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                       SECURITIES AND EXCHANGE COMMISSION

                             Washington, D. C. 20549

                                  ------------




                                   FORM 8-K/A



                                 CURRENT REPORT



                     Pursuant to Section 13 or 15(d) of the
                         Securities Exchange Act of 1934


                       Date of Report: September 21, 1998
                        (Date of earliest event reported)


                          INCYTE PHARMACEUTICALS, INC.
             (Exact name of registrant as specified in its charter)

Delaware 0-27488 94-3136539 (State or other jurisdiction (Commission (IRS Employer of incorporation) File Number) Identification No.)
3174 Porter Drive, Palo Alto, California, 94304 (Address of principal executive offices) (Zip Code) Registrant's telephone number, including area code: (650) 855-0555 - ------------------------------------------------------------------------------- Item 7. Financial Statements and Exhibits. --------------------------------- This Item 7 and the accompanying Exhibit Index amend and restate in their entirety the corresponding Item in the Registrant's Current Report on Form 8-K dated September 21, 1998. (a) Financial Statements of Business Acquired. Report of Coopers & Lybrand, independent accountants Consolidated Profit and Loss Account Statement of Total Recognised Gains and Losses Balance Sheets at 31 December 1997 Consolidated Cash Flow Statement Notes to the Financial Statements Unaudited Financial Statements of Business Acquired. Condensed Consolidated Statements of Operations Condensed Consolidated Balance Sheets Condensed Consolidated Statements of Cash Flows Notes to Condensed Consolidated Financial Statements (b) Unaudited Pro Forma Financial Information. Unaudited Pro Forma Condensed Statement of Operations Notes to the Unaudited Pro Forma Condensed Statement of Operations (c) Exhibits See Index to Exhibits (a) FINANCIAL STATEMENTS OF BUSINESS ACQUIRED Registered no: 3170808 Hexagen plc Financial statements for the year ended 31 December 1997 Hexagen plc Financial statements for the year ended 31 December 1997 Pages Report of independent accountants 1 Consolidated profit and loss account 2 Statement of total recognised gains and losses 3 Balance sheets 4 Consolidated cash flow statement 5 Notes to the financial statements 6 - 18 Hexagen plc Report of independent accountants To the Board of Directors and Shareholders of Hexagen plc We have audited the accompanying consolidated financial statements of Hexagen plc, a development stage company, as at December 31, 1997 and 1996, and the consolidated profit and loss accounts, statements of total recognised gains and losses and cash flows of Hexagen plc for the year ended December 31 1997 and period ended December 31, 1996. These consolidated financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on these financial statements based on our audits. We conducted our audits in accordance with generally accepted auditing standards in the United Kingdom which are substantially the same as those followed in the United States. These standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion. In forming our opinion, we have considered the adequacy of the disclosures made in the financial statements concerning the basis of preparation. The financial statements have been prepared on a going concern basis and the validity of this depends on the company successfully obtaining additional finance. The financial statements do not include any adjustments that would result from a failure to obtain this funding. Details of the circumstances relating to this fundamental uncertainty are discussed in note 1. Our opinion is not qualified in this respect. In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the consolidated financial position of Hexagen plc at December 31, 1997 and 1996, and the consolidated results of its operations, total recognised gains and losses and its cash flows for the year ended December 31, 1997 and period ended December 31, 1996 in conformity with accounting principles generally accepted in the United Kingdom which differ in certain respects from those generally accepted in the United States (see note 30 to the financial statements). Coopers & Lybrand Chartered Accountants Cambridge, England August 14, 1998 except for the information presented in note 30 for which the date is October 1, 1998. 1 Hexagen plc Consolidated profit and loss account for the year ended 31 December 1997
10 months ended 31 December Notes 1997 1996 as restated (pound) (pound) Net operating expenses - continuing operations 2 (2,751,444) (767,132) Exceptional net operating expenses 2 (77,550) (101,250) ----------- --------- Operating loss - continuing operations (2,828,994) (868,382) Investment income 5 318,341 125,649 Interest payable and similar charges 6 (123,161) (13,019) ----------- --------- Retained loss for the financial year 7,20 (2,633,814) (755,752) ----------- --------- ----------- ---------
There is no difference between the loss on ordinary activities before taxation and the retained loss for the year stated above, and their historical cost equivalents. 2 Hexagen plc Statement of total recognised gains and losses 1997 1996 (pound) (pound) (Loss) for the financial year and total recognised losses relating to the year (2,633,814) (755,752) --------- ------- The introduction of UITF Abstract 17 ("Employee share schemes") has necessitated a prior year adjustment relating to the granting of options in 1996 (see note 10). The cumulative effect on opening reserves is nil, comprising charges to the prior year profit and loss account of (pound)101,250, offset by a corresponding credit to reserves representing the proceeds of the equity investment. 3 Hexagen plc Balance sheets at 31 December 1997
Group Company Group Company Notes 1997 1997 1996 1996 as restated (pound) (pound) (pound) (pound) Fixed assets Tangible assets 11 1,328,131 - 1,009,692 - Investments 12 - 250,000 - 250,000 --------- ------- --------- --------- 1,328,131 250,000 1,009,692 250,000 --------- ------- --------- --------- Current assets Debtors: amounts falling due within one year 13 339,045 - 325,547 31,710 Debtors: amounts falling due after one year 13 - 6,668,656 - 6,667,527 Short-term investments 3,400,000 - 6,520,000 - Cash at bank and in hand 233,460 25,321 166,892 269 --------- --------- --------- --------- 3,972,505 6,693,977 7,012,439 6,699,506 Creditors: amounts falling due within one year 14 (997,529) - (1,201,300) (5,531) --------- --------- --------- --------- Net current assets 2,974,976 6,693,977 5,811,139 6,693,975 --------- --------- --------- --------- Total assets less current liabilities 4,303,107 6,943,977 6,820,831 6,943,975 Creditors: amounts falling due after more than one year 15 (811,249) - (772,709) - --------- --------- --------- --------- Net assets 3,491,858 6,943,977 6,048,122 6,943,975 --------- --------- --------- --------- Capital and reserves Called up share capital 18 1,376,117 1,376,117 1,376,117 1,376,117 Share premium 20 5,566,507 5,566,507 5,566,507 5,566,507 Merger reserve 20 (240,000) - (240,000) - Profit and loss account 20 (3,210,766) 1,353 (654,502) 1,351 --------- --------- --------- --------- Shareholders' funds 21 3,491,858 6,943,977 6,048,122 6,943,975 --------- --------- --------- --------- Equity shareholders' deficit/ (funds) (3,214,742) 237,377 (708,578) 187,275 Non-equity shareholders' funds 6,706,600 6,706,600 6,756,700 6,756,700 --------- --------- --------- --------- Total shareholders' funds 3,491,858 6,943,977 6,048,122 6,943,975 --------- --------- --------- ---------
