
policies;
(iii) all collective bargaining agreements to which the
Company and/or any of their ERISA Affiliates is/are a party;
(iv) a written description of any Company Plan or Company
Other Benefit Obligation that is not otherwise in writing;
(v) all registration statements filed with respect to any
Company Plan;
(vi) all insurance policies purchased by or to provide
benefits under any Company Plan;
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(vii) all contracts with third party administrators,
actuaries, investment managers, consultants, and other independent contractors
that relate to any Company Plan, Company Other Benefit Obligation, or Company
VEBA;
(viii) all reports submitted within the four years preceding
the date of this Agreement by third party administrators, actuaries,
investment managers, consultants, or other independent contractors with
respect to any Company Plan, Company Other Benefit Obligation, or Company
VEBA;
(ix) the Form 5500 filed in each of the most recent three
plan years with respect to each Company Plan, including all schedules thereto
and the opinions of independent accountants;
(x) all notices that were given by the Company or any ERISA
Affiliate of the Company or any Company Plan relating to any Company Plan to
the IRS, the PBGC, or any participant or beneficiary, pursuant to statute,
within the four years preceding the date of this Agreement;
(xi) all notices that were given by the IRS, the PBGC, or the
Department of Labor to the Company, any ERISA Affiliate of the Company, or any
Company Plan relating to any Company Plan within the four years preceding the
date of this Agreement; and
(xii) with respect to Qualified Plans and VEBAs, the most
recent determination letter for each Plan of the Company that is a Qualified
Plan.
(d) Except as set forth in Part 3.13(d) of the Disclosure Letter:
(i) The Company has performed all of its obligations under
all Company Plans, Company Other Benefit Obligations, and Company VEBAs. The
Company has made appropriate entries in its financial records and statements
for all obligations and liabilities under such Plans, VEBAs, and Obligations
that have accrued but are not due.
(ii) No statement, either written or oral, has been made by
the Company to any Person with regard to any Plan or Other Benefit Obligation
that was not in accordance with the Plan or Other Benefit Obligation and that
could have an adverse economic consequence to the Company or to the Purchaser.
(iii) The Company, with respect to all Company Plans, Company
Other Benefit Obligations, and Company VEBAs, is, and each Company Plan,
Company Other Benefit Obligation, and Company VEBA is, in full compliance with
ERISA, the IRC, and other applicable Laws including the provisions of such
Laws expressly mentioned in this Section 3.13, and with any applicable
collective bargaining agreement.
(A) No transaction prohibited by ERISA Section 406
and no "prohibited transaction" under IRC Section 4975(c) have occurred with
respect to any Company Plan.
(B) The Company has no liability to the IRS with
respect to any Plan, including any liability imposed by Chapter 43 of the IRC.
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(C) The Company has no liability to the PBGC with
respect to any Plan or has any liability under ERISA Section 502 or Section
4071.
(D) All filings required by ERISA and the IRC as to
each Plan have been timely filed, and all notices and disclosures to
participants required by either ERISA or the IRC have been timely provided.
(E) All contributions and payments made or accrued
with respect to all Company Plans, Company Other Benefit Obligations, and
Company VEBAs are deductible under IRC Section 162 or Section 404. No amount,
or any asset of any Company Plan or Company VEBA, is subject to tax as
unrelated business taxable income.
(iv) Except as set forth in Part 3.13(d)(iv) of the
Disclosure Letter, each Company Plan can be terminated within thirty days,
without payment of any additional contribution or amount and, except with
respect to Qualified Plans, without the vesting or acceleration of any
benefits promised by such Plan.
(v) To the Company's Knowledge, premium costs of the
Company's Welfare Plans are not expected to materially increase for the next
renewal period as the direct result of past claims experience.
(vi) Other than claims for benefits submitted by participants
or beneficiaries, no claim against, or legal proceeding involving, any Company
Plan, Company Other Benefit Obligation, or Company VEBA is pending or, to the
Company's Knowledge, is Threatened.
(vii) Except as set forth in Part 3.13(d)(vii) of the
Disclosure Letter, no Company Plan is a stock bonus, pension, or
profit-sharing plan within the meaning of IRC Section 401(a).
(viii) Each Qualified Plan of the Company has received a
favorable determination letter as to the qualified status of such Plan under
IRC Section 401(a), including all Plan provisions and/or amendments which, under
current Internal Revenue Service guidelines are required to have been
incorporated or made and each such Plan has been operated in all material
respects in compliance with Plan provisions and all applicable legal
requirements; each trust for each such Plan is exempt from federal income tax
under IRC Section 501(a). To 'Company's knowledge no event has occurred or
circumstance exists that will or could give rise to disqualification or loss
of tax-exempt status of any such Plan.
(ix) No Company Plan is subject to Title IV of ERISA.
(x) Neither the Company nor any ERISA Affiliate of the
Company has ever established, maintained, or contributed to or otherwise
participated in, or had an obligation to maintain, contribute to, or otherwise
participate in, any Multi-Employer Plan.
(xi) Under the terms of the Company Plans, the Company has
the right to modify and terminate benefits to retirees (other than pensions)
with respect to both retired and active employees.
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(xii) The Company has complied with the provisions of
ERISA Section 601 et seq. and IRC Section 4980B in all material respects.
(xiii) No payment that is owed or may become due to any
director, officer, employee, or agent of the Company under any current Company
Plan or Company Other Benefit Obligation will be non-deductible to the Company
or subject to tax under IRC Section 280G or Section 4999; nor will the Company
be required to "gross up" or otherwise compensate any such person because of the
imposition of any excise tax on a payment to such person.
(xiv) Except as set forth in Part 3.13(d)(xvi) of the
Disclosure Letter, the consummation of the Contemplated Transactions will not
result in the payment, vesting, or acceleration of any benefit.
3.14 COMPLIANCE WITH LEGAL REQUIREMENTS; GOVERNMENTAL AUTHORIZATIONS.
(a) Except as set forth in Part 3.14 of the Disclosure Letter:
(i) The Company is, and at all times has been, in full
compliance with each Legal Requirement that is or was applicable to it or to
the conduct or operation of its business or the ownership or use of any of its
assets in all material respects;
(ii) No event has occurred or circumstance exists that (with
or without notice or lapse of time) (A) may constitute or result in a
violation by the Company of, or a failure on the part of the Company to comply
with, any Legal Requirement in any material respect, or (B) may give rise to
any obligation on the part of the Company to undertake, or to bear all or any
portion of the cost of, any remedial action of any nature; and
(iii) The Company has not received any notice or other
communication (whether oral or written) from any Governmental Body or any
other Person regarding (A) any actual, alleged, possible, or potential
violation of, or failure to comply with, any Legal Requirement in any material
respect, or (B) any actual, alleged, possible, or potential obligation on the
part of the Company to undertake, or to bear all or any portion of the cost
of, any remedial action of any nature.
(b) Part 3.14 of the Disclosure Letter contains a complete and
accurate list of each Governmental Authorization that is held by the Company
or that otherwise relates to the business of, or to any of the assets owned or
used by, the Company. Each Governmental Authorization listed or required to be
listed in Part 3.14 of the Disclosure Letter is valid and in full force and
effect. Except as set forth in Part 3.14 of the Disclosure Letter:
(i) The Company is, and at all times has been, in full
compliance with all of the terms and requirements of each Governmental
Authorization identified or required to be identified in Part 3.14 of the
Disclosure Letter;
(ii) No event has occurred or circumstance exists that may
(with or without notice or lapse of time) (A) constitute or result directly or
indirectly in a violation of or a failure
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to comply with any term or requirement of any Governmental Authorization
listed or required to be listed in Part 3.14 of the Disclosure Letter, or (B)
result directly or indirectly in the revocation, withdrawal, suspension,
cancellation, or termination of, or any modification to, any Governmental
Authorization listed or required to be listed in Part 3.14 of the Disclosure
Letter;
(iii) The Company has not received any notice or other
communication (whether oral or written) from any Governmental Body or any
other Person regarding (A) any actual, alleged, possible, or potential
violation of or failure to comply with any term or requirement of any
Governmental Authorization, or (B) any actual, proposed, possible, or
potential revocation, withdrawal, suspension, cancellation, termination of, or
modification to any Governmental Authorization; and
(iv) All applications required to have been filed for the
renewal of the Governmental Authorizations listed or required to be listed in
Part 3.14 of the Disclosure Letter have been duly filed on a timely basis with
the appropriate Governmental Bodies, and all other filings required to have
been made with respect to such Governmental Authorizations have been duly made
on a timely basis with the appropriate Governmental Bodies.
The Governmental Authorizations listed in Part 3.14 of the Disclosure
Letter collectively constitute all of the Governmental Authorizations
necessary to permit the Company to lawfully conduct and operate its business
in the manner it currently conducts and operates such business and to permit
the Company to own and use its assets in the manner in which it currently owns
and uses such assets.
3.15 LEGAL PROCEEDINGS; ORDERS. (a) Except as set forth in Part 3.15
of the Disclosure Letter, there is no pending Proceeding:
(i) that has been commenced by or against the Company or that
otherwise relates to or may affect the business of, or any of the assets owned
or used by, the Company; or
(ii) that challenges, or that may have the effect of
preventing, delaying, making illegal, or otherwise interfering with, any of
the Contemplated Transactions.
To the Knowledge of the Company, except as disclosed in Part 3.15 of
the Disclosure Letter, (1) no such Proceeding has been Threatened, and (2) no
event has occurred or circumstance exists that may give rise to or serve as a
basis for the commencement of any such Proceeding. The Proceedings set forth
in Part 3.15 of the Disclosure Letter shall not result in Damages in the
aggregate exceeding the amount reserved therefor in the Agreed Latest Balance
Sheet (without giving effect to the $25,000 materiality standard). The Company
has delivered to the Purchaser copies of all pleadings, correspondence, and
other documents relating to each Proceeding listed in Part 3.15 of the
Disclosure Letter. The Proceedings listed in Part 3.15 of the Disclosure
Letter will not have a Material Adverse Effect.
(b) Except as set forth in Part 3.15 of the Disclosure Letter:
(i) There is no Order to which the Company, or any of
the assets owned or used by the Company, is subject;
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(ii) To the Knowledge of the Company, the Stockholders are
not subject to any Order that relates to the business of, or any of the assets
owned or used by, the Company; and
(iii) To the Knowledge of the Company, no officer, director,
agent, or employee of the Company is subject to any Order that prohibits such
officer, director, agent, or employee from engaging in or continuing any
conduct, activity, or practice relating to the business of the Company.
(c) Except as set forth in Part 3.15 of the Disclosure Letter:
(i) The Company is, and at all times has been, in full
compliance in all material respects with all of the terms and requirements of
each Order to which it, or any of the assets owned or used by it, is or has
been subject;
(ii) To the Knowledge of the Company, no event has occurred
or circumstance exists that may constitute or result in (with or without
notice or lapse of time) a violation of or failure to comply with any term or
requirement of any Order to which the Company, or any of the assets owned or
used by the Company, is subject; and
(iii) The Company has not received any notice or other
communication (whether oral or written) from any Governmental Body or any
other Person regarding any actual, alleged, possible, or potential violation
of, or failure to comply with, any term or requirement of any Order to which
the Company, or any of the assets owned or used by the Company, is or has been
subject.
3.16 ABSENCE OF CERTAIN CHANGES AND EVENTS. Except as set forth in
Part 3.16 of the Disclosure Letter, since the date of the Balance Sheet, the
Company has conducted its business only in the Ordinary Course of Business and
there has not been any:
(a) change in the Company's authorized or issued capital stock; grant
of any stock option or right to purchase shares of capital stock of the
Company; issuance of any security convertible into such capital stock;
purchase, redemption, retirement, or other acquisition by the Stockholders of
any shares of any such capital stock; or declaration or payment of any
dividend or other distribution or payment in respect of shares of capital
stock;
(b) amendment to the Organizational Documents of the Company;
(c) payment or increase by the Company of any bonuses, salaries, or
other compensation to any stockholder, director, officer, or (except in the
Ordinary Course of Business) employee or entry into any employment, severance,
or similar Contract with any director, officer, or employee;
(d) adoption of, or increase in the payments to or benefits under,
any profit sharing, bonus, deferred compensation, savings, insurance, pension,
retirement, or other employee benefit plan for or with any employees of the
Company;
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(e) damage to or destruction or loss of any asset or property of the
Company, whether or not covered by insurance, that may have a Material Adverse
Effect;
(f) entry into, termination of, or receipt of notice of termination
of (i) any license, distributorship, dealer, sales representative, joint
venture, credit, or similar agreement, or (ii) any Contract or transaction
involving a total remaining commitment by or to the Company of at least
$50,000;
(g) sale (other than sales of inventory in the Ordinary Course of
Business), lease, or other disposition of any asset or property of the Company
or mortgage, pledge, or imposition of any Encumbrance on any material asset or
property of the Company, including the sale, lease, or other disposition of
any of the Intellectual Property Assets;
(h) cancellation or waiver of any claims or rights with a value to
the Company in excess of $50,000;
(i) material change in the accounting methods used by the Company;
(j) sale or pledge, or agreement to sell or pledge, any capital stock
owned by the Company;
(k) split, combination or reclassification of the Company's
outstanding stock or issuance or authorization or proposed issuance of any
other securities with respect to, in lieu of or in substitution for the
GeneScreen Stock;
(l) incurrence of any indebtedness for borrowed money or capital
lease obligations outside the Ordinary Course of Business;
(m) guaranty of any indebtedness of another Person;
(n) acquisition by merger or consolidation with, or by purchasing a
substantial equity interest in, or by any other manner, any business or any
Person;
(o) acceleration, termination (other than end-of-term expirations),
modification, cancellation, declaration of a default under or indication of an
intent to terminate any Contract (or series of related Contracts) involving
more than $50,000 to which the Company is a party or by which it is bound;
(p) any capital expenditure (or series of related capital
expenditures) either involving more than $50,000 or outside the Ordinary
Course of Business;
(q) delay or postponement of the collection of accounts receivable or
the payment of accounts payable and other liabilities outside the Ordinary
Course of Business;
(r) loan to, or, except in Ordinary Course of Business, entry into
any other transaction with, any of its directors, officers and employees;
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(s) entry into any transaction other than in the Ordinary Course of
Business; and
(t) agreement, whether oral or written, by the Company to do any of
the foregoing.
3.17 CONTRACTS; NO DEFAULTS. (a) Part 3.17(a) of the Disclosure
Letter contains a complete and accurate list, and the Company has delivered to
the Purchaser true and complete copies, of:
(i) each Applicable Contract that involves performance of
services or delivery of goods or materials by the Company of an amount or
value in excess of $50,000;
(ii) each Applicable Contract that was not entered into in
the Ordinary Course of Business and that involves expenditures or receipts of
the Company in excess of $50,000;
(iii) each lease, rental or occupancy agreement, license,
installment and conditional sale agreement, and other Applicable Contract
affecting the ownership of, leasing of, title to, use of, or any leasehold or
other interest in, any assets of the Company (except personal property leases
and installment and conditional sales agreements having a value per item or
aggregate payments of less than $50,000 and with terms of less than one year);
(iv) each licensing agreement or other Applicable Contract
with respect to patents, trademarks, copyrights, or other intellectual
property, including agreements with current or former employees, consultants,
or contractors regarding the appropriation or the non-disclosure of any of the
Intellectual Property Assets;
(v) each collective bargaining agreement and other Applicable
Contract with any labor union or other employee representative of a group of
employees;
(vi) each joint venture, partnership, and other Applicable
Contract (however named) involving a sharing of profits, losses, costs, or
liabilities by the Company with any other Person;
(vii) each Applicable Contract containing covenants that in
any way purport to restrict the business activity of the Company or materially
limit the freedom of the Company to engage in any line of business or to
compete with any Person;
(viii) each Applicable Contract providing for payments to or
by any Person based on sales, purchases, or profits, other than direct
payments for goods having a value in excess of $50,000;
(ix) each Applicable Contract for capital expenditures in
excess of $50,000;
(x) each written warranty, guaranty, and/or other similar
undertaking with respect to contractual performance extended by the Company
other than in the Ordinary Course of Business;
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(xi) each written complaint received by the Company from a
customer during the twelve (12) month period preceding the date hereof, the
net affect of which would be the likely cancellation or termination of a
Contract having a value in excess of $50,000; and
(xii) each amendment, supplement, and modification (whether
oral or written) in respect of any of the foregoing.
Part 3.17(a) of the Disclosure Letter sets forth reasonably complete
details concerning such Contracts, including the parties to the Contracts, the
amount of the remaining commitment of the Company under the Contracts.
(b) Except as set forth in Part 3.17(b) of the Disclosure Letter:
(i) none of the Key Stockholders nor, to the Knowledge of the
Company, any Related Person of the Key Stockholders has or may acquire any
rights under, and none of the Key Stockholders nor such Related Person has or
may become subject to any obligation or liability under, any Contract that
relates to the business of the Company, or any of the assets owned or used by,
the Company; and
(ii) no officer, director, agent, employee, consultant, or
contractor of the Company is bound by any Contract that purports to limit the
ability of such officer, director, agent, employee, consultant, or contractor
to (A) engage in or continue any conduct, activity, or practice relating to
the business of the Company, or (B) assign to the Company or to any other
Person any rights to any invention, improvement, or discovery.
(c) Except as set forth in Part 3.17(c) of the Disclosure Letter,
each Contract identified or required to be identified in Part 3.17(a) of the
Disclosure Letter is in force and effect and is valid and enforceable in
accordance with its terms.
(d) Except as set forth in Part 3.17(d) of the Disclosure Letter:
(i) the Company is and has been in compliance in all material
respects with all applicable terms and requirements of each Contract under
which the Company has or had any obligation or liability or by which the
Company or any of the assets owned or used by the Company is or was bound;
(ii) to the Company's Knowledge, each other Person that has
or had any obligation or liability under any Contract under which the Company
has or had any rights is, and at all times has been, in compliance in all
material respects with all applicable terms and requirements of such Contract;
(iii) to the Company's Knowledge, no event has occurred or
circumstance exists that (with or without notice or lapse of time) may
contravene, conflict with, or result in a violation or breach of, or give the
other Person the right to declare a default or exercise any remedy under, or
to accelerate the maturity or performance of, or to cancel, terminate, or
modify, any Applicable Contract;
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(iv) the Company has not given to or received from any other
Person any notice or other communication (whether oral or written) regarding
any actual, alleged, possible, or potential violation or breach of, or default
under, any Contract; and
(v) the Company is not aware of any state of facts that would
cause a reasonable person to believe that the Company's future sales will not
equal such sales for 1996 or 1997.
(e) There are no renegotiations of, attempts to renegotiate, or
outstanding rights to renegotiate any material amounts paid or payable to the
Company under current or completed Contracts with any Person and no such
Person has made written demand for such renegotiations.
(f) The Contracts relating to the sale, design, manufacture, or
provision of products or services by the Company have been entered into in the
Ordinary Course of Business and have been entered into without the commission
of any act alone or in concert with any other Person, or any consideration
having been paid or promised, that is or would be in violation of any Legal
Requirement.
3.18 INSURANCE. (a) The Company has delivered to the Purchaser:
(i) true and complete copies of all policies of insurance to
which the Company is a party or under which the Company is or has been covered
at any time within the three years preceding the date of this Agreement;
(ii) true and complete copies of all pending applications for
policies of insurance; and
(iii) any statement by the auditor of the Company's financial
statements with regard to the adequacy of such entity's coverage or of the
reserves for claims.
(b) Part 3.18(b) of the Disclosure Letter describes:
(i) any self-insurance arrangement by or affecting the
Company, including any reserves established thereunder;
(ii) any contract or arrangement, other than a policy of
insurance, for the transfer or sharing of any risk by the Company; and
(iii) all obligations of the Company to third parties with
respect to insurance (including such obligations under leases and service
agreements) and identifies the policy under which such coverage is provided.
(c) Part 3.18(c) of the Disclosure Letter sets forth, by year, for
the current policy year and the three immediately preceding policy years:
(i) a summary of the loss experience under each policy;
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(ii) a statement describing each claim under an insurance
policy for an amount in excess of $5,000, which sets forth:
(A) the name of the claimant;
(B) a description of the policy by insurer, type of
insurance, and period of coverage; and
(C) the amount and a brief description of the
claim; and
(iii) a statement describing the loss experience for all
claims that were self-insured, including the number and aggregate cost of such
claims.
(d) Except as set forth on Part 3.18(d) of the Disclosure Letter:
(i) All policies to which the Company is a party or that
provide coverage to either the Company, or any director or officer of the
Company:
(A) are valid, outstanding, and enforceable;
(B) are issued by an insurer that is financially
sound and reputable;
(C) taken together, provide adequate insurance
coverage for the assets and the operations of the Company for all risks normally
insured against by a Person carrying on the same business as the Company;
(D) are sufficient for compliance with all Legal
Requirements and Contracts to which the Company is a party or by which it is
bound;
(E) will continue in full force and effect
following the consummation of the Contemplated Transactions; and
(F) do not provide for any retrospective premium
adjustment or other experienced-based liability on the part of the Company.
(ii) The Company has not received (A) any refusal of coverage
from the issuer of any insurance policy of the Company or any notice that a
defense will be afforded with reservation of rights, or (B) any notice of
cancellation or any other indication that any insurance policy is no longer in
full force or effect or will not be renewed or that the issuer of any policy
is not willing or able to perform its obligations thereunder.
(iii) The Company has paid all premiums due, and has
otherwise performed all of its respective obligations, under each policy to
which the Company is a party or that provides coverage to the Company or a
director thereof.
(iv) The Company has given notice to the insurer of all
claims that may be insured thereby.
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3.19 ENVIRONMENTAL MATTERS. Except as set forth in Part 3.19 of the
Disclosure Letter:
(a) The Company is, and at all times has been, in full compliance
with, and has not been and is not in violation of or liable under, any
Environmental Law. The Company has no Knowledge or any basis to expect, nor
has it or any other Person for whose conduct the Company is or may be held to
be responsible received, any actual or Threatened order, notice, or other
communication from (i) any Governmental Body or private citizen, or (ii) the
current or prior owner or operator of any Facilities, regarding any actual or
potential violation or failure to comply with any Environmental Law, or of any
actual or Threatened obligation to undertake or bear the cost of any
Environmental, Health, and Safety Liabilities with respect to any of the
Facilities or any other properties or assets (whether real, personal, or
mixed) in which the Company has had an interest, or with respect to any
property or Facility at or to which Hazardous Materials were generated,
manufactured, refined, transferred, imported, used, or processed by the
Company or any other Person for whose conduct it is or may be held
responsible, or from which Hazardous Materials have migrated or been
transported, treated, stored, handled, transferred, disposed, recycled, or
received.
(b) There are no pending or, to the Knowledge of the Company,
Threatened Encumbrances resulting from any Environmental, Health, and Safety
Liabilities or arising under or pursuant to any Environmental Law, with
respect to or affecting any of the Facilities or any other properties and
assets (whether real, personal, or mixed) in which the Company has or had an
interest.
(c) The Company has no Knowledge or any basis to expect, nor has it
or any other Person for whose conduct the Company is or may be held
responsible, received any citation, directive, inquiry, notice, Order,
summons, warning, or other communication that relates to Hazardous Activity,
Hazardous Materials, or any alleged, actual, or potential violation or failure
to comply with any Environmental Law, or of any alleged, actual, or potential
obligation to undertake or bear the cost of any Environmental, Health, and
Safety Liabilities with respect to any of the Facilities or any other
properties or assets (whether real, personal, or mixed) in which the Company
had an interest, or with respect to any property or facility to which
Hazardous Materials generated, manufactured, refined, transferred, imported,
used, or processed by the Company or any other Person for whose conduct it is
or may be held responsible, have been transported, treated, stored, handled,
transferred, disposed, recycled, or received.
(d) Neither the Company nor any other Person for whose conduct the
Company is or may be held responsible, has any Environmental, Health, and
Safety Liabilities with respect to the Facilities or with respect to any other
properties and assets (whether real, personal, or mixed) in which the Company
(or any predecessor), has or had an interest.
(e) There are no Hazardous Materials present on or in the Environment
at the Facilities, including any Hazardous Materials contained in barrels,
above or underground storage tanks, landfills, land deposits, dumps, equipment
(whether moveable or fixed) or other containers, either temporary or
permanent, and deposited or located in land, water, sumps, or any other part
of the Facilities or such adjoining property, or incorporated into any
structure therein or thereon.
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Neither the Key Stockholders, the Company nor any other Person for whose
conduct either of them is or may be held responsible, or any other Person, has
permitted or conducted, or is aware of, any Hazardous Activity conducted with
respect to the Facilities or any other properties or assets (whether real,
personal, or mixed) in which the Company has or had an interest except in full
compliance with all applicable Environmental Laws.
(f) There has been no Release or, to the Knowledge of the Company,
Threat of Release, of any Hazardous Materials at or from the Facilities or at
any other locations where any Hazardous Materials were generated,
manufactured, refined, transferred, produced, imported, used, processed,
treated, stored or disposed of, from or by the Facilities, or from or by any
other properties and assets (whether real, personal, or mixed) in which the
Company has or had an interest, or to the Knowledge of the Company any
geologically or hydrologically adjoining property, whether by the Company or
any other Person.
(g) The Company has delivered to the Purchaser true and complete
copies and results of any reports, studies, analyses, tests, or monitoring
possessed or initiated by the Company or any Related Person pertaining to
Hazardous Materials or Hazardous Activities in, on, or under the Facilities,
or concerning compliance by the Key Stockholders or the Company or any other
Person for whose conduct either of them is or may be held responsible, with
Environmental Laws.
