<PAGE> 1
Filed Pursuant to Rule 424(b)(4)
PROSPECTUS Registration File No. 333-31984
9,600,000 Shares
[deCODE genetics logo]
COMMON STOCK
------------------------
deCODE genetics, Inc. is offering shares of its common stock. This is our
initial public offering and no established public market currently exists for
our common stock.
------------------------
Our common stock has been approved for listing on the Nasdaq National Market and
the European Association of Securities Dealers Automated Quotation, in each
instance under the symbol "DCGN."
------------------------
INVESTING IN OUR COMMON STOCK INVOLVES RISKS. SEE "RISK FACTORS" BEGINNING ON
PAGE 8.
------------------------
PRICE $18 A SHARE
------------------------
<TABLE>
<CAPTION>
UNDERWRITING
PRICE TO DISCOUNTS AND PROCEEDS TO
PUBLIC COMMISSIONS DECODE
-------- ------------- -----------
<S> <C> <C> <C>
Per Share....................................... $18.00 $1.26 $16.74
Total........................................... $172,800,000 $12,096,000 $160,704,000
</TABLE>
deCODE genetics, Inc. has granted the underwriters an option to purchase up to
an additional 1,440,000 shares of our common stock to cover over-allotments.
The Securities and Exchange Commission and state securities regulators have not
approved or disapproved these securities, or determined if this prospectus is
truthful or complete. Any representation to the contrary is a criminal offense.
Morgan Stanley & Co. Incorporated expects to deliver the shares to purchasers
on July 21, 2000.
------------------------
MORGAN STANLEY DEAN WITTER
LEHMAN BROTHERS
July 17, 2000
<PAGE> 2
INSIDE FRONT COVER
[DECODE GENETICS, INC. LOGO]
[PHOTOGRAPHS DEPICTING RESEARCHERS IN DECODE'S LABORATORY]
deCODE genetics is based in Reykjavik Iceland. These pictures show
researchers in the laboratory at deCODE's headquarters.
[WORLD MAP FEATURING ICELAND; DECODE GENETICS, INC. LOGO]
deCODE is developing gene discovery, database and information technology
products and services for thee healthcare industry.
deCODE has based its research on close cooperation with the population
of Iceland.
BACK COVER
[PHOTOGRAPHS DEPICTING RESEARCH ACTIVITY AT DECODE'S FACILITIES]
[ILLUSTRATION OF FAMILY TREE OF ICELANDIC ASTHMA PATIENTS COVERING 11
GENERATIONS; DECODE GENETICS, INC. LOGO]
A family tree of Icelandic asthma patients, covering 11 generations. The
solid symbols indicate affected individuals.
<PAGE> 3
TABLE OF CONTENTS
<TABLE>
<CAPTION>
PAGE
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<S> <C>
Prospectus Summary.................... 3
Risk Factors.......................... 8
Special Note Regarding Forward-Looking
Statements.......................... 23
Use of Proceeds....................... 24
Dividend Policy....................... 25
Capitalization........................ 26
Dilution.............................. 27
Exchange Rates........................ 28
Selected Consolidated Financial
Data................................ 29
Management's Discussion and Analysis
of Financial Condition and Results
of Operations....................... 30
</TABLE>
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
Business.............................. 36
Management............................ 59
Certain Transactions.................. 65
Principal Stockholders................ 66
Description of Securities............. 68
Tax Considerations.................... 71
Shares Eligible for Future Sale....... 77
Underwriters.......................... 79
Legal Matters......................... 81
Experts............................... 82
Where You Can Find More Information... 82
EASDAQ Information.................... 82
Index to Consolidated Financial
Statements.......................... F-1
</TABLE>
------------------------
ABOUT THIS PROSPECTUS
UNTIL AUGUST 11, 2000, ALL DEALERS THAT BUY, SELL OR TRADE COMMON STOCK,
WHETHER OR NOT PARTICIPATING IN THIS OFFERING, MAY BE REQUIRED TO DELIVER A
PROSPECTUS. THIS 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.
<PAGE> 4
PROSPECTUS SUMMARY
This summary highlights information contained elsewhere in this prospectus.
This summary may not contain all of the information that you should consider
before deciding to invest in our common stock. We urge you to read this entire
prospectus carefully, including the "Risk Factors" section and our consolidated
financial statements and the notes to those statements.
deCODE
OUR COMPANY
deCODE is developing gene and drug target discovery, database and
information technology products and services for the healthcare industry using
human genetics. We develop and apply modern information technology to discover
new knowledge about health and disease through data-mining, which is the
exploration and comparison of data from various sources. We believe that certain
unique qualities of the Icelandic population, together with our advanced
bioinformatics and research facility, should place deCODE at a competitive
advantage to perform genetic and medical research to identify disease genes and
drug and diagnostic targets. As the international effort to discover the
sequence of human genetic material, known as the human genome, progresses, we
believe that the principal task will be to transform raw genetic data into
knowledge about human health and disease and then into tangible products and
services. We believe that deCODE is well-positioned to place the human genome
sequence in a meaningful context through which we and our partners can generate
value.
deCODE was founded in 1996 and its operations, as well as its approximately
300 employees, are based in Iceland. In 1998, we entered into a significant
research collaboration and cross-license agreement with F.Hoffmann-La Roche, or
Roche, under which we may receive a total of more than $200 million in research
funding and milestone payments. To date our accomplishments include:
- the identification of eight locations for disease-causing genes;
- the identification of twelve specific candidate disease genes;
- the achievement of four milestones in our research collaboration
agreement with Roche;
- the completion of a highly efficient genotyping facility;
- the development of automated software for data capture, analysis and
interpretation; and
- near completion of a computerized genealogy database covering the
Icelandic population.
We believe that discovery of healthcare knowledge requires bringing
together three key types of data: information from the healthcare system,
information about relationships among individuals covered by this system and
associated molecular genetics data. We believe that operating in Iceland
accomplishes this by allowing us to benefit from the following four important
characteristics of the Icelandic nation in our medical and genetic research:
- genealogical records dating back in some cases to the settlement of the
country in the ninth century;
- relative genetic homogeneity with a population descended from a small
number of settlers;
- a centralized healthcare system since 1915; and
- a well-educated population.
We believe that bringing these four factors together greatly enhances our
research and development efforts in generating future products and services for
the healthcare industry.
deCODE is pursuing its access to public and proprietary data through three
avenues of commercialization:
- discovery services, with a focus on gene and drug target discovery;
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<PAGE> 5
- database services, with a focus on the construction and
commercialization of the Icelandic Health Sector Database, which
contains non-personally identifiable data from Icelandic healthcare
records, and the deCODE Combined Data Processing system, to
cross-reference data from the Icelandic Health Sector Database with
genealogical and genotypic data; and
- healthcare informatics, which is the computerized analysis of healthcare
data, with a focus on bioinformatics, which is the computerized analysis
of biological information, decision-support tools and privacy products.
We believe that the deCODE Combined Data Processing system will permit
users to build more complete models of the interplay of genes, the environment
and disease than are currently available.
OUR STRATEGY
Our strategy is to use our population-based approach to the study of genes
and their function, known as genomics, to transform genomic data and healthcare
data into products and services. The key elements of our strategy are as
follows:
- Gene and Drug Target Discovery. deCODE plans to pursue gene and drug
target discovery and the characterization of genes that contribute to
the causes of common diseases. In addition, we will study the functions
and effects of genes and the interactions of the proteins they produce
to define molecular pathways, which may contain drug targets.
- Database Subscription and Consulting Services. deCODE expects to
develop and operate the deCODE Combined Data Processing system, which is
intended to cross-reference non-personally identifiable healthcare
information on the Icelandic population in the Icelandic Health Sector
Database with genealogy data and genetic data obtained through consent.
In addition, we are developing new mathematical methods to extract
further knowledge from the deCODE Combined Data Processing system.
Services we plan to offer to future subscribers to the deCODE Combined
Data Processing system will include gene discovery and drug target
validation, pharmacogenomics, disease management and health management.
- Pharmacogenomics Partnerships. In collaboration with pharmaceutical
companies, we intend to apply the analysis and identification of genes
involved in responses to drugs, a field known as pharmacogenomics, to
understand differences in drug response among individuals. We believe
that genomics will permit scientists and physicians to identify the
genetic differences that cause different people to respond differently
to the same drugs and that, as a result, it will be possible to
individualize the selection of drugs for patients.
- Sale and Marketing of Healthcare Informatics Products. We plan to
exploit market opportunities for software tools that we develop during
the design and construction of the Icelandic Health Sector Database and
deCODE Combined Data Processing system and in our disease gene discovery
efforts. The software tools that we have already developed include
GeneMiner, DecodeGT, an encryption system, and a comprehensive sample
database. We expect to offer healthcare informatics services, such as
decision-support software and privacy solutions.
- Formation of Collaborations. We intend to seek corporate collaborations
or joint ventures with pharmaceutical and biotechnology companies to
provide research alliances, product development and commercialization
for our gene and drug target discovery programs.
deCODE was incorporated in Delaware in 1996. Our principal office is
located at Lynghals 1, Reykjavik, Iceland, our telephone number is +354-570-1900
and our address on the world wide web is www.decode.com.
------------------------
In this prospectus, references to us refer to us and our wholly-owned
subsidiary Islensk erfethagreining ehf., an Icelandic company.
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deCODE genetics(TM), the deCODE genetics logo, DecodeGT(TM), Allegro(TM),
and GeneMiner(TM) are trademarks of deCODE genetics, Inc. GeneChip(R) is a
registered trademark of Affymetrix Inc. Other trade names and trademarks
appearing in this prospectus are the property of their respective holders.
You should rely only on the information contained in this prospectus. We
have not authorized anyone to provide you with different information. If anyone
provides you with different or inconsistent information, you should not rely on
it. We are offering to sell, and seeking offers to buy, shares of common stock
only in jurisdictions where offers and sales are permitted. You should assume
that the information contained in this prospectus is accurate only as of the
date of this prospectus, unless such information is stated to be given as of
another date. Our business, financial condition, results of operations and
prospects may have changed since any such date.
5
<PAGE> 7
THE OFFERING
Common stock that we are
offering................. 9,600,000 shares
Friends and family
offering................... 500,000 shares are to be set aside by the
underwriters to be offered to a number of our
directors, officers, employees, friends and family
who have expressed an interest in subscribing for
shares in the offering. These shares are included
in the number of shares set forth under "Common
stock that we are offering."
Common stock to be
outstanding immediately
after this offering...... 42,990,343 shares
Use of Proceeds............ Our net proceeds from this offering, after
deduction of expenses payable by us, will be
approximately $158.1 million. We plan to use the
net proceeds from this offering for the development
and operation of the deCODE Combined Data
Processing system, to fund our research and
discovery programs, for capital expenditures and
for working capital and general corporate purposes.
See "Use of Proceeds."
Dividend Policy............ We intend to retain earnings, if any, for use in
our business and do not anticipate paying dividends
on our common stock in the foreseeable future. See
"Dividend Policy."
Quotations................. Our common stock has been approved for listing on
the Nasdaq National Market and the European
Association of Securities Dealers Automated
Quotation, or EASDAQ, in each instance under the
symbol "DCGN."
---------------
Unless we specifically state otherwise, the information in this prospectus
does not take into account our issuance of up to 1,440,000 shares of our common
stock which the underwriters have the option to purchase solely to cover
over-allotments. If the underwriters exercise their over-allotment option in
full, 44,430,343 shares of our common stock will be outstanding after the
offering.
The number of shares of our common stock to be outstanding immediately
after this offering includes 23,737,081 shares of our common stock that we will
issue upon the automatic conversion of all our outstanding shares of preferred
stock upon the closing of this offering. See "Description of
Securities -- Preferred Stock."
The number of shares of our common stock to be outstanding immediately
after this offering does not take into account 2,070,000 shares of our common
stock that we reserved for issuance upon exercise of outstanding options and
warrants or 1,478,500 shares of our common stock issuable under our 1996 Equity
Incentive Plan. For a description of the options, see "Description of
Securities -- Stock Options" and "Certain Transactions." For a description of
the warrants, see "Description of Securities -- Warrants and Other Rights to
Purchase."
6
<PAGE> 8
SUMMARY CONSOLIDATED FINANCIAL DATA
The following table presents consolidated summary financial data for
deCODE. We have derived the data presented in this table from "Selected
Consolidated Financial Data" and the consolidated financial statements and the
notes to those statements which we have included elsewhere in this prospectus.
You should read those sections for a further explanation of the financial data
summarized here. You should also read "Management's Discussion and Analysis of
Financial Condition and Results of Operations," which describes a number of
factors that have affected our financial results.
<TABLE>
<CAPTION>
INCEPTION
(AUGUST 23, THREE MONTHS ENDED
1996) TO YEAR ENDED DECEMBER 31, MARCH 31,
DECEMBER 31, ----------------------------------------- ---------------------------
1996 1997 1998 1999 1999 2000
------------ ----------- ------------ ------------ ------------ ------------
(UNAUDITED) (UNAUDITED)
<S> <C> <C> <C> <C> <C> <C>
CONSOLIDATED STATEMENT OF
OPERATIONS DATA:
Revenue...................... $ 0 $ 0 $ 12,705,000 $ 16,591,485 $ 4,507,489 $ 4,618,386
Operating Expenses
Research and development... 737,764 6,080,096 19,282,364 33,213,557 6,805,146 9,234,368
General and
administrative........... 454,873 1,967,684 4,893,202 8,220,758 2,208,749 2,946,337
----------- ----------- ------------ ------------ ------------ ------------
Total operating expenses..... 1,192,637 8,047,780 24,175,566 41,434,315 9,013,895 12,180,705
Operating loss............... (1,192,637) (8,047,780) (11,470,566) (24,842,830) (4,506,406) (7,562,319)
Equity in net earnings (loss)
of affiliate............... 0 0 0 (486,366) (278,780) 0
Interest income and other,
net........................ 40,005 (8,461) 562,336 1,540,749 97,514 664,180
Taxes........................ 0 0 0 0 0 0
----------- ----------- ------------ ------------ ------------ ------------
Net loss..................... (1,152,632) (8,056,241) (10,908,230) (23,788,447) (4,687,672) (6,898,139)
Accrued dividends and
amortized discount on
preferred stock............ (181,852) (620,385) (2,571,523) (7,542,787) (862,260) (2,379,378)
Premium on repurchase of
preferred stock............ 0 0 0 (30,887,044) 0 0
----------- ----------- ------------ ------------ ------------ ------------
Net loss available to common
stockholders............... $(1,334,484) $(8,676,626) $(13,479,753) $(62,218,278) $ (5,549,932) $ (9,277,517)
=========== =========== ============ ============ ============ ============
Basic and diluted net loss
per share.................. $ (1.10) $ (3.85) $ (3.06) $ (9.65) $ (0.97) $ (1.25)
Shares used in computing
basic and diluted net loss
per share(1)............... 1,213,925 2,254,413 4,400,576 6,446,055 5,749,963 7,419,439
Unaudited pro forma basic and
diluted net loss per
share...................... $ (0.86) $ (0.23)
Shares used in computing
unaudited pro forma basic
and diluted net loss per
share(1)................... 27,559,365 30,392,795
</TABLE>
The following table presents a summary of our balance sheet at March 31,
2000: on an actual basis; on a pro forma basis after giving effect to the
issuance of 23,031,525 shares of our common stock upon the automatic conversion
upon the closing of this offering of our Series A preferred stock, Series B
preferred stock and Series C preferred stock into shares of common stock; and on
a pro forma basis as adjusted to give effect to the issuance of 23,031,525
shares of our common stock upon that automatic conversion and the sale of
9,600,000 shares of common stock pursuant to this offering. We have based this
information on an initial public offering price of $18 per share, less the
estimated underwriters' discounts and commissions and offering expenses.
<TABLE>
<CAPTION>
AS OF MARCH 31, 2000
-------------------------------------------
PRO FORMA
ACTUAL PRO FORMA AS ADJUSTED
------------ ----------- ------------
(UNAUDITED) (UNAUDITED) (UNAUDITED)
<S> <C> <C> <C>
CONSOLIDATED BALANCE SHEET DATA:
Cash and cash equivalents................................... $ 40,707,864 $40,707,864 $198,766,864
Total assets................................................ 60,771,808 60,771,808 218,830,808
Total long-term liabilities................................. 5,043,482 5,043,482 5,043,482
Redeemable, convertible preferred stock..................... 124,030,726 0 0
Total stockholders' equity (deficit)........................ (79,866,924) 44,163,802 202,222,802
</TABLE>
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(1) See Note B of Notes to Consolidated Financial Statements for an explanation
of the determination of the shares used in computing basic and diluted net
loss per share and unaudited pro forma basic and diluted net loss per share.
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RISK FACTORS
The shares of common stock that we are offering through this prospectus
involve a substantial risk of loss. Before making an investment in the common
stock, you should carefully read this entire prospectus and should give
particular attention to the following risk factors. You should recognize that
other significant risks may arise in the future, which we cannot foresee at this
time. Also, the risks that we now foresee might affect us to a greater or
different degree than we currently expect. There are a number of important
factors that could cause our actual results to differ materially from those
indicated by the forward-looking statements contained in this prospectus. These
factors include, without limitation, the risk factors listed below and other
factors presented throughout this prospectus.
WE MAY NOT SUCCESSFULLY DEVELOP OR DERIVE REVENUES FROM ANY PRODUCTS OR SERVICES
DISCOVERY SERVICES
Our gene discovery programs are still in the early stages of development
and may not result in marketable products. We direct our technology and
development focus primarily toward identifying genes or gene fragments which are
responsible for, or indicate the presence of, certain diseases. We have only
identified twelve specific candidate genes under our research programs and have
not yet validated any disease genes. Our technologies and approach to gene
discovery may not enable us to identify successfully the specific genes that
cause or predispose individuals to the complex diseases that are the targets of
our gene discovery program, even where we have identified candidate genes. In
addition, the diseases we are targeting are generally believed to be caused by a
number of genetic and environmental factors. It may not be possible to address
such diseases through gene-based therapeutic or diagnostic products.
Accordingly, even if we are successful in identifying specific genes, our
discoveries may not lead to the development of commercial products.
Even if we, or our collaborators, are able to develop pharmaceutical
products, those products will fail to produce revenues unless they:
- are safe and effective;
- meet regulatory standards in a timely manner;
- successfully compete with other technologies and products;
- avoid infringing on the proprietary rights of others;
- can be manufactured in sufficient quantities at reasonable costs; and
- can be marketed successfully.
We are not certain that we will be able to achieve these conditions for
product revenues. We expect that it will be a number of years, if ever, before
we will recognize revenue from therapeutic or diagnostic product sales or
royalties on such sales.
Our initiatives in pharmacogenomics and the study of the function of genes,
a field known as functional genomics, are not certain to provide any revenues.
There may be no market for these services because of competition, lack of market
acceptance or our inability to develop these services successfully. We may not
be able to develop our functional genomics capabilities to a state that is
adequate for realizing revenues.
DATABASE SERVICES
We, through our wholly-owned subsidiary Islensk erfethagreining ehf.,
received a license permitting us to develop and operate the Icelandic Health
Sector Database in January 2000, and accordingly, are at the very early stages
of its development. The collection of genotypic data, which is another integral
part of the deCODE Combined Data Processing system, is also in the early stages
of development. We expect that it will take several years before we have fully
developed the deCODE Combined Data Processing system. We are presently devoting
substantial resources to the development of the deCODE Combined Data Processing
system and its components. We plan to continue to devote substantial resources
to this development for the foreseeable future. We cannot be
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sure that the deCODE Combined Data Processing system will result in marketable
products or services. Our intended method for cross-referencing genealogical,
genotypic and healthcare data is central to the development of the deCODE
Combined Data Processing system and is unproven. The success of our database
services is contingent upon:
- the development of the Icelandic Health Sector Database and collection
of genotypic data;
- the creation of database and cross-reference software that is free from
design defects or errors;
- compliance with governmental requirements regarding the Icelandic Health
Sector Database;
- the security and reliability of encryption technology;
- the cooperation of the Icelandic healthcare system;
- the ability to obtain blood samples from consenting Icelanders and
consents to the use of their genotypic data by cross-referencing through
the deCODE Combined Data Processing system;
- the usefulness of information derived through the deCODE Combined Data
Processing system in disease management, analysis of drug response, gene
discovery and drug target validation; and
- the development of marketing and pricing methods that the intended users
of the deCODE Combined Data Processing system will accept.
If we fail to successfully commercialize our database services, we will not
realize revenues from this part of our business.
HEALTHCARE INFORMATICS
Our bioinformatics, decision-support and privacy protection products have,
to date, been tested only in connection with our own use of them and they may
not meet the needs of potential customers. We are at an early stage of
development of our medical decision-support systems for healthcare providers,
and we have generated no revenues from sales or licenses of bioinformatics,
decision-support, or privacy protection products. To date we have not produced
any decision-support tools and there can be no assurance that we can
successfully develop or commercialize medical decision-support systems or that
there will be a market for our bioinformatics, decision-support or privacy
protection products for healthcare delivery.
IF OUR ASSUMPTION ABOUT THE ROLE OF GENES IN DISEASE IS WRONG, WE MAY NOT BE
ABLE TO DEVELOP USEFUL PRODUCTS
The products we hope to develop involve new and unproven approaches. They
are based on the assumption that information about genes may help scientists
better understand complex disease processes. Scientists generally have a limited
understanding of the role of genes in diseases, and few products based on gene
discoveries have been developed. Of the products that exist, all are diagnostic
products. To date, we know of no therapeutic products based on disease gene
discoveries. If our assumption about the role of genes in the disease process is
wrong, our gene discovery programs may not result in products, the genetic data
included in our database and informatics products may not be useful to our
customers and those products may lose any competitive advantage.
IF WE CONTINUE TO INCUR OPERATING LOSSES FOR A PERIOD LONGER THAN ANTICIPATED,
OR IN AN AMOUNT GREATER THAN ANTICIPATED, WE MAY BE UNABLE TO CONTINUE OUR
OPERATIONS
We incurred net losses available to common stockholders of $9,277,517 for
the quarter ended March 31, 2000, $62,218,278 for the year ended December 31,
1999, $13,479,753 for the year ended December 31, 1998, and $8,676,626 for the
year ended December 31, 1997. As of March 31, 2000, we had an accumulated
deficit of $84,262,482. To date, we have never generated a profit and we have
not generated any significant revenues except for payments received in
connection with our research collaboration with Roche and interest revenues. The
development of our technologies will require substantial increases in
expenditures over the next several years. In addition, we expect to spend more
in connection with our internal research programs and the preparation of the
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Icelandic Health Sector Database, the deCODE Combined Data Processing system and
informatics. As a result, we expect to incur operating losses for several years.
If the time required to generate product revenues and achieve profitability is
longer than we currently anticipate or the level of operating losses is greater
than we currently anticipate, we may not be able to continue our operations.
IF WE ARE NOT ABLE TO OBTAIN SUFFICIENT ADDITIONAL FUNDING TO MEET OUR EXPANDING
CAPITAL REQUIREMENTS, WE MAY BE FORCED TO REDUCE OR TERMINATE OUR RESEARCH
PROGRAMS AND PRODUCT DEVELOPMENT
We have used substantial amounts of cash to fund our research and
development activities. We expect our capital and operating expenditures to
increase over the next several years as we expand our research and development
activities, construct the Icelandic Health Sector Database and the deCODE
Combined Data Processing system, collect the genotype data and develop
healthcare informatics products. Many factors will influence our future capital
needs, including:
- the progress of our discovery and research programs;
- the number and breadth of these programs;
- our ability to attract collaborators for, subscribers to or customers
for our products and services;
- our achievement of milestones under our research collaboration agreement
with Roche;
- our ability to establish and maintain additional collaborations;
- our collaborators' progress in commercializing our gene discoveries;
- the level of our activities relating to commercialization rights we
retain in our collaborations;
- competing technological and market developments;
- the costs involved in enforcing patent claims and other intellectual
property rights; and
- the costs and timing of regulatory approvals.
We intend to rely on Roche and future collaborators for significant funding
in support of our research efforts. In addition, we may seek additional funding
through public or private equity offerings and debt financings. Additional
financing may not be available when needed. If available, such financing may not
be on terms favorable to us or our stockholders. Stockholders' ownership will be
diluted if we raise additional capital by issuing equity securities. If we raise
additional funds through collaborations and licensing arrangements, we may have
to relinquish rights to certain of our technologies or product candidates, or
grant licenses on unfavorable terms. If adequate funds are not available, we
would have to scale back or terminate our discovery and research programs and
product development. We believe that the net proceeds from this offering,
existing cash and investment securities and anticipated cash flow from Roche
will be sufficient to support our current operating plan at least through 2001.
We have based this belief on assumptions that may prove wrong.
IF WE DO NOT MAINTAIN THE GOODWILL AND RECEIVE THE COOPERATION OF THE ICELANDIC
POPULATION, WE MAY BE UNABLE TO PURSUE OUR GENE IDENTIFICATION PROGRAMS,
PHARMACOGENOMICS OR FUNCTIONAL GENOMICS EFFORTS, COLLECT GENOTYPE DATA OR
DEVELOP THE ICELANDIC HEALTH SECTOR DATABASE AND THE DECODE COMBINED DATA
PROCESSING SYSTEM
Our approach to gene identification and the development and maintenance of
genotype data, the Icelandic Health Sector Database and the deCODE Combined Data
Processing system depend on the goodwill and cooperation of the Icelandic
population, including the Icelandic government and the healthcare system. Our
development of the Icelandic Health Sector Database will be impaired if
individual Icelanders refuse to allow information from their medical records to
be included in the Icelandic Health Sector Database or healthcare providers
attempt to prevent us from having access to medical records of their patients.
Individuals may opt-out of having their records included in the Icelandic Health
Sector Database. To date approximately 6.5% of the population has exercised this
right. Some doctors practicing in Iceland have expressed opposition to the
Icelandic Health Sector Database and may attempt to withhold their patients'
data from inclusion in such database or
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encourage their patients to exercise their opt-out rights. Our development of
genotype data and our cross-referencing through the deCODE Combined Data
Processing system of that data with information about the manifestations of
disease, which are known as phenotypes, in the Icelandic Health Sector Database
require that a substantial portion of the Icelandic population provide us with
blood samples for genotyping and consent to the use of their DNA to
cross-reference molecular genetics data with the Icelandic Health Sector
Database. To date, between eighty and ninety percent of individuals that we have
asked to participate in our research projects have done so. Because only a small
portion of the Icelandic population may carry certain mutations, the
unwillingness of even a small portion of the population to participate in our
programs could diminish our ability to develop and market information based on
the use of genotypic data.
OUR RELIANCE ON THE ICELANDIC POPULATION IN OUR GENE DISCOVERY PROGRAMS AND
DATABASE SERVICES MAY LIMIT THE APPLICABILITY OF OUR DISCOVERIES TO CERTAIN
POPULATIONS
In general, the genetic make-up and prevalence of disease vary across
populations around the world. Common complex diseases generally occur with a
similar frequency in Iceland as in other western countries. We are already
studying some of these diseases in our gene discovery programs. However, the
populations of other western nations may be genetically predisposed to certain
diseases because of mutations not present in the Icelandic population. As a
result, we and our partners may take more time or may be unable to develop
diagnostic products that are effective on all, or a portion, of those people
with such diseases. Similarly, any difference between the Icelandic population
and the populations of other countries may have an effect on the usefulness of
the Icelandic Health Sector Database and deCODE Combined Data Processing system
in studying disease in populations of countries other than Iceland. We do not
anticipate developing any products solely for the Icelandic market. For our
business to succeed, we must apply discoveries that we make on the basis of the
Icelandic population to other markets.
OUR CREATION AND OPERATION OF THE ICELANDIC HEALTH SECTOR DATABASE IS BASED UPON
A LICENSE FROM THE ICELANDIC MINISTRY OF HEALTH AND SOCIAL SECURITY AND IS
SUBJECT TO GOVERNMENT SUPERVISION AND REGULATION, WHICH MAY MAKE OUR DEVELOPMENT
OF DATABASE PRODUCTS MORE EXPENSIVE AND TIME-CONSUMING THAN WE ANTICIPATED
We may construct the Icelandic Health Sector Database and cross-reference
it with our genealogical and genetic data, through the deCODE Combined Data
Processing system, only in accordance with the stipulations of the Icelandic
Health Sector Database license which the Ministry of Health and Social Security,
or the Ministry, granted us pursuant to the Act on a Health Sector Database no.
139/1998, or the Act. The license permits the processing of healthcare data from
healthcare records and other relevant data into the Icelandic Health Sector
Database. The Monitoring Committee, the Data Protection Commission of Iceland
and an Interdisciplinary Ethics Committee will supervise our construction and
operation of the Icelandic Health Sector Database. These committees report to
the Ministry. In addition, the Icelandic Bioethics Committee will review our
operation of the Icelandic Health Sector Database. The Ministry may withdraw our
license in the event that we violate the terms and conditions of the Icelandic
Health Sector Database license, the Act or its rules. In addition, the Icelandic
parliament could amend the Act in ways which would adversely affect our ability
to develop or market the Icelandic Health Sector Database and, consequently, the
deCODE Combined Data Processing system. Because the Icelandic parliament and
government recently adopted the Act and its rules, there is no precedent
interpreting the Act or the rules.
In preparing the Icelandic Health Sector Database, we must comply with the
Data Protection Commission's technical requirements. These technical
requirements cover areas such as data encryption and privacy protection. The
Data Protection Commission may review these requirements from time to time and
may require greater technical capabilities than we currently have. Compliance
with these requirements can be expensive and time-consuming and may delay the
development of the Icelandic Health Sector Database and the deCODE Combined Data
Processing system or make such development more expensive than we anticipated.
In addition, the agencies imposing these requirements will evaluate our
compliance efforts. We cannot control the time required for this evaluation, and
accordingly, the evaluation process may lead to delay in the development of the
Icelandic Health Sector Database and the deCODE Combined Data Processing system.
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The Interdisciplinary Ethics Committee has the power to withdraw permission
for any types of research programs in the Icelandic Health Sector Database not
conducted in accordance with international rules of bioethics.
At the expiration of the Icelandic Health Sector Database license, we are
required to ensure that the Ministry or its designee will receive, without
payment of consideration, intellectual property rights necessary for the
creation and operation of the database for public health purposes and for
scientific research.
We are subject to a very extensive indemnity clause in our agreement with
the Ministry, pursuant to which:
- we have agreed not to make any claim against the government if the Act
or the license are amended as a result of the Act or rules relating to
the Icelandic Health Sector Database being found to be inconsistent with
the rules of the European Economic Area, or EEA, or other international
rules and agreements to which Iceland is or becomes a party;
- we have agreed that if the Icelandic State, by a final judgment, is
found to be liable or subject to payment to any third party as a result
of the passage of legislation on the Icelandic Health Sector Database
and/or issuance of the Icelandic Health Sector Database license, we will
indemnify it against all damages and costs in connection with the
litigation; and
- we have agreed to compensate any third parties with whom the Icelandic
government negotiates a settlement of liability claims arising from the
legislation on the Icelandic Health Sector Database and/or the issuance
of the Icelandic Health Sector Database license, provided that the
Icelandic government demonstrates that it was justified in agreeing to
make payments pursuant to the settlement.
IF WE ARE NOT ABLE TO ENTER INTO AGREEMENTS WITH ICELANDIC HEALTH INSTITUTIONS,
AS THE ICELANDIC HEALTH SECTOR DATABASE LICENSE REQUIRES, IN ORDER TO COLLECT
DATA FROM THE INSTITUTIONS, WE WILL NOT BE ABLE TO CONSTRUCT AND OPERATE THE
ICELANDIC HEALTH SECTOR DATABASE
The Icelandic Health Sector Database license requires us to enter into
agreements with Icelandic health institutions and self-employed health service
workers regarding access to and the processing of information from medical
records. To date we have not entered into any such agreements. We cannot be
certain that we will be able to enter into such agreements or that such
agreements will be on terms favorable to us. Some doctors practicing in Iceland
have expressed opposition to the Icelandic Health Sector Database and it is
possible that they may refuse to enter into such agreements or may encourage
health institutions which employ them to refuse to do so. We cannot be certain
that individuals within health institutions will adhere to the requirements of
such agreements. The Icelandic Medical Association is currently publicly
opposing the Icelandic Health Sector Database. Our inability to enter into such
agreements on favorable terms or in a timely manner, or to obtain others'
compliance with the terms of such agreements, could have a material adverse
effect on our ability to construct and operate the Icelandic Health Sector
Database.
IF WE CANNOT OBTAIN AN EXTENSION OF THE TERM OF THE ICELANDIC HEALTH SECTOR
DATABASE LICENSE BEYOND ITS EXPIRATION DATE IN JANUARY 2012, WE WILL NOT BE ABLE
TO OPERATE OR DERIVE RESOURCES FROM THE ICELANDIC HEALTH SECTOR DATABASE OR THE
DECODE COMBINED DATA PROCESSING SYSTEM AFTER THAT DATE
Even if we are successful in creating and marketing the Icelandic Health
Sector Database and the deCODE Combined Data Processing system, the Icelandic
Health Sector Database license will expire in January 2012 unless we are able to
obtain an extension. There is no assurance that we will obtain further access
rights on favorable terms, if at all. Our negotiations with healthcare
institutions, the process of genotyping and the development of database
infrastructure, among other factors, will determine when we can begin marketing
the deCODE Combined Data Processing system. We expect that the Icelandic Health
Sector Database and the deCODE Combined Data Processing system will not be fully
operational for up to five years. The Icelandic Health Sector Database license
will be subject to a review in 2008, and at that time, in accordance with an
agreement we entered into with the Ministry simultaneously with the granting of
the Icelandic Health Sector Database license, we and the Ministry will enter
into discussions on renewal of the license at the end of the term. The Ministry
might not renew the Icelandic Health Sector Database license and we cannot
guarantee any renewal.
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WE MAY NOT BE ABLE TO FORM AND MAINTAIN THE COLLABORATIVE RELATIONSHIPS THAT OUR
BUSINESS STRATEGY REQUIRES
Our strategy for deriving revenues from the discovery of genes and the
development of products based upon our discoveries depends upon the formation of
research collaborations and licensing arrangements with several partners at the
same time. We currently have only two collaborative relationships. To succeed,
we will have to maintain these relationships and establish additional
collaborations. We cannot be sure that we will be able to establish the
additional research collaborations or licensing arrangements necessary to
develop and commercialize products using our technology, that any future
collaborations or licensing arrangements will be on terms favorable to us, or
that current or future collaborations or licensing arrangements ultimately will
be successful. If we are not able to manage multiple collaborations
successfully, our programs will suffer.
We also expect to rely on collaborations in other parts of our business
such as the construction of the deCODE Combined Data Processing system. During
the development of the deCODE Combined Data Processing system, we intend to
pursue collaborations to assist us in the development of certain of its
components. Such collaborations may involve the use of particular technologies
or collaborative development and marketing activities. If we are unable to enter
into such collaborations on favorable terms, our ability to commercialize the
deCODE Combined Data Processing system will be adversely affected.
To develop our healthcare informatics products, we also plan to rely on
collaborative relationships. To date we have not established any such
collaborative relationships. If we are unable to form or maintain such
collaborative arrangements, our healthcare informatics operations will be
adversely affected.
OUR DEPENDENCE ON COLLABORATIVE RELATIONSHIPS MAY LEAD TO DELAYS IN PRODUCT
DEVELOPMENT AND DISPUTES OVER RIGHTS TO TECHNOLOGY
Under our current strategy, and for the foreseeable future, we do not
expect to develop or market pharmaceutical products on our own. As a result, we
will be dependent on collaborators for the pre-clinical study and clinical
development of therapeutic and diagnostic products and for regulatory approval,
manufacturing and marketing of any products that result from our technology. Our
agreements with pharmaceutical collaborators or collaborators for gene research
projects will typically allow them significant discretion in electing whether to
pursue such activities. We cannot control the amount and timing of resources
collaborators will devote to our programs or potential products. Our
collaborations may have the effect of limiting the areas of research that we may
pursue either alone or with others.
In addition, we expect to develop our database products, in part, with
various collaborators, and we may develop healthcare informatics tools which are
designed to work in conjunction with or to enhance the healthcare informatics
tools of other developers. These arrangements may place responsibility for key
aspects of product development and marketing on our collaborative partners.
Accordingly, the performance of these key aspects is uncertain and beyond our
direct control. If our collaborators fail to perform their obligations, our
database products could contain erroneous data, design defects, viruses or
software defects that are difficult to detect and correct and may adversely
affect our revenues and the market acceptance of our products.
If any pharmaceutical, healthcare informatics or database collaborator were
to breach or terminate its agreement with us, or otherwise fail to conduct
collaborative activities successfully and in a timely manner, the development or
commercialization of products, services, technologies or research programs may
be delayed or terminated.
Competing products that our collaborators develop or to which our
collaborators have rights may result in their withdrawal of support for our
products and services.
Disputes may arise in the future over the ownership of rights to any
technology developed with collaborators. These and other possible disagreements
between us and our collaborators could lead to delays in the collaborative
research, development or commercialization of products. Such disagreements could
also result in litigation or require arbitration to resolve.
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ETHICAL AND PRIVACY CONCERNS MAY LIMIT OUR ABILITY TO DEVELOP AND USE THE
ICELANDIC HEALTH SECTOR DATABASE AND THE DECODE COMBINED DATA PROCESSING SYSTEM
AND MAY LEAD TO LITIGATION AGAINST US OR THE ICELANDIC GOVERNMENT
The Icelandic parliament's passage of the Act and the Ministry's granting
of the Icelandic Health Sector Database license have raised ethical and privacy
concerns in Iceland and internationally among healthcare professionals and
others including the Icelandic Medical Association and the World Medical
Association. In April 1999, the World Medical Association stated that it
supported the position of the Icelandic Medical Association in opposing the Act.
At its October 1999 annual general meeting, the Icelandic Medical Association
adopted resolutions declaring its opposition to the Act based on various ethical
concerns. Ethical and privacy concerns about the development and use of the
Icelandic Health Sector Database and the deCODE Combined Data Processing system
may lead to litigation in U.S., Icelandic or other national courts, or in
international courts such as the European Court of Human Rights in Strasbourg
(e.g., on the basis of an alleged breach of the patient-doctor confidential
relationship, constitutional privacy issues, international conventions dealing
with protection of privacy issues or human rights conventions). The results of
such litigation could have a material adverse affect on our ability to construct
and operate the Icelandic Health Sector Database and the deCODE Combined Data
Processing system.
CERTAIN PARTIES HAVE ANNOUNCED AN INTENTION TO INSTITUTE LITIGATION TESTING THE
CONSTITUTIONALITY OF THE ACT, WHICH COULD DELAY OR PREVENT US FROM DEVELOPING
AND OPERATING THE ICELANDIC HEALTH SECTOR DATABASE AND THE DECODE COMBINED DATA
PROCESSING SYSTEM
In February 2000, an organization known as The Association of Icelanders
for Ethics in Science and Medicine, or Mannvernd, and a group of physicians and
other citizens issued a press release announcing their intention to file
lawsuits against the State of Iceland and any other relevant parties, including
deCODE, to test the constitutionality of the Act. According to the press
release, the intended lawsuit will allege that the Act and the Icelandic Health
Sector Database license involve human rights violations and will challenge the
validity of provisions of the Act which allow the use of presumed consent for
the processing of health data into the Icelandic Health Sector Database and the
grant of a license to operate a single database. deCODE believes that any such
litigation would be without merit and intends to defend vigorously any such
action in which we become a party. However, in the event that the Icelandic
State by a final judgment is found to be liable or subject to payment to any
third party as a result of the passage of legislation on the Icelandic Health
Sector Database and/or the issuance of the Icelandic Health Sector Database
license, our agreement with the Ministry requires us to indemnify the Icelandic
State against all damages and costs incurred in connection with such litigation.
In addition, the pendency of such litigation could lead to delay in the
development of the Icelandic Health Sector Database and the deCODE Combined Data
Processing System, and an unfavorable outcome would prevent us from developing
and operating the Icelandic Health Sector Database and the deCODE Combined Data
Processing system.
IF WE FAIL TO PROTECT CONFIDENTIAL DATA ADEQUATELY, WE COULD INCUR LIABILITY OR
LOSE OUR LICENSE
The Act and our license require us to encrypt all patient data and to take
other actions to ensure confidentiality of data included in the Icelandic Health
Sector Database and restrict access to it. We are developing the Icelandic
Health Sector Database according to the Data Protection Commission's technology,
security and organizational terms. The Data Protection Commission may
periodically review and amend such terms in light of new technology or change of
circumstances. We must comply with any such revised data protection terms within
a deadline which the Data Protection Commission may establish when it revises
the terms. Although, to date, one expert in this field has criticized the
security terms, we believe that they are, and will continue to be, in line with
international best industry-practice standards. In addition, the customers for
other products we may develop may impose confidentiality requirements.
Accidental disclosures of confidential data may result from technical failures
in encryption technology or from human error by our employees or those of our
customers or collaborators. Any failure to comply fully with all confidentiality
requirements could lead to liability for damages incurred by individuals whose
privacy is violated, the loss of the Icelandic Health Sector
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Database license, the loss of our customers and reputation and the loss of the
goodwill and cooperation of the Icelandic population including healthcare
professionals.
ETHICAL AND PRIVACY CONCERNS MAY LIMIT THE USE OF GENETIC TESTING AND THEREFORE
THE COMMERCIAL LIABILITY OF ANY PRODUCTS WE DEVELOP
Other companies have developed genetic predisposition tests that have
raised ethical concerns. It is possible that employers or others could
discriminate against people who have a genetic predisposition to certain
diseases. Concern regarding possible discrimination may result in governmental
authorities enacting restrictions or bans on the use of all, or certain types
of, genetic testing. Similarly, such concerns may lead individuals to refuse to
use genetics tests even if permissible. These factors may limit the market for,
and therefore the commercial viability of, products that we and our
collaborators develop.
WE MAY NOT BE ABLE TO COMPETE SUCCESSFULLY WITH BIOTECHNOLOGY COMPANIES AND
ESTABLISHED PHARMACEUTICAL COMPANIES IN THE DEVELOPMENT AND MARKETING OF
PRODUCTS BASED UPON THE IDENTIFICATION OF DISEASE-CAUSING GENES
A number of companies are attempting to rapidly identify and patent genes
that cause diseases or an increased susceptibility to diseases. Competition in
this field is intense and is expected to increase. We have numerous competitors,
including major pharmaceutical and diagnostic companies, specialized
biotechnology firms, universities and other research institutions, the United
States-funded Human Genome Project and other government-sponsored entities. Many
of our competitors have considerably greater capital resources, research and
development staffs and facilities, and technical and other resources than we do,
which may allow them to discover important genes before we do. We believe that a
number of our competitors are developing competing products and services that
may be commercially successful and that are further advanced in development than
our potential products and services. To succeed, we, together with our
collaborators, must discover disease-predisposing genes, characterize their
functions, develop genetic tests or therapeutic products and related information
services based on such discoveries, obtain regulatory and other approvals, and
launch such services or products before competitors. Even if our collaborators
or we are successful in developing effective products or services, our products
and services may not successfully compete with those of our competitors. Our
competitors may succeed in developing and marketing products and services that
are more effective than ours or that are marketed before ours.
Our collaboration with Roche does not prevent it from initiating its own
gene research or developing products based upon its, or any other party's, gene
research. Such products may compete with any products that we develop through
our gene discovery programs. We expect that future collaborations may allow our
future partners to undertake research and develop products on their own or with
third parties.
