<PAGE> 1
AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON MAY 5, 2000
REGISTRATION NO. 333-31984
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
------------------------
FORM S-1/A
REGISTRATION STATEMENT
UNDER
THE SECURITIES ACT OF 1933
------------------------
DECODE GENETICS, INC.
(EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)
<TABLE>
<S> <C> <C>
DELAWARE 8731 04-3326704
(State or Other Jurisdiction of (Primary Standard Industrial (I.R.S. Employer
Incorporation or Organization) Classification Code Number) Identification No.)
</TABLE>
------------------------
<TABLE>
<S> <C>
LYNGHALS 1 KARI STEFANSSON, M.D., DR. MED.
REYKJAVIK, ICELAND C/O SMITH, STRATTON, WISE, HEHER & BRENNAN
+ 354-570-1900 600 COLLEGE ROAD EAST
(Address, Including Zip Code, and Telephone PRINCETON, NEW JERSEY 08540
Number, Including Area Code, of Registrant's 609-924-6000
Principal Executive Office) (Name, Address, Including Zip Code, and Telephone
Number,
Including Area Code, of Agent for Service)
</TABLE>
------------------------
Copies to:
<TABLE>
<S> <C>
DIANE M. FRENIER, ESQ. PAUL E. KUMLEBEN, ESQ.
MARSHA E. NOVICK, ESQ. DAVIS POLK & WARDWELL
SMITH, STRATTON, WISE, HEHER & BRENNAN 99 Gresham Street
600 College Road East London EC2V 7NG
Princeton, New Jersey 08540 United Kingdom
609-924-6000 + 44-207-418-1300
</TABLE>
------------------------
APPROXIMATE DATE OF COMMENCEMENT OF PROPOSED SALE TO THE PUBLIC:
AS SOON AS POSSIBLE AFTER THE EFFECTIVE DATE OF THIS REGISTRATION STATEMENT
If any of the securities being registered on this Form are to be offered on
a delayed or continuous basis pursuant to Rule 415 under the Securities Act of
1933, check the following box. [ ]
If this Form is filed to register additional securities for an offering
pursuant to Rule 462(b) under the Securities Act, please check the following box
and list the Securities Act registration statement number of the earlier
effective registration statement for the same offering. [ ]
If this Form is a post-effective amendment filed pursuant to Rule 462(c)
under the Securities Act, check the following box and list the Securities Act
registration statement number of the earlier effective registration statement
for the same offering. [ ]
If this Form is a post-effective amendment filed pursuant to Rule 462(d)
under the Securities Act, check the following box and list the Securities Act
registration statement number of the earlier effective registration statement
for the same offering. [ ]
If delivery of the prospectus is expected to be made pursuant to Rule 434,
please check the following box. [ ]
------------------------
CALCULATION OF REGISTRATION FEE
<TABLE>
<CAPTION>
- -----------------------------------------------------------------------------------------------------------------------------
PROPOSED MAXIMUM PROPOSED MAXIMUM
TITLE OF EACH CLASS OF AMOUNT TO BE OFFERING PRICE AGGREGATE AMOUNT OF
SECURITIES TO BE REGISTERED REGISTERED PER SHARE OFFERING PRICE(1) REGISTRATION FEE(3)
- -----------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Common Stock, $.001 par value(2).... 8,000,000 shares $18 $200,000,000 $52,800
- -----------------------------------------------------------------------------------------------------------------------------
</TABLE>
(1) Estimated solely for purposes of calculating the registration fee
pursuant to Rule 457 under the Securities Act of 1933, as amended.
(2) Includes 1,200,000 shares that the underwriters have the option to
purchase to cover over-allotments, if any.
(3) Previously paid on or about March 8, 2000.
THE REGISTRANT HEREBY AMENDS THIS REGISTRATION STATEMENT ON SUCH DATE OR
DATES AS MAY BE NECESSARY TO DELAY ITS EFFECTIVE DATE UNTIL THE REGISTRANT SHALL
FILE A FURTHER AMENDMENT WHICH SPECIFICALLY STATES THAT THIS REGISTRATION
STATEMENT SHALL THEREAFTER BECOME EFFECTIVE IN ACCORDANCE WITH SECTION 8(a) OF
THE SECURITIES ACT OF 1933 OR UNTIL THE REGISTRATION STATEMENT SHALL BECOME
EFFECTIVE ON SUCH DATE AS THE COMMISSION, ACTING PURSUANT TO SAID SECTION 8(a),
MAY DETERMINE.
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
<PAGE> 2
The information in this preliminary prospectus is not complete and may be
changed. We may not sell these securities until the registration statement
filed with the Securities and Exchange Commission is effective. This
preliminary prospectus is not an offer to sell these securities and it is
not soliciting an offer to buy these securities in any jurisdiction where
the offer or sale is not permitted.
PRELIMINARY PROSPECTUS (Subject to Completion)
Issued -- , 2000
8,000,000 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. We anticipate that the initial public offering price will be
between $14 and $18 per share.
------------------------
The Nasdaq National Market has approved our shares for quotation, subject to
official notice of issuance, and we have applied for admission to listing on 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 7.
------------------------
PRICE $ -- A SHARE
------------------------
<TABLE>
<CAPTION>
UNDERWRITING
PRICE TO DISCOUNTS AND PROCEEDS TO
PUBLIC COMMISSIONS DECODE
-------- ------------- -----------
<S> <C> <C> <C>
Per Share....................................... $ $ $
Total........................................... $ $ $
</TABLE>
deCODE genetics, Inc. has granted the underwriters an option to purchase up to
an additional 1,200,000 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 -- , 2000.
------------------------
MORGAN STANLEY DEAN WITTER
LEHMAN BROTHERS
-- , 2000
<PAGE> 3
TABLE OF CONTENTS
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
Prospectus Summary.................... 3
Risk Factors.......................... 7
Special Note Regarding Forward-Looking
Statements.......................... 22
Use of Proceeds....................... 23
Dividend Policy....................... 24
Capitalization........................ 25
Dilution.............................. 26
Exchange Rates........................ 27
Selected Consolidated Financial
Data................................ 28
Management's Discussion and Analysis
of Financial Condition and Results
of Operations....................... 29
</TABLE>
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
Business.............................. 35
Management............................ 57
Certain Transactions.................. 63
Principal Stockholders................ 64
Description of Securities............. 66
Tax Considerations.................... 69
Shares Eligible for Future Sale....... 73
Underwriters.......................... 75
Legal Matters......................... 77
Experts............................... 77
Where You Can Find More Information... 77
EASDAQ Information.................... 78
Index to Consolidated Financial
Statements.......................... F-1
</TABLE>
------------------------
ABOUT THIS PROSPECTUS
UNTIL , 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.
2
<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 products and services for the healthcare industry
using human genetics by finding genes that are involved in diseases. We develop
and apply modern informatics 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 high-throughput genotyping facility;
- the development of automated software algorithms 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:
- extensive genealogical records dating back 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;
- 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 the analysis of biological information, known as
bioinformatics, decision-support tools and privacy products.
3
<PAGE> 5
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 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 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.
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.
4
<PAGE> 6
THE OFFERING
Common stock that we are
offering................. 8,000,000 shares
The employee and priority
offerings................ -- 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...... 40,664,787 shares
Use of Proceeds............ We estimate that our net proceeds from this
offering will be approximately $119.0 million,
based on an initial public offering price of $16
per share (the midpoint of the price range set
forth on the front cover page of this prospectus).
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................. The Nasdaq National Market has approved our shares
for quotation, subject to official notice of
issuance, and we have applied for admission to
listing on 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 1,200,000 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, 41,864,787 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 23,031,525 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 2,063,056 shares of our common
stock that we reserved for issuance upon exercise of outstanding options and
warrants. 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."
5
<PAGE> 7
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 $ 16,444,075 $ 4,507,489 $ 4,437,222
Operating Expenses
Research and development... 737,764 6,080,096 19,282,364 31,823,950 6,805,146 8,854,368
General and
administrative........... 454,873 1,967,684 4,893,202 7,863,299 2,208,749 2,608,898
----------- ----------- ------------ ------------ ------------ ------------
Total operating expenses..... 1,192,637 8,047,780 24,175,566 39,687,249 9,013,895 11,463,266
Operating loss............... (1,192,637) (8,047,780) (11,470,566) (23,243,174) (4,506,406) (7,026,044)
Equity in net earnings (loss)
of affiliate............... 0 0 0 (1,484,081) (278,780) (119,284)
Interest income, net......... 40,005 (8,461) 562,336 1,549,481 97,514 636,624
Taxes........................ 0 0 0 0 0 0
----------- ----------- ------------ ------------ ------------ ------------
Net loss..................... (1,152,632) (8,056,241) (10,908,230) (23,177,774) (4,687,672) (6,508,704)
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) $(61,607,605) $ (5,549,932) $ (8,888,082)
=========== =========== ============ ============ ============ ============
Basic and diluted net loss
per share.................. $ (1.10) $ (3.85) $ (3.06) $ (9.56) $ (0.97) $ (1.20)
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...................... $ (0.84) $ (0.21)
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
8,000,000 shares of common stock pursuant to this offering. We have based this
information on an initial public offering price of $16 per share, the midpoint
of the price range set forth on the front cover page of this prospectus, less
the estimated underwriters discounts and commissions.
<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................................... $ 40,530,449 $40,530,449 $159,570,449
Total assets................................................ 59,335,157 59,335,157 178,375,157
Total long-term liabilities................................. 4,474,275 4,474,275 4,474,275
Redeemable, convertible preferred stock..................... 124,030,726 0 0
Total stockholders' equity (deficit)........................ (80,504,999) 43,525,727 162,565,727
</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.
6
<PAGE> 8
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
7
<PAGE> 9
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 $8,888,082 for
the quarter ended March 31, 2000, $61,607,605 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 $83,262,374. 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
8
<PAGE> 10
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. Our development of genotype data and our cross-referencing through the
9
<PAGE> 11
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 patients
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.
10
<PAGE> 12
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. 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. We cannot be certain
that individuals within health institutions will adhere to the requirements of
such agreements. 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.
11
<PAGE> 13
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 a research collaboration only with Roche. To
succeed, we will have to maintain this relationship and establish additional
collaborations. We cannot be sure that we will be able to establish 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 programs 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.
12
<PAGE> 14
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. 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 Database license,
the loss of our customers and reputation and the loss of the goodwill and
cooperation of the Icelandic population including healthcare professionals.
13
<PAGE> 15
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 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
14
<PAGE> 16
outcomes, we cannot be sure that any of the databases that we create will
achieve greater market acceptance than those of our competitors.
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, 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 letter dated April 17, 2000, the EFTA Surveillance Authority notified the
Ministry that on the basis of information supplied to it, it is 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.
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
15
<PAGE> 17
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 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
16
<PAGE> 18
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 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
17
<PAGE> 19
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 are estimated to be approximately $119.0
million, or about $136.9 million if the underwriters exercise their
over-allotment option in full. We have based this calculation on an initial
public offering price of $16 per share (the midpoint of the price range set
forth on the front cover page of this prospectus). 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 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.
18
<PAGE> 20
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 39.4% 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 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 7,016,666
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.
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.
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
19
<PAGE> 21
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
40,664,787 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 8,000,000 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 32,664,787 shares of common stock 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 21,709,155 shares of common stock (including 2,044,456 shares of
common stock issuable upon the exercise of options and 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 -- % 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.
In addition, stockholders who will hold an aggregate of -- % 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);
20
<PAGE> 22
- 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 3,877,195 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 $12.00 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.
Following the completion of this offering, options and warrants to purchase
2,063,056 shares of common stock, at the weighted-average exercise price of
$2.24, will be outstanding.
21
<PAGE> 23
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.
22
<PAGE> 24
USE OF PROCEEDS
We estimate that we will receive net proceeds from this offering of about
$119.0 million, or about $136.9 million if the underwriters exercise their
over-allotment option in full. For purposes of this calculation, we have assumed
an initial public offering price of $16 per share, the midpoint of the price
range set forth on the front cover page of this prospectus.
We expect to use approximately $ -- million of the net proceeds of this
offering for the development and construction of the deCODE Combined Data
Processing system. In addition, we intend to spend approximately $ --
million to fund our discovery and research programs.
We also intend to spend approximately $ -- million of the net proceeds
of this offering 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.
23
<PAGE> 25
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.
24
<PAGE> 26
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
8,000,000 shares of our common stock pursuant to this offering. This information
assumes an initial public offering price of $16 per share, the midpoint of the
price range set forth on the front cover page of this prospectus, less the
estimated underwriters discounts and commissions. 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..... $ 4,474,275 $ 4,474,275 $ 4,474,275
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 40,664,787 shares
outstanding pro forma as adjusted............ 9,633 32,665 40,665
Additional paid-in capital...................... 32,984,613 146,268,131 265,300,131
Notes receivable from stockholders.............. (9,593,996) (9,593,996) (9,593,996)
Deferred compensation........................... (9,913,293) (9,913,293) (9,913,293)
Dividends accreted on redeemable, convertible
preferred stock.............................. (10,724,176) 0 0
Accumulated deficit............................. (83,262,374) (83,262,374) (83,262,374)
Accumulated other comprehensive income (loss)... (5,406) (5,406) (5,406)
------------ ------------ ------------
Total stockholders' equity (deficit)............ (80,504,999) 43,525,727 162,565,727
------------ ------------ ------------
Total capitalization............................ $ 48,000,002 $ 48,000,002 $167,040,002
============ ============ ============
</TABLE>
The information contained above does not include 2,063,056 shares of our
common stock issuable upon exercise of outstanding options to purchase common
stock and options and warrants to purchase preferred stock that will convert
into options and warrants to purchase common stock upon the closing of this
offering. See "Description of Securities" for additional information regarding
the outstanding options and warrants.
25
<PAGE> 27
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
$43,525,727 or $1.33 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 8,000,000 shares of common stock
at an assumed initial offering price of $16 per share, the midpoint of the price
range set forth on the front cover page of this prospectus, less estimated
underwriting discounts and commissions, our pro forma as adjusted net tangible
book value, at March 31, 2000, would have been approximately $162,565,727 or
$4.00 per share. This represents an immediate increase in the net tangible book
value of $2.67 per share of our common stock to present stockholders and an
immediate dilution of $12.00 per share or 75.0% of the initial public offering
price to new investors. The following table shows this dilution:
<TABLE>
<S> <C> <C>
Assumed initial public offering price per share(1).......... $ 16.00
Pro forma net tangible book value per share at March 31,
2000................................................... $ 1.33
Increase per share attributable to new investors.......... 2.67
-----------
Pro forma as adjusted net tangible book value per share
after this offering....................................... 4.00
-----------
Dilution per share to new investors......................... $ 12.00
===========
</TABLE>
- ---------------
(1) The assumed initial public offering price set forth in the above table
represents the midpoint of the range set forth on the cover page of this
prospectus, before deducting underwriting discounts and commissions payable
by us to the underwriters.
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
underwriting discounts and commissions:
<TABLE>
<CAPTION>
SHARES OWNED CONSIDERATION
------------------------ -------------------------- AVERAGE PRICE
NUMBER PERCENTAGE AMOUNT PERCENTAGE PER SHARE
---------- ---------- ------------ ---------- -------------
<S> <C> <C> <C> <C> <C>
Existing stockholders...... 32,664,787 80.3% $128,631,278 50.1% $ 3.94
New investors.............. 8,000,000 19.7 128,000,000 49.9 $16.00
---------- ------ ------------ ------
Total...................... 40,664,787 100.0% $256,631,278 100.0%
========== ====== ============ ======
</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 2,063,056
shares of our common stock issuable upon exercise of outstanding options to
purchase common stock and options and warrants to purchase preferred stock that
will convert into options and 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.
26
<PAGE> 28
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 April 25, 2000)........................ 73.51 74.21 71.27 74.21
</TABLE>
- ---------------
(1) The average of the rates for the last business day of each month in the
period, except for April 2000 for which the rate used is April 25, 2000.
On April 25, 2000 the buying exchange rate of the Icelandic krona against
the U.S. dollar was 74.21.
27
<PAGE> 29
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 $ 16,444,075 $ 4,507,489 $ 4,437,222
Operating Expenses
Research and development......... 737,764 6,080,096 19,282,364 31,823,950 6,805,146 8,854,368
General and administrative....... 454,873 1,967,684 4,893,202 7,863,299 2,208,749 2,608,898
----------- ----------- ------------ ------------ ----------- -----------
Total operating expenses........... 1,192,637 8,047,780 24,175,566 39,687,249 9,013,895 11,463,266
----------- ----------- ------------ ------------ ----------- -----------
Operating loss..................... (1,192,637) (8,047,780) (11,470,566) (23,243,174) (4,506,406) (7,026,044)
Equity in net earnings (loss) of
affiliate........................ 0 0 0 (1,484,081) (278,780) (119,284)
Interest income, net............... 40,005 (8,461) 562,336 1,549,481 97,514 636,624
Taxes.............................. 0 0 0 0 0 0
----------- ----------- ------------ ------------ ----------- -----------
Net loss........................... (1,152,632) (8,056,241) (10,908,230) (23,177,774) (4,687,672) (6,508,704)
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) $(61,607,605) $(5,549,932) $(8,888,082)
=========== =========== ============ ============ =========== ===========
Basic and diluted net loss per
share............................ $ (1.10) $ (3.85) $ (3.06) $ (9.56) $ (0.97) $ (1.20)
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....... $ (0.84) $ (0.21)
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 $ 29,668,249 $ 40,530,449
Total assets...................................... 7,801,556 6,770,492 38,540,115 79,130,186 59,335,157
Total long-term liabilities....................... 1,440,673 1,331,156 6,946,330 4,874,291 4,474,275
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) (73,404,502) (80,504,999)
</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.
28
<PAGE> 30
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 $83,262,374. 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 96% 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. We
currently only have an agreement with Roche which provides all of our
collaborative research funding.
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
29
<PAGE> 31
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.
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."
RESULTS OF OPERATIONS
COMPARISON OF QUARTERS ENDED MARCH 31, 2000 AND 1999
Revenues. Our revenues decreased to $4,437,222 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.
However, 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. As a result of this, total revenues decreased 2%.
Research and Development. Our research and development expenses increased
to $8,854,368 for the quarter ended March 31, 2000 as compared to $6,805,146 for
the quarter ended March 31, 1999, an increase of 30%. 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 $2,608,898 for the quarter ended March 31, 2000 as compared to
$2,208,749 for the quarter ended March 31, 1999, an increase of 18%. 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 $1,732,403 for the quarter ended March
31, 2000 as compared to $1,780,947 for the quarter ended March 31, 1999, a
decrease of 3%. Amortization of deferred stock compensation for the quarter
ended March 31, 2000 increased to $1,732,403 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 $119,284 for the quarter ended March 31, 2000 as compared to
$278,780 for the quarter ended March 31, 1999, a decrease of 57%. This decrease
was primarily attributable to higher amortization of the difference between our
cost and the underlying equity in the net assets of Gagnalind hf. at acquisition
in the quarter ended March 31, 1999 as compared to the quarter ending March 31,
2000.
30
<PAGE> 32
Interest Income, net. Our interest income increased to $744,036 for the
quarter ended March 31, 2000 as compared to $297,230 for the quarter ended March
31, 1999, an increase of 150%. 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 $6,508,704 as compared to $4,687,672
for the quarter ended March 31, 1999, an increase of 39%. As of March 31, 2000,
we had accumulated losses of $83,262,374 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 $8,888,082 for the quarter ended March 31, 2000
from $5,549,932 for the quarter ended March 31, 1999, an increase of 60%. 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 $16,444,075 for the year ended
December 31, 1999 as compared to $12,705,000 for the year ended December 31,
1998, an increase of 29%. 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 $31,823,950 for the year ended December 31, 1999 as compared to $19,282,364
for the year ended December 31, 1998, an increase of 65%. 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 $7,863,299 for the year ended December 31, 1999 as compared to
$4,893,202 for the year ended December 31, 1998, an increase of 61%. 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 $8,043,995 for the year ended December
31, 1999 compared to $5,219,642 for the year ended December 31, 1998, an
increase of 54%. 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, net. Our interest income increased to $2,185,441 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 $635,960 for the year ended December 31, 1999 as compared
to $359,894 for the year ended December 31, 1998, an increase of 77%. This
increase in interest
31
<PAGE> 33
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 $23,177,774 as compared to $10,908,230 for
the year ended December 31, 1998, an increase of 112%. As of December 31, 1999,
we had accumulated losses of $76,713,517 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 $61,607,605 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, 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 totalled $40,530,449 at March 31, 2000. We
have financed our operations since inception primarily through private
placements of equity securities, our collaboration with Roche and
32
<PAGE> 34
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 $20,544,852. 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 $11,646,931 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;
33
<PAGE> 35
- 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.
34
<PAGE> 36
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 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
35
<PAGE> 37
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, and to provide insights into the interplay
between environment and disease, 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 that we will develop using 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. In December 1999, the
sequence of the entire chromosome 22 was announced and the sequences of other
chromosomes are expected to follow. On April 6, 2000, Celera Genomics announced
that it had completed the sequencing phase of one person's genome. The target of
the Human Genome Project is to complete the first draft sequence of the human
genome in 2000. The challenge will then be 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.
36
<PAGE> 38
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.
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 Icelandic National Archives contains
manuscripts on genealogy dating from the fifteenth to nineteenth centuries which
form a bridge between the time of settlement and the time when church and
government officials began systematic registration of the population in the
seventeenth century. Numerous
37
<PAGE> 39
sources of genealogical information, including parish records, census data and
written manuscripts, are readily available. This 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 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
38
<PAGE> 40
on the disease genes identified through our population genomics approach to more
specifically define their molecular pathways.
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]
39
<PAGE> 41
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 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 high-throughput
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
40
<PAGE> 42
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 uses a yeast two-hybrid culture system to identify
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 have also developed methods to
evaluate protein interactions that can be used for membrane proteins that may be
difficult to analyze using two-hybrid technology. Complementing the two-hybrid
system with our methods of assessing interactions of proteins embedded in cell
membranes is essential since approximately 50% of known drug targets are
membrane associated and may not have been found using the two-hybrid system
alone. 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
41
<PAGE> 43
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 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 data 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.
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
42
<PAGE> 44
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, or IMA, and the World Medical Association
have opposed the proposals for the establishment of the Icelandic Health Sector
Database on ethical and privacy grounds. 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
to provide us with technical advice for solving such issues and maintaining or
exceeding international best industry-practice standards. We expect the Security
Advisory Board to be appointed and operational by the end of May 2000.
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, 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 system and in our
disease gene discovery efforts, including GeneMiner, DecodeGT and a
comprehensive sample database.
43
<PAGE> 45
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.
44
<PAGE> 46
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.
45
<PAGE> 47
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 DISEASE
DISEASE ANALYZING LOCUS 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.
46
<PAGE> 48
(5) Loci identified by third party.
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
47
<PAGE> 49
access to our collaborators technologies, including libraries of chemical
compounds, to enhance our operations outside of the collaboration.
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 a
total of more than $200 million in research funding and milestone payments,
depending on our progress in the research efforts. 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 $5,843,882 in the quarter ended March 31, 2000, $21,003,807 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.
In connection with the agreement, Roche Finance Ltd, or Roche Finance, an
affiliate of Roche, has purchased shares of our 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 our 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.
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.
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:
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. Payments will go into specially
designated funds for further research. 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
48
<PAGE> 50
obligated to pay all of the expenses (other than the hospitals' administrative
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.
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
49
<PAGE> 51
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.
- Health Organizations. Healthcare providers, including health
maintenance organizations, 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.
</TABLE>
50
<PAGE> 52
<TABLE>
<CAPTION>
TYPE DESCRIPTION
- ---- -----------
<S> <C>
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.
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.
51
<PAGE> 53
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 $8,854,368 in the quarter ended
March 31, 2000, $31,823,950 in 1999, $19,282,364 in 1998 and $6,080,096 in 1997.
Of these amounts, we estimate that $5,843,882 in the quarter ended March 31,
2000, $21,003,807 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.
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. 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.
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.
52
<PAGE> 54
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;
- 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.
53
<PAGE> 55
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
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.
54
<PAGE> 56
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.
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
55
<PAGE> 57
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.
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 a lease for a 1,923 square meter, or approximately 19,000 square
foot, facility located at Hlietharsmari 15, Kopavogur, Iceland to conduct
database and informatics activities.
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.
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.
56
<PAGE> 58
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......................... 34 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
57
<PAGE> 59
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
58
<PAGE> 60
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 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.
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 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 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,
59
<PAGE> 61
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, Chairman. 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
We are in the process of establishing a Security Advisory Board that will
consist of experts in the fields of computer security, data and privacy
protection and security of medical informatics. We expect this board to 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. We expect the Security Advisory
Board to be appointed and operational by the end of May 2000.
60
<PAGE> 62
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.
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.
61
<PAGE> 63
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.
62
<PAGE> 64
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 29.7% and 32%, respectively, of the outstanding
shares of Icetherm, Ltd., an Icelandic company which has entered into a research
collaboration with deCODE for discovery of compounds made from thermophilic
organisms. Dr. Stefansson is Chairman of the Board and Mr. Smarason is a
director of Icetherm. 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 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 75% 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.
63
<PAGE> 65
PRINCIPAL STOCKHOLDERS
The following table sets forth certain information regarding the beneficial
ownership of our common stock as of March 31, 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>
Roche Finance Ltd(2).......................... 4,483,334 13.3% 10.8%
124 Grenzacherstrasse (including 2.9% (including 2.3%
CH-4070 Basel in stock in stock
Switzerland options and options and
warrants) warrants)
Entities affiliated with Alta Partners(3)..... 2,335,082 7.1% 5.7%
One Embarcadero Center, Suite 4050 (including 1% (including 1%
San Francisco, CA 94111 in warrants) in warrants)
Entities affiliated with Atlas Venture(4)..... 2,335,082 7.1% 5.7%
222 Berkeley Street, Suite 1950 (including 1% (including 1%
Boston, MA 02116 in warrants) in warrants)
Entities affiliated with Polaris Venture 1,875,848 5.7% 4.6%
Partners, L.P.(5)........................... (including 1%
1000 Winter Street in warrants)
Suite 3350
Waltham, MA 02154
Kari Stefansson............................... 3,125,292 9.6% 7.7%
Hannes Smarason............................... 560,000 1.7% 1.3%
Jeffrey Gulcher............................... 481,200 1.5% 1.2%
Kristjan Erlendsson........................... 125,000 * *
Sigurethur Bjornsson.......................... 120,000 * *
Jean-Francois Formela(4)...................... 2,335,082 7.1% 5.7%
(including 1% (including 1%
in warrants) in warrants)
Andre Lamotte(6).............................. 845,259 2.6% 2.1%
Terrance McGuire(5)........................... 1,875,848 5.7% 4.6%
(including 1%
in warrants)
Guy Nohra(3).................................. 2,335,082 7.1% 5.7%
(including 1% (including 1%
in warrants) in warrants)
Sir John Vane(7).............................. 45,000 * *
All directors and executive officers as a
group (10 persons)(8)....................... 11,847,763 35.4% 28.6%
(including 3% (including 2%
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 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
64
<PAGE> 66
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 32,664,787 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 40,664,787
shares of common stock outstanding after this offering.
(2) Includes 3,511,111 shares of common stock issuable upon conversion of
shares of Series C preferred stock and 361,111 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 Roche Finance,
555,556 shares of common stock issuable upon conversion of shares of Series
C preferred stock that Roche Finance has an option to acquire, and 55,556
shares of common stock issuable upon conversion of shares of Series C
preferred stock issuable upon exercise of warrants which Roche Finance has
an option to acquire. Roche Holdings Ltd exercises voting and investment
control over the shares held by Roche Finance. In April, 2000, Roche
Finance transferred these shares, warrants and options to an affiliate.
(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 Alta Embarcadero Partners exercise sole voting and investment
power with respect to the shares held by such funds. 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 Alta Embarcadero Partners, LLC. As general partners of
such funds, 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. Mr. Formela is a general partner of Atlas Venture
Associates II, L.P. along with Barry J. Fidelman and Christopher J. Spray.
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
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
65
<PAGE> 67
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 80,641,926 shares, of which
48,000,000 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
7,016,666 shares of preferred stock into classes or series. Immediately
following this offering, there will be 40,664,787 shares of common stock and no
shares of preferred stock outstanding.
COMMON STOCK
As of March 31, 2000, there were 9,633,262 shares of common stock issued
and outstanding and held of record by approximately 350 stockholders. In
addition, as of March 31, 2000, there were outstanding options to purchase
15,000 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, 10,000,000 shares are designated as
Series B preferred stock, and 4,583,334 shares are designated as Series C
preferred stock. As of March 31, 2000, 9,624,282 shares of Series A preferred
stock (held by 20 holders of record), 9,893,814 shares of Series B preferred
stock (held by approximately 5,000 holders of record), and 3,511,111 shares of
Series C preferred stock (held by one holder of record) were outstanding. In
addition, as of March 31, 2000, there were outstanding 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. Upon the closing of this
offering, all outstanding shares of preferred stock will be converted into
23,031,525 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.
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
66
<PAGE> 68
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 7,016,666 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 March 31, 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 an option to
purchase (i) 555,556 shares of Series C preferred stock at $4.00 per share and
(ii) 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 option to purchase 555,556 shares of Series C preferred stock and a warrant
to purchase 55,556 shares of Series C preferred stock expires on February 1,
2001. 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.
The total number of shares of common stock authorized for issuance under
the 1996 Plan is 5,000,000. As of March 31, 2000, 1,041,000 shares of common
stock were eligible for issuance upon the exercise of options available to be
granted under the 1996 Plan.
REGISTRATION RIGHTS OF STOCKHOLDERS
Pursuant to the terms of an investor rights agreement, the holders of
18,583,863 shares of common stock (including 2,044,456 shares of common stock
issuable upon exercise of options and warrants) (the "Registrable Shares") will
have the right to require us to file a registration statement under the
Securities Act covering the
67
<PAGE> 69
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 21,709,155
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 AND BY-LAW 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, in our bylaws and
under Delaware law could make it more difficult for other companies to acquire
us, even if doing so would benefit our stockholders. For example, our
certificate of incorporation and bylaws provide for the issuance of preferred
stock. The use of preferred stock may have the effect of delaying, deferring or
preventing a change in control. Further, use of the preferred stock may 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 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.
68
<PAGE> 70
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.
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
69
<PAGE> 71
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 applicable in Belgium as in effect on the date of this prospectus,
and is subject to changes to Belgian law, 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.
BELGIAN WITHHOLDING TAX
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 25.0% when paid or attributed through an
intermediary in Belgium. However, no Belgian dividend withholding tax is due if
the Belgian resident is a company subject to Belgian corporation income tax,
provided certain formalities are met.
To the extent that dividends on our common stock are attributed or paid
outside Belgium, without the intervention of a paying agent or any other
financial intermediary in Belgium, no Belgian dividend withholding tax is due.
However, Belgian resident entities subject to Belgian legal entities tax (such
as pension funds) must pay the dividend withholding tax to the Belgian Treasury.
The withholding tax may be subject to exemptions or reductions provided by
Belgian law. For instance, in certain cases the above-mentioned 25% rate of
dividend withholding tax will be reduced to 15%. The reduced rate applies in
particular to:
- dividends distributed on shares publicly issued on or after January 1,
1994; and
- dividends distributed on shares that have been privately issued on or
after January 1, 1994 in exchange for cash contributions, provided the
shares are registered, or are bearer shares placed in open custody, to a
financial institution in Belgium as of the date of their issuance.
70
<PAGE> 72
INCOME TAX FOR BELGIAN RESIDENT INDIVIDUALS
The Belgian dividend withholding tax is a final tax for Belgian resident
individuals holding our common stock as a private investment, and the dividends
need to be reported in such individuals' annual income tax returns. If no
withholding tax has been levied (for example where payment or attribution is
made outside Belgium), such individuals are required to report the dividends in
their tax returns, and will be taxed at the rate of either 25.0% or 15.0%, in
each case increased by a municipal surcharge (generally varying from 5% to 8% of
the tax due).
Belgian resident individuals whose holdings of our common stock are
connected with a business 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 and a 3% crisis contribution. Any Belgian withholding tax is
creditable against the final income tax due, provided 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.