3.20 EMPLOYEES.
(a) Part 3.20 of the Disclosure Letter contains a complete and
accurate list of the following information for each employee of the Company,
including each employee on leave of absence or layoff status: employer; name;
job title; current compensation paid or payable; and service credited for
purposes of vesting and eligibility to participate under any pension,
retirement, profit-sharing, thrift-savings, deferred compensation, stock
bonus, stock option, cash bonus, employee stock ownership (including
investment credit or payroll stock ownership), severance pay, insurance,
medical, welfare, or vacation plan, other Employee Pension Benefit Plan or
Employee Welfare Benefit Plan, or any other employee benefit plan or any
Director Plan. The Company does not accrue vacation.
(b) To the Company's Knowledge, no employee or director of the
Company is a party to, or is otherwise bound by, any agreement or arrangement,
including any confidentiality, non-competition, or proprietary rights
agreement, between such employee or director and any other Person
("Proprietary Rights Agreement") that in any way adversely affects or will
adversely affect (i) the performance of his or her duties as an employee or
director of the Company, or (ii) the ability of the Company to conduct its
business, including any Proprietary Rights Agreement with the Company by any
such employee or director. To the Knowledge of the Company, no director,
officer, or other key employee of the Company intends to terminate his or her
employment with the Company.
(c) Part 3.20 of the Disclosure Letter also contains a complete and
accurate list of the following information for each retired employee or
director of the Company, or their dependents, receiving benefits or scheduled
to receive benefits in the future: name, pension benefit, pension
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option election, retiree medical insurance coverage, retiree life insurance
coverage, and other benefits.
3.21 LABOR RELATIONS; COMPLIANCE. The Company has not been and is not
a party to any collective bargaining or other labor union contract. There has
not been, there is not presently pending or existing, and to the Knowledge of
the Company there is not Threatened, (a) any strike, slowdown, picketing, work
stoppage, or employee grievance process, (b) any Proceeding against or
affecting the Company relating to the alleged violation of any Legal
Requirement pertaining to labor relations or employment matters, including any
charge or complaint filed by an employee or union with the National Labor
Relations Board, the Equal Employment Opportunity Commission, or any
comparable Governmental Body, organizational activity, or other labor or
employment dispute against or affecting the Company or its premises, or (c)
any application for certification of a collective bargaining agent. To the
Company's Knowledge no event has occurred or circumstance exists that could
provide the basis for any work stoppage or other labor dispute. There is no
lockout of any employees by the Company, and no such action is contemplated by
the Company. The Company has complied in all material respects with all Legal
Requirements relating to employment, equal employment opportunity,
nondiscrimination, immigration, wages, hours, benefits, collective bargaining,
the payment of social security and similar taxes, occupational safety and
health, and plant closing. The Company is not liable for the payment of any
compensation, damages, taxes, fines, penalties, or other amounts, however
designated, for failure to comply with any of the foregoing Legal
Requirements.
3.22 INTELLECTUAL PROPERTY.
(a) Intellectual Property Assets. The term "Intellectual Property
Assets" includes:
(i) the name "GeneScreen," all fictional business names,
trading names, registered and unregistered trademarks, service marks, and
applications held or used by the Company (collectively, "Marks");
(ii) all patents, patent applications, and inventions and
discoveries that may be patentable held by the Company (collectively,
"Patents");
(iii) all copyrights in both published works and unpublished
works held by the Company (collectively, "Copyrights"); and
(iv) all know-how, trade secrets, confidential information,
customer lists, software, technical information, data, process technology,
plans, drawings, and blue prints owned, used, or licensed by the Company
(collectively, "Trade Secrets").
(b) Agreements. Part 3.22(b) of the Disclosure Letter contains a
complete and accurate list and summary description, including any royalties
paid or received by the Company, of all Contracts relating to the Intellectual
Property Assets to which the Company is a party or by which the Company is
bound, except for any license implied by the sale of a product and perpetual,
paid-up licenses for commonly available software programs with a value of less
than
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$10,000 under which the Company is the licensee. There are no outstanding
and, to the Company's Knowledge, no Threatened disputes or disagreements with
respect to any such agreements.
(c) Know-How Necessary for the Business.
----------------------------------------
(i) The Intellectual Property Assets are all those necessary
for the operation of the Company's business as it is currently conducted. The
Company is the owner of all right, title, and interest in and to each of the
Intellectual Property Assets, free and clear of all material Encumbrances, and
has the right to use without payment to a third party, all of the Intellectual
Property Assets.
(ii) Except as set forth in Part 3.22(c) of the Disclosure
Letter, all former and current employees of the Company have executed written
Contracts with the Company that assign to the Company all rights to any
inventions, improvements, discoveries, or information relating to the business
of the Company. No employee of the Company has entered into any Contract that
restricts or limits in any way the scope or type of work in which the employee
may be engaged or requires the employee to transfer, assign, or disclose
information concerning his or her work to anyone other than the Company.
(d) Patents.
-------------
(i) Part 3.22(d) of the Disclosure Letter contains a complete
and accurate list and summary description of all Patents. Except as set forth
in Part 3.22(d) of the Disclosure Letter, the Company is the owner of all
right, title, and interest in and to each of the Patents, free and clear of
all Encumbrances.
(ii) All of the issued Patents are currently in compliance
with formal legal requirements (including payment of filing, examination, and
maintenance fees and proofs of working or use), are valid and enforceable, and
are not subject to any maintenance fees or Taxes or actions falling due within
ninety days after the Closing Date.
(iii) No Patent has been or is now involved in any
interference, reissue, reexamination, or opposition proceeding. To the
Company's Knowledge, there is no potentially interfering patent or patent
application of any third party.
(iv) No Patent is infringed or, to the Company's Knowledge,
has been challenged or threatened in any way. None of the products
manufactured and sold, nor any process or know-how used, by the Company
infringes or is alleged to infringe any patent or other proprietary right of
any other Person.
(v) All products made, used, or sold under the Patents have
been marked with the proper patent notice.
(e) Trademarks.
----------------
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(i) Part 3.22(e) of the Disclosure Letter contains a complete
and accurate list and summary description of all Marks. Except as set forth in
Part 3.22(e) of the Disclosure Letter, the Company is the owner of all right,
title, and interest in and to each of the Marks, free and clear of all
Encumbrances.
(ii) All Marks that have been registered are currently in
compliance with all formal legal requirements (including the timely
post-registration filing of affidavits of use and incontestability and renewal
applications), are valid and enforceable, and are not subject to any
maintenance fees or Taxes or actions falling due within ninety days after the
Closing Date.
(iii) No Mark has been or is now involved in any opposition,
invalidation, or cancellation and, to the Company's Knowledge, no such action
is Threatened with the respect to any of the Marks.
(iv) Except as set forth in Part 3.22(e)(iv) of the
Disclosure Letter, to the Company's Knowledge, there is no potentially
interfering trademark or trademark application of any third party.
(v) No Mark is infringed or, to the Company's Knowledge, has
been challenged or threatened in any way. To the Company's Knowledge, none of
the Marks used by the Company infringes or is alleged to infringe any trade
name, trademark, or service mark of any third party.
(f) Copyrights.
----------------
(i) Part 3.22(f) of the Disclosure Letter contains a complete
and accurate list and summary description of all Copyrights. Except as set
forth in Part 3.22(f) of the Disclosure Letter, the Company is the owner of
all right, title, and interest in and to each of the Copyrights, free and
clear of all Encumbrances.
(ii) All the Copyrights have been registered and are
currently in compliance with formal legal requirements, are valid and
enforceable, and are not subject to any maintenance fees or Taxes or actions
falling due within ninety days after the date of Closing.
(iii) No Copyright is infringed or, to the Company's
Knowledge, has been challenged or threatened in any way. None of the subject
matter of any of the Copyrights infringes or is alleged to infringe any
copyright of any third party or is a derivative work based on the work of a
third party.
(g) Trade Secrets.
-------------------
(i) With respect to each Trade Secret, the documentation
relating to such Trade Secret is current, accurate, and sufficient in detail
and content to identify and explain it and to allow its full and proper use
without reliance on the knowledge or memory of any individual.
(ii) The Company has taken all reasonable precautions to
protect the secrecy, confidentiality, and value of its Trade Secrets.
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(iii) The Company has good title and an absolute (but not
necessarily exclusive) right to use the Trade Secrets. The Trade Secrets are
not part of the public knowledge or literature, and, to the Company's
Knowledge, have not been used, divulged, or appropriated either for the
benefit of any Person or to the detriment of the Company. No Trade Secret is
subject to any adverse claim or has been challenged or threatened in any way.
(h) Year 2000 Compliance. All mission critical software licensed to
or used by the Company prior to, during or after the calendar year 2000,
includes or shall include, at no material cost to the Purchaser, design and
performance functionality so the Purchaser shall not experience software
abnormally ending and/or incorrect results from use of any such software in
the operations of the Company due to the calendar year 2000. All software use
by the Company is designed to ensure year 2000 compatibility which shall
include, but not be limited to, date data century recognition, calculations
that accommodate same century and multicentury formulas and date values, and
date data interface values that reflect the century. The Company has and the
Purchaser shall have the absolute right to use, without payment of any
additional consideration to any Person (excluding customary support and
maintenance fees) all software and operating systems necessary to continue to
operate the Company's business without interruption or delay.
3.23 CERTAIN PAYMENTS. Neither the Company nor, to the Company's
Knowledge, any director, officer, agent, or employee of the Company, or any
other Person associated with or acting for or on behalf of the Company, has
directly or indirectly (a) made any contribution, gift, bribe, rebate, payoff,
influence payment, kickback, or other payment to any Person, private or
public, regardless of form, whether in money, property, or services (i) to
obtain favorable treatment in securing business, (ii) to pay for favorable
treatment for business secured, (iii) to obtain special concessions or for
special concessions already obtained, for or in respect of the Company or any
Affiliate of the Company, or (iv) in violation of any Legal Requirement, (b)
established or maintained any fund or asset that has not been recorded in the
books and records of the Company.
3.24 DISCLOSURE.
(a) No representation or warranty of the Company or the Key
Stockholders in this Agreement and no statement in the Disclosure Letter omits
to state a material fact necessary to make the statements herein or therein,
in light of the circumstances in which they were made, not misleading.
(b) No notice given pursuant to Section 5.5 will contain any untrue
statement or omit to state a material fact necessary to make the statements
therein or in this Agreement, in light of the circumstances in which they were
made, not misleading.
(c) There is no fact known to the Company or the Key Stockholders
that has specific application to the Stockholders or the Company (other than
general economic or industry conditions) and that may have a Material Adverse
Effect that has not been set forth in this Agreement or the Disclosure Letter.
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3.25 RELATIONSHIPS WITH RELATED PERSONS. Except as set forth in Part
3.25 of the Disclosure Letter, to the Company's Knowledge, none of the
Stockholders nor any Related Person of the Stockholders or the Company has, or
since the first day of the next to last completed fiscal year of the Company
has had, any interest in any property (whether real, personal, or mixed and
whether tangible or intangible), used in or pertaining to the Company's
business. To the Company's Knowledge, none of the Stockholders nor any Related
Person of the Stockholders or the Company is, or since the first day of the
next to last completed fiscal year of the Company has owned (of record or as a
beneficial owner) an equity interest or any other financial or profit interest
in, a Person that has (i) had business dealings or a material financial
interest in any transaction with the Company, or (ii) engaged in competition
with the Company with respect to any line of the products or services of the
Company (a "Competing Business") in any market presently served by the Company
except for less than one percent of the outstanding capital stock of any
Competing Business that is publicly traded on any recognized exchange or in
the over-the-counter market. Except as set forth in Part 3.25 of the
Disclosure Letter, to the Company's Knowledge, none of the Stockholders nor
any Related Person of the Stockholders or the Company is a party to any
Contract with, or has any claim against, the Company.
3.26 BROKERS OR FINDERS. The Company, the Stockholders and their
respective agents have incurred no obligation or liability, contingent or
otherwise, for brokerage or finders' fees or agents' commissions or other
similar payment in connection with this Agreement other than to Jennifer Lobo,
whose fees will be paid by the Company.
3.27 CONTINUITY OF BUSINESS ENTERPRISE. The Company operates at least
one significant historic business line, or owns at least a significant portion
of its historic business assets, in each case within the meaning of IRS Reg.
Section 1.368-1(d).
3.28 QUALIFICATION AS AN "A" MERGER. The Company is in the process of
selling MTI to Orchid Biocomputer Inc. and hereby represents and warrants that
the total consideration to be received in the MTI Transaction will not prevent
the Merger from being consummated as a tax-free reorganization pursuant to IRC
Section 368(a)(1)(A).
3A. REPRESENTATIONS AND WARRANTIES OF THE KEY SHAREHOLDERS.
Each of the Key Stockholders represents and warrants to the Purchaser
as follows (with the term "Related Person" as used in this Section excluding
the Company itself):
3A.1 (a) Upon the execution and delivery by such Key Stockholder of
this Agreement, a Noncompetition Agreement to which such Key Stockholder is a
party, a Lockup Agreement to which the Key Stockholder is a party, the Escrow
Agreement and each other document and instrument described herein to which
such Key Stockholder is a party (the "Key Stockholder Closing Documents"),
this Agreement and the Key Stockholder Closing Documents will constitute the
legal, valid and binding obligations of such Key Stockholder, enforceable
against such Key Stockholder in accordance with their respective terms. Such
Key Stockholder has the power, authority, and capacity to execute and deliver
this Agreement and the Key Stockholder Closing Documents to which such Key
Stockholder is a party, and to perform its obligations
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under this Agreement and the Key Stockholder Closing Documents to which such
Key Stockholder is a party.
(b) Except as set forth in Part 3.2 of the Disclosure
Letter, neither the execution and delivery of this Agreement by such Key
Stockholder nor the consummation or performance of any of the Contemplated
Transactions by such Key Stockholder will, directly or indirectly (with or
without notice or lapse of time), contravene, conflict with, or result in a
violation of, or give any Governmental Body or other Person the right to
challenge any of the Contemplated Transactions or to exercise any remedy or
obtain any relief under, any Legal Requirement or any Order to which such Key
Stockholder may be subject.
3A.2 Except as set forth in Part 3.17(b) of the Disclosure Letter,
neither such Key Stockholder, nor to the Knowledge of such Key Stockholder,
any Related Person of such Key Stockholder has or may acquire any rights
under, and neither such Key Stockholder nor any of its Related Persons, has or
may become subject to any obligation or liability under any Contract that
relates to the business of the Company, or any assets owned or used by, the
Company.
3A.3 (a) No representation or warranty of such Key Stockholder in
this Agreement or in the Disclosure Letter that relates to such Key
Stockholder omits to state a material fact necessary to make the statements
herein or therein, in light of the circumstances in which they were made, not
misleading.
(b) There is no fact of which such Key Stockholder has
Knowledge that is related to such Key Stockholder that may have a Material
Adverse Effect that has not been set forth in this Agreement or the Disclosure
Letter.
3A.4 Except as set forth in Part 3.25 of the Disclosure Letter, to
the Knowledge of such Key Stockholder, neither such Key Stockholder nor any
Related Person of such Key Stockholder has, or since the first day of the next
to last completed fiscal year of the Company has had, any interest in any
property (whether real, personal, or mixed and whether tangible or
intangible), used in or pertaining to the Company's business. To the Knowledge
of such Key Stockholder, neither such Key Stockholder nor any Related Person
or such Key Stockholder is, or since the first day of the next to last
completed fiscal year of the Company has owned (of record or as a beneficial
owner) an equity interest or any other financial or profit interest in, a
Person that has (i) had business dealings or a material financial interest in
any transaction with the Company, or (ii) engaged in competition with the
Company with respect to any line of products or services of the Company (a
"Competing Business") in any market presently served by the Company except for
less than one percent (1%) of the outstanding capital stock of any Competing
Business that is publicly traded on any recognized exchange or in the
over-the-counter market. Except as set forth in Part 3.25 of the Disclosure
Letter, neither such Key Stockholder nor any Related Person of such Key
Stockholder is a party to any Contract with, or has any claim against, the
Company.
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4. REPRESENTATIONS AND WARRANTIES OF THE PURCHASER. The Purchaser represents
and warrants to the Stockholders as follows:
4.1 ORGANIZATION AND GOOD STANDING. The Purchaser is a corporation
duly organized, validly existing, and in good standing under the laws of the
State of Delaware, and has full corporate power and authority to conduct its
business as it is now being conducted. The Purchaser is duly qualified to do
business as a foreign corporation and is in good standing under the laws of
each state or other jurisdiction in which either the ownership or use of
properties owned or used by it, or the nature of the activities conducted by
it, requires such qualification.
4.2 AUTHORITY; NO CONFLICT.
(a) This Agreement constitutes the legal, valid, and binding
obligation of the Purchaser, enforceable against the Purchaser in accordance
with its terms. Upon the execution and delivery by the Purchaser of the Lockup
Agreements, the Escrow Agreement and the other documents or instruments
described herein (the "Purchaser's Closing Documents"), the Purchaser's
Closing Documents will constitute the legal, valid, and binding obligations of
the Purchaser, enforceable against the Purchaser in accordance with their
terms. The Purchaser has the absolute and unrestricted right, power, and
authority to execute and deliver this Agreement and the Purchaser's Closing
Documents, as the case may be, and to perform their respective obligations
under this Agreement and the Purchaser's Closing Documents, as the case may
be.
(b) Neither the execution and delivery of this Agreement by the
Purchaser nor the consummation or performance of any of the Contemplated
Transactions by the Purchaser will give any Person the right to prevent,
delay, or otherwise interfere with any of the Contemplated Transactions
pursuant to:
(i) any provision of the Purchaser's Organizational
Documents;
(ii) any resolution adopted by the board of directors or
stockholders of the Purchaser, as the case may be;
(iii) any Legal Requirement or Order to which the Purchaser
may be subject; or
(iv) any Contract to which the Purchaser is a party or by
which the Purchaser may be bound.
Other than consent from its stockholders and its bank lender, which
consents will be obtained on or prior to the Closing Date, the Purchaser is
not and will not be required to obtain any Consent from any Person in
connection with the execution and delivery of this Agreement or the
consummation or performance of any of the Contemplated Transactions.
4.3 CAPITALIZATION. The authorized equity securities of the Purchaser
consists of 1,500,000 shares of common stock, $.10 par value per share, of
which 773,175 were outstanding on July 15, 1998; and 500,000 shares of
preferred stock, $10.00 par value per share, of which 21,500 were outstanding
on July 15, 1998. All of the outstanding equity securities of the Purchaser
have been duly authorized and validly issued and are fully paid and
nonassessable.
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None of the outstanding equity securities or other securities of the Purchaser
were issued in violation of the Securities Act or any other Legal Requirement.
Subject to Stockholder approval, the Purchaser intends to increase its
authorized capital stock to 15,000,000 shares of common stock, $.10 par value
per share, and 1,000,000 shares of preferred stock, $10.00 par value per
share, to allow the Purchaser to implement a 3.65-for-1 stock split and to
allow the board of directors of Purchaser to issue additional shares in
connection with acquisitions and capital raising transactions and for other
purposes deemed by the board of directors to be in the best interest of the
Purchaser. If the authorized capital stock of Purchaser is increased and the
stock split is consummated as presently contemplated and set forth herein, no
more than 8,000,000 shares of common stock shall be outstanding at the
Effective Time, including the shares to be issued in connection with this
Agreement.
4.4 INVESTMENT INTENT. The Purchaser is acquiring the GeneScreen
Stock for its own account and not with a view to distribution within the
meaning of Section 2(11) of the Securities Act.
4.5 CERTAIN PROCEEDINGS. There is no pending Proceeding that has been
commenced against the Purchaser and that challenges, or may have the effect of
preventing, delaying, making illegal, or otherwise interfering with, any of
the Contemplated Transactions. To the Purchaser's Knowledge, no such
Proceeding has been Threatened.
4.6 BROKERS OR FINDERS. The Purchaser and its officers and agents
have incurred no obligation or liability, contingent or otherwise, for
brokerage or finders' fees or agents' commissions or other similar payment in
connection with this Agreement and will indemnify and hold the Stockholders
harmless from any such payment alleged to be due by or through the Purchaser
as a result of the action of the Purchaser or its officers or agents.
4.7 SEC REPRESENTATION. The Registration Statement has been filed
with the Securities and Exchange Commission for the registration under the
Securities Act of the offer and sale of Lifecodes Stock (i) pursuant to the
IPO and (ii) to the Stockholders at the Effective Time pursuant to the Merger.
The Purchaser has delivered to the Company a true and complete copy of the
Registration Statement, including all exhibits and amendments thereto. The
Registration Statement, as filed, fully complied, and on the Closing Date will
comply, in all material respects with the applicable provisions of the
Securities Act and the applicable rules and regulations of the Securities and
Exchange Commission promulgated thereunder. On the Closing Date, the
Registration Statement will not contain an untrue statement of a material fact
or omit to state a material fact required to be stated therein or necessary to
make the statements therein not misleading. On the Closing Date, any and all
required filings, notifications, registrations and qualifications under the
Securities Act and the securities or blue sky laws of each applicable state or
other jurisdiction in which a Stockholder is resident (as identified on
Exhibit J) shall have been made, given and effective, so that the Lifecodes
Stock issuable to the Stockholders pursuant to this Agreement shall be freely
tradable by the holders thereof under the Securities Act and such laws,
subject only to the terms of the Lockup Agreements.
4.8 CONTINUITY OF BUSINESS ENTERPRISE. It is the present intention of
the Purchaser to continue at least one significant historic business line of
the Company, or to use at
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least a significant portion of the Company's historic business assets, in each
case within the meaning of IRS Reg. Section 1.368-1(d).
4.9 NO MATERIAL ADVERSE CHANGE. There has been no material adverse
change in the business of the Purchaser since the date of the Registration
Statement.
5. COVENANTS OF THE COMPANY PRIOR TO CLOSING DATE.
5.1 ACCESS AND INVESTIGATION. Between the date of this Agreement and
the Closing Date, the Company will, and will cause its Representatives to, (a)
afford the Purchaser and its Representatives and lenders and their
Representatives (collectively, the "Purchaser's Advisors") full and free
access to the Company's personnel, properties, contracts, books and records,
and other documents and data, (b) furnish the Purchaser and the Purchaser's
Advisors with copies of all such contracts, books and records, and other
existing documents and data as the Purchaser may reasonably request, and (c)
furnish the Purchaser and the Purchaser's Advisors with such additional
financial, operating, and other data and information as the Purchaser may
reasonably request.
5.2 OPERATION OF THE BUSINESSES OF THE COMPANY. Between the date of
this Agreement and the Closing Date, the Company will:
(a) conduct the business of the Company, other than engaging in the
MTI Transaction, only in the Ordinary Course of Business;
(b) use its best efforts to preserve intact the current business
organization of the Company, keep available the services of the current
officers, employees, and agents of the Company, and maintain the relations and
good will with suppliers, customers, landlords, creditors, employees, agents,
and others having business relationships with the Company, in each case, other
than MTI;
(c) confer with the Purchaser concerning operational matters of a
material nature; and
(d) otherwise report periodically to the Purchaser concerning the
status of the business, operations, and finances of the Company.
5.3 NEGATIVE COVENANT. Except as otherwise expressly permitted by
this Agreement, between the date of this Agreement and the Closing Date, the
Company will not, without the prior consent of the Purchaser, take any
affirmative action, or fail to take any reasonable action within its control,
as a result of which any of the changes or events listed in Section 3.16 is
likely to occur.
5.4 REQUIRED APPROVALS. As promptly as practicable after the date of
this Agreement, the Company will make all filings required by Legal
Requirements to be made by it in order to consummate the Contemplated
Transactions. Between the date of this Agreement and the Closing Date, the
Company will cooperate with the Purchaser with respect to all filings that the
Purchaser elects to make or is required by Legal Requirements to make in
connection with
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the Contemplated Transactions and cooperate with the Purchaser in obtaining
all required consents.
5.5 NOTIFICATION. Between the date of this Agreement and the Closing
Date, the Company will promptly notify the Purchaser in writing if the Company
becomes aware of any fact or condition that causes or constitutes a Breach of
any of representations and warranties of the Key Stockholders or the Company
as of the date of this Agreement, or if the Company becomes aware of the
occurrence after the date of this Agreement of any fact or condition that
would (except as expressly contemplated by this Agreement) cause or constitute
a Breach of any such representation or warranty had such representation or
warranty been made as of the time of occurrence or discovery of such fact or
condition. Should any such fact or condition require any change in the
Disclosure Letter if the Disclosure Letter were dated the date of the
occurrence or discovery of any such fact or condition, the Company will
promptly deliver to the Purchaser a supplement to the Disclosure Letter
specifying such change. During the same period, the Company will promptly
notify the Purchaser of the occurrence of any Breach of any covenant in this
Section 5 or of the occurrence of any event that may make the satisfaction of
the conditions in Section 7 impossible or unlikely.
5.6 NO NEGOTIATION. Until such time, if any, as this Agreement is
terminated pursuant to Section 10, the Key Stockholders and the Company will
not, and each will cause its Representatives not to, directly or indirectly
solicit, initiate, or encourage any inquiries or proposals from, discuss or
negotiate with, provide any non-public information to, or consider the merits
of any unsolicited inquiries or proposals from, any Person (other than the
Purchaser) relating to any transaction involving the sale of the business or
assets (other than in the Ordinary Course of Business) of the Company, or any
of the capital stock of the Company, or any merger, consolidation, business
combination, or similar transaction involving the Company other than the MTI
Transaction.