Competitors have established, and in the future may establish, patent
positions with respect to gene sequences related to our research projects. Such
patent positions or the public availability of gene sequences comprising
substantial portions of the human genome could decrease the potential value of
our research projects and make it more difficult for us to compete. We may also
face competition from other entities in gaining access to DNA samples used for
research and development purposes.
We expect competition to intensify as technical advances are made and
become more widely known. Our future success will depend in large part on
maintaining a competitive position in the genomics field. Others' or our rapid
technological development may result in products or technologies becoming
obsolete before we recover the expenses we incur in developing them. Less
expensive or more effective technologies could make future products obsolete. We
cannot be certain that we will be able to make the necessary enhancements to any
products we develop to compete successfully with newly emerging technologies.
WE MAY NOT BE ABLE TO COMPETE SUCCESSFULLY WITH ESTABLISHED COMPANIES AND
GOVERNMENT AGENCIES IN THE FIELD OF DATABASE SERVICES
Others are currently developing or marketing a number of databases to
assist participants in the healthcare industry and academic researchers in the
management and analysis of their own genomic data and data available
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in the public domain. Although we believe that our existing genealogy database
and our license to construct and operate the Icelandic Health Sector Database
provide us with a unique opportunity to cross-reference databases that include
genetic makeup, genealogy, medical history, disease symptoms, resource use and
treatment outcomes, we cannot be sure that any of the databases that we create
will achieve greater market acceptance than those of our competitors. We plan to
grant limited Internet access to our genealogy data to the Icelandic public for
non-business use. Although our genealogy data will be restricted both by
technical and legal means, it is possible that this Internet access will in some
way facilitate the construction of similar databases intended for commercial
purposes.
WE MAY NOT BE ABLE TO COMPETE SUCCESSFULLY WITH OTHER COMPANIES IN THE FIELD OF
HEALTHCARE INFORMATICS
The healthcare informatics field is highly competitive. Many companies
compete with us to develop healthcare informatics similar to our expected
products, including products relating to medical record maintenance, medical
decision-support systems and systems design. We expect that competition will
continue to intensify. Many of our competitors have significantly greater
financial resources and market presence than we have. We cannot be sure that any
products that we develop in the field of healthcare informatics, including
medical decision-support systems, will compete effectively with those of our
competitors.
REGULATORY AUTHORITIES MAY DETERMINE THAT OUR LICENSE TO DEVELOP THE ICELANDIC
HEALTH SECTOR DATABASE INFRINGES UPON COMPETITION RULES IN THE EUROPEAN ECONOMIC
AREA, OR EEA, WHICH COULD NEGATIVELY AFFECT OUR ABILITY TO DERIVE REVENUES FROM
THE ICELANDIC HEALTH SECTOR DATABASE AND THE DECODE COMBINED DATA PROCESSING
SYSTEM
Iceland is a member of the European Free Trade Association, or EFTA,
together with Norway, Switzerland and Liechtenstein. Through this membership,
Iceland has become a part of the EEA which was created by the EEA agreement
between EFTA and the European Union, or EU. The EEA agreement extends the EU
internal market and its regulations to EFTA countries that adopt certain EU
legislation. Accordingly, Iceland is subject to both EFTA and EU competition and
public procurement rules. In April 1999, Mannvernd announced that it had filed a
complaint with the EFTA Surveillance Authority alleging that, by passing the
Act, the Icelandic government violated its obligations under the EEA agreement.
By letters dated April 17, 2000, the EFTA Surveillance Authority notified the
Ministry and Mannvernd that on the basis of information then available to it, it
was of the opinion that there is currently no reason for it to take further
action in this matter. However, the EFTA Surveillance Authority may reconsider
the matter in the event of legal or factual changes. A determination that the
Act or our Icelandic Health Sector Database license is in breach of such rules
could result in a revocation or dilution of the license and could have a
negative impact on the profitability and marketing potential of the deCODE
Combined Data Processing system.
OTHERS MAY CLAIM INTELLECTUAL PROPERTY RIGHTS TO OUR GENEALOGY DATABASE, WHICH
COULD PREVENT US FROM USING SOME OR ALL OF OUR DATABASE AND IMPAIR OUR ABILITY
TO DERIVE REVENUES FROM OUR DATABASE AND GENE DISCOVERY SERVICES
We are aware that there are other firms and individuals who have prepared,
or are currently preparing, genealogy databases similar to the one we have
developed. If any parties should successfully claim that the creation or use of
any of our databases infringes upon their intellectual property rights, it could
have a material adverse effect on our business. Recently, two holders of
copyrights in approximately 100 Icelandic genealogy books have filed a copyright
infringement suit against us in Iceland claiming that we have used data from
these books in the creation of our genealogy database, in violation of their
rights. The claimants seek a declaratory judgment to prevent our use of the
database and monetary damages in the amount of approximately $9,000,000. We
believe that this suit is without merit and intend to defend it vigorously, but
if it were successful it could have a material adverse effect on our database
and gene discovery services.
WE MAY NOT BE ABLE TO PROTECT THE PROPRIETARY RIGHTS THAT ARE CRITICAL TO OUR
SUCCESS
Our success will depend on our ability to protect our genealogy database
and genotypic data and any other proprietary databases that we develop,
proprietary software and other proprietary methods and technologies. Despite our
efforts to protect our proprietary rights, unauthorized parties may be able to
obtain and use information that we regard as proprietary.
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Our commercial success will depend in part on obtaining patent protection.
The patent positions of pharmaceutical, biopharmaceutical and biotechnology
companies, including ours, are generally uncertain and involve complex legal and
factual considerations. We cannot be sure that any of our pending patent
applications will result in issued patents, that we will develop additional
proprietary technologies that are patentable, that any patents issued to us or
our partners will provide a basis for commercially viable products, will provide
us with any competitive advantages or will not be challenged by third parties,
or that the patents of others will not have an adverse effect on our ability to
do business.
In addition, patent law relating to the scope of claims in the area of
genetics and gene discovery is still evolving. There is substantial uncertainty
regarding the patentability of genes or gene fragments without known functions.
The laws of some European countries provide that genes and gene fragments may
not be patented. The Commission of the EU has passed a directive which prevents
the patenting of genes in their natural state. The U.S. Patent and Trademark
Office initially rejected a patent application by the National Institutes of
Health on partial genes. Accordingly, the degree of future protection for our
proprietary rights is uncertain and, we cannot predict the breadth of claims
allowed in any patents issued to us or to others. We could also incur
substantial costs in litigation if we are required to defend ourselves in patent
suits brought by third parties or if we initiate such suits.
Others may have filed and in the future are likely to file patent
applications covering genes or gene products that are similar or identical to
our products. We cannot be certain that our patent applications will have
priority over any patent applications of others. The mere issuance of a patent
does not guarantee that it is valid or enforceable; thus even if we are granted
patents we cannot be sure that they would be valid and enforceable against third
parties. Further, a patent does not provide the patent holder with freedom to
operate in a way that infringes the patent rights of others. Any legal action
against us or our partners claiming damages and seeking to enjoin commercial
activities relating to the affected products and processes could, in addition to
subjecting us to potential liability for damages, require us or our partners to
obtain a license in order to continue to manufacture or market the affected
products and processes. There can be no assurance that we or our partners would
prevail in any action or that any license required under any patent would be
made available on commercially acceptable terms, if at all. If licenses are not
available, we or our partners may be required to cease marketing our products or
practicing our methods.
If expressed sequence tags, single nucleotide polymorphisms, or SNPs, or
other sequence information become publicly available before we apply for patent
protection on a corresponding full-length or partial gene, our ability to obtain
patent protection for those genes or gene sequences could be adversely affected.
In addition, other parties are attempting to rapidly identify and characterize
genes through the use of gene expression analysis and other technologies. If any
patents are issued to other parties on these partial or full-length genes or
uses for such genes, the risk increases that the sale of our or our
collaborators' potential products or processes may give rise to claims of patent
infringement. The amount of supportive data required for issuance of patents for
human therapeutics is highly uncertain. If more data than we have available is
required, our ability to obtain patent protection could be delayed or otherwise
adversely affected. Even with supportive data, the ability to obtain patents is
uncertain in view of evolving examination guidelines, such as the utility and
written description guidelines that the U.S. Patent and Trademark Office has
proposed.
While we require employees, academic collaborators and consultants to enter
into confidentiality agreements, there can be no assurance that proprietary
information will not be disclosed, that others will not independently develop
substantially equivalent proprietary information and techniques, otherwise gain
access to our trade secrets or disclose such technology, or that we can
meaningfully protect our trade secrets.
If the information processed by the deCODE Combined Data Processing system
is disclosed without our authorization, demand for our products and services may
be adversely affected.
IF WE OR OUR COLLABORATORS ARE UNABLE TO OBTAIN REGULATORY APPROVALS FOR
PRODUCTS RESULTING FROM OUR GENE DISCOVERY PROGRAMS, WE WILL NOT BE ABLE TO
DERIVE REVENUES FROM THESE PRODUCTS
Government agencies must approve new drugs and diagnostic products in the
countries in which they are to be marketed. We cannot be certain that regulatory
approval for any drugs or diagnostic products resulting from
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our gene discovery programs will be obtained. The regulatory process can take
many years and require substantial resources. Because some of the products
likely to result from our disease research programs involve the application of
new technologies and may be based upon a new therapeutic approach, various
government regulatory authorities may subject such products to substantial
additional review. As a result, these authorities may grant regulatory approvals
for these products more slowly than for products using more conventional
technologies. Furthermore, regulatory approval may impose limitations on the use
of a drug or diagnostic product.
After initial regulatory approval, a marketed product and its manufacturer
must undergo continuing review. Discovery of previously unknown problems with a
product may have adverse effects on our business, financial condition and
results of operations, including withdrawal of the product from the market.
OUR DEPENDENCE UPON A SINGLE THIRD PARTY FOR SEQUENCING MACHINES MAY IMPAIR OUR
RESEARCH PROGRAMS
We currently use a single manufacturer to supply the gene sequencing
machines that we use in our gene discovery programs. While other types of gene
sequencing machines are available from other manufacturers, we do not believe
that the other machines are as efficient as the machines we currently use. We
cannot be sure that the gene sequencing machines will remain available in
sufficient quantities at acceptable costs. If we cannot obtain additional gene
sequencing machines at commercially reasonable rates, or if we are required to
change to a new supplier of gene sequencing machines, our gene discovery
programs would be adversely affected.
WE MAY NOT BE ABLE TO OBTAIN NECESSARY TECHNOLOGY
We have acquired or licensed certain components of our technologies from
third parties. Changes in or termination of these third party agreements could
materially adversely affect our discovery or research programs. We cannot be
certain that we will be able to acquire any new technologies which we need.
WE WILL HAVE TO RELY ON OTHERS FOR CLINICAL TRIALS, MANUFACTURING, MARKETING,
REGULATORY COMPLIANCE AND SALES CAPABILITIES, WHICH MAY IMPAIR OUR ABILITY TO
DELIVER PRODUCTS
In our research collaborations, we will seek to retain rights to develop
and market certain therapeutic and diagnostic products or services. If we are
able to retain these rights and successfully develop products, we expect to
contract with others for conducting clinical trials, manufacturing, marketing
and sales.
We are not certain that we will be able to enter into such arrangements on
favorable terms, if at all. Our dependence upon third parties for the conduct of
clinical trials, the obtaining of governmental approvals or the manufacture,
marketing or sales of products may adversely affect our ability to develop and
deliver products on a timely and competitive basis. Our current facilities and
staff are inadequate for commercial production and distribution of products. If
we choose in the future to engage directly in the development, manufacturing and
marketing of certain products, we will require substantial additional funds,
personnel and production facilities.
EFFORTS TO REDUCE HEALTHCARE COSTS MAY REDUCE MARKET ACCEPTANCE OF OUR PRODUCTS
Our success will depend in part on the extent to which government and
health administration authorities, private health insurers and other third party
payors will pay for our products. Reimbursement for newly approved healthcare
products is uncertain. Third party payors, including Medicare in the U.S., are
increasingly challenging the prices charged for medical products and services.
Government and other third party payors are increasingly attempting to contain
healthcare costs by limiting both coverage and the level of reimbursement for
new therapeutic products. We cannot be certain that any third party insurance
coverage will be available to patients for any products we discover or develop.
If government or other third party payors do not provide adequate coverage and
reimbursement levels for our products, the market acceptance of these products
may be materially reduced.
OUR OPERATIONS MAY BE IMPAIRED UNLESS WE CAN SUCCESSFULLY MANAGE OUR GROWTH
We have recently experienced significant growth in the number of our
employees and the scope of our operations. We intend to hire additional
personnel to construct the Icelandic Health Sector Database and the
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deCODE Combined Data Processing system, and to develop our healthcare
informatics products. Our management and operations are, and may continue to be,
under significant strain due to this growth. To manage such growth, we must
strengthen our management team and attract and retain skilled employees. Our
success will also depend on our ability to improve our management information,
research information and operational control systems and to expand, train and
manage our workforce.
USE OF THERAPEUTIC OR DIAGNOSTIC PRODUCTS DEVELOPED AS A RESULT OF OUR PROGRAMS
MAY RESULT IN LIABILITY CLAIMS FOR WHICH WE HAVE INADEQUATE INSURANCE
The users of any therapeutic or diagnostic products developed as a result
of our discovery or research programs or the use of our database or medical
decision-support products may bring product liability claims against us. We
currently do not carry liability insurance to cover such claims. We are not
certain that we or our collaborators will be able to obtain such insurance or,
if obtained, that sufficient coverage can be acquired at a reasonable cost. If
we cannot protect against potential liability claims, we or our collaborators
may find it difficult or impossible to commercialize products.
WE MAY BE UNABLE TO HIRE AND RETAIN THE KEY PERSONNEL UPON WHOM OUR SUCCESS
DEPENDS
We depend on the principal members of our management and scientific staff,
including Dr. Kari Stefansson, Chairman, President, Chief Executive Officer and
Secretary, Hannes Smarason, Executive Vice President and Senior Business and
Finance Officer, Dr. Jeffrey Gulcher, Vice President, Research and Development
and Dr. C. Augustine Kong, Director of Statistics. We have not entered into
agreements with any of these persons that bind them to a specific period of
employment. If any of these people leaves us, our ability to conduct our
operations may be negatively affected. Our future success also will depend in
part on our ability to attract, hire and retain additional personnel. There is
intense competition for such qualified personnel and we cannot be certain that
we will be able to continue to attract and retain such personnel. Failure to
attract and retain key personnel could have a material adverse effect on us.
OUR OPERATIONS INVOLVE A RISK OF INJURY FROM HAZARDOUS MATERIALS, WHICH COULD BE
VERY EXPENSIVE TO US
Our research and manufacturing activities involve the generation, use and
disposal of hazardous materials and wastes, including various chemicals and
radioactive compounds. We are subject to laws and regulations governing the use,
storage, handling and disposal of these materials, including standards
prescribed by Iceland and applicable EU standards. Although we believe that our
safety procedures comply with such laws and regulations, we cannot eliminate the
risk of environmental contamination or injury. In the event of such an
occurrence, we could be held liable for any damages that result, which could
exceed our resources. Although we believe that we comply in all material aspects
with applicable environmental laws and regulations and do not expect to make
additional material capital expenditures in this area, we cannot predict whether
new regulatory restrictions on the production, handling and marketing of
biotechnology products will be imposed. Any such new regulatory restrictions
could require us to incur significant costs to comply.
BECAUSE OUR MANAGEMENT HAS BROAD DISCRETION OVER OUR USE OF THE PROCEEDS FROM
THIS OFFERING, WE MAY USE THE OFFERING PROCEEDS IN WAYS STOCKHOLDERS DO NOT
BELIEVE ARE ADVISABLE
The net proceeds of this offering, after deduction of expenses payable by
us, are estimated to be approximately $158.1 million, or about $182.2 million if
the underwriters exercise their over-allotment option in full. We have based
this calculation on an initial public offering price of $18 per share. We have
based the information contained in this prospectus regarding our use of these
proceeds upon the current state of our business operations, our current business
plan and strategy, and current economic and industry conditions. The amount and
timing of our expenditures will vary depending on our progress in developing and
constructing the databases, the progress of our research and discovery programs,
technological changes, changing competitive conditions, and general economic
conditions. The estimated allocations of our use of the net proceeds of this
offering are subject to reapportionment among the listed purposes, and to other
general corporate purposes, including working capital. We cannot predict the
actual amount of the uses of proceeds with any degree of
19
<PAGE> 21
certainty. Our management will retain broad discretion as to the allocation of
the proceeds of this offering, including the timing and conditions of the use of
the proceeds.
CURRENCY FLUCTUATIONS MAY NEGATIVELY AFFECT OUR FINANCIAL CONDITION
Our revenues and cash reserves are denominated in U.S. dollars, but a
portion of our operating costs are denominated in Icelandic kronas. A
strengthening of the Icelandic krona against the U.S. dollar may, therefore,
have a negative impact on our financial condition.
YEAR 2000 RISKS MAY HARM OUR BUSINESS
Despite the passing of January 1, 2000, Year 2000 issues continue to pose
risks that could adversely affect our business in a number of significant ways.
Although we believe that our internally developed systems and technology are
Year 2000 compliant, latent Year 2000 problems nevertheless could substantially
impair or cause a failure of our information technology systems. Additionally,
we rely on information technology and automated laboratory equipment supplied by
third parties. Year 2000 problems that we or any such third parties experience
could materially adversely affect our business.
THE INTERESTS OF OUR CONTROLLING STOCKHOLDERS MAY CONFLICT WITH OUR INTERESTS
AND THE INTERESTS OF OUR OTHER STOCKHOLDERS
After this offering, our directors, executive officers and current 5%
stockholders (including an affiliate of Roche), and certain of their affiliates,
will beneficially own approximately 38% of the common stock. These stockholders,
if they all act together, will then effectively have the ability to elect all of
our directors. They will also be able to determine the outcome of most corporate
actions requiring stockholder approval, including our merger with or into
another company, a sale of substantially all of our assets and amendments to our
certificate of incorporation. The decisions of these stockholders may conflict
with our interests or those of our other stockholders.
OUR RIGHT TO ISSUE PREFERRED STOCK AND OTHER ANTI-TAKEOVER PROVISIONS COULD MAKE
A THIRD-PARTY ACQUISITION OF US DIFFICULT AND OTHERWISE ADVERSELY AFFECT COMMON
STOCKHOLDERS
Our Board of Directors is authorized to designate and issue up to 6,716,666
shares of preferred stock as to which the Board can determine the price, rights,
preferences and privileges of those shares without any further vote or action by
the stockholders. If you own common stock, your ownership rights will be subject
to, and may be adversely affected by, the rights of the owners of preferred
stock that we may issue in the future. As a result, the issuance of preferred
stock could have a material adverse effect on the market value of the common
stock. An additional issuance of preferred stock would give us financial
flexibility for possible acquisitions and other corporate purposes. However, it
could make it more difficult for a third party to acquire a majority of our
outstanding voting stock.
Upon the closing of this offering, our certificate of incorporation will
provide that our Board of Directors will be divided into three classes, each
serving staggered three-year terms. Accordingly, stockholders may elect only a
minority of our board at any annual meeting, which may have the effect of
delaying or preventing changes in management or control.
Further, we are subject to the anti-takeover provisions of Section 203 of
the Delaware General Corporation Law. Under this law, if anyone becomes an
"interested stockholder" in deCODE, we may not enter a "business combination"
with that person for three years without special approval. These provisions
could delay or prevent a change of control. Certain other provisions of our
certificate of incorporation and bylaws, including those providing for preferred
stock, could also delay or prevent changes of control or management. These
provisions could adversely affect the market price of the common stock.
20
<PAGE> 22
OUR COMMON STOCK HAS NEVER BEEN PUBLICLY TRADED AND WE CANNOT PREDICT THE EXTENT
TO WHICH A TRADING MARKET WILL DEVELOP
Before this offering, there has been no public market for our common stock,
although some financial institutions in Iceland have been making a market for
privately negotiated transactions among non-U.S. persons in our Series B
preferred stock. Our Series B preferred stock transfer records indicate that
approximately 10 million shares of Series B preferred stock were transferred
during 1999 in approximately 7,000 transactions and approximately 1.1 million
shares of Series B preferred stock were transferred during January 2000 in
approximately 2,700 transactions. The majority of these transactions had an
Icelandic financial institution as one of the counterparties. We cannot predict
the extent to which an active public market for the common stock will develop or
be sustained after this offering. We will negotiate the initial public offering
price with the representatives of the underwriters. The initial public offering
price of our common stock may not be indicative of future market prices.
OUR COMMON STOCK PRICE IS LIKELY TO BE HIGHLY VOLATILE
The market price of our common stock is likely to be highly volatile. In
addition to various risks described elsewhere in this prospectus, the following
factors could also cause price volatility:
- announcements that we or our competitors make concerning the results of
research activities, technological innovations or new commercial
products;
- changes in or adoption of new government regulations;
- regulatory actions;
- changes in patent laws;
- developments concerning proprietary rights;
- variations in operating results; and
- actual, announced or threatened litigation.
Extreme price and volume fluctuations occur in the stock market from time
to time and can particularly affect the prices of technology and biotechnology
stocks. These extreme fluctuations are often unrelated to the actual performance
of the affected issuers. These broad market fluctuations may adversely affect
the market price of our common stock.
FUTURE SALES BY OUR CURRENT STOCKHOLDERS MAY ADVERSELY AFFECT OUR STOCK PRICE
AND OUR ABILITY TO RAISE FUNDS IN NEW STOCK OFFERINGS
Sales of our common stock by our current stockholders in the public market
after this offering could cause the market price of our stock to fall. Sales may
also make it more difficult for us to sell equity securities or equity-related
securities in the future at a time and price that our management deems
acceptable, or at all. Upon the completion of this offering, we will have
42,990,343 shares of common stock outstanding, assuming no exercise of options
or warrants and assuming no exercise of the underwriters' over-allotment option.
Of these outstanding shares of common stock, the 9,600,000 shares sold in this
offering will be freely tradable, without restriction under the Securities Act
of 1933, as amended (the "Securities Act"), unless purchased by our
"affiliates." The remaining 33,390,343 shares of common stock, which will be
held by existing stockholders, are "restricted securities" and may be resold in
the United States public market only if registered or pursuant to an exemption
from registration.
Commencing 180 days from the effective date of the registration statement,
holders of 21,859,155 shares of common stock (including 1,488,900 shares of
common stock issuable upon the exercise of warrants) will be entitled to certain
registration rights. Upon registration, these shares may be freely sold in the
public market.
Stockholders who will hold an aggregate of 56% of our common stock after
the offering have agreed, pursuant to certain lock-up agreements, that they will
not sell any shares of common stock for a period of 180 days after the date of
this prospectus without the prior written consent of the underwriters.
21
<PAGE> 23
In addition, stockholders who will hold an aggregate of 21% of our common
stock after the offering have signed an agreement providing that, upon request
of deCODE or the underwriters, they will not sell any shares of common stock for
a period ending 180 days after the effective date of the registration statement
of which this prospectus is a part. We cannot be certain that we can enforce
such agreements against all transferees of the initial purchasers of the shares.
Upon expiration of the lock-up agreements:
- 22,372,639 shares of common stock will be immediately eligible for
resale (subject to the volume limitations and other resale requirements
under Rule 144 in the case of sales by affiliates);
- an additional 6,414,953 shares of common stock will be immediately
eligible for resale (subject to the volume limitations and other resale
requirements under Rule 144); and
- the remaining 4,602,751 shares of common stock will be eligible for
resale from time to time thereafter upon expiration of the applicable
holding periods under Rule 144 (subject to the volume limitations and
other resale requirements under Rule 144).
PURCHASERS IN THIS OFFERING WILL SUFFER IMMEDIATE DILUTION
If you purchase common stock in this offering, the value of your shares
based upon our actual book value will immediately be less than the offering
price you paid (known as "dilution"). Based upon the net tangible book value of
the common stock at March 31, 2000, your shares will be worth $13.22 less per
share than the price you paid in the offering. If options and warrants we
previously granted are exercised, additional dilution is likely to occur. An
option to purchase 555,556 shares of Series C Preferred Stock at an exercise
price of $4.00 per share was exercised in June 2000. Following the completion of
this offering, options and warrants to purchase 2,070,000 shares of common
stock, at the weighted-average exercise price of $4.71, will be outstanding.
22
<PAGE> 24
SPECIAL NOTE REGARDING FORWARD-LOOKING STATEMENTS
This prospectus contains forward-looking statements. These statements
relate to future events or our future financial performance. In some cases, you
can identify forward-looking statements by terminology such as "may," "will,"
"should," "could," "expect," "plan," "anticipate," "believe," "estimate,"
"predict," "intend," "potential," or "continue," the negative of such terms or
other comparable terminology. These statements are only predictions. Actual
events or results may differ materially. In evaluating these statements, you
should specifically consider various factors, including the risks outlined under
"Risk Factors," "Management's Discussion and Analysis of Financial Condition and
Results of Operations" and "Business." These factors may cause our actual
results to differ materially from any forward-looking statement. Although we
believe that the expectations reflected in the forward-looking statements are
reasonable, we cannot guarantee future results, levels of activity, performance
or achievements.
23
<PAGE> 25
USE OF PROCEEDS
We will receive net proceeds from this offering, after deduction of
expenses payable by us estimated at $2,645,000, of about $158.1 million, or
about $182.2 million if the underwriters exercise their over-allotment option in
full.
We expect to use approximately $106 million of the net proceeds of this
offering for the development and construction of the deCODE Combined Data
Processing system and approximately $52 million to fund our discovery and
research programs. We intend to spend approximately $70 million of these amounts
for capital expenditures. These expenditures will include the purchase of:
- laboratory automation equipment;
- production equipment;
- computer equipment;
- furniture;
- fixtures; and
- additional office and laboratory facilities.
We expect to use the remainder of the net proceeds for working capital and
general corporate purposes. We may also use a portion of the net proceeds to
acquire businesses, technologies or products complementary to our business even
though we do not currently have any specific plans to do so.
Pending use of the net proceeds for the purposes described above, we intend
to invest the net proceeds in short-term, interest-bearing, investment-grade
securities.
24
<PAGE> 26
DIVIDEND POLICY
We have never declared or paid any dividends on our common stock. Following
this offering, our dividend practices with respect to our common stock will be
determined and may be changed from time to time by our Board of Directors. We
will base any issuance of dividends upon our earnings, financial condition,
capital requirements and other factors considered important by our Board of
Directors. Delaware law and our certificate of incorporation do not require our
Board of Directors to declare dividends on our common stock. We expect to retain
all earnings, if any, generated by our operations for the development and growth
of our business and do not anticipate paying any dividends to our stockholders
for the foreseeable future.
Each share of our outstanding classes of preferred stock bears dividends at
the rate of 8% of the original purchase price per share, payable when declared
by the Board of Directors. To date, the Board of Directors has not declared any
dividends on the preferred stock. Our certificate of incorporation provides that
all the outstanding preferred stock will convert to common stock upon the
closing of this offering, at which time all undeclared dividends will be
canceled.
25
<PAGE> 27
CAPITALIZATION
The following table shows as of March 31, 2000: our actual capitalization;
our pro forma capitalization after giving effect to the automatic conversion
upon the closing of this offering of our Series A preferred stock, Series B
preferred stock and Series C preferred stock; and our pro forma capitalization
as adjusted to give effect to that automatic conversion and the sale of
9,600,000 shares of our common stock pursuant to this offering at an initial
offering price of $18 per share, less the estimated underwriters' discounts and
commissions and offering expenses. For information pertaining to our common
stock and our preferred stock, see "Description of Securities."
<TABLE>
<CAPTION>
MARCH 31, 2000
------------------------------------------
PRO FORMA
ACTUAL PRO FORMA AS ADJUSTED
------------ ------------ ------------
(UNAUDITED) (UNAUDITED) (UNAUDITED)
<S> <C> <C> <C>
Long-term obligations, net of current portion..... $ 5,043,482 $ 5,043,482 $ 5,043,482
Redeemable, convertible preferred stock;
32,641,926 shares authorized, 23,029,207 shares
outstanding actual and no shares outstanding pro
forma........................................... 124,030,726 0 0
Stockholders' equity (deficit)
Common stock; $0.001 par value, 48,000,000
shares authorized, 9,633,262 shares
outstanding actual; 32,664,787 shares
outstanding pro forma and 42,264,787 shares
outstanding pro forma as adjusted............ 9,633 32,665 42,265
Additional paid-in capital...................... 36,055,298 149,338,816 307,388,216
Notes receivable from stockholders.............. (9,593,996) (9,593,996) (9,593,996)
Deferred compensation........................... (11,345,795) (11,345,795) (11,345,795)
Dividends accreted on redeemable, convertible
preferred stock.............................. (10,724,176) 0 0
Accumulated deficit............................. (84,262,482) (84,262,482) (84,262,482)
Accumulated other comprehensive income (loss)... (5,406) (5,406) (5,406)
------------ ------------ ------------
Total stockholders' equity (deficit)............ (79,866,924) 44,163,802 202,222,802
------------ ------------ ------------
Total capitalization............................ $ 49,207,284 $ 49,207,284 $207,266,284
============ ============ ============
</TABLE>
The information contained above does not include (i) 150,000 shares of our
Series B preferred stock which we issued in May 2000 and which will convert into
150,000 shares of our common stock upon the closing of this offering, (ii)
20,000 shares of our common stock which we issued in May 2000, (iii) 555,556
shares of our Series C Preferred Stock which we issued in June 2000 and which
will convert to 555,556 shares of our common stock upon the closing of this
offering, or (iv) 2,070,000 shares of our common stock issuable upon exercise of
options to purchase common stock which will be outstanding following the closing
of this offering and warrants to purchase preferred stock that will convert into
warrants to purchase common stock upon the closing of this offering. See
"Description of Securities" for additional information regarding the outstanding
options and warrants.
26
<PAGE> 28
DILUTION
If you invest in our common stock, your interest will be diluted to the
extent of the difference between the public offering price per share of our
common stock and the pro forma as adjusted net tangible book value per share of
common stock after this offering. Pro forma net tangible book value per share
represents the amount of our total tangible assets less total liabilities,
divided by the pro forma number of shares of common stock outstanding. As of
March 31, 2000, our pro forma net tangible book value was approximately
$44,163,802 or $1.35 per share of common stock after taking into account the
issuance of 23,031,525 shares of common stock upon the automatic conversion,
upon the closing of this offering, of our Series A preferred stock, Series B
preferred stock and Series C preferred stock. Without taking into account any
other changes in our pro forma net tangible book value after March 31, 2000,
other than to give effect to this offering of 9,600,000 shares of common stock
at an initial offering price of $18 per share, less estimated underwriters'
discounts and commissions and offering expenses, our pro forma as adjusted net
tangible book value, at March 31, 2000, would have been approximately
$202,222,802 or $4.78 per share. This represents an immediate increase in the
net tangible book value of $3.43 per share of our common stock to present
stockholders and an immediate dilution of $13.22 per share or 73.4% of the
initial public offering price to new investors. The following table shows this
dilution:
<TABLE>
<S> <C> <C>
Initial public offering price per share..................... $ 18.00
Pro forma net tangible book value per share at March 31,
2000................................................... $ 1.35
Increase per share attributable to new investors.......... 3.43
-----------
Pro forma as adjusted net tangible book value per share
after this offering....................................... 4.78
-----------
Dilution per share to new investors......................... $ 13.22
===========
</TABLE>
The following table summarizes, on a pro forma basis as of March 31, 2000,
the differences between existing stockholders and investors in this offering
with respect to the number and percentage of shares of our common stock
purchased from us, the amount and percentage of consideration paid, and the
average price paid per share of our common stock, before deduction of
underwriters' discounts and commissions and offering expenses:
<TABLE>
<CAPTION>
SHARES OWNED CONSIDERATION
------------------------ -------------------------- AVERAGE PRICE
NUMBER PERCENTAGE AMOUNT PERCENTAGE PER SHARE
---------- ---------- ------------ ---------- -------------
<S> <C> <C> <C> <C> <C>
Existing stockholders...... 32,664,787 77.3% $128,631,278 42.7% $ 3.94
New investors.............. 9,600,000 22.7 172,800,000 57.3 $18.00
---------- ------ ------------ ------
Total...................... 42,264,787 100.0% $301,431,278 100.0%
========== ====== ============ ======
</TABLE>
The information contained above includes 23,031,525 shares of our common
stock that we will issue upon the automatic conversion of all our outstanding
preferred stock upon the closing of this offering but does not include (i)
150,000 shares of our Series B preferred stock which we issued in May 2000 and
which will convert into 150,000 shares of our common stock upon the closing of
this offering, (ii) 20,000 shares of our common stock which we issued in May
2000, (iii) 555,556 shares of our Series C Preferred Stock which we issued in
June 2000 and which will convert to 555,556 shares of our common stock upon the
closing of this offering, or (iv) 2,070,000 shares of our common stock issuable
upon exercise of options to purchase common stock which will be outstanding
following the closing of this offering and warrants to purchase preferred stock
that will convert into warrants to purchase common stock upon closing of this
offering. See "Description of Securities" for additional information regarding
the outstanding options and warrants. To the extent that any of these options
and warrants are exercised, investors will experience further dilution.
27
<PAGE> 29
EXCHANGE RATES
Our revenues are denominated in U.S. dollars. However, a portion of our
costs are denominated in Icelandic kronas as a result of the fact that all our
operations take place in Iceland.
The following table sets forth, for the periods and dates indicated,
information regarding the buying exchange rate of the Icelandic krona against
the U.S. dollar as registered by the Central Bank of Iceland, expressed in
Icelandic kronas per U.S. dollar.
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31, AVERAGE(1) HIGH LOW PERIOD END
----------------------- ---------- ----- ----- ----------
<S> <C> <C> <C> <C>
1997................................................. 70.89 73.43 66.56 71.98
1998................................................. 71.05 73.26 67.00 69.32
1999................................................. 72.42 75.44 68.89 72.35
2000 (through June 30, 2000)......................... 74.51 77.61 71.27 76.25
</TABLE>
---------------
(1) The average of the rates for the last business day of each month in the
period.
On June 30, 2000 the buying exchange rate of the Icelandic krona against
the U.S. dollar was 76.25.
28
<PAGE> 30
SELECTED CONSOLIDATED FINANCIAL DATA
The following selected consolidated financial data should be read in
conjunction with our consolidated financial statements and the notes to those
statements and "Management's Discussion and Analysis of Financial Condition and
Results of Operations" included elsewhere in this prospectus. The consolidated
statement of operations data for the three month periods ended March 31, 1999
and 2000 and the consolidated balance sheet data at March 31, 2000 are derived
from unaudited consolidated interim financial statements included elsewhere in
this prospectus. The unaudited financial statements for the three month periods
ended March 31, 1999 and 2000 have been prepared on the same basis as the
audited financial statements and, in the opinion of management, reflect all
normal recurring adjustments necessary to present fairly the financial
information set forth therein, in accordance with generally accepted accounting
principles in the United States. The consolidated statement of operations data
for the fiscal years ended December 31, 1997, 1998 and 1999 and the consolidated
balance sheet data at December 31, 1998 and 1999 are derived from consolidated
financial statements included elsewhere in this prospectus that have been
audited by PricewaterhouseCoopers ehf., independent auditors. The consolidated
statement of operations data for the period from inception (August 23, 1996) to
December 31, 1996 and the consolidated balance sheet data at December 31, 1996
and 1997 are derived from audited consolidated financial statements not included
in this prospectus. Historical results are not necessarily indicative of future
results.
<TABLE>
<CAPTION>
INCEPTION THREE MONTHS ENDED
(AUGUST 23, 1996) TO YEAR ENDED DECEMBER 31, MARCH 31,
DECEMBER 31, ----------------------------------------- -------------------------
1996 1997 1998 1999 1999 2000
-------------------- ----------- ------------ ------------ ----------- -----------
(UNAUDITED) (UNAUDITED)
<S> <C> <C> <C> <C> <C> <C>
CONSOLIDATED STATEMENT OF
OPERATIONS DATA:
Revenue............................ $ 0 $ 0 $ 12,705,000 $ 16,591,485 $ 4,507,489 $ 4,618,386
Operating Expenses
Research and development......... 737,764 6,080,096 19,282,364 33,213,557 6,805,146 9,234,368
General and administrative....... 454,873 1,967,684 4,893,202 8,220,758 2,208,749 2,946,337
----------- ----------- ------------ ------------ ----------- -----------
Total operating expenses........... 1,192,637 8,047,780 24,175,566 41,434,315 9,013,895 12,180,705
----------- ----------- ------------ ------------ ----------- -----------
Operating loss..................... (1,192,637) (8,047,780) (11,470,566) (24,842,830) (4,506,406) (7,562,319)
Equity in net earnings (loss) of
affiliate........................ 0 0 0 (486,366) (278,780) 0
Interest income and other, net..... 40,005 (8,461) 562,336 1,540,749 97,514 664,180
Taxes.............................. 0 0 0 0 0 0
----------- ----------- ------------ ------------ ----------- -----------
Net loss........................... (1,152,632) (8,056,241) (10,908,230) (23,788,447) (4,687,672) (6,898,139)
Accrued dividends and amortized
discount on preferred stock...... (181,852) (620,385) (2,571,523) (7,542,787) (862,260) (2,379,378)
Premium on repurchase of preferred
stock............................ 0 0 0 (30,887,044) 0 0
----------- ----------- ------------ ------------ ----------- -----------
Net loss available to common
stockholders..................... $(1,334,484) $(8,676,626) $(13,479,753) $(62,218,278) $(5,549,932) $(9,277,517)
=========== =========== ============ ============ =========== ===========
Basic and diluted net loss per
share............................ $ (1.10) $ (3.85) $ (3.06) $ (9.65) $ (0.97) $ (1.25)
Shares used in computing basic and
diluted net loss per share(1).... 1,213,925 2,254,413 4,400,576 6,446,055 5,749,963 7,419,439
Unaudited pro forma basic and
diluted net loss per share....... $ (0.86) $ (0.23)
Shares used in computing unaudited
pro forma basic and diluted net
loss per share(1)................ 27,559,365 30,392,795
</TABLE>
<TABLE>
<CAPTION>
AS OF DECEMBER 31,
------------------------------------------------------- AS OF MARCH 31,
1996 1997 1998 1999 2000
----------- ----------- ------------ ------------ ---------------
<S> <C> <C> <C> <C> <C>
CONSOLIDATED BALANCE SHEET DATA:
Cash and cash equivalents......................... $ 3,975,311 $ 2,714,225 $ 25,075,844 $ 29,845,664 $ 40,707,864
Total assets...................................... 7,801,556 6,770,492 38,540,115 80,526,534 60,771,808
Total long-term liabilities....................... 1,440,673 1,331,156 6,946,330 5,471,054 5,043,482
Redeemable, convertible preferred stock........... 6,881,851 12,603,990 43,158,079 121,589,367 124,030,726
Total stockholders' equity (deficit).............. (1,328,469) (9,907,939) (18,222,123) (72,772,138) (79,866,924)
</TABLE>
---------------
(1) See Note B of Notes to Consolidated Financial Statements for an explanation
of the determination of the shares used in computing basic and diluted net
loss per share and unaudited pro forma basic and diluted net loss per
share.
29
<PAGE> 31
MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
You should read this section in conjunction with our consolidated financial
statements and related notes thereto appearing elsewhere in this prospectus.
OVERVIEW
deCODE was incorporated in August 1996. We have incurred losses since our
inception, principally as a result of research and development and general and
administrative expenses in support of our operations. On March 31, 2000, we had
an accumulated deficit of $84,262,482. We anticipate incurring additional losses
over at least the next several years as we expand our internal and collaborative
gene discovery efforts, continue our technology development and construct the
deCODE Combined Data Processing system and healthcare informatics. We expect
that our losses will fluctuate from quarter to quarter and that such
fluctuations may be substantial especially because progress in our scientific
work and milestone payments which are related to progress can fluctuate between
quarters.
In February 1998, we entered into a research collaboration and
cross-license agreement with Roche regarding research into the genetic causes of
twelve diseases. Under the terms of the agreement, Roche has made equity
investments and is funding our gene discovery programs in the twelve diseases.
Under the agreement, we may receive a total of more than $200 million in
research funding and milestone payments and will receive royalty payments on the
sale of diagnostic and therapeutic products resulting from the collaboration.
The term of the agreement will continue until February 1, 2003 provided that
Roche elects to extend the agreement for the one-year periods commencing on the
third and the fourth anniversaries of the agreement. For the year ended December
31, 1999, revenues from Roche constituted 95% of our total revenues. See
"Business."
We have a number of collaborative agreements with local medical
institutions and doctors regarding particular disease research. These agreements
generally extend for a period of five years. Under the agreements, these
institutions and/or physicians contribute data or other clinical information and
we contribute equipment, research supplies and our molecular genetics and
experimental design expertise. The agreements also require us to reimburse all
project-related expenses. If we sell project results, the agreements require us
to make specified payments and pay a portion of performance-based milestone
payments that we receive. In addition, we have a settlement agreement with a
non-Icelandic medical institution whereby we are committed to pay royalties and
milestone payments if we are successful in developing and commercializing
products which result from a particular technology jointly owned by us and the
medical institution.
We anticipate that collaborations will remain an important element of our
business strategy and future revenues. Our ability to generate revenue growth
and become profitable is dependent, in part, on our ability to enter into
additional collaborative arrangements, and on our ability and our collaborative
partners' ability to successfully commercialize products incorporating, or based
on, our work. There can be no assurance that we will be able to maintain or
expand our existing collaborations, enter into future collaborations to develop
applications based on existing or future research agreements or successfully
commercialize the deCODE Combined Data Processing system.
Our failure to successfully develop and market products over the next
several years, or to realize product revenues, would have a material adverse
effect on our business, financial condition and results of operations. We do not
expect to receive royalties or other revenues from commercial sales of products
developed using our technologies for at least several years, if at all.
Our operating results through March 31, 2000 reflect the expenses incurred
in our gene discovery activities, partly offset by the revenues received
pursuant to our research collaboration agreement with Roche in connection with
these activities. During the remainder of 2000 we will continue these
activities, but our operating results will also reflect the substantial costs we
expect to incur in commencing the development of the Icelandic Health Sector
Database and the deCODE Combined Data Processing system. While we intend to
enter into collaborations to help fund and develop the deCODE Combined Data
Processing system, until we do so there will be no revenue from our database
service activities to offset against these costs.
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On December 3, 1999, the staff of the Securities and Exchange Commission
issued Staff Accounting Bulletin No. 101, "Revenue Recognition in Financial
Statements" (SAB 101), that summarizes the staff's views in applying generally
accepted accounting principles to revenue recognition in financial statements.
The accounting and disclosure requirements that are described in SAB 101 apply
to all registrants. We have adopted the requirements of SAB 101 and have
restated prior years' financial statements in accordance with the going public
exemption under Accounting Principles Board Opinion No. 20, "Accounting
Changes." In this respect, deCODE has adopted a policy for recognizing revenue
related to milestone payments on a retrospective basis over the term of the
contract with Roche (see Note B to the consolidated financial statements). As a
result, certain revenue related to milestones achieved will be recognized in
periods subsequent to the achievement of such milestones.
At March 31, 2000, the total amount of deferred milestone revenue which
will be recognized in future periods aggregated $1.1 million.