CORPORATE INCOME TAX FOR COMPANIES RESIDENT IN BELGIUM
Dividends received by companies resident in Belgium are, in principle,
subject to corporation income tax at the rate of 40.1%, i.e. the standard rate
of 39%, increased by the additional tax 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.
Belgian resident companies which satisfy the minimum holding requirement of
either a participation of at least 5% in deCODE or an acquisition value of at
least BEF50 million at the time of attribution or payment of dividends will be
taxed on only 5% of the dividends received (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 revenues continue to be submitted to normal
taxation, it is highly unlikely that DRD would be denied.
INCOME TAX FOR BELGIAN RESIDENT ENTITIES SUBJECT TO BELGIAN LEGAL ENTITIES
TAX
The Belgian dividend withholding tax is a final tax for Belgian resident
entities subject to the Belgian legal entities tax.
BELGIAN CAPITAL GAINS TAXATION
Income Tax for Individuals Resident in Belgium. Individuals holding our
common stock as a private investment will not be subject to Belgian capital
gains taxation on the disposal of that stock. Individuals may, however, be
subject to a 33% tax (increased by the appropriate municipal surcharge and the
3% crisis contribution) if the capital gain is deemed to be "speculative" in
nature as defined by Belgian case law.
Corporate Income Tax for Companies Resident in Belgium. 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
DRD to benefit from this exemption.
Capital losses are only tax-deductible on a liquidation and distribution of
all our assets and liabilities. In that event, capital losses are tax-deductible
to the extent that they represent fully paid-up capital.
Belgium Resident Entities Subject to the Belgian Legal Entities
Tax. Entities subject to the Belgian legal entities tax are not subject to
Belgian capital gains taxation on the disposal of our common stock.
BELGIAN INDIRECT TAXES
Stamp Tax on Securities Transactions. In principle, a Belgian stamp tax is
levied upon the subscription or purchase or sale of our common stock in Belgium
through a professional intermediary. The rate applicable to
71
<PAGE> 73
subscriptions 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.
An exemption is available to professional intermediaries (such as credit
institutions), insurance companies, pension funds and collective investment
vehicles 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 of 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 acquisition 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 a subscription of acquisition of 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.
72
<PAGE> 74
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, 40,664,787 shares of our common stock will
be outstanding based on the number of shares of our preferred stock and common
stock outstanding as of March 31, 2000, and assuming no exercise of the
underwriters' over-allotment option. Of these shares, the 8,000,000 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 2,063,056 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, -- % 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, 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, -- % 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 32,664,787 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 3,877,195 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
73
<PAGE> 75
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 406,648 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 18,583,863 shares of our common stock (including 2,044,456
shares of common stock issuable upon exercise of options and 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.
74
<PAGE> 76
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...........................
Lehman Brothers Inc.........................................
---------
Total....................................................... 8,000,000
=========
</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 $ -- a share under the public offering price.
Any underwriter may allow, and such dealers may reallow, a concession not in
excess of $ -- a share to other underwriters or to certain dealers. After
the initial offering of the shares of common stock, the representative may from
time to time vary the offering price and other selling terms.
At our request, the underwriters have also reserved for subscription, at
the initial public offering price, -- 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 -- , 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 1,200,000 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 $147,200,000, the total
underwriters' discounts and commissions will be $10,304,000 and total proceeds
to deCODE will be $136,896,000.
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.
75
<PAGE> 77
The Nasdaq National Market has approved our common stock for quotation,
subject to official notice of issuance, on the Nasdaq National Market and we
have applied for admission to listing on 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, -- % of deCODE's
common stock after the offering) and each other person participating in the
friends and family program described above 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 shares of common stock upon the exercise of an option or
a warrant or the conversion of a security outstanding, that we have
authorized or have made available for grant on the date of this
prospectus and 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, -- % 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 made such
request on -- . We cannot be certain that we can enforce such agreements
against all transferees of the initial purchasers of the shares.
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
76
<PAGE> 78
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, 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................................. $16.00 $128,000,000 $147,200,000
Underwriting discounts and commissions payable by
us.................................................. 1.12 8,960,000 10,304,000
Proceeds, before expenses, to us...................... 14.88 119,040,000 136,896,000
</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, other than the
underwriting discounts and commissions referred to above, will be approximately
$ -- .
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. Davis Polk &
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
77
<PAGE> 79
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 approval of the preliminary prospectus and/or the final prospectus
by the Belgian Banking and Finance Commission, the shares of common stock will
not, whether directly or indirectly, be 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 -- , 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 -- as
well as the additional information contained herein.
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
78
<PAGE> 80
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. 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.
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
We have applied for admission to listing of our common stock to EASDAQ.
Our common stock is expected to begin trading on EASDAQ on -- .
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.
79
<PAGE> 81
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> 82
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> 83
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 $ 29,668,249 $ 40,530,449
Receivable from share issuance.................. 0 33,143,836 0
Prepaid expenses and other current assets....... 979,998 2,552,124 2,845,183
------------ ------------ ------------
Total current assets.......................... 26,055,842 65,364,209 43,375,632
Investments....................................... 0 757,340 979,492
Property and equipment, net....................... 12,484,273 13,008,637 14,980,033
------------ ------------ ------------
Total assets.................................. $ 38,540,115 $ 79,130,186 $ 59,335,157
============ ============ ============
LIABILITIES, REDEEMABLE, CONVERTIBLE PREFERRED
STOCK AND
STOCKHOLDERS' EQUITY (DEFICIT)
Current liabilities:
Accounts payable and accrued expenses........... $ 3,415,643 $ 4,146,894 $ 6,965,219
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 26,071,030 11,335,155
Capital lease obligations, net of current
portion......................................... 6,772,472 4,549,809 4,124,059
Other long-term liabilities....................... 173,858 324,482 350,216
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 32,023,850 32,984,613 146,268,131
Notes receivable................................ (4,033,347) (9,597,830) (9,593,996) (9,593,996)
Deferred compensation........................... (8,549,906) (10,744,069) (9,913,293) (9,913,293)
Dividends accreted on redeemable, convertible
preferred stock............................... (3,215,628) (8,384,951) (10,724,176) 0
Accumulated deficit............................. (20,275,235) (76,713,517) (83,262,374) (83,262,374)
Accumulated other comprehensive income (loss)... 0 2,411 (5,406) (5,406)
------------ ------------ ------------ ------------
Total stockholders' equity (deficit).......... (18,222,123) (73,404,502) (80,504,999) $ 43,525,727
------------ ------------ ============
Total liabilities, redeemable, convertible
preferred stock and stockholders' equity
(deficit)................................... $ 38,540,115 $ 79,130,186 $ 59,335,157
============ ============ ============
</TABLE>
The accompanying notes are an integral part of the consolidated financial
statements.
F-3
<PAGE> 84
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 0 667,408 653,600 0
----------- ------------ ------------ ----------- -----------
Total revenue............ 0 12,705,000 16,444,075 4,507,489 4,437,222
OPERATING EXPENSES
Research and development.... 6,080,096 19,282,364 31,823,950 6,805,146 8,854,368
General and
administrative........... 1,967,684 4,893,202 7,863,299 2,208,749 2,608,898
----------- ------------ ------------ ----------- -----------
Total operating
expenses............... 8,047,780 24,175,566 39,687,249 9,013,895 11,463,266
----------- ------------ ------------ ----------- -----------
Operating loss................ (8,047,780) (11,470,566) (23,243,174) (4,506,406) (7,026,044)
Equity in net earnings (loss)
of affiliate................ 0 0 (1,484,081) (278,780) (119,284)
Interest income, net.......... (8,461) 562,336 1,549,481 97,514 636,624
Taxes......................... 0 0 0 0 0
----------- ------------ ------------ ----------- -----------
Net loss...................... (8,056,241) (10,908,230) (23,177,774) (4,687,672) (6,508,704)
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) $(61,607,605) $(5,549,932) $(8,888,082)
=========== ============ ============ =========== ===========
Basic and diluted net loss per
share....................... $ (3.85) $ (3.06) $ (9.56) $ (0.97) $ (1.20)
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....................... $ (0.84) $ (0.21)
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> 85
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 1,207,845
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)
Issuance of common stock
upon exercise of stock
options.................... 847,500 154 1,413,392 (5,895,594)
Deferred compensation
arising from stock
options.................... 10,106,684 (10,106,684)
Cancellation of stock
options previously giving
rise to deferred
compensation............... (87,602) 87,602
Amortization of deferred
compensation............... 7,311,495
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.... (23,177,774)
Other comprehensive income
(loss):
Foreign currency
translation..............
Total comprehensive income
(loss).....................
--------- ------ ----------- ----------- ------------ ------------ ------------
BALANCE AT DECEMBER 31,
1999....................... 9,604,012 9,604 32,023,850 (9,597,830) (10,744,069) (8,384,951) (76,713,517)
<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.... 1,207,913
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... (3,750,000) (3,750,000)
Issuance of common stock
upon exercise of stock
options.................... 4,482,895 847
Deferred compensation
arising from stock
options.................... 0
Cancellation of stock
options previously giving
rise to deferred
compensation............... 0
Amortization of deferred
compensation............... 7,311,495
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.... (23,177,774)
Other comprehensive income
(loss):
Foreign currency
translation.............. 2,411 2,411
------------
Total comprehensive income
(loss)..................... (23,175,363)
------- ----------- ------------
BALANCE AT DECEMBER 31,
1999....................... 2,411 0 (73,404,502)
</TABLE>
F-5
<PAGE> 86
<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)................ 902,540 (902,540)
Amortization of deferred
compensation (unaudited)... 1,732,403
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).............. (6,508,704)
Other comprehensive income
(loss):
Foreign currency
translation
(unaudited)..............
Total comprehensive income
(loss) (unaudited).........
--------- ------ ----------- ----------- ------------ ------------ ------------
BALANCE AT MARCH 31, 2000
(UNAUDITED)................ 9,633,262 $9,633 $32,984,613 $(9,593,996) $ (9,913,293) $(10,724,176) $(83,262,374)
========= ====== =========== =========== ============ ============ ============
<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)... 1,732,403
Accretion of dividends and
amortization of discount on
preferred stock
(unaudited)................ (2,379,378)
Comprehensive income (loss):
Net loss for the period
(unaudited).............. (6,508,704)
Other comprehensive income
(loss):
Foreign currency
translation
(unaudited).............. (7,817) (7,817)
------------
Total comprehensive income
(loss) (unaudited)......... (6,516,521)
------- ----------- ------------
BALANCE AT MARCH 31, 2000
(UNAUDITED)................ $(5,406) $ 0 $(80,504,999)
======= =========== ============
</TABLE>
The accompanying notes are an integral part of the consolidated financial
statements.
F-6
<PAGE> 87
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) $(23,177,774) $(4,687,672) $ (6,508,704)
Adjustments to reconcile net loss to net cash used in
operating activities:
Depreciation and amortization.......................... 513,055 1,470,959 2,767,521 608,814 762,967
Equity in net loss of affiliate........................ 0 0 1,484,081 278,780 119,284
Amortization of deferred stock compensation............ 11,851 4,877,674 7,311,495 1,265,947 1,732,403
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) (1,572,126) (1,218,508) (293,059)
Accounts payable and accrued expenses.................. 1,370,458 1,802,896 881,251 (220,639) 1,395,325
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) (11,646,931) (3,227,834) (1,844,436)
----------- ------------ ------------ ----------- ------------
Cash flows from investing activities:
Purchases of property and equipment.................... (351,071) (5,084,441) (2,879,055) (648,976) (1,319,180)
Investment in affiliated company....................... 0 0 (254,444) (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) (3,129,918) (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) (2,091,123) (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 19,369,254 1,841,745 14,367,252
----------- ------------ ------------ ----------- ------------
Net increase (decrease) in cash.......................... (1,261,086) 22,361,619 4,592,405 (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 29,668,249
----------- ------------ ------------ ----------- ------------
Cash and cash equivalents at end of period............... $ 2,714,225 $ 25,075,844 $ 29,668,249 $22,786,335 $ 40,530,449
=========== ============ ============ =========== ============
Supplemental cash flow information:
Cash paid for interest................................. $ 179,164 $ 551,576 $ 554,834 $ 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
affiliate............................................ 0 0 1,207,913 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> 88
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. All significant intercompany accounts and transactions are
eliminated upon consolidation. The investments in Gagnalind hf. and eMR ehf, 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, 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.
F-8
<PAGE> 89
deCODE GENETICS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
(INFORMATION FOR THE THREE MONTHS ENDED MARCH 31, 1999 AND 2000 IS UNAUDITED.)
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 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> 90
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 straight-line basis over the
contractual term of the agreement with Roche. Accordingly, 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."
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
F-10
<PAGE> 91
deCODE GENETICS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
(INFORMATION FOR THE THREE MONTHS ENDED MARCH 31, 1999 AND 2000 IS UNAUDITED.)
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> 92
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 $23,177,774 $4,687,672 $6,508,704
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 $61,607,605 $5,549,932 $8,888,082
========== =========== =========== ========== ==========
</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> 93
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................. $(61,607,605) $(8,888,082)
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.............................. $(23,177,774) $(6,508,704)
============ ===========
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................................................... $ (0.84) $ (0.21)
</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> 94
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%, 96% 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
20% in Gagnalind hf. in exchange for $254,444 in cash and 70,824 shares of
Series B preferred stock. In November 1999, deCODE entered into an agreement in
which deCODE ultimately acquired 20% of the common shares of eMR ehf., 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 shares in Gagnalind hf; on March 10, 2000, deCODE invested
$341,436 in eMR ehf.; on April 19, 2000, deCODE exchanged shares in Gagnalind
hf. for common shares in eMR ehf., a software company; and, on April 19, 2000,
deCODE sold a portion of the resulting common shares in eMR ehf. (15%) to The
Icelandic Investment Bank. 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% of the common shares of eMR ehf.
At December 31, 1999 and March 31, 2000, deCODE provisionally held a 56%
interest in Gagnalind hf. in connection with the investment in eMR ehf. The
carrying amount of deCODE's investment at December 31, 1999 and at March 31,
2000 approximated deCODE's underlying equity in the net assets of affiliates.
deCODE's equity in net earnings (loss) of affiliates for the year ended December
31, 1999 and for the three months ended March 31, 2000 is comprised of deCODE's
share of the earnings (loss) of affiliates and amortization of the difference
between deCODE's cost and the underlying equity in the net assets of affiliates
at acquisition.
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...................................... 562,096 708,682
Laboratory equipment........................................ 8,968,309 11,370,430
Other property and equipment................................ 336,466 384,360
----------- -----------
14,528,695 17,802,672
Less: accumulated depreciation and amortization............. (2,044,422) (4,794,035)
----------- -----------
Total.................................................. $12,484,273 $13,008,637
=========== ===========
</TABLE>
F-14
<PAGE> 95
deCODE GENETICS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
(INFORMATION FOR THE THREE MONTHS ENDED MARCH 31, 1999 AND 2000 IS UNAUDITED.)
The total depreciation and amortization for the years ended December 31,
1997, 1998 and 1999 was, $513,055, $1,470,959 and $2,767,521, 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). Primarily resulting from
deCODE's continuing involvement in the property, 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 $1,461,763
Suppliers................................................... 2,433,763 2,423,849
Other....................................................... 45,437 261,282
---------- ----------
Total..................................................... $3,415,643 $4,146,894
========== ==========
</TABLE>
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.
F-15
<PAGE> 96
deCODE GENETICS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
(INFORMATION FOR THE THREE MONTHS ENDED MARCH 31, 1999 AND 2000 IS UNAUDITED.)
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 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
F-16
<PAGE> 97
deCODE GENETICS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
(INFORMATION FOR THE THREE MONTHS ENDED MARCH 31, 1999 AND 2000 IS UNAUDITED.)
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 $5,843,882 in the quarter ended March 31, 2000,
$21,003,807 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.
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.
F-17
<PAGE> 98
deCODE GENETICS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
(INFORMATION FOR THE THREE MONTHS ENDED MARCH 31, 1999 AND 2000 IS UNAUDITED.)
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.
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
F-18
<PAGE> 99
deCODE GENETICS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
(INFORMATION FOR THE THREE MONTHS ENDED MARCH 31, 1999 AND 2000 IS UNAUDITED.)
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 3,611,000 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 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
F-19
<PAGE> 100
deCODE GENETICS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
(INFORMATION FOR THE THREE MONTHS ENDED MARCH 31, 1999 AND 2000 IS UNAUDITED.)
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
- 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.
F-20
<PAGE> 101
deCODE GENETICS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
(INFORMATION FOR THE THREE MONTHS ENDED MARCH 31, 1999 AND 2000 IS UNAUDITED.)
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 75% of the fair value of the Series B preferred shares.
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.
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
With respect to the 7,016,666 shares of preferred stock not currently
designated as an existing series, deCODE's Board of Directors is authorized,
except as otherwise limited by Delaware law, without further action by the
stockholders:
F-21
<PAGE> 102
deCODE GENETICS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
(INFORMATION FOR THE THREE MONTHS ENDED MARCH 31, 1999 AND 2000 IS UNAUDITED.)
- 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.
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>
F-22
<PAGE> 103
deCODE GENETICS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
(INFORMATION FOR THE THREE MONTHS ENDED MARCH 31, 1999 AND 2000 IS UNAUDITED.)
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.
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
F-23
<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 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.
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 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 15,000 18.29 840,500 5.62 855,500
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 30,000 11.15 15,000 0.20 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 15,000 $18.29 0 $ 0.00 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>
F-24
<PAGE> 105
deCODE GENETICS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
(INFORMATION FOR THE THREE MONTHS ENDED MARCH 31, 1999 AND 2000 IS UNAUDITED.)
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-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 $5,373,810 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
$1,937,685 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.
F-25
<PAGE> 106
deCODE GENETICS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
(INFORMATION FOR THE THREE MONTHS ENDED MARCH 31, 1999 AND 2000 IS UNAUDITED.)
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.
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) $(61,607,605)
Net loss attributable to common stockholders -- pro
forma............................................... $(8,696,626) $ (9,471,753) $(58,167,605)
Basic and diluted net loss per share -- as reported... $ (3.85) $ (3.06) $ (9.56)
Basic and diluted net loss per share -- pro forma..... $ (3.86) $ (2.15) $ (9.02)
</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.
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 $11.60
Exercise price less than grant date stock fair value........ $0.10 $1.72 $11.02
</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.
F-26
<PAGE> 107
deCODE GENETICS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
(INFORMATION FOR THE THREE MONTHS ENDED MARCH 31, 1999 AND 2000 IS UNAUDITED.)
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 $ 3,121,509
Research and development expense..................... 8,176 3,462,003 4,922,486
------- ----------- -----------
Total................................................ $11,851 $ 5,219,642 $ 8,043,995
======= =========== ===========
</TABLE>
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.
F-27
<PAGE> 108
deCODE GENETICS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
(INFORMATION FOR THE THREE MONTHS ENDED MARCH 31, 1999 AND 2000 IS UNAUDITED.)
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 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;
F-28
<PAGE> 109
deCODE GENETICS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
(INFORMATION FOR THE THREE MONTHS ENDED MARCH 31, 1999 AND 2000 IS UNAUDITED.)
- 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.
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.
Islensk erfethagreining ehf. will provide capital to the foundation in the
amount of 150,000 shares of stock in its parent company, deCODE genetics Inc.
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.
F-29
<PAGE> 110
PART II
INFORMATION NOT REQUIRED IN PROSPECTUS
ITEM 13. OTHER EXPENSES OF ISSUANCE AND DISTRIBUTION.
The following table lists the costs and expenses, other than underwriting
discounts and commissions, which we expect to incur in connection with the
issuance and distribution of the securities being registered. Except for the SEC
registration fee, the NASD filing fee, the Nasdaq National Market fee and the
EASDAQ filing fee, the amounts listed below are our estimates:
<TABLE>
<S> <C>
SEC Registration Fee........................................ $
NASD filing fee............................................. $
Nasdaq National Market Listing application fee.............. $
EASDAQ Listing application fee.............................. $
Legal fees and expenses..................................... $
Blue Sky fees and expenses.................................. $
Accounting fees and expenses................................ $
Printing and engraving expenses............................. $
Transfer Agent and Registrar fees........................... $
Miscellaneous expenses...................................... $
------------
Total.................................................. $
============
</TABLE>
All expenses of registration incurred in connection herewith are being
borne by us.
ITEM 14. INDEMNIFICATION OF DIRECTORS AND OFFICERS.
Section 102(b)(7) of the Delaware General Corporation Law ("DGCL") enables
a corporation in its certificate of incorporation to limit the personal
liability of its directors for violations of their fiduciary duty of care.
Accordingly, Section 4.7 of our certificate of incorporation states that a
director will not be personally liable to us or to our stockholders for monetary
damages resulting from any breach of fiduciary duty as a director, except for
liability (i) for any breach of the director's duty of loyalty to us or to our
stockholders, (ii) for acts or omissions not in good faith or which involve
intentional misconduct or a knowing violation of law, (iii) under Section 174 of
the DGCL, or (iv) for any transaction from which the director derived an
improper personal benefit. If the DGCL is amended, then the liability of a
director will be eliminated or limited to the fullest extent permitted by the
amended DGCL.
Subsection (a) of Section 145 of the DGCL empowers a corporation to
indemnify any person who was or is a party or is threatened to be made a party
to any threatened, pending or completed action, suit or proceeding, whether
civil, criminal, administrative or investigative (other than an action by or in
the right of the corporation) by reason of the fact that he is or was a
director, officer, employee or agent of the corporation, or is or was serving at
the request of the corporation as a director, officer, employee or agent of
another corporation, partnership, joint venture, trust or other enterprise,
against expenses (including attorneys' fees), judgments, fines and amounts paid
in settlement actually and reasonably incurred by him in connection with the
action, suit or proceeding if he acted in good faith and in a manner he
reasonably believed to be in or not opposed to the best interests of the
corporation, and, with respect to any criminal action or proceeding, had no
reasonable cause to believe his conduct was unlawful.
Subsection (b) of Section 145 empowers a corporation to indemnify any
person who was or is a party or is threatened to be made a party to any
threatened, pending or completed action or suit by or in the right of the
corporation to procure a judgment in its favor by reason of the fact that he is
or was a director, officer, employee, or agent of the corporation, or is or was
serving at the request of the corporation as a director, officer, employee or
agent of another corporation, partnership, joint venture, trust or other
enterprise, against expenses (including attorneys' fees) actually and reasonably
incurred by him in connection with the defense or settlement of that action or
suit if he acted in good faith and in a manner he reasonably believed to be in,
or not opposed to, the best
II-1
<PAGE> 111
interests of the corporation. No indemnification will be made, however, in
respect to any claim, issue or matter as to which that person is adjudged to be
liable to the corporation, unless and only to the extent that the Court of
Chancery or the court in which that action or suit was brought will determine
upon application that, despite the adjudication of liability but in view of all
of the circumstances of the case, that person is fairly and reasonably entitled
to indemnity for the expenses which the Court of Chancery or such other court
deems proper.
Section 145 further provides that to the extent a present or former
director or officer of a corporation has been successful in the defense of any
action, suit or proceeding referred to in subsections (a) and (b) of Section
145, or in defense of any claim, issue or matter therein, that person will be
indemnified against expenses (including attorneys' fees) actually and reasonably
incurred by him; that the indemnification provided by Section 145 will not be
deemed exclusive of any other rights to which the indemnified party may be
entitled; and that the scope of indemnification extends to directors, officers,
employees, or agents of a constituent corporation absorbed in a consolidation or
merger and persons serving in that capacity at the request of the constituent
corporation for another. The determination of whether indemnification is proper
under the circumstances, unless made by a court, is determined by (a) a majority
of the disinterested members of the Board of Directors or board committee; (b)
independent legal counsel (if a quorum of the disinterested members of the Board
of Directors or board committee is not available or if the disinterested members
of the Board of Directors or a board committee so direct); or (c) the
stockholders.
Section 145 also empowers us to purchase and maintain insurance on behalf
of our directors or officers against any liability asserted against them or
incurred by them in any such capacity or arising out of their status as our
directors or officers whether or not we would have the power to indemnify them
against the liabilities under Section 145. We currently carry liability
insurance for the benefit of our directors and officers that provides coverage
for any damages (excluding punitive or exemplary damages, fines or penalties),
settlements, and reasonable and necessary legal fees and expenses incurred by
any of the officers or directors resulting from any judicial or administrative
proceeding initiated during the policy period against any of the officers or
directors in which they may be subjected to a binding adjudication of liability
for damages or other relief, including any appeal therefrom, for any actual or
alleged error, omission, misstatement, misleading statement, neglect, breach of
duty or negligent act by any officer or director, while acting solely in his
capacity as a director or officer of the company (or any subsidiary of the
company). Among other exclusions, our current policy specifically excludes
coverage for any claim: by or at the behest of any person or entity that at the
time the claim is first made owns or controls 20% or more of the outstanding
securities representing the present right to vote for the election of directors
of the company (and/or its subsidiaries); involving an accounting of profits
made in fact from the purchase and/or sale by the officers and directors of the
securities of the company; based upon actual or alleged pollution or
contamination; for violations of the Employee Retirement Income Security Act of
1974; by, on behalf of, or at the direction of, the company or other officers or
directors; brought about by any dishonest, fraudulent or criminal act or
omission or any personal profit or advantage gained by any director or officer
to which he was not legally entitled; based upon or arising out of a wrongful
act actually or allegedly committed subsequent to a corporate takeover; based
upon or arising out of their services as directors, officers or employees of any
entity other than the company (or a subsidiary of the company); for actual or
alleged libel, slander, defamation, bodily injury, sickness, disease, death,
false arrest, false imprisonment, assault, battery, mental anguish, emotional
distress, invasion of privacy or damage to or destruction of tangible property;
based on allegations that computer software or hardware failed to function
properly because of a Year 2000 problem; and/or based upon any future public or
private offering of securities. We expect that the exclusion for securities
offerings will be removed before the effective date of this registration
statement.
Section 42 of our bylaws requires that we indemnify each director and
executive officer to the fullest extent allowable under the DGCL, and empowers
us to indemnify our other officers, employees and other agents. Section 42
further provides, however, that we may limit the extent of our indemnification
by individual contracts with our directors and executive officers, and further,
that we will not be required to indemnify any director or executive officer in
connection with any proceeding (or part of a proceeding) initiated by that
person or any proceeding by that person against us or our directors, officers,
employees or other agents unless (a) indemnification is expressly required to be
made by law, (b) the proceeding was authorized by our Board of Directors or (c)
indemnification is provided by us, in our sole discretion, pursuant to the
powers vested in us
II-2
<PAGE> 112
under the DGCL. This provision is a contract with each director and executive
officer who serves in that capacity at any time while the provision and the
relevant provisions of the DGCL are in effect.
Any repeal or modification of Section 42 of our bylaws will only be
prospective, and will not affect any rights in effect at the time of the alleged
occurrence of any action or omission to act that is the cause of any proceeding
against any of our agents. Further, the rights conferred on any person by
Section 42 will continue as to a person who has ceased to be a director,
officer, employee or other agent and will inure to the benefit of the heirs,
executors and administrators of such person.
We have, in addition, entered into an indemnity agreement with one of our
directors, Sir John Vane. The agreement requires us, subject to certain
exceptions, to hold harmless and indemnify Sir John to the fullest extent
authorized or permitted by the provisions of the bylaws and the DGCL, as each
may be amended from time to time (but, only to the extent that an amendment
permits us to provide broader indemnification rights than the bylaws or the DGCL
permitted prior to adoption of that amendment). Subject to certain exclusions,
we further agreed to hold harmless and indemnify Sir John against any and all
expenses (including attorneys' fees), witness fees, damages, judgments, fines
and amounts paid in settlement and any other amounts that he becomes legally
obligated to pay because of any claim or claims made against or by him in
connection with any threatened, pending or completed action, suit or proceeding,
whether civil, criminal, arbitrational, administrative or investigative
(including an action by or in the right of us) to which he is, was, or at any
time becomes, a party, or is threatened to be made a party, by reason of the
fact that he is, was, or at any time becomes, our director, officer, employee or
other agent, or is or was serving, or at any time serves, at our request, as a
director, officer, employee or other agent of another corporation, partnership,
joint venture, trust, employee benefit plan or other enterprise; and otherwise
to the fullest extent as may be provided to him by us under our bylaws and the
DGCL.
Our agreement with, and obligations to, Sir John under his indemnity
agreement will continue during the period that he serves as our director,
officer, employee or other agent (or is or was serving at our request as a
director, officer, employee or other agent of another company, partnership,
joint venture, trust, employee benefit plan or other enterprise) and will
continue thereafter so long as he will be subject to any possible claim or
threatened, pending or completed action, suit or proceeding, whether civil,
criminal, arbitrational, administrative or investigative, by reason of the fact
that the director was serving in the capacity referred to herein.
Further, the Underwriting Agreement, a proposed form of which is filed as
Exhibit 1.1 hereto, contains provisions for indemnification of our underwriters
and their officers, directors and certain other persons, against certain civil
liabilities, including certain liabilities under the Securities Act.
ITEM 15. RECENT SALES OF UNREGISTERED SECURITIES.
In the three years preceding the filing of this registration statement, we
sold the following securities that were not registered under the Securities Act.
(1) In October 1997, we issued 20,000 shares of our common stock to the
Icelandic Industrial Development Fund upon the conversion of a $85,305 debt.
(2) In October 1997, we issued 5,090,376 shares of Series A preferred stock
and warrants to purchase 1,137,814 shares of Series A preferred stock to a group
of accredited investors for aggregate cash proceeds of $5,101,754. In March
2000, one of the investors exercised its warrant and purchased 61,981 shares of
Series A Preferred Stock for $61,981.
(3) In February 1998, we issued 200,000 shares of our common stock to the
Icelandic Heart Association for aggregate cash proceeds of $80,000.
(4) In December of 1997, we granted stock options to employees, directors
and consultants covering an aggregate of 1,165,000 shares of our common stock
which were exercised in January 1998 for an aggregate exercise price of
$233,000. In February of 1998, we granted stock options to employees, directors
and consultants covering an aggregate of 1,020,000 shares of our common stock
which were immediately exercised for an aggregate exercise price of $408,000. In
March and November of 1998, we granted stock options to employees, directors and
consultants covering an aggregate of 408,500 and 570,000 shares of our common
stock,
II-3
<PAGE> 113
respectively, of which 408,500 and 553,000 of these options were immediately
exercised for an aggregate exercise price of $408,500 and $2,164,000. In August
and September of 1999, we granted stock options to employees, directors and
consultants covering an aggregate of 840,500 shares of our common stock which
were immediately exercised for an aggregate exercise price of $4,726,188. Also
in 1999, 7,000 options, which were granted in November 1998, were exercised for
an aggregate exercise price of $28,000.
In December of 1997, 1998 and 1999, we granted stock options to a director
covering an aggregate of 15,000, 15,000 and 15,000 shares of our common stock,
respectively, at exercise prices of $0.20, $4.00 and $18.29 per share,
respectively. The first two of such options were exercised in February 2000 for
an aggregate exercise price of $63,000.
(5) On January 1, 1998, December 31, 1998 and December 31, 1999, we issued
100,000, 20,000 and 10,000 shares of Series A preferred stock, respectively, to
one accredited investor, The Beth Israel Deaconess Medical Center, pursuant to a
settlement agreement.
(6) On February 2, 1998, we sold 2,500,000 shares of Series C preferred
stock and options and warrants to purchase 861,112 shares of Series C preferred
stock to one accredited investor, Roche Finance Ltd, for aggregate cash proceeds
of $5,000,250 pursuant to a Series C Preferred Stock and Warrant Purchase
Agreement.
(7) On February 28, 1998, we paid total consideration of $2,375,803
($2,028,588 in cash and 74,570 shares of Series B preferred stock) to several
non-U.S. persons in connection with the purchase of a building.
(8) In March of 1998, we sold an aggregate of 3,290,000 shares of Series B
preferred stock to several non-U.S. persons for aggregate cash proceeds of
$12,580,000.
(9) In August, September and October of 1998, we sold an aggregate of
1,248,320 shares of Series B preferred stock to several non-U.S. persons for
aggregate cash proceeds of $9,277,400.