5.7 BEST EFFORTS. Between the date of this Agreement and the Closing
Date, the Company and the Key Stockholders will use their Best Efforts to
cause the conditions in Sections 7 and 8 to be satisfied.
5.8 STOCKHOLDER MEETING. The Company shall take all action necessary
in accordance with applicable law to convene a meeting of the Stockholders to
be held no later than September 25,1998 (the "Meeting"), for the purpose of
approving this Agreement. On or before September 4, 1998 the Company shall
mail to each Stockholder who was a stockholder on the record date for
determining stockholders entitled to notice of the Meeting, (i) a notice of
special meeting (which notice may be included in the Information Statement (as
defined herein)), (ii) an information statement and letter of transmittal (the
"Information Statement") with respect to the matters to be submitted for
stockholder approval at the Meeting, in which its board of directors shall
recommend to its stockholders the approval of this Agreement; and (iii) a
notice that appraisal rights are available for the shares of GeneScreen Stock
held by each such Stockholder of the Company, together with a statement of
rights of objecting Stockholders, in satisfaction of the Company's obligations
under Section 262 of the Delaware General Corporation Law. Each of the Key
Stockholders hereby agrees to vote its GeneScreen Shares in favor of the
Merger. The Company shall use its best efforts to obtain all votes and
approvals of its stockholders necessary
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for the approval of this Agreement under the Delaware General Corporation Law
and its Certificate of Incorporation and Bylaws.
6. COVENANT OF THE PURCHASER PRIOR TO CLOSING DATE.
6.1 BEST EFFORTS. Between the date of this Agreement and the Closing
Date, the Purchaser will use its Best Efforts to cause the conditions in
Sections 7 and 8 to be satisfied.
7. CONDITIONS PRECEDENT TO THE OBLIGATIONS OF THE PURCHASER TO CLOSE.
The obligations of the Purchaser to take the actions required to be
taken by the Purchaser at the Closing are subject to the satisfaction, at or
prior to the Closing, of each of the following conditions (any of which may be
waived by the Purchaser, in whole or in part):
7.1 ACCURACY OF REPRESENTATIONS.
(a) All of the representations and warranties of the Company and the
Key Stockholders in this Agreement (considered collectively), and each of
these representations and warranties (considered individually), must have been
accurate in all material respects as of the date of this Agreement, and must
be accurate in all material respects as of the Closing Date as if made on the
Closing Date, without giving effect to any supplement to the Disclosure
Letter.
(b) Each of the representations and warranties in Sections 3.3, 3.4,
3.12 and 3.24 must have been accurate in all respects as of the date of this
Agreement, and must be accurate in all respects as of the Closing Date as if
made on the Closing Date, without giving effect to any supplement to the
Disclosure Letter.
7.2 PERFORMANCE BY THE COMPANY AND THE KEY STOCKHOLDERS.
(a) All of the covenants and obligations that the Company or the Key
Stockholders are required to perform or to comply with pursuant to this
Agreement at or prior to the Closing (considered collectively), and each of
these covenants and obligations (considered individually), must have been duly
performed and complied with in all material respects.
(b) Each document required to be delivered pursuant to Section 2.5
must have been delivered, and each of the other covenants and obligations in
Section 5.4 must have been performed and complied with in all respects.
7.3 ADDITIONAL DOCUMENTS. Each of the following documents
must have been delivered to the Purchaser:
(a) an opinion of the Company's counsel, dated the Closing Date, in
the form of Exhibit F; and
(b) such other documents as the Purchaser may reasonably request for
the purpose of (i) enabling its counsel to provide the opinion referred to in
Section 8.4(a), (ii) evidencing the accuracy of any of the Company's or the
Key Stockholders' representations and warranties, (iii)
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evidencing the performance by the Company or the Key Stockholders of, or the
compliance by the Company or the Key Stockholders with, any covenant or
obligation required to be performed or complied with by the Company or the Key
Stockholders, (iv) evidencing the satisfaction of any condition referred to in
this Section 7, or (v) otherwise facilitating the consummation or performance
of any of the Contemplated Transactions.
7.4 NO PROCEEDINGS. Since the date of this Agreement, there must not
have been commenced, or to the Purchaser's Knowledge, Threatened against the
Purchaser, or against any Person affiliated with the Purchaser, any Proceeding
(a) involving any challenge to, or seeking damages or other relief in
connection with, any of the Contemplated Transactions, or (b) that may have
the effect of preventing, delaying, making illegal, or otherwise interfering
with any of the Contemplated Transactions.
7.5 NO CLAIM REGARDING SHARE OWNERSHIP OR SALE PROCEEDS. There must
not have been made or Threatened by any Person any claim asserting that such
Person (a) is the holder or the beneficial owner of, or has the right to
acquire or to obtain beneficial ownership of, any of the GeneScreen Stock or
any other voting, equity or ownership interest in the Company, or (b) is
entitled to all or any portion of the Lifecodes Stock.
7.6 NO PROHIBITION. Neither the consummation nor the performance of
any of the Contemplated Transactions will, directly or indirectly (with or
without notice or lapse of time), materially contravene, or conflict with, or
result in a material violation of, or cause the Purchaser or any Person
affiliated with the Purchaser to suffer any material adverse consequence
under, (a) any applicable Legal Requirement or Order, or (b) any Legal
Requirement or Order that has been published, introduced, or otherwise
formally proposed by or before any Governmental Body.
7.7 DUE DILIGENCE. The Purchaser shall have completed its due
diligence of the Company and its business to the Purchaser's satisfaction.
7.8 REGISTRATION OF SHARES. The offer and sale of all of the shares
of Lifecodes Stock constituting the Merger Consideration shall be the subject
of an effective registration statement under the Securities Act.
7.9 CLOSING OF THE MOLECULAR TOOL, INC. TRANSACTION. The Company
shall have: (i) closed the sale of its Molecular Tool, Inc. subsidiary ("MTI")
and distributed all or a portion of the net proceeds thereof to the
Stockholders; or (ii) distributed the shares of MTI to the Stockholders (in
either case, the "MTI Transaction"). If the MTI Transaction is consummated in
the form of an asset sale (versus a stock sale) the Company will ensure that
any and all Liabilities of MTI and MT Human that are not specifically taken
into account in the Latest Agreed Upon Balance Sheet (including but not
limited to Tax Liabilities) have been satisfied in full at or prior to the
Closing.
7.10 TECHNOLOGY LICENSE. Company shall have caused MTI to grant to
the Company on or prior to the Closing a royalty-free, fully paid-up,
perpetual, transferable, worldwide license to patented GBA methods owned or
licensed by MTI (the "Technology License"), subject only to MT Human's
existing license with Lab Corporation of America (f/k/a
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Roche Biomedical Laboratories) ("Lab Corp") in the field of human identity
testing for paternity analysis in the United States (the "Lab Corp License")
and MTI's existing License Agreement dated June 11, 1997 with Orion
Corporation, Ltd., together with ownership of MT Human (subject to the
retention of all Liabilities of MTI and MT Human as provided in Section 7.9
above) or an assignment to the Company of all royalty and other payments paid
or payable by Lab Corp to MT Human pursuant to the terms of the Lab Corp
License. The Technology License shall be exclusive for service testing and
product sales in the fields of human and animal identity testing,
transplantation and diagnostic services and co-exclusive with MTI and the
purchaser of MTI or its assets for services in the fields of human, animal and
plant pharmacogenetics (i.e., exclusive, subject only to the retained,
non-transferable, right of MTI or the purchaser of MTI or its assets to
provide services in such fields) and shall be substantially in the form of
Exhibit K, with such changes or modifications as Purchaser and the Company may
mutually agree upon, consistent with this Section 7.10 and the letter of
intent referred to in Section 13.8 below.
7.11 DISTRIBUTION OF STOCK OF MT HUMAN ID, INC. The Company shall
have caused MTI to transfer to the Company, for nominal consideration, all of
the issued and outstanding capital stock of its indirect subsidiary, MT Human.
7.12 RESIGNATIONS. All officers and directors of the Company shall
have delivered their written resignations as such.
7.13 RELEASES. The Company shall have delivered general releases from
each of the Key Stockholders listed in Exhibit A of all claims against the
Company in a form reasonably acceptable to the Purchaser.
7.14 APPROVAL BY THE STOCKHOLDERS OF GENESCREEN. The holders of a
majority in interest of the issued and outstanding shares of GeneScreen Stock
shall have approved, in accordance with the laws of the State of Delaware and
the Certificate of Incorporation and By-Laws of GeneScreen, this Agreement and
the Contemplated Transactions, provided that not more than 5% in interest of
the Stockholders shall have exercised their appraisal rights described in
Section 2.9 above.
7.15 OPTIONS; WARRANTS. The Company will amend its existing 1991
Stock Option Plan so that all options outstanding thereunder immediately prior
to the Effective Time shall be deemed to have been exercised at the Effective
Time so that at the Effective Time there will be no outstanding options,
warrants or other rights to purchase or acquire shares of common or preferred
stock from the Company at the Effective Time.
7.16 TERMINATION OF AGREEMENTS.
The Company and Stockholders will terminate: (i) all stockholders agreements
(buy-sell agreements) and (ii) the Scientific Consulting Agreement between the
Company and Philip Goelet dated March 1, 1996 at or prior to Closing.
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8. CONDITIONS PRECEDENT TO THE COMPANY'S OBLIGATION TO CLOSE.
The obligation of the Company to take the actions required to be
taken by the Company at the Closing is subject to the satisfaction, at or
prior to the Closing, of each of the following conditions (any of which may be
waived by the Company, in whole or in part):
8.1 ACCURACY OF REPRESENTATIONS. All of the Purchaser's
representations and warranties in this Agreement (considered collectively),
and each of these representations and warranties (considered individually),
must have been accurate in all material respects as of the date of this
Agreement and must be accurate in all material respects as of the Closing Date
as if made on the Closing Date.
8.2 THE PURCHASER'S PERFORMANCE.
(a) All of the covenants and obligations that the Purchaser is
required to perform or to comply with pursuant to this Agreement at or prior
to the Closing (considered collectively), and each of these covenants and
obligations (considered individually), must have been performed and complied
with in all material respects.
(b) The Purchaser must have delivered each of the documents required
to be delivered by the Purchaser pursuant to Section 2.5.
8.3 CONSENTS. Each of the Consents identified in Part 3.2 of the
Disclosure Letter must have been obtained and must be in full force and
effect.
8.4 ADDITIONAL DOCUMENTS. The Purchaser must have caused the
following documents to be delivered to the Stockholders' Representative:
(a) an opinion of Wiggin & Dana, dated the Closing Date, in the form
of Exhibit H; and
(b) such other documents as the Stockholders' Representative may
reasonably request for the purpose of (i) enabling its counsel to provide the
opinion referred to in Section 7.4(a), (ii) evidencing the accuracy of any
representation or warranty of the Purchaser, (iii) evidencing the performance
by the Purchaser of, or the compliance by the Purchaser with, any covenant or
obligation required to be performed or complied with by the Purchaser, (iv)
evidencing the satisfaction of any condition referred to in this Section 8, or
(v) otherwise facilitating the consummation of any of the Contemplated
Transactions.
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8.5 NO INJUNCTION. There must not be in effect any Legal Requirement
or any injunction or other Order that (a) prohibits the exchange of the
GeneScreen Stock for the Lifecodes Stock and Cash Component, or (b) has been
adopted or issued, or has otherwise become effective, since the date of this
Agreement.
8.6 CLOSING OF THE MTI TRANSACTION. The Company shall have closed or
consummated the MTI Transaction.
8.7 STOCKHOLDER APPROVAL. This Agreement and the transactions
contemplated hereby shall have been approved and adopted by the required vote
of the stockholders of Purchaser.
8.8 REGISTRATION OF SHARES. The offer and sale of all of the shares
of Lifecodes Stock constituting the Merger Consideration shall be the subject
of an effective Registration Statement under the Securities Act.
9. TAX MATTERS.
9.1 ALLOCATION OF LIABILITY FOR TAXES.
(a) Subject to Section 11.2, the Stockholders will be liable for, and
will indemnify and hold harmless the Purchaser and the Company from and
against, any and all Taxes based on net income, net worth or capital stock,
however defined, imposed on or with respect to the Company or its assets,
operations, ownership or activities for any Pre-Closing Period (the
"Stockholders' Tax Indemnity").
(b) Subject to Section 11.3, the Purchaser will be liable for, and
will indemnify and hold harmless the Stockholders from and against, any and
all Taxes imposed on or with respect to the Company or its assets, operations,
ownership or activities for any Post-Closing Period (the "Purchaser's Tax
Indemnity").
9.2 PRORATION OF TAXES.
(a) Tax items shall be apportioned between the Pre-Closing Period and
the Post-Closing Period based on a closing of the books and records of the
Company as of the Closing Date (provided that any Tax item incurred by reason
of the transactions occurring on or before the Closing Date as contemplated by
this Agreement shall be treated as occurring in a Pre-Closing Period ).
(b) The Stockholders and the Purchaser will not exercise any option
or election (including any election to ratably allocate a Tax year's items
under U.S. Treasury Regulation Section 1.1502-76(b)(2)(ii) or otherwise) to
allocate Tax items in a manner inconsistent with this Section 9.
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9.3 AMENDED RETURNS; CARRYOVERS.
(a) Any amended Tax Return or claim for Tax refund for any
Pre-Closing Period shall be filed, or caused to be filed, only by the
Stockholders. The Stockholders shall not, without the prior written consent of
the Purchaser (which consent shall not be unreasonably withheld or delayed),
make or cause to be made any such filing, to the extent such filing, if
accepted, reasonably might change the Tax liability of the Purchaser or the
Company for any Tax Period.
(b) An amended Tax Return or claim for Tax refund shall be filed by
the party responsible for filing the original Tax Return hereunder if either
the Purchaser or the Stockholders so request, except that such filing shall
not be done without the consent (which shall not be unreasonably withheld or
delayed) of the Purchaser (if the request is made by the Stockholders'
Representative) or of the Stockholders (if the request is made by the
Purchaser).
(c) Any amended Tax Return or claim for Tax refund for any
Post-Closing Period shall be filed, or caused to be filed, only by the
Purchaser. The Purchaser shall not, without the prior written consent of the
Stockholders' Representative (which consent shall not be unreasonably withheld
or delayed), file, or cause to be filed, any amended Tax Return or claim for
Tax refund for any Post-Closing Period to the extent that such filing, if
accepted, reasonably might change the Tax liability of the Stockholders for
any Pre-Closing Period.
(d) If any Tax loss or credit with respect to the Company arising in
a Post-Closing Period may be carried back and included in any Tax Return filed
or caused to be filed by the Stockholders with respect to the Company for any
Pre-Closing Period, the Purchaser may elect (at its expense) to carry back
such Tax items (subject to the Stockholders' Representative's consent, which
consent shall not be unreasonably withheld or delayed), in which case the
Stockholders shall pay to the Purchaser an amount equal to the Tax Benefit
resulting from such carryback of Tax loss or credit, provided that the
Stockholders shall not be required to file any carryback claim unless the
Purchaser so requests in writing and agrees to pay the reasonable expenses
related to the claim for refund.
9.4 PREPARATION AND FILING OF TAX RETURNS.
(a) The Stockholders shall have the right and obligation to timely
prepare and file, and cause to be timely prepared and filed, when due any Tax
Return that is required to include the assets, operations or activities of the
Company for Tax Periods ending on or before the Closing Date.
(b) The Purchaser shall have the right and obligation to timely
prepare and file, and cause to be timely prepared and filed, when due all Tax
Returns that are required to include the assets, operations or activities of
the Company for any Tax Periods ending after the Closing Date.
(i) The Stockholders' Representative shall prepare and
provide to the Purchaser such Tax information as is reasonably requested by
the Purchaser with respect to the assets, operations or activities of the
Company for the Pre-Closing Period to the extent such
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information is relevant to any Tax Return which the Purchaser has the right
and obligation hereunder to file.
(ii) The Stockholders shall, on the one hand, or the
Purchaser shall, on the other hand, with respect to any Tax Return which such
party is responsible hereunder for preparing and filing, or causing to be
prepared and filed, make such Tax Return and related work papers available for
review by the other party at least twenty (20) days in advance of the filing
of the Return if the Tax Return (x) is with respect to Taxes for which the
other party or one of its Affiliates may be liable hereunder or under
applicable tax law, or (y) claims Tax Benefits which the other party or one of
its Affiliates is entitled to receive hereunder. The filing party shall use
its reasonable best efforts to make Tax Returns available for review as
required under this Section 9.4(c) sufficiently in advance of the due date for
filing such Tax Returns to provide the non-filing party with a meaningful
opportunity to analyze and comment on such Tax Returns and have such Tax
Returns modified before filing, accepting the position of the filing party
unless such position is contrary to the provisions of Section 9.4(d) hereof.
(c) Any Tax Return which includes or is based on the assets,
operation or activities of the Company for any Pre-Closing Period, and any Tax
Return which includes or is based on the assets, operations or activities of
the Company for any Post-Closing Period to the extent the items reported on
such Tax Return might reasonably increase any Tax liability of the
Stockholders for any Pre-Closing Period shall be prepared in accordance with
past Tax accounting methods used with respect to the Tax Returns in question
(unless such past methods are no longer permissible under the applicable Tax
Law), and to the extent any items are not covered by past methods (or in the
event such past methods are no longer permissible under the applicable Tax
Law), in accordance with reasonable Tax accounting methods selected by the
filing party with respect to such Tax Return under this Agreement with the
consent (not to be unreasonably withheld or delayed) of the non-filing party.
9.5 TAX CONTROVERSIES; ASSISTANCE AND COOPERATION.
(a) Notice. In the event any Tax Authority informs the Stockholders,
on the one hand, or the Purchaser or Company, on the other hand, of any notice
of proposed audit, claim, assessment or other dispute concerning an amount of
Taxes with respect to which the other party may incur liability hereunder, the
party so informed shall promptly notify the other party of such matter. Such
notice shall contain factual information (to the extent known) describing any
asserted Tax liability in reasonable detail and shall be accompanied by copies
of any notice or other documents received from any Tax authority with respect
to such matter. If an Indemnified Party has Knowledge of an asserted Tax
liability with respect to a matter for which it is to be indemnified hereunder
and such party fails to provide prompt notice to the Indemnifying Party of
such asserted Tax liability, then (i) if the Indemnifying Party is precluded
from contesting the asserted Tax liability in any forum as a result of the
failure to give prompt notice, the Indemnifying Party shall have no obligation
to indemnify the Indemnified Party for Taxes arising out of such asserted Tax
liability, and (ii) if the Indemnifying Party is not precluded from contesting
the asserted Tax liability in any forum, but such failure to provide prompt
notice results in a monetary detriment to the Indemnifying Party, then any
amount which the
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Indemnifying Party is otherwise required to pay the Indemnified Party pursuant
to this Agreement shall be reduced by the amount of such detriment.
(b) Control Rights. The filing party under this Section 9 shall
control any audits, disputes, administrative, judicial or other proceedings
related to Taxes with respect to which either party may incur liability
hereunder. Subject to the preceding sentence, in the event an adverse
determination may result in each party having responsibility for any amount of
Taxes under this Section 9, each party shall be entitled to fully participate
in that portion of the proceedings relating to the Taxes with respect to which
it may incur liability hereunder. For purposes of this Section 9.5(b), the
term "participation" shall include (i) participation in conferences, meetings
or proceedings with any Tax Authority, the subject matter of which includes an
item for which such party may have liability hereunder, (ii) participation in
appearances before any court or tribunal, the subject matter of which includes
an item for which a party may have liability hereunder, and (iii) with respect
to the matters described in the preceding clauses (i) and (ii), participation
in the submission and determination of the content of the documentation,
protests, memorandum of fact and law, briefs, and the conduct of oral
arguments and presentations.
(c) Consent to Settlement. The Purchaser and the Stockholders shall
not agree to settle any Tax liability or compromise any claim with respect to
Taxes, which settlement or compromise may affect the liability for Taxes
hereunder (or right to tax benefit) of the other party, without such other
party's consent (which consent shall not be unreasonably withheld or delayed).
(d) Expenses. The Purchaser and the Stockholders shall bear their own
expenses incurred in connection with audits and other administrative judicial
proceedings relating to Taxes for which such party and its Affiliates are
liable under this Section 9.
(e) Assistance and Cooperation. The Stockholders, on the one hand,
and the Purchaser and Company, on the other hand, shall cooperate (and cause
their Affiliates to cooperate) with each other and with each other's agents,
including accounting firms and legal counsel, in connection with Tax matters
relating to the Company, including (i) preparation and filing of Tax Returns,
(ii) determining the liability and amount of any Taxes due or the right to and
amount of any refund of Taxes, (iii) examinations of Tax Returns, and (iv) any
administrative or judicial proceeding in respect of Taxes assessed or proposed
to be assessed. Such cooperation shall include each party making all
information and documents in its possession relating to the Company available
to the other party. The parties shall retain all Tax Returns, schedules and
work papers, and all material records and other documents relating thereto,
until the expiration of the applicable statute of limitations (including, to
the extent notified by any party, any extension thereof) of the Tax Period to
which such Tax Returns and other documents and information relate. Each of the
parties also shall make available to the other party, as reasonably requested
and available, personnel (including officers, directors, employees and agents)
responsible for preparing, maintaining and interpreting information and
documents relevant to Taxes, and personnel reasonably required as witnesses or
for purposes of providing information or documents in connection with any
administrative or judicial proceedings relating to Taxes.
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(f) Termination of Tax Allocation Agreements. As of the Closing Date,
the Stockholders shall cause all Tax allocation, Tax sharing, Tax
reimbursement and similar agreements or arrangements between the Stockholders
and its Affiliates, on the one hand, and the Company, on the other hand, to be
extinguished and terminated with respect to the Company and any rights or
obligations existing under any such agreement or arrangement to be no longer
enforceable.
10. TERMINATION.
10.1 TERMINATION EVENTS. This Agreement may, by notice given prior to
or at the Closing, be terminated:
(a) by either the Purchaser or the Company if a material Breach of
any provision of this Agreement has been committed by the other party and such
Breach has not been waived;
(b) (i) by the Purchaser if any of the conditions in Section 7 has
not been satisfied as of the Closing Date or if satisfaction of such a
condition is or becomes impossible (other than through the failure of the
Purchaser to comply with its obligations under this Agreement) and the
Purchaser has not waived such condition on or before the Closing Date; or (ii)
by the Company, if any of the conditions in Section 8 has not been satisfied
of the Closing Date or if satisfaction of such a condition is or becomes
impossible (other than through the failure of the Company or the Key
Stockholders to comply with its obligations under this Agreement) and the
Company has not waived such condition on or before the Closing Date;
(c) by mutual consent of the Purchaser and the Company; or
(d) by either the Purchaser or the Company if the Closing has not
occurred (other than through the failure of any party seeking to terminate
this Agreement to comply fully with its obligations under this Agreement) on
or before [November 30, 1998], or such later date as the parties may agree
upon.
10.2 EFFECT OF TERMINATION. Each party's right of termination under
Section 10.1 is in addition to any other rights it may have under this
Agreement or otherwise, and the exercise of a right of termination will not be
an election of remedies. If this Agreement is terminated pursuant to Section
10.1, all further obligations of the parties under this Agreement will
terminate, except that the obligations in Sections 13.1 and 13.3 will survive;
provided, however, that if this Agreement is terminated by a party because of
the Breach of the Agreement by the other party or because one or more of the
conditions to the terminating party's obligations under this Agreement is not
satisfied as a result of the other party's failure to comply with its
obligations under this Agreement, the terminating party's right to pursue all
legal remedies will survive such termination unimpaired.
11. INDEMNIFICATION; REMEDIES.
11.1 SURVIVAL; RIGHT TO INDEMNIFICATION NOT AFFECTED BY KNOWLEDGE.
All representations, warranties, covenants, and obligations in this Agreement,
the Disclosure Letter, the supplements to the Disclosure Letter and any other
certificate or document delivered pursuant to this Agreement will survive the
Closing. The right to
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indemnification, payment of Damages or other remedy based on such
representations, warranties, covenants, and obligations will not be affected
by any investigation conducted with respect to, or any Knowledge acquired (or
capable of being acquired) before or after the Closing Date, with respect to
the accuracy or inaccuracy of or compliance with, any such representation,
warranty, covenant, or obligation. Except to the extent expressly agreed in
writing by the parties, the waiver of any condition based on the accuracy of
any representation or warranty, or on the performance of or compliance with
any covenant or obligation, will not affect the right to indemnification,
payment of Damages, or other remedy based on such representations, warranties,
covenants, and obligations.
11.2 INDEMNIFICATION AND PAYMENT OF DAMAGES FROM ESCROW. By their
approval of this Agreement, the Stockholders hereby jointly and severally
agree to indemnify and hold harmless the Purchaser and its Representatives,
stockholders, controlling persons, and affiliates (collectively, the
"Indemnified Persons") for, and will pay to the Indemnified Persons the amount
of, any loss, liability, claim, damage (including incidental and consequential
damages), expense (including costs of investigation and defense and reasonable
attorneys' fees) or diminution of value, whether or not involving a
third-party claim (collectively, "Damages"), arising, directly or indirectly,
from or in connection with:
(a) any Breach of any representation or warranty made by the Company
or the Key Stockholders in this Agreement (without giving effect to any
supplement to the Disclosure Letter), the Disclosure Letter, the supplements
to the Disclosure Letter, or any other certificate or document delivered by
the Company, the Key Stockholders or the Stockholders' Representative pursuant
to this Agreement;
(b) any Breach of any representation or warranty made by the Company
or the Key Stockholders in this Agreement as if such representation or
warranty were made on and as of the Closing Date, other than any such Breach
that is disclosed in a supplement to the Disclosure Letter accepted by
Purchaser;
(c) any Breach by Company, the Key Stockholders or the Stockholders'
Representative of any covenant or obligation of such Person in this Agreement;
(d) any product shipped or manufactured by, or any services provided
by, the Company prior to the Closing Date;
(e) the MTI Transaction;
(f) the Stockholders' Tax Indemnity; and
(g) any claim by any Person for brokerage or finder's fees or
commissions or similar payments based upon any agreement or understanding
alleged to have been made by any such Person with the Stockholders or the
Company (or any Person acting on their behalf) in connection with any of the
Contemplated Transactions, in each case, to the extent Damages (from whatever
source derived) exceed $25,000 in the aggregate; provided, however, that the
sole and exclusive source of payment for the foregoing indemnification
obligation of the
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Stockholders shall be the Escrow and no Indemnified Person shall have any
right to payment directly from any Stockholder or from any source other than
the Escrow.