RESULTS OF OPERATIONS
COMPARISON OF QUARTERS ENDED MARCH 31, 2000 AND 1999
Revenues. Our revenues increased to $4,618,386 for the quarter ended March
31, 2000 as compared to $4,507,489 for the quarter ended March 31, 1999.
Revenues attributable to our research collaboration agreement with Roche
increased from $3,853,889 to $4,437,222, an increase of 15%. This increase was
the result of an increase in revenue recognized due to milestone payments. In
the first quarter of 1999, we recognized revenues from equipment testing
services provided to a customer, and in the first quarter of 2000 we recorded no
such revenues.
Research and Development. Our research and development expenses increased
to $9,234,368 for the quarter ended March 31, 2000 as compared to $6,805,146 for
the quarter ended March 31, 1999, an increase of 36%. This increase was
primarily attributable to the continued expansion of operations, including our
hiring of additional research personnel and the resulting salary and benefits
costs, an expansion of our laboratory facilities and the resulting depreciation,
and our increased research efforts.
General and Administrative. Our general and administrative expenses
increased to $2,946,337 for the quarter ended March 31, 2000 as compared to
$2,208,749 for the quarter ended March 31, 1999, an increase of 33%. This
increase was primarily attributable to the increase in personnel and related
salary and benefits costs.
Stock-Based Compensation and Remuneration Expense. Stock-based
compensation and remuneration expense was $2,127,549 for the quarter ended March
31, 2000 as compared to $1,780,947 for the quarter ended March 31, 1999, an
increase of 19%. Amortization of deferred stock compensation for the quarter
ended March 31, 2000 increased to $2,127,549 as compared to $1,265,947 in the
quarter ended March 31, 1999. This increase was primarily attributable to
increases in compensation resulting from stock options granted in 1999.
Remuneration expense was $0 in the quarter ended March 31, 2000, compared to
$515,000 for the quarter ended March 31, 1999.
Compensation expense for employee stock options is recorded based on the
difference between the exercise price and the fair value of the common stock on
the measurement date (i.e., the date on which both the number of shares to be
issued and the exercise price are fixed and determinable) with compensation
expense being recorded on interim estimates between the grant date and the
measurement date pursuant to Accounting Principles Board Opinion No. 25,
"Accounting for Stock Issued to Employees." Compensation expense for
non-employee stock options is based on the grant date fair value of options
granted using the Black-Scholes option pricing model pursuant to Statement of
Financial Accounting Standards No. 123, "Accounting for Stock-Based
Compensation."
Equity in Net Earnings (Loss) of Affiliate. Our equity in net loss of
affiliate was $0 for the quarter ended March 31, 2000 as compared to $278,780
for the quarter ended March 31, 1999, a decrease of 100%. This decrease was due
to the consolidation of a subsidiary in the first quarter of 2000 but which was
reported under the equity method in the first quarter of 1999.
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Interest Income and other, net. Our interest income increased to $771,592
for the quarter ended March 31, 2000 as compared to $297,230 for the quarter
ended March 31, 1999, an increase of 160%. This increase is primarily due to
interest on payments received in connection with the stock issuance in August
1999. Our interest expense decreased to $107,412 for the quarter ended March 31,
2000 from $199,716 for the quarter ended March 31, 1999, a decrease of 46%. This
decrease resulted from lower capital lease obligations in the quarter ended
March 31, 2000, as compared to the quarter ended March 31, 1999, due to
installment payments which occurred throughout 1999.
Net Loss. As a result of the foregoing factors our net loss for the
quarter ended March 31, 2000 increased to $6,898,139 as compared to $4,687,672
for the quarter ended March 31, 1999, an increase of 47%. As of March 31, 2000,
we had accumulated losses of $84,262,482 and did not owe any federal income
taxes. Realization of deferred tax assets is dependent on future earnings if
any.
Net Loss Available to Common Stockholders. Our net loss available to
common stockholders increased to $9,277,517 for the quarter ended March 31, 2000
from $5,549,932 for the quarter ended March 31, 1999, an increase of 67%. This
increase was primarily due to increases in the above-described costs and
expenses over the same period and to the increase in accrued dividends and
amortized discount on preferred stock. Accrued dividends increased due to
increase in the number of preferred shares outstanding in the first quarter of
2000 as compared to the first quarter of 1999 as well as higher average issuance
prices for the preferred shares issued between March 31, 1999 and March 31, 2000
as compared to the shares issued prior to March 31, 1999.
COMPARISON OF YEARS ENDED DECEMBER 31, 1999 AND 1998
Revenues. Our revenues increased to $16,591,485 for the year ended
December 31, 1999 as compared to $12,705,000 for the year ended December 31,
1998, an increase of 31%. The increase was primarily due to revenues related to
milestone payments received pursuant to our research collaboration agreement
with Roche; the increase also reflected the recognition of twelve months of
research funding provided by Roche in 1999 compared to eleven months in 1998,
and the receipt of laboratory equipment and consumables from Affymetrix in the
first fiscal quarter of 1999 as consideration for services provided by us on its
behalf.
Research and Development. Our research and development expenses increased
to $33,213,557 for the year ended December 31, 1999 as compared to $19,282,364
for the year ended December 31, 1998, an increase of 72%. This increase was
primarily attributable to the continued expansion of operations including our
hiring of additional research personnel and the resulting salary and benefits
costs, an expansion of our laboratory facility and the resulting depreciation,
and our increased research efforts.
General and Administrative. Our general and administrative expenses
increased to $8,220,758 for the year ended December 31, 1999 as compared to
$4,893,202 for the year ended December 31, 1998, an increase of 68%. This
increase was principally attributable to the increase in personnel and related
salaries and benefits costs.
Stock-Based Compensation and Remuneration Expense. Stock-based
compensation and remuneration expense was $9,045,865 for the year ended December
31, 1999 compared to $5,219,642 for the year ended December 31, 1998, an
increase of 73%. This increase was primarily attributable to compensation
expense being recorded on the 855,500 stock options granted in 1999 as well as a
full year of compensation expense being recorded on the stock options granted in
1998.
Equity in Net Earnings (Loss) of Affiliate. Our equity in net earnings
(loss) of affiliate, Gagnalind hf., for the year ended December 31, 1999 is
comprised of our share of the earnings of Gagnalind hf. and amortization of the
difference between deCODE's cost and the underlying equity in the net assets of
Gagnalind hf. at acquisition.
Interest Income and other, net. Our interest income increased to
$2,187,695 for the year ended December 31, 1999 as compared to $922,230 for the
year ended December 31, 1998, an increase of 137%. This increase primarily
derived from interest on payments received in connection with a stock issuance.
The increase was also attributable to increased cash reserves resulting from
milestone payments pursuant to our research collaboration agreement with Roche.
Our interest expenses increased to $646,946 for the year ended December 31, 1999
as compared to $359,894 for the year ended December 31, 1998, an increase of
80%. This
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increase in interest expense primarily resulted from new equipment leasing
arrangements which we entered into in the second half of 1998 and were in effect
for all of 1999.
Net Loss. As a result of the foregoing factors, our net loss for the year
ended December 31, 1999 increased to $23,788,447 as compared to $10,908,230 for
the year ended December 31, 1998, an increase of 118%. As of December 31, 1999,
we had accumulated losses of $77,324,190 and did not owe any federal income
taxes. Realization of deferred tax assets is dependent on future earnings if
any.
Net Loss Available to Common Stockholders. Our net loss available to common
stockholders more than quadrupled to $62,218,278 for the year ended December 31,
1999 as compared to $13,479,753 for the year ended December 31, 1998. This
increase was primarily due to increases in the above described costs and
expenses over the same period and to the increase in accrued dividends and
amortized discount on preferred stock and premiums on the repurchase of
preferred stock.
COMPARISON OF YEARS ENDED DECEMBER 31, 1998 AND 1997
Revenues. Our revenues were $12,705,000 for the year ended December 31,
1998. We did not have any revenues for the year ended December 31, 1997.
Revenues in 1998 were solely attributable to payments received pursuant to our
research collaboration agreement with Roche.
Research and Development. Our research and development expenses more than
tripled to $19,282,364 for the year ended December 31, 1998 from $6,080,096 for
the year ended December 31, 1997. This increase was primarily attributable to
continued expansion of our operations, including our hiring of more research and
development personnel, purchases of laboratory supplies, investment in
laboratory equipment and expansion of our facilities.
General and Administrative. Our general and administrative expenses more
than doubled to $4,893,202 for the year ended December 31, 1998 from $1,967,684
for the year ended December 31, 1997. This increase was primarily attributable
to the increase in personnel and related salaries and benefits costs.
Stock-Based Compensation and Remuneration Expense. Stock-based
compensation and remuneration expense was $5,219,642 for the year ended December
31, 1998, compared to $11,851 for the year ended December 31, 1997. This
increase was primarily attributable to compensation expense being recorded on
the 1,933,500 stock options granted in 1998 as well as a full year of
compensation expense being recorded on the stock options granted in 1997.
Interest Income and other, net. Our interest income increased more than
five-fold to $922,230 for the year ended December 31, 1998 from $163,076 for the
year ended December 31, 1997. This increase was due to greater cash reserves
primarily resulting from our sale of Series B preferred stock to Icelandic
investors in 1998 and also from payments received pursuant to our research
collaboration and stock purchase agreements with Roche. Our interest expense
increased to $359,894 for the year ended December 31, 1998 from $171,537 for the
year ended December 31, 1997, an increase of 110%. This increase was mainly due
to additional equipment lease obligations entered into during 1998, which
enabled us to support our research and development activities.
Net Loss. As a result of the foregoing factors, our net loss for the year
ended December 31, 1998 increased to $10,908,230 as compared to $8,056,241 for
the year ended December 31, 1997, an increase of 35%. As of December 31, 1998,
we had accumulated losses of $20,275,235 and did not owe any federal income
taxes. Realization of deferred tax assets is dependent on future earnings if
any.
Net Loss Available to Common Stockholders. Our net loss available to common
stockholders increased to $13,479,753 for the year ended December 31, 1998 as
compared to $8,676,626 for the year ended December 31, 1997, an increase of 55%.
This increase was primarily due to increases in the above-described costs and
expenses over the same period and to the increase in accrued dividends and
amortized discount on preferred stock.
LIQUIDITY AND CAPITAL RESOURCES
Our cash and cash equivalents totaled $40,707,864 at March 31, 2000. We
have financed our operations since inception primarily through private
placements of equity securities, our collaboration with Roche and
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capital leases. As of March 31, 2000, we had received an aggregate of
$43,518,695 pursuant to our collaboration agreement with Roche in fixed research
funding, milestone payments and equity contributions. Inflation has not had a
material effect on our business.
Our investing activities have consisted of the acquisition of an office and
laboratory facility in Reykjavik, Iceland, acquisitions of equipment and
expenditures for building improvements. At March 31, 2000, our gross investment
in office and laboratory space, equipment and building improvements since
inception was $20,591,828. In addition, during 1999, we acquired an equity
interest in Gagnalind hf., an Icelandic software company, in exchange for cash
and shares of our common stock and Series B preferred stock. In March 2000, we
acquired an equity interest in eMR ehf., also an Icelandic software company, in
exchange for cash.
In February and March 1999, we sold 110,000 shares of Series B preferred
stock resulting in aggregate cash proceeds of $825,000. In February and May
1999, we sold 1,111,111 shares of Series C preferred stock and 111,111 warrants
to purchase shares of Series C preferred stock for an aggregate purchase price
of $3,333,445. In August 1999, we repurchased a total of 2,358,074 shares of
Series A preferred stock, issued and subsequently repurchased 250,000 shares of
Series B preferred stock in exchange for 333,333 shares of common stock and
repurchased 100,000 shares of Series C preferred stock, at an initial purchase
price of $7.50 per share, later adjusted upward to $13.95 per share. In August
1999, we issued 5,000,000 shares of Series B preferred stock at an initial
purchase price of $7.50 per share, later adjusted upward to $15.00 per share.
The net cash used in our operating activities was $11,797,086 for the year
ended December 31, 1999 compared to $2,067,278 for the year ended 1998. The
increase was primarily due to higher research and development costs which were
only partly offset by payments from Roche.
The net cash used in our operating activities was $1,844,436 for the
quarter ended March 31, 2000 compared to $3,227,834 for the quarter ended March
31, 1999. The decrease was primarily due to higher accounts payable in the
quarter ended March 31, 2000 than in the quarter ended March 31, 1999.
As of December 31, 1999, we had net operating losses carried forward of
approximately $18,867,000 to offset Icelandic and U.S. taxable income. If not
utilized, the net operating loss carry-forwards will begin to expire in the year
2004 in Iceland and in the year 2018 in the United States.
We had no material commitments for capital expenditures at December 31,
1999. We anticipate that the net proceeds from this offering will enable us to
increase capital expenditures over the next several years to expand our
facilities and purchase additional equipment in support of additional
collaborations, increased internal research and development and development of
the deCODE Combined Data Processing system.
We expect our cash requirements to increase significantly in future periods
because of planned expansion of our operations. The planned expansion will be in
support of expected growth in research collaboration agreements, database
construction, and internal research and discovery programs. We believe that the
net proceeds from this offering, together with existing cash and cash
equivalents, and anticipated cash flows under our research collaboration
agreement with Roche, will be sufficient to support our operations through at
least 2001. Our belief is based on our current operating plan, which could
change in the future and require additional funding sooner than anticipated.
Even if we have sufficient cash for our current operating plan, we may seek to
raise additional capital because of favorable market conditions or other
strategic factors.
Our future capital requirements depend on numerous factors, including:
- the progress of our discovery and research programs;
- the number and breadth of these programs;
- our ability to attract collaborators for, subscribers to or customers
for our products and services;
- our achievement of milestones under our research collaboration agreement
with Roche;
- our ability to establish and maintain additional collaborations;
- our collaborators' progress in commercializing our gene discoveries;
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- the level of our activities relating to commercialization rights we
retain in our collaborations;
- competing technological and market developments;
- the costs involved in enforcing patent claims and other intellectual
property rights; and
- the costs and timing of regulatory approvals.
We will require significant additional capital in the future, which we may
seek to raise through public or private equity offerings, debt financing or
additional collaborations and licensing arrangements. No assurance can be given
that additional financing or collaborations and licensing arrangements will be
available when needed, or that if available, will be obtained on favorable
terms. If adequate funds are not available when needed, we may have to curtail
operations or attempt to raise funds on unattractive terms. See "Risk
Factors -- We may not be able to obtain sufficient additional funding to meet
our expanding capital requirements."
IMPACT OF CURRENCY FLUCTUATIONS
We publish our consolidated financial statements in U.S. dollars. Currency
fluctuations can affect the financial results of deCODE as revenues and cash
reserves are in U.S. dollars but a portion of operating costs are in Icelandic
kronas. A strengthening of the Icelandic krona against the dollar can thus
adversely affect the "buying power" of our cash reserves and revenues. On the
other hand, weakening of the Icelandic krona can strengthen our financial
position. All long-term liabilities are U.S. dollar denominated. deCODE has not
previously engaged in, and does not now contemplate entering into, currency
hedging transactions. deCODE may enter into such transactions on a
non-speculative basis to the extent that it may in the future have substantial
foreign currency exposure, for example, in connection with payments from
collaborative partners or due to investments.
RECENT ACCOUNTING PRONOUNCEMENT
In June 1998, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards No. 133, "Accounting for Derivative Instruments
and Hedging Activities." This standard establishes a new model for accounting
for derivatives and hedging activities and supersedes and amends a number of
existing standards. Upon the standard's initial application, all derivatives are
required to be recognized in the balance sheet as either assets or liabilities
and measured at fair value. In addition, all hedging relationships must be
designated, reassessed and documented. Currently, the standard is to be
effective for fiscal years and quarters beginning after June 15, 2000.
Considering deCODE's current activities, it is not anticipated that the adoption
of the new standard will have a significant impact on deCODE's financial
position or results of operations.
QUANTITATIVE AND QUALITATIVE DISCLOSURES
The primary objective of our investment activities is to preserve principal
while maximizing income we receive from our investments without significantly
increasing risk. Some of the securities in our investment portfolio may be
subject to market risk. This means that a change in prevailing interest rates
may cause the market value of the investment to fluctuate. For example, if we
hold a security that was issued with a fixed interest rate at the
then-prevailing rate and the prevailing interest rate later rises, the market
value of our investment will probably decline. To minimize this risk in the
future, we intend to maintain our portfolio of cash equivalents and short-term
investments in a variety of securities, including commercial paper, money market
funds and government and non-government debt securities. In general, money
market funds are not subject to market risk because the interest paid on such
funds fluctuates with the prevailing interest rate. As of December 31, 1999, all
of our cash and cash equivalents were in money market and checking accounts.
THE IMPACT OF THE YEAR 2000
Despite the passing of January 1, 2000, Year 2000 issues continue to pose
risks that could adversely affect our business in a number of significant ways.
Although we believe that our internally developed systems and technology are
Year 2000 compliant, latent Year 2000 problems nevertheless could substantially
impair or cause a failure of our information technology systems. Additionally,
we rely on information technology and automated laboratory equipment supplied by
third parties. Year 2000 problems that we or any such third parties experience
could materially adversely affect our business.
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BUSINESS
OVERVIEW
deCODE is a genomics and health informatics company which is developing
products and services for the healthcare industry. We develop and apply modern
informatics technology to discover new knowledge about health and disease
through data-mining.
Our approach to the discovery of healthcare knowledge brings together three
key types of anonymous population data derived from the Icelandic nation:
information from the healthcare system, information about relationships among
individuals covered by this system and associated molecular genetics data.
The following diagram illustrates our business model:
[BUSINESS MODEL]
Our business model is based on four sets of information:
- genealogy records of almost all living Icelanders and most of their
ancestors for whom records exist, dating back in some cases to the
settlement of Iceland in the ninth century;
- genotype data from consenting Icelanders;
- the Icelandic Health Sector Database, which we plan to create and
operate from healthcare records of Icelanders pursuant to the Icelandic
Health Sector Database license; and
- other public and proprietary data to which we have access.
Our three avenues of commercialization are as follows:
Discovery Services. We believe that the development and application of
proprietary bioinformatics tools in the context of an appropriate population
will accelerate our ability to discover disease-related genes and associated
drug targets. We have adopted this strategy to derive value both from diagnostic
and therapeutic products and from pharmacogenomic services. We are currently
working on discovery in collaboration with Roche and in our own research
programs. We expect to seek additional partners for this business unit from
among pharmaceutical and biotechnology companies.
Database Services. We are in the early stages of developing the deCODE
Combined Data Processing system, a tool which, subject to ongoing compliance
with regulatory requirements, will cross-reference
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genealogical records, data from the Icelandic Health Sector Database and
genotypes of consenting participants. We plan to develop the deCODE Combined
Data Processing system to generate knowledge about diseases and their genetic
risk factors, disease management, the interplay between environment and disease,
and outcomes and resource use in delivering healthcare. deCODE believes that the
deCODE Combined Data Processing system will be unique both in cross-referencing
genetic and healthcare information and in providing an unprecedented level of
detail of the interplay between genes, environment and disease. As more
information is generated, both inside and outside deCODE, we believe that the
deCODE Combined Data Processing system will become even more powerful. We
anticipate that the customer base for the deCODE Combined Data Processing system
will include a variety of participants in the healthcare industry, such as
pharmaceutical and biotechnology companies and healthcare providers.
Healthcare Informatics. The third unit of our business, healthcare
informatics, is derived from our discovery and database services. We expect the
products of this business unit to result from knowledge and experience acquired
in our two principal business units, discovery services and database services.
In the future, the integration of genetics and medicine will add a new level of
complexity to the decision making process in the delivery of healthcare. The
need for medical decision-support systems for healthcare providers is expected
to increase over the next several years. We are developing medical
decision-support systems, which will include insights from the deCODE Combined
Data Processing system, for healthcare providers and we will seek to
commercialize bioinformatics tools developed in our gene and drug target
discovery efforts. We also plan to provide privacy protection products based on
our expertise in encryption tools for complex and sensitive medical and genetic
data.
SCIENTIFIC BACKGROUND
The map of the human genome is about to be unraveled. On June 26, 2000
Celera Genomics and the Human Genome Project announced the completion of the
first draft sequence of the human genome. The challenge now is to transform this
raw sequence data into specific knowledge about disease and healthcare.
GENOMICS
The blueprint of all biological activity, which consists of
deoxyribonucleic acid, or DNA, is located within the nucleus of every cell and
is commonly referred to as the genome. The genome is the total DNA content of an
organism. DNA is composed of four bases. The sequence or order of these bases is
the code that ultimately determines structure and function in all organisms. The
human genome is broken up into 23 pairs of chromosomes and every individual
inherits a set of 23 chromosomes from each parent. Genes are segments of DNA
located throughout the genome. The human genome consists of approximately three
billion bases and is estimated to contain more than 100,000 genes. Each cell
uses or "expresses" only those genes (approximately 10% of the 100,000 genes)
necessary for its specific role. Accordingly, different types of cells express
different sets of genes.
When a gene is turned on or expressed, it produces a derivative copy of its
DNA sequence called messenger RNA, which is used as a template to direct the
production of a protein. Proteins are large molecules composed of amino acids
and control all biological processes. The order of the bases in DNA determines
the order of amino acids in a protein. Proteins in turn make up molecular
pathways, which cells use to carry out their specific functions. Diseases can
occur when a mutated or a defective gene upsets or blocks a molecular pathway in
a normal biological function. The ability to detect a mutation and to understand
the process by which it contributes to disease is crucial to understanding the
fundamental mechanisms of a disease. In the simplest form, genetic diseases
result from a mutation in only one gene and the disease is usually passed from
generation to generation. Common diseases are thought to have a complex genetic
basis; they generally skip one or more generations and may result from
interactions between genes or from the interaction between genetic and
environmental factors.
Soon, the entire human genome sequence will be discovered. We believe that
by itself, this knowledge is of limited value and that the importance of this
discovery will only reach its full potential if this sequence data is explored
along with detailed knowledge about health history, genetic profile and
genealogy.
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POPULATION GENOMICS
Population genomics is a field of genomics which applies modern genetic and
molecular biology techniques to an entire population to discover how genetic
factors contribute to the cause of diseases. Since almost all common diseases
have a genetic component, the discovery of the cause of disease can often be
reduced to finding the gene or genes mutated in patients who have the disease as
compared to those who do not. Since this approach does not require a
preconceived notion about which tissues or proteins or genes are important in
the disease, it represents a systematic strategy for creating specific knowledge
about disease. The challenge is to find a population which is small enough to
allow the necessary cooperation but large enough to deliver meaningful results.
FUNCTIONAL GENOMICS
Functional genomics is a field of genomics that attempts to determine the
manner in which disease genes specifically impact the disease process. It is the
study of the function of genes, including how expression of a particular gene is
regulated and the function of the protein that the gene encodes. Researchers
employing functional genomics techniques may analyze large numbers of genes to
compare patterns of gene expression in diseased and healthy tissues or may
compare genes in humans to those in other species, in each case in an effort to
determine the molecular pathways that cause disease.
GENOMICS AND HEALTHCARE PRODUCTS
Genomics and Diagnostics. Gene-based diagnostic tests for both disease
identification and management represent an important tool that physicians can
use to identify and monitor patients with increased risk of a disease. These
tests can complement clinical tests and may lead to more cost-effective use of
expensive tests and to a greater level of accuracy. Knowledge of predisposition
towards a disease may allow patients to alter their lifestyles or to take
medication that prevents the disease.
Genomics and Therapeutics. The lack of precise knowledge about the causes
of diseases makes it difficult for the pharmaceutical industry to select targets
for new drugs. Identifying specific disease genes may result in very specific
and, therefore, potentially more valuable drug targets than are otherwise
available. The disease gene products themselves may be attractive drug targets.
In addition, they mark a key molecular pathway that is composed of several other
potential drug targets.
Genomics and Drug Response. The efficacy and safety of existing and new
drugs may be enhanced by pharmacogenomics. Pharmacogenomics is the application
of genomics technology to the analysis and identification of genes involved in
drug response. It is believed that genomics will permit the identification of
the genetic differences that cause different people to respond differently to
the same drugs. This may lead to tailor-made treatments for individuals,
maximizing efficacy and minimizing side effects.
DECODE'S UNIQUE APPROACH
POPULATION GENOMICS AND THE VALUE OF THE ICELANDIC POPULATION
We believe that our unique approach, coupled with the application of
extensive bioinformatics to population genomics, has a number of distinct
advantages because of the following characteristics of the Icelandic nation:
Extensive Genealogy. Genealogy is a national pastime in Iceland. According
to Icelandic history books and old manuscripts from as early as the thirteenth
century, Iceland was settled in the ninth and tenth centuries. Since very early
stages of their history, Icelanders wrote detailed accounts of Icelandic facts
and events, including genealogy. The library of the University of Iceland and
other institutions contain manuscripts on genealogy dating from the middle ages,
which form a bridge between the time of settlement and official records kept in
the Icelandic National Archives from the time when church and government
officials began systematic registration of the population in the seventeenth
century. Numerous sources of genealogical information, including parish records,
census data and written manuscripts, such as the Icelandic sagas, are readily
available. Genealogical data can facilitate the identification of genes that
cause a specific disease by enabling researchers to compare the genes of family
members with and without the disease over the generations. Because the
genealogical data goes back as
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far as 35 generations, we believe it provides sufficient genealogical
information for our purposes. In addition, the fact that there has been little
immigration means that most Icelanders living today are descendants of the
original "founding" settlers and can, therefore, trace their ancestry to the
early middle ages.
Relative Genetic Homogeneity. Diseases which are prevalent in developed
countries, such as cancer and heart disease, have a large number of genetic
causes. In an isolated population that is genetically simpler, the number of
genetic causes is likely to be fewer than in more genetically diverse
populations. Thus, studying a more homogeneous population, like the Icelanders,
simplifies the problem of finding and subsequently understanding disease genes
and mutations causing common diseases. The Icelandic population was founded by
Norwegian and British settlers who arrived in Iceland in the ninth and tenth
centuries. Because Iceland has experienced little immigration over the last
eleven centuries, most of the 275,000 living Icelanders are descended from these
original "founding" settlers. Our ability to trace the Icelandic population back
approximately 1,100 years also facilitates gene discovery. Specific genes are
associated with the appearance and existence of specific diseases. For example,
the BRCA2 gene is known to carry mutations in some individuals that can cause
breast cancer. Because many present-day Icelanders may share a gene carrying a
mutation that causes a particular disease with one of the founding settlers,
they may also have such "disease gene" in common with other Icelanders. We can
make use of this "founder" effect to facilitate the identification of disease
genes. It has been demonstrated that the disease genes found in Iceland are, in
general, also found in other populations. Even if the disease genes in Iceland
are different from those found in other populations, the identification of any
disease gene can lead to discovery of a key molecular pathway likely to be
involved in the disease and, consequently, to the discovery of disease genes in
other populations which cause anomalies in the particular pathway. Therefore, we
believe the discovery of a disease gene in Iceland may enhance the
identification of drug targets for any population.
Centralized Healthcare System. Iceland has had a centralized national
healthcare system since 1915. It presently consists of a base of 55 primary care
centers, two major hospitals in Reykjavik which have recently merged, one
central hospital in Akureyri, and several smaller ones. Outside the primary care
centers, the healthcare system is highly specialized. Specialty clinics care for
most of the patients with major illnesses. Our clinical collaborators work at
these specialty clinics, as well as in the major hospitals. This centralization
of the healthcare system means that the data is centralized and easily
accessible for scientific research.
Well-educated Population. The level of public education is high in Iceland
and illiteracy is negligible. Historically, the Icelandic population has been
cooperative when approached by physicians and scientists working on biomedical
research in the Icelandic community.
We believe that the Icelandic population meets the criteria of being small
enough to allow necessary cooperation but large enough to deliver meaningful
results. While the Icelandic population is characterized by relative genetic
homogeneity, it is large enough to prevent an increased incidence of recessive
genetic conditions which can arise as a result of intermarriage. At the same
time, the population is small enough, and the amount of immigration is limited
enough, that the total genome of Icelanders is less variable than the genomes of
larger, less historically-isolated nations.
Comparison to Other Approaches
Some companies are using an approach to locate disease genes that relies on
correlating DNA variations such as single nucleotide polymorphisms, known as
SNPs, throughout the genome or in candidate genes to patients. This approach is
analogous to searching for a single needle that is present in one of a hundred
haystacks. We believe that our population genomics approach will allow us to
find the haystack using our large families before we begin searching for the
needle using SNPs and other variations to narrow down or fine-map genes.
Other companies are using functional genomics to help select potential drug
targets. Most of these approaches depend on expression analysis using DNA chips
that compare the genes turned on or off in diseased tissue with those in normal
tissue. We, on the other hand, apply functional genomics more selectively,
focusing on the disease genes identified through our population genomics
approach to more specifically define their molecular pathways.
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There may be some limitations to our population genomics approach because
disease genes found in Iceland may not always be directly relevant in other
populations, although there is much overlap in disease genes that have been
found in Iceland over the last 15 years and the rest of the world. The Icelandic
population is probably too small to study diseases that are not common. However,
our aim is to continue to focus on the diseases in Iceland that have the
greatest public health prevalence worldwide.
DISCOVERY SERVICES
The extensive genealogy database and associated bioinformatics that we have
built in Iceland are the core of our novel genealogical approach to identifying
human disease genes and associated drug targets.
We believe that working with the Icelandic population puts us in a position
to accelerate the discovery and development of new proprietary diagnostic and
therapeutic products capable of addressing diseases at their root causes, rather
than simply identifying and treating their symptoms. These programs may permit
doctors to make earlier diagnoses, use healthcare resources more
cost-effectively and select safer and more effective drugs for patients on the
basis of their genetic make-up.
The genealogical approach that we have developed depends on the
genealogical database and bioinformatics tools that we have built. In the study
of any particular disease, we first define the disease classification broadly
but rigorously. (For example, we first labeled stroke patients as "stroke"
rather than as a series of less common subtypes of stroke). After our clinical
collaborators compile a list of all patients who have been diagnosed with the
disease, the list is encrypted and run through our genealogy database which
yields very large extended families of patients, sometimes containing hundreds
of individuals. The genealogy naturally links together those patients who are
likely to share a gene or genes for the disease. The patients are genotyped to
determine which genes or pieces of chromosomes they have in common. The
genealogical approach compensates for the inadequacies of "consensus criteria"
for disease classification, which utilizes specific symptoms accepted by a
consensus committee of physicians to determine who is "affected" by the disease,
and increases the chance that the form of the disease studied is the one
actually inherited. We believe that no other organization uses genealogy in this
manner. Our unique approach to human genetics has allowed us to map genes in
diseases in which many others have previously failed. By using this approach,
deCODE expects to be able to assign function to the raw data contained in the
human genome sequence.
The following diagram describes our approach to gene discovery. A
description of each step and a list of supporting tools and technologies used in
each step follows the diagram.
[GENETIC DISCOVERY]
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Genetic Mapping
We have developed an extensive computerized genealogy database that
currently includes 620,000 individuals or almost all 275,000 living Icelanders
along with most of their ancestors for whom records exist. This represents most
of the Icelanders who are known through records ever to have lived in Iceland.
Research that our scientists conducted on 26 Icelandic families, which the
American Journal of Human Genetics published in its May 2000 issue, showed that
the accuracy of maternal connections in the database is 99.3%.
Before we start a study looking for genes that cause or contribute to a
particular disease, we obtain approvals from both the Icelandic Bioethics
Committee and the Data Protection Commission. All patients who participate in
our research program by giving a blood sample sign an informed consent form
approved by the Bioethics Committee. We have developed a sophisticated
encryption system to protect the personal privacy of all participating
volunteers.
In our present disease-based research projects the first step of our
genealogical approach is for our clinical collaborators to compile a list of
patients who have been diagnosed with a particular disease in Iceland. After the
Data Protection Commission has encrypted the patient list, it is sent to us and
run through an encrypted version of our genealogy database. The genealogy
database and associated data-mining tools that we have developed enable us to
determine the relationships among all members of a large patient list and
demonstrate information flow through the generations.
Using DNA from patients and their relatives who grant us informed consent,
we are able to generate high-resolution genotypes with our genotyping facility
using 1,000 microsatellite markers. A microsatellite marker is a segment of DNA
containing variable short repeats that can be used to derive a genotype. Our
high-throughput genotyping facility and bioinformatics systems substantially
decrease the amount of labor involved in reading the genotypes.
We have developed a statistical informatics program that is used to
determine which portion of the genome is shared among most or all of the
patients within a family. This technique can systematically screen every segment
of the human genome for shared genotypes and can narrow the location of a
disease gene or genes to a small fraction (1/1000) of the human genome. That
segment marks the location of the disease gene that is mutated in the patients
with the disease. We use stringent criteria to determine that we have
successfully found a disease gene location before moving onto the next step of
gene discovery.
Physical Mapping, Fine-Mapping, and Sequencing
Once we have narrowed the chromosomal region containing the disease gene to
two to three million base pairs, we develop a higher resolution map. To
accomplish this, we construct a physical map using large overlapping pieces of
human DNA. We have developed an automated high-throughput physical mapping
method which is based on sophisticated proprietary software developed at deCODE
and uses robotics. By integrating a robust hybridization system (i.e., matching
of a small piece of DNA to large segments of DNA), automated analysis of the
hybridization data, and data-mining techniques, we construct low-resolution and
high-resolution maps of the human genome spanning from 30 to 80 million bases.
We use low-resolution and high-resolution physical maps to find new
microsatellite markers and genetic variations known as single
nucleotide-polymorphisms, or SNPs, and use them to create more precise sets of
genotypes of the patients. SNP markers differ from microsatellite markers in
several ways. SNPs represent a single base change in the genomic sequence and
microsatellite markers represent short repeats of sequence. Microsatellite
markers contain more information than SNPs (one microsatellite marker contains
three to five times more information than a SNP) and, therefore, are well-suited
for our genetic studies using large families. Currently, the cost of genotyping
microsatellite markers is much less than genotyping SNPs (especially given the
relative information content). However, the SNPs are more numerous than
microsatellite markers and therefore more useful for fine-mapping and
association studies.
Many patients may share several closely spaced genotypes which serve to
narrow the region containing a disease gene. We believe that the relative
genetic homogeneity and the age of the Icelandic population will enable us to
reduce the size of the chromosomal region containing the disease gene to as few
as 250,000 base pairs. We
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believe that this segment would contain fewer than ten candidate genes, thus
reducing the amount of time required to screen the genes for mutations.
Once we have narrowed a region, we sequence this narrow region using
automated DNA sequencers and then use our bioinformatics tools to identify new
genes. The genes are screened in turn for mutations that occur in patients with
the disease and rarely in those without. Typically, only one gene in this
segment will be the disease gene, but we may find disease genes on other
chromosomes that can be discovered in the same manner. We believe that our
ability to go from gene mapping to disease gene identification will be further
enhanced as the sequencing of the human genome is completed.
Functional Genomics
After we have succeeded in identifying a disease gene under our population
genomics approach, we will define molecular pathways in which the disease gene
plays a role. This is essential information both for understanding the biology
of the disease and also for identifying additional specific drug targets that
interact with the disease genes.
We have established three complementary systems designed to isolate
specific drug targets from "upstream," "downstream" and "proximal" pathways that
may be involved in the disease process. We believe these three functional
approaches will expand the number of potential drug targets that are associated
with the specific disease genes identified using our population genomics
approach.
Our proximal analysis identifies proteins that physically interact with the
disease gene product. As very few proteins work alone in the body, these partner
proteins are likely to be involved in the normal biology of the disease gene. We
carry out the screening in yeast cells, using methods of increasing stringency
intended to eliminate false positive protein-protein interactions. We are also
able to crossmatch the genes identified as partners of the first disease gene
with additional population genomics data since they might be mutated in the same
disease.
Potential drug targets from upstream pathways include proteins that control
the expression level of the disease gene (i.e., those gene products that are
responsible for turning the disease gene on or off in particular tissues or
under particular conditions). We plan to link the control region of newly
identified disease genes to a "reporter" gene and establish precisely which
region governs expression. DNA from this region will be used to retrieve
specific binding proteins that are responsible for turning the disease on.
Finally, we plan to use gene expression analysis using Affymetrix GeneChip
technology to validate our conclusions and to identify other genes which are
regulated in tandem with the disease gene.
Our downstream analysis is designed to uncover genes that are influenced by
the overexpression, underexpression or misexpression of the disease gene. We
have established efficient systems to turn a gene on or off in cells, as well as
to express mutated versions revealed in the course of gene discovery. We employ
DNA chip technology in our efforts to find genes whose expression patterns are
altered by different scenarios of disease gene expression. Some of these genes
may play a role together with the disease gene product in disrupting the normal
biology and leading to disease.
DATABASE SERVICES
The main focus of our database services will be first on the development
and then on the operation of the deCODE Combined Data Processing system.
Description of the deCODE Combined Data Processing system
We believe that the deCODE Combined Data Processing system will represent
the first opportunity in the world to cross-reference genetic, phenotypic and
genealogic data on a large scale. It will provide a comprehensive opportunity to
assign function to genomic sequence. It will be designed to enable users to pose
specific queries to it through a software program, or query layer, which will
process the request. With these tools, we expect users to be able to query the
various data sets cross-referenced by the deCODE Combined Data Processing
system. The
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users' interactions will be confined to the query layer; users will not have
direct access to the data accessed by the deCODE Combined Data Processing
system.
We believe that the deCODE Combined Data Processing system will permit
users to build more complete models of the interplay of genes, environment and
disease than are currently available primarily as a result of the following:
- the healthcare data contained in the Icelandic Health Sector Database
will include not only basic disease diagnosis but also details of
laboratory results, treatments and outcomes;
- the Icelandic Health Sector Database will contain a population rather
than the handpicked patient lists used in existing approaches; and
- the Icelandic Health Sector Database will contain medical information
collected over time.
There are three sources of data for the deCODE Combined Data Processing
system, which are as follows:
Data from the Icelandic Healthcare System. Under the terms of the
Icelandic Health Sector Database license we will be able to process medical
information, environmental exposure information and resource use information
from the Icelandic healthcare system. The key data sources include:
- hospitals and ambulatory services;
- primary healthcare centers;
- private specialty clinics; and
- hospital and private laboratory results.
A computerized network of medical records will be organized in each
participating healthcare institution. Information processed in the Icelandic
Health Sector Database will take place in a manner designed to ensure that
personal data remains non-personally identifiable. The type of healthcare data
will include admission data, diagnostic work-up and results, diagnoses,
treatment and operations for each patient visit, medical and social history,
allergies, risk factor exposure, pharmaceutical treatment and outcomes.
Genealogy Data. The deCODE Combined Data Processing system will access the
same genealogy database that we use in our current discovery services.
Genotypic Data. We plan to derive genotypes of consenting Icelanders who
give us blood samples in accordance with applicable regulations and consent to
have their genotypic data stored and cross-referenced with the Icelandic Health
Sector Database.
Our genealogy database is complete for our applications. We are in the
early stages of development of the other two sources of data.
The License
On December 17, 1998, the Icelandic parliament passed the Act, allowing the
Ministry to grant an operating license to create and run the Icelandic Health
Sector Database. On January 22, 2000, the Ministry granted the Icelandic Health
Sector Database license to Islensk erfethagreining ehf., our wholly-owned
Icelandic subsidiary. The license, which has a term of twelve years, allows us
to collect data from medical records of Icelandic healthcare institutions and
self-employed health professionals, and to transfer such data in encrypted form
into a centralized database containing non-personally identifiable information.
It also permits us to cross-reference the Icelandic Health Sector Database data
with genealogical data and genotypic data obtained through consent.
The Act provides that patients may request at any time, by giving notice to
the Icelandic Director General of Public Health, that information about them not
be entered into the Icelandic Health Sector Database. As required by the Act,
the Director General of Public Health has prepared forms for the giving of such
notice and has distributed these forms to healthcare institutions and to the
offices of self-employed health professionals.
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Pursuant to the terms of the Icelandic Health Sector Database license and
the Act, before we can begin collecting information and transferring it into the
Icelandic Health Sector Database, we must fulfill numerous conditions, such as
paying fees and costs associated with the license and obtaining government
approval of our privacy protection measures, and must enter into agreements with
healthcare institutions and self-employed health professionals allowing us
access to their medical records. Some medical professionals, including the board
of directors of the Icelandic Medical Association, and the World Medical
Association have opposed the proposals for the establishment of the Icelandic
Health Sector Database on ethical and privacy grounds. The Icelandic Medical
Association presented its opposition to the Act before the World Medical
Association Council Session in April of 1999. The World Medical Association
publicly announced its support for the Icelandic Medical Association's
opposition shortly thereafter. At its October 1999 annual general meeting, the
Icelandic Medical Association adopted resolutions declaring its opposition to
the Act based on ethical issues, which include doctor-patient confidentiality
and privacy concerns. We do not believe that these views are representative of
the Icelandic medical profession as a whole or that they will materially affect
our ability to enter into such agreements. Once we have entered into the
required agreements, an independent security expert must verify that our
information systems and operating procedures comply with the data security
requirements of the Icelandic Data Protection Commission before we can process
the data we obtain from these healthcare providers.
In addition to the scrutiny of the Data Protection Commission, our security
system for the Icelandic Health Sector Database will benefit from the advice and
monitoring of deCODE's Security Advisory Board of internationally renowned
experts in the fields of computer security, data and privacy protection and
security of healthcare informatics. We expect this board of experts to meet
periodically to review any security issues we may encounter in our operations
and in the development and operation of the Icelandic Health Sector Database and
the deCODE Combined Data Processing system and to provide us with technical
advice for solving such issues and maintaining or exceeding international best
industry-practice standards.
HEALTHCARE INFORMATICS
Physicians are routinely required to cross-reference specific details
regarding their individual patients with their general knowledge of best medical
practice in clinics and hospitals. One of the main challenges facing physicians
today is how to deal with the vast and growing amount of medical knowledge. In
addition, the number of medical tests ordered and drugs that patients take are
leading to more information stored per patient. Some hospitals and clinics have
begun to use information technology to help store patient records. However, the
actual analysis and decision-making about diagnosis and treatment is still
mostly carried out by the un-aided human mind of the physician combining general
medical knowledge with specific patient data.
While this approach has worked well in the past, we believe it is an
increasingly difficult task which sometimes leads to delays in diagnosis and
medical mistakes. The complexity of physicians' decision-making may increase in
the future if genetics is integrated with the delivery of healthcare in the form
of predictive testing and treatments tailor-made to individual patients.
deCODE believes that the "information load" on physicians will continue to
grow as the genetic dimension of healthcare leads to risk prediction and a shift
from generalized treatment guidelines to personalized care. This trend toward
personalized healthcare presents the following three opportunities in healthcare
informatics:
- We will use the knowledge that we gain from our discovery programs and
the deCODE Combined Data Processing system to provide medical
decision-support systems necessary to deliver and interpret this
increased volume of data to a variety of end-users.
- We will use our experience in privacy protection in the deCODE Combined
Data Processing system to meet the increased need for privacy solutions
that will accompany the increased volume of personally sensitive
healthcare information.
- We will use our expertise in the gene and drug target discovery unit to
develop and market bioinformatics tools.
We also plan to pursue market opportunities for other software tools that
we have developed during the design and construction of the Icelandic Health
Sector Database and the deCODE Combined Data Processing
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system and in our disease gene discovery efforts, including GeneMiner, DecodeGT
and a comprehensive sample database.