(10) On November 27, 1998 we sold 100,000 shares of Series B preferred
stock to Buretharas hf., a non-U.S. person, for aggregate cash proceeds of
$750,000.
(11) In January 1999, we issued 70,824 shares of Series B preferred stock
to several non-U.S. persons in exchange for 8,606,231 shares of Gagnalind hf.
(12) On February 16 and March 30 of 1999, we sold 80,000 and 30,000 shares
of Series B preferred stock, respectively, to several non-U.S. persons for
aggregate cash proceeds of $825,000.
(13) On February 2, 1999, we sold 555,555 shares of Series C preferred
stock, and warrants to purchase 55,555 shares of Series C preferred stock to one
accredited investor, Roche Finance Ltd, for aggregate cash proceeds of
$1,666,721 pursuant to a Series C Preferred Stock and Warrant Purchase
Agreement.
(14) On May 20, 1999, we sold 555,556 shares of Series C preferred stock,
and warrants to purchase 55,556 shares of Series C preferred stock to one
investor, Roche Finance Ltd, for aggregate cash proceeds of $1,666,724 pursuant
to a Series C Preferred Stock and Warrant Purchase Agreement.
(15) On August 8, 1999, we issued 250,000 shares of Series B preferred
stock to Kari Stefansson in exchange for 333,333 shares of common stock held by
him.
(16) On August 8, 1999, we sold 5,000,000 shares of Series B preferred
stock to Biotek Invest, S.A., a non-U.S. person, for aggregate cash proceeds of
$37,500,000, subject to subsequent adjustment, with final net cash proceeds of
$69,750,000.
(17) In November 1999, we issued an aggregate of 68,000 shares of common
stock to Thornrounarfelag Islands hf. and Skyrr hf., two Icelandic companies, in
exchange for 17,036,502 ISK shares of Gagnalind hf.
The sale and issuance of securities in the transactions described above
were deemed to be exempt from registration under the Securities Act by virtue of
Section 4(2) and/or Regulation D as transactions not involving any public
offering or Regulation S as offers and sales that occurred outside the United
States. Where appropriate, the purchasers represented their intention to acquire
the securities for investment only and not with a view to the distribution
thereof or that they were non-U.S. persons. Appropriate legends are affixed to
the stock certificates
II-4
<PAGE> 114
issued in those transactions. All recipients either received adequate
information about us or had access, through employment or other relationships,
to adequate information.
ITEM 16. EXHIBITS AND FINANCIAL STATEMENT SCHEDULES.
EXHIBITS
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION
- ------- -----------
<C> <S>
1.1* Underwriting Agreement
3.1 Amended and Restated Certificate of Incorporation, as
further amended
3.2+ Bylaws
4.1 Specimen Common Stock Certificate
4.2+ Form of Warrant to Purchase Series A Preferred Stock
4.3+ Form of Warrant to Purchase Series C Preferred Stock
5.1* Opinion of Smith, Stratton, Wise, Heher & Brennan
8.1* Opinion of Stibbe Simont Monahan Duhot regarding Belgian
taxation
10.1+ Form of License from The Icelandic Data Protection
Commission to Islensk erfethagreining ehf. and its Clinical
Collaborators to Use and Access Patient Records and Other
Clinical Data Relating to Individuals
10.2+ 1996 Equity Incentive Plan, as amended
10.3+ Form of Non-Statutory Stock Option Agreement, including
Early Exercise Stock Purchase Agreement and all exhibits
thereto, as executed by employees and officers of deCODE
genetics, Inc. who received and exercised non-statutory
stock options
10.4+ Form of Employee Proprietary Information and Inventions
Agreement
10.5+ Agreement on the Collaboration of Friethrik Skulason (FS)
and Islensk erfethagreining ehf. (IE) on the Creation of a
Database of Icelandic Genealogy, dated April 15, 1997
10.6**+ Research Agreement between deCODE genetics, Inc., and
Islensk erfethagreining ehf. and Rannsokna- og
Fraeethslusjoethurinn ehf., dated October 24, 1997, as
extended
10.7+ Consultancy Contract between deCODE genetics, Inc. and Vane
Associates, dated December 1, 1997, together with
Nondisclosure Agreement executed by Vane Associates as of
December 1, 1997, as amended
10.8+ Indemnity Agreement between deCODE genetics, Inc. and Sir
John Vane, dated December 1, 1997
10.9**+ Settlement Agreement between The Beth Israel Deaconess
Medical Center and deCODE genetics, Inc., dated as of
December 31, 1997
10.10+ Amended and Restated Non-Recourse Promissory Note between
deCODE genetics, Inc. and Hannes Smarason, dated March 24,
1999
10.11**+ Research Collaboration and Cross-license Agreement among
F.Hoffmann-La Roche Ltd, Hoffmann-La Roche Inc. and deCODE
genetics, Inc., dated as of February 1, 1998
10.12+ Amended and Restated Investor Rights Agreement of deCODE
genetics, Inc., dated as of February 2, 1998, as further
amended and restated
10.13**+ Collaboration Agreement between The Icelandic Heart
Association (Hjartavernd) and Islensk erfethagreining ehf.,
dated February 13, 1998
10.14**+ Collaboration Agreement between Dr. Helgi Jonsson,
Thornorvaldur Ingvarsson and Islensk erfethagreining ehf.,
dated March 31, 1998
10.15**+ Collaboration Agreement between The Research Group on
Arterial Hypertension and Islensk erfethagreining ehf.,
dated June 3, 1998
</TABLE>
II-5
<PAGE> 115
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION
- ------- -----------
<C> <S>
10.16+ Contract on Sale and Leaseback between Islensk
erfethagreining ehf. and The Icelandic Investment Bank,
dated June 8, 1998
10.17+ Contract on Financial Leasing between Islensk
erfethagreining ehf. and Lysing hf., dated June 19, 1998
10.18+ Employment Agreement between Islensk erfethagreining ehf.
and Axel Nielsen, dated July 1, 1998
10.19**+ Collaboration Agreement between a Collaboration Group on
Alzheimer's Disease and Related Disorders and Islensk
erfethagreining ehf., dated July 19, 1998
10.20**+ Collaboration Agreement between The Research Group on
Osteoporosis and Islensk erfethagreining ehf., dated July
19, 1998
10.21+ Employment Agreement between Islensk erfethagreining ehf.
and Kristjan Erlendsson, dated September 4, 1998
10.22+ Co-operation Agreement between Reykjavik Hospital and
Islensk erfethagreining ehf., dated November 4, 1998
10.23+ Amended and Restated Non-Recourse Promissory Note between
deCODE genetics, Inc. and Sigurethur I. Bjornsson, dated
March 24, 1999
10.24+ Co-operation Agreement between the Iceland State Hospital
and Islensk erfethagreining ehf., dated December 15, 1998
10.25+ Employment Contract between Islensk erfethagreining ehf. and
Sigurethur I. Bjornsson, dated January 15, 1999
10.26+ Lease between Friethar sf. and Islensk erfethagreining ehf.,
dated February 18, 1999
10.27**+ Research Contract on the Co-operation of a Research Team for
Age-Related Macular Degeneration and Islensk erfethagreining
ehf., dated April 27, 1999
10.28**+ Research Contract on the Co-operation of a Research Team for
Peripheral Artery Occlusive Disease and Islensk
erfethagreining ehf., dated May 28, 1999
10.29**+ Research Contract on the Co-operation of a Research Team for
Allergy and Asthma and Islensk erfethagreining ehf., dated
July 1, 1999
10.30+ Series A Preferred Stock Repurchase Agreement between deCODE
genetics, Inc. and certain holders of Series A Preferred
Stock, dated as of July 12, 1999, with attached Addendum
10.31+ Series C Preferred Stock Repurchase Agreement between deCODE
genetics, Inc. and Roche Finance Ltd, dated as of July 12,
1999, with attached Addendum
10.32+ Common Stock Repurchase Agreement between deCODE genetics,
Inc. and Kari Stefansson, dated as of July 12, 1999
10.33+ Stock Purchase Agreement between deCODE genetics, Inc. and
Biotek Invest, S.A., dated as of June 30, 1999, with
attached Addendum
10.34+ Co-operation Agreement between Akureyri Central Hospital and
Islensk erfethagreining ehf., dated October 26, 1999, with
attached Declaration
10.35+ Non-Recourse Promissory Note between deCODE genetics, Inc.
and Hannes Smarason, dated September 15, 1999
10.36**+ Research Contract on the Co-Operation of a Research Team for
Cerebral Haemorrhage and Islensk erfethagreining ehf., dated
November 3, 1999
10.37+ Lease between the Computer Centre of the Icelandic Savings
Banks and Islensk erfethagreining ehf., dated November 24,
1999
10.38+ Research Collaboration Agreement by and between Islenskar
hveraorverur ehf. (Icetherm, Ltd.) and Islensk
erfethagreining ehf., dated December 28, 1999
</TABLE>
II-6
<PAGE> 116
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION
- ------- -----------
<C> <S>
10.39+ Agreement between The Minister for Health and Social
Security and Islensk erfethagreining ehf. relating to the
Issue of an Operating Licence for the Creation and Operation
of a Health Sector Database, dated January 21, 2000
10.40+ Operating Licence issued to Islensk erfethagreining ehf.,
State Reg. No. 691295-3549 Lynghals 1 Reykjavik for the
Creation and Operation of a Health Sector Database, dated
January 22, 2000
10.41+ Series B Preferred Stock Agreement between deCODE genetics,
Inc. and Kari Stefansson, dated as of March 1, 2000
10.42+ Agreement between The University of Iceland, Islensk
erfethagreining ehf., and the City of Reykjavik, dated
February 15, 2000
10.43 Lease between Islensk erfethagreining ehf. and Faghus ehf.,
dated as of March 1, 2000
10.44+ Form of Employee Confidentiality, Invention Assignment and
Non-Compete Agreement executed by certain officers
10.45 Series C Preferred Stock and Warrant Purchase Agreement
between Roche Finance Ltd and deCODE genetics, Inc., dated
as of February 1, 1998
10.46 Founder Stock Purchase Agreement between deCODE genetics,
Inc. and Jeffrey R. Gulcher, dated as of August 21, 1996
10.47** Research Contract on the Co-Operation of a Research Team for
Chronic Obstructive Pulmonary Disease and Islensk
erfethagreining ehf., dated as of July 1, 1999
21.1+ Subsidiaries of deCODE genetics, Inc.
23.1 Consent of PricewaterhouseCoopers ehf., independent public
accountants
23.2* Consent of Smith, Stratton, Wise, Heher & Brennan (contained
in Exhibit 5.1)
23.3* Consent of Stibbe Simont Monahan Duhot (contained in Exhibit
8.1)
24.1+ Power of Attorney (see "Power of Attorney" below)
27.1 Financial Data Schedule
99.1 Government Regulation on a Health Sector Database, dated
January 22, 2000
99.2 Act No. 139/1998 on a Health Sector Database
</TABLE>
- ---------------
* To be filed by amendment.
** Confidential treatment has been requested with respect to a portion of this
Exhibit.
+ Previously filed.
FINANCIAL STATEMENT SCHEDULES
No schedules are required because the information is either not applicable
or is presented elsewhere herein.
ITEM 17. UNDERTAKINGS.
We hereby undertake to provide to the underwriter at the closing specified
in the underwriting agreement certificates in such denominations and registered
in such names as required by the underwriter to permit prompt delivery to each
purchaser.
Insofar as indemnification for liabilities arising under the Securities Act
may be permitted to directors, officers and controlling persons of deCODE
pursuant to the foregoing provisions, or otherwise, we have been advised that in
the opinion of the Securities and Exchange Commission such indemnification is
against public policy as expressed in the Securities Act and is, therefore,
unenforceable. In the event that a claim for indemnification against such
liabilities (other than the payment by us of expenses incurred or paid by a
director, officer or controlling person of deCODE in the successful defense of
any action, suit or proceeding) is asserted by such director, officer or
controlling person in connection with the securities being registered, we will,
unless in
II-7
<PAGE> 117
the opinion of our counsel the matter has been settled by controlling precedent,
submit to a court of appropriate jurisdiction the question of whether such
indemnification by us is against public policy as expressed in the Securities
Act and will be governed by the final adjudication of such issue.
We hereby undertake that:
(1) For purposes of determining any liability under the Securities
Act, the information omitted from the form of prospectus filed as part of
this registration statement in reliance upon Rule 430A and contained in a
form of prospectus filed by us pursuant to Rule 424(b)(1) or (4) or 497(h)
under the Securities Act will be deemed to be part of this registration
statement as of the time it was declared effective.
(2) For the purpose of determining any liability under the Securities
Act, each post-effective amendment that contains a form of prospectus will
be deemed to be a new registration statement relating to the securities
offered therein, and the offering of such securities at that time will be
deemed to be the initial bona fide offering thereof.
II-8
<PAGE> 118
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933, we have duly
caused this Amendment No. 1 to the registration statement to be signed on our
behalf by the undersigned, thereunto duly authorized, in the city of Reykjavik,
Iceland, on May 4, 2000.
deCODE genetics, Inc.
/s/ DR. KARI STEFANSSON
By:
--------------------------------------
Dr. Kari Stefansson,
Chairman, President and
Chief Executive Officer
Pursuant to the requirements of the Securities Act of 1933, this Amendment
No. 1 to the registration statement has been signed by the following persons in
the capacities and on the dates stated.
<TABLE>
<CAPTION>
SIGNATURE TITLE DATE
--------- ----- ----
<S> <C> <C>
/s/ DR. KARI STEFANSSON Chairman, President, Chief Executive May 4, 2000
- --------------------------------------------- Officer (principal executive officer)
Dr. Kari Stefansson and Director
/s/ AXEL NIELSEN Vice President, Finance and Treasurer May 4, 2000
- --------------------------------------------- (principal financial officer and
Axel Nielsen principal accounting officer)
* Director May 4, 2000
- ---------------------------------------------
Jean-Francois Formela
* Director May 4, 2000
- ---------------------------------------------
Andre Lamotte
* Director May 4, 2000
- ---------------------------------------------
Terrance McGuire
* Director May 4, 2000
- ---------------------------------------------
Guy Nohra
* Director May 4, 2000
- ---------------------------------------------
Sir John Vane
</TABLE>
* By his signature set forth below, the undersigned, pursuant to duly authorized
powers of attorney filed with the Securities and Exchange Commission, has
signed this Amendment No. 1 to the registration statement on behalf of persons
indicated.
By: /s/ KARI STEFANSSON
--------------------------------------------
Kari Stefansson, M.D., Dr. Med
Attorney-in-fact
II-9
<PAGE> 119
INDEX TO EXHIBITS
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION
- ------- -----------
<C> <S>
1.1* Underwriting Agreement
3.1 Amended and Restated Certificate of Incorporation, as
further amended
3.2+ Bylaws
4.1 Specimen Common Stock Certificate
4.2+ Form of Warrant to Purchase Series A Preferred Stock
4.3+ Form of Warrant to Purchase Series C Preferred Stock
5.1* Opinion of Smith, Stratton, Wise, Heher & Brennan
8.1* Opinion of Stibbe Simont Monahan Duhot regarding Belgian
taxation
10.1+ Form of License from The Icelandic Data Protection
Commission to Islensk erfethagreining ehf. and its Clinical
Collaborators to Use and Access Patient Records and Other
Clinical Data Relating to Individuals
10.2+ 1996 Equity Incentive Plan, as amended
10.3+ Form of Non-Statutory Stock Option Agreement, including
Early Exercise Stock Purchase Agreement and all exhibits
thereto, as executed by employees and officers of deCODE
genetics, Inc. who received and exercised non-statutory
stock options
10.4+ Form of Employee Proprietary Information and Inventions
Agreement
10.5+ Agreement on the Collaboration of Friethrik Skulason (FS)
and Islensk erfethagreining ehf. (IE) on the Creation of a
Database of Icelandic Genealogy, dated April 15, 1997
10.6**+ Research Agreement between deCODE genetics, Inc., and
Islensk erfethagreining ehf. and Rannsokna- og
Fraeethslusjoethurinn ehf., dated October 24, 1997, as
extended
10.7+ Consultancy Contract between deCODE genetics, Inc. and Vane
Associates, dated December 1, 1997, together with
Nondisclosure Agreement executed by Vane Associates as of
December 1, 1997, as amended
10.8+ Indemnity Agreement between deCODE genetics, Inc. and Sir
John Vane, dated December 1, 1997
10.9**+ Settlement Agreement between The Beth Israel Deaconess
Medical Center and deCODE genetics, Inc., dated as of
December 31, 1997
10.10+ Amended and Restated Non-Recourse Promissory Note between
deCODE genetics, Inc. and Hannes Smarason, dated March 24,
1999,
10.11**+ Research Collaboration and Cross-license Agreement among
F.Hoffmann-La Roche Ltd, Hoffmann-La Roche Inc. and deCODE
genetics, Inc., dated as of February 1, 1998
10.12+ Amended and Restated Investor Rights Agreement of deCODE
genetics, Inc., dated as of February 2, 1998, as further
amended and restated
10.13**+ Collaboration Agreement between The Icelandic Heart
Association (Hjartavernd) and Islensk erfethagreining ehf.,
dated February 13, 1998
10.14**+ Collaboration Agreement between Dr. Helgi Jonsson,
Thornorvaldur Ingvarsson and Islensk erfethagreining ehf.,
dated March 31, 1998
10.15**+ Collaboration Agreement between The Research Group on
Arterial Hypertension and Islensk erfethagreining ehf.,
dated June 3, 1998
10.16+ Contract on Sale and Leaseback between Islensk
erfethagreining ehf. and The Icelandic Investment Bank,
dated June 8, 1998
</TABLE>
<PAGE> 120
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION
- ------- -----------
<C> <S>
10.17+ Contract on Financial Leasing between Islensk
erfethagreining ehf. and Lysing hf., dated June 19, 1998
10.18+ Employment Agreement between Islensk erfethagreining ehf.
and Axel Nielsen, dated July 1, 1998
10.19**+ Collaboration Agreement between a Collaboration Group on
Alzheimer's Disease and Related Disorders and Islensk
erfethagreining ehf., dated July 19, 1998
10.20**+ Collaboration Agreement between The Research Group on
Osteoporosis and Islensk erfethagreining ehf., dated July
19, 1998
10.21+ Employment Agreement between Islensk erfethagreining ehf.
and Kristjan Erlendsson, dated September 4, 1998
10.22+ Co-operation Agreement between Reykjavik Hospital and
Islensk erfethagreining ehf., dated November 4, 1998
10.23+ Amended and Restated Non-Recourse Promissory Note between
deCODE genetics, Inc. and Sigurethur I. Bjornsson, dated
March 24, 1999
10.24+ Co-operation Agreement between the Iceland State Hospital
and Islensk erfethagreining ehf., dated December 15, 1998
10.25+ Employment Contract between Islensk erfethagreining ehf. and
Sigurethur I. Bjornsson, dated January 15, 1999
10.26+ Lease between Friethar sf. and Islensk erfethagreining ehf.,
dated February 18, 1999
10.27**+ Research Contract on the Co-operation of a Research Team for
Age-Related Macular Degeneration and Islensk erfethagreining
ehf., dated April 27, 1999
10.28**+ Research Contract on the Co-operation of a Research Team for
Peripheral Artery Occlusive Disease and Islensk
erfethagreining ehf., dated May 28, 1999
10.29**+ Research Contract on the Co-operation of a Research Team for
Allergy and Asthma and Islensk erfethagreining ehf., dated
July 1, 1999
10.30+ Series A Preferred Stock Repurchase Agreement between deCODE
genetics, Inc. and certain holders of Series A Preferred
Stock, dated as of July 12, 1999, with attached Addendum
10.31+ Series C Preferred Stock Repurchase Agreement between deCODE
genetics, Inc. and Roche Finance Ltd, dated as of July 12,
1999, with attached Addendum
10.32+ Common Stock Repurchase Agreement between deCODE genetics,
Inc. and Kari Stefansson, dated as of July 12, 1999
10.33+ Stock Purchase Agreement between deCODE genetics, Inc. and
Biotek Invest, S.A., dated as of June 30, 1999, with
attached Addendum
10.34+ Co-operation Agreement between Akureyri Central Hospital and
Islensk erfethagreining ehf., dated October 26, 1999, with
attached Declaration
10.35+ Non-Recourse Promissory Note between deCODE genetics, Inc.
and Hannes Smarason, dated September 15, 1999
10.36**+ Research Contract on the Co-Operation of a Research Team for
Cerebral Haemorrhage and Islensk erfethagreining ehf., dated
November 3, 1999
10.37+ Lease between the Computer Centre of the Icelandic Savings
Banks and Islensk erfethagreining ehf., dated November 24,
1999
10.38+ Research Collaboration Agreement by and between Islenskar
hveraorverur ehf. (Icetherm, Ltd.) and Islensk
erfethagreining ehf., dated December 28, 1999
10.39+ Agreement between The Minister for Health and Social
Security and Islensk erfethagreining ehf. relating to the
Issue of an Operating Licence for the Creation and Operation
of a Health Sector Database, dated January 21, 2000
</TABLE>
<PAGE> 121
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION
- ------- -----------
<C> <S>
10.40+ Operating Licence issued to Islensk erfethagreining ehf.,
State Reg. No. 691295-3549 Lynghals 1 Reykjavik for the
Creation and Operation of a Health Sector Database, dated
January 22, 2000
10.41+ Series B Preferred Stock Agreement between deCODE genetics,
Inc. and Kari Stefansson, dated as of March 1, 2000
10.42+ Agreement between The University of Iceland, Islensk
erfethagreining ehf., and the City of Reykjavik, dated
February 15, 2000
10.43 Lease between Islensk erfethagreining ehf. and Faghus ehf.,
dated as of March 1, 2000
10.44+ Form of Employee Confidentiality, Invention Assignment and
Non-Compete Agreement executed by certain officers
10.45 Series C Preferred Stock and Warrant Purchase Agreement
between Roche Finance Ltd and deCODE genetics, Inc., dated
as of February 1, 1998
10.46 Founder Stock Purchase Agreement between deCODE genetics,
Inc. and Jeffrey R. Gulcher, dated as of August 21, 1996
10.47** Research Contract on the Co-Operation of a Research Team for
Chronic Obstructive Pulmonary Disease and Islensk
erfethagreining ehf., dated as of July 1, 1999.
21.1+ Subsidiaries of deCODE genetics, Inc.
23.1 Consent of PricewaterhouseCoopers ehf., independent public
accountants
23.2* Consent of Smith, Stratton, Wise, Heher & Brennan (contained
in Exhibit 5.1)
23.3* Consent of Stibbe Simont Monahan Duhot (contained in Exhibit
8.1)
24.1+ Power of Attorney (see "Power of Attorney" above)
27.1 Financial Data Schedule
99.1 Government Regulation on a Health Sector Database, dated
January 22, 2000
99.2 Act No. 139/1998 on a Health Sector Database
</TABLE>
- ---------------
* To be filed by amendment.
** Confidential treatment has been requested with respect to a portion of this
Exhibit.
+ Previously filed.
<PAGE> 1
EXHIBIT 3.1
AMENDED AND RESTATED
CERTIFICATE OF INCORPORATION OF
deCODE genetics, INC.
Kari Stefansson hereby certifies that:
1. The original name of this corporation is deCODE genetics, Inc.,
and the date of filing of the original Certificate of Incorporation of this
corporation with the Secretary of State of the State of Delaware is August 6,
1996.
2. He is the duly elected President and Secretary of such
corporation.
3. The Certificate of Incorporation of such corporation is hereby
amended and restated to read in its entirety as follows:
I
The name of the corporation is deCODE genetics, Inc. (the
"Corporation").
II
The address of the registered office of the Corporation in the State of
Delaware is:
Corporation Service Company
1013 Centre Road
Wilmington, DE 19901
County of New Castle
The name of the Corporation's registered agent at said address is the
Corporation Service Company.
III
The purpose of the Corporation is to engage in any lawful act or
activity for which a corporation may be organized under the General Corporation
Law of the State of Delaware.
IV
4.1 Authorized Shares. This Corporation is authorized to issue two
classes of stock to be designated, respectively, "Common Stock" and "Preferred
Stock." The total number of shares which the Corporation is authorized to issue
is Seventy-five Million (75,000,000) shares, Forty-five Million (45,000,000)
shares of which shall be Common Stock (the "Common Stock") and Thirty Million
(30,000,000) shares of which shall be Preferred Stock (the "Preferred Stock").
The Preferred Stock shall have a par value of one-tenth of one cent ($0.001) per
share, and the Common Stock shall have a par value of one-tenth of one cent
($0.001) per share.
<PAGE> 2
4.2 Increase or Decrease of Shares of Common Stock. Subject to Section
4.5.2(b), the number of authorized shares of Common Stock may be increased or
decreased (but not below the number of shares of Common Stock then outstanding)
by the affirmative vote of the holders of a majority of the stock of the
Corporation (voting together, on an as-if converted basis).
4.3 Issuance, Designation of Preferred Stock. Subject to Section
4.5.2(b), the Preferred Stock may be issued from time to time in one or more
series. The Board of Directors is hereby authorized, within the limitations and
restrictions stated in this Amended and Restated Certificate (including, without
limitation, Section 4.5.2(b)), to fix or alter the dividend rights, dividend
rate, conversion rights, voting rights, rights and terms of redemption
(including sinking fund provisions), the redemption price or prices, the
liquidation preferences of any wholly unissued series of Preferred Stock, and
the number of shares constituting any such series and the designation thereof,
or any of them; and to increase or decrease the number of shares of any series
subsequent to the issue of shares of that series, but not below the number of
shares of such series then outstanding. In case the number of shares of any
series shall be so decreased, the shares constituting such decrease shall resume
the status which they had prior to the adoption of the resolution originally
fixing the number of shares of such series.
4.4 Designation of Preferred Shares. Thirteen Million Four Hundred
Thousand (13,400,000) of the authorized shares of Preferred Stock are hereby
designated "Series A Preferred Stock" (the "Series A Preferred"), Five Million
(5,000,000) of the authorized shares of Preferred Stock are hereby designated
"Series B Preferred Stock" (the "Series B Preferred"), and Four Million Five
Hundred Eighty-three Thousand Three Hundred Thirty-four (4,583,334) of the
authorized shares of Preferred Stock are hereby designated "Series C Preferred
Stock" (the "Series C Preferred").
4.5 Rights, etc. of Preferred Stock. The rights, preferences,
privileges, restrictions and other matters relating to the Series A Preferred,
the Series B Preferred and the Series C Preferred are as follows:
4.5.1 Dividend Rights.
(a) Generally. Holders of Series A Preferred,
Series B Preferred and Series C Preferred, together as a separate class and in
preference to the holders of any other stock of the Corporation, including any
Common Stock and all other classes or series of stock issued by the Corporation
(all such stock, "Junior Stock"), shall be entitled to receive, when and as
declared by the Board of Directors, but only out of funds that are legally
available therefor, cash dividends at the rate of eight percent (8%) of the
Original Issue Price per annum on each outstanding
-2-
<PAGE> 3
share of Series A Preferred, Series B Preferred and Series C Preferred Stock (as
adjusted for any stock dividends, combinations, splits, recapitalizations and
the like with respect to such shares). The "Original Issue Price" of the Series
A Preferred shall be the purchase price paid in connection with the issuance of
each respective share of Series A Preferred. The "Original Issue Price" of the
Series B Preferred shall be the purchase price paid in connection with the
issuance of each respective share of Series B Preferred. The "Original Issue
Price" of the Series C Preferred shall be the purchase price paid in connection
with the issuance of each respective share of Series C Preferred. Such dividends
not declared and paid shall accumulate, but shall not accrue any interest.
(b) Dividends on Junior Stock. So long as any
shares of Series A Preferred, Series B Preferred or Series C Preferred shall be
outstanding, no dividend, whether in cash or property, shall be paid or
declared, nor shall any other distribution be made, on any Junior Stock, nor
shall any shares of any Junior Stock of the Corporation be purchased, redeemed,
or otherwise acquired for value by the Corporation (except for acquisitions of
Common Stock by the Corporation pursuant to agreements which permit the
Corporation to repurchase such shares upon termination of services to the
Corporation or in exercise of the Corporation's right of first refusal upon a
proposed transfer) until all dividends (set forth in Section 4.5.1(a) above) on
the Series A Preferred, Series B Preferred and the Series C Preferred shall have
been paid or declared and set apart. In the event dividends are paid on any
share of Common Stock, an additional dividend shall be paid with respect to all
outstanding shares of Series A Preferred, Series B Preferred and Series C
Preferred in an amount equal per share (on an as-converted to Common Stock
basis) to the amount paid or set aside for each share of Common Stock. The
provisions of this Section 4.5.1(b) shall not, however, apply to (i) a dividend
payable in Common Stock, (ii) the acquisition of shares of any Junior Stock in
exchange for shares of any other Junior Stock, or (iii) any repurchase of any
outstanding securities of the Corporation that is unanimously approved by the
Corporation's Board of Directors.
4.5.2 Voting Rights.
(a) Generally. Except as otherwise provided herein
or as required by law, the Series A Preferred, Series B Preferred and Series C
Preferred shall be voted equally with the shares of the Common Stock and not as
a separate class, at any annual or special meeting of shareholders of the
Corporation, and may act by written consent in the same manner as the Common
Stock, in either case upon the following basis: each holder of shares of Series
A Preferred, Series B Preferred and Series C Preferred shall be entitled to such
number of votes as shall be equal to the whole number of shares of Common Stock
into which such holder's aggregate
-3-
<PAGE> 4
number of shares of Series A Preferred, Series B Preferred or Series C Preferred
are convertible (pursuant to Section 4.5.4 hereof) immediately after the close
of business on the record date fixed for such meeting or the effective date of
such written consent.
(b) By Series A Preferred and Series C Preferred
Collectively. In addition to any other vote or consent required herein or by
law, the vote or written consent of the holders of at least sixty-seven percent
(67%) of the outstanding Series A Preferred (so long as at least One Million
(1,000,000) shares of Series A Preferred remain outstanding), and/or the
outstanding Series C Preferred (so long as at least One Million (1,000,000)
shares of Series C Preferred remain outstanding) (subject, in each case, to
adjustment for any stock split, reverse stock split or other similar event
affecting the Series A Preferred and/or Series C Preferred), as the case may be,
voting together, on an as-if converted basis, as a separate class, shall be
necessary for effecting or validating the following actions:
(i) Any amendment, alteration, repeal, or
waiver of any provision of the Certificate of Incorporation of the Corporation
(including the filing of any Certificate of Designations), as in effect from
time to time (the "Certificate of Incorporation"), or the Bylaws of the
Corporation, that affects adversely the voting powers, preferences, or other
special rights or privileges, qualifications, limitations, or restrictions of
the Series A Preferred and the Series C Preferred Stock;
(ii) Any authorization or any designation,
whether by reclassification or otherwise, of any new class or series of stock or
any other securities convertible into equity securities of the Corporation
ranking on a parity with or senior to the Series A Preferred and Series C
Preferred in right of redemption, liquidation preference, voting or dividends or
any increase in the authorized or designated number of any such new class or
series;
(iii) Any redemption, repurchase, payment of
dividends or other distributions with respect to Junior Stock (except for
acquisitions of Common Stock by the Corporation pursuant to agreements which
permit the Corporation to repurchase such shares upon termination of service to
the Corporation or in exercise of the Corporation's right of first refusal upon
a proposed transfer);
(iv) Any increase or decrease (other than by
redemption or conversion) in the authorized number of shares of Common Stock or
Preferred Stock, subject to Section 4.5.2(c);
-4-
<PAGE> 5
(v) Any agreement by the Corporation or its
stockholders regarding an Asset Transfer or Acquisition (each as defined in
Section 4.5.3(c));
(vi) Any agreement by the Corporation or its
stockholders regarding any consolidation or merger of the Corporation with or
into any other corporation or other entity or person, or any other corporate
reorganization following which the stockholders of the Corporation immediately
prior thereto will own more than fifty percent (50%) of the Corporation's voting
power immediately thereafter;
(vii) The Corporation's entering into any
line of business other than the biopharmaceutical business;
(viii) The appointment, termination or removal
of the Chief Executive Officer of the Corporation;
(ix) Any action that results in the payment
or declaration of a dividend on or distribution with respect to any shares of
Common Stock or Preferred Stock;
(x) Any voluntary dissolution, liquidation
winding-up or partial liquidation of the Corporation, or any distribution or
transaction in the nature of a partial liquidation or distribution, or any
abandonment of all or substantially all of the assets of the Corporation; or
(xi) Any change in the authorized number of
members of the Corporation's Board of Directors.