The remedies provided in this Section 11.2 will be exclusive and
limit any other remedies that may be available to the Purchaser or the other
Indemnified Persons.
11.3 INDEMNIFICATION AND PAYMENT OF DAMAGES BY THE PURCHASER. The
Purchaser will indemnify and hold harmless the Stockholders, and will pay to
the Stockholders the amount of any Damages arising, directly or indirectly,
from or in connection with:
(a) any Breach of any representation or warranty made by the
Purchaser in this Agreement or in any certificate delivered by the Purchaser
pursuant to this Agreement;
(b) any Breach by the Purchaser of any covenant or obligation of the
Purchaser in this Agreement;
(c) the Purchaser's Tax Indemnity; or
(d) any claim by any Person for brokerage or finder's fees or
commissions or similar payments based upon any agreement or understanding
alleged to have been made by such Person with the Purchaser (or any Person
acting on its behalf) in connection with any of the Contemplated Transactions,
in each case, to the extent Damages (from whatever source derived) exceed
$25,000, in the aggregate, provided that in no event shall Purchaser's
liability under this Agreement regardless of the nature thereof, exceed
$1,000,000.
11.4 TIME LIMITATIONS. If the Closing occurs, the Stockholders will
have no liability (for indemnification or otherwise) with respect to any
representation or warranty, or covenant or obligation to be performed and
complied with prior to the Closing Date, other than those in Sections 3.3,
3.11, 3.13, 3.19 and 9, unless on or before September 1, 2000 the Purchaser
notifies the Stockholders' Representative of a claim specifying the factual
basis of that claim in reasonable detail to the extent then known by the
Purchaser; a claim with respect to Section 3.3, 3.11, 3.13, 3.19 or 9, or a
claim for indemnification or reimbursement not based upon any representation
or warranty or any covenant or obligation to be performed and complied with
prior to the Closing Date, may be made at any time. If the Closing occurs, the
Purchaser will have no liability (for indemnification or otherwise) with
respect to any representation or warranty, or covenant or obligation to be
performed and complied with prior to the Closing Date, unless on or before
September 1, 2000 the Stockholders' Representative notifies the Purchaser of a
claim specifying the factual basis of that claim in reasonable detail to the
extent then known by the Stockholders Representative.]
11.5 PROCEDURE FOR INDEMNIFICATION--THIRD PARTY CLAIMS.
(a) Promptly after receipt by an indemnified party under Section 11.2
or 11.3 of notice of the commencement of any Proceeding against it, such
indemnified party will, if a claim is to be made against an indemnifying party
under such Section, give notice to the indemnifying party of the commencement
of such claim, but the failure to notify the indemnifying party will not
relieve
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the indemnifying party of any liability that it may have to any indemnified
party, except to the extent that the indemnifying party demonstrates that the
defense of such action is prejudiced by the indemnifying party's failure to
give such notice.
(b) If any Proceeding referred to in Section 11.5(a) is brought
against an indemnified party and it gives notice to the indemnifying party of
the commencement of such Proceeding, the indemnifying party will, unless the
claim involves Taxes, be entitled to participate in such Proceeding and, to
the extent that it wishes (unless (i) the indemnifying party is also a party
to such Proceeding and the indemnified party determines in good faith that
joint representation would be inappropriate, or (ii) the indemnifying party
fails to provide reasonable assurance to the indemnified party of its
financial capacity to defend such Proceeding and provide indemnification with
respect to such Proceeding), to assume the defense of such Proceeding with
counsel satisfactory to the indemnified party and, after notice from the
indemnifying party to the indemnified party of its election to assume the
defense of such Proceeding, the indemnifying party will not, as long as it
diligently conducts such defense, be liable to the indemnified party under
this Section 11 for any fees of other counsel or any other expenses with
respect to the defense of such Proceeding, in each case subsequently incurred
by the indemnified party in connection with the defense of such Proceeding,
other than reasonable costs of investigation. If the indemnifying party
assumes the defense of a Proceeding, (i) it will be conclusively established
for purposes of this Agreement that the claims made in that Proceeding are
within the scope of and subject to indemnification; (ii) no compromise or
settlement of such claims may be effected by the indemnifying party without
the indemnified party's consent unless (A) there is no finding or admission of
any violation of Legal Requirements or any violation of the rights of any
Person and no effect on any other claims that may be made against the
indemnified party, and (B) the sole relief provided is monetary damages that
are paid in full by the indemnifying party; and (iii) the indemnified party
will have no liability with respect to any compromise or settlement of such
claims effected without its consent. If notice is given to an indemnifying
party of the commencement of any Proceeding and the indemnifying party does
not, within ten days after the indemnified party's notice is given, give
notice to the indemnified party of its election to assume the defense of such
Proceeding, the indemnifying party will be bound by any determination made in
such Proceeding or any compromise or settlement effected by the indemnified
party.
(c) Notwithstanding the foregoing, if an indemnified party determines
in good faith that there is a reasonable probability that a Proceeding may
adversely affect it or its affiliates other than as a result of monetary
damages for which it would be entitled to indemnification under this
Agreement, the indemnified party may, by notice to the indemnifying party,
assume the exclusive right to defend, compromise, or settle such Proceeding,
but the indemnifying party will not be bound by any determination of a
Proceeding so defended or any compromise or settlement effected without its
consent (which may not be unreasonably withheld).
(d) Each party hereby consents to the non-exclusive jurisdiction of
any court in which a Proceeding is brought against any Indemnified Person for
purposes of any claim that an Indemnified Person may have under this Agreement
with respect to such Proceeding or the matters alleged therein, and agree that
process may be served on such party with respect to such a claim anywhere in
the world.
50
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11.6 PROCEDURE FOR INDEMNIFICATION--OTHER CLAIMS. A claim for
indemnification for any matter not involving a third-party claim may be
asserted by written notice to the party from whom indemnification is sought.
11.7 ESCROW. The Purchaser shall be entitled to obtain the funds in
Escrow to satisfy its claims for indemnification or Damages as provided in the
Escrow Agreement. On the date that is twelve (12) months from the Closing
Date, the Stockholders shall be entitled to receive $1,800,000 of the General
Escrow Amount; on the date that is twenty-four (24) months from the Closing
Date, the Stockholders shall be entitled to receive an additional $700,000 of
the General Escrow Amount, and on the date that is thirty-six (36) months from
the date that the Company files all Tax Returns for all Tax Periods ending on
or before the Closing (or such later date as may be required due to the
extension of any applicable statute of limitation relating to any Tax matter),
the Stockholders shall be entitled to receive the Tax Escrow Amount, except to
the extent, in each case, that there is, at any time that either Tax or
General Escrow Amounts are to be distributed from Escrow, a claim by Purchaser
for Damages with respect to such Escrow Amount, in which event an amount
sufficient to reimburse Purchaser for such Damages shall be retained in the
Escrow pending resolution of the claim for Damages as provided in the Escrow
Agreement.
12. STOCKHOLDERS' REPRESENTATIVE.
12.1 APPOINTMENT OF STOCKHOLDERS' REPRESENTATIVE. Approval of this
Agreement of Merger pursuant to Section 251 of the Delaware General
Corporation Law shall be deemed to also constitute the irrevocable appointment
of Sandpiper Ventures LLC, a Texas limited liability company, as the true and
lawful representative, agent and attorney-in-fact of the Stockholders with the
following authority:
(a) at the Closing, to execute and deliver the Escrow Agreement (and
any actions or transactions contemplated thereunder) on behalf of the
Stockholders;
(b) to review the Company's determination of the adjustment to the
Merger Consideration as provided in Section 2.11; to agree or object thereto
in the manner he determines; and to perform any and all other acts in
connection with the Section 2.11 adjustment to the Merger Consideration,
including without limitation, the acts required pursuant to Section 2.11(g),
if applicable;
(c) subsequent to the Closing, to accept and acknowledge receipt from
the Purchaser, the Exchange Agent or the Escrow Agent, for the account of each
Exchanging Stockholders, any payment made pursuant to Section 2.11(f) or under
the Escrow Agreement and to deliver the appropriate payment to each such
Stockholder;
(d) to resolve with the Purchaser any disputes relating to claims for
indemnification, commence and carry out any Proceeding and to otherwise settle
any claim asserted by the Indemnified Parties pursuant to this Agreement or
the Escrow Agreement;
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(e) to determine, in his sole and absolute discretion, the time or
times when, the purposes for, and the manner in which, any power herein
conferred shall be exercised and the provisions of any instrument or document
that may be executed by him pursuant hereto; and
(f) to employ such attorneys, accountants and agents as he shall deem
appropriate in connection with his duties hereunder, and he shall not be
liable under any circumstance for action taken pursuant to the written advice
of such attorneys, accountants and agents. This power of attorney is coupled
with an interest and is irrevocable.
12.2 LIMIT OF LIABILITY. Except for willful misconduct, the
Stockholders' Representative shall not be liable to any of the Stockholders
for any act, omission, loss, damage or expense arising from the performance of
his duties hereunder. In no event shall the Purchaser or the Surviving
Corporation have any liability to any of the Stockholders for any act or
omission of the Stockholders' Representative, including without limitation,
negligence and willful misconduct.
12.3 INDEMNITY OF STOCKHOLDERS' REPRESENTATIVE. The Stockholders
shall indemnify, defend and hold the Stockholders' Representative harmless
from and against any and all loss, damage, Tax, liability and expense that may
be incurred by the Stockholders' Representative arising out of or in
connection with its acceptance of the appointment as Stockholders'
Representative hereunder, except as caused by its gross negligence or willful
misconduct, including the legal costs and expenses of defending itself against
any claim or liability in connection with its performance hereunder, in equal
shares of any such loss, damage, Tax, liability, legal cost and expense.
12.4 SUCCESSOR REPRESENTATIVE. In the event that Sandpiper Ventures
LLC, or any successor Stockholders' Representative appointed in accordance
with this Section 12.4, shall cease to serve as Stockholders' Representative
for any reason, then the holders of a majority of the shares of GeneScreen
Stock as of the Effective Time shall appoint a successor Stockholders'
Representative.
13. GENERAL PROVISIONS.
13.1 EXPENSES. Except as otherwise expressly provided in this
Agreement, each party to this Agreement will bear its respective expenses
incurred in connection with the preparation, execution, and performance of
this Agreement and the Contemplated Transactions, including all fees and
expenses of agents, representatives, counsel, and accountants. In the event of
termination of this Agreement, the obligation of each party to pay its own
expenses will be subject to any rights of such party arising from a breach of
this Agreement by another party.
13.2 PUBLIC ANNOUNCEMENTS. Any public announcement or similar
publicity with respect to this Agreement or the Contemplated Transactions will
be issued, if at all, at such time and in such manner as the Purchaser
determines. Unless consented to by the Purchaser in advance or required by
Legal Requirements, prior to the Closing the Company shall, and shall cause
its directors, officers, employees, agents, advisors and Stockholders to, keep
this Agreement strictly confidential and may not make any disclosure of this
Agreement to any
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Person. The Company and the Purchaser will consult with each other concerning
the means by which the Company's employees, customers, and suppliers and
others having dealings with the Company will be informed of the Contemplated
Transactions, and the Purchaser will have the right to be present for any such
communication.
13.3 CONFIDENTIALITY. Between the date of this Agreement and the
Closing Date, the Purchaser and the Company will maintain in confidence, and
will cause the directors, officers, employees, agents, and advisors (and in
the case of the Company, the Stockholders) of the Purchaser and the Company to
maintain in confidence, and not use to the detriment of another party any
written, oral, or other information obtained in confidence from another party
in connection with this Agreement or the Contemplated Transactions, unless (a)
such information is already known to such party or to others not bound by a
duty of confidentiality or such information becomes publicly available through
no fault of such party, (b) the use of such information is necessary or
appropriate in making any filing or obtaining any consent or approval required
for the consummation of the Contemplated Transactions, or (c) the furnishing
or use of such information is required by or necessary or appropriate in
connection with legal proceedings.
If the Contemplated Transactions are not consummated, each party will
return or destroy as much of such written information as the other party may
reasonably request. If the Closing takes place, the Stockholders waive any
cause of action, right, or claim arising out of the access of the Purchaser or
its representatives to any trade secrets or other confidential information
except for the intentional competitive misuse by the Purchaser of such trade
secrets or confidential information.
13.4 NOTICES. All notices, consents, waivers, and other
communications under this Agreement must be in writing and will be deemed to
have been duly given when (a) delivered by hand, (b) sent by telecopier,
provided that a copy is mailed by overnight courier service, or (c) when
received by the addressee, if sent by a nationally recognized overnight
delivery service, in each case to the appropriate addresses and telecopier
numbers set forth below (or to such other addresses and telecopier numbers as
a party may designate by notice to the other parties):
Key Stockholders or Company: c/o Stockholders'- Representative
Sandpiper Ventures LLC
c/o Glenn M. Stinchcomb
10111 North Central Expressway
Dallas, Texas 73231
Facsimile No.: (214) 739-9993
And
GeneScreen, Inc.
Attn: Keith W. Brown
2600 Stemmons Freeway, Suite 133
Dallas, Texas 75207
Facsimile No.: (214) 634-2898
53
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with a copy to: Worsham, Forsythe & Wooldridge, L.L.P.
Energy Plaza
1601 Bryan, 30th Floor
Dallas, Texas 75201-3402
Attention: Timothy A. Mack, Esq.
Facsimile: (214) 880-0011
The Purchaser: Lifecodes Corporation
550 West Avenue
Stamford, CT 06902 Attention: President
Facsimile No.: (203) 328-9598
with a copy to: Wiggin & Dana
Three Stamford Plaza
301 Tresser Blvd.
Stamford, CT 06901
Attention: William A. Perrone, Esq.
Facsimile No.: (203) 363-7676
13.5 JURISDICTION; SERVICE OF PROCESS. Any action or proceeding
seeking to enforce any provision of, or based on any right arising out of,
this Agreement may be brought against any of the parties in the courts of the
State of Connecticut, County of Fairfield, or, if it has or can acquire
jurisdiction, in the United States District Court for the District of
Connecticut, and each of the parties consents to the non-exclusive
jurisdiction of such courts (and of the appropriate appellate courts) in any
such action or proceeding and waives any objection to venue laid therein.
Process in any action or proceeding referred to in the preceding sentence may
be served on any party anywhere in the world.
13.6 FURTHER ASSURANCES. The parties agree (a) to furnish upon
request to each other such further information, (b) to execute and deliver to
each other such other documents, and (c) to do such other acts and things, all
as the other party may reasonably request for the purpose of carrying out the
intent of this Agreement and the documents referred to in this Agreement.
13.7 WAIVER. The rights and remedies of the parties to this Agreement
are cumulative and not alternative. Neither the failure nor any delay by any
party in exercising any right, power, or privilege under this Agreement or the
documents referred to in this Agreement will operate as a waiver of such
right, power, or privilege, and no single or partial exercise of any such
right, power, or privilege will preclude any other or further exercise of such
right, power, or privilege or the exercise of any other right, power, or
privilege. To the maximum extent permitted by applicable law, (a) no claim or
right arising out of this Agreement or the documents referred to in this
Agreement can be discharged by one party, in whole or in part, by a waiver or
renunciation of the claim or right unless in writing signed by the other
party; (b) no waiver that may be given by a party will be applicable except in
the specific instance for which it is given; and (c) no notice to or demand on
one party will be deemed to be a waiver of any obligation of
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<PAGE>
such party or of the right of the party giving such notice or demand to take
further action without notice or demand as provided in this Agreement or the
documents referred to in this Agreement.
13.8 ENTIRE AGREEMENT AND MODIFICATION. This Agreement supersedes all
prior agreements between the parties with respect to its subject matter
(including that certain letter of intent between the Company and the Purchaser
dated July 13, 1998) and constitutes (along with the documents referred to in
this Agreement) a complete and exclusive statement of the terms of the
agreement between the parties with respect to its subject matter. This
Agreement may not be amended except by a written agreement executed by the
party to be charged with the amendment. The boards of directors of the Company
and the Purchaser may amend this Agreement at any time prior to the Effective
Time, provided that if such amendment is made subsequent to the approval of
this Agreement by the stockholders of the Company such amendment shall not:
(i) alter or change the Merger Consideration, (ii) alter or change any term of
the certificate of incorporation of the Surviving Corporation or (iii) alter
or change any term or condition of the Agreement if such alteration or change
would adversely affect the Stockholders.
13.9 DISCLOSURE LETTER.
(a) The disclosures in the Disclosure Letter, and those in any
Supplement thereto, must relate only to the representations and warranties in
the Section of the Agreement to which they expressly relate and not to any
other representation or warranty in this Agreement.
(b) In the event of any inconsistency between the statements in the
body of this Agreement and those in the Disclosure Letter (other than an
exception expressly set forth as such in the Disclosure Letter with respect to
a specifically identified representation or warranty), the statements in the
body of this Agreement will control.
13.10 ASSIGNMENTS, SUCCESSORS, AND NO THIRD-PARTY RIGHTS. No party
may assign any of its rights under this Agreement without the prior consent of
the other parties, except that the Purchaser may assign any of its rights
under this Agreement to any of its affiliates. Subject to the preceding
sentence, this Agreement will apply to, be binding in all respects upon, and
inure to the benefit of the successors and permitted assigns of the parties.
Nothing expressed or referred to in this Agreement will be construed to give
any Person other than the parties to this Agreement any legal or equitable
right, remedy, or claim under or with respect to this Agreement or any
provision of this Agreement. This Agreement and all of its provisions and
conditions are for the sole and exclusive benefit of the parties to this
Agreement and their successors and assigns.
13.11 SEVERABILITY. If any provision of this Agreement is held
invalid or unenforceable by any court of competent jurisdiction, the other
provisions of this Agreement will remain in full force and effect. Any
provision of this Agreement held invalid or unenforceable only in part or
degree will remain in full force and effect to the extent not held invalid or
unenforceable.
13.12 SECTION HEADINGS, CONSTRUCTION. The headings of Sections in
this Agreement are provided for convenience only and will not affect its
construction or
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interpretation. All references to "Section" or "Sections" refer to the
corresponding Section or Sections of this Agreement. All words used in this
Agreement will be construed to be of such gender or number as the circumstances
require. Unless otherwise expressly provided, the word "including" does not
limit the preceding words or terms.
13.13 GOVERNING LAW. This Agreement will be governed by the laws of
the State of Connecticut without regard to conflicts of laws principles.
13.14 COUNTERPARTS. This Agreement may be executed in one or more
counterparts, each of which will be deemed to be an original copy of this
Agreement and all of which, when taken together, will be deemed to constitute
one and the same agreement.
[Signature pages follow]
<PAGE>
IN WITNESS WHEREOF, the undersigned have executed this
Agreement as of the day and year first above written.
(THE PURCHASER)
LIFECODES CORPORATION
By: /s/ Walter O. Fredericks
------------------------------------------------
Name: Walter O. Fredericks
Title: President and Chief Executive Officer
THE KEY STOCKHOLDERS
[Counterpart signature pages attached]
Southwest Enterprise Associates, Limited Partnership
By: /s/ C.V. Prothro
------------------------------------------------
Name: C.V. Prothro
Title: General Partner
New Enterprise Associates IV, Limited Partnership
By: NEA Partners IV, Limited Partnership,
General Partner
By: /s/ Frank A. Bonsal, Jr.
------------------------------------------------
Name: Frank A. Bonsal, Jr.
Title: General Partner
/s/ Timothy A. Mack
----------------------------------------------------
Timothy A. Mack
/s/ Glenn M. Stinchcomb
----------------------------------------------------
Glenn M. Stinchcomb
DB Liquidation, LLC
By: /s/ Glenn M. Stinchcomb
------------------------------------------------
Name: Glenn M. Stinchcomb
Title: Manager
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Blue Doctor, LLC
By: /s/
------------------------------------------------
Name:
Title:
/s/ Keith W. Brown
----------------------------------------------------
Keith W. Brown
/s/ William K. Baxter
----------------------------------------------------
William K. Baxter
(COMPANY)
GENESCREEN INC.
By: /s/ Keith W. Brown
------------------------------------------------
Name: Keith W. Brown
Title: President and Chief Executive Officer
SANDPIPER VENTURES LLC
By: /s/ Glenn M. Stinchcomb
------------------------------------------------
Name: Glenn M. Stinchcomb
Title: Manager
as STOCKHOLDERS' REPRESENTATIVE
58
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Exhibit A
Key Stockholders*
Name Total Shares*
Southwest Enterprise Associates, Limited Partnership 357,055
New Enterprise Associates IV, Limited Partnership 350,278
Timothy A. Mack 7,641
Glenn M. Stinchcomb 3,000
DB Liquidation, LLC 191,463
Blue Doctor, LLC 1,074,561
Keith W. Brown 56,575
William K. Baxter 24,475
- ----------------- ------
Total 2,065,048
===== =========
- -------------------------
*Assumes one-for-one conversion of all preferred shares.
<PAGE>
Exhibit B
Definitions
"Adverse Consequences"--all actions, suits, proceedings, hearings,
investigations, charges, complaints, claims, demands, injunctions, judgments,
orders, decrees, rulings, damages, dues, penalties, fines, costs, costs,
reasonable amounts paid in settlement, liabilities, obligations, taxes, liens,
losses, expenses, and fees, including court costs and reasonable attorneys'
fees and expenses.
"Applicable Contract"--any Contract (a) under which the Company has
or may acquire any rights, (b) under which the Company has or may become
subject to any obligation or liability, or (c) by which the Company or any of
the assets owned or used by it is or may become bound.
"Balance Sheet"--as defined in Section 3.4.
"Best Efforts"--the efforts that a prudent Person desirous of
achieving a result would use in similar circumstances to ensure that such
result is achieved as expeditiously as possible.
"Breach"--a "Breach" of a representation, warranty, covenant,
obligation, or other provision of this Agreement or any instrument delivered
pursuant to this Agreement will be deemed to have occurred if there is or has
been (a) any inaccuracy in or breach of, or any failure to perform or comply
with, such representation, warranty, covenant, obligation, or other provision,
or (b) any claim (by any Person) or other occurrence or circumstance that is
or was inconsistent with such representation, warranty, covenant, obligation,
or other provision, and the term "Breach" means any such inaccuracy, breach,
failure, claim, occurrence, or circumstance.
"Cash Component"--an aggregate of $5,000,000.
"Closing"--as defined in Section 2.2.
"Closing Date"--the date and time as of which the Closing actually
takes place.
"Company"--as defined in the first paragraph of this Agreement.
"Consent"--any approval, consent, ratification, waiver, or other
authorization (including any Governmental Authorization).
"Contemplated Transactions"--all of the transactions contemplated by
this Agreement, including:
(a) the Merger;
(b) the conversion of the GeneScreen Stock into Lifecodes Stock
and cash at the Effective Time;
<PAGE>
(c) the registration under the Securities Act of the Lifecodes
Stock issuable to the Stockholders at the Effective Time pursuant to the Merger;
(d) the execution, delivery, and performance of the Lockup
Agreements, the Noncompetition Agreements and the other documents and
instruments referred to herein; and
(e) the performance by the Purchaser, on the one hand, and the
Company and the Key Stockholders, on the other hand, of their respective
covenants and obligations under this Agreement.
"Contract"--any agreement, contract, obligation, promise, or
undertaking (whether written or oral and whether express or implied) that is
legally binding.
"Damages"--as defined in Section 11.2.
"Dissenters' Shares"--as defined in Section 2.9(a).
"Disclosure Letter"--the disclosure letter delivered by the Company
to the Purchaser concurrently with the execution and delivery of this
Agreement.
"Effective Time"--as defined in Section 2.3.
"Encumbrance"--any charge, claim, community property interest,
condition, equitable interest, lien, option, pledge, security interest, right
of first refusal, or restriction of any kind, including any restriction on
use, voting, transfer, receipt of income, or exercise of any other attribute
of ownership.
"Environment"--soil, land surface or subsurface strata, surface
waters (including navigable waters, ocean waters, streams, ponds, drainage
basins, and wetlands), groundwaters, drinking water supply, stream sediments,
ambient air (including indoor air), plant and animal life, and any other
environmental medium or natural resource.
"Environmental, Health, and Safety Liabilities"--any cost, damages,
expense, liability, obligation, or other responsibility arising from or under
Environmental Law or Occupational Safety and Health Law and consisting of or
relating to:
(a) any environmental, health, or safety matters or conditions
(including on-site or off-site contamination, occupational safety and health,
and regulation of chemical substances or products);
(b) fines, penalties, judgments, awards, settlements, legal or
administrative proceedings, damages, losses, claims, demands and removal
response, investigative, remedial, cleanup, corrective action, containment or
inspection costs and expenses arising under Environmental Law or Occupational
Safety and Health Law;
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(c) financial responsibility under Environmental Law or Occupational
Safety and Health Law for cleanup costs or corrective action, including any
investigation, cleanup, removal, containment, or other remediation or response
actions ("Cleanup") required by applicable Environmental Law or Occupational
Safety and Health Law (whether or not such Cleanup has been required or
requested by any Governmental Body or any other Person) and for any natural
resource damages; or
(d) any other compliance, corrective, investigative, or remedial
measures required under Environmental Law or Occupational Safety and Health
Law.