OUR STRATEGY
deCODE's strategy is to use its population-based approach to transform
genomic and healthcare data into products and services for the healthcare
sector. The key elements of our strategy are as follows:
Gene and Drug Target Discovery. deCODE plans to pursue gene and drug
target discovery and the characterization of genes that contribute to the causes
of common diseases. In addition, we will use studies of gene expression and
protein-protein interaction systems to define molecular pathways, which may
contain drug targets. We will focus on diseases that have the potential to
result in the discovery of new proteins and drug candidates. We will also seek
to identify disease genes for the purpose of developing diagnostic products.
Database Subscription and Consulting Services. deCODE expects to build and
operate the deCODE Combined Data Processing system, which is intended to process
and cross-reference non-personally identifiable healthcare information on the
Icelandic population (in the Icelandic Health Sector Database) with genealogy
data and genetic data obtained through consent. In addition, we are developing
new mathematical algorithms to extract further knowledge from the deCODE
Combined Data Processing system. Services we plan to offer to future subscribers
of the deCODE Combined Data Processing system will include principally gene
discovery and drug target validation, pharmacogenomics, disease management and
health management. We expect subscribers to include pharmaceutical companies,
healthcare organizations, national health services and government agencies that
will pay subscription fees and, in some cases, a share of product revenues they
generate as a result of using the database.
Pharmacogenomics Partnerships. In collaboration with pharmaceutical
companies, we intend to apply pharmacogenomics to understand differences in drug
response among individuals. We believe that genomics will permit the
identification of the genetic differences that cause different people to respond
differently to the same drugs and that, as a result, it will be possible to
individualize the selection of drugs for patients. We believe that the
integration of medical treatment and outcome information with genetic
information will give us an advantage in the generation of pharmacogenomics
information. We expect to generate revenues from these partnerships through
fixed research funding and milestone and royalty payments.
Sale and Marketing of Healthcare Informatics Products. We plan to exploit
market opportunities for software tools that we develop during the design and
construction of the Icelandic Health Sector Database and the deCODE Combined
Data Processing system and in our disease gene discovery efforts. Software tools
that we have developed to date include GeneMiner, DecodeGT, an encryption
system, and a comprehensive sample database. We expect to offer healthcare
informatics services, such as medical decision-support systems and privacy
solutions. The decision-support tools would, for example, be useful in areas
such as medical record keeping and its standardization and in medical decision
making. deCODE may provide specialized services to customers such as
governmental agencies and medical institutions which will enable them to collect
and process information in a standardized form. We intend to capitalize on our
experience in the protection of privacy of medical and genetic data to market
systems for the protection of privacy in healthcare. The customers for these
services could include industry, public institutions and governments.
Formation of Collaborations. We intend to seek corporate collaborations or
joint ventures with pharmaceutical and biotechnology companies to provide
research alliances, product development and commercialization for our gene and
drug target discovery programs. We expect to generate revenues from these
collaborations through research funding and milestone and royalty payments. We
also plan to seek collaborators for the development and marketing of our
database and healthcare informatics products and services.
PRODUCTS AND SERVICES
Our current services and those under development can be classified into
three categories, all of which are based on analyzing data from the Icelandic
population using our proprietary bioinformatics tools: discovery services;
database services; and healthcare informatics.
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DISCOVERY SERVICES
Current Discovery Programs
We have started gene discovery programs associated with 28 common diseases,
12 of which are collaborative programs with Roche. The inheritance patterns of
many common diseases are complex, indicating that the diseases are probably
caused by mutations in one or more genes and/or through interactions between
genes and environment. We believe that these diseases represent large market
opportunities for therapeutic and diagnostic products because:
- their causes are not fully understood;
- current treatments are of limited effectiveness;
- there are currently no approaches to tailor treatment to cause; and
- large numbers of individuals are affected by these diseases.
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We expect the identification of disease genes to provide insights into the
causes of common diseases and to help the development of highly-specific
diagnostic and therapeutic products, including small molecule products,
recombinant proteins, gene therapy and antisense therapy. The following table
sets forth the current status of our gene discovery programs.
<TABLE>
<CAPTION>
PROGRESS STATUS
-----------------------------------------------------------
ONE OR MORE ONE OR MORE DISEASE
DISEASE ANALYZING LOCI CANDIDATE GENES GENE
CATEGORY DNA IDENTIFIED(2) IDENTIFIED(3) VALIDATION(4)
-------- --------- ------------- --------------- -------------
<S> <C> <C> <C> <C>
AUTOIMMUNE DISEASES
Atopy/Allergy......................................... X
Inflammatory bowel disease............................ X
Insulin dependent diabetes............................ X
Psoriasis............................................. X X X
Rheumatoid arthritis.................................. X
CANCER
Lung cancer........................................... X
Melanoma.............................................. X
Prostate cancer....................................... X
Renal cancer.......................................... X
CARDIOPULMONARY DISEASES
Asthma................................................ X
Chronic obstructive pulmonary disease(1).............. X
Hypertension(1)....................................... X
Myocardial infarction(1).............................. X
Peripheral arterial occlusive disease(1).............. X
Cerebrovascular disease (stroke)(1)................... X X X
CENTRAL NERVOUS SYSTEM DISEASES
Alzheimer's disease(1)................................ X X X
Anxiety disorder(1)................................... X
Bipolar disease/depression(1)......................... X
Familial essential tremor............................. X X
Multiple sclerosis.................................... X X X
Narcolepsy............................................ X (5) X
Parkinson's disease................................... X
Schizophrenia(1)...................................... X X X
EYE DISEASES
Macular degeneration.................................. X
FEMALE HEALTH
Endometriosis......................................... X
METABOLIC DISEASE & OTHER
Non-insulin dependent diabetes(1)..................... X
Osteoporosis(1)....................................... X
Osteoarthritis(1)..................................... X X X
</TABLE>
---------------
(1) Gene discovery programs in collaboration with Roche.
(2) Locus describes a specific region in the human genome that has been linked
to a genetic trait or disease and that meets stringent criteria of
statistical significance.
(3) Candidate gene describes a particular gene that is suspected to cause or
contribute to a genetic trait or disease on the basis of its location
within a locus meeting stringent statistical criteria.
(4) Disease gene validation means identification of mutations in the candidate
gene in Iceland and other populations of patients.
(5) Loci identified by third party.
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The following is a description of the diseases in which our programs are
most advanced.
Autoimmune Diseases. We are currently studying several autoimmune diseases
such as inflammatory bowel disease (Crohn's and ulcerative colitis), psoriasis,
atopy and rheumatoid arthritis. All four are in large genome-wide linkage scans,
and we have found the location of a novel psoriasis gene.
- Psoriasis. Psoriasis is a chronic inflammatory disease that leads to
disfiguring skin lesions and arthritis. We have completed a genome-wide
linkage scan of Icelandic familial material and have confirmed linkage
and association to a region of the genome that regulates immune response
known as the MHC. Our genome-wide scan also identified a novel region of
the genome that interacts with the MHC to cause psoriasis. Our second
location represents the second gene mapped outside the MHC that fulfills
the criteria for genome-wide significance. We are in the process of
fine-mapping both gene locations.
Cardiopulmonary Diseases. We are studying a variety of common diseases
such as asthma, chronic obstructive pulmonary disease, myocardial infarction,
peripheral vascular disease and stroke. We have already achieved a milestone
with Roche for finding the location of a gene associated with stroke.
- Cerebrovascular disease (Stroke). Stroke represents diseases that
directly or indirectly affect the blood vessels in the brain and cause
central nervous system damage from either blockage of cerebral blood
flow or rupture of an intracranial artery. It is the third leading cause
of death. We have formed a research alliance with local physicians who
care for a majority of the stroke patients diagnosed in Iceland. We have
collected almost 2,000 DNA samples from informative families and
genotyped most of them. Using our genealogical approach, we have mapped
the location of one stroke gene that meets the criteria for genome-wide
significance. This represents the first gene ever mapped for the common
forms of stroke.
Central Nervous System Diseases. We are studying the genetic basis for
psychiatric and central nervous system diseases. We have achieved two milestones
in our collaboration with Roche by mapping the location of genes contributing to
the following diseases.
- Alzheimer's Disease. Alzheimer's disease is the most common cause of
dementia. We have carried out a genome-wide scan that included 1,200
Icelanders. We have mapped late onset Alzheimer's disease to a novel
chromosome location. We are currently fine-mapping the gene location.
- Schizophrenia. Schizophrenia is a debilitating psychiatric disorder. No
group has ever reported the isolation of a schizophrenia gene. We and
our clinical collaborators have collected a significant number of DNA
samples from the largest families in Iceland. We have carried out a
genome-wide scan, and we are currently fine-mapping and sequencing one
small region of the genome. We have also identified three candidate
disease genes.
Metabolic and Other Diseases. We are studying the genetic basis for
osteoarthritis, non-insulin-dependent diabetes, osteoporosis and endometriosis.
We have achieved a research milestone in our collaboration with Roche for
mapping a gene associated with osteoarthritis.
- Osteoarthritis. Osteoarthritis is a degenerative disease of the joints.
There are currently no known genes causing the common forms of
osteoarthritis. We have mapped three genes linked to osteoarthritis. We
are currently fine-mapping and sequencing these regions to search for
the disease genes themselves.
Collaborations
Our strategy for pursuing business opportunities is to establish alliances
with pharmaceutical companies, biotechnology firms and other healthcare
institutions to perform research into the genetic basis of a given disease or
group of diseases. Depending on the nature of each prospective business
opportunity, we may conduct the research in return for one or more of the
following: up-front equity investments; direct payments for research funding;
payments upon the achievement of scientific milestones; shared or exclusive
rights to diagnostics and therapeutics; and royalties on products that our
collaborators market. In some instances, we may negotiate for access to our
collaborators technologies, including libraries of chemical compounds, to
enhance our operations outside of the collaboration.
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Hoffmann-La Roche. In February 1998, we entered into a research
collaboration and cross-license agreement with Roche to collaborate on the
discovery of genetic variations which affect the cause of diseases for the
purpose of developing new methods to diagnose diseases and obtain drug targets
useful in drug discovery. The agreement provides for a steering committee, the
membership of which is equally divided between the parties, to oversee the
collaborative research programs. The agreement requires us to conduct research
activities assigned by the steering committee and requires Roche to fund the
collaborative gene discovery programs in twelve diseases, including four
cardiovascular diseases, four psychiatric/neurologic diseases and four metabolic
diseases, by making specified payments according to a payment schedule. Roche's
obligation under the agreement to fund these programs will continue until
February 1, 2003 provided that Roche elects to extend the research term of the
agreement for the one-year periods commencing on the third and fourth
anniversaries of the agreement. During the research term, neither party may
terminate the agreement unless the other is in default. In addition to research
funding payments, Roche is required to make payments to us upon the achievement
of specified scientific development and marketing milestones. We have reached
four milestones in this collaboration. Under this agreement, we may receive
approximately $70 million in research funding and more than $130 million in
milestone payments that are linked to our progress in research efforts and
commercialization. The milestone payments may include, with respect to each
disease being researched, the payment of up to an aggregate of approximately
$5.75 million for early discovery efforts and the confirmation of the first,
second and third genes. Additional milestone payments are required in the event
we confirm additional genes with respect to each of the diseases. For each
therapeutic product, Roche is also required to make milestone payments of up to
an aggregate of $7 million for regulatory filings and approvals. Milestone
payments of up to $3 million are also required in connection with the commercial
sale of diagnostic products. As of March 31, 2000, Roche had paid us
approximately $34 million in research funding and milestone payments. The costs
of the collaboration with Roche which we have incurred consist mainly of
salaries, materials, equipment depreciation and other facilities costs. We
estimate that these costs were $6,094,682 in the quarter ended March 31, 2000,
$21,920,948 in 1999 and $12,726,360 in 1998.
The agreement gives Roche exclusive worldwide rights to develop and
commercialize therapeutic and diagnostic products based on gene discoveries.
Roche is required to pay us royalties on sales of any such products until the
later of ten years from the first commercial sale or the last date on which the
product is covered by a patent. We retained the exclusive, worldwide rights to
develop and commercialize gene therapy and antisense products based on our gene
discoveries and will be required to pay Roche royalties on sales of any such
products. Because no products have yet been developed, we are unable to estimate
the amount of royalties which we may receive or be required to pay under the
agreement.
In connection with the agreement, Roche Finance Ltd, or Roche Finance, an
affiliate of Roche, purchased shares of our Series C preferred stock and
received an option to purchase additional shares at any time prior to the end of
February 2001. Roche Finance also purchased warrants to buy shares of our Series
C preferred stock and received the right to purchase additional warrants if it
exercised its option to acquire additional shares of Series C preferred stock.
These will become warrants to purchase an equivalent amount of common stock upon
the completion of this offering. In April 2000, Roche Finance transferred these
shares, warrants and options to an affiliate, SAPAC Corporation Ltd., or SAPAC.
In June 2000 SAPAC exercised its option and purchased 555,556 shares of our
Series C Preferred Stock and a warrant to purchase 55,556 shares of our Series C
Preferred Stock.
Pursuant to an agreement, we license our GeneMiner bioinformatic software
product to Roche.
In addition to the research collaboration with Roche, we have entered into
the following collaborations:
Partners HealthCare System, Inc. In May 2000, we entered into a strategic
alliance agreement and crosswalk development agreement with Partners HealthCare
System, Inc., The General Hospital Corporation, d.b.a. Massachusetts General
Hospital and The Brigham and Women's Hospital, Inc. (collectively, "Partners")
pursuant to which (a) we will fund research by investigators of Partners
pursuant to sponsored research agreements and/or clinical trial agreements to be
entered into from time to time, (b) we will collaborate with Partners on, and
provide funding for, development of an information technology bridge, called the
crosswalk, to facilitate studies with the deCODE Combined Data Processing system
and Partners' Research Patient Data Registry and (c) we will develop and market,
in consultation with Partners, new information technology products and services
relating to the use of
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the crosswalk for future pharmaceutical and biotechnology applications. We do
not believe that the amount of funding we have agreed to provide over the term
of the agreements is material to us.
The strategic alliance agreement provides that a steering committee, the
membership of which is equally divided between the parties, will oversee the
alliance (including the development of the crosswalk) and select the research
projects and/or clinical trials that we will fund at Partners. We will have an
exclusive option to acquire an exclusive license to any patents or copyrights
developed under such sponsored research or clinical trial agreements on
financial terms to be negotiated by the parties based on pre-determined criteria
contained in the strategic alliance agreement. Each party has the right to use
the crosswalk to facilitate studies with the databases for non-commercial
internal research purposes. Each party also has the right to use the crosswalk
to facilitate studies with such party's own database to conduct commercially
sponsored research. Partners is required to pay us a royalty on revenue it
receives from such use. In addition, we have the exclusive right to use the
crosswalk to develop and market products and services, and we are obligated to
pay Partners a royalty on revenue we receive from the sale of such products and
services. Because we have not yet developed such products or services and
Partners has not yet entered into any commercially sponsored research
agreements, we cannot estimate the amount of royalties we may receive or be
required to pay under the agreements.
The agreements are for a three year term, which, in the case of the
strategic alliance agreement, may be extended for an additional two year term by
the mutual agreement of the parties and, in the case of the crosswalk
development agreement, may be extended for an additional term to be agreed upon
by the parties. The agreements may also be terminated by either party if the
other party is in default. In addition, we may terminate the agreements under
certain circumstances, including infeasibility of the alliance or if the
alliance jeopardizes the mission or objectives of either party.
Other Hospital and Physician Collaborations. We have entered into
collaboration agreements and arrangements with the Icelandic Heart Association
and several physician groups. The goal of these collaborations is the discovery
of genetic factors which contribute to the genesis of certain disorders on which
the various physician groups maintain patient information. These collaborators
contribute data and/or other clinical information to the project, while we
provide our expertise in molecular genetics and experimental design, as well as
necessary equipment and research supplies. We are responsible for the
reimbursement of all expenses related to the projects. In addition, if we sell
the results of the project to a third party, we will make specified payments and
pay a portion of any performance-based milestones and royalties we receive from
these third parties to the physician groups. We have already sold the results of
many of these projects to a third party, Roche. As a result, we have already
paid approximately $4 million and, in addition, are obligated to pay
approximately $4 million over the remaining terms of these agreements, in
specified payments and milestone payments. We share the ability to make
management decisions regarding the projects with these collaborators, and we
jointly form executive or steering committees to monitor the projects. Our
collaboration agreements with these collaborators normally continue for a term
of no more than five years.
To further facilitate our research projects and enable us to construct
lists of patients with specific diseases, we have also entered into
collaboration agreements and arrangements with three of the largest hospitals in
Iceland, two of which have recently merged. Under the terms of these agreements,
the hospitals contribute research data, and surveillance committees that we
jointly appoint with the hospitals monitor our projects. We are obligated to pay
all the hospitals' out-of-pocket expenses incurred as a result of the
collaboration. Our agreements with the hospitals will continue until terminated
by the parties.
Pharmacogenomics
Through its access to relevant data (e.g., through the cross-referencing of
genetic and phenotypic information), deCODE plans to offer pharmacogenomic
services to pharmaceutical and biotechnology companies. In this way, we believe
that we will be able to assist pharmaceutical companies in tailoring drugs to
specific parts of the patient population. Tailor-made drugs will better ensure
both effectiveness and safety. In addition, it is expected that genetic
information may lead to faster and more successful clinical trials, which may
result in cost savings. Pharmacogenomics may also enable pharmaceutical
companies to explore the use of older chemical compounds which have been
abandoned. Because the development cost of these compounds has already been
incurred, the additional cost to bring these products to market may be reduced.
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Internal Programs
We also plan to work on some diseases without partnering with
pharmaceutical companies, and we are currently pursuing a number of disease
projects independent of research sponsorships. In the event we complete any
independent projects, we intend to pursue the commercial development of our gene
and drug target discovery through the development and marketing of therapeutics
and diagnostic products. We may do this by using our own resources to turn
discoveries from our internal projects into therapeutic or diagnostic products
and developing our own marketing capabilities, by licensing our discoveries to
others who would be required to pay us royalties on sales of any products they
develop using the results of our gene discovery programs or by entering into
collaborative arrangements for the development and marketing of products from
these programs.
DATABASE SERVICES
The deCODE Combined Data Processing system is intended to allow users to
ask questions about relationships between genetic and environmental data and
disease. We believe the deCODE Combined Data Processing system should increase
the utility of human genome sequence data by providing a medical and
environmental context, which should facilitate the development of new products
and services for healthcare.
Products
Gene Discovery and Drug Target Validation. We expect pharmaceutical and
biotechnology companies to use the deCODE Combined Data Processing system in
gene discovery programs and drug target validation as a way of confirming their
own provisional findings or providing an impetus for further research. We expect
users to implement the deCODE Combined Data Processing system to search the
human genome for gene mutations that are linked to the occurrence of a
particular disease.
Pharmacogenomics. We expect the deCODE Combined Data Processing system to
improve understanding of how drug response can vary across a population due to
underlying genetic differences. For example, a customer might search for a
region of the genome that appears to be shared by patients with similar drug
responses. Pharmacogenomic analysis with the deCODE Combined Data Processing
system is therefore an opportunity for pharmaceutical companies to market
products which more closely meet the needs of a diverse market.
Disease Management. The deCODE Combined Data Processing system is uniquely
positioned to provide new insights and help design disease management programs.
By carefully analyzing clinical data and correlating such data with genetic
factors, healthcare providers may develop programs that cover the lifespan of
the disease, from preventive actions to determining the most appropriate
treatments for each individual. For a healthcare provider, which is constantly
making the cost/quality tradeoff, this is a unique way to design programs which
optimize both cost and quality.
Health Economics. We believe that a major trend in healthcare is the shift
from managing disease towards maintaining individual health. Providers are under
pressure to stop focusing on therapeutic areas in isolation and to begin
considering an individual's risk of disease in general. In order to do this,
providers will need to understand inter-relationships between different
therapeutic areas and health indicators so that they can analyze the costs and
benefits of various treatments or behavioral modifications. We believe that the
deCODE Combined Data Processing system will naturally lend itself to this kind
of analysis by processing data across the major therapeutic areas as well as
information on well-being and lifestyle. For example, a customer may use the
deCODE Combined Data Processing system to analyze a particular preventive
measure known to reduce the risk of a target disease to see if that measure may
increase the patient's risk of developing other diseases.
Customers
We believe that the potential customer base for the deCODE Combined Data
Processing system consists of members of the healthcare industry, including:
- Pharmaceutical and Biotechnology Companies. Pharmaceutical and
biotechnology companies may use the deCODE Combined Data Processing
system in their gene discovery and pharmacogenomics programs.
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- Health Organizations. Healthcare providers, including health
maintenance organizations, or HMOs, managed care groups and hospital
groups may use the deCODE Combined Data Processing system to help them
determine the most appropriate method of care for patients.
- National Health Services and Government Agencies. National health
services and government agencies may use the database to save money by
determining the most effective allocation of resources.
We anticipate that our customers will pay for access to the database by
means of a fixed subscription plus, in the case of pharmaceutical and
biotechnology companies, a share of any product revenues they generate as a
result of using the database.
Collaborations
During our development of the deCODE Combined Data Processing system, we
intend to establish alliances with partners who can contribute to the creation
of the deCODE Combined Data Processing system and the Icelandic Health Sector
Database and complement our efforts. Potential areas of collaboration include
access to comparable data from populations outside Iceland, assistance from
potential users with the design of products and technical expertise from vendors
or consultants. We anticipate that any partner would contribute to funding of
the development of the deCODE Combined Data Processing system.
HEALTHCARE INFORMATICS
We have identified three product opportunities in healthcare informatics to
leverage capabilities derived from our gene discovery and database operations.
Products
Bioinformatics. To aid in our gene and drug target discovery work, we have
developed numerous proprietary bioinformatics tools for genealogy analysis,
project management, gene mapping, physical mapping, and gene identification
which we hope to commercialize as independent products.
A description of these tools is illustrated below:
<TABLE>
<CAPTION>
TYPE DESCRIPTION
---- -----------
<S> <C>
Genealogy tools: - Clustering algorithms are used to compare lists of
patients with the genealogy database to determine relevant
patient relationships.
- Special datamining algorithms are used to determine the
genetic component of traits.
Project management tools: - Our sample manager is used to track blood and DNA samples
that have arrived in the laboratory, throughout the
discovery process.
- Our project manager is used to keep track of all patient
blood samples, DNA samples, pedigrees, and medical
information in research projects.
Genotyping tools: - Our genotype viewer automates the fractionation of data
according to quality, decreasing the amount of labor.
- The marker manager manages large genetic marker sets
collated in the laboratory and is used to view and define
maps for statistical analysis.
- Our genotype manager manages the imports and exports of
the genotypes for a given set of patients and markers.
- The Observer is a quality control tool for genotyping and
sequencing facilities.
Statistical tools: - The Allegro linkage analysis program has computational
power which is one to two orders of magnitude more efficient
than previously developed statistical analysis programs
known in the public domain.
</TABLE>
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<TABLE>
<CAPTION>
TYPE DESCRIPTION
---- -----------
<S> <C>
Physical mapping tools: - Our software automates the process of reading physical
mapping hybridization data through image analysis and uses
data-mining tools that combine multiple data sources.
Gene discovery tools: - GeneMiner is used to discover new genes through the use
of sequence information alone; it analyzes up to a million
base pairs of sequence; its graphical interface allows
user annotation; and it permits integration of third
party information (exon and gene predictors, sequence
comparison programs, mouse and human homology comparisons
and repeat similarity)
</TABLE>
Privacy Protection. deCODE has developed expertise in encryption
mechanisms and security management to fulfill the Icelandic Data Protection
Commission's requirements. For example, our encryption tools provide for privacy
of blood samples that enter our laboratory. We believe that the opportunity to
commercialize this expertise will grow as the healthcare industry seeks to take
advantage of the benefits that information technology offers to manage complex
healthcare data while maintaining patient confidentiality.
Medical Decision-Support Software. In deciding how to treat patients,
physicians are routinely required to make the appropriate link between the
specific details regarding patients and their general knowledge of best medical
practice. One of the main challenges facing physicians today is how to deal with
the vast and growing amount of information about best medical practice and the
specific circumstances of their patients. Medical decision-support software
provides computer-based assistance to physicians in assimilating and using
available information. deCODE expects to offer products which will include ways
of combining medical knowledge with patient information such as symptoms and
test results to assist physicians in determining diagnosis and treatment while
addressing patients' concerns about the confidentiality of their personal
medical data.
Customers
Bioinformatics. We believe that the customers for our bioinformatics tools
will mainly consist of pharmaceutical and biotechnology companies. However, we
also expect to attract customers in other areas of the healthcare industry.
These customers will use our tools to aid in their gene and drug target
discovery programs.
Privacy Products. We believe that privacy products can potentially be sold
to any company handling sensitive data about individual persons, whether or not
the data are healthcare-related. However, pharmaceutical companies, healthcare
providers and payors with substantial quantities of individual data protected by
privacy restrictions will serve as our primary target. One such opportunity is
to develop a secure Internet environment for government agencies collecting
nation-wide patient data from mobile field staff. Other opportunities relate to
developing and supporting medical decision-support services and enabling secure
remote access by patients, physicians and other users or to a distributed
network.
Medical Decision-Support Software. Products and services in the field of
decision support have a broad potential customer base in the healthcare
industry. deCODE's initial focus will be on healthcare providers, government
agencies, physicians and HMOs, all of whom use support tools that capture and
analyze patient data to assist them in healthcare decision-making.
RESEARCH AND DEVELOPMENT EXPENSES
Our research and development expenses were $9,234,368 in the quarter ended
March 31, 2000, $33,213,557 in 1999, $19,282,364 in 1998 and $6,080,096 in 1997.
Of these amounts, we estimate that $6,094,682 in the quarter ended March 31,
2000, $21,920,948 in 1999, $12,726,360 in 1998 and $0 in 1997 were customer
sponsored research activities.
PATENTS AND PROPRIETARY RIGHTS
We will be able to protect our proprietary rights from unauthorized use by
third parties only to the extent that our proprietary rights are covered by
valid and enforceable patents or are effectively maintained as trade secrets.
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Accordingly, patents and other proprietary rights protections are an essential
element of our business. We currently rely on patents, trade secret law and
contractual non-disclosure and confidentiality arrangements to protect our
proprietary information. We intend to seek patent protection in the United
States and other jurisdictions to protect technology, inventions and
improvements to inventions that are commercially important to the development of
our business, including genes we discover, mutations of genes and related
processes and inventions, technologies which may be used to discover and
characterize genes, and therapeutic and diagnostic processes and other
inventions based on these genes. We have no issued patents but have filed twelve
patent applications in the United States. We also intend to seek patent
protection or rely upon trade secret rights to protect other technologies that
may be used to develop databases and healthcare informatics products and
services.
We have obtained an exclusive license from The Beth Israel Deaconess
Medical Center, or Beth Israel, in Boston, Massachusetts to develop and
commercialize therapeutic and diagnostic products anywhere in the world based on
Beth Israel's interest in patents and know-how relating to the linkage between a
particular segment of DNA and multiple sclerosis. The license under the patents
will expire upon the expiration of the last patent to expire and thereafter the
license to the know-how will be perpetual. Under the terms of the agreement, we
are obligated to pay license fees and other payments upon the achievement of
specified milestones. We are also obligated to pay royalties to Beth Israel on
the sales of products that may result from the licensed technology. We do not
believe that payments under our agreement with Beth Israel will be material to
us.
COMPETITION
We face, and will continue to face, intense competition in our gene
discovery programs from organizations such as major pharmaceutical companies,
specialized biotechnology firms, universities and other research institutions,
the Human Genome Project and other government-sponsored entities. A number of
entities are attempting to rapidly identify and patent genes responsible for
causing diseases or an increased susceptibility to diseases and to develop
products based on these discoveries.
Competition is also intense in the healthcare informatics and database
areas. Many companies are focusing on medical record systems and cost-oriented
patient databases as well databases containing genomics information.
Many of our competitors, either alone or together with their collaborative
partners, have substantially greater financial resources and larger research and
development staffs than we do. These competitors may discover, characterize or
develop important genes, drug targets or drug leads before we or our
collaborators do or may obtain regulatory approvals of their drugs more rapidly
than we or our collaborators do. They may develop healthcare informatics and
database products before we do or which are technically superior to ours or
prove to be more useful to our potential customers.
Developments by others may render pharmaceutical product candidates or
technologies that we or our collaborators develop obsolete or non-competitive.
Any product candidate that we or our collaborators successfully develop may
compete with existing therapies that have long histories of safe and effective
use.
Our competitors may obtain patent protection or other intellectual property
rights that could limit our rights, or our customers' ability, to use our
technologies, healthcare informatics products or databases, or commercialize
therapeutic or diagnostics products. In addition, we face, and will continue to
face, intense competition from other companies for collaborative arrangements
with pharmaceutical and biotechnology companies, for establishing relationships
with academic and research institutions and for licenses to proprietary
technology.
Our ability to compete successfully will depend, in part, on our ability,
and that of our collaborators, to:
- develop proprietary products;
- develop and maintain products that reach the market first, and are
technologically superior to and more cost effective than other products
on the market;
- obtain patent or other proprietary protection for our products and
technologies;
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- attract and retain scientific and product development personnel;
- obtain required regulatory approvals; and
- manufacture, market and sell products that we develop.
GOVERNMENT REGULATION
Regulation by governmental authorities will be a significant factor in our
ongoing research and development activities and in our proposed business
relating to the deCODE Combined Data Processing system. In addition, the
development, production and marketing of any pharmaceutical products which we or
a partner may develop is subject to regulation by governmental authorities.
THE ICELANDIC HEALTH SECTOR DATABASE LICENSE
The deCODE Combined Data Processing system and the Icelandic Health Sector
Database are subject to applicable Icelandic law. The Icelandic Health Sector
Database will be developed and operated pursuant to an operating license from
the Ministry and will be subject to the Act, the regulations promulgated under
the Act, the license and an agreement between the licensee and the Ministry, all
of which impose numerous requirements on our activities.
As required by the license, concurrently with the issuance of the license,
we, through our Icelandic subsidiary, entered into an agreement with the
Ministry. This agreement provides that we must pay the Icelandic government a
fixed annual fee of 70 million Icelandic kronas (approximately $950,000) and an
additional annual fee of 6% of its net profit, up to a maximum of 70 million
Icelandic kronas per year (approximately $950,000). The agreement also provides
that our rights to the Icelandic Health Sector Database will be transferred to
the Ministry on the expiration or termination of the license.
The license and the agreement under which we received the license also
require us to:
- pay the costs that the health institutions incur (including the costs of
medical record software) in connection with the entering of data from
medical records before transfer to the Icelandic Health Sector Database;
- financially segregate the operation of the Icelandic Health Sector
Database from our other activities by maintaining a separate operating
unit and separate accounts for Icelandic Health Sector Database
operations;
- pay the costs of the governmental agencies which monitor our Icelandic
Health Sector Database activities;
- indemnify and agree not to sue the Icelandic government for any
liability resulting from the passage of the legislation on the Icelandic
Health Sector Database and its operation and/or the issuance of the
Icelandic Health Sector Database license; and
- observe international bioethics rules.
The license prohibits us from, among other things:
- abusing our position by charging unreasonable fees, refusing business to
our competitors or discriminating among customers by imposing
discriminatory or other onerous business terms on our customers; or
- assigning or pledging our rights in the license.
The Act places a number of duties on us, as the Icelandic Health Sector
Database licensee, and imposes a number of conditions on the Icelandic Health
Sector Database license. The Act, prohibits us from allowing direct access to
the Icelandic Health Sector Database and requires us keep the Icelandic Health
Sector Database and processing of the database in Iceland. Our database
employees and contractors must sign an irrevocable confidentiality oath prior to
commencing employment or performing services on our behalf. At the expiration of
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the Icelandic Health Sector Database license, we are required to ensure that the
Ministry or a party entrusted by the Ministry will receive, without payment of
consideration, intellectual property rights necessary for the creation and
operation of the database for public health purposes and for scientific
research.
The Icelandic Health Sector Database license may be revoked if we or our
employees violate the terms of the Act, if we fail to fulfill the conditions of
the license or if we become unable to operate the Icelandic Health Sector
Database. If we or our employees or any person assigned to process data violate
the provisions of the Act or applicable regulations with regard to
confidentiality, the license requires us to compensate any persons to whom the
data relate for financial loss which the violation causes. If results obtained
from cross-referencing data in the deCODE Combined Data Processing system prove
to be personally identifiable, the Data Protection Commission may, among other
actions, order the destruction of such results in their entirety or in part or
revoke its approval of the procedures and work processes applied by us to ensure
privacy of the Icelandic Health Sector Database data.
The Icelandic Health Sector Database license will be reviewed by the
Ministry no later than October 1, 2008. During the course of the review, we and
the Ministry will enter into discussions for the renewal of the license after
its expiration in 2012 provided that we continue to meet the requirements of all
applicable laws and regulations. The Ministry may also review the Icelandic
Health Sector Database license from time to time following our request, on its
own initiative or if the Icelandic Health Sector Database license contravenes
any applicable laws or regulations.
Our creation and operation of the Icelandic Health Sector Database and the
deCODE Combined Data Processing system will involve oversight by the Ministry,
with the assistance of an Icelandic Health Sector Database Monitoring Committee,
an Interdisciplinary Ethics Committee, the Bioethics Committee of Iceland and
the Data Protection Commission of Iceland. These bodies will help to ensure our
compliance with applicable laws and regulations.
The Monitoring Committee consists of three members which the Minister of
Health and Social Security appoints. The Monitoring Committee will ensure that
the licensee complies with the Act and applicable regulations by monitoring
negotiations and agreements for the transfer of data and reporting any events of
noncompliance with the Act to the Ministry. The Monitoring Committee is charged
with protecting the interests of the public health authorities, health
institutions, self-employed health service workers and scientists in the process
of making agreements between us and those parties.
The Interdisciplinary Ethics Committee will review query types and monitor
research projects for compliance with internationally accepted ethical standards
for scientific research involving human beings. The Ministry appoints members of
the Interdisciplinary Ethics Committee which may halt any query or research
project deemed by the committee to violate such standards.
The Bioethics Committee of Iceland is a standing committee that oversees
scientific research relating to human beings in Iceland. It has no direct
supervisory function over our Icelandic Health Sector Database license but will
provide ethical advice to the Monitoring Committee based upon quarterly reports
containing lists of queries and patient data submitted to the Icelandic Health
Sector Database. The Ministry appoints the members of the committee.
Members of the Data Protection Commission, which is a standing committee
responsible for overseeing rights of privacy and data protection in Iceland,
include health, legal and computer specialists. The Minister of Justice appoints
the members of the commission. The Data Protection Commission establishes the
technology, security and organizational terms with which we must comply in the
development of the Icelandic Health Sector Database pursuant to the Icelandic
Health Sector Database license. The Data Protection Commission may periodically
review such terms in light of new technologies, experience or change of
circumstances, and we will be required to comply with the revised data
protection terms within the deadline established by the Data Protection
Commission. The Data Protection Commission will monitor the security of the
collection, use and access to patients' information and may intervene to prevent
breaches of such security. The Data Protection Commission will ensure that we
comply with the privacy laws applicable in Iceland and will administer the
access limitations to data and encryption methodology used for the Icelandic
Health Sector Database.
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PHARMACEUTICAL PRODUCTS
Our success will depend, in part, on the development and marketing of
products based on our research and development. Strict regulatory controls on
the clinical testing, manufacture, labelling, supply and marketing of the
products will influence our ability and our partners' ability to successfully
manufacture and market therapeutic or diagnostic products. Most countries
require a company to obtain and maintain regulatory approval for a product from
the relevant regulatory authority to enable the product to be marketed.
Obtaining regulatory approval and complying with appropriate statutes and
regulations is time-consuming and requires the expenditure of substantial
resources.
Most European countries and the United States have very high standards of
technical appraisal and consequently, in most cases, a lengthy approval process
for pharmaceutical products. The regulatory approval processes, which usually
include pre-clinical and clinical studies, as well as post-marketing
surveillance to establish a compound's safety and efficacy, can take many years
and require the expenditure of substantial resources. Data obtained from such
studies is susceptible to varying interpretations that could delay, limit or
prevent regulatory approval. Delays or rejections may also be encountered based
upon changes in drug approval policies in applicable jurisdictions. There can be
no assurance that we or our collaborative customers will obtain regulatory
approval for any drugs or diagnostic products developed as the result of our
gene discovery programs.
Because many of the products which may result from our research and
development programs are likely to involve the application of new technologies,
various governmental regulatory authorities may subject such products to a
greater degree of review. As a result, regulatory approvals for such products
may require more time than for products using more conventional technologies. In
addition, ethical concerns about the use of genetic predisposition testing, and
in particular about the risk that such testing could lead to discrimination by
insurance providers or employers, may lead to poor market acceptance or to
regulatory controls that would adversely affect the development of or demand for
diagnostic products based on our research.
ENVIRONMENTAL
Our research facilities and laboratory are located in Reykjavik, Iceland.
We operate under applicable Icelandic and European Union laws and standards,
with which we believe that we comply, relating to environmental, hazardous
materials and other safety matters. Our research and manufacturing activities
involve the generation, use and disposal of hazardous materials and wastes,
including various chemicals and radioactive compounds. These activities are
subject to standards prescribed by Iceland and the EU. We do not believe that
compliance with these laws and standards will have any material effect upon our
capital expenditures, earnings or competitive position, nor that we will have
any material capital expenditures for environmental control facilities for the
remainder of this fiscal year or any succeeding fiscal year.
EMPLOYEES
As of December 31, 1999, we had approximately 310 employees, of whom
approximately 295 were employed full-time, 47 held Ph.D. or M.D. degrees and
approximately 171 held college degrees. 267 employees were engaged in, or
directly supported, research and development activities, of whom 185 worked
within the laboratory facilities and 50 held positions associated with the
development of informatics. 38 employees were engaged in business development,
finance, administration and facilities management. In addition, we utilized
part-time employees and outside contractors and consultants as needed and plan
to continue to do so. We anticipate hiring approximately 100 software developers
in 2000 and 2001.
We have entered into individual employment contracts with our employees in
accordance with standard Icelandic hiring practices. We believe that the
relationship with our employees is good. Furthermore, to help protect our
proprietary know-how and data, each employee must agree not to disclose any
trade secret or confidential information without our prior consent. Employees
also assign to us all patent rights and technical information which they develop
during employment.
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FACILITIES
Our headquarters are located at Lynghals 1, Reykjavik, Iceland, a business
district. This three-story building, which we lease pursuant to a sale/leaseback
arrangement, has 3,300 square meters, or approximately 30,000 square feet, of
floor space including our laboratory space, executive offices, support and
administrative space. The lease expires in 2008, at which time the property will
be transferred to us, provided we have complied fully with the lease. We may
also build a 1,500 square meter, or approximately 13,500 square foot, facility
on adjacent land. In addition, we maintain a facility for approximately 15
genealogists located in Thornverholt 14, Reykjavik and we lease 533 square
meters, or approximately 5,000 square feet, of additional office space for our
database department at Hlietharsmari 19, Kopavogur, Iceland. We have also
entered into two leases for a total of 2,308 square meters, or approximately
19,000 square feet in a facility located at Hlietharsmari 15, Kopavogur, Iceland
to conduct database and informatics activities and provide additional management
and administrative space.
On February 15, 2000, we entered into an agreement with the City of
Reykjavik and the University of Iceland pursuant to which, subject to municipal
approval, we will be entitled to enter into a lease and construct a 10,000
square meter, or approximately 108,000 square foot, facility to replace our
current headquarters facility. If such approval is granted, we expect to
complete the project within the next two years.
LEGAL PROCEEDINGS
We are not a party to any material legal proceedings except as follows: On
January 13, 2000 Thornorsteinn Jonsson and Genealogia Islandorum hf., the
holders of copyrights to approximately 100 books of genealogical information,
commenced an action against us in the District Court of Reykjavik in Iceland.
They allege that our genealogy database infringes their copyrights and seek
damages in the amount of approximately $9,000,000 and a declaratory judgment to
prevent us from using the allegedly infringing data. We believe the suit is
without merit and intend to defend this action vigorously.
In January, 2000, an individual advised us that he believes that he and
another individual are entitled to receive, collectively, 1,000,000 shares of
our common stock pursuant to an agreement with us. The other individual has not
asserted a claim to these shares. We believe that this assertion is without
merit and intend to defend vigorously any action that this party may commence.
On April 10, 2000, Ernir Snorrason, one of our original stockholders, filed
a complaint in the Court of Chancery of the State of Delaware for New Castle
County alleging that we improperly exercised an option to repurchase 256,637
shares of common stock that we issued to him in 1996 pursuant to a Founders'
Stock Purchase Agreement. The complaint seeks an order requiring us to recognize
Mr. Snorrason as the owner of these shares. We believe that we have good
defenses to this action and intend to defend it vigorously. However, given the
uncertainties inherent in the litigation process, we cannot be certain of the
outcome of this proceeding.
Mannvernd issued a press release in February, 2000, announcing its
intention to file lawsuits against the State of Iceland and any other relevant
parties, including us, to test the constitutionality of the Act. In its press
release, Mannvernd indicated that it hopes to halt the construction and/or
operation of the Icelandic Health Sector Database. Mannvernd has not commenced
litigation against us and we are not aware of any other litigation commenced by
Mannvernd with respect to the Act.
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<PAGE> 60
MANAGEMENT
EXECUTIVE OFFICERS AND DIRECTORS
Our executive officers and directors as of the date of this prospectus are
as follows:
<TABLE>
<CAPTION>
NAME AGE POSITION
---- --- --------
<S> <C> <C>
Kari Stefansson(2)................... 51 Chairman of the Board of Directors, President, Chief
Executive Officer and Secretary
Hannes Smarason...................... 32 Executive Vice President and Senior Business and
Finance Officer
Axel Nielsen......................... 35 Vice President, Finance and Treasurer
Jeffrey Gulcher...................... 40 Vice President, Research and Development
Kristjan Erlendsson.................. 50 Vice President, Clinical Collaborations
Hakon Guethbjartsson................. 34 Vice President, Informatics
Sigurethur Bjornsson................. 36 Vice President, Medical Informatics
Jean-Francois Formela(1)............. 43 Director
Andre Lamotte........................ 51 Director
Terrance McGuire(1)(2)(3)............ 43 Director, Vice-Chairman of the Board of Directors and
Assistant Secretary
Guy Nohra(1)(3)...................... 39 Director
Sir John Vane........................ 72 Director
</TABLE>
---------------
(1) Member of Audit Committee.
(2) Member of Nominating Committee.
(3) Member of Compensation Committee.
Following are brief descriptions of our current executive officers and
directors:
Kari Stefansson, M.D., Dr. Med. has served as our President, Chief
Executive Officer, Secretary and a Director since he co-founded deCODE in August
1996. Dr. Stefansson was appointed to serve as the Chairman of our Board of
Directors in December 1999. From 1993 until April 1997, Dr. Stefansson was a
professor of Neurology, Neuropathology and Neuroscience at Harvard University.
In addition, from 1993 through December 1996 he was Director of Neuropathology
at Beth Israel Hospital in Boston, Massachusetts. From 1983 to 1993, he held
faculty positions in Neurology, Neuropathology and Neurosciences at the
University of Chicago. Dr. Stefansson received his M.D. and Dr. Med. from the
University of Iceland in 1976 and 1986, respectively.