(c) By Series A Preferred and Series C Preferred
Severally.
(i) The vote or written consent of the
holders of at least fifty percent (50%) of the outstanding Series A Preferred,
voting as a separate class, shall be necessary for effecting or validating any
increase or decrease (other than by redemption or conversion) in the number of
shares of Preferred Stock designated as Series A Preferred.
(ii) The vote or written consent of the
holders of at least fifty percent (50%) of the outstanding Series C Preferred,
voting as a separate class, shall be necessary for effecting or validating any
increase or decrease (other than by redemption or conversion) in the number of
shares of Preferred Stock designated as Series C Preferred.
-5-
<PAGE> 6
(d) By Series A Preferred, Series B Preferred and
Series C Preferred Severally.
(i) The vote or written consent of the
holders of at least fifty percent (50%) of the outstanding Series A Preferred,
voting as a separate class, shall be necessary for effecting (A) a subdivision
of the outstanding Series A Preferred without a corresponding subdivision of the
Common Stock, or (B) a combination of the outstanding Series A Preferred without
a corresponding combination of the Common Stock.
(ii) The vote or written consent of the
holders of at least fifty percent (50%) of the outstanding Series B Preferred,
voting as a separate class, shall be necessary for effecting (A) a subdivision
of the outstanding Series B Preferred without a corresponding subdivision of the
Common Stock, or (B) a combination of the outstanding Series B Preferred without
a corresponding combination of the Common Stock.
(iii) The vote or written consent of the
holders of at least fifty percent (50%) of the outstanding Series C Preferred,
voting as a separate class, shall be necessary for effecting (A) a subdivision
of the outstanding Series C Preferred without a corresponding subdivision of the
Common Stock or (B) a combination of the outstanding Series C Preferred without
a corresponding combination of the Common Stock.
(e) Election of Board of Directors. For so long
as the authorized size of the Corporation's Board of Directors is seven (7) or
more:
(i) And so long as at least One Million
(1,000,000) shares of the Series A Preferred remain outstanding (subject to
adjustment for any stock split, reverse stock split or similar event affecting
the Series A Preferred), the holders of the Series A Preferred, voting as a
separate class, shall be entitled to elect three (3) members of the
Corporation's Board of Directors at each meeting or pursuant to each consent of
the Corporation's stockholders for the election of directors, and to remove from
office such directors and to fill any vacancy caused by the resignation, death
or removal of such directors; and
(ii) The holders of the Common Stock, voting
as a separate class, shall be entitled to elect three (3) members of the Board
of Directors at each meeting or pursuant to each consent of the Corporation's
stockholders for the election of directors, and to remove from office such
directors and to fill any vacancy caused by the resignation, death or removal of
such directors; and
(iii) The holders of the Common Stock, the
Series A Preferred, Series B Preferred and the Series C Preferred, voting
together, on an as-if converted basis (in the case of the
-6-
<PAGE> 7
Preferred Stock), as a separate class, shall be entitled to elect all remaining
members of the Board of Directors.
4.5.3 Liquidation Rights.
(a) Preference. Upon any liquidation, dissolution,
or winding up of the Corporation, whether voluntary or involuntary, before any
distribution or payment shall be made to the holders of any Junior Stock, the
holders of the Series A Preferred, the Series B Preferred and the Series C
Preferred shall be entitled to be paid out of the assets of the Corporation an
amount per share of the Series A Preferred, the Series B Preferred and the
Series C Preferred equal to the sum of (i) the respective Original Issue Price
thereof, plus (ii) an amount equal to eight percent (8%) of such Original Issue
Price per annum from the Original Issue Date until the date of payment (less the
per share amount of any dividends previously paid on such shares) (as adjusted
for any stock dividends, combinations, splits, recapitalizations and the like
with respect to such shares) for each share of Series A Preferred, Series B
Preferred or Series C Preferred held by them. For purposes of this Section 4.5,
"Original Issue Date" shall mean the date on which each share of the Series A
Preferred, each share of Series B Preferred or each share of Series C Preferred,
as the case may be, is issued.
(b) Remaining Assets. After the payment of the
full liquidation preference of the Series A Preferred, the Series B Preferred
and the Series C Preferred as set forth in Section 4.5.3(a), the assets of the
Corporation legally available for distribution, if any, shall be distributed
ratably to the holders of the Common Stock and the Series A Preferred, the
Series B Preferred and the Series C Preferred, on an as-converted to Common
Stock basis.
(c) Constructive Liquidation. The following events
shall be considered a liquidation under this Section 4.5.3:
(i) any consolidation or merger of the
Corporation with or into any other corporation or other entity or person, or any
other corporate reorganization, in which the stockholders of the Corporation
immediately prior to such consolidation, merger or reorganization, own less than
fifty percent (50%) of the Corporation's voting power immediately after such
consolidation, merger or reorganization, or any transaction or series of related
transactions in which in excess of fifty percent (50%) of the Corporation's
voting power is transferred (an "Acquisition"); or
(ii) a sale, lease, transfer or other
disposition of all or substantially all of the assets of the Corporation (an
"Asset Transfer").
-7-
<PAGE> 8
(d) Insufficient Assets. If, upon any liquidation,
distribution, or winding up, the assets of the Corporation shall be insufficient
to make payment in full to all holders of the Series A Preferred, the Series B
Preferred and the Series C Preferred of the liquidation preference set forth in
Section 4.5.3(a), then such assets shall be distributed among the holders of the
Series A Preferred, the Series B Preferred and the Series C Preferred at the
time outstanding, ratably in proportion to the full amounts to which they would
otherwise be respectively entitled.
4.5.4 Conversion Rights.
The holders of the Series A Preferred, the Series B Preferred
and the Series C Preferred shall have the following rights, respectively, with
respect to the conversion of the Series A Preferred, the Series B Preferred and
the Series C Preferred into shares of Common Stock (collectively, the
"Conversion Rights"):
(a) Optional Conversion. Subject to and in
compliance with the provisions of this Section 4.5.4, any shares of Series A
Preferred, Series B Preferred or Series C Preferred may, at the option of the
holder, be converted at any time into fully paid and nonassessable shares of
Common Stock. The number of shares of Common Stock to which a holder of Series A
Preferred shall be entitled upon conversion shall be the product obtained by
multiplying the Series A Preferred Rate then in effect (determined as provided
in Section 4.5.4(b)(i)) by the number of shares of Series A Preferred being
converted. The number of shares of Common Stock to which a holder of Series B
Preferred shall be entitled upon conversion shall be the product obtained by
multiplying the Series B Preferred Rate then in effect (determined as provided
in Section 4.5.4(b)(ii)) by the number of shares of Series B Preferred being
converted. The number of shares of Common Stock to which a holder of Series C
Preferred shall be entitled upon conversion shall be the product obtained by
multiplying the Series C Preferred Rate then in effect (determined as provided
in Section 4.5.4(b)(iii)) by the number of shares of Series C Preferred being
converted.
(b) Preferred Rate.
(i) The conversion rate in effect at any
time for conversion of the Series A Preferred (the "Series A Preferred Rate")
shall be the quotient obtained by dividing the Original Issue Price of the
Series A Preferred by the Series A Preferred Price, calculated as provided in
Section 4.5.4(c)(i).
(ii) The conversion rate in effect at any
time for conversion of the Series B Preferred (the "Series B Preferred Rate")
shall be the quotient obtained by dividing the Original Issue Price of the
Series B Preferred by the Series B Preferred Price, calculated as provided in
Section 4.5.4(c)(ii).
-8-
<PAGE> 9
(iii) The conversion rate in effect at any
time for conversion of the Series C Preferred (the "Series C Preferred Rate")
shall be the quotient obtained by dividing the Original Issue Price of the
Series C Preferred by the Series C Preferred Price, calculated as provided in
Section 4.5.4(c)(iii).
(c) Preferred Price.
(i) For purposes of this Section 4.5.4,
the conversion price for the Series A Preferred (the "Series A Preferred Price")
shall initially be the Original Issue Price of the Series A Preferred. The
Series A Preferred Price shall be adjusted from time to time in accordance with
this Section 4.5.4. All references to the Series A Preferred Price herein shall
mean the Series A Preferred Price as so adjusted.
(ii) For purposes of this Section 4.5.4, the
conversion price for the Series B Preferred (the "Series B Preferred Price")
shall initially be the Original Issue Price of the Series B Preferred. The
Series B Preferred Price shall be adjusted from time to time in accordance with
this Section 4.5.4. All references to the Series B Preferred Price herein shall
mean the Series B Preferred Price as so adjusted.
(iii) For purposes of this Section 4.5.4, the
conversion price for the Series C Preferred (the "Series C Preferred Price")
shall initially be the Original Issue Price of the Series C Preferred. The
Series C Preferred Price shall be adjusted from time to time in accordance with
this Section 4.5.4. All references to the Series C Preferred Price herein shall
mean the Series C Preferred Price as so adjusted.
(d) Mechanics of Conversion. Each holder of the
Series A Preferred, the Series B Preferred or the Series C Preferred who desires
to convert the same into shares of Common Stock pursuant to Section 4.5.4(a)
shall surrender the certificate or certificates therefor, duly endorsed, at the
office of the Corporation or any transfer agent for the Series A Preferred, the
Series B Preferred or the Series C Preferred, as the case may be, and shall give
written notice to the Corporation at such office that such holder elects to
convert the same. Such notice shall state the number of shares of Series A
Preferred, Series B Preferred or Series C Preferred being converted. Thereupon,
the Corporation shall promptly issue and deliver at such office to such holder a
certificate or certificates for the number of shares of Common Stock to which
such holder is entitled and shall promptly pay in cash or, to the extent
sufficient funds are not then legally available therefor, in Common Stock (at
the Common Stock's fair market value determined by the Board of Directors as of
the date of such conversion), any accumulated and unpaid dividends as provided
in Section 4.5.1(a), whether or not declared on the shares of Series A
Preferred, Series B Preferred or Series C Preferred being
-9-
<PAGE> 10
converted. Such conversion shall be deemed to have been made at the close of
business on the date of such surrender of the certificates representing the
shares of Series A Preferred, Series B Preferred or Series C Preferred to be
converted, and the person entitled to receive the shares of Common Stock
issuable upon such conversion shall be treated for all purposes as the record
holder of such shares of Common Stock on such date.
(e) Adjustment for Stock Splits and Combinations.
If the Corporation shall, at any time or from time to time after the respective
Original Issue Dates of the Series A Preferred, the Series B Preferred and the
Series C Preferred, effect a subdivision of the outstanding Common Stock without
a corresponding subdivision of the Series A Preferred, the Series B Preferred
and/or the Series C Preferred, the Series A Preferred Price, the Series B
Preferred Price and/or the Series C Preferred Price, as the case may be, in
effect immediately before that subdivision shall be proportionately decreased.
Conversely, if the Corporation shall, at any time or from time to time after the
respective Original Issue Dates of the Series A Preferred, the Series B
Preferred or the Series C Preferred, combine the outstanding shares of Common
Stock into a smaller number of shares without a corresponding combination of the
Series A Preferred, the Series B Preferred and/or the Series C Preferred, the
Series A Preferred Price, the Series B Preferred Price and/or the Series C
Preferred Price, as the case may be, in effect immediately before the
combination shall be proportionately increased. Any adjustment under this
Section 4.5.4(e) shall become effective at the close of business on the date the
subdivision or combination becomes effective.
(f) Adjustment for Common Stock Dividends and
Distribution. If the Corporation, at any time or from time to time after the
respective Original Issue Dates of the Series A Preferred, the Series B
Preferred and the Series C Preferred, makes, or fixes a record date for the
determination of holders of Common Stock entitled to receive, a dividend or
other distribution payable in additional shares of Common Stock, in each such
event the Series A Preferred Price, the Series B Preferred Price and the Series
C Preferred Price that are then in effect shall each be decreased as of the time
of such issuance or, in the event such record date is fixed, as of the close of
business on such record date, by multiplying each of the Series A Preferred
Price, the Series B Preferred Price and the Series C Preferred Price then in
effect by a fraction (i) the numerator of which is the total number of shares of
Common Stock issued and outstanding immediately prior to the time of such
issuance or the close of business on such record date, and (ii) the denominator
of which is the total number of shares of Common Stock issued and outstanding
immediately prior to the time of such issuance or the close of business on such
record date plus the number of shares of Common Stock issuable in payment of
such dividend or distribution; provided, however, that if such record date is
fixed and such dividend is not fully paid or
-10-
<PAGE> 11
if such distribution is not fully made on the date fixed therefor, the Series A
Preferred Price, the Series B Preferred Price and the Series C Preferred Price
shall be adjusted pursuant to this Section 4.5.4(f) to reflect the actual
payment of such dividend or distribution.
(g) Adjustments for Other Dividends and
Distributions. If the Corporation, at any time or from time to time after the
respective Original Issue Dates of the Series A Preferred, the Series B
Preferred and the Series C Preferred, makes, or fixes a record date for the
determination of holders of Common Stock entitled to receive, a dividend or
other distribution payable in securities of the Corporation other than shares of
Common Stock, in each such event provision shall be made so that the holders of
the Series A Preferred, the Series B Preferred and the Series C Preferred shall
receive upon conversion thereof, in addition to the number of shares of Common
Stock receivable thereupon, the amount of other securities of the Corporation
which they would have received had their Series A Preferred, Series B Preferred
or Series C Preferred, as the case may be, been converted into Common Stock on
the date of such event and had they thereafter, during the period from the date
of such event to an including the conversion date, retained such securities
receivable by them as aforesaid during such period, subject to all other
adjustments called for during such period under this Section 4.5.4 with respect
to the rights of the holders of the Series A Preferred, Series B Preferred and
Series C Preferred or with respect to such other securities by their terms.
(h) Adjustment for Reclassification, Exchange and
Substitution. If, at any time or from time to time after the respective Original
Issue Dates of the Series A Preferred, the Series B Preferred and the Series C
Preferred, the Common Stock issuable upon the conversion of the Series A
Preferred, the Series B Preferred or the Series C Preferred is changed into the
same or a different number of shares of any class or classes of stock, whether
by recapitalization, reclassification or otherwise (other than an Acquisition or
Asset Transfer as defined in Section 4.5.3(c) or a subdivision or combination of
shares of stock dividend or a reorganization, merger consolidation or sale of
assets provided or elsewhere in this Section 4.5.4), in any such event each
holder of Series A Preferred, Series B Preferred or Series C Preferred, as the
case may be, shall have the right thereafter to convert such stock into the kind
and amount of stock and other securities and property that is receivable upon
such recapitalization, reclassification or other change by holders of the
maximum number of shares of Common Stock into which such shares of Series A
Preferred, Series B Preferred or Series C Preferred could have been converted
immediately prior to such recapitalization, reclassification or change, all
subject to further adjustment as provided herein or with respect to such other
securities or property by the terms thereof.
-11-
<PAGE> 12
(i) Reorganizations, Mergers, Consolidations or
Sales of Assets. If, at any time or from time to time after the respective
Original Issue Dates of the Series A Preferred, the Series B Preferred and the
Series C Preferred, there is a capital reorganization of the Common Stock (other
than an Acquisition or Asset Transfer as defined in Section 4.5.3(c) or a
recapitalization, subdivision, combination, reclassification, exchange or
substitution of shares provided for elsewhere in this Section 4.5.4), as a part
of such capital reorganization, provision shall be made so that the holders of
the Series A Preferred, the Series B Preferred and the Series C Preferred shall
thereafter be entitled to receive upon conversion of the Series A Preferred,
Series B Preferred and the Series C Preferred, as the case may be, the number of
shares of stock or other securities or property of the Corporation to which a
holder of the number of shares of Common Stock deliverable upon conversion would
have been entitled on such capital reorganization, subject to adjustment in
respect of such stock or securities by the terms thereof. In any such case,
appropriate adjustment shall be made in the application of the provisions of
this Section 4.5.4 with respect to the rights of the holders of Series A
Preferred, Series B Preferred and Series C Preferred after the capital
reorganization to the end that the provisions of this Section 4.5.4 (including
adjustment of the Series A Preferred Price, the Series B Preferred Price and the
Series C Preferred Price then in effect and the number of shares issuable upon
conversion of the Series A Preferred, the Series B Preferred and the Series C
Preferred) shall be applicable after that event and be as nearly equivalent as
practicable.
(j) Sale of Shares Below Preferred Price.
(i) If, at any time or from time to time
after the respective Original Issue Dates of the Series A Preferred, the Series
B Preferred and the Series C Preferred, the Corporation issues or sells, or is
deemed by the express provisions of this Section 4.5.4(j) to have issued or
sold, Additional Shares of Common Stock (as hereinafter defined), other than as
a dividend or other distribution on any class of stock as provided in Section
4.5.4(f), and other than a subdivision or combination of shares of Common Stock
as provided in Section 4.5.4(e), for an Effective Price (as hereinafter defined)
less than the then effective Series A Preferred Price, the then effective Series
B Preferred Price or the then effective Series C Preferred Price, as the case
may be, then and in each such case the then existing Series A Preferred Price,
the then existing Series B Preferred Price or the then existing Series C
Preferred Price, as the case may be, shall be reduced, as of the opening of the
business on the date of such issue or sale, to a price according to the
following formula:
-12-
<PAGE> 13
A + B
X = Y x ---------
C
Where:
X = the new Series A Preferred Price,
the new Series B Preferred Price or
the new Series C Preferred Price, as
the case may be;
Y = the then existing Series A
Preferred Price, the then existing
Series B Preferred Price or the then
existing Series C Preferred Price,
as the case may be;
A = the number of shares of Common
Stock deemed outstanding (as defined
below) immediately prior to such
issue or sale;
B = the number of shares of Common
Stock which the aggregate
consideration received (as defined
in Section 4.5.4(j)(ii)) by the
Corporation for the total number of
Additional Shares of Common Stock so
issued would purchase at the then
existing Series A Preferred Price,
the then existing Series B Preferred
Price or the then existing Series C
Preferred Price, as the case may be;
and
C = the number of shares of Common
Stock deemed outstanding (as defined
below) immediately prior to such
issue or sale plus the total number
of Additional Shares of Common Stock
so issued.
For the purposes of the preceding sentence, the number of shares of Common Stock
deemed to be outstanding as of a given date shall be the sum of (A) the number
of shares of Common Stock actually outstanding, and (B) the aggregate number of
shares of Common Stock into which the then outstanding shares of Series A
Preferred, Series B Preferred and Series C Preferred could be converted if fully
converted on the day immediately preceding the given date.
(ii) For the purpose of making any
adjustment required under this Section 4.5.4(j), the consideration received by
the Corporation for any issue or sale of securities shall: (A) to the extent it
consists of cash, be computed at the net amount of cash received by the
Corporation after deduction of any
-13-
<PAGE> 14
underwriting or similar commissions, compensation, or concessions paid or
allowed by the Corporation in connection with such issue or sale but without
deduction of any expenses payable by the Corporation, (B) to the extent it
consists of property other than cash, be computed at the fair value of that
property as determined in good faith by the Board of Directors, and (C) if
Additional Shares of Common Stock, Convertible Securities (as hereinafter
defined) or rights or options to purchase either Additional Shares of Common
Stock or Convertible Securities are issued or sold together with other stock or
securities or other assets of the Corporation for a consideration which covers
both, be computed as the portion of the consideration so received that may be
reasonably determined in good faith by the Board of Directors to be allocable to
such Additional Shares of Common Stock, Convertible Securities or rights or
options.
(iii) For the purpose of the adjustment
required under this Section 4.5.4(j), if the Corporation issues or sells any
rights or options for the purchase of, or stock or other securities convertible
into, Additional Shares of Common Stock (such convertible stock or securities
being referred to as "Convertible Securities") and if the Effective Price of
such Additional Shares of Common Stock is less than the Series A Preferred
Price, the Series B Preferred Price and/or the Series C Preferred Price, as the
case may be, in each case the Corporation shall be deemed to have issued at the
time of the issuance of such rights or options or Convertible Securities the
maximum number of Additional Shares of Common Stock issuable upon the exercise
or conversion thereof and to have received as consideration for the issuance of
such shares an amount equal to the total amount of consideration, if any,
received by the Corporation for the issuance of such rights or options or
Convertible Securities, plus, in the case of such rights or options, the minimum
amounts of consideration, if any, payable to the Corporation upon the exercise
of such rights or options, plus, in the case of Convertible Securities, the
minimum amounts of consideration, if any, payable to the Corporation (other than
by cancellation of liabilities or obligations evidenced by such Convertible
Securities) upon the conversion thereof; provided that if in the case of
Convertible Securities the minimum amounts of such consideration cannot be
ascertained, but are a function of anti-dilution or similar protective clauses,
the Corporation shall be deemed to have received the minimum amounts of
consideration without reference to such clauses; and provided further that if
the minimum amount of consideration payable to the Corporation upon the exercise
or conversion of rights, options or Convertible Securities is reduced over time
or on the occurrence or nonoccurrence of specified events other than by reason
of anti-dilution adjustments, the Effective Price shall be recalculated using
the figure to which such minimum amount of consideration is reduced; and
provided further that if the minimum amount of consideration payable to the
Corporation upon the exercise or conversion of such rights, options or
Convertible Securities is subsequently increased, the Effective
-14-
<PAGE> 15
Price shall be again recalculated using the increased minimum amount of
consideration payable to the Corporation upon the exercise or conversion of such
rights, options or Convertible Securities. No further adjustment of the Series A
Preferred Price, the Series B Price and/or the Series C Preferred Price, as
adjusted upon the issuance of such rights, options or Convertible Securities,
shall be made as a result of the actual issuance of Additional Shares of Common
Stock on the exercise of any such rights or options or the conversion of any
such Convertible Securities. If any such rights or options or the conversion
privileges represented by any such Convertible Securities shall expire without
having been exercised, the Series A Preferred Price, the Series B Preferred
Price and/or the Series C Preferred Price, as adjusted upon the issuance of such
rights, options or Convertible Securities, shall be readjusted to the Series A
Preferred Price, the Series B Preferred Price and/or the Series C Preferred
Price which would have been in effect had an adjustment been made on the basis
that the only Additional Shares of Common Stock so issued were the Additional
Shares of Common Stock, if any, actually issued or sold on the exercise of such
rights or options or rights of conversion of such Convertible Securities, and
such Additional Shares of Common Stock, if any, were issued or sold for the
consideration actually received by the Corporation upon such exercise, plus the
consideration, if any, actually received by the Corporation for the granting of
all such rights or options, whether or not exercised, plus the consideration
received for issuing or selling the Convertible Securities actually converted,
plus the consideration, if any, actually received by the Corporation (other than
by cancellation of liabilities or obligations evidenced by such Convertible
Securities) on the conversion of such Convertible Securities, provided that such
readjustment shall not apply to prior conversions of Series A Preferred, Series
B Preferred and Series C Preferred.
(iv) "Additional Shares of Common Stock"
shall mean all shares of Common Stock issued by the Corporation or deemed to be
issued pursuant to this Section 4.5.4(j), whether or not subsequently reacquired
or retired by the Corporation other than (A) shares of Common Stock issued upon
conversion of the Series A Preferred, the Series B Preferred and the Series C
Preferred; (B) up to 1,900,000 shares of Common Stock and/or options, warrants
or other Common Stock purchase rights, and the Common Stock issued pursuant to
such options, warrants or other rights (as adjusted for any stock dividends,
combinations, splits, recapitalizations and the like) issued after the
respective Original Issue Dates of the Series A Preferred, the Series B
Preferred and the Series C Preferred to employees, officers or directors of, or
consultants and advisors to, the Corporation or any subsidiary pursuant to stock
purchase or stock option plans or other arrangements that are approved by the
Board of Directors; and (C) shares of Common Stock issued pursuant to the
exercise of options, warrants or convertible securities outstanding, or
securities issued pursuant to any rights
-15-
<PAGE> 16
or agreements outstanding, as of the respective Original Issue Dates of the
Series A Preferred, the Series B Preferred and the Series C Preferred. The
"Effective Price" of Additional Shares of Common Stock shall mean the quotient
determined by dividing the total number of Additional Shares of Common Stock
issued or sold, or deemed to have been issued or sold by the Corporation under
this Section 4.5.4(j), into the aggregate consideration received, or deemed to
have been received, by the Corporation for such issue under this Section
4.5.4(j), for such Additional Shares of Stock.
(k) Accountants' Certificate of Adjustment. In
each case of an adjustment or readjustment of the Series A Preferred Price, the
Series B Preferred Price and/or the Series C Preferred Price for the number of
shares of Common Stock or other securities issuable upon conversion of the
Series A Preferred, the Series B Preferred or the Series C Preferred, if the
Series A Preferred, the Series B Preferred and/or the Series C Preferred, as the
case may be, is then covered by this Section 4.5.4, the Corporation, at its
expense, shall compute such adjustment or readjustment in accordance with the
provisions hereof and prepare a certificate showing such adjustment or
readjustment, and shall mail such certificate, by first class mail, postage
prepaid to each registered holder of the Series A Preferred, the Series B
Preferred and/or the Series C Preferred at the holder's address as shown in the
Corporation's books. The Certificate shall set forth such adjustment or
readjustment, showing in detail the facts upon which such adjustment or
readjustment is based, including a statement of (i) the consideration received
or deemed to be received by the Corporation for any Additional Shares of Common
Stock issued or sold or deemed to have been issued or sold, (ii) the Series A
Preferred Price, Series B Preferred Price or Series C Preferred Price at the
time in effect, (iii) the number of Additional Shares of Common Stock, and (iv)
the type and amount, if any, of other property which at the time would be
received upon conversion of the Series A Preferred, the Series B Preferred or
the Series C Preferred.
(l) Notices of Record Date. Upon (i) any taking
by the Corporation of a record of the holders of any class of securities for the
purpose of determining the holders thereof who are entitled to receive any
dividend or other distribution, or (ii) any Acquisition (as defined in Section
4.5.3(c)(i)) or other capital reorganization of the Corporation, any
reclassification or recapitalization of the capital stock of the Corporation,
any merger or consolidation of the Corporation with or into any other
corporation, or any Asset Transfer (as defined in Section 4.5.3(c)(ii)), or any
voluntary or involuntary dissolution, liquidation or winding up of the
Corporation, the Corporation shall mail to each holder of Series A Preferred,
Series B Preferred and Series C Preferred at least twenty (20) days prior to the
record date specified therein a notice specifying: (A) the date on which any
such record is to be taken for the purpose of such dividend or
-16-
<PAGE> 17
distribution and a description of such dividend or distribution, (B) the date on
which any such Acquisition, reorganization, reclassification, transfer,
consolidation, merger, Asset Transfer, dissolution, liquidation or winding up is
expected to become effective, and (C) the date, if any, that is to be fixed as
to when the holders of record of Common Stock (or other securities) shall be
entitled to exchange their shares of Common Stock (or other securities) for
securities or other property deliverable upon such Acquisition, reorganization,
reclassification, transfer, consolidation, merger, Asset Transfer, dissolution,
liquidation or winding up.
(m) Automatic Conversion.
(i) (A) Each share of Series A Preferred
shall automatically be converted into shares of Common Stock, based on the
then-effective Series A Preferred Price, at any time upon the affirmative
election of the holders of at least fifty percent (50%) of the outstanding
shares of the Series A Preferred, voting as a separate class. (B) Each share of
Series B Preferred shall automatically be converted into shares of Common Stock,
based on the then-effective Series B Preferred Price at any time upon the
affirmative election of the holders of at least fifty percent (50%) of the
outstanding shares of the Series B Preferred, voting as a separate class. (C)
Each share of Series C Preferred shall automatically be converted into shares of
Common Stock, based on the then-effective Series C Preferred Price at any time
upon the affirmative election of the holders of at least fifty percent (50%) of
the outstanding shares of the Series C Preferred, voting as a separate class.
Upon any conversion pursuant to this Section 4.5.4(m)(i), any declared and
unpaid dividends shall be paid in accordance with the provisions of Sections
4.5.4(d) and 4.5.1(a), and any undeclared dividends shall be canceled.
(ii) Each share of the Series A Preferred,
Series B Preferred and Series C Preferred shall automatically be converted into
shares of Common Stock, based on the then effective Series A Preferred Price,
Series B Preferred Price and Series C Preferred Price, as the case may be,
immediately upon the closing of a firmly underwritten public offering pursuant
to an effective registration statement under the United States Securities Act of
1933, as amended (the "Securities Act"), covering the offer and sale of Common
Stock for the account of the Corporation in which (A) the per share is at least
$7.00 (such price subject to equitable adjustment in the event of any stock
dividend, stock split, combination, reorganization, recapitalization,
reclassification or similar such event involving a change in the Common Stock),
and (B) the gross cash proceeds to the Corporation (before underwriting
discounts, commissions and fees) are at least $15,000,000 (such offer and sale,
a "Qualified Public Offering"); provided, however, that in the event of any
conversion pursuant to this Section 4.5.4(m)(ii), the minimum number of shares
of Common
-17-
<PAGE> 18
Stock to be issued upon such conversion shall be adjusted on a one-to-one basis
with respect to each share of Series A Preferred, Series B Preferred or Series C
Preferred, as the case may be, to be converted. Upon any conversion pursuant to
this Section 4.5.4(m)(ii), any declared and unpaid dividends shall be paid in
accordance with the provisions of Sections 4.5.4(d) and 4.5.1(a), and any
undeclared dividends shall be canceled.
(iii) Upon the occurrence of the event
specified in Section 4.5.4(m)(i) or (ii), the outstanding shares of Series A
Preferred, Series B Preferred and/or Series C Preferred, as the case may be,
shall be converted automatically without any further action by the holders of
such shares and whether or not the certificates representing such shares are
surrendered to the Corporation or its transfer agent; provided, however, that
the Corporation shall not be obligated to issue certificates evidencing the
shares of Common Stock issuable upon such conversion unless the certificates
evidencing such shares of Series A Preferred, Series B Preferred and/or Series C
Preferred are either delivered to the Corporation or its transfer agent as
provided below, or the holder notifies the Corporation or its transfer agent
that such certificates have been lost, stolen or destroyed and executes an
agreement satisfactory to the Corporation to indemnify the Corporation from any
loss incurred by it in connection with such certificates. Upon the occurrence of
such automatic conversion of the Series A Preferred, Series B and/or the Series
C Preferred, as the case may be, the holders of Series A Preferred, Series B
Preferred or Series C Preferred shall surrender the certificates representing
such shares at the office of the Corporation or any respective transfer agents
for the Series A Preferred, Series B Preferred and Series C Preferred.
Thereupon, there shall be issued and delivered to such holder promptly at such
office and in its name as shown on such surrendered certificate or certificates,
a certificate or certificates for the number of shares of Common Stock into
which the shares of Series A Preferred, Series B Preferred or Series C Preferred
surrendered were convertible on the date on which such automatic conversion
occurred, and any declared and unpaid dividends shall be paid in accordance with
the provisions of Sections 4.5.4(d) and 4.5.1(a), and any undeclared dividends
shall be canceled.
(n) Fractional Shares. No fractional shares of
Common Stock shall be issued upon conversion of Series A Preferred, Series B
Preferred or Series C Preferred. All shares of Common Stock (including fractions
thereof) issuable upon conversion of more than one share of Series A Preferred,
Series B Preferred or Series C Preferred by a holder thereof shall be aggregated
for purposes of determining whether the conversion would result in the issuance
of any fractional share. If, after such aggregation, the conversion would result
in the issuance of any fractional share, the Corporation shall, in lieu of
issuing any fractional share, pay cash equal to the product of such fraction
multiplied by the Common
-18-
<PAGE> 19
Stock's fair market value (as determined by the Board) on the date of
conversion.
(o) Reservation of Stock Issuable Upon Conversion.