The terms "removal," "remedial," and "response action," include the
types of activities covered by the United States Comprehensive Environmental
Response, Compensation, and Liability Act, 42 U.S.C. Section 9601 et seq., as
amended ("CERCLA").
"Environmental Law"--any Legal Requirement that requires or relates to:
(a) advising appropriate authorities, employees, and the public of
intended or actual releases of pollutants or hazardous substances or
materials, violations of discharge limits, or other prohibitions and of the
commencements of activities, such as resource extraction or construction, that
could have significant impact on the Environment;
(b) preventing or reducing to authorized levels the Release of
Hazardous substances or materials into the Environment;
(c) reducing the quantities, preventing the Release, or minimizing
the hazardous characteristics of wastes that are generated;
(d) assuring that products are designed, formulated, packaged, and
used so that they do not present unreasonable risks to human health or the
Environment when used or disposed of;
(e) protecting natural resources, species, or ecological amenities;
(f) reducing to acceptable levels the risks inherent in the
transportation of Hazardous Materials;
(g) cleaning up pollutants that have been released, preventing the
threat of release, or paying the costs of such clean up or prevention; or
(h) making responsible parties pay private parties, or groups of
them, for damages done to their health or the Environment, or permitting
self-appointed representatives of the public interest to recover for injuries
done to public assets.
"Equity Component"--as defined in Section 2.4.
"ERISA"--the Employee Retirement Income Security Act of 1974 or any
successor law, and regulations and rules issued pursuant to that Act or any
successor law.
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"Escrow"--as defined in Section 2.4.
"Escrow Agent"--First Union National Bank.
"Escrow Amount"--as defined in Section 2.4.
"Escrow Agreement"--as defined in Section 2.4.
"Exchange Agent"--Worsham, Forsythe & Wooldridge, L.L.P.
"Exchanging Stockholders"--as defined in Section 2.9(a).
"Facilities"--any real property, leaseholds, or other interests
currently or formerly owned or operated by the Company and any buildings,
plants, structures, or equipment (including motor vehicles, tank cars, and
rolling stock) currently or formerly owned or operated by the Company.
"GAAP"--generally accepted United States accounting principles,
applied on a basis consistent with the basis on which the Balance Sheet and
the other financial statements referred to in Section 3.4(b) were prepared.
"General Escrow Amount"--as defined in Section 2.4.
"GeneScreen Shares"--as defined in Section 2.8(a).
"GeneScreen Stock"--as defined in Section 3.3.
"Governmental Authorization"--any approval, consent, license, permit,
waiver, or other authorization issued, granted, given, or otherwise made
available by or under the authority of any Governmental Body or pursuant to
any Legal Requirement.
"Governmental Body"--any:
(a) nation, state, county, city, town, village, district, or other
jurisdiction of any nature;
(b) federal, state, local, municipal, foreign, or other government;
(c) governmental or quasi-governmental authority of any nature
(including any governmental agency, branch, department, official, or entity
and any court or other tribunal);
(d) multi-national organization or body; or
(e) body exercising, or entitled to exercise, any administrative,
executive, judicial, legislative, police, regulatory, or Taxing Authority or
power of any nature.
"Hazardous Activity"--the distribution, generation, handling,
importing, management, manufacturing, processing, production, refinement,
Release, storage, transfer, transportation, treatment, or use (including any
withdrawal or other use of groundwater) of Hazardous Materials
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in, on, under, about, or from the Facilities or any part thereof into the
Environment, and any other act, business, operation, or thing that increases the
danger, or risk of danger, or poses an unreasonable risk of harm to persons or
property on or off the Facilities, or that may affect the value of the
Facilities or the Company.
"Hazardous Materials"--any waste or other substance that is listed,
defined, designated, or classified as, or otherwise determined to be,
hazardous, radioactive, or toxic or a pollutant or a contaminant under or
pursuant to any Environmental Law, including any admixture or solution
thereof, and specifically including petroleum and all derivatives thereof or
synthetic substitutes therefor and asbestos or asbestos-containing materials.
"Indemnified Losses"--items (a) through (g) of Section 11.2.
"Indemnified Persons"--as defined in Section 11.2.
"Intellectual Property Assets"--as defined in Section 3.22.
"Interim Balance Sheet"--as defined in Section 3.4.
"IPO"--as defined in Section 2.4.
"IRC"--the Internal Revenue Code of 1986 or any successor law, and
regulations issued by the IRS pursuant to the Internal Revenue Code or any
successor law.
"IRS"--the United States Internal Revenue Service or any successor
agency, and, to the extent relevant, the United States Department of the
Treasury.
"Key Stockholders"--as defined in the first paragraph of this
Agreement.
"Knowledge"--an individual will be deemed to have "Knowledge" of a
particular fact or other matter if:
(a) such individual is actually aware of such fact or other matter; or
(b) a prudent individual could be expected to discover or otherwise
become aware of such fact or other matter in the course of conducting a
reasonably comprehensive investigation concerning the existence of such fact
or other matter.
A Person (other than an individual) will be deemed to have
"Knowledge" of a particular fact or other matter if any individual who is
serving, or who has at any time served, as a director, officer, partner,
executor, or trustee of such Person (or in any similar capacity) has, or at
any time had, Knowledge of such fact or other matter.
"Legal Requirement"--any federal, state, local, municipal, foreign,
international, multinational, or other administrative order, law, ordinance,
principle of common law, regulation, statute, treaty or Order.
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"Lifecodes Stock"--common stock of the Purchaser, $.10 par value per
share.
"material" or "materially" -unless the context otherwise requires, as
used in Section 3, a qualification of:
(a) an asset with value of at least $25,000 individually or in the
aggregate of $25,000, or
(b) an act, omission, occurrence or event likely to result in Adverse
Consequences individually or in the aggregate of a least $25,000;
provided that, in either case, if such qualifications in the aggregate result
in Adverse Consequences to the Company or the Purchaser in excess of $25,000,
the Purchaser shall be entitled to seek indemnification for the total amount
of such Adverse Consequences or reductions in value pursuant to the
indemnification procedures set forth in Section 11.
"Material Adverse Effect"--with respect to any party or business or
assets, an effect that would be materially (as defined above) adverse to the
properties, business, financial condition or results of operations of such
party, or to such business or assets.
"Material Applicable Contract"--any of the Applicable Contracts
described in clauses (i) through (xiii) of Section 3.17(a).
"Merger"--as defined in Section 2.1.
"MTI"--as defined in Section 7.9.
"MTI Transaction"--as defined in Section 7.9.
"Occupational Safety and Health Law"--any Legal Requirement designed
to provide safe and healthful working conditions and to reduce occupational
safety and health hazards, and any program, whether governmental or private
(including those promulgated or sponsored by industry associations and
insurance companies), designed to provide safe and healthful working
conditions.
"Order"--any award, decision, injunction, judgment, order, ruling,
subpoena, or verdict entered, issued, made, or rendered by any court,
administrative agency, or other Governmental Body or by any arbitrator.
"Ordinary Course of Business"--an action taken by a Person will be
deemed to have been taken in the "Ordinary Course of Business" only if:
(a) such action is consistent with the past practices of such Person
and is taken in the ordinary course of the normal day-to-day operations of
such Person;
(b) such action is not required to be authorized by the board of
directors of such Person (or by any Person or group of Persons exercising
similar authority); and
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(c) such action is similar in nature and magnitude to actions
customarily taken, without any authorization by the board of directors (or by
any Person or group of Persons exercising similar authority), in the ordinary
course of the normal day-to-day operations of other Persons that are in the
same line of business as such Person.
"Organizational Documents"--(a) the articles or certificate of
incorporation and the bylaws of a corporation; (b) the partnership agreement
and any statement of partnership of a general partnership; (c) the limited
partnership agreement and the certificate of limited partnership of a limited
partnership; (d) any charter or similar document adopted or filed in
connection with the creation, formation, or organization of a Person; and (e)
any amendment to any of the foregoing.
"Person"--any individual, corporation (including any non-profit
corporation), general or limited partnership, limited liability company, joint
venture, estate, trust, association, organization, labor union, or other
entity or Governmental Body.
"Plan"--as defined in Section 3.13.
"Post-Closing Period" means with respect to the Company any Tax
Period commencing after the Closing Date.
"Pre-Closing Period" means with respect to the Company any Tax Period
ending on or before the Closing Date.
"Proceeding"--any action, arbitration, audit, hearing, investigation,
litigation, or suit (whether civil, criminal, administrative, investigative)
commenced, brought, conducted, or heard by or before, or otherwise involving,
any Governmental Body or arbitrator.
"Purchaser"--as defined in the first paragraph of this Agreement.
"Purchaser's Tax Indemnity"--as defined in Section 9.1(b).
"Registration Statement"--The Purchaser's Registration Statement on
Form S-1 (File No. 333-59271) as filed with the Securities and Exchange
Commission.
"Related Person"--with respect to a particular individual:
(a) each other member of such individual's Family;
(b) any Person that is directly or indirectly controlled by such
individual or one or more members of such individual's Family;
(c) any Person in which such individual or members of such
individual's Family hold (individually or in the aggregate) a Material
Interest; and
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(d) any Person with respect to which such individual or one or more
members of such individual's Family serves as a director, officer, partner,
executor, or trustee (or in a similar capacity).
With respect to a specified Person other than an individual:
(a) any Person that directly or indirectly controls, is directly or
indirectly controlled by, or is directly or indirectly under common control
with such specified Person;
(b) any Person that holds a Material Interest in such specified
Person;
(c) each Person that serves as a director, officer, partner,
executor, or trustee of such specified Person (or in a similar capacity);
(d) any Person in which such specified Person holds a Material
Interest;
(e) any Person with respect to which such specified Person serves as
a general partner or a trustee (or in a similar capacity); and
(f) any Related Person of any individual described in clause (b) or
(c).
For purposes of this definition, (a) the "Family" of an individual
includes (i) the individual, (ii) the individual's spouse and former spouses,
(iii) any other natural person who is related to the individual or the
individual's spouse within the second degree, and (iv) any other natural
person who resides with such individual, and (b) "Material Interest" means
direct or indirect beneficial ownership (as defined in Rule 13d-3 under the
Securities Exchange Act of 1934) of voting securities or other voting
interests representing at least 10% of the outstanding voting power of a
Person or equity securities or other equity interests representing at least
10% of the outstanding equity securities or equity interests in a Person.
"Release"--any spilling, leaking, emitting, discharging, depositing,
escaping, leaching, dumping into the Environment, whether intentional or
unintentional.
"Representative"--with respect to a particular Person, any director,
officer, employee, agent, consultant, advisor, or other representative of such
Person, including legal counsel, accountants, and financial advisors.
"Securities Act"--the Securities Act of 1933 or any successor law,
and regulations and rules issued pursuant to that Act or any successor law.
"Stockholders"--the holders of all of the issued and outstanding
shares of GeneScreen Stock immediately prior to the Effective Date and listed
on Exhibit J.
"Stockholders' Representative"--as defined in the first paragraph of
this Agreement.
"Stockholders' Tax Indemnity"--as defined in Section 9.1(a).
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"Surviving Corporation"--as defined in Section 2.1.
"Tax"--any tax (including any income tax, capital gains tax,
value-added tax, sales tax, property tax, gift tax, or estate tax), levy,
assessment, tariff, duty (including any customs duty), deficiency, or other
fee, and any related charge or amount (including any fine, penalty, interest,
or addition to tax), imposed, assessed, or collected by or under the authority
of any Governmental Body or payable pursuant to any tax-sharing agreement or
any other Contract relating to the sharing or payment of any such tax, levy,
assessment, tariff, duty, deficiency, or fee.
"Tax Authority" means, with respect to any Tax, the Governmental Body
that imposes or collects such Tax, including any Governmental Body that
imposes, or is charged with collecting, social security or similar charges or
premiums.
"Tax Benefit" means the value of any refund, credit or reduction in
otherwise required Tax payments including any interest payable thereon
actually realized by a Person, which value shall be computed as of the Closing
Date or the first date on which such refund, credit or other Tax reduction
arises or otherwise becomes available to be utilized, whichever is later,
using the Tax rate applicable to the highest level of income with respect to
such Tax under the applicable Tax Law on such date. Any Tax Benefit shall be
computed net of any related Tax cost (which shall be computed in the same
manner in which Tax Benefits are otherwise computed pursuant to this
definition).
"Tax Escrow Amount"--as defined in Section 2.4.
"Tax Period" means with respect to any Tax the period for which the
Tax is reported as provided under applicable Legal Requirements.
"Tax Representation"--any representation or warranty made by the
Company or the Key Stockholders in Section 3.11 of this Agreement (without
giving effect to any supplement to the Disclosure Letter), the Disclosure
Letter, the Supplements to the Disclosure Letter, or any other certificate or
document delivered by the Company, the Key Stockholders or the Stockholders'
Representative pursuant to this Agreement.
"Tax Return"--any return (including any information return), report,
statement, schedule, notice, form, or other document or information filed with
or submitted to, or required to be filed with or submitted to, any
Governmental Body in connection with the determination, assessment,
collection, or payment of any Tax or in connection with the administration,
implementation, or enforcement of or compliance with any Legal Requirement
relating to any Tax.
"Technology License"--as defined in Section 7.11.
"Threat of Release"--a substantial likelihood of a Release that may
require action in order to prevent or mitigate damage to the Environment that
may result from such Release.
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"Threatened"--a claim, Proceeding, dispute, action, or other matter
will be deemed to have been "Threatened" if any demand or statement has been
made (orally or in writing) or any notice has been given (orally or in
writing), or if any other event has occurred or any other circumstances exist,
that would lead a prudent Person to conclude that such a claim, Proceeding,
dispute, action, or other matter is likely to be asserted, commenced, taken,
or otherwise pursued in the future.
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Exhibit C
Form of Certificate of Merger
-----------------------------
CERTIFICATE OF MERGER
OF
GENESCREEN INC.
INTO
LIFECODES CORPORATION
It is hereby certified that:
1. The name and state of incorporation of each of the constituent
corporations of the merger are:
a) GeneScreen Inc., a Delaware corporation; and
b) Lifecodes Corporation, a Delaware corporation.
2. An Agreement and Plan of Merger between the constituent
corporations has been approved, adopted, certified, executed, and acknowledged
by each of the constituent corporations in accordance with the provisions of
subsection (c) of 251 of the General Corporation Law of the State of Delaware.
3. The name of the surviving corporation in the merger is Lifecodes
Corporation.
4. The Certificate of Incorporation of Lifecodes Corporation, as now
in force and effect, shall continue to be the Certificate of Incorporation of
the surviving corporation until amended and changed pursuant to the provisions
of the General Corporation Law of the State of Delaware.
5. The executed Agreement and Plan of Merger is on file at the
principal place of business of Lifecodes Corporation at 550 West Ave.,
Stamford, Connecticut 06902.
6. A copy of the aforesaid Agreement and Plan of Merger will be
furnished by Lifecodes Corporation, on request, and without cost, to any
stockholder of either of the constituent corporations.
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7. The merger shall become effective the date of the filing of this
Certificate of Merger.
Dated: , 1998
LIFECODES CORPORATION
By: ____________________________
Walter O. Fredericks
President
GENESCREEN INC.
By: ______________________________
Keith W. Brown
President and Chief Executive Officer
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Exhibit D
Form of Escrow Agreement
THIS ESCROW AGREEMENT ("Agreement"), dated as of ______, 1998, by and
among LIFECODES CORPORATION ("Lifecodes"), a Delaware corporation, having its
principal place of business in Stamford, Connecticut; SANDPIPER VENTURES LLC,
a Texas limited liability company, acting for itself and in its capacity as
representative for each of the individuals listed on Appendix A hereto (the
"Stockholders' Representative"); and _________________, a _____________ with
offices located in ______________, ________ (the "Escrow Agent").
WHEREAS, GeneScreen Inc., a Delaware corporation ("GeneScreen"),
Lifecodes and certain principal stockholders of GeneScreen (the "Key
Stockholders") entered into an Agreement and Plan of Merger for the merger of
GeneScreen into Lifecodes, dated as of August 31, 1998 (the "Merger
Agreement") (all capitalized terms used herein without definition have the
same meanings assigned thereto in the Merger Agreement);
WHEREAS, immediately prior to the Merger, all of the outstanding
shares of capital stock of GeneScreen were owned solely by the individuals
listed on Appendix A (the "Stockholders");
WHEREAS, pursuant to Section 11 of the Merger Agreement, each of the
Stockholders (the "Stockholders") shall indemnify and hold harmless Lifecodes
and its Representatives, stockholders, controlling persons and affiliates
(collectively, the Indemnified Persons") for Damages arising, directly or
indirectly, from or in connection with Indemnified Losses;
WHEREAS, pursuant to Section 12 of the Merger Agreement, the
Stockholders (other than holders of Dissenters' Shares) have appointed
Sandpiper Ventures LLC as the Stockholders' Representative;
NOW, THEREFORE, the parties hereto agree as follows:
1. Deposit of Funds. On the date hereof, Lifecodes shall deposit or
cause to be deposited in escrow with the Escrow Agent cash in an amount equal
to $3,500,000.00 (the "Escrow Amount"). The Escrow Amount shall be divided as
follows: (i) $2,500,000.00 of the Escrow Amount (the "General Escrow Amount")
shall be held as the sole source to satisfy the Stockholders' indemnity
obligations other than those relating to the Stockholders' Tax Indemnity or
any breach of any Tax Representation (the "General Indemnified Losses"); and
(ii) $1,000,000.00 of the Escrow Amount (the "Tax Escrow Amount") shall be
held as the sole source to satisfy indemnity obligations relating to the
Stockholders' Tax Indemnity and any breach of any Tax Representation (the "Tax
Indemnified Losses"). In the event Lifecodes recovers from a third party
(e.g., a tax refund or late payment of a receivable), at any time prior to the
Tax Distribution Date, an amount that had previously been the subject of a
withdrawal from the Escrow Amount pursuant to a General Indemnified Claim or a
Tax Indemnified Claim, it will
<PAGE>
promptly deposit with the Escrow Agent an amount in cash equal to the lesser
of (i) the amount recovered or (ii) the amount of the Indemnified Claim.
2. Administration of Escrow Fund. Upon receipt by the Escrow Agent of
the Escrow Amount, the Escrow Agent shall invest the Escrow Amount and any and
all interest earned thereon in United States government securities or
securities of governmental agencies covered by bank repurchase agreements or
securities guaranteed by the United States government or bankers' acceptances
or certificates of deposit not subject to a penalty upon its premature
withdrawal in banks having undivided capital and surplus of not less than
$100,000,000.00 or money market funds having assets of not less than
$100,000,000.00, including money market funds that may be sold (without regard
to maturity date) by the Escrow Agent whenever necessary to make any
disbursement required under this Agreement. Interest and dividends earned on
the Escrow Amount shall accrue to Lifecodes and be distributed monthly.
3. Resolution of General Indemnified Claims.
(a) Notice. If Lifecodes elects to assert a claim for a General
Indemnified Loss (a "General Indemnified Claim"), it shall simultaneously
furnish to the Escrow Agent and the Stockholders' Representative a written
claim notice (the "Claim Notice") that shall contain a brief description of
its claim, reference to the relevant provisions of the Merger Agreement and
its good faith estimate of the General Indemnified Losses expected to result
therefrom; provided that a general description of the claim and the amount
thereof shall be sufficient for claims asserted by third parties. Lifecodes
may amend each Claim Notice from time to time to the extent its estimate of
the General Indemnified Losses changes by giving written notice to the Escrow
Agent and the Stockholders' Representative. On or prior to ____________, 2000,
Lifecodes shall submit a written statement to the Stockholders' Representative
that shall set forth a list of all General Indemnified Claims submitted by
______________, 2000. Except as otherwise permitted pursuant to Section 11.4
of the Merger Agreement, Lifecodes shall not be permitted to assert any
General Indemnified Claim after ______________, 2000; provided, that Lifecodes
thereafter may amend the estimated amount of the General Indemnified Losses.
(b) No Objection by the Stockholders' Representative. If the
Escrow Agent does not receive a written objection from the Stockholders'
Representative within thirty (30) days after the Escrow Agent's receipt of a
Claim Notice or any amendment thereof, it shall pay Lifecodes, as soon as
practicable, an amount equal to the total General Indemnified Claims set forth
in the Claim Notice, as amended.
(c) Objection by the Stockholders' Representative. If the Escrow
Agent receives a written objection from the Stockholders' Representative
within such thirty (30) days, it shall retain the amount of such General
Indemnified Claims. It shall thereafter pay such amount to Lifecodes only upon
receipt of either (i) a written statement signed by both Lifecodes and the
Stockholders' Representative stating the agreed amount of the General Escrow
Amount to be paid to Lifecodes; or (ii) a certified copy of an order of a
court or a written arbitration award, accompanied by an opinion of independent
counsel to the effect that such order or award is final and not subject to
appeal or that no appeal has been taken within the time prescribed. If
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<PAGE>
Lifecodes and the Stockholders' Representative agree on the amount of any
General Indemnified Claim, each agrees to execute the statement referred to in
clause (i) above.
(d) Mutual Resolution. If the Stockholders' Representative so
objects to a General Indemnified Claim, Lifecodes and the Stockholders'
Representative shall use their best efforts to attempt in good faith to
resolve such General Indemnified Claim in an expedited manner. Each such party
shall cooperate in furnishing, or providing access to, all available documents
or other evidence relevant to such General Indemnified Claim, except any
privileged evidence or materials specially prepared to support such General
Indemnified Claim against the Stockholders or to support the Stockholders'
defense in respect of such General Indemnified Claim against Lifecodes, as the
case may be. To the extent the amount of such General Indemnified Claim is not
finally resolved within thirty (30) days after such objection, the disputed
portion of such General Indemnified Claim shall be submitted for to
arbitration for final settlement pursuant to Section 6 below. To the extent
the amount of a General Indemnified Claim is finally resolved, Lifecodes and
the Stockholders' Representative shall sign a written statement setting forth
such amount, if any, and submit such statement to the Escrow Agent. Lifecodes
shall then be entitled to receive payment of such amount, if any, from the
General Escrow Amount. The difference between the amount set forth in the
applicable Claim Notice and the amount set forth in such statement shall be
retained by the Escrow Agent for distribution pursuant to Section 5(b) below.
(e) Unliquidated Claims. If a General Indemnified Loss arises
out of a claim asserted by a third party, the parties shall not be required to
resolve the amount of such General Indemnified Loss until the final resolution
of such third party claim. To the extent the amount of any General Indemnified
Claims not withdrawn by Lifecodes (including such third party claims) are not
resolved pursuant to this Section 3 on the Second General Distribution Date,
the Escrow Agent shall retain the amount of the General Indemnified Claims
that are claimed by Lifecodes in the applicable Claim Notices.
4. Resolution of Tax Indemnified Claims.
(a) Notice. If Lifecodes elects to assert a claim for a Tax
Indemnified Loss (a "Tax Indemnified Claim"), it shall simultaneously furnish
to the Escrow Agent and the Stockholders' Representative a written claim
notice (the "Claim Notice") that shall contain a brief description of its
claim, reference to the relevant provisions of the Merger Agreement and its
good faith estimate of the Tax Indemnified Losses expected to result
therefrom; provided that a general description of the claim and the amount
thereof shall be sufficient for claims asserted by third parties. Lifecodes
may amend each Claim Notice from time to time to the extent its estimate of
the Tax Indemnified Losses changes by giving written notice to the Escrow
Agent and the Stockholders' Representative. On or prior to the date that is
thirty-six (36) months from the date that [the Stockholders' Representative]
files all Tax Returns for all Tax Periods ending on or before the Closing
Date, or such later date as may be required due to the extension of any
applicable statute of limitations relating to any Tax matter (the "Final Tax
Claim Date"), Lifecodes shall submit a written statement to the Stockholders'
Representative that shall set forth a list of all Tax Indemnified Claims
submitted by the Final Tax Claim Date. Except as otherwise permitted pursuant
to Section 11.4 of the Merger Agreement, Lifecodes shall not be permitted to
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<PAGE>
assert any Tax Indemnified Claim after the Final Tax Claim Date; provided,
that Lifecodes thereafter may amend the estimated amount of the Tax
Indemnified Losses.
(b) No Objection by the Stockholders' Representative. If the
Escrow Agent does not receive a written objection from the Stockholders'
Representative within thirty (30) days after the Escrow Agent's receipt of a
Claim Notice or any amendment thereof, it shall pay Lifecodes, as soon as
practicable, an amount equal to the total Tax Indemnified Claims set forth in
the Claim Notice, as amended.
(c) Objection by the Stockholders' Representative. If the Escrow
Agent receives a written objection from the Stockholders' Representative
within such thirty (30) days, it shall retain the amount of such Tax
Indemnified Claims. It shall thereafter pay such amount to Lifecodes only upon
receipt of either (i) a written statement signed by both Lifecodes and the
Stockholders' Representative stating the agreed amount of the Tax Escrow
Amount to be paid to Lifecodes; or (ii) a certified copy of an order of a
court or a written arbitration award, accompanied by an opinion of independent
counsel to the effect that such order or award is final and not subject to
appeal or that no appeal has been taken within the time prescribed. If
Lifecodes and the Stockholders' Representative agree on the amount of any Tax
Indemnified Claim, each agrees to execute the statement referred to in clause
(i) above.