4 Hexagen plc Consolidated cash flow statement for the year ended 31 December 1997
Year 10 months ended ended 31 December 31 December Notes 1997 1996 as restated (pound) (pound) Net cash outflow from continuing operating activities 22 (2,898,115) (164,754) ----------- ----------- Returns on investments and servicing of finance Interest received 305,786 108,923 Interest paid on finance leases (123,161) (13,019) ----------- ----------- 182,625 95,904 ----------- ----------- Taxation UK corporation tax paid - - ----------- ----------- Capital expenditure Purchase of tangible fixed assets - (85,874) Sale of tangible fixed assets 2,396 32,900 ----------- ----------- 2,396 (52,974) ----------- ----------- Net cash outflow before management of liquid resources and financing (2,713,094) (121,824) ----------- ----------- Management of liquid resources Purchase of treasury deposits - (6,520,000) Sale of treasury deposits 3,120,000 - ---------- ----------- 3,120,000 (6,520,000) ---------- ----------- Financing Issue of shares - 6,677,574 Repayment of principal under finance leases (445,675) (48,271) Finance lease funds not yet utilised 105,337 179,413 ---------- ----------- Net cash inflow from financing (340,338) 6,808,716 ---------- ----------- Increase in cash 23 66,568 166,892 ---------- -----------
5 Hexagen plc Notes to the financial statements for the year ended 31 December 1997 1 Principal accounting policies The financial statements have been prepared in accordance with applicable Accounting Standards in the United Kingdom. A summary of the more important accounting policies, which have been applied consistently, is set out below. Basis of preparing the financial statements - going concern assumption The company supports its subsidiary, Hexagen Technology Limited, through intercompany funding. The directors estimate that cash and short term investments held at the balance sheet date within the group are not sufficient to continue funding activities for a full twelve months from 1 January 1998. Accordingly, the directors currently plan to obtain further finance which would enable the group to continue its activities for the foreseeable future. The directors intend to obtain these additional funds during 1998. However, there is uncertainty over the amount of finance which would be obtained. The financial statements have been prepared on a going concern basis which assumes that the company and its subsidiaries will continue in operational existence for the foreseeable future. The validity of this assumption depends on Hexagen plc being able to obtain adequate additional finance to continue its activities. If the company or its subsidiary were unable to continue in operational existence for the foreseeable future, adjustments would have to be made to reduce the balance sheet values of assets to their recoverable amounts, to provide for further liabilities that might arise, and to reclassify fixed assets as current assets. Whilst the directors are presently uncertain as to the outcome of the matters mentioned above, they believe that it is appropriate for the financial statements to be prepared on the going concern basis. Basis of consolidation The consolidated profit and loss account includes the financial statements of the holding company and its subsidiary undertaking. The consolidated financial statements have been prepared using the principles of merger accounting. The cost of investment in the company's balance sheet is recorded as the nominal value of the shares issued. 6 Hexagen plc Change in presentation of financial information FRS1 ("Cash flow statements") was revised in 1996 to change the format for reporting cash flows. The revised standard came into effect for accounting periods ending on or after 23 March 1997. Accordingly the group's cash flow statement has been presented under the new format. Change in accounting policy UITF Abstract 17 ("Employee share schemes") was introduced in 1997 and applies to accounting periods ending on or after 22 June 1997. In accordance with its provisions, Hexagen plc has made a charge to the profit and loss account when options are granted being the market value of the shares at the date of grant less the exercise price of the options. The charge is then credited back to reserves in accordance with the Abstract. The effects of the change in accounting policy are disclosed in note 10. Tangible fixed assets The cost of tangible fixed assets is their purchase cost, together with any incidental costs of acquisition. Depreciation is calculated so as to write off the cost of tangible fixed assets, less their estimated residual values, on a straight line basis over the expected useful economic lives of the assets concerned. The principal annual rates used for this purpose are: % Laboratory equipment 20 Fixtures and fittings 11 Office equipment 20 Computer equipment 33 1/3 Finance and operating leases Costs in respect of operating leases are charged on a straight line basis over the lease term. Leasing agreements which transfer to the company substantially all the benefits and risks of ownership of an asset are treated as if the asset had been purchased outright. The assets are included in fixed assets and the capital element of the leasing commitments is shown as obligations under finance leases. The lease rentals are treated as consisting of capital and interest elements. The capital element is applied to reduce the outstanding obligations and the interest element is charged against profit in proportion to the reducing capital element outstanding. Assets held under finance leases are depreciated over the shorter of the lease terms and the useful lives of equivalent owned assets. Deferred taxation 7 Hexagen plc Provision is made for deferred taxation, using the liability method, on all material timing differences to the extent that it is probable that a liability or asset will crystallise. Research and development Costs associated with research