The Corporation shall at all times reserve and keep available out of its
authorized but unissued shares of Common Stock, solely for the purpose of
effecting the conversion of the shares of the Series A Preferred, the Series B
Preferred and the Series C Preferred, such number of its shares of Common Stock
as shall from time to time be sufficient to effect the conversion of all
outstanding shares of the Series A Preferred, the Series B Preferred and the
Series C Preferred, on a fully diluted basis. If at any time the number of
authorized but unissued shares of Common Stock shall not be sufficient to effect
the conversion of all then outstanding shares of the Series A Preferred, the
Series B Preferred and the Series C Preferred, on a fully diluted basis, the
Corporation will take such corporate action as may, in the opinion of its
counsel, be necessary to increase its authorized but unissued shares of Common
Stock to such number of shares as shall be sufficient for such purpose.
(p) Notices. Any notice required by the provisions
of this Section 4.5.4 shall be in writing and shall be deemed effectively given:
(i) upon personal delivery to the party to be notified, (ii) when sent by
confirmed telex or facsimile if sent during normal business hours of the
recipient, or if not, then on the next business day, (ii) five (5) days after
having been sent by registered or certified mail, return receipt requested,
postage prepaid, or (iv) one (1) day after deposit with a nationally recognized
overnight courier, specifying the next day delivery, with written verification
of receipt. All notices shall be addressed to each holder of record at the
address of such holder appearing on the books of the Corporation.
(q) Payment of Taxes. The Corporation will pay all
taxes (other than taxes based upon income) and other governmental charges that
may be imposed with respect to the issue or delivery of shares of Common Stock
upon conversion of shares of Series A Preferred, Series B Preferred or Series C
Preferred, excluding any tax or other charge imposed in connection with any
transfer involved in the issue and delivery of shares of Common Stock in a name
other than that in which the shares of Series A Preferred, Series B Preferred or
Series C Preferred so converted were registered.
4.5.5 Redemption.
(a) The Corporation shall be obligated to redeem
the Series A Preferred and the Series C Preferred as follows:
(i) The holders of at least seventy-five
percent (75%) of the then outstanding shares of Series A Preferred,
-19-
<PAGE> 20
voting together as a class, may require the Corporation, to the extent it may
lawfully do so, to redeem the Series A Preferred in three (3) equal annual
installments beginning on the seventh (7th) anniversary of the earliest Original
Issue Date of the Series A Preferred, and ending on three (3) years from such
first redemption date (each redemption date, a "Series A Redemption Date"). The
Corporation shall effect such redemptions on the applicable Series A Redemption
Date by paying in cash in exchange for the shares of Series A Preferred to be
redeemed a sum equal to the Original Issue Price per share of Series A Preferred
(as adjusted for any stock dividends, combinations, splits, recapitalizations
and the like) plus accrued and unpaid dividends with respect to such shares. The
total amount to be paid for the Series A Preferred is hereinafter referred to as
the "Series A Redemption Price." The number of shares of Series A Preferred that
the Corporation shall be required to redeem on any one Series A Redemption Date
shall be equal to the amount determined by dividing (A) the aggregate number of
shares of Series A Preferred outstanding immediately prior to the Series A
Redemption Date by (B) the number of remaining Series A Redemption Dates
(including the Series A Redemption Date to which such calculation applies).
Shares subject to redemption pursuant to this Section 4.5.5(a)(i) shall be
redeemed from each holder of Series A Preferred on a pro rata basis.
(ii) The holders of at least seventy-five
percent (75%) of the then outstanding shares of Series C Preferred, voting
together as a separate class, may require the Corporation, to the extent it may
lawfully do so, to redeem the Series C Preferred in three (3) equal annual
installments beginning on the seventh (7th) anniversary of the earliest Original
Issue Date of the Series C Preferred, and ending on three (3) years from such
first redemption date (each redemption date, a "Series C Redemption Date"). The
Corporation shall effect such redemptions on the applicable Series C Redemption
Date by paying in cash in exchange for the shares of Series C Preferred to be
redeemed a sum equal to the Original Issue Price per share of Series C Preferred
(as adjusted for any stock dividends, combinations, splits, recapitalizations
and the like) plus accrued and unpaid dividends with respect to such shares. The
total amount to be paid for the Series C Preferred is hereinafter referred to as
the "Series C Redemption Price." The number of shares of Series C Preferred that
the Corporation shall be required to redeem on any one Series C Redemption Date
shall be equal to the amount determined by dividing (i) the aggregate number of
shares of Series C Preferred outstanding immediately prior to the Series C
Redemption Date by (ii) the number of remaining Series C Redemption Dates
(including the Series C Redemption Date to which such calculation applies).
Shares subject to redemption pursuant to this Section 4.5.5(a)(ii) shall be
redeemed from each holder of Series C Preferred on a pro rata basis.
-20-
<PAGE> 21
(iii) At least thirty (30) days but no more
than sixty (60) days prior to each of the first Series A Redemption Date and the
first Series C Redemption Date, the Corporation shall send a notice (each, a
"Redemption Notice") to all holders of Series A Preferred or Series C Preferred,
as the case may be, to be redeemed setting forth (A) the Series A Redemption
Price or Series C Redemption Price for the shares to be redeemed; and (B) the
place at which such holders may obtain payment of the Series A Redemption Price
or Series C Redemption Price upon surrender of their share certificates. If the
Corporation does not have sufficient funds legally available to redeem all
shares to be redeemed at a Series A Redemption Date or Series C Redemption Date
(including, if applicable, those to be redeemed at the option of the
Corporation), then it shall redeem such shares pro rata (based on the portion of
the aggregate Series A Redemption Price or Series C Redemption Price payable to
them) to the extent possible and shall redeem the remaining shares to be
redeemed as soon as sufficient funds are legally available.
(b) On or prior to each Series A Redemption Date
and Series C Redemption Date, the Corporation shall deposit the Series A
Redemption Price or Series C Redemption Price, as the case may be, of all shares
to be redeemed with a bank or trust company having aggregate capital and surplus
in excess of $100,000,000, as a trust fund, with irrevocable instructions and
authority to the bank or trust company to pay, on and after such Series A
Redemption Date or Series C Redemption Date, the Series A Redemption Price or
Series C Redemption Price of the shares to their respective holders upon the
surrender of their share certificates. Any money deposited by the Corporation
pursuant to this Section 4.5.5(b) for the redemption of shares thereafter
converted into shares of Common Stock pursuant to Section 4.5.4 hereof no later
than the fifth (5th) day preceding the Series A Redemption Date or Series C
Redemption Date, as the case may be, shall be returned to the Corporation
forthwith upon such conversion. The balance of any funds deposited by the
Corporation pursuant to this Section 4.5.5(b) remaining unclaimed at the
expiration of one (1) year following such Series A Redemption Date or Series C
Redemption Date shall be returned to the Corporation promptly upon its written
request.
(c) On or after each Series A Redemption Date or
Series C Redemption Date, each holder of shares of Series A Preferred or Series
C Preferred to be redeemed on such Series A Redemption Date or Series C
Redemption Date, as the case may be (such shares, the "Redeemable Shares"),
shall surrender such holder's certificates representing such holder's Redeemable
Shares to the Corporation in the manner and at the place designated in the
Redemption Notice, and thereupon the Series A Redemption Price or Series C
Redemption Price of such shares shall be payable to the order of the person
whose name appears on such certificate or certificates as the owner thereof and
each surrendered certificate
-21-
<PAGE> 22
shall be canceled. In the event less than all the shares represented by such
certificates are redeemed, a new certificate shall be issued representing the
unredeemed shares. From and after each Series A Redemption Date or Series C
Redemption Date, as the case may be, unless there shall have been a default in
payment of the Series A Redemption Price or Series C Redemption Price or the
Corporation is unable to pay the Series A Redemption Price or Series C
Redemption Price due to not having sufficient legally available funds, all
rights of the holder of Redeemable Shares as holder of Series A Preferred or
Series C Preferred (except the right to receive the Series A Redemption Price or
Series C Redemption Price, as the case may be, without interest upon surrender
of their certificates), shall cease and terminate with respect to such
Redeemable Shares, provided that in the event that shares of Series A Preferred
or Series C Preferred are not redeemed due to a default in payment by the
Corporation or because the Corporation does not have sufficient legally
available funds, such shares of Series A Preferred or Series C Preferred shall
remain outstanding and shall be entitled to all of the rights and preferences
provided herein.
(d) In the event of a call for redemption of any
shares of Series A Preferred or Series C Preferred, as the case may be, the
Conversion Rights (as defined in Section 4.5.4) for such Series A Preferred or
Series C Preferred, as the case may be, shall terminate as to the Redeemable
Shares at the close of business on the fifth (5th) day preceding the Series A
Redemption Date or Series C Redemption Date, unless default is made in payment
of the Series A Redemption Price or Series C Redemption Price.
4.5.6 No Reissuance of Series A Preferred. No share or shares
of Series A Preferred acquired by the Corporation by reason of redemption,
purchase, conversion or otherwise shall be reissued.
4.6 No Preemptive Rights. Stockholders shall have no preemptive
rights except as granted by the Corporation pursuant to written agreements.
4.7 Release of Directors from Liability. A director of the
Corporation shall not be personally liable to the Corporation or its
stockholders for monetary damages for any breach of fiduciary duty as a
director, except for liability (i) for any breach of the director's duty of
loyalty to the Corporation or its stockholders, (ii) for acts or omissions not
in good faith or which involve intentional misconduct or a knowing violation of
law, (iii) under Section 174 of the Delaware General Corporation Law, or (iv)
for any transaction from which the director derived an improper personal
benefit. If the Delaware General Corporation Law is amended after approval by
the stockholders of this Article V to authorize corporate action further
eliminating or limiting the personal liability of directors, then the liability
of a director
-22-
<PAGE> 23
shall be eliminated or limited to the fullest extent permitted by the Delaware
General Corporation Law, as so amended.
4.8 Repeal; Modification. Any repeal or modification of this Article
V shall only be prospective and shall not affect the rights under this Article V
in effect at the time of the alleged occurrence of any action or omission to act
giving rise to liability.
V
For the management of the business and for the conduct of the affairs
of the Corporation, and in further definition, limitation and regulation of the
powers of the Corporation, of its directors and of its stockholders or any class
thereof, as the case may be, and subject, in all cases, to the provisions of
this Certificate of Incorporation, it is further provided that:
5.1 Management by Board. The management of the business and the
conduct of the affairs of the Corporation shall be vested in its Board of
Directors. The member of directors shall be fixed by the Board of Directors in
the manner provided in the Bylaws.
5.2 Amendment, etc. of Bylaws. The Board of Directors may from time
to time make, amend, supplement or repeal the Bylaws, provided, however, that
the stockholders may change or repeal any Bylaws adopted by the Board of
Directors by the affirmative vote of the holders of a majority of the voting
power of all of the then outstanding shares of the capital stock of the
Corporation; and, provided further, that no amendment or supplement to the
Bylaws adopted by the Board of Directors shall vary or conflict with any
amendment or supplement thus adopted by the stockholders.
5.3 Election of Directors. The directors of the Corporation need not
be elected by written ballot unless the Bylaws so provide.
VI
The Corporation reserves the right to amend, alter, change or repeal
any provision of this Certificate of Incorporation, in the manner now or
hereafter prescribed by statute, subject to the provisions of this Certificate
of Incorporation."
* * *
-23-
<PAGE> 24
4. This Amended and Restated Certificate of Incorporation has been
duly adopted in accordance with the provisions of Sections 228, 242 and 245 of
the General Corporation Law of the State of Delaware by the Board of Directors
and the stockholders of the Corporation. The total number of outstanding shares
entitled to vote or act by written consent was 6,035,000 shares of Common Stock
and 11,890,375 shares of Series A Preferred. Holders of a majority of the
outstanding shares of Common Stock, and of Ninety-two percent (92%) of the
outstanding shares of Series A Preferred, approved this Amended and Restated
Certificate of Incorporation by written consent in accordance with Section 228
of the General Corporation Law of the State of Delaware and written notice of
such was given by this Corporation in accordance with said Section 228.
IN WITNESS WHEREOF, deCODE genetics, Inc. has caused this Amended and
Restated Certificate of Incorporation to be signed by its President and
Secretary this 28th day of January 1998.
deCODE genetics, Inc.
By: /s/ Kari Stefansson
-------------------------
Name: Kari Stefansson
Title: President and Secretary
-24-
<PAGE> 25
CERTIFICATE OF AMENDMENT
TO THE
AMENDED AND RESTATED
CERTIFICATE OF INCORPORATION
OF
deCODE GENETICS, INC.
Kari Stefansson hereby certifies that:
1. The original name of this corporation is deCODE genetics, Inc.
(the "Corporation"), and the date of filing of the original Certificate of
Incorporation of the Corporation with the Secretary of State of the State of
Delaware is August 6, 1996.
2. He is the duly elected President and Secretary of the Corporation.
3. Section 4.5.4(j)(iv) of the Corporation's Amended and Restated
Certificate of Incorporation is hereby amended to read in its entirety as
follows:
" (iv) "Additional Shares of Common Stock" shall mean all
shares of Common Stock issued by the Corporation or deemed to be issued
pursuant to this Section 4.5.4(j), whether or not subsequently
reacquired or retired by the Corporation other than (A) shares of
Common Stock issued upon conversion of the Series A Preferred, the
Series B Preferred and the Series C Preferred; (B) up to 3,000,000
shares of Common Stock and/or options, warrants or other Common Stock
purchase rights, and the Common Stock issued pursuant to such options,
warrants or other rights (as adjusted for any stock dividends,
combinations, splits, recapitalizations and the like) issued after the
respective Original Issue Dates of the Series A Preferred, the Series B
Preferred and the Series C Preferred to employees, officers or
directors of, or consultants and advisors to, the Corporation or any
subsidiary pursuant to stock purchase or stock option plans or other
arrangements that are approved by the Board of Directors; and (C)
shares of Common Stock issued pursuant to the exercise of options,
warrants or convertible securities outstanding, or securities issued
pursuant to any rights or agreements outstanding, as of the respective
Original Issue Dates of the Series A Preferred, the Series B Preferred
and the Series C Preferred. The "Effective Price" of Additional Shares
of Common Stock shall mean the quotient determined by dividing the
total number of Additional Shares of Common Stock issued or sold, or
deemed to have been issued or sold by the Corporation under this
Section 4.5.4(j), into the aggregate consideration received, or deemed
to have been received, by the Corporation for such issue under this
Section 4.5.4(j), for such Additional Shares of Stock."
4. The foregoing amendment has been duly adopted by the Board of
Directors and the stockholders of the Corporation in accordance with the
provisions of Section 242 of the General Corporation Law of the State of
Delaware. The total number of outstanding shares
<PAGE> 26
entitled to vote thereon was 9,664,688 shares of Series A Preferred Stock and
2,500,000 shares of Series C Preferred Stock. Holders of 99.94% of such
outstanding shares of Series A Preferred Stock and Series C Preferred Stock,
voting together as a class, approved such amendment at a duly called and
conducted meeting of the stockholders of the Corporation, held on April 25,
1998.
IN WITNESS WHEREOF, deCODE genetics, Inc. has caused this Certificate
of Amendment to be signed by its President and Secretary this 9th day of July
1998.
deCODE genetics, Inc.
By /s/ Kari Stefansson
--------------------------
Name: Kari Stefansson
Title: President and Secretary
<PAGE> 27
CERTIFICATE OF AMENDMENT
OF
AMENDED AND RESTATED CERTIFICATE OF INCORPORATION
OF
deCODE GENETICS, INC.
Pursuant to Section 242 of the Delaware General Corporation Law, the
undersigned corporation (the "Corporation") executes this Certificate of
Amendment of its Amended and Restated Certificate of Incorporation.
1. Section 4.1 of the Amended and Restated Certificate of
Incorporation is amended to provide in its entirety as follows:
"4.1 Authorized Shares. This Corporation is authorized to
issue two classes of stock to be designated, respectively, "Common
Stock" and "Preferred Stock." The total number of shares which the
Corporation is authorized to issue is Eighty-Three Million (83,000,000)
shares, Forty-Eight Million (48,000,000) shares of which shall be
Common Stock (the "Common Stock") and Thirty-Five Million (35,000,000)
shares of which shall be Preferred Stock (the "Preferred Stock"). The
Preferred Stock shall have a par value of one-tenth of one cent
($0.001) per share, and the Common Stock shall have a par value of
one-tenth of one cent ($0.001) per share."
2. Section 4.4 of the Amended and Restated Certificate of
Incorporation is amended to provide in its entirety as follows:
"4.4 Designation of Preferred Shares. Thirteen Million Four
Hundred Thousand (13,400,000) of the authorized shares of Preferred
Stock are hereby designated "Series A Preferred Stock" (the "Series A
Preferred"), Ten Million (10,000,000) of the authorized shares of
Preferred Stock are hereby designated "Series B Preferred Stock" (the
"Series B Preferred"), and Four Million Five Hundred Eighty-three
Thousand Three Hundred Thirty-four (4,583,334) of the authorized shares
of Preferred Stock are hereby designated "Series C Preferred Stock"
(the "Series C Preferred")."
3. Section 4.5.2(e)(i) of the Amended and Restated Certificate of
Incorporation is amended to provide in its entirety as follows:
"(i) And so long as at least One Million (1,000,000) shares of
the Series A Preferred remain outstanding (subject to adjustment for
any stock split, reverse stock split or similar event affecting the
Series A Preferred), the holders of the Series A Preferred, voting as a
separate class, shall be entitled to elect two (2) members of the
Corporation's Board of Directors at each meeting or pursuant to each
consent of the Corporation's stockholders for the election of
directors, and to remove from office such directors and to fill any
vacancy caused by the resignation, death or removal of such directors."
1
<PAGE> 28
4. Section 4.5.4(j)(iv) of the Amended and Restated Certificate of
Incorporation is amended to provide in its entirety as follows:
"(iv) "Additional Shares of Common Stock" shall mean all shares
of Common Stock issued by the Corporation or deemed to be issued
pursuant to this Section 4.5.4(j), whether or not subsequently
reacquired or retired by the Corporation other than (A) shares of
Common Stock issued upon conversion of the Series A Preferred, the
Series B Preferred and the Series C Preferred; (B) up to 5,000,000
shares of Common Stock and/or options, warrants or other Common Stock
purchase rights, and the Common Stock issued pursuant to such options,
warrants or other rights (as adjusted for any stock dividends,
combinations, splits, recapitalizations and the like) issued after the
respective Original Issue Dates of the Series A Preferred, the Series B
Preferred and the Series C Preferred to employees, officers or
directors of, or consultants and advisors to, the Corporation or any
subsidiary pursuant to stock purchase or stock option plans or other
arrangements that are approved by the Board of Directors; and (C)
shares of Common Stock issued pursuant to the exercise of options,
warrants or convertible securities outstanding, or securities issued
pursuant to any rights or agreements outstanding, as of the respective
Original Issue Dates of the Series A Preferred, the Series B Preferred
and the Series C Preferred. The "Effective Price" of Additional Shares
of Common Stock shall mean the quotient determined by dividing the
total number of Additional Shares of Common Stock issued or sold, or
deemed to have been issued or sold by the Corporation under this
Section 4.5.4(j), into the aggregate consideration received, or deemed
to have been received, by the Corporation for such issue under this
Section 4.5.4(j), for such Additional Shares of Stock."
5. The foregoing amendment has been duly adopted in accordance with
the provisions Section 242(b) of the Delaware General Corporation Law.
IN WITNESS WHEREOF, the Corporation has caused this Certificate of
Amendment of its Amended and Restated Certificate of Incorporation to be duly
executed in its corporate name on this 19th day of July, 1999.
deCODE genetics, Inc.
By: /s/ Kari Stefansson
--------------------------
Kari Stefansson, President
2
<PAGE> 29
CERTIFICATE OF RETIREMENT OF STOCK
OF
DECODE GENETICS, INC.
Pursuant to Section 243 of the Delaware General Corporation Law, deCODE
genetics, Inc., a corporation organized and existing under the laws of the State
of Delaware (the "Corporation"), DOES HEREBY CERTIFY THAT:
1. The Amended and Restated Certificate of Incorporation of the
Corporation, as amended, provides that no share or shares of the Corporation's
Series A Preferred Stock (the "Series A Preferred Stock") acquired by the
Corporation by reason of redemption, purchase, conversion or otherwise shall be
reissued.
2. Effective August 13, 1999, 2,358,074 issued and outstanding shares
of Series A Preferred Stock were acquired by the Corporation and were retired on
such date.
3. Effective August 13, 1999, as a result of the retirement of such
outstanding shares of Series A Preferred Stock, the total number of shares of
Series A Preferred Stock which the Corporation is authorized to issue is
11,041,926 shares.
IN WITNESS WHEREOF, this Certificate of Retirement of Stock is made
this 20th day of August, 1999.
deCODE genetics, Inc.
By: /s/ Kari Stefansson
-------------------------
Name: Kari Stefansson
Title: President
<PAGE> 1
Exhibit 4.1
<TABLE>
<S> <C> <C> <C>
[deCODE GENETICS LOGO] [MAP OF ICELAND, 1704] [CIRCULAR FAMILY TREE GRAPHIC] COMMON STOCK
PAR VALUE US $0.001
SHARES
INCORPORATED UNDER THE Map of Iceland, 1704 A family tree of
LAWS OF THE STATE OF Icelandic asthma patients CUSIP 243586 10 4
DELAWARE
ISIN US2435861040
SEE REVERSE SIDE
FOR CERTAIN DEFINITIONS
</TABLE>
THIS CERTIFIES THAT
IS THE OWNER OF
FULLY PAID AND NON-ASSESSABLE SHARES OF THE COMMON STOCK OF
deCODE genetics, Inc.
transferable on the books of the Corporation by the holder hereof in person or
by duly authorized attorney upon surrender of this certificate properly
endorsed. This certificate and the shares represented hereby are issued and
shall be held subject to the laws of the State of Delaware and the provisions of
the Certificate of Incorporation and the By-laws of the Corporation, as amended
from time to time, to which the holder by acceptance hereof assents. This
certificate is not valid until countersigned and registered by the Transfer
Agent and Registrar.
IN WITNESS WHEREOF the Corporation has caused this Certificate to be signed
by the facsimile signatures of its duly authorized officers and a facsimile of
its corporate seal hereunto affixed.
Dated:
/s/ Terence G. McGuire [CORPORATE SEAL GRAPHIC] /s/ Kari Stefansson
ASSISTANT SECRETARY PRESIDENT, CHIEF EXECUTIVE
OFFICER & CHAIRMAN OF THE
BOARD OF DIRECTORS
Countersigned and Registered:
THE BANK OF NEW YORK
By Transfer Agent
and Registrar
Authorized Signature
<PAGE> 2
deCODE genetics, Inc.
The Corporation will furnish without charge to each stockholder who so
requests the powers, designations, preferences and relative, participating,
optional or other special rights of each class of stock or series thereof of
the Corporation, and the qualifications, limitations or restrictions of such
preferences and/or rights.
The following abbreviations, when used in the inscription on the face of
this Certificate, shall be construed as though they were written out in full
according to applicable laws or regulations:
<TABLE>
<S> <C>
TEN COM - as tenants in common UNIF GIFT MIN ACT - _________Custodian __________
(Cust) (Minor)
TEN ENT - as tenants by the entireties under Uniform Gifts to Minors
JT TEN - as joint tenants with right Act ________________________
of survivorship and not as (State)
tenants in common
Additional abbreviations may also be used though not in the above list.
</TABLE>
For value received, ________________________________ hereby sell, assign and
transfer unto
PLEASE INSERT SOCIAL SECURITY OR OTHER
IDENTIFYING NUMBER OF ASSIGNEE
_____________________________________
| |
|_____________________________________| ___________________________________
_____________________________________________________________________________
(PLEASE PRINT OR TYPEWRITE NAME AND ADDRESS, INCLUDING ZIP CODE OF ASSIGNEE)
_____________________________________________________________________________
_____________________________________________________________________________
_________________________________________________________________________ shares
of the common stock represented by the within Certificate and do hereby
irrevocably constitute and appoint ___________________________________________
_______________________________________________________________________ Attorney
to transfer the said stock on the books of the within named Corporation with
full power of substitution in the premises.
Dated:___________________________________
NOTICE: THE SIGNATURE TO THIS ASSIGNMENT MUST CORRESPOND
WITH THE NAME AS WRITTEN UPON THE FACE OF THE
CERTIFICATE IN EVERY PARTICULAR WITHOUT ALTERATION
OR ENLARGEMENT, OR ANY CHANGE WHATSOEVER.
Signature(s) Guaranteed:
_____________________________________________________________________________
THE SIGNATURE(S) SHOULD BE GUARANTEED BY AN ELIGIBLE GUARANTOR INSTITUTION
(BANKS, STOCKHOLDERS, SAVINGS AND LOAN ASSOCIATIONS AND CREDIT UNIONS WITH
MEMBERSHIP IN AN APPROVED SIGNATURE GUARANTEE MEDALLION PROGRAM PURSUANT TO
S.E.C. RULE 17Ad-15
_____________________________________________________________________________
[BANKNOTE CORP. OF AMERICA LETTERHEAD]
<PAGE> 1
Exhibit 10.43
OFFICER'S CERTIFICATE
I, the undersigned, do hereby certify and represent that:
1. I am the duly elected Chairman, President and Chief Executive
Officer of deCODE genetics, Inc., a Delaware Corporation.
2. Pursuant to Rule 306(a) of Regulation S-T, the following exhibit
10.43 to deCODE genetics, Inc.'s Registration Statement on Form S-1 is a fair
and accurate English translation of a document prepared in the Icelandic
language.
IN WITNESS WHEREOF, I have signed this Officer's Certificate in my
capacity as Chairman, President and Chief Executive Officer of deCODE genetics,
Inc. on this 25th day of April, 2000.
By: /s/ Kari Stefansson
--------------------------------------
Name: Kari Stefansson
Title: Chairman, President and Chief Executive Officer
<PAGE> 2
PROPERTY LEASING CONTRACT
ON OFFICE PREMISES AT HLIOARSMARI 15
1. PARTIES TO THE LEASE:
LESSOR: Miojan ehf., State Reg. No. 580294-3599, Hlioarsmari 17, 200
Kopavogur, tel. 554-6664.
LESSEE: Islensk erfoagreining ehf., State Reg. No. 691295-3549, Lynghals 1,
110 Reykjavik, tel. 570-1900.
2. DEFINITION OF THE LEASED PROPERTY:
The leased property consists of the second, third, and fourth floors of the
office building at Hlioarsmari 17, currently under construction, in the town of
Kopavogur. More specifically, it consists of 397 m(2) on the second floor,
property lot registered no. 02-02 by the Valuation Office of Iceland, 963 m(2)
on the third floor, property lots no. 03-01 and 03-02, and 550 m(2) on the
fourth floor, property lot no. 04-01. The total gross size of the leased
property is therefore 1,910 m(2) including a mezzanine floor and shared premises
of all lessees of the building. The premises are leased for the office
activities of Islensk erfoagreining ehf., and will be furnished as required by
the Lessee in accordance with Article 5 of this Contract. The parking area on
the site shall be shared with other lessees of the building. The Lessee may not
use the building for activities unrelated with those specified above, without
the prior consent of the Lessor. The Lessee may not use the interior part of the
joint property for his activities, or in any other way curtail the functional
value of this part of the building.
3. LEASE PERIOD AND DATE OF DELIVERY:
COMMENCEMENT OF LEASE PERIOD: 1 July 2000.
END OF LEASE PERIOD: 30 June 2005.
The property shall be delivered, in a completed state, in four (4) stages as
follows:
<TABLE>
<S> <C>
Property lot no. 02-02 1 June 2000, along with the interior
part of the joint property
Property lot no. 03-01 15 June 2000
Property lot no. 03-02 1 July 2000
Property lot no. 04-01 15 July 2000
</TABLE>
The above dates of delivery are subject to the condition that all design shall
have been completed by 20 March 2000. As indicated above, the date of actual
commencement of the lease period is variable, in accordance with the date of
delivery of each property lot. The "joint commencement of the lease period",
however, is fixed at 1 July 2000 for the sake of convenience only and payments
are adjusted below in Article 4 of this Contract. In other respects this Leasing
Contract shall remain in effect for five years as described above, and shall be
terminated without notice from either party on 30 June 2005. The Lessee shall
have the right of first refusal to lease the property when the five-year period
has expired, in the event of continuing lease of the property (cf. Article 51 of
the Property Rental Act No. 36/1994), provided that a new leasing contract is
then made. If the Lessee wishes to exercise his rights of first refusal to lease
the property, he shall announce this in writing to the Lessor in a verifiable
manner at no later date than 31 March 2005. Should he not choose to do so, his
right of first refusal shall lapse (cf. Article 51 of the Property Rental Act).
4. LEASE AMOUNTS, PAYMENTS, AND PLACE OF PAYMENT:
Value Added Tax shall be added to the rent, which shall be in the amount of ISK
1,871,800 (VAT not included) or ISK 2,330,391 (VAT included) per month, in
letters ISK two million three hundred and thirty thousand three hundred ninety
one 00/100, not including operating expenses as described in Article 7 of this
Contract. The rent is calculated on the basis of the consumer price index of 1
February 2000 (195.5 points) and shall be adjusted up or down every month, for
the first time on 1 August 2000. Rent for the period 1 July 2000 - 31 July
LL/p. 1 of 4
<PAGE> 3
2000, ISK 1,871,800 plus VAT, shall be paid on signature of this Contract
together with a balancing amount due to different dates of delivery of the
units, calculated as 325 m(2) for one month or ISK 318,500 plus VAT. A total of
ISK 2,190,625 (VAT not included), or ISK 2,727,328 (VAT included), shall
therefore be paid on signature of the Contract. Rent shall thereafter be paid
monthly, one month at a time in advance, due on the first day of every month and
with a final due date on the fifth day of every month, for the first time on 1
August 2000. The rent shall be paid into the Lessor's checking account no.
1135-26-777 in the Savings Bank of Kopavogur.
5. ALTERATIONS AND RETURN OF THE LEASED PROPERTY:
The Lessor shall deliver the leased property, including the joint property and
site, in a fully finished state. The Lessor will arrange to have interior
furnishings designed at his expense according to the Lessee's requirements.
Design work shall be done by the designer of the building in consultation with
the Lessee, and final plans shall be submitted to the Lessee for approval. The
Lessor shall deliver the leased property fully completed, as follows: Partition
walls shall be plastered and isolated with insulating wool, and reach to the
ceiling. Partitioned rooms shall be finished with doors of cherry wood and
window units in the interior walls with recessed blinds. The building shall be
delivered freshly painted on the inside in light colours, with wiring ducts
along the exterior walls and installed radiators on every floor. Installation
channels shall contain electrical cables, computer installations and telephone
wires, and be equipped with a normal number of electricity and computer sockets.
Ceilings on the 4th floor shall be panelled with material of the Lessor's
choice, but 2nd and 3rd floor ceilings shall be suspended system ceilings with
mounted work lamps. Work lamps (about 2x36W) shall be connected to electricity
and delivered with installed fluorescent bulbs. The number of lamps shall be
sufficient to provide adequate light for work. All floors shall be
linoleum-covered. Bathrooms and storage rooms for cleaning material and apparel
shall be installed on every floor, equipped with toilets, washbasins, doors,
flooring, and water taps. Fire alarm and security systems will be installed.
However, the Lessor is not required to deliver the leased property with a
reception desk, cooker, refrigerator, window blinds, shelves and similar items.
The joint property shall be fully functional and complete with elevator, doors,
hand rails, and linoleum chosen by the Lessor. The standard for the fully
finished leased property shall be the joint premises and property lot no. 03-02
at Hlioarsmari 17, the premises of the company Ban ehf., and property lot no.
02-02 in the same building which the Lessee has thoroughly inspected. The site
shall be paved with asphalt and fully finished as soon as possible, when the
thaw in the ground frost permits, no later than 15 July 2000. The interior of
the joint property, however, shall be delivered in a fully finished state on 1
June 2000. As regards the furnishing of the leased property, it shall be assumed
that the premises will be fully furnished for maximum utilisation regarding the
order of rooms on each floor so that the lessee will not face any limitations in
the number of rooms in order to satisfy the needs of the company whether in
respect of offices, storage rooms, conference rooms or open spaces. Should the
Lessee on the other hand decide that he wants e.g. more expensive flooring
material in certain spaces, more sophisticated kitchen furnishings, aluminium
installation channels etc, he shall then pay the resulting additional cost in
the form of higher rent or by a lump sum payment. All fixed furnishings
installed by the Lessee subsequent to delivery shall become the property of the
Lessor upon the end of the lease period or termination of this Contract without
special compensation. The Lessee has familiarised himself with other operations
conducted in the building. Markings relating to the operations of the Lessee
shall be installed in consultation with the owners of the building, and shall
not be in conflict with rules of the building and municipal regulations. The
leased property shall be returned at the end of the lease period along with all
appurtenances, in no worse condition than upon commencement thereof apart from
normal wear.