(d) Mutual Resolution. If the Stockholders' Representative so
objects to a Tax Indemnified Claim, Lifecodes and the Stockholders'
Representative shall use their best efforts to attempt in good faith to
resolve such Tax Indemnified Claim in an expedited manner. Each such party
shall cooperate in furnishing, or providing access to, all available documents
or other evidence relevant to such Tax Indemnified Claim, except any
privileged evidence or materials specially prepared to support such Tax
Indemnified Claim against the Stockholders or to support the Stockholders'
defense in respect of such Tax Indemnified Claim against Lifecodes, as the
case may be. To the extent the amount of such Tax Indemnified Claim is not
finally resolved within thirty (30) days after such objection, the disputed
portion of such Tax Indemnified Claim shall be submitted to arbitration for
final settlement pursuant to Section 6 below. To the extent the amount of a
Tax Indemnified Claim is finally resolved, Lifecodes and the Stockholders'
Representative shall sign a written statement setting forth such amount and
submit such statement to the Escrow Agent. Lifecodes shall then be entitled to
receive payment of such amount from the Tax Escrow Amount. The difference
between the amount set forth in the applicable Claim Notice and the amount set
forth in such statement shall be retained by the Escrow Agent for distribution
pursuant to Section 5(b) below.
(e) Unliquidated Claims. If a Tax Indemnified Loss arises out of
a claim asserted by a third party, the parties shall not be required to
resolve the amount of such Tax Indemnified Loss until the final resolution of
such third party claim. To the extent the amount of any Tax Indemnified Claims
not withdrawn by Lifecodes (including such third party claims) are not
resolved pursuant to this Section 4 on the Tax Distribution Date, the Escrow
Agent shall retain the amount of the Tax Indemnified Claims that are claimed
by Lifecodes in the applicable Claim Notices.
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5. Distribution of Escrow Amount.
(a) Claims for Indemnified Losses. The Escrow Agent shall
promptly pay to Lifecodes the amount of all General and Tax Indemnified Claims
(the "Indemnified Claims") to the extent such amounts are payable to Lifecodes
pursuant to Section 3(b), (c) or (d) or 4(b), (c) or (d) above.
(b) Distribution. The balance of the Escrow Amount shall be
distributed as follows:
(i) Subject to clause (iv) below, within ten (10) days
after _______, 1999 (the "First General Distribution Date"),
$1,800,000.00 of the General Escrow Amount shall be distributed
by wire transfer to the Stockholders' Representative, or
otherwise as the Stockholders' Representative shall direct;
(ii) Subject to clause (iv) below, within ten (10) days
after ________, 2000 (the "Second General Distribution Date"),
the balance of the General Escrow Amount shall be distributed by
wire transfer to the Stockholders' Representative, or otherwise
as the Stockholders' Representative shall direct;
(iii) Subject to clause (iv) below, within ten (10) days
after the Final Tax Claim Date (the "Tax Distribution Date"),
the balance of the Tax Escrow Amount shall be distributed by
wire transfer to the Stockholders' Representative, or otherwise
as the Stockholders' Representative shall direct; and
(iv) To the extent Indemnified Claims are not finally
resolved on each of the First or Second General Distribution
Date or the Tax Distribution Date, (A) the Escrow Agent shall
retain the amount of each such Claims as determined pursuant to
Section 3(e) or 4(e) above, as the case may be, and (B) within
ten (10) days after each such Claim is finally resolved in the
manner provided in Section 3 or 4 above, the Escrow Agent shall
pay such final amount, if any, to Lifecodes and the balance, if
any, of the amount asserted in the related Claim Notice to the
Stockholders' Representative to the extent such amount was to be
paid on a General or Tax Distribution Date pursuant to Section
5(b)(i), (ii) or (iii) but was retained pursuant to this Section
5(b)(iv).
6. Arbitration. In the event the Stockholders' Representative and
Lifecodes have not resolved any disputed Indemnified Claim pursuant to Section
3(d) or 4(d) above, either party may commence an arbitration proceeding by
submitting the disputed Indemnified Claim to arbitration in accordance with
the Commercial Arbitration Rules of the American Arbitration Association (the
"AAA"). Any such arbitration shall be before an arbitral tribunal composed of
three arbitrators; one selected by the Stockholders' Representative, one
selected by Lifecodes and one selected by mutual agreement of the
Stockholders' Representative and Lifecodes. If the Stockholders'
Representative and Lifecodes are unable to agree on such third arbitrator, the
arbitrator shall be selected by the AAA. The venue for the arbitration shall
be Stamford, Connecticut or such other venue mutually agreed to by the
Stockholders' Representative and
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<PAGE>
Lifecodes. The arbitration award or order shall be final and binding on the
Stockholders, the Stockholders' Representative and Lifecodes and all costs of
such proceeding shall be borne as specified in the award or order.
7. Escrow Fees. The Escrow Agent shall be entitled to the fees set
forth on Appendix B attached hereto at the times indicated therein. The
responsibility for such fees shall be shared equally by Lifecodes and the
Stockholders with the fees payable by the Stockholders payable solely from the
General Escrow Fund.
8. Obligations of the Escrow Agent. It is agreed that the duties and
obligations of the Escrow Agent are those specifically provided herein and no
other. The Escrow Agent shall have no liability under, or duty to inquire into
or construe the terms and provisions of, the Merger Agreement or any other
contract or instrument entered into by the parties hereto in connection
herewith. The Escrow Agent's duties are purely ministerial in nature and so
long as it has acted in good faith, the Escrow Agent shall incur no liability
whatsoever for actions taken pursuant to the terms of this Agreement except
for its willful misconduct or gross negligence. The Escrow Agent shall not be
bound by any modification, amendment, termination, cancellation, rescission or
supercession of this Agreement unless it shall have given prior written
consent thereto. In the event that the Escrow Agent (a) shall be uncertain as
to its duties or rights hereunder or (b) shall receive conflicting
instructions, claims or demands from Lifecodes or the Stockholders'
Representative, it shall be entitled to refrain from taking any action other
than to keep safely all property held in Escrow until (i) it shall be directed
otherwise in writing by the Stockholders' Representative and Lifecodes or (ii)
until it shall be directed by an arbitration award or court order. The Escrow
Agent shall have no liability for following the instructions contained herein
or written instructions given by Lifecodes and the Stockholders'
Representative. The Escrow Agent shall have no responsibility for the
genuineness or validity of any document or other item deposited with it and
shall have no liability for acting in accordance with any written instructions
or certificates given to it hereunder and reasonably believed by it to be
signed by the proper parties. The Escrow Agent shall not be required to
institute legal proceedings of any kind and shall not be required to defend
any legal proceedings which may be instituted against it with respect to the
subject matter of these instructions unless requested to do so and indemnified
to its satisfaction against the cost and expense of such defense.
9. Release of Escrow Agent. The Escrow Agent may resign at any time
by giving written notice of its resignation to the Stockholders'
Representative and Lifecodes at their respective addresses set forth below, at
least thirty (30) days prior to the date specified for such resignation to
take effect, and upon the effective date of such resignation, all property
then held by the Escrow Agent hereunder shall be delivered by it to such
person as may be designated mutually by the Stockholders' Representative and
Lifecodes, whereupon all of the Escrow Agent's obligations hereunder shall
cease and terminate. The Escrow Agent's sole responsibility thereafter shall
be to keep safely all property then held by it and to deliver the same to the
persons designated by the parties hereto or in accordance with the directions
of a final order or judgment of a court of competent jurisdiction or
arbitration award.
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10. Notices. All notices, consents, waivers, and other communications
under this Agreement must be in writing and will be deemed to have been duly
given when (a) delivered by hand, (b) sent by telecopier, provided that a copy
is mailed by overnight courier service, or (c) when received by the addressee,
if sent by a nationally recognized overnight delivery service, in each case to
the appropriate addresses and telecopier numbers set forth below (or to such
other addresses and telecopier numbers as a party may designate by notice to
the other parties):
To Lifecodes:
Lifecodes Corporation
550 West Ave.
Stamford, CT 06902
Attention: Walter O. Fredericks
Facsimile No.: (203) 328-9598
With a copy to:
Wiggin & Dana
Three Stamford Plaza
301 Tresser Blvd.
Stamford, CT 06911
Attention: William A. Perrone, Esq.
Facsimile No.: (203) 363-7676
(a) To Stockholders' Representative
Sandpiper Ventures LLC
Attn: Glenn H. Stinchcomb
10111 North Central Expressway
Dallas, TX 75231
Facsimile No.: (214) 739-9993
With a copy to:
Worsham, Forsythe & Wooldridge LLP
1601 Bryon Street, 30th Floor
Dallas, TX 75201
Attn: Timothy A. Mack, Esq.
Facsimile No.: (214) 880-0011
(b) To Escrow Agent:
With a copy to:
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11. Miscellaneous.
(a) Entire Agreement. This Agreement constitutes the entire
agreement of the parties with respect to the subject matter hereof, and may
not be modified or amended except by written instrument executed by the
parties.
(b) Binding Effect. This Agreement shall be binding upon the
Stockholders' Representative, Lifecodes and the Escrow Agent, their respective
successors and assigns, and shall inure to the benefit of each of the parties,
their respective heirs, legal representatives, successors and assigns.
(c) Applicable Law. This Agreement shall be governed by and
construed in accordance with the laws of the State of Connecticut, without
regard for its conflicts of law principles.
(d) Jurisdiction; Service of Process. Any action or proceeding
seeking to enforce any provision of, or based on any right arising out of,
this Agreement may be brought against any of the parties in the courts of the
State of Connecticut, County of Fairfield, or, if it has or can acquire
jurisdiction, in the United States District Court for the District of
Connecticut, and each of the parties consents to the non-exclusive
jurisdiction of such courts (and of the appropriate appellate courts) in any
such action or proceeding and waives any objection to venue laid therein.
Process in any action or proceeding referred to in the preceding sentence may
be served on any party anywhere in the world.
(e) Counterparts. This Agreement may be executed simultaneously
in any number of counterparts, each of which shall be deemed an original and
all of which, when taken together, shall be deemed to constitute one and the
same agreement.
(f) Severability. If any provision of this Agreement is held
invalid or unenforceable by any court of competent jurisdiction, the other
provisions of this Agreement will remain in full force and effect. Any
provision of this Agreement held invalid or unenforceable only in part or
degree will remain in full force and effect to the extent not held invalid or
unenforceable.
(g) Section Headings. The headings of Sections in this Agreement
are provided for convenience only and will not affect its construction or
interpretation.
(h) Successor Representative. In the event that Sandpiper
Ventures LLC shall cease to serve as Stockholders' Representative for any
reason then such person as shall be designated in writing in accordance with
the Merger Agreement.
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<PAGE>
IN WITNESS WHEREOF, the parties hereto have executed this Escrow Agreement as
of the date and year first above written.
LIFECODES CORPORATION
By: _______________________________
Name: Walter O. Fredericks
Title: President
STOCKHOLDERS' REPRESENTATIVE
___________________________________
Name: Glenn H. Stinchcomb
KEY STOCKHOLDERS
Southwest Enterprise Associates, Limited
Partnership
By:___________________________________
Name:
New Enterprise Associates IV, Limited
Partnership
By:___________________________________
Name:
______________________________________
Name: Timothy A. Mack
______________________________________
Name: Glenn M. Stinchcomb
DB Liquidation, LLC
By:____________________________________
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Name:
Blue Doctor, LLC
By:___________________________________
Name:
_______________________________________
Name: Keith W. Brown
_______________________________________
Name: William K. Baxter
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APPENDIX A
STOCKHOLDERS
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APPENDIX B
ESCROW FEES
12
<PAGE>
Exhibit E-1
Individuals Executing Non-Competition Agreements
Keith Brown
Robert Giles
Robert Gutendorf
Robert Funk
Christopher Smith
Kathy Leis
<PAGE>
Exhibit E-2
Form of Non-Competition Agreement
This Non-Competition Agreement (this "Agreement") is made as of
______________, 1998, by and between Lifecodes Corporation, a Delaware
corporation (the "Purchaser"), on the one hand, and ___________, an individual
residing in ______________, for himself and his Related Persons (the
"Employee"), on the other hand.
WITNESSETH
WHEREAS, concurrently with the execution and delivery of this
Agreement, GeneScreen Inc., a Delaware corporation (the "Company") is merging
with and into Purchaser pursuant to the terms and conditions of an Agreement
and Plan of Merger made as of _______________, 1998 (the "Merger Agreement");
WHEREAS, pursuant to the terms of the Merger Agreement, the Employee, an
employee of the Company, to induce the Purchaser to enter into the Merger
Agreement and to consummate the transactions contemplated thereby, has agreed
to execute and deliver this Agreement;
NOW THEREFORE, in consideration of the premises and other good and
valuable consideration, the receipt of which is hereby acknowledged, the
parties, intending to be legally bound, agree as follows:
1. DEFINITIONS
Capitalized terms not expressly defined in this Agreement shall have
the meanings ascribed to them in the Merger Agreement.
2. ACKNOWLEDGEMENTS BY EMPLOYEE
Employee acknowledges that (a) Employee may have, in the course of its
relationship with the Company, become familiar with some or all of the
following, any and all of which constitute confidential information of the
Company, (collectively the "Confidential Information"): (i) trade secrets
concerning business and affairs of the Company, product specifications, data,
know-how, formulae, compositions, processes, designs, sketches, photographs,
graphs, drawings, samples, inventions and ideas, past, current and planned
research and development, current and planned testing, manufacturing and
distribution methods and processes, customer lists, current and anticipated
customer requirements, price lists, market studies, marketing information,
customer surveys, business plans, discoveries, concepts, designs, methods and
information, of the Company and any other information, however documented, of
the Company that is a trade secret within the meaning of the Uniform Trade
Secrets Act, C.G.S.A. ss.35-50 et seq.; (ii) information concerning the
business and affairs of the Company (which includes historical financial
statements, financial projections and budgets, historical and projected sales,
capital spending budgets and plans, the names and backgrounds of key
personnel, personnel training and
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techniques and materials), however documented; and (iii) notes, analysis,
compilations, studies, summaries, and other material prepared by or for the
Company containing or based, in whole or in part, on any information included in
the foregoing, (b) the business of the Company is international in scope, (c)
its products and services are marketed throughout the world; (d) Purchaser has
required that Employee make the covenants set forth in Sections 3 and 4 of this
Agreement as a condition to the Merger; (e) the provisions of Sections 3 and 4
of this Agreement are reasonable and necessary to protect and preserve
Purchaser; and (f) Purchaser would be irreparably damaged if Employee were to
breach the covenants set forth in Sections 3 and 4 of this Agreement.
3. CONFIDENTIAL INFORMATION
Employee agrees that Employee will not, at any time, disclose to any
unauthorized Persons, or use for its own account for the purpose of competing
against Purchaser or its Affiliates, or use for the benefit of any third party
any Confidential Information, whether Employee has such information in his
memory or embodied in writing or other physical form, without Purchaser's
written consent, unless and to the extent that the Confidential Information is
or becomes generally known to and available for use by the public other than
as a result of Employee's fault or the fault of any other Person bound by a
duty of confidentiality to Purchaser or the Company.
4. NON-COMPETITION
As an inducement for Purchaser to enter into the Merger Agreement and
as additional consideration for the consideration to be provided to Employee
under the Merger Agreement, Employee agrees that:
(a) For a period of five (5) years after the Closing:
(i) Employee will not, directly or indirectly, engage or
invest in, own, manage, operate, finance, control, or participate in the
ownership, management, operation, financing, or control of, be retained by,
associated with, lend credit to, or render services or advice to, any business
whose products or activities materially compete with the services, products or
activities of Purchaser or its Affiliates, in any states in which the Company
presently does, or presently intends to do business, or any states contiguous
to such states; provided, however, that Employee may purchase or otherwise
acquire up to (but not more than) one percent of any class of securities of
any enterprise (but without otherwise participating in the activities of such
enterprise) if such securities are listed on any national or regional
securities exchange or have been registered under Section 12(g) of the
Securities Exchange Act of 1934. Employee agrees that this covenant is
reasonable with respect to its duration, geographical area, and scope.
(ii) Employee will not directly or indirectly, (A) induce or
attempt to induce any employee of or consultant to Purchaser or its Affiliates
to leave the employ of Purchaser or its Affiliates, (B) in any way interfere
with any relationship between Purchaser or its Affiliates and any employee of
Purchaser or its Affiliates, (C) employ, or otherwise engage as an employee,
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<PAGE>
independent contractor, or otherwise, any employee of Purchaser or its
Affiliates, or (D) induce or attempt to induce any customer, supplier,
licensee, or business relation of the Company to cease doing business with
Purchaser or its Affiliates, or in anyway interfere with the relationship
between any customer, supplier, licensee, or business relation of Purchaser or
its Affiliates;
(b) In the event of a breach by Employee of any covenant set forth in
Subsection 4(a) of this Agreement, the term of such covenant will be extended
by the period of the duration of such breach; and
(c) Employee will not, at any time during or after the five (5) year
period, knowingly disparage Purchaser or its Affiliates, or any of its
Representatives.
5. REMEDIES
If Employee breaches the covenants set forth in Sections 3 or 4 of this
Agreement, Purchaser will be entitled to the following remedies:
(a) Damages from Employee; and
(b) In addition to its rights to Damages and any other rights it may
have, to obtain injunctive or other equitable relief to restrain any breach or
threatened breach or otherwise to specifically enforce the provisions of
Sections 3 and 4 of this Agreement, it being agreed that money damages alone
would be inadequate to compensate Purchaser and would be an inadequate remedy
for such breach.
The rights and remedies of the parties of this Agreement are cumulative and
not alternative.
6. SUCCESSORS AND ASSIGNS
This Agreement will be binding upon Purchaser and Employee and will
inure to the benefit of Purchaser and its Related Persons, successors and
assigns. Employee may not assign this Agreement.
7. WAIVER
Neither the failure nor any delay by any party in exercising any
right, power or privilege, and no single or partial exercise of any such
right, power, or privilege will preclude any other or further exercise of such
right, power, or privilege or the exercise of any other right, power, or
privilege. To the maximum extent permitted by applicable law, (a) no claim or
right arising out of this Agreement can be discharged by one party, in whole
or in part, by a waiver or renunciation of the claim or right unless in
writing signed by the other party; (b) no waiver that may be given by a party
will be applicable except in the specific instance for which it is given; and
(c) no notice to or demand on one party will be deemed to be a waiver of any
obligation of such party or of the right of the party giving such notice or
demand to take further action without notice or demand as provided in this
Agreement.
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8. GOVERNING LAW
This Agreement will be governed by the laws of the State of
Connecticut without regard to conflicts of law principles.
9. JURISDICTION; SERVICE OF PROCESS
Any action or proceeding seeking to enforce any provision of, or
based on any right arising out of, this Agreement may be brought against any
of the parties in the courts of the State of Connecticut, County of Fairfield,
or, if it has or can acquire jurisdiction, in the United States District Court
for the District of Connecticut, and each of the parties consents to the
non-exclusive jurisdiction of such courts (and of the appropriate appellate
courts) in any such action or proceeding and waives any objection to venue
laid therein. Process in any action or proceeding referred to in the preceding
sentence may be served on any party anywhere in the world in accordance with
applicable law.
10. SEVERABILITY
Whenever possible each provision and term of this Agreement will be
interpreted in a manner to be effective and valid but if any provision or term
of this Agreement is held to be prohibited by or invalid, then such provision
or term will be ineffective only to the extent of such prohibition or
invalidity, without invalidating or affecting in any manner whatsoever the
remainder of such provision or term or the remaining provisions or terms of
this Agreement. If any of the covenants set forth in Section 4 of this
Agreement are held to be unreasonable, arbitrary, or against public policy,
such covenants will be considered divisible with respect to scope, time and
geographic area, and in such lesser scope, time and geographic area, will be
effective, binding and enforceable against Employee.
11. COUNTERPARTS
This Agreement may be executed in one or more counterparts, each of
which will be deemed to be an original copy of this Agreement and all of
which, when taken together, will be deemed to constitute one and the same
agreement.
12. SECTION HEADINGS; CONSTRUCTION
The headings of Sections in this Agreement are provided for
convenience only and will not affect its construction or interpretation. All
references to "Section" or "Sections" refer to the corresponding Section or
Sections of this Agreement unless otherwise specified. All words used in this
Agreement will be construed to be such gender or number as the circumstances
require. Unless otherwise expressly provided, the word "including" does not
limit the preceding words or terms.
13. NOTICES
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<PAGE>
All notices, consents, waivers and other communications under this
Agreement must be in writing and will be deemed to have been duly given when
(a) delivered by hand (with written confirmation of receipt), (b) sent by
facsimile (with written confirmation of receipt), provided that a copy is
mailed by registered mail, return receipt requested, or (c) when received by
the addressee, if sent by a nationally recognized overnight delivery service
(receipt requested), in each case to the appropriate addresses and facsimile
numbers set forth below (or to such other addresses and facsimile numbers as a
party may designate by notice to the other parties):
Employee:
Attention:
Facsimile No.:
with a copy to:
Attention:
Facsimile No.:
Purchaser: Lifecodes Corporation
550 West Avenue
Stamford, CT 06902
Attention: Walter O. Fredericks, President
Facsimile No.: (203) 328-9598
with a copy to: Wiggin & Dana
Three Stamford Plaza
301 Tresser Boulevard
P.O. Box 110325
Stamford, CT 06911-0325
Attention: William A. Perrone
Facsimile No.: (203) 363-7676
14. ENTIRE AGREEMENT
This Agreement and the Merger Agreement constitute the entire
agreement between the parties with respect to the subject matter of this
Agreement and supersede all prior written or oral agreements and
understandings between Purchaser and Employee with respect to the subject
matter of this Agreement. This Agreement may not be amended except by a
written agreement executed by each party hereto.
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IN WITNESS WHEREOF, the parties have executed and delivered this
Agreement as of the date first above written.
Employee:
--------------------------------------------
[ ]
-------------------------------------------
LIFECODES CORPORATION
By:
----------------------------------------
Name:
--------------------------------------
Title:
-------------------------------------
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<PAGE>
Exhibit F
Form of Opinion Letter from WF&W
As of ____, 1998
Lifecodes Corporation
550 West Avenue
Stamford, Connecticut 06902
Re: Merger of GeneScreen Inc. and Lifecodes Corporation
Gentlemen:
We have acted as special counsel to GeneScreen Inc., a Delaware corporation
("GeneScreen") in connection with the merger of GeneScreen with and into
Lifecodes Corporation, a Delaware corporation ("Lifecodes"), pursuant to the
terms and conditions contained in the Agreement and Plan of Merger, dated
______, 1998, by and among Lifecodes, certain stockholders of GeneScreen (the
"Key Stockholders"), Sandpiper Ventures LLC, acting in its capacity as
representative for each of the stockholders of GeneScreen (the "Stockholders'
Representative") and GeneScreen (the "Merger Agreement"). Capitalized terms
used herein and not otherwise defined herein shall have the meanings assigned
to such terms in the Merger Agreement.
This opinion is rendered to you pursuant to Section 7.4(a) of the Merger
Agreement. In connection with the Merger and for the purposes of this opinion,
we have made such investigations of fact and considered such questions of law
as we have deemed necessary for the purpose of this opinion. In that regard,
we have reviewed originals or copies of the following documents:
(a) The executed or execution copy of the Merger Agreement;
(b) The executed or execution copy of the Escrow Agreement among
Lifecodes, the Stockholders' Representative and First Union
(the "Escrow Agreement" and together with the Merger
Agreement, the "Transaction Documents"); and
(c) Such other corporate documents, instruments and records of
GeneScreen and public authorities as we have considered
necessary for the purposes of this opinion.
In rendering this opinion, we have assumed, without having made any
independent investigation of the facts, the following:
<PAGE>
(i) Lifecodes is a corporation duly organized, validly existing and in
good standing under the laws of the State of Delaware;
(ii) Lifecodes and First Union (in the case of the Escrow Agreement),
each has full power and authority to enter into each of the Transaction
Documents to which it is a party and perform its obligations thereunder; each
of the Transaction Documents executed by Lifecodes and First Union in
connection with the Merger has been duly authorized, executed and delivered by
each such person; and each of the Transaction Documents is the valid and
binding obligation of Lifecodes and First Union, as the case may be,
enforceable against each of them in accordance with its terms;
(iii) the authenticity of all documents, certificates and instruments
submitted to us as originals, the genuineness of all signatures, the legal
capacity of natural persons, the truthfulness of all statements of fact
contained therein and the conformity to the authentic and complete originals
of all documents, certificates and instruments submitted to us as copies; and
(iv) that the drafts of the Transaction Documents are substantially
the same as the execution copies.
We note, however, that no information has come to our attention which would
give us any reason to believe that any of the assumptions set forth above is
untrue or inaccurate in any material respect.
Based upon the foregoing, and subject to the qualifications set forth herein,
it is our opinion that:
1. GeneScreen is a corporation duly incorporated, validly existing
and in good standing under the laws of the State of Delaware and GeneScreen is
duly qualified and in good standing as a foreign corporation in the States of
Texas, Ohio, Illinois, California, North Carolina and Mississippi and in each
other jurisdiction where the properties owned, leased or operated, or the
business conducted, by it requires such qualification and where failure to so
qualify would in the aggregate have a material adverse effect on the financial
condition, properties, businesses or results of operations of GeneScreen.