and development are charged to the profit and loss account in the year in which they occur. Foreign currencies Trading transactions denominated in foreign currencies are translated into sterling at the exchange rate ruling when the transaction was entered into. Monetary assets and liabilities denominated in foreign currencies are translated into sterling at the exchange rates ruling at the balance sheet date. Exchange gains or losses are taken to the profit and loss account in the year in which they arise. Turnover There is no turnover shown in the accounts. Pension scheme arrangements The company operates a defined contribution pension scheme. The pension cost is the amount of contributions payable in the year. 2 Net operating expenses Year 10 months ended ended 31 December 31 December 1997 1996 as restated (pound) (pound) Continuing operations Research and development 2,046,451 482,519 Administrative expenses 704,993 284,613 --------- --------- 2,751,444 767,132 Exceptional administrative expenses 77,550 101,250 --------- --------- 2,828,994 868,382 --------- --------- The exceptional administrative expenses arise from the charge made on the granting of share options. The charge is the difference between the market value of the shares at the date of grant and the exercise price of the options (see note 10). 8 Hexagen plc 3 Directors' emoluments
Year 10 months ended ended 31 December 31 December 1997 1996 (pound) (pound) Aggregate emoluments 223,189 106,257 Company pension contributions to defined contribution scheme 18,478 9,750 ------- ------- 241,667 116,007 ------- -------
Included above are amounts paid to the highest paid director of:
Year 10 months ended ended 31 December 31 December 1997 1996 (pound) (pound) Aggregate emoluments 112,046 57,374 Company pension contributions to defined contribution scheme 9,291 5,250 ------- ------ 121,337 62,624 ------- ------
Benefits accrued to two directors during the year under a defined contribution scheme. 4 Employee information The average monthly number of persons (including executive directors) employed by the group during the year was:
Year 10 months ended ended 31 December 31 December 1997 1996 Number Number By activity Research 24 5 Administration 5 4 -- -- 29 9 -- --
9 Hexagen plc
Year 10 months ended ended 31 December 31 December 1997 1996 (pound) (pound) Staff costs (for the above persons) Wages and salaries 898,468 198,526 Social security costs 92,226 19,859 Other pension costs (see note 16) 80,383 17,883 --------- ------- 1,071,077 236,268 --------- -------
5 Investment income
Year 10 months ended ended 31 December 31 December 1997 1996 (pound) (pound) Other interest receivable 318,341 125,649 ------- -------
6 Interest payable and similar charges
Year 10 months ended ended 31 December 31 December 1997 1996 (pound) (pound) On finance leases 123,161 13,019 ------- ------
7 Loss on ordinary activities before taxation
Year 10 months ended ended 31 December 31 December 1997 1996 (pound) (pound) Loss on ordinary activities before taxation is stated after charging: Depreciation charge for the year: Tangible owned fixed assets - 949 Tangible fixed assets held under finance leases 251,352 8,700 Research and development expenditure - current year 2,046,451 482,519 Auditors' remuneration: Audit (company(pound)500 (1996:(pound)500)) 6,000 4,500 Other services to the group 4,900 17,450 Hire of other assets - operating leases 91,093 15,117 --------- -------
10 Hexagen plc 8 Tax on profit on ordinary activities No corporation tax liability arises on the results for the year due to the loss incurred. At 31 December 1997 there were estimated tax losses to carry forward in excess of (pound)3,150,000 (1996: (pound)500,000). 9 Profit for the financial year As permitted by section 230 of the Companies Act 1985, the parent company's profit and loss account has not been included in these financial statements. The parent company's profit for the financial year was (pound)2. 10 Change in accounting policies The prior year adjustment of (pound)101,250 is made as a result of the change in accounting policy for share options discussed in note 1. The adjustment is reported in the statement of total recognised gains and losses and reserves (see note 20). The effect of the change in accounting policy is to increase the current year's loss before taxation by (pound)77,550. The effect on the comparative profit and loss account is to increase the loss before taxation from (pound)654,502 to (pound)755,752. 11 Hexagen plc 11 Tangible fixed assets
Office equipment and fixtures Laboratory Computer and equipment equipment fittings Total (pound) (pound) (pound) (pound) Cost At 1 January 1997 628,020 131,541 259,780 1,019,341 Additions 319,456 172,641 80,465 572,562 Disposals (2,071) (700) - (2,771) ------- ------- ------- --------- At 31 December 1997 945,405 303,482 340,245 1,589,132 ------- ------- ------- --------- Depreciation At 31 December 1996 - 5,364 4,285 9,649 Charge for year 140,203 71,121 40,028 251,352 ------- ------- ------- ------- At 31 December 1997 140,203 76,485 44,313 261,001 ------- ------- ------- ------- Net book value At 31 December 1997 805,202 226,997 295,932 1,328,131 ------- ------- ------- --------- Net book value At 31 December 1996 628,020 126,177 255,495 1,009,692 ------- ------- ------- ---------
The net book value of tangible fixed assets includes an amount of(pound)1,328,131 (1996:(pound)965,567) in respect of assets held under finance leases. The company has no tangible fixed assets.
12 Fixed asset investments Company Interest in group undertakings (pound) Cost and net book value: At 31 December 1997 and at 1 January 1997 250,000 ------- Interests in group undertakings
Name of Country of Description of Percentage of undertaking incorporation shares held shares held Hexagen Technology Limited Great Britain Ordinary 0.2p shares 100%
12 Hexagen plc Hexagen Technology Limited's principal activity is research into potential new drug targets. Its results are included in the consolidated financial statements. 13 Hexagen plc 13 Debtors
Group Company Group Company 1997 1997 1996 1996 (pound) (pound) (pound) (pound) Amounts falling due within one year Other debtors 118,345 - 233,490 31,710 Prepayments and accrued income 220,700 - 92,057 - ------- ------- ------- ------- 339,045 - 325,547 31,710 ------- ------- ------- ------- Amounts falling due after one year Amounts owed by group undertaking - 6,668,656 - 6,667,527 ------- --------- ------- ------- - 6,668,656 - 6,667,527 ------- --------- ------- ---------
14 Creditors: amounts falling due within one year
Group Company Group Company 1997 1997 1996 1996 (pound) (pound) (pound) (pound) Trade creditors 376,977 - 644,296 5,531 Obligations under finance leases 526,384 - 332,700 - Other taxation and social security 31,384 - 86,710 - Accruals and deferred income 62,784 - 137,594 - ------- ------- --------- ----- 997,529 - 1,201,300 5,531 ------- ------- --------- -----