6. MAINTENANCE OF THE LEASED PROPERTY:
The Lessee shall, at his own expense, arrange for all indoor maintenance, e.g.
flooring, appliances, and equipment. The Lessor shall arrange for all
maintenance of the site and the
LL/p. 2 of 4
<PAGE> 4
exterior of the building, including pipe and drainage channels even if they may
be regarded as being located indoors.
7. OPERATING EXPENSES:
The Lessee shall pay all operating expenses, including the expense incurred by
the use of water and electricity in the leased property, and heating expenses.
The Lessee shall pay electricity expenses according to a separate meter, but
heating expenses are included in a building fund which is calculated
proportionally at each time. The monthly contribution to this fund is estimated
at ISK 107,000 and will be collected each month by a building association
service of a bank or savings bank that will be chosen by the board of the
building's as yet unfounded house association. The Lessee's proportional
contribution to the house fund shall be 59.2%. The house fund also covers
cleaning, heating and electricity of the joint property, clearing of snow from
the parking area, garbage collection, cleaning of exterior windows, mowing of
the lawn and the like. The Lessor shall pay all property taxes, and all expenses
incurred by renovation of the exterior of the building, joint property or
outlying premises.
8. RIGHTS AND OBLIGATIONS:
The Lessee shall treat the leased property in every way consistent with
generally accepted principles regarding such treatment. The Lessor shall, in
consultation with the Lessee, have the right of access to the leased property
for the purposes of conducting improvements on the building or showing it to
prospective lessees/buyers, provided that he gives reasonable notice of any
intent to exercise this right.
9. SALE AND SUBLETTING OF THE LEASED PROPERTY:
Sale of the leased property is not subject to approval of the Lessee. Upon sale,
the Lessor shall surrender his ownership to the leased property to the buyer,
who will in every regard replace the Lessor as of an agreed date of delivery of
the property. They buyer will assume all rights and duties of the Lessor,
whereas the rights and duties of the Lessee remain unaltered. The Lessor shall
inform the Lessee of the sale of the property in a verifiable manner within 30
days of signing a purchase contract. The Lessee may, partially or entirely,
sublet the leased property to a third party conducting similar operations,
subject however to the Lessor's written consent.
10. INSURANCE AND LIABILITY
The Lessee undertakes to take out insurance with a recognised insurance company,
covering damage to the furnishings from water, fire, etc. The Lessor shall
purchase homeowner's insurance for the leased property itself. The Lessor is not
responsible for damage that may occur to the Lessee's property in the leased
property from accidents such as water damage, fire, smoke etc., except damage
unlawfully caused by the Lessor himself or people for which he is responsible.
The Lessee exercise care regarding fire in the building and ensure that there is
no fire hazard from electrical cables, machines, and other things that he keeps
and uses in the building. The Lessor shall ensure that upon delivery the leased
property complies with fire safety regulations regarding office buildings.
Subsequent to delivery, however, the Lessee shall at his own expense arrange for
all necessary fire safety measures in the leased property, which may be required
by the Reykjavik Fire Authority due to the operations conducted by the Lessee or
alterations that he may have done to the leased property. The Lessor's liability
for damage which the Lessee may suffer will in other respects be determined by
general rules on compensation.
11. DEFAULT
Remedies available to the Lessor in case of default on the part of the Lessee
shall be determined by the provisions of the Property Rental Act no. 36/1994.
All expenses incurred by clearing the building, and moving and storing the
Lessee's property shall be paid by the Lessee. Penalty interest of the rent
amount shall be calculated according to the postings of the
LL/p. 3 of 4
<PAGE> 5
Central Bank of Iceland from the date that payment was due, if rent is not paid
on the final due date.
12. GUARANTEE
To ensure performance of this Leasing Contract the Lessee submits a bank
guarantee to the amount of ISK 11,230,800, the equivalent of six month's rent
(VAT not included). The bank guarantee shall remain valid until 31 August 2005,
and the Lessor shall draw funds from it to compensate for any non-performance or
damage to the building which may occur before that date. Should default occur in
payment of the rent (cf. Article 11 above) and collecting measures fail, the
Lessor may draw on the bank guarantee for payment of the rent amount owed by the
Lessee. In other respects the bank guarantee is for the purpose of compensating
for damage to the building for which the Lessee is responsible. However, in the
event of damage to the building, the Lessor may not draw on the bank guarantee
before a court of law has ruled on the Lessee's obligation to pay. By signing
this Leasing Contract the Lessor confirms reception of the aforesaid banker's
guarantee to the amount of ISK 11,230,800 (VAT not included), and of the payment
of rent to the amount of ISK 2,727,328 (VAT included) i.e. for the period from
the delivery of single units of the building until 31 July 2000.
13. SPECIAL PROVISIONS
13.1 The Lessor has familiarised himself with the Lessee's ability to pay
and examined a transcript from the register of companies.
13.2 The Lessee has examined printed material from the Valuation Office of
Iceland regarding the leased property, the agreement on the division
of the premises, basic plans, and transcripts from the register of
companies regarding Miojan ehf. and Faghus ehf.
13.3 In the event of disputes arising in relation to this Contract, such
disputes shall be submitted to the District Court of Reykjanes.
13.4 Matters to which the provisions of this Contract do not apply shall
be settled according to the provisions of the Property Rental Act no.
36/1994.
13.5 By signing this contract, the Lessee agrees that the building will be
registered so as to permit imposition of VAT on rent payments.
13.6 The Lessee is aware that conveyance of title between the building
parties of Hlioarsmari 15, i.e. Faghus ehf., State Reg. 540187-1429,
and Miojan ehf., State Reg. 580294-3599, which company will be the
property's operating party and final lessor, will not take place
until the building has been constructed and the leased property fully
furnished or at the very latest on 15 July 2000. Both companies are
owned by the same individual, who signs this Contract on behalf of
both. The signature on behalf of Faghus entails that that company
will temporarily assume all responsibilities and rights of the Lessor
as described in this Leasing Contract.
This Contract is made in three identical copies, one copy to be held by
each of the parties thereto. One copy shall be kept in the custody of
Leigulistinn ehf. In confirmation of all the aforesaid, this Contract is
signed by the parties thereto in the presence of witnesses.
Reykjavik, 1 March 2000
Jon Por Hjaltason [sign.] 160653-4469
For Miojan ehf. and Faghus ehf.
as Lessor
Elin Poroardottir [sign.]
For Islensk Erfoagreining ehf., 691295-3549,
Kari Stefansson, as Lessee
Witnesses to the correct date, signatures and financial competence of the
parties:
Gunnar Poroarson [sign.] Auour Sturludottir [sign.], Id. No. 241175-3169
LL/p. 4 of 4
<PAGE> 6
Reykjavik 1 March 2000
I the undersigned hereby authorise Ms. Elin Poroardottir, Id. No. 060769-4969,
to sign the Leasing Contract on Hlioarsmari 15, 200 Kopavogur, on behalf of
Islensk erfoagreining.
Kari Stefansson [sign.]
Islensk erfoagreining
Witnesses:
Vioir Finnbogason [sign.] Id. No. 020973-4049
Ingibjorg Garoarsdottir [sign.] Id. No. 031072-3289
<PAGE> 7
GUARANTEE
GUARANTOR: The National Bank of Iceland
Breioholt Office
Alfabakki 10, 109 Reykjavik
BUYER: Islensk erfoagreining ehf.
State Reg. 691295-3549
Lynghals 1, 110 Reykjavik
BENEFICIARY: Miojan ehf., Reykjavik
580294-3580
Hlioarsmari 17, 200 Kopavogur
At the request of Islensk erfoagreining ehf., State Reg. No. 691295-3549, the
National Bank of Iceland, State Reg. No. 680482-0639, hereby guarantees payment
to you of ISK 11,230,800.00 - ISK eleven million two hundred and thirty thousand
eight hundred 00/100 - in accordance with the provisions of a lease offer dated
18 February 2000, the property concerned being 50% of the second floor and the
entire third and fourth floors of the building Hlioarsmari 15.
The Guarantee extends to the performance of a Leasing Contract in accordance
with Article 12 of the Contract on guarantees.
The Guarantee shall remain valid until 31 August 2005.
In the event of disputes arising in relation to this Guarantee, such disputes
shall be submitted to the District Court of Reykjavik.
Reykjavik, 28 February 2000
The National Bank of Iceland
Breioholt Office
Tomas Hallgrimsson [sign.]
Margret Arnadottir [sign.]
1 March 2000
Jon Por Hjaltason [sign.]
Miojan hf.
<PAGE> 1
Exhibit 10.45
SERIES C PREFERRED STOCK
AND
WARRANT PURCHASE AGREEMENT
BETWEEN
ROCHE FINANCE LTD
AND
DECODE GENETICS, INC.
DATED AS OF FEBRUARY 1, 1998
<PAGE> 2
TABLE OF CONTENTS
<TABLE>
<CAPTION>
Page
----
<S> <C>
1. AGREEMENT TO SELL AND PURCHASE ................................... 1
1.1 Authorization of Shares ................................ 1
1.2 Sale and Purchase ...................................... 2
1.3 Option ................................................. 2
1.4 Purchase Price ......................................... 3
1.5 Conversion Prior to Occurrence of All Closings ......... 3
2. CLOSING, DELIVERY AND PAYMENT .................................... 4
2.1 Closing ................................................ 4
2.2 Delivery ............................................... 5
3. REPRESENTATIONS AND WARRANTIES OF COMPANY ........................ 5
3.1 Organization, Good Standing and Qualification .......... 5
3.2 Capitalization; Voting Rights .......................... 6
3.3 Authorization; Binding Obligations ..................... 7
3.4 Financial Statement .................................... 7
3.5 Liabilities ............................................ 8
3.6 Agreements; Action ..................................... 8
3.7 Obligations to, of Related Parties ..................... 9
3.8 Changes ................................................ 10
3.9 Title to Properties and Assets; Liens .................. 11
3.10 Patents and Trademarks ................................. 12
3.11 Compliance with Other Instruments ...................... 13
3.12 Litigation ............................................. 13
3.13 Employees .............................................. 14
3.14 Proprietary Information
and Inventions Agreement ............................... 14
3.15 Compliance with Laws; Permits .......................... 14
3.16 CERCLA Superfund Requirements .......................... 15
3.17 Offering Valid ......................................... 16
3.18 Full Disclosure ........................................ 16
3.19 Real Property Holding Corporation ...................... 16
3.20 Insurance .............................................. 16
3.21 Board of Directors ..................................... 17
3.22 Use of Proceeds ........................................ 17
3.23 Taxes .................................................. 17
3.24 Investments in Other Persons ........................... 17
3.25 ERISA .................................................. 17
3.26 Issuance of Series B Preferred ......................... 18
3.27 Initial Public Offering ................................ 18
3.28 Future Issuance of Common Stock ........................ 18
4. REPRESENTATIONS AND WARRANTIES OF PURCHASER ...................... 18
4.1 Requisite Power and Authority .......................... 18
4.2 Investment Representations ............................. 19
4.3 Transfer Restrictions .................................. 21
</TABLE>
i
<PAGE> 3
<TABLE>
<S> <C>
5. CONDITIONS TO CLOSING ............................................ 21
5.1 Conditions to Purchaser's
Obligations at Closing ................................. 21
5.2 Conditions to Obligations of the Company ............... 23
6. MISCELLANEOUS .................................................... 23
6.1 Governing Law .......................................... 23
6.2 Survival ............................................... 24
6.3 Successors and Assigns ................................. 24
6.4 Entire Agreement ....................................... 24
6.5 Severability ........................................... 24
6.6 Amendment and Waiver ................................... 24
6.7 Delays or Omissions .................................... 24
6.8 Indemnification ........................................ 25
6.9 Notices ................................................ 25
6.10 Expenses ............................................... 26
6.11 Headings ............................................... 26
6.12 Counterparts ........................................... 26
6.13 Broker's Fees .......................................... 26
6.14 Pronouns ............................................... 26
</TABLE>
EXHIBITS
<TABLE>
<S> <C>
EXHIBIT A Amended and Restated Certificate of Incorporation
EXHIBIT B Exercise Form
EXHIBIT C Form of Warrant
EXHIBIT D Investor Rights Agreement
EXHIBIT E Schedule of Exceptions
EXHIBIT F Stockholder List
EXHIBIT G Financial Statements
EXHIBIT H Proprietary Information and Inventions Agreement
EXHIBIT I Voting Agreement
EXHIBIT J Form of Legal Opinion
</TABLE>
i
<PAGE> 4
SERIES C PREFERRED STOCK
AND WARRANT PURCHASE AGREEMENT
THIS SERIES C PREFERRED STOCK AND WARRANT PURCHASE AGREEMENT (this
"Agreement") is entered into as of February 1, 1998, by and among deCODE
genetics, Inc., a Delaware corporation (the "Company"), having offices at
Lynghalsi 1, IS-110 Reykjavik, Iceland, and Roche Finance Ltd, a Swiss company,
and having offices at 124 Grenzacherstrasse CH-4070, Basel, Switzerland (the
"Purchaser").
PRELIMINARY STATEMENTS
A. The Company and the Purchaser are entering into that certain
Research Collaboration and License Agreement (the "Research Agreement") of even
date herewith, pursuant to which, inter alia, the Company has granted to the
Purchaser certain license rights with respect to the technology identified
therein.
B. The Company has authorized the sale and issuance of an aggregate of
up to 4,166,667 shares (the "Shares") of its Series C Preferred Stock, par value
US$0.001 per share ("Series C Preferred Stock"), and the sale and issuance of
warrants (the "Warrants") to purchase an aggregate of up to an additional
416,667 shares (the "Warrant Shares") of Series C Preferred Stock.
C. The Company wishes to issue and sell to the Purchaser, and the
Purchaser wishes to purchase from the Company, the Shares and the Warrants on
the terms and conditions set forth herein.
NOW, THEREFORE, in consideration of the foregoing statements and the
mutual covenants and agreements of the parties contained in this Agreement, the
parties hereto agree as follows:
1. AGREEMENT TO SELL AND PURCHASE.
1.1 Authorization of Shares. On or prior to each Closing (as defined
herein), the Company shall have authorized: (i) the sale and issuance to
Purchaser of the Shares and the Warrants; (ii) the sale and issuance of the
Warrant Shares upon the exercise of the Warrants; and (iii) the issuance of such
shares of common stock of the Company, par value US$0.001 per share (the "Common
Stock"), to be issued upon conversion of the Shares and the Warrant Shares (the
"Conversion Shares"). The Shares, the Warrant Shares and the Conversion Shares
shall have the rights, preferences, privileges and restrictions set forth in the
Amended and Restated Certificate of Incorporation attached as Exhibit A (the
"Amended Certificate of Incorporation").
<PAGE> 5
1.2 Sale and Purchase. Subject to the terms and conditions of this
Agreement, at each Closing the Company hereby agrees to issue and sell to the
Purchaser, and the Purchaser agrees to purchase from the Company:
(a) Upon the later of: (i) the Effective Date (as such term is
defined in the Research Agreement), or (ii) the business day immediately
following the date on which the Purchaser receives a copy of the Amended
Certificate of Incorporation filed as required under Section 5.1(d) and file
stamped by the Delaware, USA Secretary of State, 2,500,000 Shares and Warrants
to purchase 250,000 Warrant Shares, the exercise price of each Warrant Share to
equal the purchase price paid for each such Share.
(b) Upon the first anniversary of the later of the events
referred to in Section 1.2(a), 555,555 Shares and Warrants to purchase 55,555
Warrant Shares, the exercise price of each Warrant Share to equal the purchase
price paid for each such Share.
(c) Upon the mapping of a Disease (as such term is defined in
the Research Agreement) to a chromosomal location (as provided in Section
8.2(a)(i) of the Research Agreement), 555,556 Shares and Warrants to purchase
55,556 Warrant Shares, the exercise price of each Warrant Share to equal the
purchase price paid for each such Share.
The Company shall promptly provide the Purchaser with notice of the
occurrence of the events set forth in Sections 1.2(b) and (c).
1.3 Option.
(a) During the period commencing upon the Effective Date and
terminating on the third anniversary of the Effective Date (the "Option Term"),
the Purchaser shall have the right, but not the obligation (the "Option"), to
purchase from the Company, and if the Option is exercised as provided in this
Section 1.3 the Company shall sell and issue to the Purchaser, up to 555,556
Shares.
(b) If during the Option Term the Purchaser is interested in
exercising the Option, the Purchaser shall give the Company notice of such
interest (a "Notice of Interest").
(c) In the event that the Purchaser gives the Company a timely
Notice of Interest, promptly thereafter the Company shall disclose to the
Purchaser then current information with respect to the subject matter set forth
in Section 3. If following the receipt of such disclosure, the Purchaser wishes
to exercise the Option, it shall execute and deliver to the Company,
<PAGE> 6
within sixty (60) days after receipt of all such disclosure from the Company,
the exercise form (the "Exercise Form") attached as Exhibit B.
(d) In connection with the exercise of the Option during the
Option Term, the Company will sell to the Purchaser Warrants to purchase the
number of Warrant Shares that bears the same proportion to 55,556 as the number
of Shares purchased pursuant to the Option bears to 555,556, the exercise price
of each Warrant Share to equal the purchase price paid for each such Share.
1.4 Purchase Price.
(a) The per share purchase price of the Shares to be purchased
at the First Closing (as defined herein) shall be Two U.S. Dollars (US$2.00) per
Share.
(b) The per share purchase price of the Shares to be purchased
at the Second Closing (as defined herein) shall be Three U.S. Dollars (US$3.00)
per Share.
(c) The per share purchase price of the Shares to be purchased
at the Third Closing (as defined herein) shall be Three U.S. Dollars (US$3.00)
per Share.
(d) The per share purchase price of the Shares to be purchased
at the Fourth Closing (as defined herein), if any, shall be Four U.S. Dollars
(US$4.00) per Share.
(e) The purchase price of the Warrants to be purchased at the
First Closing, Second Closing, Third Closing and Fourth Closing shall be
US$0.001 per underlying Warrant Share.
1.5 Conversion Prior to Occurrence of All Closings. In the event that
all of the outstanding Series C Preferred Stock is, at any time prior to the
occurrence of all of the Closings, converted in accordance with the Amended
Certificate of Incorporation into shares of Common Stock, then at each Closing
thereafter: (i) the Company will issue, and the Purchaser will purchase, that
number of shares of Common Stock into which the Shares purchasable at such
Closing would have been converted upon such conversion if they had been
outstanding at the time of such conversion; and (ii) the Company will issue, and
the Purchaser will purchase, warrants to purchase that number of shares of
Common Stock into which the Warrant Shares underlying the Warrants purchasable
at such closing would have been converted upon such conversion if such Warrant
Shares had been outstanding at the time of such conversion. For purposes of this
Agreement, following any such conversion, except where context dictates
otherwise: the term "Shares" shall mean the
3
<PAGE> 7
aggregate number of shares of Common Stock issuable pursuant to clause (i)
above; the term "Warrants" shall mean the warrants to purchase Common Stock
issuable pursuant to clause (ii) above; and the term "Warrants Shares" shall
mean the aggregate number of shares of Common Stock issuable pursuant to the
exercise of the warrants issuable pursuant to clause (ii) above.
2. CLOSING, DELIVERY AND PAYMENT.
2.1 Closing.
(a) The closing of the sale and purchase of the Shares under
this Agreement in connection with the occurrence of the later of the events set
forth in Section 1.2(a) (such closing, the "First Closing") shall take place at
5:00 p.m. on the date of such later event (the "First Closing Date").
(b) The closing of the sale and purchase of the Shares and
Warrants under this Agreement in connection with the occurrence of the event set
forth in Section 1.2(b) (such closing, the "Second Closing") shall take place at
5:00 p.m. on the tenth business day following the date on which the Purchaser
receives notice of such event (the "Second Closing Date").
(c) The closing of the sale and purchase of the Shares and
Warrants under this Agreement in connection with the occurrence of the event set
forth in Section 1.2(c) (such closing, the "Third Closing") shall take place at
5:00 p.m. on the tenth business day immediately following the date on which the
Purchaser receives notice of such event (the "Third Closing Date").
(d) The closing of the sale and purchase of the Shares and
Warrants under this Agreement, if any, in connection with the Purchaser's
exercise of the Option (such closing, the "Fourth Closing") (each of the First
Closing, Second Closing, Third Closing and Fourth Closing, a "Closing" and
collectively, the "Closings") shall take place at 5:00 p.m. on the tenth
business day immediately following the date on which the Company receives the
Exercise Form executed by the Purchaser (the "Fourth Closing Date") (the First
Closing Date, Second Closing Date, Third Closing Date and Fourth Closing Date,
each a "Closing Date" and collectively, the "Closing Dates").
(e) Each Closing shall take place at the offices of Smith,
Stratton, Wise, Heher & Brennan, 600 College Road East, Princeton, New Jersey,
USA, or at such other time or place the Company and Purchaser may mutually
agree.
4
<PAGE> 8
2.2 Delivery.
(a) At each Closing, subject to the terms and conditions of
this Agreement, the Company shall deliver to the Purchaser a certificate
representing the shares of Series C Preferred Stock and a certificate,
substantially in the form of Exhibit C, representing the Warrants that the
Purchaser is purchasing, against payment of the purchase price therefor by
check, wire transfer, cancellation of indebtedness, or such other form of
payment as shall be mutually agreed upon by the Purchaser and the Company. In
the event that payment by a Purchaser is made, in whole or in part, by
cancellation of indebtedness, then such Purchaser shall surrender to the Company
for cancellation at the Closing any evidence of such indebtedness or shall
execute an instrument of cancellation in form and substance acceptable to the
Company.
(b) At the first closing, the Company shall deliver to the
Purchaser an Investor Rights Agreement, in the form attached as Exhibit D (the
"Investor Rights Agreement"), executed by the Company and all of the other
parties thereto other than the Purchaser, and the Purchaser shall deliver to the
Company an Investor Rights Agreement, in the form attached as Exhibit D,
executed by the Purchaser.
3. REPRESENTATIONS AND WARRANTIES OF COMPANY.
Except as set forth on the Schedule of Exceptions attached as Exhibit
E, the Company hereby represents and warrants to each Purchaser as follows:
3.1 Organization, Good Standing and Qualification. The Company is
a corporation duly organized, validly existing and in good standing under the
laws of the State of Delaware, USA. The Company has all requisite corporate
power and authority to own and operate its properties and assets, to execute and
deliver this Agreement and the Investor Rights Agreement, to issue and sell the
Shares, the Warrants, the Warrant Shares and the Conversion Shares and to carry
out the provisions of this Agreement, the Investor Rights Agreement and the
Amended Certificate of Incorporation and to carry on its business as presently
conducted and as presently proposed to be conducted. The Company is duly
qualified and is authorized to do business and is in good standing as a foreign
corporation in all jurisdictions in which the nature of its activities and of
its properties (both owned and leased) makes such qualification necessary,
except for those jurisdictions in which failure to do so would not have a
material adverse effect on the Company or its business. The Company owns no
equity securities of
5
<PAGE> 9
any other corporation, limited partnership or similar entity. The Company is not
a participant in any joint venture, partnership or similar arrangement.
3.2 Capitalization; Voting Rights. The authorized capital stock of
the Company, immediately prior to the First Closing, will consist of: (i)
forty-five million (45,000,000) shares of Common Stock, (A) seven million two
hundred five thousand (7,205,000) shares of which are issued and outstanding,
(B) one million nine hundred thousand (1,900,000) shares of which are reserved
for issuance to employees, officers or directors of, or consultants or advisors
to, the Company (including members of the Company's Scientific Advisory Board)
or any subsidiary, pursuant to stock purchase or stock option plans or other
arrangements that are approved by the Board of Directors of the Company, of
which shares one million one hundred seventy thousand (1,170,000) shares have
been issued and are outstanding and are reflected as such in clause (i)(A) of
this Section 3.2, (C) twelve million one hundred ninety thousand three hundred
seventy-five (12,190,375) shares of which are reserved for issuance upon
conversion into Common Stock of outstanding shares, or shares that the Company
is obligated to issue pursuant to any rights or agreements outstanding as of the
date hereof, of Series A Preferred Stock, par value US$0.001 per share (the
"Series A Preferred Stock"), and (D) one million one hundred thirty-seven
thousand eight hundred fourteen (1,137,814) shares of which are reserved for
issuance upon conversion of Series A Preferred Stock issuable upon exercise of
the outstanding warrants for Series A Preferred Stock (the "Series A Preferred
Warrants"); and (ii) thirty million (30,000,000) shares of Preferred Stock, (A)
thirteen million four hundred thousand (13,400,000) shares of which are
designated Series A Preferred Stock, eleven million eight hundred ninety
thousand three hundred seventy-five (11,890,375) shares of which are issued and
outstanding, and one million one hundred thirty-seven thousand eight hundred
fourteen (1,137,814) shares of which are reserved for issuance upon exercise of
the Series A Preferred Warrants and three hundred thousand (300,000) shares of
which are reserved for issuance pursuant to that certain Settlement Agreement by
and between the Company and Beth Israel Deaconess Medical Center, Inc. dated as
of December 31, 1997, (B) five million (5,000,000) shares of which are
designated Series B Preferred Stock, par value US$0.001 per share (the "Series B
Preferred Stock"), none of which is issued and outstanding, and (C) four million
five hundred eighty-three thousand three hundred thirty-four (4,583,334) shares
of which are designated Series C Preferred Stock, none of which is issued and
outstanding. All issued and outstanding shares of the Company's Common Stock and
Series A Preferred Stock (x) have been duly authorized and validly issued to the
persons listed on Exhibit F, (y) are fully paid and nonassessable, and (z) were
issued in
6
<PAGE> 10
compliance with all applicable United States federal and state laws concerning
the issuance of securities. The rights, preferences privileges and restrictions
of the Shares are as stated in the Amended Certificate of Incorporation. The
Warrant Shares and the Conversion Shares have been duly and validly reserved for
issuance. Other than as set forth on Exhibit F, and except as may be provided in
the Amended Certificate of Incorporation or granted pursuant to the Investor
Rights Agreement, there are no outstanding options, warrants, rights (including
conversion or preemptive rights and rights of first refusal), proxy or
shareholder agreements, or agreements of any kind for the purchase or
acquisition from the Company of any of its securities. When issued in compliance
with the provisions of this Agreement, the Amended Certificate of Incorporation
and the Warrants (if applicable), the Shares, Warrants, Warrant Shares and
Conversion Shares will be validly issued, fully paid and nonassessable, and will
be free of any liens or encumbrances; provided, however, that the Shares,
Warrants, Warrant Shares and Conversion Shares may be subject to restrictions on
transfer under United States federal and/or state securities laws as set forth
herein or as otherwise required by such laws at the time a transfer is proposed.
3.3 Authorization; Binding Obligations. All corporate action on
the part of the Company, its officers, directors and stockholders necessary for
the authorization of this Agreement and the Investor Rights Agreement, the
performance of all obligations of the Company hereunder and thereunder at each
Closing and the authorization, sale, issuance and delivery of the Shares and the
Warrants pursuant to this Agreement, the Warrant Shares pursuant to the
Warrants, and the Conversion Shares pursuant to the Amended Certificate of
Incorporation has been taken or will be taken prior to the First Closing. The
Agreement and the Investor Rights Agreement, when executed and delivered, will
be valid and binding obligations of the Company enforceable in accordance with
their terms, except (i) as limited by applicable bankruptcy, insolvency,
reorganization, moratorium or other laws of general application affecting
enforcement of creditors' rights; (ii) general principles of equity that
restrict the availability of equitable remedies; and (iii) to the extent that
the enforceability of the indemnification provisions in Section 2.10 of the
Investor Rights Agreement may be limited by applicable United States federal or
state laws. The sale of the Shares and the subsequent conversion of the Shares
into Conversion Shares, and the sale of the Warrants and the issuance of the
Warrant Shares are not and will not be subject to any preemptive rights or
rights of first refusal that have not been properly waived or complied with.
3.4 Financial Statement. The Company has delivered to the
Purchaser: (i) its audited balance sheet as at December 31, 1996,
7
<PAGE> 11
together with its audited statements of income and cash flows for the year then
ended, and (ii) its unaudited balance sheet (the "Balance Sheet") as at
September 30, 1997 (the "Balance Sheet Date"), together with statements of
income and cash flows for the nine-month period then ended (all of the
foregoing, collectively, the "Financial Statements"), copies of which is
attached as Exhibit G. The Financial Statement, together with the notes thereto,
if any, present fairly and accurately the financial condition and position of
the Company as of the dates and for the periods to which they relate.
3.5 Liabilities. The Company has no material liabilities, and is
not aware of any material contingent liabilities not disclosed in the Balance
Sheet, except current liabilities incurred in the ordinary course of business
subsequent to the Balance Sheet Date which have not been, either in any
individual case or in the aggregate, materially adverse.
3.6 Agreements; Action. Except for agreements explicitly
contemplated hereby:
(a) There are no agreements, understandings or proposed
transactions between the Company and any of its officers, directors, affiliates
or any affiliate thereof.
(b) There are no agreements, understandings, instruments,
contracts, proposed transactions, judgments, orders, writs or decrees to which
the Company is a party or to its knowledge by which it is bound which may
involve (i) obligations (contingent or otherwise) of, or payments to, the
Company in excess of $50,000 (other than obligations of, or payments to, the
Company arising from or entered into in the ordinary course of business), or
(ii) the license of any patent, copyright, trade secret or other proprietary
right to or from the Company (other than licenses arising from the purchase of
"off the shelf" or other standard products), or (iii) provisions restricting or
affecting the development, manufacture or distribution of the Company's products
or services, or (iv) indemnification by the Company with respect to
infringements of proprietary rights (other than indemnification obligations
arising from purchase or sale agreements entered into in the ordinary course of
business).
(c) The Company has not (i) declared or paid any dividends, or
authorized or made any distribution upon or with respect to any class or series
of its capital stock, (ii) incurred any indebtedness for money borrowed or any
other liabilities (other than with respect to dividend obligations,
distributions, indebtedness and other obligations incurred in the ordinary
course of business or as disclosed in the Balance Sheet) individually in
8
<PAGE> 12
excess of $50,000 or, in the case of indebtedness and/or liabilities
individually less than $50,000, in excess of $100,000 in the aggregate, (iii)
made any loans or advances to any person, other than ordinary advances for
travel expenses, or (iv) sold, exchanged or otherwise disposed of any of its
assets or rights, other than the sale of its inventory in the ordinary course of
business.
(d) For purposes of Sections 3.6(b) and (c), all indebtedness,
liabilities, agreements, understandings, instruments, contracts and proposed
transactions involving the same person or entity (including persons or entities
that the Company has reason to believe are affiliated with such person or
entity) shall be aggregated for the purpose of meeting the individual minimum
dollar amounts of such Sections.
(e) The Company has not engaged in the past three (3) months,
and as of the date of this Agreement is not engaged, in any discussion (i) with
any representative of any corporation or corporations regarding the
consolidation or merger of the Company with or into any such corporation or
corporations; (ii) with any corporation, partnership, association or other
business entity or any individual regarding the sale, conveyance or disposition
of all or substantially all of the assets of the Company, or a transaction or
series of transactions in which more than fifty percent (50%) of the voting
power of the Company would be disposed of; or (iii) regarding any other form of
acquisition, liquidation, dissolution or winding up of the Company.