2. The authorized capital stock of GeneScreen consists of 5,000,000
shares of preferred stock, $.05 par value per share, of which 350,000 shares
have been designated as Series A Preferred Stock and 700,000 shares have been
designated as Series B Preferred Stock and 10,000,000 shares of common stock,
$0.01 par value per share, of which _________ shares of Series A Preferred
Stock, _________ shares of Series B Preferred Stock and __________ shares of
Common Stock are issued and outstanding. All such issued and outstanding
shares are validly issued, fully paid, non-assessable and free of preemptive
rights. There are not at the date hereof any options, warrants, calls,
subscriptions, convertible securities or other rights for other agreements or
commitments which either (i) obligate GeneScreen to issue, transfer or sell
any shares of capital stock of GeneScreen or (ii) restrict the transfer or
voting of the Shares.
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3. GeneScreen has taken all required corporate and stockholder action
to approve and adopt the Merger, and authorize the execution and delivery of
the Transaction Documents, and the Transaction Documents constitute valid and
binding agreements of GeneScreen, enforceable against GeneScreen in accordance
with their terms, subject as to enforcement to bankruptcy, insolvency, and
other rules of general applicability relating to or affecting creditors'
rights and to general equity principles.
4. Except as set forth in the Disclosure Letter the execution,
delivery and performance of the Transaction Documents by GeneScreen will not:
(i) constitute a breach or violation of, or a default under, the Certificate
of Incorporation or Bylaws of GeneScreen, (ii) to the best of our knowledge,
constitute a breach or violation of, or a default under, any law, rule or
regulation, or any judgment, decree, order, governmental permit or license, or
agreement, indenture or instrument of GeneScreen or to which GeneScreen is
subject, which breach, violation or default would have a material adverse
effect on the financial condition, properties, businesses or results of
operations of GeneScreen, (iii) to our knowledge, result in the creation or
imposition of any material lien, charge, pledge, security interest or other
encumbrance upon any property of GeneScreen, or (iv) to our knowledge, require
the consent of any party to any agreement or commitment to which GeneScreen is
a party or by which GeneScreen is bound, the failure to obtain which
reasonably could, individually or in the aggregate with all other failures to
obtain required consents, have a material adverse effect on the financial
condition or prospects of GeneScreen.
5. Other than filing the Certificate of Merger pursuant to the
Delaware General Corporation Law, as necessary, except as obtained and in
effect at the effective time of the Transaction Documents, no consent,
approval, order or authorization of, or registration, declaration or filing
with, any governmental authority is required in connection with the execution
and delivery of the Merger by GeneScreen or the consummation by GeneScreen of
the transactions contemplated thereby in accordance with the terms thereof.
6. To our knowledge, there is no action, suit, proceeding,
investigation or audit, pending or threatened, before any court or any
governmental or regulatory authority by, against or involving GeneScreen or
challenging the Agreement or the Contemplated Transactions, except as
reflected in the Disclosure Letter. To our knowledge, no order, writ,
injunction, decree or judgment has been issued by or request of any court or
governmental or regulatory authority that might result in a material adverse
change in the business, property or assets or in the condition, financial or
otherwise, of GeneScreen or that might materially adversely affect the
Contemplated Transactions.
The opinions set forth above are qualified as stated herein and are further
qualified as follows:
A. The enforceability of the Transaction Documents are qualified to
the extent that enforcement may be limited by: (i) bankruptcy, insolvency,
fraudulent conveyance, receivership, reorganization, moratorium, or other laws
of general application relating to or affecting the enforcement of the rights
of creditors or for the relief of debtors; (ii) the exercise of judicial
discretion in accordance with general equitable principles; and/or (iii) by
the possible
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application by a court of an implied covenant of good faith and fair dealing and
a finding by such court that the performance or enforcement of a creditor's
rights and remedies would violate such implied covenant.
B. The availability of the remedy of specific performance or of any
injunctive relief or of any other equitable remedy is subject to general
principles of equity and the discretion of the court before which any
proceedings therefor may be brought, whether in a court of law or a court of
equity.
C. We have not undertaken any independent investigation to determine
the existence or absence of such facts which would be contrary to the opinions
expressed herein, and no inference as to the knowledge of the existence of
such facts should be drawn from the fact of our representation of GeneScreen.
Reference to the phrase "to our knowledge" or a phrase having equivalent
wording means the conscious awareness of the attorney who signs this opinion
letter and any attorney in the law firm who has active involvement in the
preparation of this opinion letter or is primarily responsible for providing
the response concerning a particular issue or information regarding factual
matters.
D. We are licensed to practice law in the State of Texas.
Accordingly, the foregoing opinion applies only with respect to the laws of
the State of Texas, the General Corporation Law of the State of Delaware and
the Federal laws of the United States of America, and we express no opinion
with respect to the laws of any other jurisdiction.
This opinion is rendered solely for the benefit of Lifecodes. This opinion may
not be relied upon by any other person or entity, nor may copies be delivered
or furnished to any other person or entity (except for counsel to Lifecodes),
nor may all or portions of this opinion be quoted, circulated, or referred to
in any other document without our prior written consent.
Worsham, Forsythe & Wooldridge, LLP
By:
------------------------------------
4
<PAGE>
Exhibit G
Form of Lock-Up Agreement
Volpe Brown Whelan & Company, LLC
Vector Securities International, Inc.
Advest, Inc.
as Representatives of the
Several Underwriters
One Maritime Plaza, 11th Floor
San Francisco, CA 94111
Ladies and Gentlemen:
The undersigned is a holder of securities of Lifecodes Corporation, a Delaware
corporation (the "Company"), and wishes to facilitate the public offering of
shares of the Company's Common Stock (the "Offering"). The undersigned
recognizes that such Offering and the public market for shares of the
Company's Common Stock created thereby will be of benefit to the undersigned.
In consideration of the foregoing and in order to induce you to act as
underwriters in connection with the Offering, the undersigned hereby
irrevocably agrees that he, she or it will not, without the prior written
approval of Volpe Brown Whelan & Company, offer, sell, contract to sell, make
any short sale (including, but not limited to, a "short against the box"),
pledge, or otherwise dispose of directly or indirectly, any shares of Common
Stock (except for shares included in the Offering), options to acquire shares
of Common Stock or securities exchangeable or exercisable for or convertible
into shares of, or any other rights to purchase or acquire, Common Stock of
the Company (the "Securities") which he, she or it may own directly or
indirectly or beneficially (as defined by the Securities Exchange Act of 1934
and the rules and regulations thereunder) for a period beginning on the date
hereof and ending one hundred eighty (180) days (the "Lock-Up Period")
following the day on which the Form S-1 Registration Statement filed on behalf
of the Company in connection with the Offering (the "Registration Statement")
shall become effective by order of the Securities and Exchange Commission. The
foregoing restriction is expressly agreed to preclude the holder of Securities
from engaging in any hedging or other transaction that is designed to or
reasonably expected to lead to, or result in, a disposition of Securities
during the Lock-Up Period even if such Securities would be disposed of by the
undersigned subsequent to the Lock-Up Period or by someone other than the
undersigned.
Notwithstanding the foregoing, any transfer of Securities which either (i)
will not result in any change in beneficial ownership, including, but not
limited to, pro rata distributions by partnerships, limited liability
companies or other entities and transfers into trusts for the benefit of the
original holder, or (ii) constitute bona fide gifts of such shares will not
require your consent; provided, that the transferee enters into a lock-up
agreement in substantially the form hereof covering the remainder of the
Lock-Up Period under this Agreement.
<PAGE>
The undersigned confirms that he, she or it understands that the underwriters
and the Company will rely upon the representations set forth in this Agreement
in proceeding with the Offering. The undersigned understands that this
Agreement is irrevocable and shall be binding on the undersigned and his, her
or its respective successors, heirs, personal representatives and assigns. The
undersigned agrees and consents to the entry of stop transfer instructions
with the Company's transfer agent against the transfer of Securities of the
Company held by the undersigned except in compliance with this Agreement.
- -----------------------------------
(Security holder's name)
- -----------------------------------
(Signature)
- -----------------------------------
(Name of person signing)
- -----------------------------------
(Title)
- -----------------------------------
(Date)
<PAGE>
Exhibit H
Form of Wiggin & Dana Opinion Letter
As of ____, 1998
GeneScreen Inc.
2600 Stemmons Freeway, Suite 133
Dallas, Texas 75207
Re: Merger of GeneScreen Inc. and Lifecodes Corporation
Gentlemen:
We have acted as special counsel to Lifecodes Corporation, a Delaware
corporation ("Lifecodes"), in connection with the merger (the "Merger") of
GeneScreen Inc., a Delaware corporation ("GeneScreen"), with and into
Lifecodes, pursuant to the terms and conditions contained in the Agreement and
Plan of Merger, dated ______, 1998, by and among Lifecodes, certain
stockholders of GeneScreen (the "Key Stockholders"), Glenn H. Stinchcomb,
acting for himself and in his capacity for each of the stockholders of
GeneScreen (the "Stockholders' Representative") and GeneScreen (the "Merger
Agreement"). Capitalized terms used herein and not otherwise defined herein
shall have the meanings assigned to such terms in the Merger Agreement.
This opinion is rendered to you pursuant to Section 8.4(a) of the Merger
Agreement. In connection with the Merger and for the purposes of this opinion,
we have made such investigations of fact and considered such questions of law
as we have deemed necessary for the purpose of this opinion. In that regard,
we have reviewed originals or copies of the following documents:
(a) The executed or execution copy of the Merger Agreement;
(b) The executed or execution copy of the Escrow Agreement among
Lifecodes, the Stockholders' Representative and First Union
(the "Escrow Agreement, " and together with the Merger
Agreement, and the Non-Competition Agreements, the
"Transaction Documents"); and
(c) Such other corporate documents, instruments and records of
Lifecodes and public authorities as we have considered
necessary for the purposes of this opinion.
In rendering this opinion, we have assumed, without having made any
independent investigation of the facts, the following:
<PAGE>
(i) GeneScreen is a corporation duly organized, validly existing and in
good standing under the laws of the State of Delaware;
(ii) GeneScreen, each of the Key Stockholders, the Stockholders'
Representative and First Union has full power and authority to enter into each
of the Transaction Documents to which it is a party and perform its
obligations thereunder; each of the Transaction Documents executed by
GeneScreen, the Key Stockholders, the Stockholders' Representative and First
Union in connection with the Merger has been duly authorized, executed and
delivered by each such person; and each of the Transaction Documents is the
valid and binding obligation of GeneScreen, the Key Stockholders, the
Stockholders Representative and First Union, as the case may be, enforceable
against each of them in accordance with its terms;
(iii) the authenticity of all documents, certificates and instruments
submitted to us as originals, the genuineness of all signatures, the legal
capacity of natural persons, the truthfulness of all statements of fact
contained therein and the conformity to the authentic and complete originals
of all documents, certificates and instruments submitted to us as copies; and
(iv) that the drafts of the Transaction Documents are substantially
the same as the execution copies.
We note, however, that no information has come to our attention which would
give us any reason to believe that any of the assumptions set forth above is
untrue or inaccurate in any material respect.
Based upon the foregoing and subject to the qualifications set forth below, it
is our opinion that:
1. Lifecodes is a corporation duly organized, validly existing and in
good standing under the laws of the State of Delaware. Lifecodes is duly
qualified as a foreign corporation and in good standing under the laws of the
State of Texas.
2. The authorized capital stock of Lifecodes consists of 15,000,000
shares of common stock $.10 par value per share (the "Common Stock"), of which
774,675 were issued and outstanding on July 15, 1998; and 1,000,000 shares of
Preferred Stock, $10.00 par value per share, of which 21,500 were issued and
outstanding on July 15, 1998. The shares of Common Stock to be issued and
delivered to the stockholders of GeneScreen in connection with the
consummation of the transactions contemplated by the Merger Agreement, when
issued and delivered in accordance with the terms of the Merger Agreement,
will be duly authorized, validly issued, fully paid and non-assessable.
3. Lifecodes has taken all required corporate and stockholder action
to approve and adopt the Merger and to authorize the execution and delivery of
the Transaction Documents, and the Transaction Documents constitute valid and
binding agreements of Lifecodes enforceable against it in accordance with
their terms, subject as to enforcement to bankruptcy, insolvency, and other
laws of general applicability relating to or affecting creditors' rights and
to general equity principles.
2
<PAGE>
4. The execution, delivery and performance of the Transaction
Documents by Lifecodes will not: (i) constitute a breach or violation of, or a
default under, the Certificate of Incorporation or Bylaws of Lifecodes, (ii)
to the best of our knowledge, constitute a breach or violation of, or a
default under, any law, rule or regulation, or any judgment, decree, order,
governmental permit or license, or agreement, indenture or instrument of
Lifecodes or to which Lifecodes is subject, which breach, violation or default
would have a material adverse effect on the financial condition, properties,
businesses or results of operations of Lifecodes, (iii) to the best of our
knowledge, result in the creation or imposition of any material lien, charge,
pledge, security interest or other encumbrance upon any property of Lifecodes,
or (iv) to the best of our knowledge, require the consent of any party to any
agreement or commitment to which Lifecodes is a party or by which Lifecodes is
bound, the failure to obtain which reasonably could, individually or in the
aggregate with all other failures to obtain required consents, have a material
adverse effect on the financial condition or prospects of Lifecodes.
5. Other than (a) filing the Certificate of Merger pursuant to the
Delaware General Corporation Law, and (b) making post-effective filings under
state securities or "Blue Sky" laws, except as obtained and in effect at the
Effective Time, no consent, approval, order or authorization of, or
registration, declaration or filing with, any governmental authority is
required in connection with the execution and delivery of the Merger Agreement
by Lifecodes or the consummation by Lifecodes of the transactions contemplated
thereby in accordance with the terms thereof.
6. The Registration Statement on Form S-1 covering the registration
of Lifecodes shares filed with the Securities and Exchange Commission has
become effective under the Securities Act of 1933 and, to our knowledge, no
stop order suspending the effectiveness of the Registration Statement has been
issued and no proceedings for that purpose are pending before or contemplated
by the Commission; and any required filing of the Prospectus pursuant to Rule
424(b) had been made in accordance with Rule 424(b).
7. To the best of our knowledge, there is no action, suit,
proceeding, investigation or audit, pending or threatened, before any court or
any governmental or regulatory authority by, against or involving Lifecodes
that challenges, or may have the effect of preventing, delaying, making
illegal, or otherwise interfering with, any of the Contemplated Transactions.
The opinions set forth above are qualified as stated herein and are further
qualified as follows:
A. The enforceability of the Transaction Documents are qualified to
the extent that enforcement may be limited by: (i) bankruptcy, insolvency,
fraudulent conveyance, receivership, reorganization, moratorium, or other laws
of general application relating to or affecting the enforcement of the rights
of creditors or for the relief of debtors; (ii) the exercise of judicial
discretion in accordance with general equitable principles; and/or (iii) by
the possible application by a court of an implied covenant of good faith and
fair dealing and a finding by such court that the performance or enforcement
of a creditor's rights and remedies would violate such implied covenant.
3
<PAGE>
B. The availability of the remedy of specific performance or of any
injunctive relief or of any other equitable remedy is subject to general
principles of equity and the discretion of the court before which any
proceedings therefor may be brought, whether in a court of law or a court of
equity.
C. As to questions of fact material to this opinion, we have relied
solely (without independent investigation) upon the representations and
warranties of Lifecodes contained in the Merger Agreement and upon
certificates and oral statements of Lifecodes or their officers, and nothing
has come to our attention leading us to question the accuracy of such
information. We have not undertaken any independent investigation to determine
the existence or absence of such facts that would be contrary to the opinions
expressed herein, and no inference as to the knowledge of the existence of
such facts should be drawn from the fact of our representation of Lifecodes.
Reference to the phrase "to our knowledge" or a phrase having equivalent
wording means the conscious awareness of the attorney who signs this opinion
letter and any attorney in the law firm who has active involvement in the
preparation of this opinion letter or is primarily responsible for providing
the response concerning a particular issue or information regarding factual
matters.
D. We are licensed to practice law only in the State of Connecticut.
Accordingly, the foregoing opinion applies only with respect to the laws of
the State of Connecticut, the General Corporation Law of the State of Delaware
and the Federal laws of the United States of America, and we express no
opinion with respect to the laws of any other jurisdiction.
This opinion is rendered solely for the benefit of GeneScreen. This opinion
may not be relied upon by any other person or entity, nor may copies be
delivered or furnished to any other person or entity (except for counsel to
GeneScreen), nor may all or portions of this opinion be quoted, circulated, or
referred to in any other document without our prior written consent.
Very truly yours,
WIGGIN & DANA
4
<PAGE>
Exhibit I
Agreed Latest Balance Sheet
GeneScreen - Consolidated
Aug 31, 1998
Consolidated Lab Services
As of May 31, 1998
ASSETS
Current Assets
Operating Cash $175,384.49
Petty Cash 675.00
Accounts Receivable-Accrued 765,000.00
Accounts Receivable-Trade 1,651,965.61
Accounts Receivable-Accr WIP 383,199.00
Allowance For Work In Progress (31,760.00)
Allowance Doubtful Accts (62,727.26)
Employee Advances 4,253.64
Prepaid Deposits 6,311.22
Prepaid Miscellaneous 28,171.48
Inventory-Lab Supplies 334,630.33
Inventory-Products 62,200.00
-------------
Total Current Assets $3,317,303.51
Fixed Assets
Equipment $1,431,665.98
Furniture & Fixtures 183,148.89
Computers/Software 312,324.41
Accumulated Depr - Equipment (960,106.43)
Accumulated Depr-Furn & Fix (110,542.68)
Accumulated Dept-Computers (224,901.28)
Leasehold Improvements 151,954.29
Accumulated Dept - L.I (51,279.04)
-------------
Total Fixed Assets $732,264.14
Other Assets
Patents $15,000.00
Development Costs 88,578.87
Accum Amort - Development (56,022.00)
Technology License 200,000.00
Accum Amort-Technology License (198,333.71)
Goodwill 106,988.00
Investment In Subsidiary 1,728,484.60
-------------
Total Other Assets $1,884,695.76
-------------
Total Assets $5,934,263.41
=============
<PAGE>
GeneScreen - Consolidated
Aug 31, 1998
Consolidated Lab Services
As of May 31, 1998
LIABILITIES
Current Liabilities
Deferred Revenue $66,982.50
Allow For WIP - Deferred Rev 23,078.00
Allow For Billed Partials 16,896.00
Royalty Payable 34,700.00
Accounts Payable - Trade 1,583,531.11
Accounts Payable - Prebilled (17,174.62)
Note Payable - Stockholders 823,526.00
Comerica - Credit Line 720,000.00
Bonuses Payable 160,720.92
Flex-125 Fund 669.25
401K Fund 18,658.92
State Tax - Payable 759.43
Taxes Payable 34,100.00
Miscellaneous Payable 294,482.04
Accrued Litigation Reserve 171,287.99
-------------
Total Current Liabilities $3,932,217.54
Lon-Term Liabilities
Accrued Rent - Long Term $8,250.37
-------------
Total Long-Term Liabilities $8,250.37
-------------
Total Liabilities $3,940,467.91
EQUITY
Series A Stock $875,000.00
Series B Stock 2,254,052.88
Common Stock 4,644,615.87
Notes Receivable (85,317.34)
Retained Earnings (4,692,340.05)
Inter-Company Transfer (632,094.19)
Net Profit / (Loss) (370,121.67)
-------------
Total Equity $1,993,795.50
-------------
Total Liabilities and Equity $5,934,263.41
=============
<PAGE>
Exhibit J
GENESCREEN PREFERRED & COMMON STOCKHOLDERS
<TABLE>
<CAPTION>
Name and Address Shares Owned
<S> <C>
Mr. Steve Anderson Common: 30,000
Rutger University
675 Hoes Lane
Piscataway, NJ 08854
Bankers Trust Co. Common: 2,319
Trustee for Vought Aircraft Co.
P.O. Box 1107
New York, NY 10008
Bank One M-Venture
Attn: Mr. J. Wayne Gaylord Common: 3,333
Banc One Capital Corporation
300 Crescent Court, Suite 1600
Dallas, TX 75201
Mr. Paul Barjon Common: 20
1015 WillowCreek Drive
Lancaster, TX 75146
Ms. Sharon Baxter Common: 3,498
2713 Trinidad Circle
Melbourne, FL 32934
Mr. William Baxter Common: 24,475
2920-111 Weald Way
Sacramento, CA 95833
Blue Doctor, LLC Common: 800,171
Attn: Mark Rosenbaum Series B: 274,390
425 Park Ave., 28th Floor
New York, NY 10022
Mr. Frank A. Bonsal, Jr. Common: 1,561
c/o New Enterprise Associates IV L.P.
1119 St. Paul Street
Baltimore, MD 21202
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
Name and Address Shares Owned
<S> <C>
Booth & Co. Common: 3,333
Fox Management Trust
c/o Northern Trust Company of New York
Attn: Angeline Grey
80 Broad Street, 19th Floor
New York, NY 10004
Ms. Sylvia Bovio Common: 7
2301 Windspring Way #503
Arlington, TX 76014
Mr. Earl M. Brown Series A: 34,000
164 5th Street S.E., #403 Series B: 16,000
Portage la Prairie, MB
CANADA R1N 3P9
Mr. Keith Brown Common: 22,075
4123 Rainsong Drive Series A: 20,000
Dallas, TX 75287 Series B: 14,500
Ms. Jane Browning Common: 77,777
c/o Browning Offices Series A: 16,000
8080 N. Central Expressway Series B: 21,000
Suite 1410, LB 42
Dallas, TX 75206-1806
Mr. Douglas D. Bruton Common: 333
8200 Brookriver Drive
Suite N 610 LB #165
Dallas, TX 75247
Bruton Children's Trust Common: 333
c/o Mr. Richard L. Giesecke, Trustee
Inwood National Bank
P.O. Box 890900
Dallas, TX 75389
Bruton Corporation Common: 333
Attn: Douglas Bruton
8200 Brookriver Drive
Suite N 610, LB #165
Dallas, TX 75247
</TABLE>
2
<PAGE>
<TABLE>
<CAPTION>
Name and Address Shares Owned
<S> <C>
J. Donald Capra, M.D. Common: 18,750
707 N.E. 18th Street
Oklahoma City, OK 73104
Dr. Webster Cavenee Common: 1,332
c/o Ludwig Institute for Cancer Research
9500 Gilman Drive
La Jolla, CA 92093-0660
Ms. Jill Cortada Common: 51
1322 Twilight Ridge
San Antonio, TX 78258
Ms. Pamela (Gouger) Crabtree Common: 10
7878 Marvin D. Love Frwy. #220
Dallas, TX 75237
Crossroads Capital Limited Partnership Common: 198,518
Attn: Mr. Hanse Halligan Series A: 40,000
190 Farmington Avenue
Farmington, CT 06032-1713
DB Liquidation LLC Common: 99,999
c/o H. Leland Murphy Series B: 91,464
14305 Inwood Road, #101-44
Dallas, TX 75244
Ms. Koleen Dupuy Common: 30
704 Golf Links Dr.
Blytheville, AR 72315
Dr. Richard E. Erbe Common: 1,332
c/o Children's Hospital
Division of Human Genetics
219 Bryant Street
Buffalo, NY 14222
Ms. Tracie Flanary Common: 20
3 E. Townhouse Lane
Grand Prairie, TX 75052
Ms. Judith Floyd Common: 104
2912 Markham
</TABLE>
3
<PAGE>
<TABLE>
<CAPTION>
Name and Address Shares Owned
<S> <C>
Plano, TX 75075
Mr. Robert L. Funk Common: 4,166
1920 Rutherford Lane
Arlington, TX 76014
Mr. Robert D. Funk Common: 104
7127 Casa Loma Ave.
Dallas, TX 75214
Dr. Thomas D. Gelehrter Common: 1,332
c/o University of Michigan Medical School
Department of Human Genetics
Box 0618
Ann Arbor, MI 48109-0618
GFI Company Common: 243,518
Attn: Glenn M. Stinchcomb Series A: 80,000
10111 N. Central Expressway Series B: 67,100
Dallas, TX 75231
Devon Giacalone Common: 8,333
336 Forrest Avenue
Fairfax, CA 94930
Mr. Robert Giles Common: 8,333
14314 Olympic Court
Farmers Branch, TX 75234
Ms. Janet Goldstein Common: 500
2006 Girard Ave.
Baltimore, MD 21211
Achile Guest Common: 7,378
249 E. 48th Street, Apt. 12D
New York, NY 10017
Ms. Judy Gutendorf Common: 175
290 Limrick
Wexford, PA 15090
R.W. Gutendorf Common: 18,355
290 Limrick
Wexford, PA 15090
</TABLE>
4
<PAGE>
<TABLE>
<CAPTION>
Name and Address Shares Owned
<S> <C>
William & Judy Gutendorf Common: 874
290 Limrick
Wexford, PA 15090
Judith G. Hall, M.D. Common: 1,332
c/o B.C. Children's Hospital
Department of Pediatrics
4480 Oak Street
Vancouver, BC
V6H 3V4 CANADA
The John A. Hartford Foundation Common: 141,666
Attn: Samuel Gische, Controller
55 E. 59th Street, 23rd Floor
New York, NY 10022
Ms. Heidi Havener Common: 8
4101 Inwood Road
Fort Worth, TX 76109
Ms. Grace M. Hay Common: 333
P.O Box 190303
Dallas, TX 75219-0303
Mr. S. Roger Horchow Common: 36,666
5722 Chatham Hill Rd.
Dallas, TX 75225
Ms. Madelaine Howard Common: 972
4618 Essex
Grand Prairie, TX 75050
Mr. Michael Humphrey Common: 50
11201 Lake Highlands
#2040
Dallas, TX 75218
The Jockey Club Common: 64,052
Attn: Mr. Alan Marzelli
40 East 52nd Street
New York, NY 10022
</TABLE>
5
<PAGE>
<TABLE>
<CAPTION>
Name and Address Shares Owned
<S> <C>
Ms. Sharon Johnson Common: 60
3411 57th Street
Lubbock, TX 79413
Kane & Co. Common: 1,681
c/o Chase Manhattan Bank, N.A.