15 Creditors: amounts falling due after more than one year
Group Company Group Company 1997 1997 1996 1996 (pound) (pound) (pound) (pound) Obligations under finance leases 811,249 - 772,709 - ------- --- ------- ---
The net finance lease obligations to which the group is committed are:
1997 1996 (pound) (pound) In one year or less 526,384 332,700 Between one and two years 526,384 332,700 Between two and five years 284,865 440,009 --------- --------- 1,337,633 1,105,409 --------- ---------
14 Hexagen plc Hexagen plc has guaranteed the liabilities of Hexagen Technology Limited with regard to that company's finance lease commitments. 16 Deferred taxation At 31 December 1997 the company has no potential liability for deferred taxation. The group had potential deferred tax assets as follows:
Amount provided Amount unprovided 1997 1996 1997 1996 (pound) (pound) (pound) (pound) Tax effect of timing differences because of: Excess of capital allowances over depreciation - - - (2,784) Other - - (992,546) (203,630) --- --- ------- ------- - - (992,546) (206,414) --- --- ------- -------
17 Pensions The group operates a defined contribution scheme. The pension charge for the year is (pound)80,383 (1996: (pound)17,883). (pound)45 remained outstanding at the year-end and is included within accruals. 18 Called up share capital
1997 1996 (pound) (pound) Authorised 23,355,672 preferred ordinary shares of 5p each 1,167,784 1,167,784 5,000,000 `A' ordinary shares of 5p each 250,000 250,000 3,339,668 ordinary shares of 5p each 166,983 166,983 --------- --------- 1,584,767 1,584,767 --------- --------- Allotted, called up and fully paid 22,355,331 preferred ordinary shares of 5p each 1,117,767 1,117,767 5,000,000 `A' ordinary shares of 5p each 250,000 250,000 167,000 (1996: Nil) ordinary shares of 5p each 8,350 - --------- --------- 1,376,117 1,367,767 Allotted shares - not fully paid up Nil (1996: 167,000) preferred ordinary shares of 5p each - 8,350 --------- --------- 1,376,117 1,376,117 --------- ---------
15 Hexagen plc On 26 November 1997 the holders of 167,000 of the preferred ordinary shares exercised the right to convert their shares into ordinary shares. The preferred ordinary shares rank in priority to the other shares in a return of capital and in the payment of a dividend. The priority in respect of the dividend is limited to 8% (non-cumulative) of the nominal value of the shares. Thereafter they rank equally with the `A' ordinary and ordinary shares. The priority in respect of a return of capital is limited to the subscription price plus any arrears of dividends. Thereafter they rank equally with the `A' ordinary and ordinary shares. The preferred ordinary shares are classed as non equity because one of the rights in respect of dividends is for a limited amount. The classes of shares are equal in all other respects. 19 Options in shares of Hexagen plc Options have been granted for 5p ordinary shares as follows:
Number Subscription Period of shares price per share within which options exercisable 50,000 5p 15 July 1997 - 15 July 2003 10,000 5p 12 August 1997 - 12 August 2003 225,000 5p 3 September 1997 - 3 September 2003 30,000 5p 23 September 1997 - 23 September 2003 30,000 5p 30 September 1997 - 30 September 2003 100,000 5p 7 October 1997 - 7 October 2003 40,000 5p 14 October 1997 - 14 October 2003 15,000 5p 21 October 1997 - 21 October 2003 150,000 5p 1 November 1997 - 1 November 2003 25,000 5p 16 December 1997 - 16 December 2003 75,000 5p 28 February 1998 - 28 February 2004 15,000 5p 1 March 1998 - 28 February 2004 95,000 5p 1 March 1998 - 29 February 2004 50,000 5p 1 April 1998 - 1 April 2004 72,000 5p 1 May 1998 - 1 May 2004 35,000 5p 1 June 1998 - 1 June 2004 75,000 5p 1 July 1998 - 1 July 2004 20,000 5p 1 August 1998 - 1 August 2004 15,000 5p 1 September 1998 - 1 September 2004 15,000 5p 1 October 1998 - 1 October 2004 50,000 5p 1 December 1998 - 1 December 2004 --------- 1,192,000 ---------
16 Hexagen plc 20 Reserves
Group Share Merger Profit and premium reserve loss account (pound) (pound) (pound) At 1 January 1997 5,566,507 (240,000) (654,502) Prior year adjustment (see note 10) - - (101,250) Reversal of prior year adjustment (see note 1) - - 101,250 Reversal of share option charge (see note 1) - - 77,550 Loss for the year - - (2,633,814) --------- ------- -------- 5,566,507 (240,000) (3,210,766) --------- ------- -------- Company
Share Profit and premium loss account (pound) (pound) At 1 January 1997 5,566,507 1,351 Profit for the year - 2 --------- ------- 5,566,507 1,353 --------- ------- 21 Reconciliation of movements in shareholders' funds
Group Group 1997 1996 (pound) (pound) Opening shareholders' funds 6,048,122 - Share issue during the year - 7,006,700 Expenses of share issues - (64,076) Reversal of share option charge 77,550 101,250 (Loss) for the financial year (2,633,814) (755,752) Difference arising on consolidation - (240,000) --------- --------- Closing shareholders' funds 3,491,858 6,048,122 --------- ---------
17 Hexagen plc 22 Reconciliation of operating loss to net cash outflow from operating activities
Year 10 months ended ended 31 December 31 December 1997 1996 (pound) (pound) Continuing operating activities Operating loss (2,828,994) (868,382) Share option charge 77,550 101,250 ----------- --------- (2,751,444) (767,132) Depreciation on tangible fixed assets 251,352 9,649 Loss on sale of tangible fixed assets 375 7,900 Decrease/(increase) in other debtors 115,145 (191,714) (Increase) in prepayments and accrued income (116,088) (92,057) (Decrease)/increase in trade creditors (267,319) 644,296 (Decrease)/increase in other taxation and social security (55,326) 86,710 (Decrease)/increase in accruals and deferred income (74,810) 137,594 ----------- --------- Net cash outflow from continuing operating activities (2,898,115) (164,754) ----------- ---------
23 Reconciliation of net cash flow to movement in net funds
Year 10 months ended ended 31 December 31 December 1997 1996 (pound) (pound) Increase in cash in the period 66,568 166,892 Cash (inflow)/outflow from decrease in debt and lease financing 445,675 48,271 Cash (inflow)/outflow from (decrease)/increase in liquid resources (3,120,000) 6,520,000 --------- --------- Change in net funds resulting from cash flows (2,607,757) 6,735,163 Other non-cash items New finance leases (677,899) (1,153,680) --------- --------- Movement in net funds in the period (3,285,656) 5,581,483 Net funds at 1 January/incorporation 5,581,483 - --------- --------- Net funds at 31 December 2,295,827 5,581,483 --------- --------- 24 Analysis of net funds At At 1 January Cash 31 December 1997 flow 1997 (pound) (pound) (pound) Cash in hand, at bank 166,892 66,568 233,460 Finance leases (1,105,409) (232,224) (1,337,633) Current asset investments 6,520,000 (3,120,000) 3,400,000 --------- --------- --------- Total 5,581,483 (3,285,656) 2,295,827 --------- --------- ---------