3.7 Obligations to, of Related Parties.
(a) There are no obligations of the Company to officers,
directors, stockholders, or employees of the Company other than (i) for payment
of salary for services rendered, (ii) reimbursement for reasonable expenses
incurred on behalf of the Company and (iii) for other standard employee benefits
made generally available to all employees (including agreements outstanding
under any stock option or stock purchase plan or other arrangement approved by
the Board). None of the officers or directors of the Company has a business
relationship (other than as a director, officer or employee) with the Company or
has any direct or indirect ownership interest in any firm or corporation with
which the Company has a business relationship; provided, however, that direct or
indirect ownership of less than a five percent (5%) interest in any entity shall
not constitute an "ownership interest" for purposes of this Section 3.7. Except
as may be disclosed in the Balance Sheet, the Company is not a guarantor or
indemnitor of any indebtedness of any other person, firm or corporation.
9
<PAGE> 13
(b) Each employee, officer or director of or consultant to the
Company who has been issued shares of Common Stock is a signatory to, and is
bound by, a Founder's Stock Purchase Agreement, with stock transfer restrictions
and rights of first offer in favor of the Company in a form previously approved
by the Board of Directors. Each Founder's Stock Purchase Agreement contains a
vesting schedule previously approved by the Board of Directors. In addition,
each employee, officer or director of or consultant to the Company who has been
issued options, warrants or other rights to acquire shares of Common Stock
pursuant to any stock purchase or stock option plans or other arrangements that
are approved by the Board of Directors of the Company will, as a condition to
the exercise of such options, warrants or rights, execute a stock purchase
agreement or stock option agreement that contains stock transfer restrictions
and rights of first offer in favor of the Company, and a vesting schedule, all
in a form approved by the Board of Directors.
3.8 Changes. Since the Balance Sheet Date, to the Company's
knowledge there has not been:
(a) Any change in the assets, liabilities, financial condition
or operations of the Company from that reflected in the Balance Sheet, other
than changes in the ordinary course of business, none of which individually or
in the aggregate has had or is expected to have a material adverse effect on
such assets, liabilities, financial condition or operations of the Company.
(b) Any resignation or termination of any key officers of the
Company; and the Company, to its knowledge, does not know of the impending
resignation or termination of employment of any such officer.
(c) Any material change, except in the ordinary course of
business, in the contingent obligations of the Company by way of guaranty,
endorsement, indemnity, warranty or otherwise.
(d) Any damage, destruction or loss, whether or not covered by
insurance, materially and adversely affecting the properties, business or
prospects or financial condition of the Company.
(e) Any waiver by the Company of any material debt owed to it.
(f) Any direct or indirect loans made by the Company to any
stockholder, employee, officer or director of the Company, other than advances
made in the ordinary course of business.
10
<PAGE> 14
(g) Any material change in any compensation arrangement or
agreement with any employee, officer, director or stockholder.
(h) Any declaration or payment of any dividend or other
distribution of the assets of the Company.
(i) Any labor organization activity.
(j) Any debt, obligation or liability incurred, assumed or
guaranteed by the Company, except those for immaterial amounts and for current
liabilities incurred in the ordinary course of business.
(k) Any sale, assignment or transfer of any patents,
trademarks, copyrights, trade secrets or other intangible assets.
(l) Any material change in any material agreement to which the
Company is a party or by which it is bound which materially and adversely
affects the business, assets, liabilities, financial condition, operations or
prospects of the Company.
(m) Any other event or condition of any character that, either
individually or cumulatively, has materially and adversely affected the
business, assets, liabilities, financial condition, operations or prospects of
the Company.
3.9 Title to Properties and Assets; Liens. The Company has good
and marketable title to its properties and assets, including the properties and
assets reflected in the Balance Sheet, and good title to its leasehold estates,
in each case subject to no mortgage, pledge, lien, lease, encumbrance or charge,
other than (i) those resulting from taxes which have not yet become delinquent,
(ii) minor liens and encumbrances which do not materially detract from the value
of the property subject thereto or materially impair the operations of the
Company, and (iii) those that have otherwise arisen in the ordinary course of
business. All facilities, machinery, equipment, fixtures, vehicles and other
properties owned, leased or used by the Company are in good operating condition
and repair and are reasonably fit and usable for the purposes for which they are
being used. Each lease of real or personal property to which the Company is a
party is fully effective, affords the Company peaceful and undisturbed
possession of the subject matter of the lease and is free of any liens, claims
or encumbrances. To the knowledge of the Company (except with respect to its own
obligations and enforceability against itself), each such lease constitutes a
valid and binding obligation of, and
11
<PAGE> 15
is enforceable in accordance with its terms against, the respective parties
thereto.
3.10 Patents and Trademarks. To its knowledge, the Company owns or
possesses sufficient legal rights to all patents, trademarks, service marks,
trade names, copyrights, trade secrets, information and other proprietary rights
and processes necessary for its business as now conducted and as proposed to be
conducted (such rights as the Company owns or has a license to, collectively,
the "Intellectual Property Rights"), without any known infringement of the
rights of others. To the Company's knowledge, the Intellectual Property Rights
are valid and enforceable. There are no outstanding options, licenses or
agreements of any kind relating to the Intellectual Property Rights, nor is the
Company bound by or a party to any options, licenses or agreements of any kind
with respect to the patents, trademarks, service marks, trade names, copyrights,
trade secrets, licenses, information and other proprietary rights and processes
of any other person or entity other than such licenses or agreements arising
from the purchase of "off the shelf" or standard products. The Company has not
received any communications alleging that the Company has violated or, by
conducting its business as proposed would violate, any of the patents,
trademarks, service marks, trade names, copyrights or trade secrets or other
proprietary rights of any other person or entity, nor is the Company aware of
any basis for any such claim. To the Company's knowledge, no person, corporation
or other entity is infringing any of the Intellectual Property Rights. The
Company is not aware that any of its employees is obligated under any contract
(including licenses, covenants or commitments of any nature) or other agreement,
or subject to any judgment, decree or order of any court or administrative
agency, that would interfere with their duties to the Company or that would
conflict with the Company's business as conducted or proposed to be conducted.
Neither the execution nor the delivery of this Agreement, nor the carrying on of
the Company's business as proposed will, to the Company's knowledge, conflict
with or result in a breach of the terms, conditions or provisions of, or
constitute a default under, any contract, covenant or instrument under which any
employee of the Company is now obligated. The Company does not believe that it
is or will be necessary to utilize any inventions, trade secrets or proprietary
information of any of its employees made prior to their employment by the
Company, except for inventions, trade secrets or proprietary information that
have been assigned to the Company. The Company has no obligation to compensate
others for use of any of the Intellectual Property Rights, nor has the Company
granted any license or other right to use, in any manner, any of the
Intellectual Property Rights, whether or not requiring the payment of royalties.
12
<PAGE> 16
3.11 Compliance with Other Instruments. The Company is not in
violation or default of any term of its certificate of incorporation as in
effect as of the date hereof, or its Bylaws or, to the knowledge of the Company,
of any provision of any mortgage, indenture, contract, agreement, instrument or
contract to which it is party or by which it is bound or of any judgment,
decree, order, writ or, to its knowledge, any statue, rule or regulation
applicable to the Company which would materially and adversely affect the
business, assets, liabilities, financial condition, operations or prospects of
the Company, and will not be in violation or default of any term of the Amended
Certificate of Incorporation, when such Certificate is filed. The execution,
delivery, and performance of and compliance with this Agreement and the Investor
Rights Agreement, and the issuance and sale of the Shares and the Warrants
pursuant hereto, the issuance of the Warrant Shares upon the exercise of the
Warrants, and the issuance of the Conversion Shares pursuant to the Amended
Certificate of Incorporation, will not, with or without the passage of time or
the giving of notice, result in any such material violation, or be in conflict
with or constitute a default under any such term, or result in the creation of
any mortgage, pledge, lien, encumbrance or charge upon any of the properties or
assets of the Company or the suspension, revocation, impairment, forfeiture or
non-renewal of any permit license, authorization or approval applicable to the
Company, its business or operations or any of its assets or properties.
3.12 Litigation. There is no action, suit, proceeding or
investigation pending or, to the Company's knowledge, currently threatened
against the Company that questions the validity of this Agreement, or the
Investor Rights Agreement or the right of the Company to enter into any of such
agreements, or to consummate the transactions contemplated hereby or thereby, or
which might result, either individually or in the aggregate, in any material
adverse change in the assets, condition, affairs or prospects of the Company,
financially or otherwise, nor is the Company aware that there is any basis for
the foregoing. The foregoing includes, without limitation, actions pending or
threatened (or any basis therefor known to the Company) involving the prior
employment of any of the Company's employees, their use in connection with the
Company's business of any information or techniques allegedly proprietary to any
of their former employers, or their obligations under any agreements with prior
employers. The Company is not a party or subject to the provisions of any order,
writ, injunction, judgment or decree of any court or government agency or
instrumentality. There is no action, suit, proceeding or investigation by the
Company currently pending or which the Company intends to initiate.
13
<PAGE> 17
3.13 Employees. The Company has no collective bargaining agreements
with any of its employees. There is no labor union organizing activity pending
or, to the Company's knowledge, threatened with respect to the Company. To the
Company's knowledge, no employee of the Company, nor any consultant with whom
the Company has contracted, is in violation of any term of any employment
contract, proprietary information agreement or any other agreement relating to
the right of any such individual to be employed by, or to contract with, the
Company because of the nature of the business to be conducted by the Company;
and to the Company's knowledge, the continued employment by the Company of its
present employees, and the performance of the Company's contracts with its
independent contractors, will not result in any such violation. The Company has
not received any notice alleging that any such violation has occurred. The
Company is not aware that any officer or key employee, or that any group of key
employees, intends to terminate their employment with the Company, nor does the
Company have a present intention to terminate the employment of any officer, key
employee or group of key employees.
3.14 Proprietary Information and Inventions Agreement. Each current
employee, officer and consultant of the Company has executed a Proprietary
Information and Inventions Agreement in the form of Exhibit H attached.
3.15 Compliance with Laws; Permits. To its knowledge, the Company
is not in violation of any applicable statute, rule, regulation, order or
restriction of any domestic or foreign government or any instrumentality or
agency thereof in respect of the conduct of its business or the ownership of its
properties which violation would materially and adversely affect the business,
assets, liabilities, financial condition, operations or prospects of the
Company. No governmental orders, permissions, consents, approvals or
authorizations are required to be obtained, and no registrations or declarations
are required to be filed, in connection with the execution and delivery of this
Agreement and the issuance of the Shares, the Warrant Shares or the Conversion
Shares, except such as has been duly and validly obtained or filed, or with
respect to any filings that must be made after the Closing(s), as will be filed
in a timely manner. The Company has all franchises, permits, licenses and any
similar authority necessary for the conduct of its business as now being
conducted by it, the lack of which could materially and adversely affect the
business, properties, prospects or financial condition of the Company and
believes it can obtain, without undue burden or expense, any similar authority
for the conduct of its business as planned to be conducted.
14
<PAGE> 18
3.16 CERCLA Superfund Requirements.
(a) The Company has not caused or allowed, nor has the Company
contacted with any party for, the generation, use, transportation, treatment,
storage or disposal of any Hazardous Substances (as defined below) in connection
with the operations of its business or otherwise.
(b) The Company, the operations of its business, and any real
property that the Company owns, leases or otherwise occupies or uses (the
"Premises") are in compliance with all applicable Environmental Laws (as defined
below) and orders or directives of any governmental authorities having
jurisdiction under such Environmental Laws including, without limitation, any
Environmental Laws or orders or directives with respect to any cleanup or
remediation of any release or threat of release of Hazardous Substances.
(c) The Company has not received any citation. directive,
letter or other communication, written or oral, or any notice of any
proceedings, claims or lawsuits, from any person, entity or governmental
authority arising out of the ownership or occupation of the Premises, or the
conduct of its operations, nor is it aware of any basis therefor.
(d) The Company has obtained and is maintaining in full force
and effect all necessary permits, licenses and approvals required by any
Environmental Laws applicable to the Premises and the business operations
conducted thereon (including operations conducted by tenants on the Premises)
and is in compliance with all such permits, licenses and approvals.
(e) The Company has not caused, or allowed a release, or a
threat of a release of any Hazardous Substances, nor to the best of the
Company's knowledge has the Premises or any property at or near the Premises
ever been subject to a release, or a threat of a release, of any Hazardous
Substance.
For purposes or this Section 3.16, the term "Environmental Laws" shall mean any
federal, state or local law, ordinance or regulation pertaining to the
protection of human health or the environment including, without limitation, the
Comprehensive Environmental Response, Compensation and Liability Act, 42 U.S.C.
Sections 9601 et seq., the Emergency Planning and Community Right-to-Know Act,
42 U.S.C. Sections 1101 et seq., and the Resource Conservation and Recovery Act,
42 U.S.C. Sections 6901 et seq.
For purposes of this Section 3.16, the term "Hazardous Substances" includes oil
and petroleum products, asbestos, polychlorinated
15
<PAGE> 19
biphenyls and urea formaldehyde, and any other materials classified as hazardous
or toxic under any Environmental Laws.
3.17 Offering Valid. Assuming the accuracy of the representations
and warranties of the Purchaser contained in Section 4, the offer, sale and
issuance of the Shares, the Warrants, the Warrant Shares and the Conversion
Shares will be exempt from the registration requirements of the United States
Securities Act of 1933, as amended (the "Securities Act"), and are exempt from
registration and qualification under the registration, permit or qualification
requirements of all applicable securities laws of any state of the United
States. Neither the Company nor any agent on its behalf has solicited or will
solicit any offers to sell or has offered to sell or will offer to sell all or
any part of the Shares or Warrants to any person or persons so as to bring the
sale of such Shares or Warrants by the Company within the registration
provisions of the Securities Act.
3.18 Full Disclosure. This Agreement, the Exhibits hereto, the
Investor Rights Agreement and all other documents delivered by the Company to
the Purchaser or its attorneys or agents in connection herewith or therewith or
with the transactions contemplated hereby or thereby, do not contain any untrue
statement of a material fact nor, to the Company's knowledge, omit to state a
material fact necessary in order to make the statements contained herein or
therein not misleading. Notwithstanding the foregoing, any Business Plan (a
"Business Plan") provided to the Purchaser was prepared by the management of the
Company in a good faith effort to describe the Company's proposed business and
products and the markets therefor. The assumptions applied in preparing any
Business Plan appeared reasonable to management as of the date thereof; however,
there is no assurance that these assumptions will prove to be valid or that the
objectives set forth in the Business Plan will be achieved. To the Company's
knowledge, there are no facts which (individually or in the aggregate)
materially adversely affect the business, assets, liabilities, financial
condition, prospects or operations of the Company that have not been set forth
in this Agreement, the Exhibits hereto, the Investor Rights Agreement or in
other documents delivered to the Purchaser or its attorneys or agents in
connection herewith.
3.19 Real Property Holding Corporation. The Company is not a real
property holding corporation within the meaning of Section 897(c)(2) of the
United States Internal Revenue Code of 1986, as amended (the "Code"), and any
regulations promulgated thereunder.
3.20 Insurance. The Company maintains fire and casualty insurance
policies with coverage customary for companies similarly situated to the
Company. The Company is not in default with
16
<PAGE> 20
respect to its obligations under any insurance policy maintained by it.
3.21 Board of Directors. The authorized size of the Board of
Directors of the Company is seven (7), and the Board consists of the individuals
set forth on Exhibit E.
3.22 Use of Proceeds. The proceeds from the sale of the Shares, the
Warrants and the Warrant Shares shall be used by the Company for general
corporate purposes, including research and development.
3.23 Taxes. The Company has accurately prepared and filed within
the time prescribed by law all federal, state and local income, excise or
franchise tax returns, real estate and personal property tax returns, sales and
use tax returns, payroll tax returns and other tax returns required to be filed
by it, and has paid or made provision for the payment of all accrued and unpaid
taxes and other charges to which the Company is subject and which are not
currently due and payable. The Company has not elected to be treated as a
Subchapter S corporation pursuant to Section 1362 of the Code or as a
collapsible corporation pursuant to Section 341(f) of the Code. The Company has
never had any tax deficiency proposed or assessed against it and has not
executed any waiver of any statute of limitations on the assessment or
collection of any tax or governmental charge. The United States federal income
tax returns of the Company have never been audited by the United States Internal
Revenue Service (the "IRS"). Neither the IRS nor any other taxing authority is
now asserting or is threatening to assert against the Company any deficiency or
claim for additional taxes or interest thereon or penalties in connection
therewith, and the Company does not know of any such deficiency or any basis for
any such deficiency or claim.
3.24 Investments in Other Persons. The Company has not made any
loan or advance to any person or entity which is outstanding on the date hereof,
nor is it committed to make any such loan or advance. The Company has never
owned or controlled, and does not currently own or control, directly or
indirectly, any subsidiaries and has never owned or controlled, and does not
currently own or control, any capital stock or other ownership interest,
directly or indirectly, in any entity.
3.25 ERISA. The Company has not made contributions to any pension,
defined benefit or defined contribution plans of the Company, if any, for its
employees that are subject to the United States Employee Retirement Income
Security Act of 1974, as amended ("ERISA"). The Company is in compliance in all
respects with all material provisions of ERISA to the extent the Company's
pension,
17
<PAGE> 21
defined benefit or defined contribution plans, if any, are subject to ERISA.
3.26 Issuance of Series B Preferred. The Company shall not issue
and sell shares of its Series B Preferred Stock for consideration that, on a
per-share basis, is less than the per-share purchase price last paid by the
Purchaser in connection with the purchase of Shares hereunder.
3.27 Initial Public Offering. In connection with an initial public
offering of the Common Stock pursuant to a registration statement filed with the
U.S. Securities and Exchange Commission under the Securities Act (an "IPO"), the
Company shall use its best efforts to have allocated for purchase by the
Purchaser that number of whole shares of Common Stock being registered in the
IPO obtained by dividing US$2,000,000 by the IPO per share price, subject to the
approval of the lead underwriter.
3.28 Future Issuance of Common Stock. The Company shall reserve
thirty million (30,000,000) of the authorized shares of Common Stock for
issuance only upon conversion of shares of Preferred Stock in accordance with
the Amended Certificate of Incorporation and shall issue such shares of Common
Stock only upon such conversion, from time to time.
4. REPRESENTATIONS AND WARRANTIES OF PURCHASER.
The Purchaser hereby represents and warrants to the Company, as of the
date of this Agreement, as follows (such representations and warranties not
lessening or obviating the representations or warranties of the Company set
forth in this Agreement):
4.1 Requisite Power and Authority. All corporate action on the
part of the Purchaser, its officers, directors and stockholders, necessary for
the authorization of this Agreement and the Investor Rights Agreement, the
performance of all obligations of the Purchaser hereunder and thereunder at each
Closing and the purchase of the Shares and the Warrants pursuant to this
Agreement, have been or will be effectively taken prior to the First Closing.
Upon their execution and delivery, this Agreement and the Investor Rights
Agreement will be valid and binding obligations of the Purchaser, enforceable in
accordance with their terms, except (i) as limited by applicable bankruptcy,
insolvency, reorganization, moratorium or other laws of general application
affecting enforcement of creditors' rights, and general principles of equity
that restrict the availability of equitable remedies, and (ii) to the extent
that the enforceability of the indemnification
18
<PAGE> 22
provisions of Section 2.10 of the Investor Rights Agreement may be limited by
applicable laws.
4.2 Investment Representations. The Purchaser understands that
neither the Shares, the Warrants, the Warrant Shares nor the Conversion Shares
have been registered under the Securities Act. The Purchaser also understands
that the Shares and the Warrants are being offered and sold pursuant to an
exemption from registration contained in the Securities Act based in part upon
the Purchaser's representations contained in this Agreement. The Purchaser
hereby represents and warrants as follows:
(a) The Purchaser is an entity organized and existing under
the laws of Switzerland, is not a "U.S. person" (as such term is defined in
Regulation S promulgated under the Securities Act ("Regulation S")), and was not
formed by a "U.S. person" principally for the purpose of investing in securities
not registered under the Securities Act.
(b) The Purchaser has substantial experience in evaluating and
investing in private placement transactions of securities in companies similar
to the Company so that it is capable of evaluating the merits and risks of its
investment in the Company and has the capacity to protect its own interests. The
Purchaser must bear the economic risk of this investment indefinitely unless the
Shares and Warrants (or the Conversion Shares or Warrant Shares, as the case may
be) are registered pursuant to the Securities Act or an exemption from such
registration is available. The Purchaser understands that the Company has no
present intention of registering the Shares, the Warrants, the Warrant Shares,
the Conversion Shares or any shares of its Common Stock. The Purchaser also
understands that there is no assurance that any exemption from registration
under the Securities Act will be available and that, even if available, such
exemption may not allow the Purchaser to transfer all or any portion of the
Shares, Warrants, Warrant Shares or the Conversion Shares under the
circumstances, in the amounts or at the times the Purchaser might propose.
(c) The Purchaser is acquiring the Shares, the Warrants and
the Conversion Shares for the Purchaser's own account, for investment only, and
not with a view toward their distribution. The Purchase is not acquiring the
Shares, the Warrants or the Conversion Shares for the account or benefit of any
U.S. person (as such term is defined in Regulation S).
(d) The Purchaser represents that by reason of its or of its
management's business or financial experience, the Purchaser has the capacity to
protect its own interests in
19
<PAGE> 23
connection with the transactions contemplated in this Agreement, and the
Investor Rights Agreement.
(e) The Purchaser represents that it is an "accredited
investor" within the meaning of Regulation D promulgated under the Securities
Act.
(f) The Purchaser has received and read the Financial
Statements and Business Plans and has had an opportunity to discuss the
Company's business, management and financial affairs with directors, officers
and management of the Company and has had the opportunity to review the
Company's operations and facilities. The Purchaser has also had the opportunity
to ask questions of, and receive answers from, the Company and its management
regarding the terms and conditions of this investment. The Purchaser has had an
opportunity to obtain any additional information, to the extent that the Company
possesses such information, or can acquire it without unreasonable effort or
expense, necessary to verify the accuracy of the information given to the
Purchaser.
(g) The Purchaser acknowledges and agrees that the Shares and
Warrants, and, if issued, the Warrants Shares and Conversion Shares, must be
held indefinitely unless they are subsequently registered under the Securities
Act, an exemption from such registration is available or as otherwise permitted
by applicable United States federal or state law. The Purchaser has been advised
or is aware of the provisions of Rule 144 promulgated under the Securities Act,
which permits limited resale of shares purchased in a private placement subject
to the satisfaction of certain conditions, including, among other things: the
availability of certain current public information about the Company, the resale
occurring not less than one (1) year after a party has purchased and paid for
the security to be sold, the sale being through an unsolicited "broker's
transaction" or in transactions directly with a market maker (as said term is
defined under the United States Securities Exchange Act of 1934, as amended) and
the number of shares being sold during any three-month period not exceeding
specified limitations.
(h) The Purchaser acknowledges and agrees that each
certificate representing the Shares, Warrants, Warrant Shares and the Conversion
Shares shall bear, in addition to the legend set forth in Section 2.1(b) of the
Investor Rights Agreement, substantially the following legends (in addition to
any legends required under applicable United States state securities laws):
THE SECURITIES EVIDENCED BY THIS CERTIFICATE MAY NOT BE
OFFERED, SOLD OR TRANSFERRED IN THE UNITED STATES OR TO
U.S.PERSONS UNTIL REGISTERED UNDER THE ACT OR UNLESS THE
20
<PAGE> 24
COMPANY HAS RECEIVED AN OPINION OF COUNSEL SATISFACTORY TO THE
COMPANY AND ITS COUNSEL THAT SUCH REGISTRATION IS NOT
REQUIRED.
TRANSFER OF THE SECURITIES EVIDENCED BY THIS CERTIFICATE IS
PROHIBITED EXCEPT IN ACCORDANCE WITH THE PROVISIONS OF
REGULATION S PROMULGATED PURSUANT TO THE ACT.
4.3 Transfer Restrictions.
(a) The Purchaser acknowledges and agrees that the Shares and
the Warrants and, if issued, the Warrant Shares and the Conversion Shares are
subject to restrictions on transfer as set forth in the Investor Rights
Agreement and in this Agreement.
(b) The Purchaser agrees to resell the Shares and Warrants
and, if issued, the Warrant Shares and Conversion Shares, only in accordance
with the provisions of Regulation S, or pursuant to registration under the
Securities Act or to an exemption from such registration. Furthermore, the
Purchaser acknowledges and agrees that the Company shall refuse to register any
transfer of the Shares or Warrants or, if issued, the Warrant Shares or
Conversion Shares, not made in accordance with the provisions of Regulation S.
5. CONDITIONS TO CLOSING.
5.1 Conditions to Purchaser's Obligations at Closing. The
Purchaser's obligations to purchase Shares and, if applicable, Warrants at each
Closing are subject to the satisfaction, at or prior to such Closing, of the
following conditions:
(a) The representations and warranties made by the Company in
Section 3 shall be true and correct in all material respects as of the date of
such Closing with the same force and effect as if they had been made on and as
of such date, and the Company shall have performed all obligations and
conditions herein required to be performed or observed by it on or prior to such
Closing.
(b) On such Closing Date, the sale and issuance of the Shares
and the proposed issuance of the Conversion Shares, and, if applicable, the
issuance of the Warrants and the proposed issuance of the Warrant Shares, shall
be legally permitted by all laws and regulations to which the Purchaser and the
Company are subject.
21
<PAGE> 25
(c) The Company shall have obtained any and all consents,
permits and waivers necessary or appropriate for consummation of the
transactions contemplated by the Agreement and the Investor Rights Agreement
(except for such as may be properly obtained subsequent to such Closing).
(d) The Amended Certificate of Incorporation shall have been
filed with the Secretary of State of the State of Delaware.
(e) The Company shall have delivered to the Purchaser or its
counsel copies of all corporate documents of the Company as the Purchaser shall
reasonably request.
(f) The Conversion Shares shall have been duly authorized and
reserved for issuance upon conversion of the Shares and the Warrant Shares, and
the Warrant Shares shall have been duly authorized and reserved for issuance
upon the exercise of the Warrants.
(g) The Company shall have delivered to the Purchaser a
compliance certificate, executed by the President of the Company, dated the date
of such Closing, to the effect that the conditions specified in Sections 5.1(a),
(c), (d) and (f) have been satisfied.
(h) The Company shall have delivered to the Purchaser a
certificate, dated the date of such Closing, of the Secretary or Assistant
Secretary of the Company certifying as to (i) the resolutions of the Board of
Directors and stockholders authorizing the execution and delivery of this
Agreement and the documents and instruments contemplated hereby, the issuance to
the Purchaser of the Shares and the Warrants and the consummation of the
transactions contemplated hereby, and certifying that such resolutions were duly
adopted and have not been rescinded or amended as of such date; and (ii) the
name and signature of the officers of the Company authorized to sign, as
appropriate, this Agreement and the other documents and certificates to be
delivered pursuant to this Agreement by either the Company or any of its
officers.
(i) The Company shall have delivered an Investor Rights
Agreement in accordance with Section 2.2(b).
(j) The Company and the holders of at least seventy-five
percent (75%) of the Common Stock outstanding as of the date of this Agreement
shall have executed and delivered a Voting Agreement substantially in the form
attached as Exhibit I.
22
<PAGE> 26
(k) The Purchaser shall have received from legal counsel to
the Company an opinion addressed to it, dated as of such Closing Date, in
substantially the form attached as Exhibit J, which shall include an opinion as
to the exemption of the transactions contemplated hereby from applicable United
States state securities laws.
(l) All corporate and other proceedings in connection with the
transactions contemplated hereby at each Closing and all documents and
instruments incident to such transactions shall be reasonably satisfactory in
substance and form to the Purchaser and its counsel, and the Purchaser and its
counsel shall have received all such counterpart originals or certified or other
copies of such documents as they may reasonably request.
5.29 Conditions to Obligations of the Company. The Company's
obligations to issue and sell the Shares and Warrants at each Closing are
subject to the satisfaction, on or prior to such Closing, of the following
conditions:
(a) The representations and Warranties made by the Purchaser
in Section 4 hereof shall be true and correct in all material respects at the
date of the Closing, with the same force and effect as if they had been made on
and as of said date.
(b) The Purchaser shall have performed and complied with all
agreements and conditions herein required to be performed or complied with by
the Purchaser on or before such Closing.
(c) The Amended Certificate of Incorporation shall have been
filed with the Secretary of State of the State of Delaware.
(d) The Purchaser shall have delivered an Investor Rights
Agreement in accordance with Section 2.2(b).
(e) The Company shall have obtained any and all consents,
permits and waivers necessary or appropriate for consummation of the
transactions contemplated by the Agreement and the Investor Rights Agreement
(except for such as may be properly obtained subsequent to such Closing).
6. MISCELLANEOUS.
6.1 Governing Law. This Agreement shall be governed in all
respects by the laws of the State of Delaware, USA without regard to principles
of conflicts of law.
23
<PAGE> 27
6.2 Survival. The representations, warranties, covenants and
agreements made herein shall survive the closing of the transactions
contemplated hereby. All statements as to factual matters contained in any
certificate or other instrument delivered by or on behalf of the Company
pursuant hereto in connection with the transactions contemplated hereby shall be
deemed to be representations and warranties by the Company hereunder solely as
of the date of such certificate or instrument.
6.3 Successors and Assigns. Except as otherwise expressly provided
herein, the provisions hereof shall inure to the benefit of, and be binding
upon, the successors and assigns of the parties hereto and shall inure to the
benefit of and be enforceable by each person who shall be a holder of the
Shares, the Warrant Shares or the Conversion Shares from time to time.
6.4 Entire Agreement. This Agreement, the Exhibits hereto, the
Investor Rights Agreement and the other documents delivered pursuant hereto
constitute the full and entire understanding and agreement between the parties
with regard to the subject matter hereof and thereof, and no party shall be
liable or bound to any other in any manner by any representations, warranties,
covenants and agreements except as specifically set forth herein and therein.
6.5 Severability. In case any provision of this Agreement shall be
invalid, illegal or unenforceable, the validity, legality and enforceability of
the remaining provisions shall not in any way be affected or impaired thereby.
6.6 Amendment and Waiver. This Agreement may be amended or
modified only upon the written consent of the Company and the Purchaser. The
obligations of one party may be waived only upon the written consent of the
other party.
6.7 Delays or Omissions It is agreed that no delay or omission to
exercise any right, power or remedy accruing to any party, upon any breach,
default or noncompliance by another party under this Agreement, the Investor
Rights Agreement or the Amended Certificate of Incorporation shall impair any
such right, power or remedy, nor shall it be construed to be a waiver of any
such breach, default or noncompliance, or any acquiescence therein, or of or in
any similar breach, default or noncompliance thereafter occurring. It is further
agreed that any waiver, permit, consent or approval of any kind or character on
any Purchaser's part of any breach, default or noncompliance under this
Agreement, the Investor Rights Agreement or the Amended Certificate of
Incorporation or any waiver on such party's part of any provisions or conditions
of the Agreement, the Investor Rights Agreement or the Amended Certificate of
Incorporation must be in writing and shall be effective only to
24
<PAGE> 28
the extent specifically set forth in such writing. All remedies, either under
this Agreement, the Investor Rights Agreement, the Amended Certificate of
Incorporation or otherwise afforded to any party, shall be cumulative and not in
the alternative.
6.8 Indemnification. The Company shall indemnify, defend and hold
harmless the Purchaser and its directors, officers, employees, agents and
affiliates, and the directors, officers, employees and agents of such
affiliates, against any and all liabilities, losses, costs or damages, together
with all reasonable costs and expenses related thereto (including reasonable
legal and accounting fees and expenses), arising from, relating to or connected
with the untruth, inaccuracy or breach of any statement, representation,
warranty or covenant of the Company contained in this Agreement, including,
without limitation, all statements, representations, warranties or covenants
concerning environmental matters.
6.9 Notices. Any notice or request required or permitted to be
given under or in connection with this Agreement shall be deemed to have been
sufficiently given if in writing and personally delivered or sent by certified
mail (return receipt requested), facsimile transmission (receipt verified), or
overnight express courier service (signature required), prepaid, to the party
for which such notice is intended, at the address set forth for such party
below:
(a) In the case of the Purchaser, to:
Roche Finance Ltd
124 Grenzacherstrasse CH-4070
Basel
SWITZERLAND
Attention: CFDV Building 21 Room 292
Facsimile No.: 41-61-688-4169
With a copy to:
Hoffmann-La Roche Inc.