Hannes Smarason has served as our Executive Vice President and Senior
Business and Finance Officer since March 2000. From March 1999 to March 2000, he
served as our Senior Vice President, Chief Business Officer and Treasurer and
from January 1997 to March 1999, he served as our Chief Financial Officer and
Vice President of Business Development. Before joining us, he worked with
McKinsey & Co. in Boston from 1992 through December 1996 as a consultant. Mr.
Smarason received his B.S. in Mechanical Engineering and Management from the
Massachusetts Institute of Technology and his M.B.A. from the Massachusetts
Institute of Technology Sloan School of Management.
Axel Nielsen has served as our Vice President, Finance and Treasurer since
March 2000. From March 1999 to March 2000, he served as our Chief Financial
Officer and from June 1998 to March 1999, he served as our controller.
Icelandair employed Mr. Nielsen as the Director of Strategic Affairs from July
1997 to June 1998. From August 1995 to June 1997 he worked with McKinsey & Co.
in London as a consultant. Mr. Nielsen received a B.Sc. in Computer Science from
the University of Iceland in 1989, a Cand. Oecon. in Business and Finance from
the University of Iceland in 1991, and an M.B.A. from the Massachusetts
Institute of Technology Sloan School of Management in 1995.
Jeffrey Gulcher, M.D., Ph.D. has served as our Vice President, Research and
Development since he co-founded the company in August 1996. Dr. Gulcher was on
staff in the Department of Neurology at Beth Israel
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<PAGE> 61
Hospital in Boston, Massachusetts and Harvard University Medical School from
June 1993 to October 1998. Dr. Gulcher received his Ph.D. and M.D. from the
University of Chicago in 1986 and 1990, respectively, and completed his
neurology residency at the Longwood Program of the Neurology Department of the
Harvard Medical School in 1996.
Dr. Kristjan Erlendsson joined us in September 1998 to oversee
collaboration projects and was elected to serve as our Vice President for
Clinical Collaborations in March 1999. From March 1996 to August 1998, he was
Director of Hospital Affairs at Iceland's Ministry of Health and Social
Security. Since 1988, Dr. Erlendsson has served as Executive Director of Medical
Education at the University of Iceland. He has also been a Consultant in
Internal Medicine, Allergy and Clinical Immunology at Landspitalinn University
Hospital since 1985. Dr. Erlendsson received his M.D. from the University of
Iceland in 1976, trained in internal medicine at the University of
Connecticut-New Britain General Hospital from 1978 to 1981, and did a
postdoctoral fellowship in allergy and clinical immunology at Yale
University-Yale New Haven Hospital from 1981 to 1984.
Hakon Guethbjartsson, Ph.D. has served as our Vice President, Informatics
since March 2000. In 1996, Dr. Guethbjartsson joined us to direct our Department
of Informatics. Dr. Guethbjartsson received his B.Sc. in electrical engineering
in 1990 and his M.Sc. in electrical engineering and computer science in 1992
from the University of Iceland. In 1996, he received his Ph.D. from the
Massachusetts Institute of Technology and performed post-doctoral research
concerning magnetic resonance imaging at Brigham and Woman's Hospital in Boston
until he joined deCODE.
Sigurethur Bjornsson has served as our Vice President, Medical Informatics
since February 1999. Mr. Bjornsson served as Chief Executive Officer of Thor
Investments and Chief Financial Officer of Hof Holdings from February 1996 to
January 1999 and Director of Information Technology for Hof Holdings from
November 1992 to January 1996. Mr. Bjornsson studied mathematics at the
University of Iceland from 1984 to 1987.
Jean-Francois Formela, M.D. has served as a director of deCODE since August
1996, and as a member of our Audit Committee since February 1998. Dr. Formela is
a General Partner of Atlas Venture Associates II, L.P. Before joining Atlas
Venture in 1993, Dr. Formela was Senior Director, Medical Marketing and
Scientific Affairs at Schering-Plough in the U.S. where he also held
biotechnology licensing and marketing responsibilities. Dr. Formela is a
director of Biochem Pharma, Exelixis, Inc. and several private companies. Dr.
Formela holds an M.D. from Paris University School of Medicine and an M.B.A.
from Columbia Business School.
Andre Lamotte has served as a director of deCODE since August 1996. In
1989, Dr. Lamotte founded Medical Science Partners, or MSP, which specializes in
early stage life sciences investments, in affiliation with Harvard University,
and has served as the Managing General Partner since then. Before founding MSP,
Dr. Lamotte served as a General Manager at Pasteur Merieux from April 1983 to
April 1988. He also currently serves as the Managing General Partner of Medical
Science Partners II, L.P. and Medical Science II Co-Investment, L.P. Dr. Lamotte
is a director of Ascent Pediatrics, Inc. Dr. Lamotte holds a Ph.D. in chemistry
from the Massachusetts Institute of Technology and an M.B.A. from Harvard
University.
Terrance G. McGuire has served as a director of deCODE since August 1996
and as Assistant Secretary since January 1998 and Vice-Chairman of the Board of
Directors since April 2000. He currently serves as Chairman of three board
committees: the Compensation Committee, the Audit Committee and the Nominating
Committee. Since March 1996, he has been a Founding General Partner of Polaris
Venture Partners. Since 1992, he has served as a general partner of Alta V
Management Partners L.P., which is the general partner of Alta V Limited
Partnership. He is a director of Akamai Technologies, Inc., Aspect Medical
Systems, Inc., Inspire Pharmaceuticals, Inc., Wrenchead.com, Inc., Paradigm
Genetics, Inc. and several other private healthcare and information technology
companies. Mr. McGuire received his B.S. in Physics and Economics from Hobart
College, his M.S. in Engineering from Dartmouth College and his M.B.A from the
Harvard Business School.
Guy P. Nohra has served as a director of deCODE since August 1996. He is a
founder and general partner of Alta Partners, a venture capital partnership
investing in information technologies and life science companies. Prior to
founding Alta Partners in 1996, Mr. Nohra was a partner of Burr, Egan, Deleage &
Co., which he joined in 1989 and served as a Vice President from 1989-1997.
Previously, Mr. Nohra was a Product Manager of
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<PAGE> 62
Medical Products with Security Pacific Trading Corporation where he was
responsible for a multi-million dollar product line and travelled extensively in
Korea, Taiwan, Hong Kong, China and Southeast Asia. In 1982, he received his
B.A. from Stanford University and in 1989 he received his M.B.A from the
University of Chicago Graduate School of Business. Mr. Nohra is serving or has
served on the board of directors of Vesica, Pilot Cardiovascular, InnerDyne,
Interpore, R2 Technologies, VitaGen and several private life science companies.
Sir John Vane has served as a director of deCODE since January 1997. In
1982, Sir John received the Nobel Prize in Physiology or Medicine for his work
in prostaglandins and for discovering the mode of action of aspirin. As a
consultant to Squibb, he initiated the program on inhibiting
angiotensin-converting enzyme which led to the marketing of Captopril. During 12
years as Director of Research and Development at the Wellcome Foundation, he
oversaw the development of Tracrium, Flolan, Zovirax and Lamictal. In 1986, he
founded the William Harvey Research Institute and built the Institute to over
100 members, first as Chairman, then as Director General, and, since 1997, as
Honorary President. Sir John graduated with a degree in Chemistry from
Birmingham University, obtained a D.Phil and D.Sc in Pharmacology from Oxford
University, and spent 20 years in academic research. Sir John acts as a
consultant to, and board member of, several pharmaceutical and biopharmaceutical
companies. Sir John also has served as a partner of Vane Associates since 1997.
He became a Fellow of the Royal Society in 1974, was knighted in 1984 and has
received numerous other honorary fellowships and doctorates.
Other Significant Management Member
C. Augustine Kong, Ph.D., who is 41 years old, has served as our Director
of Statistics as a full time consultant since 1996. He is an associate professor
in the Department of Human Genetics at the University of Chicago, where he has
been a member of the faculty since 1987. Dr. Kong received his Ph.D. in
statistics from Harvard University in 1986.
Members of our Board of Directors serve for a term of one year and until
their successors are elected and qualify. Our Board of Directors elects our
executive officers, who serve until their successors are elected and qualify.
COMPENSATION COMMITTEE INTERLOCKS AND INSIDER PARTICIPATION
During 1999, our compensation committee consisted of Terrance McGuire and
Guy Nohra. Neither of the members of our compensation committee has at any time
been an officer or employee of deCODE. No interlocking relationship exists
between our Board of Directors or compensation committee and the board of
directors or compensation committee of any other company, nor has any
interlocking relationship existed in the past.
CLASSIFIED BOARD OF DIRECTORS
Upon the closing of this offering, our certificate of incorporation will
provide for a classified Board of Directors consisting of three classes of
directors, each serving staggered three-year terms. As a result, a portion of
our Board of Directors will be elected each year. We will implement the
classified structure at the first annual meeting of stockholders following the
closing of this offering by electing two directors for one-year terms, two
directors for two-year terms and two directors for three-year terms. After these
initial terms, directors will be elected for three-year terms.
DIRECTOR COMPENSATION
Our directors do not receive cash compensation for services on our Board of
Directors or any board committee, except as described below. We entered into an
agreement with Vane Associates (of which Sir John Vane is a partner) on December
1, 1997, pursuant to which we agreed to pay Vane Associates $2,000 per day for
each Board meeting that Sir John attends and to grant Sir John options to
purchase up to an aggregate of 60,000 shares of our common stock for his
participation on our Board of Directors. Pursuant to the agreement, Sir John
received a stock option for 15,000 shares on December 1, 1997, at an exercise
price of $0.20 per share, a stock option for 15,000 shares on December 1, 1998,
at an exercise price of $4.00 per share, and a stock option for 15,000 shares on
December 1, 1999, at an exercise price of $18.29 per share. In addition, Sir
John will receive
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<PAGE> 63
a stock option for 15,000 shares on December 1, 2000, at an exercise price equal
to the fair market value on the date of grant subject to the continued
satisfaction of certain obligations under our agreement with Vane Associates. We
reimburse all directors for their expenses incurred in connection with
attendance at Board of Directors and committee meetings.
BOARD COMMITTEES
Our Board of Directors has established an audit committee, a nominating
committee and a compensation committee. Our audit committee, which consists of
Terrance McGuire, Guy Nohra and Jean-Francois Formela, reviews the results and
scope of our annual audit and the services provided by our independent auditors.
Our nominating committee, which consists of Kari Stefansson and Terrance
McGuire, reviews the qualifications of candidates and proposes nominees to serve
as directors on our board and nominees for membership on our board committees.
Our compensation committee, which consists of Terrance McGuire and Guy Nohra,
makes recommendations to the Board of Directors with respect to our general and
specific compensation policies and practices and administers our 1996 Equity
Incentive Plan.
SCIENTIFIC ADVISORY BOARD
An international Scientific Advisory Board, which is currently composed of
four members with expertise in the fields of statistics, molecular biology,
genetic research and medicine, advises us. Our Scientific Advisory Board meets
periodically to review specific projects with those members who are experts in
the subjects being discussed. In addition, we may consult individual board
members as to matters in their respective areas of expertise. Our Scientific
Advisory Board currently is composed of the following individuals:
Professor Peter Donnelly, Ph.D. Dr. Donnelly graduated with a Ph.D. in
statistics from Oxford University. He was Professor of Statistics and Ecology
and Evolution at the University of Chicago before he returned to Oxford as
Professor of Statistical Science and Chairman of the Department of Statistics.
In addition to being on our scientific advisory board, Dr. Donnelly has agreed
to spend one month a year assisting us on statistical and population genetic
issues.
Karl Tryggvason, M.D., Ph.D. Dr. Tryggvason is Professor of Medical
Chemistry at the Karolinska Institute in Stockholm, Sweden, and the leading
author of over 150 scientific publications. Dr. Tryggvason is a permanent member
of the Nobel Assembly, and was recently re-elected to the Nobel Committee for
Physiology or Medicine.
Helgi Valdimarsson, M.D. Dr. Valdimarsson is Professor of Immunology and
former chairman of the Department of Medicine at the University of Iceland.
Guethmundur Thornorgeirsson, M.D. Dr. Thornorgeirsson is Professor of
Internal Medicine at the University of Iceland and the chairman of the
scientific board of the Icelandic Heart Association.
SECURITY ADVISORY BOARD
A Security Advisory Board, which currently consists of three experts in the
fields of computer security, data and privacy protection and security of medical
informatics, will meet periodically to review security issues in our operations
and in the development and operation of the Icelandic Health Sector Database and
to advise us on the development of appropriate security measures. Our Security
Advisory Board currently consists of the following individuals:
Professor Fred B. Schneider, Ph.D. Dr. Schneider is a professor of
Computer Science at Cornell University. He is a former chair of the United
States National Research Council Study on Information Systems Trustworthiness
and currently serves as a member of Sun Microsystems, Inc.'s Java Security
Advisory Council.
John Horm. Mr. Horm is a senior public-sector biostatistician. He
currently serves as Expert Research Officer at the United States National Center
for Health Statistics, and has also served the National Cancer Institute. He is
the manager of the National Center for Health Statistics Research Data Center,
which gives outside researchers statistical access to medical information
without violating patient confidentiality.
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<PAGE> 64
Assistant Professor Latanya Sweeney. Ms. Sweeney is Assistant Professor of
Public Policy and of Computer Science at Carnegie Mellon University. In addition
to her research career in computational disclosure control, she has served as a
consulting expert in several proceedings concerning the disclosure of sensitive
medical information.
EXECUTIVE COMPENSATION
The following table provides certain information concerning the annual and
long-term compensation for the fiscal year ended December 31, 1999 of: (i) our
Chief Executive Officer; and (ii) our four highest-paid executive officers as of
December 31, 1999 whose salary and bonus earned during the fiscal year ended
December 31, 1999 exceeded $100,000. These individuals are referred to as the
"Named Officers" here and elsewhere in the prospectus.
SUMMARY COMPENSATION TABLE
<TABLE>
<CAPTION>
LONG-TERM
ANNUAL COMPENSATION
COMPENSATION(1) STOCK OPTION AWARDS
--------------- (NUMBER OF SHARES ALL OTHER
NAME AND PRINCIPAL POSITION SALARY UNDERLINING OPTIONS) COMPENSATION
--------------------------- --------------- -------------------- ------------
<S> <C> <C> <C>
Kari Stefansson............................... $304,551 -- $43,686(2)
Chairman of the Board of Directors, President,
Chief Executive Officer and Secretary
Hannes Smarason............................... $146,597 260,000 --
Executive Vice President and Senior Business
and Finance Officer
Jeffrey Gulcher............................... $162,323 -- --
Vice President, Research and Development
Kristjan Erlendsson........................... $132,460 -- --
Vice President, Clinical Collaborations
Sigurethur Bjornsson.......................... $114,062 -- --
Vice President, Medical Informatics
</TABLE>
---------------
(1) Includes compensation paid in Icelandic kronas. Figures reflect an exchange
rate of 72.55 Icelandic kronas to $1.00, the exchange rate determined by
the Central Bank of Iceland on December 31, 1999.
(2) Includes the value of housing and an automobile provided by us for the
benefit of the Named Officer.
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The following table provides certain information concerning grants of stock
options to the Named Officers during the fiscal year ended December 31, 1999.
The percent of the total options set forth below is based on an aggregate of
840,500 options granted to employees in 1999.
OPTION GRANTS IN LAST FISCAL YEAR INDIVIDUAL GRANTS
<TABLE>
<CAPTION>
POTENTIAL
REALIZABLE VALUE
AT ASSUMED
ANNUAL RATES OF
NUMBER OF PERCENTAGE OF STOCK PRICE
SECURITIES TOTAL OPTIONS APPRECIATION FOR
UNDERLYING GRANTED TO EXERCISE OR OPTION TERM
OPTIONS EMPLOYEES IN BASE PRICE EXPIRATION -----------------
NAME GRANTED FISCAL 1999 PER SHARE DATE 5% 10%
---- ---------- ------------- ----------- ---------- ------ ------
<S> <C> <C> <C> <C> <C> <C>
Kari Stefansson............... 0 -- -- -- -- --
Hannes Smarason............... 260,000 30.9% $5.63 8/26/09 $ 0(1) $ 0(1)
Jeffrey Gulcher............... 0 -- -- -- -- --
Kristjan Erlendsson........... 0 -- -- -- -- --
Sigurethur Bjornsson.......... 0 -- -- -- -- --
</TABLE>
---------------
(1) This option was exercised prior to December 31, 1999 pursuant to an early
option exercise right.
The following table sets forth certain information concerning exercisable
and unexercisable stock options that the Named Officers held as of December 31,
1999.
AGGREGATE OPTION EXERCISES IN LAST FISCAL YEAR
FISCAL YEAR-END OPTION VALUES
<TABLE>
<CAPTION>
NUMBER OF UNEXERCISED VALUE OF UNEXERCISED
OPTIONS AT IN-THE-MONEY
SHARES ACQUIRED VALUE FISCAL YEAR END(1) OPTIONS OF FISCAL YEAR-END
NAME ON EXERCISE REALIZED EXERCISABLE/UNEXERCISABLE EXERCISABLE/UNEXERCISABLE
---- --------------- -------- ------------------------- --------------------------
<S> <C> <C> <C> <C>
Kari Stefansson........... 0 -- 0/0 $0/0
Hannes Smarason........... 260,000 $ 0 0/0 $0/0
Jeffrey Gulcher........... 0 -- 0/0 $0/0
Kristjan Erlendsson....... 0 -- 0/0 $0/0
Sigurethur Bjornsson...... 0 -- 0/0 $0/0
</TABLE>
---------------
(1) All of the options granted to date to employees (including officers) have
provided for an early exercise right, which has been exercised. See
"Description of Securities -- Stock Options" and "Certain Transactions" for
information pertaining to the early exercise right and promissory notes
delivered by certain Named Officers in connection with their exercise of
such rights.
EMPLOYMENT AGREEMENTS
At the time of commencement of employment, our executive officers generally
receive offer letters specifying basic terms and conditions of their employment.
We have entered into employment agreements with Mr. Erlendsson and Mr. Bjornsson
that allow either party to terminate the agreement upon three months and six
months prior notice, respectively.
Our executive officers have signed agreements which require them to
maintain the confidentiality of our information and to assign inventions to us.
These agreements also prohibit these officers from competing with us during the
terms of their employment and for two years thereafter by engaging in any
capacity in any business which is, or on the date of termination of their
employment was, competitive with our business.
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CERTAIN TRANSACTIONS
In January 1998 and August 1999, we granted to Hannes Smarason, our
Executive Vice President and Senior Business and Finance Officer, options to
purchase 300,000 and 260,000 shares of our common stock, respectively. In
November 1998, we granted to Sigurethur Bjornsson, our Vice President, Medical
Informatics, an option to purchase 120,000 shares of our common stock. Messrs.
Smarason and Bjornsson immediately exercised their options pursuant to the early
exercise right granted to all our employees. At the times of exercise, Mr.
Smarason delivered to us promissory notes in the principal amounts of $59,700
and $1,462,240 and Mr. Bjornsson delivered to us a promissory note in the amount
of $479,880. Each of these promissory notes bears interest in the amount of six
percent (6%) per annum. The notes are due and payable on January 1, 2001,
November 1, 2003 and February 1, 2003, respectively. The shares that Mr.
Bjornsson and Mr. Smarason purchased in 1998 vest at the rate of 1/4 on the
first anniversary of the date of employment and 1/48 on the last day of each
month thereafter. The shares that Mr. Smarason purchased in 1999 vest at the
rate of 1/48 on the first day of each month, commencing December 1, 1999. As of
December 31, 1999, the principal and accrued interest on the notes that Mr.
Smarason delivered in 1998 and 1999 was $66,769 and $1,487,432, respectively,
and the principal and accrued interest on the note that Mr. Bjornsson delivered
was $512,340.
Kari Stefansson, our Chairman, Chief Executive Officer and President, and
Mr. Smarason are holders of 29.75% and 32.75%, respectively, of the outstanding
shares of Prokaria ehf., an Icelandic company which has entered into a research
collaboration with deCODE, on terms we believe to be no less favorable than
those we could obtain from an unrelated third party, for discovery of compounds
made from thermophilic organisms. Dr. Stefansson is Chairman of the Board and
Mr. Smarason is a director of Prokaria ehf. We provide funding for, and own the
rights to all intellectual property created in, this collaboration. During 1998
and 1999, we made research funding payments to the company in the aggregate
amount of $593,955.
In February and May 1999, we sold to Roche Finance shares of Series C
preferred stock and warrants to purchase shares of Series C preferred stock for
an aggregate purchase price of $3,333,445. In June 2000 we sold to SAPAC, Roche
Finance's successor-in-interest, shares of Series C Preferred Stock and a
warrant to purchase shares of Series C Preferred Stock for an aggregate purchase
price of $2,222,280.
In August 1999, we
- repurchased 13,559 shares of Series A preferred stock held by Alta
Embarcadero Partners, LLC, 507,711 shares of Series A preferred stock
held by Alta California Partners, L.P., 260,635 shares of Series A
preferred stock held by Atlas Venture Europe Fund, B.V., 260,635 shares
of Series A preferred stock held by Atlas Venture Fund II, L.P., 146,628
shares of Series A preferred stock held by Medical Science Partners, II,
L.P., 39,686 shares of Series A preferred stock held by Medical Science
II Co-Investment, L.P., 395,714 shares of Series A preferred stock held
by Polaris Venture Partners, L.P. and 23,040 shares of Series A
preferred stock held by Polaris Venture Partners Founders' Fund, L.P.;
- issued (and repurchased) 250,000 shares of Series B preferred stock to
Kari Stefansson in exchange for 333,333 shares of common stock held by
him; and
- repurchased 100,000 shares of Series C preferred stock held by Roche
Finance.
At the time of the transactions with Dr. Stefansson, the common stock was
estimated to have a fair market value equal to 90% of the fair market value of
the Series B preferred stock. We held the re-acquired common stock and Series B
preferred stock in treasury and subsequently re-issued it during 1999.
The initial purchase price we paid for the shares of Series A preferred
stock, Series B preferred stock and Series C preferred stock was $7.50 per
share. Pursuant to the agreement of the parties, this price was subject to later
upward adjustment to reflect possible adjustment in the price at which we sold
shares of Series B preferred stock to a third party in August 1999. In December
1999, the purchase price was adjusted to $13.95 per share with the additional
amounts paid in February 2000. Mr. Nohra, one of our directors, is a general
partner of Alta Partners, which provides investment advisory services to Alta
California Partners, L.P. and Alta Embarcadero Partners, LLC. Dr. Formela, one
of our directors, is a general partner of Atlas Venture Associates II, L.P., the
general partner of Atlas Venture Fund II, L.P. Mr. McGuire, one of our
directors, is a general partner of Polaris Venture Partners, L.P. and Polaris
Venture Partners Founders' Fund, L.P. Mr. Lamotte, one of our directors, is the
Managing General Partner of Medical Science Partners II, L.P. and Medical
Science II Co-Investment, L.P.
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PRINCIPAL STOCKHOLDERS
The following table sets forth certain information regarding the beneficial
ownership of our common stock as of July 15, 2000, and as of that date as
adjusted to give effect to the offering, by (i) each person who is known by us
to own beneficially more than 5% of our common stock; (ii) each of our Named
Officers and current directors; and (iii) all of our directors and Named
Officers as a group.
<TABLE>
<CAPTION>
NUMBER OF SHARES PERCENTAGE PERCENTAGE
BENEFICIALLY OWNED OWNED BEFORE OWNED AFTER
NAME OF BENEFICIAL OWNER BEFORE OFFERING(1) OFFERING(1) OFFERING(1)
------------------------ ------------------ --------------- ---------------
<S> <C> <C> <C>
SAPAC Corporation Ltd.(2)..................... 4,483,334 13.3% 10.3%
124 Grenzacherstrasse (including 1.2% (including 1.0%
CH-4070 Basel in warrants) in warrants)
Switzerland
Entities affiliated with Alta Partners(3)..... 2,335,082 6.9% 5.4%
One Embarcadero Center, Suite 4050 (including .7% (including .6%
San Francisco, CA 94111 in warrants) in warrants)
Entities affiliated with Atlas Venture(4)..... 2,335,082 6.9% 5.4%
222 Berkeley Street, Suite 1950 (including .7% (including .6%
Boston, MA 02116 in warrants) in warrants)
Entities affiliated with Polaris Venture 1,875,848 5.6% 4.3%
Partners, L.P.(5)........................... (including .6% (including .5%
1000 Winter Street in warrants) in warrants)
Suite 3350
Waltham, MA 02154
Kari Stefansson............................... 3,125,292 9.4% 7.3%
Hannes Smarason............................... 560,000 1.7% 1.3%
Jeffrey Gulcher............................... 481,200 1.4% 1.1%
Kristjan Erlendsson........................... 125,000 * *
Sigurethur Bjornsson.......................... 120,000 * *
Jean-Francois Formela(4)...................... 2,335,082 6.9% 5.4%
(including .7% (including .6%
in warrants) in warrants)
Andre Lamotte(6).............................. 845,259 2.5% 2.0%
(including .3% (including .2%
in warrants) in warrants)
Terrance McGuire(5)........................... 1,875,848 5.6% 4.3%
(including .6% (including .5%
in warrants) in warrants)
Guy Nohra(3).................................. 2,335,082 6% 5.4%
(including .7% (including .6%
in warrants) in warrants)
Sir John Vane(7).............................. 45,000 * *
All directors and executive officers as a
group (10 persons)(8)....................... 11,847,763 34.6% 27%
(including 2.4% (including 1.9%
in stock in stock
options and options and
warrants) warrants)
</TABLE>
---------------
* Less than one percent
(1) Beneficial ownership is determined in a manner prescribed by the rules of
the Securities and Exchange Commission and generally includes voting or
investment power with respect to securities. Shares of
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common stock subject to stock options and warrants currently exercisable or
exercisable within 60 days are considered outstanding for computing the
percentage ownership of the person holding the options and the percentage
ownership of any group of which the holder is a member, but are not
considered outstanding for computing the percentage ownership of any other
person. Except as indicated by footnote, or otherwise subject to community
property laws, the persons named in the table have sole voting and
investment power with respect to all shares of common stock shown as
beneficially owned by them.
Applicable percentage of ownership is based on 33,390,343 shares of common
stock outstanding on the date of this prospectus giving effect to the
automatic conversion of all outstanding shares of our preferred stock into
shares of common stock upon the closing of this offering and on 42,990,343
shares of common stock outstanding after this offering.
(2) SAPAC is successor-in-interest to Roche Finance Ltd. Includes 4,066,667
shares of common stock issuable upon conversion of shares of Series C
preferred stock and 416,667 shares of common stock issuable upon conversion
of shares of Series C preferred stock which, in turn, are issuable upon
exercise of warrants owned by SAPAC. Roche Holdings Ltd exercises voting
and investment control over the shares held by SAPAC. Does not include up
to $2,000,000 of common stock which SAPAC may acquire in this offering.
(3) Includes (1) 2,030,846 shares of common stock issuable upon conversion of
shares of Series A preferred stock owned by Alta California Partners, L.P.
and 244,416 shares of common stock issuable upon conversion of shares of
Series A preferred stock which, in turn, are issuable upon exercise of
warrants owned by Alta California Partners, L.P. and (2) 54,236 shares of
common stock issuable upon conversion of shares of Series A preferred stock
owned by Alta Embarcadero Partners, LLC and 5,584 shares of common stock
issuable upon conversion of shares of Series A preferred stock which, in
turn, are issuable upon exercise of warrants owned by Alta Embarcadero
Partners, LLC. The respective general partners of Alta California Partners
L.P. and members of Alta Embarcadero Partners, LLC exercise voting and
investment power with respect to the shares held by such funds. Alta
Partners provides investment advisory services to Alta California Partners,
L.P. and Alta Embarcadero Partners, LLC. The principals of Alta Partners,
Mr. Nohra, Jean Deleage, Garret Gruener, Dan Janney, Alix Marduel, and
Marino Polestra, are general partners of Alta California Management
Partners, L.P. (which is a general partner of Alta California Partners,
L.P.) and direct the voting and investment policies of Alta Embarcadero
Partners, LLC. They may be deemed to share voting and investment power for
the shares held by the funds. Mr. Nohra and the other principals of Alta
Partners disclaim beneficial ownership of all such shares held by the
foregoing funds, except to the extent of their proportionate pecuniary
interests therein.
(4) Includes (1) 1,042,541 shares of common stock issuable upon conversion of
shares of Series A preferred stock owned by Atlas Venture Fund II, L.P.,
and 125,000 shares of common stock issuable upon conversion of shares of
Series A preferred stock which, in turn, are issuable upon exercise of
warrants owned by Atlas Venture Fund II, L.P., and (2) 1,042,541 shares of
common stock issuable upon conversion of shares of Series A preferred stock
owned by Atlas Venture Europe Fund B.V., and 125,000 shares of common stock
issuable upon conversion of shares of Series A preferred stock which, in
turn, are issuable upon exercise of warrants owned by Atlas Venture Europe
Fund B.V., a wholly owned subsidiary of Atlas InvesteringsGroep N.V., which
is a limited partner in Atlas Venture Fund II L.P. The voting and
investment discretion over the shares held by Atlas Venture Fund, II, L.P.
is exercised by the general partners of Atlas Venture Associates II, L.P.,
its sole general partner. Dr. Formela is a general partner of Atlas Venture
Associates II, L.P. along with Barry J. Fidelman and Christopher J. Spray.
Dr. Formela and the other general partners of Atlas Venture Associates II,
L.P. disclaim beneficial ownership of all shares held by the foregoing
funds, except to the extent of their proportionate pecuniary interests
therein. The voting and investment discretion over the shares held by the
Atlas Venture Europe Fund B.V. is exercised by the managing directors of
AIG, Gerard H. Montanus and Hans Bosman.
(5) Includes (1) 1,582,854 shares of common stock issuable upon conversion of
shares of Series A preferred stock owned by Polaris Venture Partners, L.P.
and 189,496 shares of common stock issuable upon conversion of shares of
Series A preferred stock which, in turn, are issuable upon exercise of
warrants owned by Polaris Venture Partners, L.P., and (2) 92,161 shares of
common stock issuable upon conversion of shares of Series A preferred stock
owned by Polaris Venture Partners Founders' Fund, L.P. and 11,337 shares of
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<PAGE> 69
common stock issuable upon conversion of shares of Series A preferred stock
which in turn, are issuable upon exercise of warrants owned by Polaris
Venture Partners Founders' Fund, L.P. Polaris Venture Management Co.,
L.L.C., the general partner of both Polaris Venture Partners, L.P. and
Polaris Venture Partners Founders' Fund, L.P., exercises sole voting and
investment power with respect to the shares held by the funds. Mr. McGuire
is a member of Polaris Venture Management Co., L.L.C., and as such may be
deemed to share voting and investment power for the shares held by the
funds.
(6) Includes (1) 586,514 shares of common stock issuable upon conversion of
shares of Series A preferred stock owned by Medical Science Partners II,
L.P. and 100,000 shares of common stock issuable upon the conversion of
shares of Series A preferred stock which, in turn, are issuable upon
exercise of warrants held by Medical Science Partners II, L.P. and (2)
158,745 shares of common stock issuable upon conversion of shares of Series
A preferred stock held by Medical Science II Co-Investment, L.P. Mr.
Lamotte is the Managing General Partner of Medical Science Partners, II,
L.P. and Medical Science II Co-Investment, L.P.
(7) Includes 15,000 shares of common stock underlying options. Does not include
15,000 shares of common stock underlying options which will be granted to
Sir John in December 2000 subject to the continued satisfaction of certain
obligations under our consulting contract with Vane Associates (of which
Sir John is a partner).
(8) Includes 15,000 shares of common stock underlying options as well as
800,833 shares of common stock issuable upon conversion of shares of Series
A preferred stock which, in turn, are issuable upon the exercise of the
warrants and other rights to purchase described in footnotes 3 through 7
above.
DESCRIPTION OF SECURITIES
Our authorized capital stock consists of 92,641,926 shares, of which
60,000,000 shares are common stock, $0.001 par value, and 32,641,926 shares are
preferred stock. Our Board of Directors has the power and authority to designate
6,716,666 shares of preferred stock into classes or series. Immediately
following this offering, there will be 42,990,343 shares of common stock and no
shares of preferred stock outstanding.
COMMON STOCK
As of June 30, 2000, there were 9,653,262 shares of common stock issued and
outstanding and held of record by approximately 350 stockholders. In addition,
as of June 30, 2000, there were outstanding options to purchase 577,500 shares
of common stock.
Holders of shares of common stock are entitled to one vote at all meetings
of stockholders for each share held by them. The common stock has no preemptive
rights or other rights to subscribe for additional shares, no conversion right
and no right of redemption. Subject to the rights and preferences of the holders
of any preferred stock, the holders of the common stock are entitled to receive
such dividends as, when and if declared by the Board of Directors out of funds
legally available therefor for that purpose. We have not paid dividends on the
common stock. The payment of dividends, if any, in the future with respect to
the common stock is within the discretion of the Board of Directors and will
depend on our earnings, capital requirements, financial condition and other
relevant factors. At present, our Board of Directors does not intend to declare
any dividend on the common stock in the foreseeable future.
PREFERRED STOCK
Of our 32,641,926 authorized preferred shares, 11,041,926 shares are
designated as Series A preferred stock, 10,300,000 shares are designated as
Series B preferred stock, and 4,583,334 shares are designated as Series C
preferred stock. As of June 30, 2000, 9,624,282 shares of Series A preferred
stock (held by 20 holders of record), 10,043,814 shares of Series B preferred
stock (held by approximately 6,000 holders of record), and 4,066,667 shares of
Series C preferred stock (held by one holder of record) were outstanding. In
addition, as of June 30, 2000, there were outstanding warrants to purchase
1,075,833 shares of Series A preferred stock and warrants to purchase 416,667
shares of Series C preferred stock. Upon the closing of this offering, all
outstanding shares of preferred stock will be converted into 23,737,081 shares
of common stock. In addition, all outstanding warrants to purchase shares of
preferred stock will be converted into warrants and options to purchase shares
of common stock.
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<PAGE> 70
Each share of our outstanding classes of preferred stock bears dividends at
the rate of 8% of the original purchase price per share, payable when declared
by the Board of Directors. To date the Board of Directors has not declared any
dividends on the preferred stock. Our certificate of incorporation provides that
the outstanding preferred stock will convert to common stock upon the closing of
this offering, at which time all undeclared dividends will be cancelled.
With respect to the 6,716,666 shares of preferred stock not currently
designated as an existing series, our Board of Directors is authorized, except
as otherwise limited by Delaware law, without further action by the
stockholders:
- to issue shares of preferred stock in one or more series;
- to fix or alter the dividend rights, dividend rates, conversion rights,
voting rights, terms of redemption (including sinking fund provisions),
redemption price or prices, and liquidation preferences of any wholly
unissued series of preferred stock;
- to designate the number of shares constituting, and the designation of,
any series of preferred stock; and
- to increase or decrease the number of shares of a series subsequent to
the issue of shares of that series, but not below the number of shares
of that series then outstanding.
WARRANTS AND OTHER RIGHTS TO PURCHASE
As of June 30, 2000, we had outstanding warrants to purchase 1,075,833
shares of Series A preferred stock at $1.00 per share, a warrant to purchase
250,000 shares of Series C preferred stock at $2.00 per share, a warrant to
purchase 55,555 shares of Series C preferred stock at $3.00 per share, a warrant
to purchase 55,556 shares of Series C preferred stock at $3.00 and a warrant to
purchase 55,556 shares of Series C preferred stock at $4.00 per share. The
warrants to purchase 1,075,833 shares of Series A preferred stock expire on
August 26, 2005, the warrant to purchase 250,000 shares of Series C preferred
stock expires on February 2, 2007, the warrant to purchase 55,555 shares of
Series C preferred stock expires on February 5, 2008, the warrant to purchase
55,556 shares of Series C preferred stock expires on May 20, 2009 and the
warrant to purchase 55,556 shares of Series C preferred stock expires on June
30, 2009, respectively. Immediately following this offering all of the
outstanding warrants will be converted into warrants to purchase an identical
number of shares of common stock at the exercise price set forth in the
applicable warrant.
STOCK OPTIONS
We established our 1996 Equity Incentive Plan, or the 1996 Plan, for the
purposes of attracting and retaining the best available personnel, to provide
additional incentive to our employees and consultants and to promote our
success. Our incentive plan provides for: (i) the grant of stock options to
employees and consultants; (ii) the grant of stock bonuses to employees,
directors and consultants; and (iii) the grant of rights to purchase restricted
stock, on such terms and conditions our Board of Directors or a board committee
determines. The powers of our Board of Directors or board committee, as the case
may be, include the determination of which employees and consultants are to
receive stock option grants, the exercise price, number of shares and the
vesting schedule of the grants.
At the discretion of our Board of Directors or board committee, any options
granted may permit the early exercise of the options, in whole or in part, prior
to vesting. We retain the right, upon termination of the option holder's
employment or consulting arrangement, to repurchase the shares of common stock
acquired as a result of an early exercise that are unvested on the date of
termination, at the price per share paid by the option holder at the time of
exercise of the option. All of the options granted to employees to date have
provided for an early exercise right.
Upon the closing of this offering, the total number of shares of common
stock authorized for issuance under the 1996 Plan will be 6,000,000. Upon the
closing of this offering, 1,478,500 shares of common stock will be eligible for
issuance upon the exercise of options available under the 1996 Plan.
REGISTRATION RIGHTS OF STOCKHOLDERS
Pursuant to the terms of an investor rights agreement, the holders of
18,733,863 shares of common stock (including 1,488,900 shares of common stock
issuable upon exercise of warrants) (the "Registrable Shares") will
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have the right to require us to file a registration statement under the
Securities Act covering the registration of their shares at any time after 180
days from the effective date of the registration statement of which this
prospectus is a part if the holders of 50% of such shares demand registration
and the number of shares to be registered has an aggregate public offering price
of at least $5,000,000. The investors rights agreement requires us to effect no
more than two registrations for the holders.
In addition, the investors rights agreement provides holders of 21,859,155
shares of common stock (including the Registrable Securities) with piggyback
registration rights with respect to the registration of these shares under the
Securities Act. If we propose to register any shares of common stock under the
Securities Act either for our account or for the account of our other security
holders, the investors rights agreement provides the holders of shares having
piggyback rights the right to receive notice of the registration and the right,
with some limitation, to include their shares in the registration.
Further, at any time after we become eligible to file a registration
statement on Form S-3, any holder or holders of the then outstanding Registrable
Shares may require us to file registration statements under the Securities Act
on Form S-3 with respect to their shares of common stock.
Certain conditions and limitations, including the right of the underwriters
of an offering to limit the number of shares of common stock which security
holders may include in a registration, apply to the above described registration
rights. Further, we may defer a registration for a period of 90 days if we
furnish to the holders requesting registration a certificate signed by the
chairman of the board stating that in the good faith judgment of the Board of
Directors it would be seriously detrimental to deCODE and our stockholders for
the requested registration to be effected at that time. We are generally
required to bear all of the expenses of all such registrations, including the
reasonable fees of a single counsel acting on behalf of all selling holders,
except underwriting discounts and selling commissions. Registration of any of
the shares of common stock held by security holders with registration rights
would result in such shares becoming freely tradable without restriction under
the Securities Act immediately upon effectiveness of such registration.
DELAWARE LAW AND CERTAIN CHARTER PROVISIONS
We are subject to Section 203 of the Delaware General Corporation Law
("DGCL") which is an anti-takeover provision. In general, the statute prohibits
a publicly-held Delaware corporation from engaging in a "business combination"
with an "interested stockholder" for a period of three years after the date of
the transaction in which the person became an interested stockholder unless the
business combination is approved in a prescribed manner. A "business
combination" includes a merger, asset sale or other transaction resulting in
financial benefit to the stockholder. An "interested stockholder" is a person
who, together with affiliates and associates, owns (or within three years prior,
did own) 15% or more of a corporation's voting stock.
Certain provisions in our certificate of incorporation and bylaws could
also make it more difficult for other companies to acquire us, even if doing so
would benefit our stockholders. For example, upon the closing of this offering
our bylaws will provide that only the Board of Directors may call a special
meeting of stockholders, and our certificate of incorporation will provide for a
classified Board of Directors consisting of three classes of directors, each
serving staggered three-year terms. Accordingly, stockholders may only elect a
minority of our board at any annual meeting. This staggering of our directors'
terms and the inability of stockholders to call special meetings of stockholders
may have the effect of delaying or preventing changes in control or management
of our company. In addition, our certificate of incorporation provides for the
issuance of preferred stock. The use of preferred stock may have the effect of
delaying, deferring or preventing a change in control and may also have an
adverse impact on the ability of our stockholders to participate, if applicable,
in a tender offer or exchange offer for the common stock, which would diminish
the value of the common stock.
The DGCL authorizes a corporation in its certificate of incorporation to
limit the personal liability of its directors for violations of their fiduciary
duty of care. Accordingly, our certificate of incorporation states that a
director will not be personally liable to deCODE or to our stockholders for
monetary damages resulting from any breach of fiduciary duty as a director,
except for the breach of the director's duty of loyalty to us or our
stockholders, acts or omissions not in good faith or which involve intentional
misconduct or a knowing violation of law, or a transaction from which the
director derives an improper personal benefit. The DGCL also authorizes a
corporation to indemnify its directors and officers, and our bylaws require that
we indemnify each director and
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executive officer to the fullest extent allowable under the DGCL. We believe
that these provisions will assist us in attracting and retaining qualified
individuals to serve as directors.
TRANSFER AGENT AND REGISTRAR
The transfer agent and registrar for the common stock will be The Bank of
New York.
TAX CONSIDERATIONS
U.S. FEDERAL TAX CONSIDERATIONS FOR NON-U.S. HOLDERS OF COMMON STOCK
The following is a general discussion of material U.S. federal income tax
consequences relating to the ownership and disposition of shares of common stock
by a beneficial owner thereof that is a non-U.S. holder. A non-U.S. holder is a
person or entity that, for U.S. federal income tax purposes, is a non-resident
alien individual, a foreign corporation, a foreign partnership, or other foreign
entity, or a foreign estate or trust.
This discussion is based on the Internal Revenue Code of 1986, as amended,
or the Code, and administrative interpretations as of the date hereof, all of
which are subject to change, including changes with retroactive effect. This
discussion does not address all aspects of U.S. federal income taxation that may
be relevant to non-U.S. holders in light of their particular circumstances. In
particular, this discussion does not address non-U.S. holders who are subject to
U.S. federal income tax on their worldwide income or whose shares of common
stock are effectively connected with the conduct of a U.S. trade or business. In
addition, this discussion does not address any tax consequences arising under
the laws of any state, local or foreign jurisdiction. Prospective holders should
consult their tax advisors with respect to the particular tax consequences to
them of owning and disposing of shares of common stock, including the
consequences under the laws of any state, local or foreign jurisdiction.
DIVIDENDS
Subject to the discussion below, dividends paid to a non-U.S. holder of
common stock generally will be subject to withholding tax at a 30% rate or such
lower rate as may be specified by an applicable income tax treaty. For purposes
of determining whether tax is to be withheld at a 30% rate or at a reduced rate
as specified by an income tax treaty, we ordinarily will presume that dividends
paid on or before December 31, 2000, to an address in a foreign country are paid
to a resident of such country absent knowledge that such presumption is not
warranted.
Under new United States Treasury Regulations applicable to dividends paid
after December 31, 2000, to obtain a reduced rate of withholding under a treaty,
a non-U.S. holder will generally be required to provide to us certification of
such non-U.S. holder's entitlement to benefits under a treaty. The new
regulations also provide special rules to determine whether, for purposes of
determining the applicability of a tax treaty, dividends paid to a non-U.S.
holder that is an entity should be treated as paid to the entity or those
holding an interest in that entity.