18 Hexagen plc 25 Capital commitments
Group 1997 1996 (pound) (pound) Capital expenditure that has been contracted for but has not been provided for in the financial statements 386,100 39,000 ------- ------
26 Contingent liabilities The Inland Revenue has recently challenged the group's view that it has been trading since incorporation. The company has sought professional advice on this matter but if the challenge is upheld, taxation may become payable on interest receivable since incorporation. This would amount to (pound)30,500 (plus interest) for the year ended 31 December 1996 and (pound)70,500 for the year ended 31 December 1997. No provision has been made in the financial statements for these amounts. 27 Financial commitments At 31 December 1997 the group had annual commitments under non-cancellable operating leases as follows:
Land and Land and buildings Other buildings Other 1997 1997 1996 1996 (pound) (pound) (pound) (pound) Expiring within one year - 9,036 - - In the second to fifth years inclusive 70,000 9,000 70,000 21,068 ------ ------ ------ ------ 70,000 18,036 70,000 21,068 ------ ------ ------ ------
28 Post balance sheet event In February 1998 the group entered into a lease agreement for further premises at 214 Cambridge Science Park, Milton Road, Cambridge. The new agreement replaced the existing lease on the premises which at 31 December 1997 committed the group to (pound)70,000 per annum for less than five years (see note 27). Under the terms of the new agreement, the group is committed to annual leasing costs on the premises of (pound)180,000 for more than five years. 19 Hexagen plc 29 Related party transactions The company has taken advantage of the exemption available to companies not to disclose transactions with wholly owned subsidiaries which are eliminated on consolidation. There are no other related party transactions requiring disclosure. 30 Summary of significant differences between UK and US Generally Accepted Accounting Principles ("GAAP") The accompanying consolidated financial statements have been prepared in accordance with accounting principles generally accepted in the United Kingdom ("UK GAAP"). Such principles differ in certain respects from generally accepted accounting principles in the United States ("US GAAP"). A summary of principal differences and additional disclosures applicable to the Group are set out below. Reconciliation of consolidated profit and loss account:
1997 1996 (pound) (pound) Retained loss under UK GAAP (2,633,814) (755,752) US GAAP adjustments: Stock options 40,174 91,931 ----------- -------- Net loss under US GAAP (2,593,640) (663,821) ========= ======= Reconciliation of shareholders' equity: 1997 1996 (pound) (pound) Shareholders' funds under UK GAAP 3,491,858 6,048,122 US GAAP adjustments: Stock options 132,105 91,931 ---------- --------- Shareholders' equity under US GAAP 3,623,963 6,140,053 ========= =========
(i) Stock options Under both UK and US GAAP, options issued with an exercise price below the fair market value are considered compensatory. Under UK GAAP, the compensation charge on options issued to reward past performance is reflected in the profit and loss on the date of grant. Under US GAAP, compensation cost also represents the difference between the current market price and the exercise price on the grant date, but is recognised in the profit and loss over the vesting period of the options granted. 20 Hexagen plc (ii) Disclosures related to development stage enterprises The company was formed on 12 March 1996 to research potential new drug targets that may enable the treatment of human and veterinary diseases. The company is considered a development stage enterprise as defined by Financial Accounting Standards Board Opinion No. 7, Accounting and Reporting by Development Stage Enterprises. As required under the standard, the deficit accumulated in the development stage on a UK GAAP basis from 12 March 1996 to 31 December 1997 is (pound)3,210,766. The cumulative statements of profit and loss and cash flows for the period since inception are shown below. Consolidated profit and loss account from 12 March 1996, date of inception, to 31 December 1997
(pound) Net operating expenses - continuing operations (3,518,576) Exceptional net operating expenses (178,800) ----------- Operating loss - continuing operations (3,697,376) Investment income 443,990 Interest payable and similar charges (136,180) ----------- Retained loss since inception (3,389,566) Consolidated cash flow statement from 12 March 1996, date of inception, to 31 December 1997 (pound) Net cash outflow from continuing operating activities (3,062,869) ----------- Returns on investments and servicing of finance Interest received 414,709 Interest paid on finance leases (136,180) --------- 278,529 -------- Capital expenditure Purchase of tangible fixed assets (85,874) Sale of tangible fixed assets 35,296 -------- (50,578) -------- Net cash outflow before management of liquid resources and financing (2,834,918) ---------- 21 Hexagen plc Management of liquid resources Purchase of treasury deposits (6,520,000) Sale of treasury deposits 3,120,000 --------- (3,400,000) ---------- Financing Issue of shares 6,677,574 Repayment of principal under finance leases (493,946) Finance lease funds not yet utilised 284,750 -------- Net cash inflow from financing 6,468,378 -------- Increase in cash 233,460 --------
22 Hexagen plc (iii) Statement of cash flows Under UK GAAP, the consolidated cash flow statements have been prepared in accordance with the revised version of UK Financial Reporting Standard No.1 ("FRS 1 revised") and presents substantially the same information as required under SFAS No. 95. Under US GAAP however, there are certain differences from UK GAAP with regard to classification of items within the cash flow statement. Under UK GAAP, cash flows are presented separately for operating activities, returns on investments and servicing of finance, taxation, capital expenditure and financial investment, acquisitions and disposals, equity dividends paid, management of liquid resources and financing. Under US GAAP cash flows are classified under operating activities, investing activities and financing activities. Under UK GAAP, cash is defined as cash in hand and deposits repayable on demand, less overdrafts repayable on demand. Under US GAAP, cash and cash equivalents are defined as cash and investments with original maturities of three months or less. A summary of the Group's operating, investing and financing activities classified in accordance with US GAAP is presented below. For the purposes of this summary, the Group considers all highly liquid investments with a maturity of three months or less at the time of purchase to be cash equivalents. 23 Hexagen plc