P.O. Box 1508, Church Street Station
New York, NY 10008
Ms. Kathy Katz Common: 77
1327 Woodbrook Lane
Southlake, TX 76092
Ms. Lisa Lindsay Common: 90
P.O. Box 90452
Albuquerque, NM 87199
Casomira Luna Common: 30
2715 Iroquois
Dallas, TX 75212
Mr. Timothy A. Mack Common: 2,592
c/o Worsham, Forsythe & Wooldridge, L.L.P. Series A: 2,000
1601 Bryan, Ste. 3000 Series B: 3,049
Dallas, TX 75201
Mr. & Mrs. Tom Marsh Common: 27,148
P.O. Box 460
Dallas, TX 75221
Ms. Cara McClellan Common: 50
2216 Cottonwood Ln.
Bedford, TX 76021
Ms. Ellen McHugh Common: 350
c/o Steven McHugh Altick & Corwin
1700 One Dayton Center
1 S. Main St.
Dayton, OH 45402
</TABLE>
6
<PAGE>
<TABLE>
<CAPTION>
Name and Address Shares Owned
<S> <C>
Merifin N.V. Common: 51,296
c/o Merifin Capital Group Series A: 14,000
Attn: Martine De Meyer Series B: 76,219
Avenue Lloyd George 6, Boite 8
B-1000 Brussels
Belgium
Mr. Ian Milsark Common: 11
4147 Emerson Avenue
Dallas, TX 75205-1144
Ms. Sandie Morris Common: 25
14000 Noel, #916
Dallas, TX 75240
Mr. Sean Morrison Common: 35
4711 Amberwood Dr.
Dayton, OH 45424
Ms. Windolyn Mosely Common: 6
65 W. Townhouse
Grand Prairie, TX 75051
NationsBank Capital Investors
c/o Mr. Patrick W. Pullman Common: 16,666
TX1-492-22-05
901 Main Street, 22nd Floor
Dallas,TX 75202
New Enterprise Associates IV L.P. Common: 194,814
Attn: Mr. C. Richard Kramlich Series A: 64,000
Managing General Partner Series B: 91,464
2490 Sand Hill Road
Menlo Park, CA 94025
Mr. Peter O'Donnell, Jr. Common: 99,259
100 Crescent Court
Suite 1690
Dallas, TX 75204
Ms. Julie S. Patrick Common: 808
5829 Carroll Dr.
The Colony, TX 75056
</TABLE>
7
<PAGE>
<TABLE>
<CAPTION>
Name and Address Shares Owned
<S> <C>
Whitney D. Pidot Common: 3,122
c/o Shearman & Sterling
599 Lexington Ave. at 53rd St.
New York, NY 10022
Mr. Charles N. Prothro Common: 49,629
2304 Midwestern Pkwy, #200
Wichita Falls, TX 76308
Ms. Tracy Rahmig Common: 75
2832 Texas Avenue South
St. Louis Park, MN 55426
Ms. Jennifer E. Reynolds Common: 1,120
9100 Bellwart Way
Columbia, MD 21045
Dr. C. Sue Richards Common: 3,083
Baylor College of Medicine
C/O Institute of Molecular Biology
One Baylor Plaza, T536
Houston, TX 77030
Ms. Frances Rohn Common: 175
2936 21st St. NW
Canton, OH 44708
Ms. R. Cris Sanchez Common: 30
4275-1 Las Virgenes Road
Calabasas, CA 91302
Ms. Susan Smallwood Common: 20
5815 Phoenix #9
Dallas, TX 75231
Mr. Randall A. Smith Common: 1,748
6450 Harrison Court
Centerville, OH 45459
Mr. William Solomon Common: 30,111
c/o Austin Industries, Inc.
P.O. Box 1590
Dallas, TX 75221
</TABLE>
8
<PAGE>
<TABLE>
<CAPTION>
Name and Address Shares Owned
<S> <C>
Southwest Enterprise Associates, L.P. Common: 243,518
Attn: Mr. H. Leland Murphy Series A: 80,000
14305 Inwood #101-44 Series B: 33,537
Dallas, TX 75244-3944
Mr. Glenn M. Stinchcomb Series B: 3,000
c/o Oklahoma Publishing Company
10111 N. Central Expressway
Dallas, TX 75231
Philip W. Tucker, Ph.D. Common: 18,750
c/o U.T. at Austin, Dept. of Microbiology
ESB 534-A
24th Street & Speedway
Austin, TX 78712-1095
UT Southwestern Medical Center Common: 45,833
Attn: Dr. William B. Neaves
Dean of Medical School
5323 Harry Hines Blvd
Dallas, TX 75235
Ms. Allison Williams Common: 70
2219 Flagler Place NW
Washington, DC 20001
Ms. Barbara Zink Common: 350
1491 Belvo Estates Dr.
Miamiburg, OH 45342
</TABLE>
9
<PAGE>
Exhibit K
Form of Technology License
<PAGE>
LIFECODES CORPORATION
Number [Logo] Shares
LC__________ __________
CUSIP 532188 10 9
INCORPORATED UNDER THE LAWS OF THE STATE OF DELAWARE
COMMON STOCK
This Certifies That
is the owner of
FULLY PAID AND NON-ASSESSABLE SHARES OF THE COMMON STOCK, $.10 PAR VALUE PER
SHARE OF
LIFECODES CORPORATION
(the "Corporation") transferable on the books of the Corporation by the holder
hereof in person or by duly authorized attorney upon the surrender of this
Certificate properly endorsed. This Certificate and the shares represented
hereby are subject to all of the terms and conditions contained in the
Certificate of Incorporation of the Corporation and all amendments thereto.
This Certificate is not valid until countersigned and registered by
the Transfer Agent and Registrar. WITNESS the facsimile seal of the Corporation
and the facsimile signatures of its duly authorized officers.
Dated:
- ------------------------------------- --------------------------
President and Chief Executive Officer Secretary
The following abbreviations, when used in the inscription on the fact
of this certificate, shall be construed as though they were written out in full
according to applicable laws or regulations:
<TABLE>
<S> <C>
TEN COM - as tenants in common UNIF GIFT MIN ACT-______Custodian_______
TEN ENT - as tenants by the entireties (Cust) (Minor)
JT TEN - as joint tenants with right of under Uniform Gifts to Minors
survivorship and not as tenants Act___________
in common (State)
</TABLE>
Additional abbreviations may also be used though not in
the above list.
<PAGE>
For Value Received, ___________________________ hereby sell, assign and
transfer unto
PLEASE INSERT SOCIAL SECURITY OR OTHER
IDENTIFYING NUMBER OF ASSIGNEE
- --------------------------------------------------------------------------------
(PLEASE PRINT OR TYPEWRITE NAME AND ADDRESS, INCLUDING ZIP CODE, OF ASSIGNEE)
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
Shares of the common stock represented by the within Certificate, and do hereby
irrevocably constitute and appoint
- --------------------------------------------------------------------------------
Attorney to transfer the said stock on the books of the within named Company
with full power of substitution in the premises.
Dated__________________
-------------------------------------------------------
NOTICE:THE SIGNATURE TO THIS ASSIGNMENT MUST CORRESPOND WITH
THE NAME AS WRITTEN UPON THE FACE OF THE CERTIFICATE IN
EVERY PARTICULAR, WITHOUT ALTERATION OR ENLARGEMENT
OR ANY CHANGE WHATEVER.
Signature(s) Guaranteed:
- ----------------------------------------------------
THE SIGNATURE(S) SHOULD BE GUARANTEED BY AN ELIGIBLE
GUARANTOR INSTITUTION (BANKS, STOCKBROKDERS, SAVINGS
AND LOAN ASSOCIATIONS AND CREDIT UNIONS WITH MEMBERSHIP
IN AN APPROVED SIGNATURE GUARANTEE MEDALION PROGRAM),
PURSUANT TO S.E.C. RULE 17AD-15.
<PAGE>
AMENDED AND RESTATED SECURED PROMISSORY NOTE
$566,628.00 Stamford, Connecticut
April 3, 1998
FOR VALUE RECEIVED, Gerhard Ehninger, with an address at c/o Deutsche
Knochenmarkspenderdatei GmbH, Postfach 1405, 72004 Tubingen, Germany, (the
"MAKER"), unconditionally promises to pay to INTERNATIONAL SUPPORT FOR BONE
MARROW DRIVES, LTD., a North Carolina corporation with offices at 550 West
Avenue, Stamford, Connecticut 06902 ("PAYEE"), at such office or such other
place as Payee may designate in writing, the principal sum of FIVE HUNDRED
SIXTY-SIX THOUSAND SIX HUNDRED TWENTY-EIGHT AND 00/100 DOLLARS ($566,628.00),
together with interest in arrears thereon from the date hereof at the rate of
eight percent (8.0%) per annum upon the whole of said principal sum remaining
from time to time unpaid. Maker promises to pay the principal and interest on
this Note on demand after March 31, 2004 or at such earlier time provided
herein (the "MATURITY DATE"). Notwithstanding references therein to the amount
owed, this Note is secured by a pledge of 50,000 shares of common stock of
Lifecodes Corporation ("LIFECODES"), all as set forth in a Stock Pledge
Agreement of even date herewith (the "PLEDGE AGREEMENT") between Maker and
Payee. This Note shall be non-recourse, other than any rights to proceed
against such collateral, which shall be the sole source of repayment
hereunder.
Interest shall accrue, compounded monthly, on the unpaid principal and
interest due hereunder, provided, payment shall be made only on the Maturity
Date or at such time expressly provided in Section 1 hereof. All payments
shall be applied first to the payment of reasonable costs, expenses and
attorneys' fees incurred by Payee as set forth herein, if any, then to the
payment of interest on the unpaid principal of this Note and the balance on
account of the principal of this Note, with any excess proceeds from
collateral being payable to Maker.
1. (a) If Lifecodes common stock is registered pursuant to Section
12(b) or 12(g) of the Securities Exchange Act of 1934, as amended, and an
Event of Default (as defined herein) occurs, Payee can, if payment is not made
within ten (10) days after such Event of Default, thereupon take title to all
collateral under the Pledge Agreement and such collateral shall be applied
against amounts due under this Note at a valuation equal to the "Fair Market
Value" of a share of common stock of Lifecodes on the date of such Event of
Default multiplied by the applicable number of shares. "FAIR MARKET VALUE" as
of a specified date for the purposes of this Note shall mean the closing price
of a share of Lifecodes common stock on the principal securities exchange on
which such shares are traded on the day immediately preceding the date as of
which Fair Market Value is being determined, or on the next preceding date on
which such shares are traded if no shares were traded on such immediately
preceding day, or if the shares are not traded on a securities exchange, Fair
Market Value shall be deemed to be the average of the high bid and low asked
prices of the shares in the over-the-counter market during the five (5) day
period immediately preceding the date as of which Fair Market Value is being
determined or on the next preceding five (5) days on which such high bid and
low asked prices were recorded.
<PAGE>
(b) If Lifecodes common stock is not registered pursuant to Section
12(b) or 12(g) of the Securities Exchange Act of 1934, as amended, and an
Event of Default (as defined herein) occurs, Payee can, if payment is not made
within ten (10) days after receipt of the appraisal described below, thereupon
take title to all collateral under the Pledge Agreement and such collateral
shall be applied against amounts due under this Note at a valuation equal to
the "NON-PUBLIC FAIR MARKET VALUE" of a share of common stock of Lifecodes on
the date of such Event of Default multiplied by the applicable number of
shares. For the purpose of determining the "Non-Public Fair Market Value", the
value of each share of Lifecodes common stock shall be determined by Deloitte
& Touche LLP or another nationally recognized accounting firm selected by
Payee (the "APPRAISER"), which appraisal shall be final and binding on the
parties and shall be completed not later than 60 days after the Event of
Default. The Appraiser shall determine the fair market value of the Lifecodes
common stock by determining the value of Lifecodes as a going concern and
dividing such sum by the number of shares of common stock of Lifecodes
outstanding on a fully diluted basis; provided, however, for purposes of this
Note the value shall not be less than $9.80 per share. The Appraiser shall
promptly notify Payee and Maker in writing of such determination. Payee and
Maker shall share equally the costs of the appraisal.
2. The principal and accrued interest amounts due under this Note shall
be reduced as follows:
For each quarter commencing in the 37th month following the date of
this Note (i.e. months 37-39, months 40-42, etc.), the principal and interest
reduction, if any, shall be based upon the number of Applicable Samples
generated, as set forth in the following chart:
Applicable Samples Forgiveness Amount
------------------ ------------------
Over 22,500 $50,000
20,001-22,500 $45,000
17,501-20,000 $40,000
15,001-17,500 $30,000
12,500-15,000 $25,000
Under 12,500 $0
Any amounts forgiven shall be determined in good faith by Payee and the
amounts of any forgiveness shall be appended to this Note and shall become a
part thereof.
For purposes of this Section 2, "Applicable Samples" shall mean typing
requests or buccal swab samples for bone marrow testing obtained or sent
directly by Payee or its agents to laboratories owned or designated by Payee
or Lifecodes from sources outside the United States, including samples sent by
Payee to Medical Molecular Diagnostics GmbH of Dresden, Germany.
3. Maker agrees to pay all personal taxes or duties levied or assessed
against Payee on account of this Note (other than taxes on the interest income
to Payee arising from this Note).
2
<PAGE>
Maker further agrees to pay all reasonable out-of-pocket costs, expenses and
attorneys' fees incurred by Payee in any proceeding for the collection of the
debt evidenced hereby, or upon the happening of a default as provided for in
this Note.
4. There shall be an "EVENT OF DEFAULT": (i) if Maker defaults for ten
(10) days in making any scheduled payment of principal or interest on this
Note, or any other required payment under this Note, as the same become due,
or (ii) if an order for relief is sought by or against Maker or any guarantor
under the Federal Bankruptcy Code or acts amendatory thereof or supplemental
thereto or under any statute either of the United States or any state or
foreign jurisdiction in connection with insolvency or reorganization or for
the appointment of a receiver or trustee for all or a portion of Maker's or
any guarantor's property, and any such order for relief, receiver or trustee
is not withdrawn, dismissed, discharged, or removed within sixty (60) days,
except for any order sought or consented to by the Maker or any guarantor, in
which case the event of default shall be immediate, or (iii) if an assignment
of Maker's or any guarantor's property is made for the benefit of creditors,
or (iv) if Maker or any guarantor declares in writing its inability to pay
debts as they come due. Except as expressly provided herein, upon the
occurrence of an Event of Default, the entire principal sum with accrued
interest thereon due under this Note shall, at the option of Payee, become
immediately due and payable and Payee may proceed to exercise any rights and
remedies Maker has under this Note or at law, in equity or otherwise. No
failure to exercise such option shall be deemed to be a waiver on the part of
Payee of the right to exercise the same in the event of any subsequent Event
of Default.
5. Maker shall have the right to prepay this Note in whole or in part
at any time, without penalty.
6. Maker and each and every endorser, guarantor, and surety of this
Note and all others who may become liable for all or any part of this
obligation do hereby waive diligence, demand, presentment for payment,
protest, notice of protest and notice of non-payment of this Note, and do
hereby consent to any number of renewals or extensions of the time of payment
hereof and of the time for advances, if any, and agree that any such renewals
or extensions may be made without notice to any of said parties and without
affecting their liability herein, all without affecting the liability of the
other persons, firms or corporations liable for the payment of this Note.
7. MAKER ACKNOWLEDGES THAT THIS NOTE AND THE UNDERLYING TRANSACTIONS
GIVING RISE HERETO CONSTITUTE COMMERCIAL BUSINESS TRANSACTED WITHIN THE STATE
OF CONNECTICUT. IN THE EVENT OF ANY LEGAL ACTION BETWEEN MAKER AND PAYEE
HEREUNDER, MAKER HEREBY EXPRESSLY WAIVES ANY RIGHTS WITH REGARD TO NOTICE,
PRIOR HEARING AND ANY OTHER RIGHTS HE MAY HAVE UNDER THE CONNECTICUT GENERAL
STATUTES, CHAPTER 903a, AS NOW CONSTITUTED OR HEREAFTER AMENDED OR
SUPPLEMENTED, OR OTHER STATUTE OR STATUTES, STATE OR FEDERAL, AFFECTING
PREJUDGMENT REMEDIES, AND PAYEE MAY INVOKE ANY
3
<PAGE>
PREJUDGMENT REMEDY AVAILABLE TO IT WITH REGARD TO THE COLLATERAL, TO ENFORCE
THE PROVISIONS OF THIS NOTE, WITHOUT GIVING MAKER ANY NOTICE OR OPPORTUNITY
FOR A HEARING.
ADDITIONALLY, MAKER AND PAYEE HEREBY EACH WAIVE THE RIGHT TO TRIAL BY
JURY IN ANY ACTION, DEFENSE, COUNTERCLAIM, CROSSCLAIM AND/OR ANY FORM OF
PROCEEDING BROUGHT IN CONNECTION WITH THIS NOTE OR RELATING TO ANY
INDEBTEDNESS EVIDENCED HEREBY AND/OR ANY COLLATERAL NOW OR HEREAFTER SECURING
THIS NOTE.
8. This Note has been made and delivered in the State of Connecticut
and shall be construed and enforced under and in accordance with the laws of
the State of Connecticut.
9. This Note replaces in its entirety the Secured Promissory Note also
dated April 3, 1998 from the Maker to the Payee in the amount of $632,072.14.
[Next page is signature page]
4
<PAGE>
IN WITNESS WHEREOF, Maker has hereunto set Maker's hand as of the 3rd
day of April, 1998.
/s/ Gerhard Ehninger
-----------------------------------
Gerhard Ehninger
5
<PAGE>
AGREEMENT TO EXCHANGE COMMON STOCK OF
CELLMARK DIAGNOSTICS, INC. FOR SHARES OF
COMMON STOCK OF LIFECODES CORPORATION
The undersigned employee (the "Employee") does hereby agree as
follows:
1. Employee owns ___ shares of the common stock (the "Cellmark Stock")
of Cellmark Diagnostics, Inc., ("Cellmark") purchased by means of a
non-recourse, non-interest bearing promissory note in the amount of $__________
(the "Original Promissory Note"). Employee represents and warrants that the
Cellmark Stock is not subject to any lien or encumbrance except a lien securing
the Original Promissory Note.
2. Employee acknowledges that Lifecodes Corporation ("Lifecodes"), the
owner of approximately 80% of the common stock of Cellmark, proposes to conduct
an initial public offering of Lifecodes common stock. Employee has received and
read a copy of the S-1 Registration Statement dated July 17, 1998, relating to
such offering as filed with the SEC. Employee has been offered an opportunity
to ask such questions and obtain such information regarding Lifecodes and its
common stock as Employee has deemed desirable in connection with exchange
described below.
3. Employee acknowledges that (i) the exchange of stock in Cellmark
held by Cellmark employees for shares of Lifecodes will help facilitate the
public offering of Lifecodes stock, and (ii) exchange of Employee's Cellmark
stock for Lifecodes stock may be advantageous to Employee due to the
possibility of a public market for the sale of such shares should an initial
public offering be consummated, subject to satisfaction of the requirements of
SEC Rule 144.
4. Employee does hereby agree to exchange each of Employee's Cellmark
shares for 11.96 shares of Lifecodes common stock, for a total of ______
Lifecodes shares (the "Lifecodes Shares"). The foregoing amount DOES NOT
reflect a proposed 3.65-for-1 stock split to take effect prior to the initial
public offering and share amounts will be adjusted accordingly following any
stock split. In this connection, the Original Promissory Note is hereby
cancelled and a new promissory note in the form of an Exhibit A hereto (the
"New Promissory Note") is being executed contemporaneously herewith. The New
Promissory Note will evidence the non-recourse obligation of Employee to pay
for the Lifecodes Shares.
5. Employee does hereby grant to Lifecodes a lien on the Lifecodes
Shares, and all proceeds of stock splits or stock dividends, as security for
payment of the amount evidenced by the New Promissory Note. Employee
acknowledges that Lifecodes will, until the New Promissory Note is paid in
full, maintain physical possession of all certificates evidencing the Lifecodes
shares in order to reflect the lien hereby granted. Employee will execute such
further assignments and documents as Lifecodes may deem desirable to effectuate
such pledge.
6. Employee acknowledges that (i) the New Promissory Note will be
payable on March 15, 1999 or such earlier date as Employee's employment is
terminated, (ii) Rule 144 under the Securities Act of 1933 (a copy of which is
appended hereto as Exhibit B) will require,
<PAGE>
among other things, that Employee hold the Lifecodes Shares for at least
one year after payment of the New Promissory Note before Employee may sell the
Lifecodes Shares through a broker.
7. Employee further acknowledges that if the New Promissory Note is
not timely paid, Lifecodes may, at its option, extinguish the New Promissory
Note by transferring the Lifecodes Shares to itself in satisfaction of the New
Promissory Note to the extent of the value of such Lifecodes Shares (measured
by the closing price on the day of such transfer as reported by NASDAQ, if the
Lifecodes Shares are so listed). Until such time as Employee may default in
payment of the New Promissory Note, the Lifecodes Shares will be voted in
accordance with the instructions of Employee.
8. The terms of this Agreement and the New Promissory Note supersede
in their entirety the Original Promissory Note and the terms of the Cellmark
Employee Equity Program dated May 2, 1996.
- -------------------------------------
Name:
Dated:
<PAGE>
NINETY DAY PROMISSORY NOTE
$50,000 July 8, 1998
FOR VALUE RECEIVED, Walter O. Fredericks and his heirs, executors and
administrators ("Borrower") hereby promises to repay Lifecodes Corporation
("Lifecodes") the principal sum of $50,000 plus interest at the rate of 8.5% per
annum no later than October 6, 1998.
Payment of principal and interest shall be made in lawful currency of
the United States at the offices of the lender at 550 West Ave., Stamford, CT
06902.
Borrower hereby submits to the jurisdiction of the courts of the State
of Connecticut in respect to any action or proceeding relating to this Agreement
of the enforcement of any judgement thereto.
This Agreement shall be governed by and construed in accordance with
the laws of the State of Connecticut.
/s/ Walter O. Fredericks
------------------------
Walter O. Fredericks
<PAGE>
Exhibit 23.2
INDEPENDENT ACCOUNTANTS' CONSENT
We consent to use in this registration statement No. 333-59271 of Lifecodes
Corporation on Form S-1 of our report dated August 25, 1998 on the consolidated
financial statements of Lifecodes Corporation, our report dated May 22, 1998,
on the financial statements of Micro Diagnostics Inc., our report dated June 19,
1998 on the financial statements of International Support for Bone Marrow
Drives, Ltd., and our report dated May 26, 1998 on the financial statements of
GeneScreen, Inc. appearing in the Prospectus, which is part of this Registration
Statement. We also consent to the reference to us under the heading "Experts" in
such Prospectus.
DELOITTE & TOUCHE LLP
Stamford, Connecticut
September 1, 1998
<PAGE>
Exhibit 23.3
INDEPENDENT ACCOUNTANTS' CONSENT
We consent to use in this Registration Statement of Lifecodes Corporation on
Form S-1 of our report dated February 20, 1998 accompanying the financial
statements appearing in the Prospectus, which is part of this Registration
Statement. We also consent to the reference to us under the heading "Experts" in
such Prospectus.
Schlattman & Associates, P.C.
Mason, Michigan
September 1, 1998
<TABLE> <S> <C>
<ARTICLE> 5
<MULTIPLIER> 1000
<S> <C> <C>
<PERIOD-TYPE> YEAR 9-MOS
<FISCAL-YEAR-END> SEP-30-1997 SEP-30-1998
<PERIOD-END> DEC-31-1997 JUN-30-1997
<CASH> 615,000 1,285,000
<SECURITIES> 0 0
<RECEIVABLES> 2,477,000 3,952,000
<ALLOWANCES> 181,000 234,000
<INVENTORY> 1,252,000 1,455,000
<CURRENT-ASSETS> 4,475,000 7,674,000
<PP&E> 1,621,000 4,205,000
<DEPRECIATION> 686,000 1,385,000
<TOTAL-ASSETS> 6,702,000 14,280,000
<CURRENT-LIABILITIES> 3,204,000 7,474,000
<BONDS> 0 0
0 0
215,000 215,000
<COMMON> 194,000 270,000
<OTHER-SE> 1,996,000 3,689,000
<TOTAL-LIABILITY-AND-EQUITY> 6,702,000 14,280,000
<SALES> 12,224,000 16,519,000
<TOTAL-REVENUES> 12,224,000 16,519,000
<CGS> 4,896,000 8,169,000
<TOTAL-COSTS> 5,581,000 6,406,000
<OTHER-EXPENSES> 0 0
<LOSS-PROVISION> 0 0
<INTEREST-EXPENSE> 224,000 178,000
<INCOME-PRETAX> 1,566,00 1,702,000
<INCOME-TAX> 174,000 752,000
<INCOME-CONTINUING> 1,747,000 1,763,000
<DISCONTINUED> 0 0
<EXTRAORDINARY> 0 0
<CHANGES> 0 0
<NET-INCOME> 1,392,000 951,000
<EPS-PRIMARY> 0.00 .39
<EPS-DILUTED> 0.00 .28
</TABLE>