Generally, we must report to the U.S. Internal Revenue Service the amount
of dividends paid, the name and address of the recipient, and the amount, if
any, of tax withheld. A similar report is sent to the holder. Pursuant to tax
treaties or certain other agreements, the U.S. Internal Revenue Service may make
its reports available to tax authorities in the recipient's country of
residence.
Dividends paid to a non-U.S. holder at an address within the United States
may be subject to backup withholding imposed at a rate of 31% if the non-U.S.
holder fails to establish that it is entitled to an exemption or to provide a
correct taxpayer identification number and certain other information. Under
current United States federal income tax law, backup withholding (imposed at a
rate of 31%) generally will not apply to dividends paid on or before December
31, 2000, to a non-U.S. holder at an address outside the United States (unless
the payer has knowledge that the payee is a U.S. holder). Under new regulations
applicable to payments after December 31, 2000, however, a non-U.S. holder will
be subject to backup withholding if the non-U.S. holder does not provide the
certification required in order to receive treaty benefits described above.
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GAIN ON DISPOSITION OF COMMON STOCK
A non-U.S. holder generally will not be subject to U.S. federal income tax
with respect to gain realized on a sale or other disposition of shares of common
stock.
INFORMATION REPORTING REQUIREMENTS AND BACKUP WITHHOLDING ON DISPOSITION OF
COMMON STOCK
Under current United States federal income tax law, information reporting
and backup withholding imposed at a rate of 31% will apply to the proceeds of a
disposition of shares of common stock effected by or through a U.S. office of a
broker unless the disposing holder certifies as to its non-U.S. status or
otherwise establishes an exemption. Generally, U.S. information reporting and
backup withholding will not apply to a payment of disposition proceeds where the
transaction is effected outside the United States through a non-U.S. office of a
non-U.S. broker. However, U.S. information reporting requirements (but not
backup withholding) will apply to a payment of disposition proceeds where the
transaction is effected outside the United States by or through an office
outside the United States of a broker that is:
- a U.S. person,
- a foreign person which derives 50% or more of its gross income for
certain periods from the conduct of a trade or business in the United
States,
- a "controlled foreign corporation" for U.S. federal income tax purposes
or
- in the case of payments made after December 31, 2000, a foreign
partnership with certain connections to the United States, in each case
unless such broker has documentary evidence in its files of the holder's
non-U.S. status and has no actual knowledge to the contrary or unless
the holder establishes an exemption.
Backup withholding is not an additional tax. Rather, the tax liability of
persons subject to backup withholding will be reduced by the amount of tax
withheld. If withholding results in an overpayment of taxes, a refund may be
obtained, provided that the required information is furnished to the U.S.
Internal Revenue Service.
BELGIAN TAX CONSIDERATIONS FOR BELGIAN HOLDERS OF COMMON STOCK
The following generally summarizes the material Belgian income and stamp
tax consequences of the acquisition, direct ownership and disposition of our
common stock by Belgian residents and it is based on the opinion of Stibbe
Simont Monahan Duhot, Belgian legal counsel to deCODE. This discussion is based
on tax law (and the interpretation thereof) applicable in Belgium as in effect
on the date of this prospectus, and is subject to changes to Belgian law (and
the interpretation thereof), including changes that could have retroactive
effect. The following summary does not take into account or discuss tax laws of
any country other than Belgium nor does it take into account the individual
circumstances of each investor.
Prospective Belgian investors are advised to consult their own tax advisers
as to the tax consequences of the acquisition, ownership and disposition of our
common stock.
INCOME TAXATION
Income Taxation for Belgian Resident Individuals Holding Shares for Private
Investment
Dividends. Dividends distributed on our common stock (gross of Belgian
taxation but net of any foreign withholding tax deducted) are subject to Belgian
dividend withholding tax at the rate of, in principle, 25%, if the dividends are
paid or attributed through an intermediary in Belgium.
Subject to certain conditions, the 25% rate is reduced to 15% for dividends
on certain shares (so-called "VVPR-shares"). However, the issuing company can
renounce the benefit of the reduced rate. In the case at hand, the Board of
Directors of deCODE (or a properly authorized committee) intends to renounce the
benefit of the reduced rate with respect to newly issued common stock as well as
with respect to existing common stock.
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Consequently, as a general rule, the dividends on deCODE's common stock listed
on EASDAQ will be subject to a Belgian withholding tax at a rate of 25% if they
are paid through a Belgian professional intermediary.
If the Belgian withholding tax is applied by the Belgian intermediary at
the rate of 25%, this withholding tax is a final tax for Belgian resident
individuals holding our common stock as a private investment. The dividends
(gross of Belgian taxation but net of any foreign withholding tax deducted) need
not be reported in such individuals' annual income tax returns, but the
individuals may still elect to report them. An individual has no interest in
reporting the dividends in such individual's personal income tax return, unless
such individual's taxable income is lower than the taxable minimum. In that
case, the withholding tax will then be credited against personal income tax due
and it will be reimbursed to the extent that it exceeds the actual tax payable.
The Belgian withholding tax is only creditable against the final income tax due,
provided that the dividend distribution does not entail a reduction in value or
capital loss on the shares. If the individual reports the dividends in such
individual's annual income tax return and such individual's taxable income
exceeds the taxable minimum, the dividends will be taxed at the same rate of the
withholding tax, i.e. 25%, to be increased, however, by municipal surcharge
(generally varying from 5% to 8% of the tax due).
If no Belgian withholding taxes are levied (e.g. because the individual
collects U.S. source dividends outside Belgium), the individual is then required
to report the dividends (gross of Belgian taxation but net of any foreign
withholding tax deducted) in the individual's personal income tax return. These
dividends will be taxed in the way described above, depending on whether or not
the individual's taxable income is lower than the taxable minimum.
There is no tax credit for foreign taxes.
Capital Gains. Individuals holding our common stock as a private
investment will not be subject to Belgian capital gains taxation on the disposal
of that stock. Capital gains may, however, be subject to a 33% tax (increased by
the appropriate municipal surcharge, generally varying from 5% to 8% of the tax
due, and the 3% crisis surcharge (under certain circumstances the crisis
contribution will be reduced to 2% or 1% on the tax due, depending on the income
year and on the global taxable income of the beneficiary) of the tax due) if the
capital gain is deemed to be "speculative" in nature as defined by Belgian case
law.
Capital losses are not deductible, unless the losses are realized on a
transaction which is deemed to be "speculative" in nature as defined by Belgian
case law. In that case, the losses may be deducted from other "speculative"
income taxable at the above 33%. Losses may be carried forward during a period
of five years.
Income Taxation for Belgian Resident Individuals Whose Holdings of the
Shares Are Connected with a Business
Dividends. These stockholders will be taxed on the dividends at the
ordinary rates for business income, varying from 25% to 55% and increased by the
appropriate municipal surcharge (generally varying from 5% to 8% of the tax due)
and a 3% crisis surcharge (under certain circumstances the crisis contribution
will be reduced to 2% or 1% on the tax due, depending on the income year and on
the global taxable income of the beneficiary) of the tax due. The dividends must
be reported in the personal income tax return.
Any Belgian withholding tax is creditable against personal income tax due
and it will be reimbursed to the extent that it exceeds the actual tax payable,
provided that the holder of our common stock has full ownership of that stock at
the time of attribution or payment of the dividends and the dividend
distribution does not entail a reduction in value or capital loss on the shares.
There is no tax credit for foreign taxes.
Capital Gains. Individuals whose holdings of the shares are connected with
a business will be subject to Belgian capital gains taxation on the disposal of
that stock at the ordinary rates for business income, varying from 25% to 55%,
to be increased with the appropriate municipal surcharge (generally varying from
5% to 8% of the tax due) and a 3% crisis contribution of the tax due (under
certain circumstances the crisis contribution will be reduced to 2% or 1% on the
tax due, depending on the income year and on the global taxable income of the
beneficiary).
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Capital losses are tax deductible.
Income Taxation for Belgian Resident Non-Profit Organizations (such as
Pension Funds)
Dividends. If the entity collects U.S. source dividends through an
intermediary in Belgium, the intermediary must withhold Belgian withholding tax
at the rate of 25%, on the amount of the dividends (gross of Belgian taxation
but net of any foreign withholding tax deducted). The Belgian dividend
withholding tax is a final tax for a Belgian resident non-profit organizations,
and the dividends need not be reported in such non-profit organization's annual
income tax return.
If the entity collects U.S. source dividends abroad, it should pay the
Belgian withholding tax to the Belgian Treasury and file the proper form within
15 days following the taxable period in which the dividends are received. This
withholding tax is the final tax. The dividends should be reported in the income
tax return and evidence of the payment of the withholding tax should be
submitted at the same time.
There is no tax credit for foreign taxes.
Capital Gains. Entities subject to the Belgian legal entities tax are not
subject to Belgian capital gains taxation on the disposal of our common stock.
Capital losses are not tax-deductible.
Income Taxation for Companies Resident in Belgium
Dividends. If the company collects U.S. source dividends through an
intermediary in Belgium, the intermediary must withhold Belgian withholding tax
at the rate of 25%, on the amount of the dividends (gross of Belgian taxation
but net of any foreign withholding tax deducted). If, however, certain formal
conditions of identification are fulfilled, the dividends will benefit from an
exemption from Belgian withholding tax.
Dividends received by companies resident in Belgium must be reported in the
corporate tax return and are, in principle, subject to corporation income tax at
the rate of 40.17%, i.e. the standard rate of 39% increased by the crisis
surcharge of 3% of the corporate income tax due. Lower rates may be applicable
to Belgian resident companies which, among other conditions, are not 50% or more
owned by another company and whose taxable income is below certain thresholds
fixed by law. If Belgian withholding tax is applied, this withholding tax is
creditable against income tax due and it will be reimbursed to the extent that
it exceeds the actual tax, provided that the holder of our common stock has full
ownership of that stock at the time of attribution or payment of the dividends
and the dividend distribution does not entail a reduction in value or capital
loss on the shares.
Belgian resident companies which satisfy the minimum holding requirement of
either a participation of at least 5% in deCODE paid-up capital or an
acquisition value of at least BEF 50 million at the time of attribution or
payment of dividends benefit from an exemption of 95% of the dividends received
from income tax (so-called dividends-received deductions or DRD) unless deCODE
falls within one of the categories expressly excluded from the DRD. DRD
entitlement is assessed on a case by case basis at the time of attribution by
reference to the origin of the issuer's revenue used to distribute the dividend.
If our corporation revenues continue to be submitted to normal taxation, it is
highly unlikely that DRD would be denied. The minimum participation requirement
does not apply to shares held by financial institutions, insurance companies,
stock broking companies and investment companies. Any unused DRD, due to current
year losses, cannot be carried over.
There is no tax credit for foreign taxes.
Capital Gains. Capital gains realized by companies resident in Belgium on
the disposal of our common stock are exempt from Belgian capital gains taxation
if our dividends fully qualify for the DRD. It is not necessary to satisfy the
minimum holding requirement for the DRD to benefit from this exception.
Only capital losses resulting from the liquidation and distribution of all
our assets and liabilities are tax deductible, to the extent that they represent
fully paid-up capital.
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STAMP TAX ON SECURITIES TRANSACTIONS
In principle, a Belgian stamp tax is levied upon the subscription, purchase
or sale of our common stock in Belgium through a professional intermediary. The
rate applicable to subscriptions through a professional intermediary for new
shares is 0.35% subject to an upper limit of BEF 10.000 (or Euro 248) per
transaction. The rate applicable to sales and purchases of existing shares in
Belgium through a professional intermediary is 0.17% subject to an upper limit
of BEF 10.000 (or Euro 248) per transaction. The tax is due on each purchase and
sale separately.
An exemption is available to professional intermediaries mentioned in
article 2 of the Law of 6 April 1995, insurance companies mentioned in article
2, sec.1 of the Law of 9 July 1975, pension funds mentioned in article 2, sec.3,
6(LOGO) of the Law of 9 July 1975, collective investment institutions mentioned
in the Law of 4 December 1990, acting for their own account. Non-Belgian
resident holders of our common stock acting for their own account will also be
entitled to an exemption from this stamp tax, if they deliver to the issuer or
the professional intermediary in Belgium, as the case may be, an affidavit
confirming non-Belgian resident status.
TAX ON PHYSICAL DELIVERY OF BEARER SECURITIES
A tax is levied upon the physical delivery of our common stock pursuant to
the subscription or acquisition for consideration in Belgium. This tax is also
due on the delivery of our common stock pursuant to a withdrawal of such stock
from "open custody" in Belgium. An exemption is available if the delivery for
consideration does not take place through a professional intermediary.
This tax is due, at the rate of 0.2% on the sums payable by the subscriber
or acquirer on the subscription or acquisition price, or on the sales value of
our common stock, as estimated by the custodian, on a withdrawal from "open
custody".
An exemption is available for deliveries to recognized professional
intermediaries (such as credit institutions) acting for their own account. An
exemption is also available for delivery to a non-resident of shares of our
common stock which are held in "open custody" with certain specified financial
intermediaries.
Since securities listed on EASDAQ are always in book entry form, the
Belgian tax on the physical delivery of bearer securities will not apply to
transactions in our common stock on EASDAQ.
U.S. WITHHOLDING TAX
Reference is made to "U.S. Federal Tax Considerations for Non-U.S. Holders
of Common Stock" with respect to U.S. withholding tax.
According to Article 10 of the Convention between the United States of
America and the Kingdom of Belgium for the avoidance of double taxation and the
prevention of fiscal evasion with respect to taxes on income of July 9, 1970 and
the Supplementary Protocol thereto (hereinafter "Belgium-U.S.A. Tax Treaty"),
the U.S. withholding tax shall not exceed:
- (i) 5% of the gross amount of the dividend if the beneficial owner is a
company which owns directly at least 10% of the voting shares of the
company which distributes the dividends; or
- (ii) 15% in all the other cases.
The above-mentioned reductions will, however, only apply if the beneficial
owner of the dividends does not have a permanent establishment or maintain a
fixed base in the U.S. or the shares with respect to which the dividends are
paid are not effectively connected with such permanent establishment or such
fixed base.
According to Article 13 of the Belgium-U.S.A. Tax Treaty, capital gains
derived by a Belgian resident from the sale, exchange, or other disposition of
shares shall be exempt from U.S. tax unless:
- (i) the recipient of the gain, being a Belgian resident, has a
permanent establishment or maintains a fixed base in the U.S. and the
shares giving rise to the gain are effectively connected with such
permanent establishment or such fixed base; or
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- (ii) the recipient of the gain, being a Belgian individual resident, is
present in the U.S. for a period or periods aggregating 183 days or more
in the taxable year.
In addition, according to Article 12A of the Belgium-U.S.A. Tax Treaty, a
person (other than an individual) which is a resident of Belgium and derives
dividends from the U.S. will not be entitled under Article 10 (Dividends) to
relief from taxation in the U.S. unless:
(a) both of the following conditions are satisfied:
(i) more than 50% of the beneficial interest in such person (or in the
case of a company, more than 50% of the number of shares of each
class of the company's shares) is owned, directly or indirectly, by
one or more individual residents of Belgium or the U.S., one of the
contracting states or its political subdivisions or local
authorities, or citizens of the U.S.; and
(ii) more than 50% of the gross income of such person is not used,
directly or indirectly, to meet liabilities for interest or
royalties to persons who are not residents of Belgium or the U.S.,
one of the contracting states or its political subdivisions or
local authorities, or citizens of the U.S.; or
(b) the dividends derived from the U.S. are derived in connection with, or
are incidental to, the active conduct by such person of a trade or business in
Belgium (other than a business the principal activities of which are making or
managing investments in the U.S.); or
(c) the person deriving the dividend is a resident of Belgium either in
whose principal class of shares there is substantial and regular trading on a
recognized securities exchange, or more than 50% of whose shares of each class
is owned by a resident of Belgium in whose principal class of shares there is
such substantial and regular trading on a recognized securities exchange.
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SHARES ELIGIBLE FOR FUTURE SALE
Prior to this offering there has been no public market for our common
stock. Some financial institutions in Iceland have been making a market for
privately-negotiated transactions among non-U.S. persons in shares of our
outstanding Series B preferred stock. Our Series B preferred stock transfer
records indicate that approximately 10 million shares of Series B preferred
stock were transferred during 1999 in approximately 7,000 transactions and
approximately 1.1 million shares of Series B preferred stock were transferred
during January 2000 in approximately 2,700 transactions. The majority of these
transactions had an Icelandic financial institution as one of the
counterparties. Future sales of substantial amounts of our common stock, or even
the possibility of such sales, could reduce the prevailing market price. As
described below, only a limited number of shares of common stock that our
stockholders currently hold will be available for sale shortly after this
offering due to certain contractual and legal restrictions on resale. Sales of
substantial amounts of common stock in the public market after the restrictions
lapse could adversely affect the prevailing market price and our ability to
raise equity capital in the future.
Upon closing of this offering, 42,990,343 shares of our common stock will
be outstanding based on the number of shares of our preferred stock and common
stock outstanding as of June 30, 2000, and assuming no exercise of the
underwriters' over-allotment option. Of these shares, the 9,600,000 shares of
common stock that we plan to sell in this offering will be freely tradable
(unless purchased by an "affiliate" of deCODE as such term is defined in the
Securities Act of 1933) without restriction or registration under the Securities
Act. We issued and sold all remaining shares of common stock in private
transactions. These shares are "restricted securities" which are eligible for
public sale only if registered under the Securities Act or sold in accordance
with Rule 144 promulgated under that Act. In addition, upon closing of this
offering 2,070,000 shares of common stock will be issuable upon the exercise of
warrants and options.
Each of deCODE and the directors, executive officers and certain other
stockholders of deCODE (who will hold, in the aggregate, 56% of deCODE's common
stock after the offering) has agreed that, without the prior written consent of
Morgan Stanley & Co. Incorporated on behalf of the underwriters, and, to the
extent required by EASDAQ rules, the EASDAQ Market Authority, it will not sell
its shares during the period ending 180 days after the date of this prospectus.
In addition, each of certain other stockholders of deCODE, (who will hold,
in the aggregate, 21% of deCODE's common stock after the offering), has signed
an agreement providing that, upon the request of deCODE or Morgan Stanley & Co.
Incorporated, it will not, during the period ending 180 days after the effective
date of the registration statement of which this prospectus is a part, sell or
otherwise transfer or dispose of any shares of common stock. We cannot be
certain that we can enforce such agreements against all transferees of the
initial purchasers of the shares.
As a result of lockups with the underwriters and the provisions of Rule
144, the 33,390,343 shares which are restricted securities will be available for
sale in the U.S. public market, upon expiration of the lockup period, as
follows:
- 22,372,639 shares of common stock will be immediately eligible for
resale (subject to the volume limitations and other resale requirements
under Rule 144 in the case of sales by affiliates)
- an additional 6,414,953 shares of common stock will be immediately
eligible for resale (subject to the volume limitations and other resale
requirements under Rule 144)
- the remaining 4,602,751 shares of common stock will be eligible for
resale from time to time thereafter upon expiration of the applicable
holding periods under Rule 144 (subject to the volume limitations and
other resale requirements under Rule 144)
Rule 144. In general, under Rule 144 as currently in effect, beginning 90
days after the date of this prospectus a person or persons whose shares are
aggregated, who has beneficially owned restricted securities for
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at least one year, including the holding period of any prior owner except an
affiliate, will be entitled to sell within any three-month period a number of
shares that does not exceed the greater of:
- 1% of the number of shares of our common stock then outstanding, which
will equal approximately 429,903 shares immediately after this offering;
or
- the average weekly trading volume of our common stock on the Nasdaq
National Market during the four calendar weeks preceding the filing of a
notice on Form 144 with respect to the sale.
Sales under Rule 144 are also subject to manner of sale provisions and
notice requirements and to the availability of current public information about
deCODE.
Rule 144(k). Under Rule 144(k), a person who is not deemed to have been
one of our affiliates at any time during the three months preceding a sale, and
who has beneficially owned the shares proposed to be sold for at least two
years, including the holding period of any prior owner except an affiliate, is
entitled to sell these shares without complying with the manner of sale, public
information, volume limitation or notice provisions of Rule 144.
Registration Rights. As described above, an investors rights agreement
entitles holders of 18,733,863 shares of our common stock (including 1,488,900
shares of common stock issuable upon exercise of warrants to purchase common
stock) which are restricted securities to demand registration of their shares
under the Securities Act at any time after 180 days after the effective date of
the registration statement of which this prospectus is a part. Registration of
these shares under the Securities Act would result in their becoming freely
tradeable without restriction under the Securities Act, except for shares
purchased by affiliates, immediately upon the effectiveness of the registration.
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UNDERWRITERS
The underwriters named below, for whom Morgan Stanley & Co. Incorporated is
acting as representative, have severally agreed to purchase, and deCODE has
agreed to sell to them, severally, the number of shares indicated below. An
underwriting agreement dated the date of this prospectus provides the terms and
conditions for the sale.
<TABLE>
<CAPTION>
NUMBER OF
NAME SHARES
---- ---------
<S> <C>
Morgan Stanley & Co. Incorporated........................... 6,240,000
Lehman Brothers Inc......................................... 3,360,000
---------
Total....................................................... 9,600,000
=========
</TABLE>
The underwriters are offering the shares of common stock subject to their
acceptance of the shares from deCODE and subject to prior sale. The underwriting
agreement provides that the obligations of the several underwriters to pay for
and accept delivery of the shares of common stock offered by this prospectus are
subject to the underwriters' counsel's approval of certain legal matters, and to
certain other conditions. The agreement requires the underwriters to take and
pay for all of the shares of common stock offered by this prospectus if any such
shares are taken. However, it does not require them to take or pay for the
shares covered by the underwriters' over-allotment option described below.
The underwriters initially propose to offer part of the shares of common
stock directly to the public at the public offering price listed on the cover
page of this prospectus and part to certain dealers at a price that represents a
concession not in excess of $0.756 a share under the public offering price.
After the initial offering of the shares of common stock, the representatives
may from time to time vary the offering price and other selling terms.
Morgan Stanley Dean Witter Online Inc., an affiliate of Morgan Stanley &
Co. Incorporated, will act as a selected dealer in the offering and will
distribute shares of common stock over the Internet to its eligible account
holders. In connection with these Internet distributions, Morgan Stanley Dean
Witter Online will provide for offers and acceptances of offers to be made
through e-mail and over the Internet.
At our request, the underwriters have also reserved for subscription, at
the initial public offering price, 500,000 shares for a number of our directors,
officers, employees, friends and family. The shares available to the general
public will be reduced to the extent such persons purchase such reserved shares.
Any reserved shares which are not so purchased will be offered by the
underwriters to the general public on the same basis as other shares sold in
this offering.
Morgan Stanley & Co. Incorporated expects to deliver the shares to
purchasers on July 21, 2000.
Morgan Stanley International Ltd., an affiliate of Morgan Stanley & Co.,
will act as the stabilizing manager on EASDAQ.
deCODE has granted to the underwriters an option to purchase up to an
aggregate of 1,440,000 additional shares of common stock exercisable for 30 days
from the date of this prospectus, at the public offering price listed on the
cover page of this prospectus, less underwriting discounts and commissions. The
underwriters may exercise this option solely for the purpose of covering
overallotments, if any, that they make in connection with the offering of the
shares of common stock under this prospectus. To the extent the underwriters
exercise the option, each will become obligated, subject to certain conditions,
to purchase approximately the same percentage of the additional shares of common
stock as the number listed next to the underwriter's name in the preceding table
bears to the total number of shares of common stock listed next to the names of
all underwriters in the preceding table. If the underwriters' option is
exercised in full, the total price to the public will be $198,720,000, the total
underwriters' discounts and commissions will be $13,910,410 and total proceeds
to deCODE will be $184,809,600.
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The underwriters have informed deCODE that they do not intend sales to
discretionary accounts to exceed five percent of the total number of shares of
common stock that they will offer.
Our common stock has been approved for listing on the Nasdaq National
Market and EASDAQ, in each case under the symbol "DCGN."
Each of deCODE and the directors, executive officers and certain other
stockholders of deCODE (who will hold, in the aggregate, 56% of deCODE's common
stock after the offering) has agreed that, without the prior written consent of
Morgan Stanley & Co. Incorporated on behalf of the underwriters and, to the
extent required by EASDAQ rules, the EASDAQ Market Authority, it will not during
the period ending 180 days after the date of this prospectus:
- offer, pledge, sell, contract to sell, sell any option or contract to
purchase, purchase any option or contract to sell, grant any option,
right or warrant to purchase, lend or otherwise transfer or dispose of
directly or indirectly, any shares of common stock or any securities
convertible into or exercisable or exchangeable for common stock; or
- enter into any swap or other arrangement that transfers to another, in
whole or in part, any of the economic consequences of ownership of the
common stock,
whether any transaction described above is to be settled by delivery of common
stock or such other securities, in cash or otherwise.
The restrictions described in the paragraph above do not apply to:
- our sale of shares to the underwriters;
- our issuance of up to 500,000 shares of common stock to be used in the
context of strategic investments or acquisitions for which we have
previously consulted the underwriters;
- (i) our issuance of shares of common stock upon the exercise of an
option or a warrant or the conversion of a security outstanding on the
date of this prospectus; and (ii) our issuance of options to purchase
shares of common stock, and the issuance of shares upon the exercise of
such options, that are eligible for issuance under the 1996 Plan on the
date of the closing of this offering, in either case of which we have
advised the underwriters in writing; or
- transactions by any person other than deCODE relating to shares of
common stock or other securities that such person has acquired in open
market transactions after the completion of the offering of the shares.
Morgan Stanley & Co. Incorporated, on behalf of the underwriters, may
exercise its discretion to grant the consent referred to above based on, among
other things, the existence of an outstanding offer to purchase all or a
substantial portion of deCODE's shares, the terms of the proposed disposal, the
identity of the buyer, and the identity and circumstances of the proposed
seller. To our knowledge, none of our officers, directors or current
stockholders intend to ask for consent to offer, sell or otherwise dispose of
the shares of common stock within the lock-up period.
Each of certain other stockholders of deCODE, (who will hold, in the
aggregate, 21% of deCODE's common stock after the offering), signed an agreement
providing that, upon the request of deCODE or Morgan Stanley & Co. Incorporated,
it will not, during the period ending 180 days after the effective date of the
registration statement of which this prospectus is a part, sell or otherwise
transfer or dispose of any shares of common stock. deCODE will make this request
prior to the effective date of the registration statement. We cannot be certain
that we can enforce such agreements against all transferees of the initial
purchasers of the shares. Share certificates representing the common stock
subject to lock-up agreements will bear a legend stating the duration and terms
of the relevant lock up agreement. We will instruct The Bank of New York, the
transfer agent and registrar for the common stock, to monitor all transfers of
shares of common stock and not to execute transfer requests of shares of common
stock subject to a lock up agreement. However, given the large number of
stockholders who signed the agreements, there is no assurance that the lock-up
agreements will, in practice, be fully enforced against all parties.
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Any deCODE stockholder holding registration rights cannot require deCODE to
register its stock earlier than 180 days after the date of this prospectus.
Therefore, such stockholders cannot use these registration rights to break-up
any lock-up arrangements described above.
In order to facilitate the offering of the common stock, the underwriters
may engage in transactions that stabilize, maintain or otherwise affect the
price of the common stock. Specifically, the underwriters may over-allot in
connection with the offering, creating a short position in the common stock for
their own account. In addition, to cover over-allotments or to stabilize the
price of the common stock, the underwriters may bid for, and purchase, shares of
the common stock in the open market. Finally, the underwriting syndicate may
reclaim selling concessions allowed to an underwriter or a dealer for
distributing the common stock in the offering, if the syndicate repurchases
previously distributed common stock in transactions to cover syndicate short
positions, in stabilization transactions or otherwise. Any of these activities
may stabilize or maintain the market price of the common stock above independent
market levels. The underwriting agreement does not require the underwriters to
engage in these activities, and permits them to terminate any of these
activities at any time.
deCODE and the underwriters have agreed to indemnify each other against
certain liabilities, including liabilities under the Securities Act.
PRICING OF THE OFFERING
Prior to this offering, there has been no public market for the common
stock. Some Icelandic financial institutions have been making a market for
privately negotiated transactions among non-U.S. persons in shares of our
outstanding Series B preferred stock. deCODE and the representative will
negotiate to determine the initial public offering price of the common stock.
Among the factors that we and the representative will consider to determine the
initial public offering price will be the future prospects of deCODE and its
industry in general, earning and certain other financial operating information
of deCODE in recent periods, and the price-earnings ratios, price-sales ratios,
market prices of securities and certain financial and operating information of
companies engaged in activities similar to those of deCODE. Market conditions
and other factors may result in a change of the estimated initial public
offering price range set forth on the cover page of this preliminary prospectus.
The following table summarizes the per share and total public offering
price of the shares of common stock in the offering (based on the midpoint of
the price range set forth on the front cover of the prospectus), the
underwriting compensation that we will pay to the underwriters and the proceeds
of the offering, before expenses, to us. The information presented assumes
either no exercise or full exercise by the underwriters of their over-allotment
option.
<TABLE>
<CAPTION>
TOTAL
----------------------------
WITHOUT WITH
PER OVER- OVER-
SHARE ALLOTMENT ALLOTMENT
------ ------------ ------------
<S> <C> <C> <C>
Public offering price................................. $18.00 $172,800,000 $198,720,000
Underwriting discounts and commissions payable by
us.................................................. 1.26 12,096,000 13,910,400
Proceeds, before expenses, to us...................... 16.74 160,704,000 184,809,600
</TABLE>
The underwriting discount and commission per share is equal to the public
offering price per share of our common stock less the amount that the
underwriters pay to us per share of common stock.
We estimate total offering expenses payable by us (including a portion of
the Underwriters' expenses which we have agreed to reimburse), other than the
underwriting discounts and commissions referred to above, will be approximately
$2.645 million.
LEGAL MATTERS
Smith, Stratton, Wise, Heher & Brennan of Princeton, New Jersey will pass
upon the validity of the common stock we are offering and some of the legal
matters arising in connection with this offering on our behalf. A member of this
firm serves as our assistant secretary, for which she receives no compensation.
Davis Polk &
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Wardwell of New York, New York will pass upon other legal matters in connection
with this offering for the underwriters.
EXPERTS
The consolidated financial statements as of December 31, 1998 and 1999 and
for each of the three years in the period ended December 31, 1999, included in
this prospectus have been included herein in reliance on the report of
PricewaterhouseCoopers ehf., independent accountants, given on the authority of
that firm as experts in accounting and auditing.
WHERE YOU CAN FIND MORE INFORMATION
We have filed with the Securities and Exchange Commission, Washington,
D.C., a registration statement on Form S-1 (together with required schedules and
exhibits) under the Securities Act with respect to the shares of common stock
offered. This prospectus, which constitutes a part of the registration
statement, does not contain all of the information provided in the registration
statement. We have omitted certain terms in accordance with the rules and
regulations of the Securities and Exchange Commission. You can find additional
information with respect to deCODE and the common stock in the registration
statement, which you may inspect without charge, at the public reference
facilities maintained by the Securities and Exchange Commission at Judiciary
Plaza, 450 Fifth Street, N.W., Washington, D.C. 20549; Seven World Trade Center,
13th Floor, New York, New York 10048; and 500 West Madison Street, Suite 1400,
Chicago, Illinois 60661. You may obtain copies of these materials from the
Public Reference Room of the Securities and Exchange Commission, 450 Fifth
Street, N.W., Washington, D.C., 20549, at prescribed rates. You may obtain
information on the operation of the Public Reference Room by calling the
Securities and Exchange Commission at 1-800-SEC-0330. The registration statement
is also publicly available through the Securities and Exchange Commission's web
site located at http://www.sec.gov.
EASDAQ INFORMATION
BELGIUM RESTRICTIONS
Prior to admission to trading on EASDAQ, the shares of common stock are
not, whether directly or indirectly, offered, sold, transferred or delivered in
Belgium to any individual or entity other than institutional investors referred
to in Article 3.2. of the Belgian Royal Decree of July 7, 1999, on the public
character of financial transactions, acting on their own account.
APPROVAL BY THE BANKING AND FINANCE COMMISSION
On July 14, 2000, The Banking and Financial Commission (Commission bancaire
et financiere/Commissie voor het Bank- en Financiewezen) approved this
prospectus in accordance with article 29 ter, (sec.) 1 of the Belgian Royal
Decree 185 of July 9, 1935 on the supervision of banks and the issue of
securities as supplemented by the law of March 9, 1989. This approval does not
imply any judgment as to the appropriateness or the quality of this initial
public offering and the admission to trading of our common stock on EASDAQ, nor
of our situation. The notice required by article 29 ter, (sec.) 1 of the Royal
Decree will be published in the press on the first day of trading on EASDAQ.
For this purpose, the prospectus approved by the Belgian Banking and
Finance Commission is considered to include the registration statement declared
effective by the United States Securities and Exchange Commission on July 17,
2000.
THE OFFERING
The underwriters will offer the shares of common stock to the public in the
United States and through private placements in certain European countries.
During the bookbuilding process the representative of the
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underwriters will organize meetings with prospective investors to solicit
indications of interest in the shares of common stock within the indicative
price range stated in the preliminary prospectus. Such price change is subject
to change at any time until pricing of the shares. The underwriters have not set
aside for subscription any specific number of shares to be sold in any one
particular country. However, the underwriters have set aside 500,000 shares to
be offered to our directors, officers, employees, friends and family who express
interest in subscribing for shares in this offering.
RESPONSIBILITY FOR THE PROSPECTUS
deCODE, represented by Kari Stefansson, Chairman, Chief Executive Officer
and President, and Hannes Smarason, Executive Vice President and Senior Business
and Finance Officer, takes responsibility for the contents of this prospectus.
deCODE, having made all reasonable inquiries, accepts responsibility for,
and confirms that this prospectus contains, all information with regard to us
and our shares of common stock that is material in the context of the offering
and sale of our shares of common stock, that the information contained in this
prospectus is true and correct in all material respects and is not misleading,
that the opinions and our intentions expressed herein are honestly held and that
there are no other facts the omission of which makes this prospectus as a whole
or any of such information or the expression of any such opinions or intentions
misleading.
AVAILABILITY OF INFORMATION
Companies applying for admission to trading on EASDAQ are required to
publish relevant financial and other information regularly and to keep the
public informed of all events likely to affect the market price of their
securities. Price sensitive information will be made available to investors in
Europe through the EASDAQ -- Company Reporting System and other international
information vendors. Copies of deCODE's certificate of incorporation, bylaws and
annual financial statements are available upon request from EASDAQ.
Copies of the Registration Statement will be available for review at the
office of Morgan Stanley Dean Witter, 25 Cabot Square, Canary Wharf, London,
E14B 4QA and can be obtained at no cost upon request by mail to such address or
by telephone to 44-20-7425-6107. Additional information about deCODE may be
obtained from the sources indicated under "Where You Can Find More Information"
in this prospectus.
SETTLEMENT AND CLEARANCE
The following summarizes our understanding of the operation of the clearing
system which will be in place. Persons proposing to trade the common stock on
EASDAQ should inform themselves about the costs of such trading including any
taxes that might arise from such trade. See also "Certain Tax Considerations --
Certain Belgian Tax Considerations for Belgian Holders of Common Stock."
Transactions in the common stock executed in the United States generally
will be settled by book-entry through financial institutions that are
participants in DTC.
DTC is a limited-purpose trust company that was created to hold securities
for its participating organizations, collectively, DTC Participants, and to
facilitate the clearance settlements of transactions in such securities between
participants through electronic book-entry changes in accounts of DTC
Participants. DTC Participants include securities brokers and dealers, banks and
trust companies, clearing corporations and certain other organizations. Access
to DTC's system is also available to other entities such as banks, brokers,
dealers and trust companies, collectively, DTC Indirect Participants, that clear
through or maintain a custodial relationship with a DTC Participant, either
directly or indirectly. Persons which are DTC Participants may beneficially own
securities held by or on behalf of DTC only through DTC Participants or DTC
Indirect Participants.
Our shares of common stock are expected to be quoted on EASDAQ in U.S.
dollars. Transactions in the shares of common stock on EASDAQ will be settled in
U.S. dollars or any other Euroclear of Clearstream eligible currency through the
Euroclear or Clearstream systems. Investors in the common stock on EASDAQ must
have a securities account with a financial institution which directly or
indirectly has access to Euroclear or Clearstream. Euroclear and Clearstream are
DTC Indirect Participants.
83
<PAGE> 85
Euroclear and Clearstream hold securities and book-entry interests in
securities for their direct participants, which include banks, securities
brokers and dealers, other professional intermediaries and foreign depositories
and facilitate the clearance and settlements of securities transactions between
their respective participants, and between their participants and participants
of certain other securities intermediaries, including DTC, through electronic
book-entry changes in accounts of such participants or other securities
intermediaries.
Euroclear and Clearstream provide their respective participants, among
other things, with safekeeping, administration, clearance and settlement,
securities lending and borrowing, and related services. Euroclear and
Clearstream have established an electronic bridge between their two systems,
across which their respective participants may settle trades with each other.
Euroclear and Clearstream participants are investment banks, securities brokers
and dealers, banks, central banks, supranationals, custodians, investment
managers, corporations, trust companies and certain their organizations and
include certain of the underwriters.
ADMISSION TO LISTING ON EASDAQ
Our common stock has been approved for listing on EASDAQ.
Our common stock is expected to begin trading on EASDAQ on July 19, 2000.
The EASDAQ trading symbol will be "DCGN."
TRANSFER OF OUR COMMON STOCK
Upon the issuance of the securities in the manner set forth in this
prospectus, our common stock will be freely transferable within the EU, and
fully paid and nonassessable.
84
<PAGE> 86
deCODE GENETICS, INC.
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
<TABLE>
<CAPTION>
PAGE
-------
<S> <C>
Report of Independent Accountants........................... F-2
Consolidated Balance Sheets................................. F-3
Consolidated Statements of Operations....................... F-4
Consolidated Statements of Changes in Stockholders' Equity
(Deficit)................................................. F-5
Consolidated Statements of Cash Flows....................... F-7
Notes to Consolidated Financial Statements.................. F-8
</TABLE>
F-1
<PAGE> 87
REPORT OF INDEPENDENT ACCOUNTANTS
To the Board of Directors and stockholders of deCODE genetics, Inc.:
In our opinion, the accompanying consolidated balance sheets and the
related consolidated statements of operations, changes in stockholders' equity
and cash flows present fairly, in all material respects, the consolidated
financial position of deCODE genetics, Inc. ("deCODE") at December 31, 1998 and
1999 and the consolidated results of its operations and its consolidated cash
flows for each of the three years in the period ended December 31, 1999, in
conformity with generally accepted accounting principles in the United States.
These financial statements are the responsibility of deCODE's management; our
responsibility is to express an opinion on these financial statements based on
our audits. We conducted our audits of these statements in accordance with
generally accepted auditing standards in the United States, which 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, assessing the accounting principles used and
significant estimates made by management, and evaluating the overall financial
statement presentation. We believe that our audits provide a reasonable basis
for the opinion expressed above.
PricewaterhouseCoopers ehf.
Reykjavik, Iceland
March 8, 2000
F-2
<PAGE> 88
deCODE GENETICS, INC.
CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
PRO FORMA
STOCKHOLDERS'
DECEMBER 31, EQUITY AT
--------------------------- MARCH 31, MARCH 31,
1998 1999 2000 2000
------------ ------------ ------------ --------------
(UNAUDITED) (UNAUDITED)
<S> <C> <C> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents....................... $ 25,075,844 $ 29,845,664 $ 40,707,864
Receivable from share issuance.................. 0 33,143,836 0
Prepaid expenses and other current assets....... 979,998 3,695,351 3,988,409
------------ ------------ ------------
Total current assets.......................... 26,055,842 66,684,851 44,696,273
Investments and other long-term assets............ 0 790,217 1,052,673
Property and equipment, net....................... 12,484,273 13,051,466 15,022,862
------------ ------------ ------------
Total assets.................................. $ 38,540,115 $ 80,526,534 $ 60,771,808
============ ============ ============
LIABILITIES, REDEEMABLE, CONVERTIBLE PREFERRED
STOCK AND STOCKHOLDERS' EQUITY (DEFICIT)
Current liabilities:
Accounts payable and accrued expenses........... $ 3,415,643 $ 4,314,115 $ 7,194,588
Current portion of capital lease obligations.... 2,087,186 2,218,726 2,103,825
Deferred research revenue....................... 1,155,000 2,238,333 2,266,111
Payable to preferred shareholders............... 0 17,467,077 0
------------ ------------ ------------
Total current liabilities..................... 6,657,829 26,238,251 11,564,524
Capital lease obligations, net of current
portion......................................... 6,772,472 4,549,809 4,124,059
Other long-term liabilities....................... 173,858 921,245 919,423
Redeemable, convertible preferred stock, $0.001
par value; 32,641,926 shares authorized:
Series A;
Designated: 11,041,926 shares
Issued and outstanding: 9,624,282 shares
(liquidation value $11,948,418) at March 31,
2000........................................ 14,012,463 12,405,887 12,689,364 $ 0
Series B;
Designated: 10,000,000 shares
Issued and outstanding: 9,893,814 shares
(liquidation value $106,671,341) at March
31, 2000.................................... 23,729,876 99,865,152 101,845,926 0
Series C;
Designated: 4,583,334 shares
Issued 3,611,111 shares and outstanding
3,511,111 shares (liquidation value
$9,230,845) at March 31, 2000............... 5,415,740 9,318,328 9,495,436 0
------------ ------------ ------------ ------------
Total redeemable, convertible preferred stock... 43,158,079 121,589,367 124,030,726 0
------------ ------------ ------------ ------------
Commitments and contingencies (Note G)
Stockholders' equity (deficit):
Common stock, $0.001 par value;
Authorized: 48,000,000 shares
Issued and outstanding: 9,381,500, 9,604,012,
and 9,633,262 shares at December 31, 1998
and 1999 and March 31, 2000, respectively,
and 32,664,787 on an unaudited pro forma
basis....................................... 9,382 9,604 9,633 32,665
Additional paid-in capital...................... 17,842,611 35,072,575 36,055,298 149,338,816
Notes receivable................................ (4,033,347) (9,597,830) (9,593,996) (9,593,996)
Deferred compensation........................... (8,549,906) (12,549,757) (11,345,795) (11,345,795)
Dividends accreted on redeemable, convertible
preferred stock............................... (3,215,628) (8,384,951) (10,724,176) 0
Accumulated deficit............................. (20,275,235) (77,324,190) (84,262,482) (84,262,482)
Accumulated other comprehensive income (loss)... 0 2,411 (5,406) (5,406)
------------ ------------ ------------ ------------
Total stockholders' equity (deficit).......... (18,222,123) (72,772,138) (79,866,924) $ 44,163,802
------------ ------------ ============
Total liabilities, redeemable, convertible
preferred stock and stockholders' equity
(deficit)................................... $ 38,540,115 $ 80,526,534 $ 60,771,808
============ ============ ============
</TABLE>
The accompanying notes are an integral part of the consolidated financial
statements.