1997 1996 (pound) (pound) Net cash used in operating activities (2,715,490) (68,850) Net cash provided by investing activities (997,604) (52,974) Net cash (used in)/provided by financing activities (340,338) 6,808,716 --------- --------- Net increase in cash and cash equivalents (4,053,432) 6,686,892 Cash and cash equivalents at beginning of period 6,686,892 - --------- --------- Cash and equivalents at end of period 2,633,460 6,686,892 ========= ========= Cash and cash equivalents are: Cash at bank and in hand 233,460 166,892 Current asset investments 2,400,000 6,520,000
24 HEXAGEN plc CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS (unaudited) Nine months ended September 30, -------------------------- 1997 1998 (pound) (pound) ----------- ------------ Cost and expenses: Research and development (1,465,645) (2,060,252) General and administrative (617,408) (1,562,494) ----------- ----------- Net loss from operations (2,083,053) (3,622,746) Interest income 252,228 120,150 Interest payable and similar charges (95,985) (110,454) ----------- ----------- Net loss (1,926,810) (3,613,050) =========== =========== See accompanying notes 1 HEXAGEN plc CONDENSED CONSOLIDATED BALANCE SHEETS (unaudited) December 31, September 30, 1997* 1998 ----------- ------------- (pound) (pound) Fixed assets 1,328,131 1,578,430 --------- --------- Current assets: Debtors: amounts falling due within one year 339,045 201,664 Cash at hand and in bank 233,460 201,900 Short term investments 3,400,000 400,000 ----------- ----------- Total current assets 3,972,505 803,564 Creditors: amounts falling due within one year (997,529) (1,223,670) ---------- ----------- Net current assets / (liabilities) 2,974,976 (420,106) --------- ----------- Total assets less current liabilities 4,303,107 1,158,324 Creditors: amounts falling due after more than one year (811,249) (330,304) ---------- ----------- Net assets 3,491,858 828,020 ============= ============= Capital and reserves Called up share capital 1,376,117 1,386,078 Merger reserve (240,000) (240,000) Share premium 5,566,507 5,566,507 Accumulated deficit (3,210,766) (5,884,565) ----------- ----------- Equity shareholders' fund 3,491,858 828,020 ============= ============= * The balances at December 31, 1997 are derived from the audited financial statements See accompanying notes 2 HEXAGEN plc CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (unaudited) Nine months ended September 30, --------------------------- 1997 1998 ---------- --------- (pound) (pound) Net cash flows from continuing operations (2,338,985) (2,045,128) ----------- ----------- Returns on investments and servicing of finance Interest received 252,228 120,150 Interest paid on finance leases (95,985) (110,454) -------- --------- 156,243 9,696 -------- -------- Net cash outflow before management of liquid resources (2,182,742) (2,035,432) and financing ----------- ----------- Management of liquid resources Sale of treasury deposits 2,120,000 3,000,000 --------- ---------- 2,120,000 3,000,000 --------- ---------- Financing Issue of shares -- 9,961 Repayment of principal under finance leases (346,367) (480,945) Change in finance lease funds not yet utilized 396,550 (525,144) ---------- ----------- Net cash inflow (outflow) from financing 50,183 (996,128) ---------- ----------- Decrease in cash (12,559) (31,560) ========== ========== See accompanying notes 3 HEXAGEN plc NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS September 30, 1998 (Unaudited) Note 1 BASIS OF PRESENTATION The accompanying unaudited condensed consolidated financial statements have been prepared in accordance with applicable Accounting Standards in the United Kingdom (U.K. GAAP) applied on a basis consistent with the audited financial statements for the year ended December 31, 1997. Those accounting practices differ in certain respects from United States generally accepted accounting practices (U.S. GAAP) as discussed in Note 2. In preparing the financial statements and notes thereto, certain reclassifications and changes in presentation have been made in order to comply with accounting presentation and disclosure requirements in the United States. The condensed consolidated balance sheets as of September 30, 1998 and December 31, 1997 and the consolidated statements of operations and cash flows for the nine months ended September 30, 1998 and 1997 are unaudited, but include all adjustments (consisting of normal recurring adjustments) which the Company considers necessary for a fair presentation of the financial position, operating results and cash flows for the periods presented. Although the Company believes that the disclosures in these financial statements are adequate to make the information presented not misleading, certain information and footnote information normally included have been condensed or omitted pursuant to the rules and regulations of the Securities and Exchange Commission. Note 2 SUMMARY OF SIGNIFICANT DIFFERENCES BETWEEN U.K. GAAP AND U.S. GAAP Employee share options Under both U.K. and U.S. GAAP, if stock options are issued at below fair market value there is a compensation cost charged to the profit and loss account. Under U.K. GAAP any compensation cost arising on options issued to reward past performance is charged to the profit and loss account when the options are granted. Under U.S. GAAP the equivalent compensation cost is charged to the profit and loss account over the vesting period of the related share options. The effect of this difference on the group is as follows: Nine months ended September 30, ---------------------------------- 1997 1998 ------------ ------------- (pound) (pound) Net loss under U.K. GAAP (1,926,810) (3,613,050) U.S. GAAP adjustments: Deferral of stock compensation expense on stock options 34,274 808,653 granted ----------- ----------- Net loss under U.S. GAAP (1,892,536) (2,804,397) ============ ============ 4 HEXAGEN plc NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS September 30, 1998 The difference between the treatment of stock compensation for option grants between U.K. GAAP and U.S. GAAP has no impact on cash flows, and has no effect on the total consolidated net shareholders' equity of the Company. Statement of cash flows Under U.K. GAAP, cash does not include short term deposits and investments which cannot be withdrawn without notice and without incurring a financial penalty. Such items are shown as current asset investments. Under U.S. GAAP, deposits with a maturity period at inception of less than three months and which are convertible into known amounts of cash are included as cash and cash equivalents. The effect of this difference on the group is as follows:
September 30, ------------------------------------------ 1997 1998 -------------- ------------- (pound) (pound) Cash as reported under U.K. GAAP 154,333 201,900 Adjustments for cash equivalents 1,600,000 400,000 ---------- ---------- Cash and equivalents under U.S. GAAP 1,754,333 601,900 ========== ========== Increase (decrease) in cash under U.K. GAAP (12,559) (31,560) Adjustment for cash equivalents (4,920,000) (2,000,000) ---------- ----------- Decrease in cash and cash equivalents under (4,932,559) (2,031,560) U.S. GAAP =========== ===========
Additionally, under U.K. GAAP cash flows are presented separately for operating activities, returns on investments and servicing of finance, taxation, capital expenditures and financial investment, and management of liquid resources and financing. Under U.S. GAAP, cash flows are classified under operating, investing, and financing activities. Note 3 SUBSEQUENT EVENTS In September 1998, Incyte Pharmaceuticals, Inc. ("Incyte") completed the acquisition of the Company. Incyte issued 976,130 shares of its Common Stock and $5.0 million in cash in exchange for all of the outstanding capital stock of the Company. In addition, Incyte assumed all of the Company's outstanding stock options. Immediately prior to the consummation of this transaction, the Company was re-registered as a private limited company under the law of England and Wales under the name Hexagen Limited. 5 (b) UNAUDITED PRO FORMA FINANCIAL INFORMATION The following Unaudited Pro Forma Condensed Statements of Operations for the year ended December 31, 1997, and the nine months ended September 30, 1998 give effect to the acquisition by Incyte Pharmaceuticals, Inc.(the "Company") of all of the outstanding capital stock of Hexagen Limited, formerly Hexagen plc ("Hexagen"), accounted for using the purchase method of accounting. The Unaudited Pro Forma Condensed Statements of operations are based on the historical financial statements of the Company and Hexagen, and give effect to the assumptions and adjustments set forth in the accompanying Notes to the Unaudited Pro Forma Statements of Operations. The Unaudited Pro Forma Condensed Statement of Operations for the year ended December 31, 1997 assumes the acquisition was consummated on January 1, 1997 and the Unaudited Pro Forma Condensed Statement of Operations for the Nine months ended September 30, 1998 assumes the acquisition was consummated on January 1, 1998. The pro forma adjustments are based on the agreements between the Company and Hexagen, which provide for Hexagen shareholders to receive 976,130 shares of newly issued Incyte Pharmaceuticals, Inc. common stock, options to purchase 125,909 shares of the Company's Common Stock and $5 million in cash. The intrinsic value of the options issued has been included in the purchase price. The Unaudited Pro Forma Condensed Statements of Operations excludes any potential benefits that might result from the acquisition due to synergie that may be derived and from the elimination of any duplicate efforts or any non-recurring costs of the integration of the two operations. The Unaudited Pro Forma Condensed Financial Statements do not purport to be indicative of the results that actually would have been achieved if the acquisition had occurred on the dates indicated or indicative of results which may be obtained in the future. The Unaudited Pro Forma Condensed Financial Statements should be read in conjunction with the historical financial statements and accompanying Notes for the Company, and Hexagen. The historical financial statements of Hexagen included herein are expressed in British pounds sterling (BPS) and are prepared in accordance with accounting principles generally accepted in the United Kingdom ("U.K. GAAP"). For purposes of preparing pro forma information in accordance with accounting principles generally accepted in the United States ("U.S. GAAP"), the historical statements have been adjusted as appropriate utilizing the reconciliations of the approximate effect on net income (loss) and shareholders' equity of differences between U.K. GAAP and U.S. GAAP provided in Hexagen's historical financial statements. For purposes of preparing the pro forma information, certain reclassifications have also been made to the U.K. GAAP historical statements to conform to the U.S. GAAP presentation. The statements have been translated into U.S. dollars using the following exchange rates which equals the average daily exchange rate for the related periods: $ to BPS ----------- Pro Forma Condensed Statement of Operations for the year ended 1.64 December 31, 1997 Pro Forma Condensed Statement of Operations for the nine months Ended September 30, 1998 1.65 As the Hexagen acquisition was completed on September 21, 1998, Hexagen's balance sheet accounts have been incorporated in the Company's September 30, 1998 Consolidated Balance Sheet included in the Company's Form 10-Q for the quarter ended September 30, 1998, no Pro Forma Balance Sheet is required. 1 UNAUDITED PRO FORMA CONDENSED STATEMENT OF OPERATIONS Year Ended December 31, 1997 (in thousands, except per share amounts)
Incyte Consolidated Incyte Pro Forma Pro Forma Consolidated Hexagen Adjustments Total ------------ ------- ----------- ----- Revenues $ 89,996 $ -- $ -- $ 89,996 Costs and expenses Research and development 72,452 3,351 -- 75,803 Selling, general, and administrative 13,928 1,214 2,392 17,534 ---------- ---------- --------- ---------- Total costs and expenses 86,380 4,565 2,392 93,337 Income (loss) from operations 3,616 (4,565) (2,392) (3,341) Interest and other income (expenses), net 3,840 320 ---- 4,160 --------- ---------- --------- --------- Income (loss) before income taxes 7,456 (4,245) (2,392) 819 Provision for income taxes 548 ----- ---- 548 ---------- ---------- --------- ---------- Net income (loss) $ 6,908 $ (4,245) $ (2,392) $ 271 =========== ============ ========== ============ Basic net income per share $ 0.28 $ 0.01 ---------- ---------- Shares used in computing basic 24,300 25,276 net income per share ---------- ---------- Diluted net income per share $ 0.26 $ 0.01 ---------- ---------- Shares used in computing diluted 26,498 27,588 net income per share ---------- ---------- See accompanying notes