F-3
<PAGE> 89
deCODE GENETICS, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
<TABLE>
<CAPTION>
FOR THE THREE MONTHS ENDED
FOR THE YEARS ENDED DECEMBER 31, MARCH 31,
----------------------------------------- ---------------------------
1997 1998 1999 1999 2000
----------- ------------ ------------ ------------ ------------
(UNAUDITED) (UNAUDITED)
<S> <C> <C> <C> <C> <C>
REVENUE
Research collaborative
contract................. $ 0 $ 12,705,000 $ 15,776,667 $ 3,853,889 $ 4,437,222
Other revenue............... 0 0 814,818 653,600 $ 181,164
----------- ------------ ------------ ----------- -----------
Total revenue............ 0 12,705,000 16,591,485 4,507,489 4,618,386
OPERATING EXPENSES
Research and development.... 6,080,096 19,282,364 33,213,557 6,805,146 9,234,368
General and
administrative........... 1,967,684 4,893,202 8,220,758 2,208,749 2,946,337
----------- ------------ ------------ ----------- -----------
Total operating
expenses............... 8,047,780 24,175,566 41,434,315 9,013,895 12,180,705
----------- ------------ ------------ ----------- -----------
Operating loss................ (8,047,780) (11,470,566) (24,842,830) (4,506,406) (7,562,319)
Equity in net earnings (loss)
of affiliate................ 0 0 (486,366) (278,780) 0
Interest income and other,
net......................... (8,461) 562,336 1,540,749 97,514 664,180
Taxes......................... 0 0 0 0 0
----------- ------------ ------------ ----------- -----------
Net loss...................... (8,056,241) (10,908,230) (23,788,447) (4,687,672) (6,898,139)
Accrued dividends and
amortized discount on
preferred stock............. (620,385) (2,571,523) (7,542,787) (862,260) (2,379,378)
Premium on repurchase of
preferred stock............. 0 0 (30,887,044) 0 0
----------- ------------ ------------ ----------- -----------
Net loss available to common
stockholders................ $(8,676,626) $(13,479,753) $(62,218,278) $(5,549,932) $(9,277,517)
=========== ============ ============ =========== ===========
Basic and diluted net loss per
share....................... $ (3.85) $ (3.06) $ (9.65) $ (0.97) $ (1.25)
Shares used in computing basic
and diluted net loss per
share....................... 2,254,413 4,400,576 6,446,055 5,749,963 7,419,439
Unaudited pro forma basic and
diluted net loss per
share....................... $ (0.86) $ (0.23)
Shares used in computing
unaudited pro forma basic
and diluted net loss per
share....................... 27,559,365 30,392,795
</TABLE>
The accompanying notes are an integral part of the consolidated financial
statements.
F-4
<PAGE> 90
deCODE GENETICS, INC.
CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY (DEFICIT)
<TABLE>
<CAPTION>
DIVIDENDS
ACCRETED ON
ADDITIONAL REDEEMABLE,
COMMON PAID-IN NOTES DEFERRED CONVERTIBLE ACCUMULATED
STOCK PAR VALUE CAPITAL RECEIVABLE COMPENSATION PREFERRED STOCK DEFICIT
--------- --------- ----------- ----------- ------------ --------------- ------------
<S> <C> <C> <C> <C> <C> <C> <C>
BALANCE AT DECEMBER 31,
1996....................... 6,015,000 $6,015 $ 0 $ 0 $ 0 $ (181,852) $ (1,152,632)
Issuance of common stock in
exchange for settlement of
loan....................... 20,000 20 85,285
Deferred compensation
arising from stock
options.................... 55,250 (55,250)
Amortization of deferred
compensation............... 11,851
Accretion of dividends and
amortization of discount on
preferred stock............ (605,174) (15,211)
Comprehensive income (loss):
Net loss for the period.... (8,056,241)
Total comprehensive income
(loss).....................
--------- ------ ----------- ----------- ------------ ------------ ------------
BALANCE AT DECEMBER 31,
1997....................... 6,035,000 6,035 140,535 0 (43,399) (787,026) (9,224,084)
Issuance of common stock.... 200,000 200 340,768 (80,000)
Issuance of common stock
upon exercise of stock
options.................... 3,146,500 3,147 3,977,127 (3,953,347)
Deferred compensation
arising from stock
options.................... 13,384,181 (13,384,181)
Amortization of deferred
compensation............... 4,877,674
Accretion of dividends and
amortization of discount on
preferred stock............ (2,428,602) (142,921)
Comprehensive income (loss):
Net loss for the period.... (10,908,230)
Total comprehensive income
(loss).....................
--------- ------ ----------- ----------- ------------ ------------ ------------
BALANCE AT DECEMBER 31,
1998....................... 9,381,500 9,382 17,842,611 (4,033,347) (8,549,906) (3,215,628) (20,275,235)
Issuance of common stock.... 68,000 68 1,449,012
Forfeiture of unvested
founder stock and unvested
common stock issued upon
early exercise of stock
options.................... (359,655) 219,111 513,424
Exchange of common stock for
Series B preferred stock... (333,333) 750,000
Issuance of common stock
upon exercise of stock
options.................... 847,500 154 663,392 (5,895,594)
Deferred compensation
arising from stock
options.................... 12,941,712 (12,941,712)
Cancellation of stock
options previously giving
rise to deferred
compensation............... (115,072) 115,072
Amortization of deferred
compensation............... 8,313,365
Payments of notes
receivable................. 112,000
Premium on repurchase of
preferred stock............ 582,514 (31,469,558)
Beneficial conversion
feature of issuance of
Series C preferred stock... 1,540,920
Accretion of dividends and
amortization of discount on
preferred stock............ (5,751,837) (1,790,950)
Comprehensive income (loss):
Net loss for the period.... (23,788,447)
Other comprehensive income
(loss):
Foreign currency
translation..............
Total comprehensive income
(loss).....................
--------- ------ ----------- ----------- ------------ ------------ ------------
BALANCE AT DECEMBER 31,
1999....................... 9,604,012 9,604 35,072,575 (9,597,830) (12,549,757) (8,384,951) (77,324,190)
<CAPTION>
ACCUMULATED
OTHER TOTAL
COMPREHENSIVE STOCKHOLDERS'
INCOME TREASURY EQUITY
(LOSS) STOCK (DEFICIT)
------------- ----------- -------------
<S> <C> <C> <C>
BALANCE AT DECEMBER 31,
1996....................... $ 0 $ 0 $ (1,328,469)
Issuance of common stock in
exchange for settlement of
loan....................... 85,305
Deferred compensation
arising from stock
options.................... 0
Amortization of deferred
compensation............... 11,851
Accretion of dividends and
amortization of discount on
preferred stock............ (620,385)
Comprehensive income (loss):
Net loss for the period.... (8,056,241)
------------
Total comprehensive income
(loss)..................... (8,056,241)
------- ----------- ------------
BALANCE AT DECEMBER 31,
1997....................... 0 0 (9,907,939)
Issuance of common stock.... 260,968
Issuance of common stock
upon exercise of stock
options.................... 26,927
Deferred compensation
arising from stock
options.................... 0
Amortization of deferred
compensation............... 4,877,674
Accretion of dividends and
amortization of discount on
preferred stock............ (2,571,523)
Comprehensive income (loss):
Net loss for the period.... (10,908,230)
------------
Total comprehensive income
(loss)..................... (10,908,230)
------- ----------- ------------
BALANCE AT DECEMBER 31,
1998....................... 0 0 (18,222,123)
Issuance of common stock.... 1,449,080
Forfeiture of unvested
founder stock and unvested
common stock issued upon
early exercise of stock
options.................... (732,895) (360)
Exchange of common stock for
Series B preferred stock... (4,500,000) (3,750,000)
Issuance of common stock
upon exercise of stock
options.................... 5,232,895 847
Deferred compensation
arising from stock
options.................... 0
Cancellation of stock
options previously giving
rise to deferred
compensation............... 0
Amortization of deferred
compensation............... 8,313,365
Payments of notes
receivable................. 112,000
Premium on repurchase of
preferred stock............ (30,887,044)
Beneficial conversion
feature of issuance of
Series C preferred stock... 1,540,920
Accretion of dividends and
amortization of discount on
preferred stock............ (7,542,787)
Comprehensive income (loss):
Net loss for the period.... (23,788,447)
Other comprehensive income
(loss):
Foreign currency
translation.............. 2,411 2,411
------------
Total comprehensive income
(loss)..................... (23,786,036)
------- ----------- ------------
BALANCE AT DECEMBER 31,
1999....................... 2,411 0 (72,772,138)
</TABLE>
F-5
<PAGE> 91
<TABLE>
<CAPTION>
DIVIDENDS
ACCRETED ON
ADDITIONAL REDEEMABLE,
COMMON PAID-IN NOTES DEFERRED CONVERTIBLE ACCUMULATED
STOCK PAR VALUE CAPITAL RECEIVABLE COMPENSATION PREFERRED STOCK DEFICIT
--------- --------- ----------- ----------- ------------ --------------- ------------
<S> <C> <C> <C> <C> <C> <C> <C>
Forfeiture of unvested
common stock issued upon
early exercise of stock
options (unaudited)........ (750) 3,834 913
Issuance of common stock
upon exercise of stock
options (unaudited)........ 30,000 29 58,223
Deferred compensation
arising from stock options
(unaudited)................ 924,500 (924,500)
Amortization of deferred
compensation (unaudited)... 2,127,549
Accretion of dividends and
amortization of discount on
preferred stock
(unaudited)................ (2,339,225) (40,153)
Comprehensive income (loss):
Net loss for the period
(unaudited).............. (6,898,139)
Other comprehensive income
(loss):
Foreign currency
translation
(unaudited)..............
Total comprehensive income
(loss) (unaudited).........
--------- ------ ----------- ----------- ------------ ------------ ------------
BALANCE AT MARCH 31, 2000
(UNAUDITED)................ 9,633,262 $9,633 $36,055,298 $(9,593,996) $(11,345,795) $(10,724,176) $(84,262,482)
========= ====== =========== =========== ============ ============ ============
<CAPTION>
ACCUMULATED
OTHER TOTAL
COMPREHENSIVE STOCKHOLDERS'
INCOME TREASURY EQUITY
(LOSS) STOCK (DEFICIT)
------------- ----------- -------------
<S> <C> <C> <C>
Forfeiture of unvested
common stock issued upon
early exercise of stock
options (unaudited)........ (4,748) (1)
Issuance of common stock
upon exercise of stock
options (unaudited)........ 4,748 63,000
Deferred compensation
arising from stock options
(unaudited)................ 0
Amortization of deferred
compensation (unaudited)... 2,127,549
Accretion of dividends and
amortization of discount on
preferred stock
(unaudited)................ (2,379,378)
Comprehensive income (loss):
Net loss for the period
(unaudited).............. (6,898,139)
Other comprehensive income
(loss):
Foreign currency
translation
(unaudited).............. (7,817) (7,817)
------------
Total comprehensive income
(loss) (unaudited)......... (6,905,956)
------- ----------- ------------
BALANCE AT MARCH 31, 2000
(UNAUDITED)................ $(5,406) $ 0 $(79,866,924)
======= =========== ============
</TABLE>
The accompanying notes are an integral part of the consolidated financial
statements.
F-6
<PAGE> 92
deCODE GENETICS, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
FOR THE THREE MONTHS
FOR THE YEARS ENDED DECEMBER 31, ENDED MARCH 31,
----------------------------------------- --------------------------
1997 1998 1999 1999 2000
----------- ------------ ------------ ----------- ------------
(UNAUDITED) (UNAUDITED)
<S> <C> <C> <C> <C> <C>
Cash flows from operating activities:
Net loss................................................. $(8,056,241) $(10,908,230) $(23,788,447) $(4,687,672) $ (6,898,139)
Adjustments to reconcile net loss to net cash used in
operating activities:
Depreciation and amortization.......................... 513,055 1,470,959 3,374,039 608,814 814,392
Equity in net loss of affiliate........................ 0 0 486,366 278,780 0
Amortization of deferred stock compensation............ 11,851 4,877,674 8,313,365 1,265,947 2,127,549
Other stock-based remuneration......................... 0 341,968 732,500 515,000 0
Accrued interest on receivable from share issuance..... 0 0 (893,836) 0 893,836
Equipment received for services provided............... 0 0 (414,000) (414,000) 0
Other.................................................. 10,521 (45,389) 0 0 0
Changes in operating assets and liabilities:
Prepaid expenses and other current assets.............. 76,436 (753,014) (1,748,007) (1,218,508) (293,059)
Accounts payable and accrued expenses.................. 1,370,458 1,802,896 906,977 (220,639) 1,457,473
Deferred research revenue.............................. 0 1,155,000 1,083,333 611,111 27,778
Other long-term liabilities............................ 183,000 (9,142) 150,624 33,333 25,734
----------- ------------ ------------ ----------- ------------
Net cash used in operating activities................ (5,890,920) (2,067,278) (11,797,086) (3,227,834) (1,844,436)
----------- ------------ ------------ ----------- ------------
Cash flows from investing activities:
Purchases of property and equipment.................... (351,071) (5,084,441) (2,885,644) (648,976) (1,319,180)
Investments in affiliated company, net................. 0 0 (104,324) (254,444) (341,436)
Proceeds from sales of equipment....................... 23,371 0 3,581 0 0
----------- ------------ ------------ ----------- ------------
Net cash used in investing activities................ (327,700) (5,084,441) (2,986,387) (903,420) (1,660,616)
----------- ------------ ------------ ----------- ------------
Cash flows from financing activities:
Proceeds from financing of facility.................... 0 2,437,254 0 0 0
Repurchase of preferred stock.......................... 0 0 (20,310,555) 0 (17,467,077)
Forfeiture of common stock............................. 0 0 (360) 0 (1)
Issuance of preferred stock and warrants............... 5,101,754 27,269,350 41,658,444 2,266,721 32,311,981
Issuance of common stock............................... 0 26,927 848 0 63,000
Repayment of notes receivable for common stock......... 0 0 112,000 80,000 0
Cash on deposit........................................ (76,464) 1,595,769 0 0 0
Installment payments on capital lease obligations...... (408,153) (1,475,565) (1,907,084) (504,976) (540,651)
Proceeds from bridge loans............................. 706,074 0 0 0 0
Repayment of bridge loans.............................. (365,677) (340,397) 0 0 0
----------- ------------ ------------ ----------- ------------
Net cash provided by financing activities............ 4,957,534 29,513,338 19,553,293 1,841,745 14,367,252
----------- ------------ ------------ ----------- ------------
Net increase (decrease) in cash.......................... (1,261,086) 22,361,619 4,769,820 (2,289,509) 10,862,200
Cash and cash equivalents at beginning of period......... 3,975,311 2,714,225 25,075,844 25,075,844 29,845,664
----------- ------------ ------------ ----------- ------------
Cash and cash equivalents at end of period............... $ 2,714,225 $ 25,075,844 $ 29,845,664 $22,786,335 $ 40,707,864
=========== ============ ============ =========== ============
Supplemental cash flow information:
Cash paid for interest................................. $ 179,164 $ 551,576 $ 574,226 $ 164,843 $ 116,825
=========== ============ ============ =========== ============
Supplemental schedule of non-cash transactions:
Equipment acquired under capital leases................ $ 426,036 $ 8,420,123 $ 0 $ 0 $ 0
Common stock issued in settlement of loan.............. 85,305 0 0 0 0
Series A preferred stock issued in settlement of
current liability.................................... 0 285,000 150,000 0 0
Series B preferred stock issued as a part of payment
for facility......................................... 0 347,216 0 0 0
Receivable from share issuance......................... 0 0 33,143,836 0 0
Payable to preferred shareholders...................... 0 0 17,467,077 0 0
Series B preferred stock issued in exchange for shares
in affiliate......................................... 0 0 779,064 779,064 0
Common stock issued in exchange for shares in
subsidiary........................................... 0 0 1,449,080 0 0
Supplies received in exchange for services provided.... 0 0 239,600 239,600 0
Payable related to purchase of property................ 0 0 0 0 $ 1,423,000
</TABLE>
The accompanying notes are an integral part of the consolidated financial
statements.
F-7
<PAGE> 93
deCODE GENETICS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(INFORMATION FOR THE THREE MONTHS ENDED MARCH 31, 1999 AND 2000 IS UNAUDITED.)
A. DESCRIPTION OF BUSINESS:
deCODE genetics, Inc. ("deCODE") is a genomics and health informatics
company which applies and develops modern informatics to collect and analyze
data about the Icelandic population in order to develop products and services
for the healthcare industry. deCODE was founded in 1996 and its facilities are
located in Reykjavik, Iceland, where all of deCODE's operations take place.
In November 1996, deCODE acquired all of the then outstanding shares and
assumed the related liabilities of deCODE ehf. which was subsequently renamed
Islensk erfethagreining ehf. deCODE ehf. was founded in December 1995 by certain
of the same founding stockholders of deCODE. From inception to the date of
acquisition by deCODE, deCODE ehf. had been engaged in the early assessment of
the feasibility of utilizing genomics to aid in drug discovery.
Through February 1998, deCODE was a development stage enterprise as defined
by Statement of Financial Accounting Standards No. 7, "Accounting and Reporting
by Development Stage Enterprises." On February 1, 1998, deCODE entered into a
research and collaboration agreement with the Swiss pharmaceutical and
diagnostic company F.Hoffmann-La Roche ("Roche"), under which deCODE may receive
a total of more than $200 million in equity contributions, research funding and
milestone payments. This agreement covers research of up to twelve disease
categories over a period of up to five years. As a part of this relationship,
Roche has made capital investments in deCODE, provides funding for ongoing
research and has made cash payments upon the achievement of certain research
milestones.
B. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES:
BASIS OF PRESENTATION
These financial statements are reported in United States dollars, deCODE's
functional currency, and prepared in accordance with generally accepted
accounting principles in the United States.
PRINCIPLES OF CONSOLIDATION
The consolidated financial statements include the accounts and operations
of deCODE and its wholly owned subsidiary, Islensk erfethagreining ehf., which
is an Icelandic company registered in Reykjavik. deCODE conducts all of its
operations through this subsidiary and owns all of its outstanding share
capital, all of which is fully-paid. No dividends have been paid by this
subsidiary. In addition, the consolidated financial statements also include the
accounts and operations of Gagnalind hf. from November 19, 1999, the date on
which deCODE obtained a majority interest. All significant intercompany accounts
and transactions are eliminated upon consolidation. Investments in which deCODE
has significant influence, but does not control, are accounted for using the
equity method.
USE OF ESTIMATES
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make certain estimates and
assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the financial
statements and the reported amounts of revenues and expenses during the reported
period. Actual results could differ from those estimates.
UNAUDITED INTERIM FINANCIAL DATA
The unaudited financial statements for the three month periods ended March
31, 1999 and March 31, 2000 have been prepared on the same basis as the audited
financial statements and, in the opinion of management,
F-8
<PAGE> 94
deCODE GENETICS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
(INFORMATION FOR THE THREE MONTHS ENDED MARCH 31, 1999 AND 2000 IS UNAUDITED.)
reflect all normal recurring adjustments necessary to present fairly the
financial information set forth therein, in accordance with generally accepted
accounting principles in the United States.
UNCERTAINTIES
deCODE is subject to risks common to companies in the biotechnology
industry including, but not limited to, development by deCODE or its competitors
of new technological innovations, ability to market products or services,
dependence on key personnel, dependence on key suppliers, protection of
proprietary technology, ability to obtain additional financing, ability to
negotiate collaborative arrangements and compliance with governmental and other
regulations.
CONCENTRATION OF RISK
Financial instruments that potentially subject deCODE to concentrations of
credit risk consist principally of temporary cash investments. deCODE's cash is
deposited only with financial institutions in Iceland and the United States
having a high credit standing.
FAIR VALUE OF FINANCIAL INSTRUMENTS
The fair value of short-term financial instruments, including cash and cash
equivalents, receivables, certain other current assets, trade accounts payable,
certain accrued liabilities, and other current liabilities approximates their
carrying amount in the financial statements mainly due to the short maturity of
such instruments.
The fair value of capital lease obligations and other long-term liabilities
approximate their carrying amounts based on deCODE's estimated current
incremental borrowing rate for similar obligations with similar terms.
CASH EQUIVALENTS
deCODE considers all highly liquid investments with a maturity of 90 days
or less at the date of purchase to be cash equivalents.
PROPERTY AND EQUIPMENT
Property and equipment are recorded at cost. Depreciation is computed using
the straight-line method over the estimated useful lives of the related assets
of generally three years for computer equipment, five years for laboratory
equipment, furniture, fixtures and company cars, and fifty years for buildings.
Maintenance and repairs are expensed as incurred, while major betterments are
capitalized. When assets are retired or otherwise disposed of, the assets and
related accumulated depreciation or amortization are eliminated from the
accounts and any resulting gain or loss is reflected in the statement of
operations.
IMPAIRMENT OF LONG-LIVED ASSETS
deCODE reviews long-lived assets for potential impairment whenever events
or changes in circumstances indicate that the carrying amount of an asset may
not be recoverable. Recoverability of assets held for use is measured by
comparing the carrying amount of an asset to the undiscounted estimated future
cash flows expected to be generated by the asset. In estimating expected future
cash flows for determining whether an asset is impaired, assets are grouped at
the lowest level for which there are identifiable cash flows that are largely
independent of the cash flows of other groups of assets. If any such assets are
considered to be impaired, the impairment to be recognized is the amount by
which the carrying amount of the assets exceeds its fair value.
deCODE has made no adjustments to the carrying values of long-lived assets
during the years ended December 31, 1997, 1998 and 1999.
F-9
<PAGE> 95
deCODE GENETICS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
(INFORMATION FOR THE THREE MONTHS ENDED MARCH 31, 1999 AND 2000 IS UNAUDITED.)
CAPITAL LEASES
Assets acquired under capital lease agreements are recorded at the present
value of the future minimum rental payments using interest rates appropriate at
the inception of the lease. Property and equipment subject to capital lease
agreements are amortized over the shorter of the life of the lease or the
estimated useful life of the asset, in accordance with deCODE's normal
depreciation policies, unless the lease transfers ownership or contains a
bargain purchase option, in which case the leased asset is amortized over the
estimated useful life of such asset.
REVENUE RECOGNITION AND DEFERRED REVENUE
On December 3, 1999, the staff of the Securities and Exchange Commission
issued Staff Accounting Bulletin No. 101, "Revenue Recognition in Financial
Statements" (SAB 101), that summarizes the staff's views in applying generally
accepted accounting principles to revenue recognition in financial statements.
The accounting and disclosure requirements that are described in SAB 101 apply
to all registrants. deCODE has adopted the requirements of SAB 101 and has
restated prior years' financial statements in accordance with the going public
exemption under Accounting Principles Board Opinion No. 20, "Accounting
Changes." Prior to deCODE's initial filing of its registration statement for the
offering of its securities with the Securities and Exchange Commission, deCODE
followed a policy of recognizing revenue from milestone payments earned under
the research collaboration agreement with Roche when acknowledgement of having
achieved applicable performance requirements was received from the steering
committee. The full amount of the milestone payments were recognized as revenue
at that time. In connection with the initial filing of its registration
statement, deCODE changed its accounting policy for milestone payments received
under the agreement with Roche to recognize the revenue associated with such
payments on a retrospective basis over the related contract term, with no
revenue being recorded until acknowledgement of having achieved applicable
performance requirements is received. deCODE believes that the milestone
payments represent additional amounts of the aggregate total revenue to be
earned under the arrangement with Roche, and that such revenue is more
appropriately accounted for over the service period of the agreement.
deCODE's revenues are currently derived primarily from research funding
under the research and collaboration agreement with Roche. Research funding
revenue is recognized on an accrual basis as services are provided and are
recorded with reference to contracted rates. Research funding payments are not
refundable in the event that the research efforts are not successful. Milestone
payments are recorded when acknowledgement of having achieved applicable
performance requirements is received from the joint steering committee and are
recognized as revenue on a retrospective basis over the contractual term of the
agreement with Roche. Accordingly, upon achievement of the milestone, a portion
of the milestone payment equal to the percentage of the collaboration completed
through that date is recognized. The remainder is recognized as services
performed (generally straight line) over the remaining term of the
collaboration. Payments received in advance of being earned are recorded as
deferred revenue.
RESEARCH AND DEVELOPMENT AND SOFTWARE DEVELOPMENT COSTS
All research and development costs are expensed as incurred. Costs
associated with the development of computer software to be used in deCODE's
research and development activities are expensed as incurred pursuant to
Financial Accounting Standards Board Interpretation No. 6, "Applicability of
FASB Statement No. 2 to Computer Software."
F-10
<PAGE> 96
deCODE GENETICS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
(INFORMATION FOR THE THREE MONTHS ENDED MARCH 31, 1999 AND 2000 IS UNAUDITED.)
STOCK-BASED COMPENSATION
deCODE follows Statement of Financial Accounting Standards No. 123 (SFAS
No. 123), "Accounting for Stock-Based Compensation." The provisions of SFAS No.
123 allow companies to either expense the estimated fair value of stock options
granted to employees or to follow the intrinsic value method set forth in
Accounting Principles Board Opinion No. 25 (APB No. 25), "Accounting for Stock
Issued to Employees," and disclose the pro forma effects on net loss and net
loss per share had the estimated fair value of the options granted to employees
been expensed. SFAS No. 123 requires companies to expense the estimated fair
value of stock options granted to non-employees. deCODE has elected to follow
the intrinsic value method in accounting for its employee stock options and
follows the fair value method in accounting for its non-employee stock options.
FOREIGN CURRENCY TRANSLATION
deCODE and its wholly-owned subsidiary use the U.S. dollar as the
functional currency. deCODE's wholly-owned subsidiary also consolidates its
subsidiaries, all of which use the local currency, the Icelandic krona, as the
functional currency. For these entities the assets and liabilities are
translated into U.S. dollars at exchange rates in effect at the balance sheet
date. Income and expense items are translated at the average exchange rates
prevailing during the period. Gains and losses from translation are included in
accumulated other comprehensive income (loss).
Foreign currency transaction gains and losses are reported according to the
exchange rates prevailing on the transaction date and are included in the
consolidated statements of operations.
INCOME TAXES
deCODE accounts for income taxes using the liability method, which requires
the recognition of deferred tax assets or liabilities for the temporary
differences between the financial reporting and tax bases of deCODE's assets and
liabilities and for tax carryforwards at enacted statutory tax rates in effect
for the years in which the difference are expected to reverse. In addition,
valuation allowances are established when necessary to reduce deferred tax
assets to the amounts expected to be realized.
COMPUTATION OF NET LOSS PER COMMON SHARE
Net loss per share is computed under Statement of Financial Accounting
Standards No. 128, "Earnings Per Share." Basic net loss per share is computed
using net loss available to common stockholders and the weighted-average number
of common shares outstanding. The weighted-average number of common shares
outstanding during the period is the number of shares determined by relating the
portion of time within a reporting period that common shares have been
outstanding to the total time in that period.
F-11
<PAGE> 97
deCODE GENETICS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
(INFORMATION FOR THE THREE MONTHS ENDED MARCH 31, 1999 AND 2000 IS UNAUDITED.)
Net loss available to common stockholders consisted of the following:
<TABLE>
<CAPTION>
FOR THE THREE
MONTHS ENDED
FOR THE YEARS ENDED DECEMBER 31, MARCH 31,
-------------------------------------- -------------------------
1997 1998 1999 1999 2000
---------- ----------- ----------- ----------- -----------
(UNAUDITED) (UNAUDITED)
<S> <C> <C> <C> <C> <C>
Net loss........................... $8,056,241 $10,908,230 $23,788,447 $4,687,672 $6,898,139
Accrued dividends on Series A,
Series B and Series C preferred
stock............................ 605,174 2,428,602 5,751,837 822,522 2,339,225
Amortized discount on Series A and
Series C preferred stock......... 15,211 142,921 1,790,950 39,738 40,153
---------- ----------- ----------- ---------- ----------
Accrued dividends and amortized
discount on preferred stock...... 620,385 2,571,523 7,542,787 862,260 2,379,378
Premium on repurchase of preferred
stock............................ 0 0 30,887,044 0 0
---------- ----------- ----------- ---------- ----------
Net loss available to common
stockholders..................... $8,676,626 $13,479,753 $62,218,278 $5,549,932 $9,277,517
========== =========== =========== ========== ==========
</TABLE>
The premium on repurchase of preferred stock arises as a result of deCODE's
repurchase of Series A, Series B and Series C preferred stock in August 1999 and
represents the aggregate difference between the adjusted repurchase price and
the then carrying value of the Series A, Series B and Series C preferred stock.
Diluted net loss per share is computed using the weighted-average number of
common shares outstanding during the period, plus the dilutive effect of
potential common shares. Diluted net loss per share does not differ from basic
net loss per share since potential common shares from the conversion of
preferred stock, stock options and warrants are antidilutive for all periods
presented and are, therefore, excluded from the calculation. For the years ended
December 31, 1997, 1998, and 1999 and the three month periods ended March 31,
1999 and 2000, preferred stock convertible into 11,790,375, 19,125,683,
22,969,544, 19,862,062 and 23,031,525 shares of common stock, respectively,
options to purchase 1,180,000, 47,000, 45,000, 30,000 and 15,000 shares of
common stock, respectively, and options and warrants to purchase 1,137,814,
1,998,926, 2,110,037, 2,054,481 and 2,048,056 shares of preferred stock,
respectively, were not included in the computation of diluted loss per share
since their inclusion would be antidilutive.
UNAUDITED PRO FORMA STOCKHOLDERS' EQUITY
Upon the closing of a qualified initial public offering, all of the
outstanding shares of Series A, Series B and Series C preferred stock, will
automatically convert into 23,031,525 shares of common stock. These conversions
have been reflected in unaudited pro forma stockholders' equity at March 31,
2000.
UNAUDITED PRO FORMA NET LOSS PER SHARE
Unaudited pro forma basic and diluted net loss per share have been
calculated assuming the conversion of all outstanding shares of preferred stock
into common stock, as if the preferred shares had converted immediately upon
their issuance. Accordingly, in the calculation of unaudited pro forma net loss
per share, net loss has not
F-12
<PAGE> 98
deCODE GENETICS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
(INFORMATION FOR THE THREE MONTHS ENDED MARCH 31, 1999 AND 2000 IS UNAUDITED.)
been increased for the accumulated dividends or amortized discounts on preferred
stock or for the premium on the repurchase of preferred stock. The calculation
of unaudited pro forma net loss per share is as follows:
<TABLE>
<CAPTION>
YEAR ENDED THREE MONTHS ENDED
DECEMBER 31, 1999 MARCH 31, 2000
----------------- ------------------
(UNAUDITED) (UNAUDITED)
<S> <C> <C>
Net loss available to common stockholders................. $(62,218,278) $(9,277,517)
Unaudited pro forma adjustments to reflect assumed
conversion of preferred stock:
Accrued dividends and amortized discounts on preferred
stock................................................ 7,542,787 2,379,378
Premium on repurchase of preferred stock................ 30,887,044 0
------------ -----------
Net loss used in computing unaudited pro forma basic and
diluted net loss per share.............................. $(23,788,447) $(6,898,139)
============ ===========
Shares used in computing basic and diluted net loss per
share................................................... 6,446,055 7,419,439
Unaudited pro forma adjustment to reflect weighted effect
of assumed conversion of preferred stock................ 21,113,310 22,973,356
------------ -----------
Shares used in computing unaudited pro forma basic and
diluted net loss per share.............................. 27,559,365 30,392,795
============ ===========
Unaudited pro forma basic and diluted net loss per
share................................................... $ (0.86) $ (0.23)
</TABLE>
SEGMENT INFORMATION
In June 1997, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards No. 131 (SFAS No. 131), "Disclosures About
Segments of an Enterprise and Related Information." This statement requires
companies to report information about operating segments in interim and annual
financial statements. It also requires segment disclosures about products and
services, geographic areas and major customers.
Management plans to organize deCODE's main business units along three
avenues of commercialization: discovery services, database services, and
healthcare informatics. Through March 31, 2000, deCODE has substantially
undertaken only discovery services and, as such, has only this single reportable
segment under SFAS No. 131. Discovery services, or the development and
application of proprietary bioinformatics tools to discover disease-related
genes and associated drug targets, are currently carried-out in collaboration
with Roche and in deCODE's own research programs. This business unit will also
ultimately encompass diagnostic and therapeutic products and pharmacogenomic
services. The database services business unit will involve the construction and
commercialization of the Icelandic Health Sector Database containing
non-personally identifiable data from Icelandic healthcare records, and the
deCODE Combined Data Processing system to cross-reference data from the
Icelandic Health Sector Database with genealogical and genotypic data. deCODE
expects to derive revenues from the database services business unit by providing
services through the deCODE Combined Data Processing system to pharmaceutical
and biotechnology companies, healthcare providers and other participants in the
healthcare industry. The healthcare informatics business unit will seek to
commercialize bioinformatics tools developed in deCODE's gene and drug target
discovery and database efforts. Products of the healthcare informatics business
unit are expected to include medical decision-support systems designed to assist
the decision making process in the delivery of healthcare and privacy protection
products derived from deCODE's expertise in encryption tools for complex and
sensitive medical and genetic data.
F-13
<PAGE> 99
deCODE GENETICS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
(INFORMATION FOR THE THREE MONTHS ENDED MARCH 31, 1999 AND 2000 IS UNAUDITED.)
All of deCODE's revenues from inception through March 31, 2000 have been
generated in Iceland, and all of deCODE's long-lived assets are located in
Iceland. In the years ended December 31, 1998 and 1999 and the three months
ended March 31, 2000, Roche accounted for 100%, 95% and 100% of revenues,
respectively.
RECENT ACCOUNTING PRONOUNCEMENT
In June 1998, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards No. 133 (SFAS No. 133), "Accounting for
Derivative Instruments and Hedging Activities." This standard establishes a new
model for accounting for derivatives and hedging activities and supersedes and
amends a number of existing standards. Upon the standard's initial application,
all derivatives are required to be recognized in the balance sheet as either
assets or liabilities and measured at fair value. In addition, all hedging
relationships must be designated, reassessed and documented. Currently, the
standard is to be effective for fiscal years and quarters beginning after June
15, 2000. Considering deCODE's current activities, it is not anticipated that
the adoption of SFAS No. 133 will have a significant impact on its financial
position or results of operations.
C. INVESTMENTS:
In January and February 1999, deCODE acquired equity interests totalling
25.2% in Gagnalind hf. in exchange for $254,444 in cash and 70,824 shares of
Series B preferred stock. On the date of issuance, these Series B shares had an
aggregate estimated value of $779,064, or $11.00 per share. In November 1999,
deCODE entered into an agreement in which it ultimately acquired 20.0% of the
common shares of eMR ehf., an Icelandic software company, with such investment
made in an integrated series of transactions as follows:
- On November 19, 1999, deCODE issued 68,000 shares of common stock to two
Icelandic companies in exchange for an additional 30.4% equity interest
in Gagnalind hf. On this date, these common shares had an aggregate
estimated value of $1,449,080, or $21.31 per share.
- In March and April 2000, deCODE acquired 29,925,000 common shares (35.0%)
in eMR ehf. in exchange for $341,436 in cash and 31,169,112 shares
(55.6%) in Gagnalind hf.
- On April 19, 2000, deCODE sold 12,825,000 common shares (15.0%) in eMR
ehf. to The Icelandic Investment Bank for $963,568 resulting in a gain on
sale of $270,325.
As of April 20, 2000, the operations of Gagnalind hf. have been integrated
into the operations of eMR ehf., and deCODE holds an investment in 20.0% of the
common shares of eMR ehf.
deCODE's investment in Gagnalind hf. was accounted for under the equity
method until November 19, 1999. On this date, deCODE acquired a majority
interest and Gagnalind hf. was consolidated. deCODE's equity in net earnings
(loss) of Gagnalind hf. for the period through November 19, 1999 is comprised of
deCODE's share of the earnings (loss) of Gagnalind hf. and amortization of the
difference between deCODE's cost and the underlying equity in the net assets of
Gagnalind hf. at acquisition. Minority interest in the earnings (loss) of
Gagnalind hf. (44.4%) from November 19, 1999 to year-end 1999 and for the
quarter ended March 31, 2000 was $2,842 and ($27,557), respectively, and is
included in interest income and other, net in the consolidated statements of
operations.
F-14
<PAGE> 100
deCODE GENETICS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
(INFORMATION FOR THE THREE MONTHS ENDED MARCH 31, 1999 AND 2000 IS UNAUDITED.)
D. PROPERTY AND EQUIPMENT:
Property and equipment, all located in Iceland, consisted of the following:
<TABLE>
<CAPTION>
DECEMBER 31,
--------------------------
1998 1999
----------- -----------
<S> <C> <C>
Buildings................................................... $ 4,661,824 $ 5,339,200
Furniture and fixtures...................................... 562,096 763,475
Laboratory equipment........................................ 8,968,309 11,370,430
Other property and equipment................................ 336,466 384,360
----------- -----------
14,528,695 17,857,465
Less: accumulated depreciation and amortization............. (2,044,422) (4,805,999)
----------- -----------
Total.................................................. $12,484,273 $13,051,466
=========== ===========
</TABLE>
The total depreciation and amortization of property and equipment for the
years ended December 31, 1997, 1998 and 1999 was, $513,055, $1,470,959 and
$2,791,449, respectively.
During 1999, laboratory equipment and consumables were received by deCODE
from a customer as consideration for equipment testing services provided.
Revenue was recorded, and fair value was determined, with reference to list
prices for such laboratory equipment and consumables. Laboratory equipment
valued at $414,000 has been capitalized and is being depreciated according to
deCODE's normal depreciation policy and consumables valued at $239,600 were
expensed in 1999.
In January 1998, deCODE purchased the building housing its research
operations and corporate headquarters for total consideration amounting to
$2,375,803, comprised of cash and 74,670 shares of Series B preferred stock. In
June 1998, deCODE sold the building for $2,403,846 of cash proceeds and leased
it back from the counterparty (an Icelandic bank). As ownership of the property
will be transferred to deCODE at the end of the lease without any further
payment, the transaction has been recorded as a financing and no immediate gain
was recognized.
In addition to deCODE's building, property and equipment includes amounts
for certain fixed assets financed under capital lease obligations. Total cost
and accumulated amortization relating to property and equipment subject to
capital lease obligations was $10,624,985 and $1,601,675, respectively, as of
December 31, 1998, and $10,624,985 and $3,336,034, respectively, as of December
31, 1999.
deCODE's capital lease obligations are collateralized by the assets to
which the obligations relate. deCODE has an option to purchase all of the leased
property and equipment for 3% of the original lease amount at lease end, with
the exception of the leased building, in which ownership transfers upon lease
expiration.
E. ACCOUNTS PAYABLE AND ACCRUED EXPENSES:
Accounts payable and accrued expenses consisted of the following:
<TABLE>
<CAPTION>
DECEMBER 31,
------------------------
1998 1999
---------- ----------
<S> <C> <C>
Salaries and other employee benefits........................ $ 936,443 $1,570,150
Suppliers................................................... 2,433,763 2,482,683
Other....................................................... 45,437 261,282
---------- ----------
Total..................................................... $3,415,643 $4,314,115
========== ==========
</TABLE>
F-15
<PAGE> 101
deCODE GENETICS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
(INFORMATION FOR THE THREE MONTHS ENDED MARCH 31, 1999 AND 2000 IS UNAUDITED.)
F. BRIDGE LOANS:
In September 1997, the Series A preferred stockholders provided deCODE with
bridge loans totaling $706,074 and bearing interest at the rate of 7% per annum.
deCODE repaid $365,677 in October 1997, using the proceeds from the second round
of Series A preferred stock and paid the remaining $340,397 in April 1998.
G. COMMITMENTS AND CONTINGENCIES:
LEASE COMMITMENTS
deCODE leases certain property, laboratory equipment and other assets under
long-term capital leases which expire at varying dates through 2008. At March
31, 2000, future minimum lease payments for non-cancelable capital leases were
as follows:
<TABLE>
<CAPTION>
MARCH 31,
2000
-----------
<S> <C>
2000........................................................ $ 1,953,134
2001........................................................ 2,000,808
2002........................................................ 1,189,722
2003........................................................ 383,608
2004-2008................................................... 1,739,317
-----------
Total minimum lease payments................................ 7,266,589
Less amount representing interest........................... (1,038,705)
-----------
Present value of future minimum lease payments.............. 6,227,884
Less current portion........................................ (2,103,825)
-----------
Long-term portion........................................... $ 4,124,059
===========
</TABLE>
At December 31, 1997, some of deCODE's capital lease obligations were
collateralized by an amount of cash on deposit with an Icelandic bank
($1,595,769 at December 31, 1997). The requirement for the deposited amount was
removed by the leasing company in 1998.
SETTLEMENT AGREEMENT
On December 31, 1997, deCODE entered into a settlement agreement (the
"Agreement") with The Beth Israel Deaconess Medical Center, a non-Icelandic
medical institution, in respect of deCODE's past use of the institution's
research facilities. Among other terms, the Agreement provides for the joint
ownership of a specific technology associated with the linkage of a segment of
DNA to the multiple sclerosis trait that was developed at the research
facilities.
Pursuant to the Agreement, deCODE paid cash fees and issued Series A
preferred stock as follows: on January 1, 1998, deCODE issued 100,000 shares of
Series A preferred stock; and on December 31, 1998 and 1999, deCODE issued
20,000 shares and 10,000 shares of Series A preferred stock, respectively. The
amounts paid and the value of the shares issued have been expensed in the
statement of operations. Additionally, during the years ended December 31, 1998
and 1999, deCODE recognized stock-based remuneration expenses of $81,000 and
$217,500, respectively, which related to the share issuances and resulted from
the difference between the contractual share issuance price and the estimated
fair value of the shares on the dates of issuance.
Under the Agreement, deCODE is obligated to make certain payments upon the
achievement of established milestones leading to the discovery of defined
products. deCODE is also required to pay royalties on certain
F-16
<PAGE> 102
deCODE GENETICS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
(INFORMATION FOR THE THREE MONTHS ENDED MARCH 31, 1999 AND 2000 IS UNAUDITED.)
royalty bearing products which may result. Such royalties are to be paid for a
period up to and potentially exceeding 15 years.
COLLABORATIVE PARTIES
Hoffman-La Roche. In February 1998, deCODE entered into a research
collaboration and cross-license agreement with Roche to collaborate on the
discovery of genetic variations which affect the cause of diseases for the
purpose of developing new methods to diagnose diseases and obtain drug targets
useful in drug discovery. The agreement provides for a steering committee, the
membership of which is equally divided between the parties, to oversee the
collaborative research programs. The agreement requires deCODE to conduct
research activities assigned by the steering committee and requires Roche to
fund the collaborative gene discovery programs in twelve diseases, including
four cardiovascular diseases, four psychiatric/neurologic diseases and four
metabolic diseases, by making specified payments according to a payment
schedule. Roche's obligation under the agreement to fund these programs will
continue until February 1, 2003 provided that Roche elects to extend the
research term of the agreement for the one-year periods commencing on the third
and fourth anniversaries of the agreement. During the research term, neither
party may terminate the agreement unless the other is in default. In addition to
research funding payments, Roche is required to make payments to deCODE upon the
achievement of specified scientific development and marketing milestones. deCODE
has reached four milestones to date in this collaboration. Under this agreement,
deCODE may receive a total of more than $200 million in research funding and
milestone payments, depending on its progress in the research efforts. The costs
of the collaboration with Roche which deCODE has incurred consist mainly of
salaries, materials, equipment depreciation and other facilities costs. deCODE
estimates that these costs were $6,094,682 in the quarter ended March 31, 2000,
$21,920,948 in 1999 and $12,726,360 in 1998.