2 NOTES TO THE PRO FORMA CONDENSED STATEMENT OF OPERATIONS The Unaudited Pro Forma Condensed Statement of Operations for the year ended December 31, 1997 was prepared to reflect the acquisition by Incyte Pharmaceuticals, Inc. of all of the outstanding capital stock of Hexagen accounted for under the purchase method of accounting, as if it occurred on January 1, 1997. The adjustments reflected in the Unaudited Pro Forma Condensed Statement of Operations represent the amortization of the intangible assets acquired in the acquisition of Hexagen over an estimated useful life of 8 years. The Unaudited Pro Forma basic and diluted net income per share were computed assuming that the 976,130 shares of Common Stock issued in connection with the acquisition were outstanding as of January 1, 1997. The Unaudited Pro Forma diluted net income per share also gives effect to dilutive potential shares of Common Stock subject to options assumed in connection with the acquisition under the treasury stock method. No adjustments have been made to reflect the charge for the purchase of in-process research and development recorded by the Company at the time of acquisition, as it represents a non-recurring charge directly attributable to the transaction. No tax benefit has been recognized for the Hexagen net operating loss, as the related deferred tax asset has been fully offset by a valuation allowance. 3
UNAUDITED PROFORMA CONDENSED STATEMENT OF OPERATIONS Nine Months Ended September 30, 1998 (in thousands, except per share amounts) Incyte Consolidated Incyte Pro Forma Pro Forma Consolidated Hexagen Adjustments Total ------------ ------- ----------- ----- Revenues $ 98,164 $ -- $ -- $ 98,164 Costs and expenses Research and development 69,581 3,181 -- 72,762 Selling, general, and administrative 17,196 1,571 1,793 20,560 Charge for purchase of in-process research and development 10,978 --- (10,978) ---- Acquisition-related charges 1,171 --- ---- 1,171 ---------- ---------- -------- ---------- Total costs and expenses $ 98,926 4,752 (9,185) 94,493 Income (loss) from operations (762) (4,752) 9,185 3,671 Interest and other income (expenses), net 4,860 17 ---- 4,877 --------- ---------- --------- --------- Income (loss) before income taxes 4,098 (4,735) 9,185 8,548 Provision for income taxes 2,111 ----- ---- 2,111 ---------- ---------- --------- ---------- Net income (loss) $ 1,987 (4,735) 9,185 6,437 ============ ============ ========== ============ Basic net income per share $ 0.07 $ 0.23 ---------- ---------- Shares used in computing basic 26,634 27,523 net income per share ---------- ---------- Diluted net income per share $ 0.07 $ 0.22 ---------- ---------- Shares used in computing diluted 28,753 29,756 net income per share ---------- ---------- See accompanying notes
4 NOTES TO THE PRO FORMA CONDENSED STATEMENT OF OPERATIONS The Unaudited Pro Forma Condensed Statement of Operations for the nine months ended September 30, 1998 was prepared to reflect the acquisition by Incyte Pharmaceuticals, Inc. of all of the outstanding capital stock of Hexagen accounted for under the purchase method of accounting, as if it occurred on January 1, 1998. The adjustments reflected in the Unaudited Pro Forma Condensed Statement of Operations represent the amortization of the intangible assets acquired in the acquisition of Hexagen over an estimated useful life of eight years. The Unaudited Pro Forma basic and diluted net income per share were computed assuming that the 976,130 shares of Common Stock issued in connection with the acquisition were outstanding as of January 1, 1998. The Unaudited Pro Forma net income per share also gives effect to dilutive potential shares of Common Stock subject to options assumed in connection with the acquisition, under the treasury stock method. An adjustment has been made to exclude the charge for the purchase of in-process research and development recorded by the Company at the time of the acquisition, as it represents a non-recurring charge directly attributable to the transaction. No tax benefit has been recognized for the Hexagen net operating loss, as the related deferred tax asset has been fully offset by a valuation allowance. 5 INDEX TO EXHIBITS Exhibit Number Description - ------ ----------- 2.1* Share Purchase Agreement, dated as of September 21, 1998, by and among Incyte Pharmaceuticals, Inc., Hexagen Limited and the shareholders of Hexagen Limited. The following schedules and exhibits to the Share Purchase Agreement have been omitted. Incyte will furnish copies of the omitted schedules and exhibits to the Commission upon request. Exhibit A - Form of Irrevocable Undertaking Exhibit D-1 - Form of Amendments to Hexagen plc Unapproved Share Option Plan 1996 (effective prior to Closing) Exhibit D-2 - Form of Amendments to Hexagen plc Unapproved Share Option Plan 1996 (effective upon Closing) Exhibit D-3 - Form of Option Exchange Agreement** Exhibit D-4 - Form of Replacement Option Certificate Exhibit D-5 - Form of Option Release Deed Exhibit E - Form of Restrictive Covenants Agreement Exhibit E - Form of Restrictive Covenants Agreement Schedule I - Schedule of Consideration Schedule II - Schedule of Options to be Converted Schedule 2.2 - Post-Closing Directors and Officers of the Company; Resignations Schedule 7.3 - Schedule of Shareholders and Employees to be Parties to Restrictive Covenants Agreement and Employment Agreements - ----------------------- * Previously filed as Exhibit 2.1 to the Registrant's Current Report on Form 8-K dated September 21, 1998. ** Previously filed as Exhibit 10.2 to the Registrant's Registration Statement on Form S-8 (File No. 0-27488) filed on November 20, 1998. SIGNATURE Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned hereunto duly authorized. Dated: December 4, 1998. INCYTE PHARMACEUTICALS, INC. By /s/ DENISE M. GILBERT ------------------------------ Name Denise M. Gilbert ---------------------------- Title Executive Vice President and Chief Financial Officer --------------------------- INDEX TO EXHIBITS Exhibit Number Description - ------ ----------- 2.1* Share Purchase Agreement, dated as of September 21, 1998, by and among Incyte Pharmaceuticals, Inc., Hexagen Limited and the shareholders of Hexagen Limited. The following schedules and exhibits to the Share Purchase Agreement have been omitted. Incyte will furnish copies of the omitted schedules and exhibits to the Commission upon request. Exhibit A - Form of Irrevocable Undertaking Exhibit D-1 - Form of Amendments to Hexagen plc Unapproved Share Option Plan 1996 (effective prior to Closing) Exhibit D-2 - Form of Amendments to Hexagen plc Unapproved Share Option Plan 1996 (effective upon Closing) Exhibit D-3 - Form of Option Exchange Agreement** Exhibit D-4 - Form of Replacement Option Certificate Exhibit D-5 - Form of Option Release Deed Exhibit E - Form of Restrictive Covenants Agreement Exhibit E - Form of Restrictive Covenants Agreement Schedule I - Schedule of Consideration Schedule II - Schedule of Options to be Converted Schedule 2.2 - Post-Closing Directors and Officers of the Company; Resignations Schedule 7.3 - Schedule of Shareholders and Employees to be Parties to Restrictive Covenants Agreement and Employment Agreements - ----------------------- * Previously filed as Exhibit 2.1 to the Registrant's Current Report on Form 8-K dated September 21, 1998. ** Previously filed as Exhibit 10.2 to the Registrant's Registration Statement on Form S-8 (File No. 0-27488) filed on November 20, 1998.