The agreement gives Roche exclusive worldwide rights to develop and
commercialize therapeutic and diagnostic products based on gene discoveries.
Roche is required to pay deCODE royalties on sales of any such products until
the later of ten years from the first commercial sale or the last date on which
the product is covered by a patent. deCODE retained the exclusive, worldwide
rights to develop and commercialize gene therapy and antisense products based on
its gene discoveries and will be required to pay Roche royalties on sales of any
such products.
In connection with the agreement, Roche Finance Ltd, or Roche Finance, an
affiliate of Roche, has purchased shares of deCODE's Series C preferred stock
and has an option to purchase additional shares at any time prior to the end of
February 2001. Roche Finance has also purchased warrants to buy shares of
deCODE's Series C preferred stock and will be entitled to purchase additional
warrants if it exercises its option to acquire additional shares of Series C
preferred stock.
Hospital and Physician Collaborations. deCODE has entered into
collaboration agreements and arrangements with the Icelandic Heart Association
and several physician groups. The goal of these collaborations is the discovery
of genetic factors which contribute to the genesis of certain disorders on which
the various physician groups maintain patient information. Under the agreements,
these institutions and/or physicians contribute data or other clinical
information and deCODE contributes equipment, research supplies and our
molecular genetics and experimental design expertise. The agreements also
require deCODE to reimburse all project-related expenses. If deCODE sells
project results, the agreements require it to make specified payments and pay a
portion of any performance-based milestones and royalties that it receives.
deCODE has already sold the results of many of these projects to a third party,
Roche. deCODE shares the ability to make management decisions regarding the
projects with the physician groups, and jointly forms an executive or steering
committee to monitor the project. deCODE's collaboration agreements with the
physician groups normally continue for a term of no more than five years.
F-17
<PAGE> 103
deCODE GENETICS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
(INFORMATION FOR THE THREE MONTHS ENDED MARCH 31, 1999 AND 2000 IS UNAUDITED.)
To further facilitate deCODE's research projects and enable it to construct
lists of patients with specific diseases, deCODE has also entered into
collaboration agreements and arrangements with three of the largest hospitals in
Iceland. Under the terms of these agreements, the hospitals provide research
data. deCODE's projects are monitored by a surveillance committee that is
jointly appointed with the hospitals. deCODE is obligated to pay all of the
expenses (other than the hospitals' administrative expenses) incurred as a
result of the collaboration. The agreements with the hospitals will continue
until terminated by the parties.
LITIGATION
In January 2000, Thornorsteinn Jonsson and Genealogia Islandorum hf., the
holders of copyrights to approximately 100 books of genealogical information,
commenced an action against deCODE in the District Court of Reykjavik in
Iceland. They allege that deCODE's genealogy database infringes their copyrights
and seek damages in the amount of approximately $9,000,000 and a declaratory
judgment to prevent deCODE from using the allegedly infringing data. deCODE
believes the suit is without merit and intends to defend this action vigorously;
however, the ultimate resolution of this matter cannot yet be determined.
In January 2000, an individual advised deCODE that he believes that he and
another individual are entitled to receive, collectively, 1,000,000 shares of
deCODE common stock pursuant to an agreement with deCODE. The other individual
has not asserted a claim to these shares. deCODE believes that this assertion is
without merit and intends to defend vigorously any action that this party may
commence. On April 10, 2000, Ernir Snorrason, original stockholder of deCODE,
filed a complaint in the Court of Chancery of the State of Delaware for New
Castle County alleging that deCODE improperly exercised an option to repurchase
256,637 shares of common stock that deCODE issued to Mr. Snorrason in 1996
pursuant to a Founders' Stock Purchase Agreement. The complaint seeks an order
requiring deCODE to recognize Mr. Snorrason as the owner of these shares. deCODE
believes that it has good defenses to this action and intends to defend it
vigorously; however, the ultimate resolution of this matter cannot yet be
determined.
In February 2000, Mannvernd, an organization known as the Association of
Icelanders for Ethics in Science and Medicine, issued a press release announcing
its intention to file lawsuits against the State of Iceland and any other
relevant parties, including deCODE, to test the constitutionality of the Act. In
its press release, Mannvernd indicated that it hopes to halt the construction
and/or operation of the Icelandic Health Sector Database. Mannvernd has not
commenced litigation against deCODE and deCODE is not aware of any other
litigation commenced by Mannvernd with respect to the Act. The ultimate
resolution of this matter cannot yet be determined.
OTHER
deCODE is committed to grant stock options for 15,000 shares of common
stock to a director of deCODE on December 1, 2000, subject to such director's
continued service through such date.
H. REDEEMABLE, CONVERTIBLE PREFERRED STOCK:
deCODE is authorized to issue 32,641,926 shares of preferred stock which
can be issued in one or more series. Holders of the Series A, Series B and
Series C preferred stock are entitled to receive, when and as declared by the
Board of Directors, cash dividends at the rate of 8% of the original issue price
per annum. These dividends are recorded each period as an increase to the
carrying value of the preferred stock and a reduction to stockholders' equity.
These dividends are also deducted from net loss to arrive at net loss available
to common stockholders for purposes of calculating net loss per share. Preferred
stock dividends are cumulative and receive preference over dividends on any
outstanding shares of common stock.
F-18
<PAGE> 104
deCODE GENETICS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
(INFORMATION FOR THE THREE MONTHS ENDED MARCH 31, 1999 AND 2000 IS UNAUDITED.)
The outstanding shares of preferred stock issued are convertible, at the
option of the holder, into common stock at any time, at the applicable
conversion rate (one-to-one at the date of issuance) as adjusted from time to
time for, among other things, stock splits or combinations, stock dividends and
distributions, reorganizations, mergers and, subject to exceptions, sales below
the then applicable conversion price. Upon such optional conversion, deCODE
shall pay any accumulated, unpaid dividends, whether or not declared by the
Board of Directors. The preferred stock automatically converts to common stock
upon closing of a qualified initial public offering, as defined by deCODE's
Amended and Restated Certificate of Incorporation. Upon such automatic
conversion, all accumulated, unpaid dividends are cancelled and all amounts
previously recorded will be reversed with a corresponding increase to
stockholders equity. Common stock that would be received upon an optional or
automatic conversion would carry with it certain registration rights.
Upon liquidation, dissolution or winding-up of deCODE, the holders of
preferred stock are entitled to receive the sum of the original issue price plus
any accumulated, unpaid dividends before any distributions to the holders of
common stock. In addition, the preferred stock contains constructive liquidation
provisions whereby the occurrence of certain defined events are deemed to be
liquidations of deCODE. These events include (i) any consolidation, merger or
reorganization of deCODE in which the stockholders of deCODE immediately prior
to such consolidation, merger or reorganization own less than fifty percent of
deCODE's voting power immediately after such transaction and (ii) any sale,
lease, transfer or other disposition of all or substantially all of the assets
of deCODE.
A description of the preferred stock outstanding on March 31, 2000 is as
follows:
SERIES A
As of March 31, 2000, deCODE has issued and outstanding 9,624,282 shares of
Series A preferred stock. The Series A preferred stock is redeemable upon the
vote of 75% of the shareholders voting as a separate class, beginning on the
seventh anniversary of the earliest issue date and ending three years later. The
redemption value is the sum of the original issue price plus any accumulated,
unpaid dividends. Accumulated, accreted dividends on Series A preferred stock
amounted to $1,738,233, $2,069,888, and $2,266,118 at December 31, 1998 and 1999
and March 31, 2000, respectively.
In connection with the sale of 5,090,376 shares of Series A preferred stock
in October 1997, deCODE issued 1,137,814 warrants to purchase Series A preferred
stock for $1.00 per share. The total consideration received under the issuance
was allocated between the preferred shares and the warrants based upon their
relative fair values at the date of issuance. The consideration allocated to the
warrants was $650,240, and the resulting discount on the preferred shares is
being amortized over seven years, the earliest redemption date of the Series A
preferred stock. These warrants expire on August 26, 2005. One stockholder
exercised 61,981 warrants in March 2000.
SERIES B
As of March 31, 2000, deCODE has issued and outstanding 9,893,814 shares of
Series B preferred stock. Accumulated, accreted dividends on Series B preferred
stock amounted to $1,113,560, $5,379,772 and $7,360,546 at December 31, 1998 and
1999 and March 31, 2000, respectively.
SERIES C
As of March 31, 2000, deCODE has issued 3,611,111 shares of Series C
preferred stock and, of those, 3,511,111 shares are outstanding. The Series C
preferred stock is redeemable upon the vote of 75% of the shareholders voting as
a separate class, beginning on the seventh anniversary of the earliest issue
date and ending three years later. The redemption value is the sum of the
original issue price plus any accumulated, unpaid
F-19
<PAGE> 105
deCODE GENETICS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
(INFORMATION FOR THE THREE MONTHS ENDED MARCH 31, 1999 AND 2000 IS UNAUDITED.)
dividends. Accumulated, accreted dividends on Series C Preferred Stock amounted
to $363,835, $935,291 and $1,097,512 at December 31, 1998 and 1999 and March 31,
2000, respectively.
Pursuant to a stock and warrant purchase agreement signed in February 1998,
Roche purchased 2,500,000 shares of Series C preferred stock at $2.00 per share
in February 1998, purchased 555,555 additional shares of Series C preferred
stock at $3.00 per share in February 1999, and purchased another 555,556 shares
of Series C preferred stock at $3.00 per share in May 1999. There are no future
performance obligations or any stated or unstated rights or privileges
associated with these purchases of Series C preferred stock by Roche. In
connection with these share purchases, Roche also obtained options and warrants
to purchase a total of 972,223 shares of Series C preferred stock for a
weighted-average exercise price of $3.37 per share. The total consideration
received under these issuances was allocated between the preferred shares and
the warrants based upon their relative fair values at the dates of issuance.
The consideration allocated to the 861,112 options and warrants issued in
February 1998 was $400,250, and the resulting discount on the preferred shares
is being amortized over seven years, the earliest redemption date of the Series
C preferred stock. Options and warrants to purchase 611,112 shares expire on
February 1, 2001, and warrants to purchase 250,000 shares expire on February 2,
2007.
The consideration allocated to the 55,555 warrants issued in February 1999
was $41,668, and the resulting discount on the preferred shares is being
amortized over seven years, the earliest redemption date of the Series C
preferred stock. These warrants expire on February 5, 2008.
The consideration allocated to the 55,556 warrants issued in May 1999 was
$125,804 resulting in the shares being issued at a discount. As the preferred
shares issued with these warrants were issued with beneficial conversion
features, the remaining consideration to be allocated was recorded as additional
paid-in capital resulting in no consideration being allocated to the preferred
shares. This resulting discount on the preferred shares was amortized entirely
on the date of issuance, as the preferred shares are convertible upon issuance.
These warrants expire on May 20, 2009.
ISSUANCE OF SERIES B PREFERRED STOCK
On June 30, 1999, deCODE entered into a Stock Purchase Agreement (the
"Purchase Agreement") to sell five million shares of Series B preferred stock at
$7.50 per share (the "Purchase Price") to a Luxembourg-based financial buyer
(the "Buyer"). The sale closed on August 8, 1999.
Contemporaneously with the execution of the Purchase Agreement, deCODE and
the Buyer entered into an agreement pursuant to which the parties agreed upon
the following:
- Sales of Series B preferred stock in the Icelandic market shortly before
the date of the Purchase Agreement indicated that the market price was
approximately $15 per share;
- The Buyer would sell the Series B preferred stock to Icelandic investors
at the market price;
- The Purchase Price at which the Buyer would buy the Series B shares from
deCODE would be increased to $15.00 per share (the "Adjusted Purchase
Price") if (i) the Buyer was able to sell at least 50% of the Series B
shares at or above the Adjusted Purchase Price and (ii) the trading
price in the Icelandic market remained at or above the Adjusted Purchase
Price from the time of such resale through the end of 1999;
- In the event that deCODE received the incremental Adjusted Purchase
Price proceeds from the Buyer, deCODE would also receive interest on
such amount at a rate of 6% per annum from the closing date; and
F-20
<PAGE> 106
deCODE GENETICS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
(INFORMATION FOR THE THREE MONTHS ENDED MARCH 31, 1999 AND 2000 IS UNAUDITED.)
- The Buyer would receive a commission of 7% of the proceeds from the sale
of the Series B preferred stock for the placement of deCODE's stock.
This commission would only become payable in the event that the Purchase
Price was subsequently increased to the Adjusted Purchase Price.
On August 8, 1999, the closing date, the Buyer advised deCODE that it had
arranged for the sale of at least 50% of the Series B shares at a price of
$15.00 per share.
EXCHANGE OF COMMON STOCK FOR SERIES B PREFERRED STOCK
On August 8, 1999, deCODE exchanged 333,333 shares of common stock held by
deCODE's chief executive officer, or CEO, for 250,000 shares of newly issued
Series B preferred stock. At this time, the common shares were estimated to have
a fair value equal to 90% of the fair value of the Series B preferred shares.
This exchange resulted in a deemed contribution by deCODE's CEO of $750,000
being recorded. The 333,333 shares of common stock were held in treasury and
subsequently re-issued during 1999.
REPURCHASE OF SERIES A, SERIES B AND SERIES C PREFERRED STOCK
On August 8, 1999, deCODE repurchased the 250,000 shares of Series B
preferred stock issued to its CEO pursuant to a Resolution adopted by the Board
of Directors. The 250,000 shares of Series B preferred stock were held in
treasury and subsequently re-issued during 1999.
On August 11, 1999, deCODE repurchased and retired 2,358,074 shares of
Series A preferred stock.
On August 24, 1999, deCODE repurchased and holds in treasury 100,000 shares
of Series C preferred stock.
Pursuant to the Series A and Series C preferred stock repurchase agreements
and the Board Resolution, the initial repurchase price deCODE paid for such
shares of Series A, Series B and Series C preferred stock was $7.50 per share
(the "Repurchase Price"). deCODE paid the Repurchase Price to the selling
shareholders in August 1999. However, pursuant to agreements between the
respective stockholders and deCODE on July 12, 1999, it was agreed that the
repurchase price paid for the Series A, Series B and Series C preferred stock
would be equal to the Purchase Price per share, net of any commission payable to
the Buyer, at which deCODE sold shares of its Series B preferred stock in the
August 8, 1999 offering.
ADJUSTMENT TO ISSUANCE AND REPURCHASE PRICES
On December 28, 1999, the conditions requiring an increase of the Purchase
Price were met, and deCODE and the Buyer agreed on an Adjusted Purchase Price of
$15.00 per share for the five million shares of Series B preferred stock sold to
the Buyer on August 8, 1999. It was also agreed that the Buyer would receive the
commission in the amount of $5,250,000, representing 7% of the total aggregate
Adjusted Purchase Price for the Series B shares.
As of December 31, 1999, deCODE has recorded a receivable from the Buyer in
the amount of $33,143,836 representing the incremental amount due from the Buyer
with respect to the Adjusted Purchase Price of $37,500,000, less commissions and
plus accrued interest. The receivable from the Buyer was paid in February 2000.
The total amount received was $33,476,712.
As a result of the Purchase Price being adjusted, on December 28, 1999,
deCODE and the Series A stockholders, deCODE's CEO and the Series C stockholder
agreed upon an adjusted repurchase price for the Series A, Series B and Series C
preferred stock of $13.95 per share, that being the Adjusted Purchase Price of
$15.00 per share less a commission of 7% of the Adjusted Purchase Price. This
adjustment to the repurchase price resulted in the Series A and Series C shares
being repurchased for total premiums of $29,978,873 and $1,170,671,
respectively, and the Series B shares being repurchased for a net discount of
$262,500.
F-21
<PAGE> 107
deCODE GENETICS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
(INFORMATION FOR THE THREE MONTHS ENDED MARCH 31, 1999 AND 2000 IS UNAUDITED.)
The incremental repurchase price per share of $6.45, or $17,467,077 in
aggregate, was paid to the respective sellers of Series A, Series B and Series C
preferred stock in February 2000, and accordingly, is reflected in the balance
sheet at December 31, 1999 as a current liability.
UNDESIGNATED PREFERRED STOCK
7,016,666 shares of preferred stock as of March 31, 2000, and 6,716,666
shares of preferred stock as of May 31, 2000 are not designated as an existing
series. With respect to these shares, deCODE's Board of Directors is authorized,
except as otherwise limited by Delaware law, without further action by the
stockholders:
- to issue shares of preferred stock in one or more series;
- to fix or alter the dividend rights, dividend rates, conversion rights,
voting rights, terms of redemption (including sinking fund provisions),
redemption price or prices, and liquidation preferences of any wholly
unissued series of preferred stock;
- to designate the number of shares constituting, and the designation of,
any series of preferred stock; and
- to increase or decrease the number of shares of a series subsequent to
the issue of shares of that series, but not below the number of shares
of that series then outstanding.
F-22
<PAGE> 108
deCODE GENETICS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
(INFORMATION FOR THE THREE MONTHS ENDED MARCH 31, 1999 AND 2000 IS UNAUDITED.)
BALANCES OF THE SERIES A, SERIES B AND SERIES C PREFERRED STOCK
<TABLE>
<CAPTION>
NUMBER OF SHARES AMOUNT
---------------------------------- ---------------------------------------
SERIES A SERIES B SERIES C SERIES A SERIES B SERIES C
PREFERRED PREFERRED PREFERRED PREFERRED PREFERRED PREFERRED
STOCK STOCK STOCK STOCK STOCK STOCK TOTAL
---------- --------- --------- ----------- ------------ ---------- ------------
<S> <C> <C> <C> <C> <C> <C> <C>
Issuance of Series A preferred
stock........................... 6,699,999 0 0 $ 6,699,999 $ 0 $ 0 $ 6,699,999
Accretion of dividends on
preferred stock................. 181,852 181,852
---------- --------- --------- ----------- ------------ ---------- ------------
BALANCE AT DECEMBER 31, 1996...... 6,699,999 0 0 6,881,851 0 0 6,881,851
Issuance of Series A preferred
stock and warrants.............. 5,090,376 5,101,754 5,101,754
Accretion of dividends and
amortization of discount on
preferred stock................. 620,385 620,385
---------- --------- --------- ----------- ------------ ---------- ------------
BALANCE AT DECEMBER 31, 1997...... 11,790,375 0 0 12,603,990 0 0 12,603,990
Issuance of Series A preferred
stock........................... 120,000 366,000 366,000
Issuance of Series B preferred
stock........................... 4,712,990 22,616,316 22,616,316
Issuance of Series C preferred
stock, warrants and options..... 2,500,000 5,000,250 5,000,250
Accretion of dividends and
amortization of discount on
preferred stock................. 1,042,473 1,113,560 415,490 2,571,523
---------- --------- --------- ----------- ------------ ---------- ------------
BALANCE AT DECEMBER 31, 1998...... 11,910,375 4,712,990 2,500,000 14,012,463 23,729,876 5,415,740 43,158,079
Repurchase and retirement of
Series A preferred stock........ (2,358,074) (2,916,259) (2,916,259)
Exchange of common stock for
Series B
preferred stock................. 250,000 3,750,000 3,750,000
Repurchase of Series B preferred
stock........................... (250,000) (3,750,000) (3,750,000)
Repurchase of Series C preferred
stock and held in treasury...... (100,000) (224,329) (224,329)
Issuance of Series A preferred
stock........................... 10,000 367,500 367,500
Issuance of Series B preferred
stock........................... 5,180,824 71,869,064 71,869,064
Issuance of Series C preferred
stock and warrants.............. 1,111,111 1,792,525 1,792,525
Accretion of dividends and
amortization of discount on
preferred stock................. 942,183 4,266,212 2,334,392 7,542,787
---------- --------- --------- ----------- ------------ ---------- ------------
BALANCE AT DECEMBER 31, 1999...... 9,562,301 9,893,814 3,511,111 12,405,887 99,865,152 9,318,328 121,589,367
Issuance of Series A preferred
stock upon exercise of warrants
(unaudited)..................... 61,981 61,981 61,981
Accretion of dividends and
amortization of discount on
preferred stock (unaudited)..... 221,496 1,980,774 177,108 2,379,378
---------- --------- --------- ----------- ------------ ---------- ------------
BALANCE AT MARCH 31, 2000
(UNAUDITED)..................... 9,624,282 9,893,814 3,511,111 $12,689,364 $101,845,926 $9,495,436 $124,030,726
========== ========= ========= =========== ============ ========== ============
</TABLE>
I. STOCKHOLDERS' EQUITY:
COMMON STOCK
The total authorized shares of common stock, par value $0.001, of deCODE is
48,000,000 shares. Holders of shares of common stock are entitled to one vote at
all meetings of stockholders for each share held by them. The common stock has
no preemptive rights or other rights to subscribe for additional shares, no
conversion right and no right of redemption. Subject to the rights and
preferences of the holders of any preferred stock, the holders of the common
stock are entitled to receive such dividends as, when and if declared by the
Board of Directors out of funds legally available therefor for that purpose.
F-23
<PAGE> 109
deCODE GENETICS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
(INFORMATION FOR THE THREE MONTHS ENDED MARCH 31, 1999 AND 2000 IS UNAUDITED.)
Notes receivable for the purchase of common stock are collateralized only
by the shares to which they relate, are payable after a fixed period of
generally four years and bear a fixed interest rate of generally six percent per
annum.
Of the 6,015,000 shares of common stock that were issued and paid at the
inception of deCODE, 5,789,438 were issued to the founders of deCODE subject to
certain vesting provisions ("Founder Stock"). The unvested shares of Founder
Stock are subject to repurchase by deCODE at the original issue price in the
event that a founder does not continue in employment, according to individual
terms. At March 31, 2000, 406,778 shares of the Founder Stock remained subject
to repurchase.
Of the Founder Stock, 3,125,292 shares of common stock are entitled to
piggyback registration rights with respect to the registration of such shares
under the Securities Act. Should deCODE propose to register any shares of common
stock under the Securities Act either for deCODE's own account or for the
account of other security holders, the holders of shares having piggyback rights
are entitled to receive notice of the registration and are entitled, with some
limitation, to include their shares in the registration.
Forfeited unvested Founder Stock and unvested common stock issued upon
early exercise of stock options totalling 359,655 shares were held in treasury
and subsequently re-issued during 1999. At March 31, 2000, 1,749,178 shares of
common stock that were issued upon early-exercise of stock options remained
unvested.
Upon the closing of a public offering, all outstanding shares of preferred
stock will automatically convert into shares of common stock. As of March 31,
2000, the number of shares of common stock issuable upon conversion are as
follows:
<TABLE>
<CAPTION>
SHARES OF
COMMON STOCK
------------
<S> <C>
Series A preferred stock.................................... 9,624,282
Series B preferred stock.................................... 9,896,132
Series C preferred stock.................................... 3,511,111
----------
23,031,525
==========
</TABLE>
Also upon the closing of a public offering, warrants and options to purchase
shares of Series A and Series C preferred stock will automatically convert into
warrants and options to purchase the same number of shares of common stock. As
of March 31, 2000, warrants to purchase 1,075,833 shares of Series A preferred
stock and warrants and options to purchase 972,223 shares of Series C preferred
stock were outstanding. Holders of 18,583,863 of such shares (including
2,044,456 shares issuable upon exercise of options and warrants) will have the
right to require deCODE to file a registration statement under the Securities
Act covering the registration of their shares at any time after 180 days from
the effective date of an initial registration statement if the holders of 50% of
such shares demand registration and the number of shares to be registered has an
aggregate public offering price of at least $5,000,000. Such registration rights
are subject to conditions and limitations, including the right of the
underwriters of an offering to limit the number of shares of common stock which
security holders may include in a registration. Further, deCODE may defer a
registration for a period of 90 days if deCODE furnishes to the holders
requesting registration a certificate signed by the chairman of the board
stating that in the good faith judgment of the Board of Directors it would be
seriously detrimental to deCODE and its stockholders for the requested
registration to be effected at that time. deCODE is generally required to bear
all of the expenses of such registrations, except underwriting discounts and
selling commissions. Registration of any of the shares of common stock held by
security holders with registration rights would result in such shares becoming
freely tradable without restriction under the Securities Act immediately upon
effectiveness of such registration.
F-24
<PAGE> 110
deCODE GENETICS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
(INFORMATION FOR THE THREE MONTHS ENDED MARCH 31, 1999 AND 2000 IS UNAUDITED.)
STOCK OPTION PLAN
In August 1996, deCODE adopted the deCODE genetics, Inc. 1996 Equity
Incentive Plan (the "Plan"). A total of 5,000,000 options as of March 31, 2000,
and 6,000,000 options as of the closing of deCODE's initial public offering are
reserved to be granted under the terms of the Plan. The Plan provides for grants
of stock options to employees, members of the Board of Directors, consultants
and other advisors who are not employees. Options granted to date generally vest
over a period of four years, generally have a maximum term of 10 years, contain
early-exercise provisions and allow for company-provided financing of the
exercise price. As of March 31, 2000, 1,041,000 shares were available for grant
under the 1996 Plan.
Options transactions pursuant to the Plan are summarized as follows:
<TABLE>
<CAPTION>
EXERCISE PRICE EXERCISE PRICE EXERCISE PRICE
GREATER THAN GRANT EQUALS GRANT LESS THAN GRANT
DATE STOCK FAIR VALUE DATE STOCK FAIR VALUE DATE STOCK FAIR VALUE TOTAL
-------------------------- -------------------------- --------------------------- ----------
WEIGHTED- WEIGHTED- WEIGHTED-
NUMBER AVERAGE NUMBER AVERAGE NUMBER AVERAGE NUMBER
OF SHARES EXERCISE PRICE OF SHARES EXERCISE PRICE OF SHARES EXERCISE PRICE OF SHARES
--------- -------------- --------- -------------- ---------- -------------- ----------
<S> <C> <C> <C> <C> <C> <C> <C>
Outstanding at December
31, 1996............... 0 $ 0.00 0 $ 0.00 0 $ 0.00 0
Granted.................. 0 0.00 0 0.00 1,180,000 0.20 1,180,000
-------- ------ ------- ------ ---------- ------ ----------
Outstanding at December
31, 1997............... 0 0.00 0 0.00 1,180,000 0.20 1,180,000
Granted.................. 540,000 4.00 15,000 4.00 1,378,500 0.64 1,933,500
Exercised................ (523,000) 4.00 0 0.00 (2,543,500) 0.42 (3,066,500)
-------- ------ ------- ------ ---------- ------ ----------
Outstanding at December
31, 1998............... 17,000 4.00 15,000 4.00 15,000 0.20 47,000
Granted.................. 0 0.00 0 0.00 855,500 5.85 855,500
Exercised................ (7,000) 4.00 0 0.00 (840,500) 5.62 (847,500)
Cancelled................ (10,000) 4.00 0 0.00 0 0.00 (10,000)
-------- ------ ------- ------ ---------- ------ ----------
Outstanding at December
31, 1999............... 0 0.00 15,000 4.00 30,000 9.25 45,000
Exercised (unaudited).... 0 0.00 (15,000) 4.00 (15,000) 0.20 (30,000)
-------- ------ ------- ------ ---------- ------ ----------
Outstanding at March 31,
2000 (unaudited)....... 0 $ 0.00 0 $ 0.00 15,000 $18.29 15,000
======== ====== ======= ====== ========== ====== ==========
<CAPTION>
TOTAL
--------------
WEIGHTED-
AVERAGE
EXERCISE PRICE
--------------
<S> <C>
Outstanding at December
31, 1996............... $ 0.00
Granted.................. 0.20
------
Outstanding at December
31, 1997............... 0.20
Granted.................. 1.58
Exercised................ 1.03
------
Outstanding at December
31, 1998............... 2.79
Granted.................. 5.85
Exercised................ 5.61
Cancelled................ 4.00
------
Outstanding at December
31, 1999............... 7.50
Exercised (unaudited).... 2.10
------
Outstanding at March 31,
2000 (unaudited)....... $18.29
======
</TABLE>
The following table summarizes information about stock options outstanding
at December 31, 1999:
<TABLE>
<CAPTION>
OUTSTANDING VESTED AND EXERCISABLE
------------------------ ---------------------------
WEIGHTED-
AVERAGE
REMAINING
CONTRACTUAL WEIGHTED-
NUMBER LIFE NUMBER AVERAGE
EXERCISE PRICE OF SHARES (IN YEARS) OF SHARES EXERCISE PRICE
-------------- --------- ----------- --------- --------------
<S> <C> <C> <C> <C>
$0.20.......................................... 15,000 7.92 15,000 $ 0.20
$4.00.......................................... 15,000 8.92 15,000 4.00
$18.29......................................... 15,000 9.92 1,250 18.29
------ ----- ------ ------
$0.20-18.29.................................... 45,000 8.92 31,250 $ 2.75
====== ===== ====== ======
</TABLE>
deCODE records deferred compensation for employee stock options based on
the difference between the exercise price and the common stock fair value on the
measurement date (i.e., the date on which both the number of shares to be issued
and the exercise price are fixed and determinable) and records interim estimates
of deferred compensation between the grant date and the measurement date. deCODE
records deferred compensation for non-employee stock options based on the grant
date fair value of options granted as estimated by the Black-
F-25
<PAGE> 111
deCODE GENETICS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
(INFORMATION FOR THE THREE MONTHS ENDED MARCH 31, 1999 AND 2000 IS UNAUDITED.)
Scholes option pricing model. Deferred compensation is amortized and recorded as
compensation expense ratably over the vesting period of the options. Stock-based
compensation expense of $11,851, $4,655,647 and $5,815,010 was recognized in the
statements of operations during the years ended December 31, 1997, 1998 and 1999
for employee stock options, and stock-based compensation expense of $0, $222,027
and $2,498,355 was recognized in the statements of operations during the years
ended December 31, 1997, 1998 and 1999 for non-employee stock options.
Each employee option grant generally vests twenty-five percent on the first
anniversary date of an employee's commencement of employment and 1/48 of the
original grant each month thereafter for the following three years. Non-employee
option grants generally do not contain vesting provisions.
All options granted to date have contained a provision for early-exercise
according to the terms of the Plan with company-provided financing of the
exercise price made available. In almost all cases, employees have taken
advantage of their right to early-exercise and to fund such exercise with a
company-provided loan. The company-provided loans are due after a fixed term of
generally four years and bear a fixed interest rate of six percent per annum.
Employee stock options granted in 1997 and 1998 were amended in March 1999.
Such amendment eliminated prepayment terms with respect to principal and
interest pursuant to the company-provided note and fixed the interest rate at
6%. With this, these option grants, which were originally variable awards,
became fixed. Total compensation measured at March 1999 with respect to the
options granted in 1997 and 1998 aggregated $14,872,579. Of this amount,
$11,851, $4,655,647 and $1,265,947 was recognized as compensation in the
consolidated statements of operations in 1997, 1998 and in the period January
through March 1999, respectively. Compensation deferred as of and to be
recognized subsequent to March 1999 with respect to the options granted in 1997
and 1998, amounted to $8,939,134.
OTHER STOCK OPTION ARRANGEMENTS
In February 1998, deCODE granted a stock option to a collaborator which was
not granted under the provisions of the Plan. This option was for 80,000 shares
of common stock at an exercise price of $0.40 per share. The option had no
vesting provisions and was immediately exercised using company-provided
financing that was subsequently paid in 1999.
PRO FORMA NET LOSS PER COMMON SHARE
deCODE applies Accounting Principles Board Opinion No. 25 (APB No. 25),
"Accounting for Stock Issued to Employees," in accounting for options granted to
employees and has adopted the disclosure-only provisions of Statement of
Financial Accounting Standards No. 123 (SFAS No. 123), "Accounting for
Stock-Based Compensation." Accordingly, no compensation expense as calculated
under SFAS No. 123 has been recognized in the statements of operations for stock
options granted to employees.
deCODE applies SFAS No. 123 in accounting for options granted to
non-employees and has recognized the grant date fair value of options granted to
non-employees in the statements of operations.
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deCODE GENETICS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
(INFORMATION FOR THE THREE MONTHS ENDED MARCH 31, 1999 AND 2000 IS UNAUDITED.)
Had compensation cost for all stock options been determined based on the
fair value at the grant date for awards in 1997, 1998 and 1999, consistent with
the provisions of SFAS No. 123, deCODE's net loss and basic and diluted net loss
per share would have been changed to the pro forma amounts indicated below:
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
-----------------------------------------
1997 1998 1999
----------- ------------ ------------
<S> <C> <C> <C>
Net loss attributable to common stockholders -- as
reported............................................ $(8,676,626) $(13,479,753) $(62,218,278)
Net loss attributable to common stockholders -- pro
forma............................................... $(8,696,626) $ (9,471,753) $(58,348,278)
Basic and diluted net loss per share -- as reported... $ (3.85) $ (3.06) $ (9.65)
Basic and diluted net loss per share -- pro forma..... $ (3.86) $ (2.15) $ (9.05)
</TABLE>
Pro forma net loss and net loss per share for the years ended December 31,
1998 and 1999 is less than net loss and net loss per share as reported as a
result of deCODE's employee stock options initially being accounted for as
variable awards under APB No. 25. The variable award accounting combined with
the growth in the estimated fair value of deCODE's common stock during these
years resulted in significant stock-based compensation expense being recognized
in the statements of operations for 1998 and 1999 under APB No. 25. Under SFAS
123, stock-based compensation expense is measured on the date of grant and is
not subsequently remeasured for changes in the value of the underlying stock.
The effects of applying the provisions of SFAS No. 123 on net loss and net
loss per share as stated above is not necessarily representative of the effects
on reported income or loss for future years due to, among other things, the
vesting period of the stock options and the fair value of additional stock
options that may be granted in future years.
The weighted-average grant-date fair values using the Black-Scholes option
pricing model were:
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
------------------------
1997 1998 1999
----- ----- ------
<S> <C> <C> <C>
Exercise price greater than grant date stock fair value..... -- $2.31 --
Exercise price equals grant date stock fair value........... -- $1.88 --
Exercise price less than grant date stock fair value........ $0.10 $1.72 $11.89
</TABLE>
The fair values of the options granted during 1997, 1998 and 1999 are
estimated on the date of grant using the Black-Scholes option-pricing model with
the following weighted-average assumptions: no dividends, expected volatility of
50%, 50% and 60%, respectively; expected terms of 3.1 years, 3.8 years and 3.9
years, respectively; and risk-free interest rates of 5.82%, 5.44% and 5.74%,
respectively.
J. STOCK-BASED COMPENSATION AND REMUNERATION:
Stock-based compensation represents the expense charged in the statements
of operations relating to employee and non-employee stock options granted.
Stock-based remuneration represents the expense charged in the statements of
operations relating to shares of stock issued to non-employees in exchange for
services provided. Stock-based compensation and remuneration are included in the
statements of operations in the following captions:
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
-------------------------------------
1997 1998 1999
------- ----------- -----------
<S> <C> <C> <C>
General and administrative expense................... $ 3,675 $ 1,757,639 $ 3,478,968
Research and development expense..................... 8,176 3,462,003 5,566,897
------- ----------- -----------
Total................................................ $11,851 $ 5,219,642 $ 9,045,865
======= =========== ===========
</TABLE>
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<PAGE> 113
deCODE GENETICS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
(INFORMATION FOR THE THREE MONTHS ENDED MARCH 31, 1999 AND 2000 IS UNAUDITED.)
K. DEFINED CONTRIBUTION BENEFITS:
deCODE contributes to relevant pension organizations for personnel in
Iceland in accordance with Icelandic law. Certain other discretionary
contributions may be made. Contributions are based on employee salaries and
deCODE has no further liability in connection with these plans. Total
contributions were $101,064, $381,138 and $747,939 for the years ended December
31, 1997, 1998 and 1999, respectively.
L. INCOME TAXES:
deCODE accounts for income taxes in accordance with Statement of Financial
Accounting Standards No. 109 (SFAS No. 109), "Accounting for Income Taxes." Due
to deCODE incurring net losses since inception, there is no provision for income
taxes for the years ended December 31, 1997, 1998 and 1999. deCODE has not paid
income taxes in the United States, Iceland or elsewhere since inception.
The tax effects of temporary differences that give rise to deferred tax
assets and deferred tax liabilities were as follows:
<TABLE>
<CAPTION>
DECEMBER 31,
--------------------------
1998 1999
----------- -----------
<S> <C> <C>
DEFERRED TAX ASSETS (LIABILITIES):
Loss carryforwards.......................................... $ 4,591,389 $ 5,662,000
Capitalization of research and development costs............ 0 3,308,000
Other deferred tax assets................................... 0 121,000
Tax depreciation in excess of book depreciation............. (185,699) (428,000)
----------- -----------
Net deferred tax asset...................................... 4,405,690 8,663,000
Valuation allowance......................................... (4,405,690) (8,663,000)
----------- -----------
$ 0 $ 0
=========== ===========
</TABLE>
At December 31, 1999, deCODE has available a net operating loss
carryforward for federal income tax purposes of approximately $38,000 to offset
future federal taxable income in the United States which expires in 2018. deCODE
also has approximately $18,829,000 of foreign net operating loss carryforwards
available to offset future taxable income in Iceland which expires in varying
amounts beginning in 2004. As required by SFAS No. 109, the management of deCODE
has evaluated the positive and negative evidence bearing upon the realizability
of its deferred tax assets and has established a full valuation allowance for
such assets, which are comprised principally of net operating loss carryforwards
and capitalization of research and development costs. Management reevaluates the
positive and negative evidence periodically. The net operating loss
carryforwards could be limited in the future if there is a significant change in
ownership.
M. RECENT EVENTS:
ICELANDIC HEALTH SECTOR DATABASE LICENSE
On January 22, 2000, the Ministry of Health and Social Security granted
deCODE's Icelandic subsidiary, Islensk erfethagreining ehf., an operating
license to create and run the Icelandic Health Sector Database, or IHD. The
license, which has a term of twelve years, allows deCODE to collect data from
medical records of Icelandic healthcare institutions and self-employed
healthcare professionals and to transfer such data in encrypted form into a
centralized database. As required by the license and concurrently with the
issuance of the license, our Icelandic subsidiary entered into an agreement with
the Ministry. This agreement provides that deCODE must pay the Icelandic
government a fixed annual fee of 70 million Icelandic kronas (approximately
$950,000 at December 31, 1999) and an additional annual fee of 6% of its net
profit, up to a maximum of 70 million Icelandic kronas per
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<PAGE> 114
deCODE GENETICS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
(INFORMATION FOR THE THREE MONTHS ENDED MARCH 31, 1999 AND 2000 IS UNAUDITED.)
year. The agreement also provides that deCODE's rights to the Icelandic Health
Sector Database will be transferred to the Ministry on the expiration or
termination of the license.
deCODE's preparation of the Icelandic Health Sector Database is subject to
technical requirements imposed by the Icelandic Data Protection Commission in
areas such as data encryption and privacy protection. These requirements are
subject to change from time to time and may require greater technical
capabilities than deCODE currently has. Compliance with these requirements can
be expensive and time-consuming and may delay the development of the Icelandic
Health Sector Database and the deCODE Combined Data Processing system or make
such development more expensive than anticipated. In addition, deCODE's
compliance is subject to evaluation by the agencies imposing these requirements.
deCODE cannot control the time required for this evaluation, and accordingly,
the evaluation process may lead to delay in the development of the Icelandic
Health Sector Database and the deCODE Combined Data Processing system.
deCODE is subject to a very extensive indemnity clause in the agreement
with the Ministry, pursuant to which it has:
- agreed not to make any claim against the government if the Act or the
license are amended as a result of the Act or rules relating to the
Icelandic Health Sector Database being found to be inconsistent with the
rules of the European Economic Area or other international rules and
agreements to which Iceland is or becomes a party;
- agreed that if the Icelandic state by a final judgment is found to be
liable or subject to payment to any third party as a result of the
passage of legislation on the Icelandic Health Sector Database and/or
issuance of the Icelandic Health Sector Database license, deCODE will
indemnify it against all damages and costs in connection with the
litigation; and
- agreed to compensate any third parties with whom the Icelandic
government negotiates a settlement of liability claims arising from the
legislation on the Icelandic Health Sector Database and/or the issue of
the Icelandic Health Sector Database license, provided that the
Icelandic government demonstrates that it was justified in agreeing to
make payments pursuant to the settlement.
The license and the agreement under which deCODE received the license also
require it to:
- pay the costs incurred by the health institutions (including the costs
of medical record software) in connection with the entering of data from
medical records before transfer to the Icelandic Health Sector Database;
- financially segregate the operation of the Icelandic Health Sector
Database from its other activities by maintaining a separate operating
unit, and separate accounts for the Icelandic Health Sector Database;
- pay the costs of the governmental agencies which monitor deCODE's
Icelandic Health Sector Database activities;
- indemnify and agree not to sue the Icelandic government for any
liability resulting from the passage of the legislation on the Icelandic
Health Sector Database and its operation and/or the issuance of the
Icelandic Health Sector Database; and
- observe international science ethics rules.
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<PAGE> 115
deCODE GENETICS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
(INFORMATION FOR THE THREE MONTHS ENDED MARCH 31, 1999 AND 2000 IS UNAUDITED.)
The license prohibits deCODE from, among other things:
- abusing its position by charging unreasonable fees, refusing business to
our competitors or discriminating among customers by imposing
discriminatory or other onerous business terms on our customers; or
- assigning or pledging our rights in the license.
The Icelandic Health Sector Database license will expire in January 2012,
unless an extension is granted.
CONTRIBUTION TO THE CHILDREN'S ADVOCACY FOUNDATION
On January 21, 2000, Islensk erfethagreining ehf., the wholly owned
subsidiary of deCODE genetics, Inc., and the Icelandic Ministry for Health and
Social Security, agreed to jointly establish an independent foundation, the
objective of which is to tend to matters of interest for children in Iceland. On
May 31, 2000, Islensk erfethagreining ehf. provided capital to the foundation in
the amount of 150,000 shares of Series B preferred stock in its parent company,
deCODE genetics Inc; such issuance resulting in an aggregate amount of
approximately $3 million being recorded immediately as a contribution expense.
On March 30, 2000, deCODE's Board of Directors approved, contingent upon
stockholder approval of the amendment of the Certificate of Incorporation, the
issuance, sale and delivery of the above mentioned number of shares to the
Children's Advocacy Fund for a purchase price of $0.001 per share.
SITE FOR NEW FACILITIES IN REYKJAVIK, ICELAND
On February 15, 2000, Islensk erfethagreining ehf., the wholly owned
subsidiary of deCODE genetics, Inc., entered into an agreement with the
University of Iceland and the City of Reykjavik pursuant to which Islensk
erfethagreining ehf. will be permitted to construct a building of approximately
10,000 square meters in the University District which will house the operations
of deCODE. For the right to construct a building on this property, Islensk
erfethagreining ehf. will pay $1,423,000 and will undertake to construct the
building on the site within approximately two years. This amount is included in
accounts payable and accrued expenses in the accompanying balance sheet at March
31, 2000.
EXERCISE OF OPTIONS AND WARRANTS BY ROCHE
Pursuant to a stock and warrant purchase agreement signed in February 1998,
SAPAC Corporation Ltd., successor-in-interest to Roche Finance Ltd, on June
30th, exercised its option to purchase 555,556 shares of our Series C preferred
stock which will convert to 555,556 shares of our common stock upon the closing
of this offering. On the same day, SAPAC also exercised its option to acquire a
warrant to purchase 55,556 shares of our Series C preferred stock which will
convert into a warrant to purchase 55,556 shares of our common stock upon the
closing of this offering. The aggregate purchase price was $2,222,280.
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