340 Kingsland Street
Nutley, NJ 07110
Attention: General Counsel
Facsimile No.: (973) 235-3500
25
<PAGE> 29
(b) In the case of the Company, to:
deCODE genetics, Inc.
Lynghalsi 1
SI-110 Reykjavik
ICELAND
Attention: President
Facsimile No.: 354-570-1901
or to such other address for such party as it shall have specified by like
notice to the other party, provided that notices of a change of address shall be
effective only upon receipt thereof. If delivered personally or by facsimile
transmission, the date of delivery shall be deemed to be the date on which such
notice or request was given. If sent by overnight express courier service, the
date of delivery shall be deemed to be the next business day after such notice
or request was deposited with such service. If sent by certified mail, the date
of delivery shall be deemed to be the third business day after such notice or
request was deposited with the U.S. Postal Service, or the foreign equivalent
thereto.
6.10 Expenses. Each party shall pay all costs and expenses that it
incurs with respect to the negotiation, execution, delivery and performance of
this Agreement.
6.11 Headings. The titles of the Sections of this Agreement are for
convenience of reference only and are not to be considered in construing this
Agreement.
6.12 Counterparts. This Agreement may be executed in any number of
counterparts, each of which shall be an original, but all of which together
shall constitute one instrument.
6.13 Broker's Fees. Each party hereby represents and warrants to
the other party that no agent, broker, investment banker, person or firm acting
on behalf of or under the authority of such party is or will be entitled to any
broker's or finder's fee or any other commission directly or indirectly in
connection with the transactions contemplated herein. Each party further agrees
to indemnify the other party for any claims, losses or expenses incurred by such
other party as a result of the representation in this Section 6.13 being untrue.
6.14 Pronouns. All pronouns contained herein and any variations
thereof, shall be deemed to refer to the masculine, feminine or neutral,
singular or plural, as the identity of the person or thing referred to may
require.
* * *
26
<PAGE> 30
IN WITNESS WHEREOF, each of the parties hereto has caused to be
executed by its duly authorized representative this Series C Preferred Stock and
Warrant Purchase Agreement as of the date first set forth above.
deCODE genetics, Inc.
By: /s/ Kari Stefansson
----------------------------
Kari Stefansson
President
ROCHE FINANCE LTD
By: /s/ Hans Wyss
---------------------------
Name: Mr. Hans Wyss
---------------------------
Title Director
---------------------------
By: /s/ Bruno Maier
---------------------------
Name: Dr. Bruno Maier
---------------------------
Title Director
---------------------------
<PAGE> 31
(EXHIBITS OMITTED)
<PAGE> 1
Exhibit 10.46
deCODE GENETICS, INC.
FOUNDER STOCK PURCHASE AGREEMENT
THIS AGREEMENT is made as of the 21st day of August, 1996 by and between deCODE
GENETICS, INC., a Delaware corporation (the "Corporation"), and JEFFREY R.
GULCHER (the "Purchaser").
WHEREAS, pursuant to Section 152 of the Delaware General Corporation
Law, the Corporation desires to issue, and the Purchaser desires to acquire,
stock of the Corporation as herein described, on the terms and conditions
hereinafter set forth:
WHEREAS, the issuance of Common Stock hereby is, where applicable, in
connection with a compensatory benefit plan for the employees, directors,
officers, advisers or consultants of the Corporation and is intended to comply
with the provisions of Rule 701 promulgated by the Securities and Exchange
Commission (the "SEC") under the Securities Act of 1933, as amended (the "Act").
NOW, THEREFORE, IT IS AGREED between the parties as follows:
1. The Purchaser hereby agrees to purchase from the Corporation, and
the Corporation hereby agrees to sell to the Purchaser, an aggregate of Four
Hundred Eighty One Thousand Two Hundred (481,200) shares of the Common Stock of
the Corporation (the "Stock") at one tenth of one cent ($.001) per share, for an
aggregate purchase price of $481.200, which amount shall be payable in cash.
2. The shares to be purchased by the Purchaser pursuant to this
Agreement (hereinafter sometimes collectively referred to as the "Stock") shall
be subject to the repurchase options of the Corporation set forth in
subparagraphs (a) and (b) below ("Purchase Option"):
1.
<PAGE> 2
(a) In the event the Purchaser ceases to be an employee of the
Corporation as a result of (1) voluntary or mutual termination of Purchaser's
employment (except as a result of bona fide medical disability); or (2)
termination of Purchaser's employment by the Company for any of the following
reasons: (A) indictment or conviction of any felony or of any crime involving
dishonesty; (B) participation in any fraud against the Company; (C) breach of
Purchaser's duties to the Company, including, without limitation, persistent
unsatisfactory performance of job duties or breach of loyalty (except as a
result of bona fide medical disability); (D) intentional damage to any Company
property; or (E) conduct by Purchaser which in the good faith and reasonable
determination of the Board demonstrates gross unfitness to serve, the
Corporation shall have the right as set forth herein, to exercise its Purchase
Option. The Corporation may, by exercising its Purchase Option at any time
within ninety (90) business days after said cessation or such longer period as
may be determined by the Company if such later repurchase is deemed necessary by
the Company for treatment of its stock as Qualified Small Business Stock under
Section 1202 of the Internal Revenue Code of 1986, as amended and regulations
promulgated thereunder, repurchase from the Purchaser or his personal
representative, as the case my be, at the total price per share indicated above
as paid by the Purchaser for such Stock ("Option Price"), up to but not
exceeding the number of shares of stock which have not vested under the
provisions of paragraph (b) below. As used herein, employment with the
Corporation shall include employment with a "parent" or "subsidiary" of the
Corporation as those terms are defined in Sections 424(e) and (f) of the
Internal Revenue Code of 1986, as amended.
(b) The right of the Corporation to exercise its Purchase
Option as to the maximum portion of the stock specified in the event of
termination shall be by reference to the following schedule.
2.
<PAGE> 3
(i) 10% of the stock issued to the Purchaser shall vest as of
the date of this Agreement; and
(ii) 1.875% of the stock issued to the Purchaser shall vest
monthly thereafter.
(c) The Corporation shall be entitled to pay for any shares
purchased pursuant to it Purchase Option at the Corporation's option in cash or
by offset against any indebtedness owing to the Corporation by Purchaser
(including without limitation any Note given in payment for the Stock).
(d) Nothing in this Agreement shall affect in any manner whatsoever
the right or power of the Corporation (or a parent or subsidiary of the
Corporation) to terminate Purchaser's employment.
3. The Purchase Option shall be exercised by written notice signed by
an officer of the Corporation or by any assignee or assignees of the Corporation
and delivered or mailed as provided in paragraph 13. Such notice shall identify
the number of shares to be purchased and shall notify the Purchaser of the time,
place and date for settlement of such purchase, which shall be scheduled by the
Corporation within one hundred fifty (150) business days from the date of
cessation of employment.
4. If, from time to time during the term of the Purchase Option:
(i) There is any stock dividend or other distribution of cash
and/or property, stock split or other change in the character or amount of any
of the outstanding securities of the Corporation; or
(ii) There is any consolidation, merger or sale of all, or
substantially all of the assets of the Corporation;
3.
<PAGE> 4
then, in such event, any and all new, substituted or additional securities or
other property to which the Purchaser is entitled by reason of its ownership of
Stock shall be immediately subject to the Purchase Option and be included in the
word "Stock" for all purposes of the Purchase Option with the same force and
effect as the shares of the Stock presently subject to the Purchase Option.
While the total Option Price shall remain the same after each such event, the
Option Price per share of Stock upon exercise of the Purchase Option shall be
appropriately adjusted.
Upon the occurrence of any event specified in clause (ii) above, the
Purchase Option may be assigned to any successor to the Corporation, and the
Purchase Option shall apply if the Purchaser does not become or shall cease for
any reason to be employed by such successor (or its parent or subsidiaries). In
such case, the references herein to the "Corporation" shall be deemed to refer
to such successor.
5. All certificates representing any shares of Stock of the Corporation
subject to the provisions of this Agreement shall have endorsed thereon legends
in substantially the following forms (in addition to any other legend which may
be required by other agreements between the parties hereto):
(i) "The shares represented by this certificate are subject to
an option set forth in an agreement between the Corporation and the registered
holder, or his predecessor in interest, a copy of which is on file at the
principal office of the Corporation. Any transfer or attempted transfer of any
shares subject to such option is void without the prior express written consent
of the issuer of these shares."
(ii) "The securities represented by this Certificate have not
been registered under the Securities Act of 1933. They may not be sold, offered
for sale, pledged or hypothecated in the absence of an effective registration
statement as to the securities under
4.
<PAGE> 5
said Act or an opinion of counsel satisfactory to the Company that such
registration is not required."
(iii) "The shares represented by this certificate are subject
to a right of first refusal option in favor of the corporation and/or its
assignee(s) as provided in the bylaws of the Corporation."
(iv) Any legend required by applicable state securities laws.
6. Purchaser acknowledges that he is aware that the Stock to be issued
to him by the Corporation pursuant to this Agreement has not been registered
under the Act, and that the Stock is deemed to constitute "restricted
securities" under Rule 701 and Rule 144 promulgated under the Act. In this
connection, Purchaser warrants and represents to the Corporation that Purchaser
is purchasing the Stock Purchaser's own account and Purchaser has no present
intention of distributing or selling said stock except as permitted under the
Act and under applicable state securities laws. Purchaser further warrants and
represents that Purchaser has either (i) preexisting personal or business
relationships with the Corporation or any of its officers, directors or
controlling persons, or (ii) the capacity to protect his own interests in
connection with the purchase of the Stock by virtue of the business or financial
expertise of himself or of professional advisors to the Purchaser who are
unaffiliated with and who are not compensated by the Corporation or any of its
affiliates, directly or indirectly. Purchaser further acknowledges that the
exemption from registration under Rule 144 will not be available for at least
three years from the date of sale of the Stock unless at least two years from
the date of sale (i) a public trading market then exists for the Common Stock of
the Corporation, (ii) adequate information concerning the Corporation is then
available to the public, and (iii) other terms and conditions of Rule 144 are
complied with; and that any sale of the Stock may be made only in limited
amounts in accordance with such terms and conditions and that exemption from
registration
5.
<PAGE> 6
under Rule 701 will not be available until ninety days after the Corporation
becomes subject to the reporting requirements of Section 13 or 15(d) of the
Securities Exchange Act of 1934 and that after such date the Stock may be resold
by persons other than affiliates in reliance on Rule 144 without compliance with
paragraphs (c), (d), (e) and (h) thereof, and by affiliates without compliance
with paragraph (d) thereof.
7. The Purchaser agrees that during the one hundred eighty (180) day
period following the effective date of a registration statement of the
Corporation filed under the Act of the Purchaser shall not, to the extent
requested by the Corporation and any underwriter, sell or otherwise transfer or
dispose of (other than to donees who agree to be similarly bound), or enter into
any hedging or similar transaction with the same economic effect as a sale, any
Common Stock of the Corporation held by the Purchaser at any time during such
period (the "Purchaser's Registrable Securities") except Common Stock included
in such registration; provided, however, that:
(a) such agreement shall be applicable only to the first such
registration statement of the Corporation which covers Common Stock (or other
securities) to be sold on its behalf to the public in an underwritten offering;
and
(b) all officers and directors of the Corporation enter into
similar agreements. In order to enforce the foregoing covenant, the Corporation
may impose stop-transfer instructions with respect to the Purchaser's
Registrable Securities (and the shares or securities of every other person
subject to the foregoing restriction) until the end of such period.
8. The Purchaser shall not transfer by sale, assignment, hypothecation,
donation or otherwise any of the Stock or any interest therein subject to the
Purchase Option without the prior express written consent of the issuer of the
shares. As security for his faithful performance of the terms of this Agreement
and to insure the availability for delivery of Purchaser's Stock
6.
<PAGE> 7
upon exercise of the Purchase Option herein provided for, the Purchaser agrees,
at the closing hereunder, to deliver to and deposit with the Secretary of the
Corporation ("Escrow Agent"), as Escrow Agent in this transaction, three stock
assignments duly endorsed (with date and number of shares blank) in the form
attached hereto as Exhibit B, together with a certificate or certificates
evidencing all of the Stock subject to the Purchase Option; said documents are
to be held by the Escrow Agent and delivered by said Escrow Agent pursuant to
the Joint Escrow Instructions of the Corporation and the Purchaser set forth in
Exhibit A attached hereto and incorporated by this reference, which instructions
shall also be delivered to the Escrow Agent at the closing hereunder.
9. The Corporation shall not be required (i) to transfer on its books
any shares of Stock of the Corporation which shall have been transferred in
violation of any of the provisions set forth in this Agreement or (ii) to treat
as owner of such shares or to accord the right to vote as such owner or to pay
dividends to any transferee to whom such shares shall have been so transferred.
10. Subject to provisions of paragraphs 7, 8, and 9 above, the
Purchaser (but not any unapproved transferee) shall exercise all rights and
privileges of a shareholder of the Corporation with respect to the Stock.
11. Paragraphs 2, 3 and 4 of this Agreement shall terminate upon the
exercise in full or expiration of the Purchase Option, whichever first occurs.
12. The parties agree to execute such further instruments and to take
such further action as may reasonably be necessary to carry out the intent of
this Agreement.
13. Any notice required or permitted hereunder shall be given in
writing and shall be deemed effectively given upon personal delivery or upon
deposit in the United States Post Office, by registered or certified mail with
postage and fees prepaid, addressed to the other party
7.
<PAGE> 8
hereto at his address hereinafter shown below its signature or at such other
address as such party may designate by ten (10) days advance written notice to
the other party hereto.
14. This Agreement shall inure to the benefit of the successors and
assigns of the Corporation and, subject to the restrictions on transfer herein
set forth, be binding upon the Purchaser, its successors, and assigns. The
Purchase Option of the Corporation hereunder shall be assignable by the
Corporation at any time or from time to time, in whole or in part.
15. The Purchaser shall reimburse the Corporation for all costs
incurred by the Corporation in enforcing the performance of, or protecting its
rights under, any part of this Agreement, including reasonable costs of
investigation and attorney's fees. It is the intention of the parties that the
Corporation, upon exercise of the Purchase Option and payment of the Option
Price, pursuant to the terms of this Agreement, shall be entitled to receive the
Stock, in specie, in order to have such Stock available for future issuance
without dilution of the holdings of other shareholders. Furthermore, it is
expressly agreed between the parties that money damages are inadequate to
compensate the Corporation for the Stock and that the Corporation shall, upon
proper exercise of the Purchase Option, be entitled to specific enforcement of
its rights to purchase and receive said Stock.
16. This Agreement shall be governed by and construed in accordance
with the laws of the State of Delaware. The parties agree that any action
brought by either party to interpret or enforce any provision of this Agreement
shall be brought in, and each party agrees to, and does hereby, submit to the
jurisdiction and venue of, the appropriate state or federal court for the
district encompassing the Corporation's principal place of business.
17. The parties agree to take all such further action(s) as may
reasonably be necessary to carry out and consummate this Agreement as soon as
practicable, and to take whatever steps may be necessary to obtain any
governmental approval in connection with or otherwise qualify
8.
<PAGE> 9
the issuance of the securities that are the subject of this Agreement. The
closing hereunder, including payment for and delivery of the Stock, shall occur
at the offices of Cooley Godward Castro Huddleson & Tatum in Palo Alto,
California on the date hereof, or at such other time and place as the parties
may mutually agree.
18. This Agreement is not an employment contract and nothing in this
Agreement shall be deemed to create in any way whatsoever any obligations on the
part of the Purchaser to continue in the employ of the Corporation or of the
Corporation to continue the Purchaser in the employ of the Corporation.
19. Purchaser acknowledges that this Agreement has been prepared on
behalf of the Company by Cooley Godward Castro Huddleson & Tatum, counsel to the
Company and that Cooley Godward does not represent, and is not acting on behalf
of, Purchaser. Purchaser has been provided with an opportunity to consult with
its own counsel with respect to this Agreement.
20. This Agreement constitutes the entire agreement between the parties
with respect to the subject matter hereof. This Agreement may not be amended,
modified or revoked, in whole or in part, except by an agreement in writing
signed by each of the parties hereto.
9.
<PAGE> 10
IN WITNESS WHEREOF, the parties hereto have executed this Agreement as
of the day and year first above written.
deCODE GENETICS, INC.
--------------------------------------
By: /s/ Kari Stefansson
------------------------------
Title: President and CEO
------------------------------
Address: Lynghals 1 Reykjavik
------------------------------
Iceland
------------------------------
PURCHASER:
By: /s/ Jeffrey Gulcher
------------------------------
Name: Jeffrey R. Gulcher
Address: 140 Sumner Rd.
------------------------------
Brookline, MA 02215
------------------------------
ATTACHMENTS:
Exhibit A -- Joint Escrow Instructions
Exhibit B -- Stock Assignment Separate from Certificate
10.
<PAGE> 11
EXHIBIT A
JOINT ESCROW INSTRUCTIONS
Alan C. Mendelson, Esq.
Counsel to deCODE genetics, Inc.
c/o Cooley Godward Castro Huddleson & Tatum
Five Palo Alto Square
3000 El Camino Real
Palo Alto, CA 94306
Dear Sir:
As Escrow Agent for both deCODE genetics, Inc., a Delaware corporation
("Corporation"), and Jeffrey R. Gulcher ("Purchaser"), you are hereby authorized
and directed to hold the documents delivered to you pursuant to the terms of
that certain Stock Purchase Agreement ("Agreement") dated as of August 21, 1996,
to which a copy of these Joint Escrow Instructions is attached as EXHIBIT A, in
accordance with the following instructions:
1. In the event Corporation or an assignee shall elect to exercise the
Purchase Option set forth in the Agreement, the Corporation or its assignee will
give to Purchaser and you a written notice specifying the number of shares of
stock to be purchased, the purchase price, and the time for a closing thereunder
at the principal office of the Corporation. Purchaser and the Corporation hereby
irrevocably authorize and direct you to close the transaction contemplated by
such notice in accordance with the terms of said notice.
2. At the closing, you are directed (a) to date the stock assignments
necessary for the transfer in question, (b) to fill in the number of shares
being transferred, and (c) to deliver the same, together with the certificate
evidencing the shares of stock to be transferred, to the Corporation against the
simultaneous delivery to you of the purchase price (which may include suitable
acknowledgment of cancellation of indebtedness) for the number of shares of
stock being purchased pursuant to the exercise of the Purchase Option.
3. Purchaser irrevocably authorizes the Corporation to deposit with any
certificates evidencing shares of stock to be held by you hereunder and any
additions and substitutions to said shares as specified in the Agreement.
Purchaser does hereby irrevocably constitute and appoint you as his
attorney-in-fact and agent for the term of this escrow to execute with respect
to such securities all documents necessary or appropriate to make such
securities negotiable and complete any transaction herein contemplated,
including but not limited to any appropriate filing with state or government
officials or bank officials. Subject to the provisions of this paragraph 3,
Purchaser shall exercise all rights and privileges of a shareholder of the
Corporation while the stock is held by you.
1.
<PAGE> 12
4. This escrow shall terminate upon the exercise in full or expiration
of the Purchase Option, whichever occurs first.
5. If at the time of termination of this escrow you should have in your
possession any documents, securities, or other property belonging to Purchaser,
you shall deliver all of the same to Purchaser and shall be discharged of all
further obligations hereunder; provided, however, that if at the time of
termination of this escrow you are advised by the Corporation that any property
subject to this escrow is the subject of a pledge or other security agreement,
you shall deliver all such property to the pledgeholder or other person
designated by the Corporation.
6. Your duties hereunder may be altered, amended, modified or revoked
only by a writing signed by all of the parties hereto.
7. You shall be obligated only for the performance of such duties as
are specifically set forth herein and may rely and shall be protected in relying
or refraining from acting on any instrument reasonable believed by you to be
genuine and to have been signed or presented by the proper party or parties. You
shall not be personally liable for any act you may do or omit to do hereunder as
Escrow Agent or as attorney-in-fact for Purchaser while acting in good faith and
in the exercise of your own good judgment, and any act done or omitted by you
pursuant to the advice of your own attorneys shall be conclusive evidence of
such good faith.
8. You are hereby expressly authorized to disregard any and all
warnings given by any of the parties hereto or by any other person or
corporation, excepting only orders or process of courts of law, and are hereby
expressly authorized to comply with and obey orders, judgments or decrees of any
court. In case you obey or comply with any such order, judgment or decree of any
court, you shall not be liable to any of the parties hereto or to any other
person, firm or corporation by reason of such compliance, notwithstanding any
such order, judgment or decree being subsequently reversed, modified, annulled,
set aside, vacated or found to have been entered without jurisdiction.
9. You shall not be liable in any respect on account of the identify,
authorities or rights of the parties executing or delivering or purporting to
execute or deliver the Agreement or any documents or papers deposited or called
for hereunder.
10. You shall not be liable for the outlawing of any rights under any
statute of limitations with respect to these Joint Escrow Instructions or any
documents deposited with you.
11. Your responsibilities as Escrow Agent hereunder shall terminate if
you shall cease to be Counsel to the Corporation or if you shall resign by
written notice to each party. In the event of any such termination, the
Corporation shall appoint any officer or assistant officer of the Corporation as
successor Escrow Agent, and Purchaser hereby confirms the appointment of such
successor as his attorney-in-fact and agent to the full extent of your
appointment.
2.
<PAGE> 13
12. If you reasonably require other or further instruments in
connection with these Joint Escrow Instructions or obligations in respect
hereto, the necessary parties hereto shall join in furnishing such instruments.
13. It is understood and agreed that should any dispute arise with
respect to the delivery and/or ownership or right of possession of the
securities held by you hereunder, you are authorized and directed to retain in
your possession without liability to anyone all or any part of said securities
until such dispute shall have been settled either by mutual written agreement of
the parties concerned or by a final order, decree or judgment of a court of
competent jurisdiction after the time for appeal has expired and no appeal has
been perfected, but you shall be under no duty whatsoever to institute or defend
any such proceedings.
14. Any notice required or permitted hereunder shall be given in
writing and shall be deemed effectively given upon personal delivery, including
delivery by express courier, or four (4) days after deposit in the United States
Post Office, by registered or certified mail with postage and fees prepaid,
addressed to each of the other parties entitled to such notice at the following
addresses, or at such other addresses as a party may designate by ten days'
advance written notice to each of the other parties hereto.
CORPORATION: deCODE genetics, Inc.
Attention: Kari Stefansson
Lynghals 1
Reykjavik 110
Iceland
PURCHASER: Jeffrey R. Gulcher
140 Sumner Road
Brookline, MA 02115
ESCROW AGENT: Alan C. Mendelson, Esq.
Cooley Godward Castro Huddleson & Tatum
Five Palo Alto Square
3000 El Camino Real
Palo Alto, CA 94306
15. By signing these Joint Escrow Instructions, you become a party
hereto only for the purpose of said Joint Escrow Instructions; you do not become
a party to the Agreement.
16. You shall be entitled to employ such legal counsel and other
experts (including, without limitation, the firm of Cooley Godward Castro
Huddleson Tatum) as you may deem necessary properly to advise you in connection
with your obligations hereunder. You may rely upon the advice of such counsel,
and you may pay such counsel reasonable compensation.
3.
<PAGE> 14
17. This instrument shall be binding upon and inure to the benefit of
the parties hereto and their respective successors and permitted assigns.
18. This Agreement shall be governed by and interpreted and determined
in accordance with the laws of the State of Delaware as such laws are applied by
Delaware courts to contracts made and to be performed entirely in Delaware by
residents of that state.
Very truly yours,
deCODE genetics, Inc.
/s/ Kari Stefansson
-------------------------------
Kari Stefansson
President
PURCHASER:
Signature: /s/ Jeff Gulcher
-------------------
Name: Jeff Gulcher
-------------------
ESCROW AGENT:
/s/ Alan C. Mendelson
- -------------------------
Alan C. Mendelson, Esq.
4.
<PAGE> 15
EXHIBIT B
STOCK ASSIGNMENT SEPARATE FROM CERTIFICATE
FOR VALUE RECEIVED, hereby sells, assigns, and transfers unto
deCODE genetics, Inc. a Delaware corporation (the "Company"), pursuant to the
Purchase Option under that certain Stock Purchase Agreement, dated August ,
1996, by and between the undersigned and the Company (the "Agreement"),
shares of Common Stock of the Company standing the undersigned's name on the
books of the Company represented by Certificate No. and does hereby
irrevocably constitute and appoint the Company's Secretary attorney to transfer
said stock on the books of the Company with full power of substitution in the
premises. This Assignment may be used only in accordance with and subject to the
terms and conditions of the Agreement, in connection with the repurchase of
shares of Common Stock issued to the undersigned pursuant to the Agreement, and
only to the extent that such shares remain subject to the Company's Purchase
Option under the Agreement.
Dated: 8-16-96
------------------------
/s/ Jeff Gulcher
------------------------
(Signature)
Jeff Gulcher
------------------------
(Name)
5.
<PAGE> 1
Exhibit 10.47
OFFICER'S CERTIFICATE
I, the undersigned, do hereby certify and represent that:
1. I am the duly elected Chairman, President and Chief Executive
Officer of deCODE genetics, Inc., a Delaware Corporation.
2. Pursuant to Rule 306(a) of Regulation S-T, the following exhibit
10.47 to deCODE genetics, Inc.'s Registration Statement on Form S-1 is a fair
and accurate English translation of a document prepared in the Icelandic
language.
IN WITNESS WHEREOF, I have signed this Officer's Certificate in my
capacity as Chairman, President and Chief Executive Officer of deCODE genetics,
Inc. on this 25th day of April, 2000.
By: /s/ Kari Stefansson
------------------------------------
Name: Kari Stefansson
Title: Chairman, President and Chief Executive Officer
<PAGE> 2
[NOTE: CERTAIN PORTIONS OF THIS DOCUMENT HAVE BEEN MARKED TO INDICATE THAT
CONFIDENTIALITY HAS BEEN REQUESTED FOR THIS CONFIDENTIAL INFORMATION. THE
CONFIDENTIAL PORTIONS HAVE BEEN OMITTED AND FILED SEPARATELY WITH THE SECURITIES
AND EXCHANGE COMMISSION.]
RESEARCH CONTRACT ON THE CO-OPERATION OF
A RESEARCH TEAM FOR CHRONIC OBSTRUCTIVE
PULMONARY DISEASE
AND
ISLENSK ERFDAGREINING EHF
A research team for Chronic Obstructive Pulmonary Disease (hereinafter referred
to as COPD) and related diseases, on the one hand, hereinafter referred to as
RTCOPD, and, on the other hand, Islensk erfoagreining ehf., hereinafter referred
to as IE, enter into the following
Contract
on co-operation on the research of the inheritability of COPD and related
diseases.
This Contract is made on the basis of the Co-operation Agreement between the
State Hospitals and Islensk erfoagreining [e]hf. from 15 December 1998, which
shall prevail over this Contract in the event of any discrepancy between their
individual provisions.
CHAPTER 1
THE SUBSTANCE OF THE CO-OPERATION
RTCOPD and IE agree to co-operate, on the basis of this Contract, in the search
for genes involved in the genesis of COPD and related diseases. The proposed
co-operation between the parties will hereinafter be referred to as the Research
Project.
The part of the co-operation involving RTCOPD parties working for the State
Hospitals shall be supervised by the physicians [Foreign Character]orarinn
Gislason and Andres Sigvaldason.
The part of the co-operation involving the National Association for the
Prevention of Heart Diseases, Hjartavernd, [hereinafter referred to as
Hjartavernd) shall be supervised by the physician Vilmundur Guonason.
CHAPTER 2
CONTRIBUTIONS OF THE PARTIES TO THE RESEARCH PROJECT
2.1 RESEARCH MATERIALS AND THEIR PROCUREMENT
RTCOPD shall provide biosamples (including blood samples and tissue samples),
other clinical data and research materials which RTCOPD may provide, by the
permit of the Data Protection Commission for the research, in relation to
patients suffering from COPD and their relatives who do not suffer from COPD,
cf. Article 5 of this Contract for further details.
RTCOPD shall supervise relations with individuals invited to participate in the
research and/or their legal guardians. This includes procuring the informed
consent of participants, information on health, blood tests or other sampling
and examination of disease symptoms (e.g. further diagnosis). IE, on the one
hand, and RTCOPD and individuals within the team, on the other hand, undertake
to do whatever is in their power so that the procurement of research materials
pursuant to this sub-chapter shall
<PAGE> 3
proceed with expedience and safety. In this respect, account shall be taken of
the Research Plan, which includes milestone dates and is attached to this
Contract as Annex A ('Research Plan and Cost Estimation for the Research of IE
and RTCOPD on COPD'). All research materials delivered to the IE research
laboratory shall first be encrypted at the Genetic Research Service Centre, a
private institution domiciled at Noatun 17, Reykjavik, before being transported
to IE, in accordance with the instructions of the Data Protection Commission.
2.2. EXPERTISE, EQUIPMENT AND RESEARCH FACILITIES
RTCOPD shall provide expertise and knowledge in relation to the diagnosis of
diseases, the design and organisation of the Research Project, the conduct of
experiments and the interpretation of their results.
IE and RTCOPD shall provide expertise for the design and organisation of the
research. IE shall also be responsible for the research and testing of blood
samples and genetic material, the assessment of the inheritance of the disease
and the interpretation of the findings of the research. IE shall, among other
things, provide equipment, research resources, laboratory reagents and personnel
for these purposes.
2.3. PAYMENT OF RESEARCH EXPENSES
IE shall cover all expenses of the Research Project necessary to achieve the
objectives of the Project, including materials and wage costs in relation to
calling in participants for research and necessary sampling.
RTCOPD and IE shall jointly submit a comprehensive budget on signature of this
Contract, in which the projected materials and wage costs of the Project are
estimated, see Annex A. Annex A shall also further delineate the itemisation of
individual cost items and the manner in which the procurement of consent and the
payment of bills shall be conducted. In the event of direct cash outlay on the
part of the State Hospitals in relation to the conduct of this Research Project,
IE and the State Hospitals shall make a special agreement on the payment of such
cost, cf. the Co-operation Agreement between the State Hospitals and Islensk
erfoagreining ehf.
The State Hospitals may request information from IE on wages paid by IE to
employees of the State Hospitals working on the Research Project.
2.4. INTELLECTUAL PROPERTY PROTECTION
RTCOPD and individuals within the team undertake to provide IE with the
assistance necessary to enable IE to ensure international patent protection of
the findings of the Research Project, including application for patents together
with IE when necessary, provided that IE pays all expenses in relation to such
applications.
CHAPTER 3
RIGHTS OF THE PARTIES
3.1. THE RIGHTS OF HEALTH-CARE INSTITUTIONS AND THE EFFECTIVE DATE OF THIS
CONTRACT
The parties to this Contract are aware that a framework agreement on the
co-operation Hjartavernd and IE on research into the heredity of certain
diseases is currently in effect. The provisions of the framework agreement
between Hjartavernd and IE are
<PAGE> 4
valid for the part of the Research Project involving Hjartavernd. The framework
agreement between IE and Hjartavernd is attached to this Contract as Annex B.
The parties to this Contract are also aware that a Co-operation Agreement
between IE and the State Hospitals (SH) (hereinafter referred to as the
Institutions Agreement) is currently in effect. The Institutions Agreement
between IE and SH is attached to this Contract as Annex C. The provisions of the
Institutions Agreement shall be valid for this Research Agreement, where
applicable, as regards the part of SH employees. All other payments from IE to
RTCOPD pursuant to chapters 3.3. and 3.4. of this Contract shall be in
accordance with the provisions of Chapter 7.3 of the Institutions Agreement.
3.2. FINANCIAL AND COMMERCIAL RIGHTS ATTACHED TO THE FINDINGS OF THE RESEARCH
PROJECT
IE shall be sole owner of all financial and commercial rights attached to the
Research Project and its results. IE shall have the right to sell the results
and findings of the Research Project to a third party and utilise it financially
in any other way consistent with approved ethical standards, irrespective of
whether this takes place before or after the completion of the Research Project.
IE and its parent company, deCODE genetics Inc. (herinafter referred to as
deCODE), have made a contract with a third party (hereinafter referred to as the
Purchaser) on the sale of the Research Project, its results and findings. deCODE
shall never be considered the purchaser of the Project in the understanding of
this Contract.
3.3. FIXED PAYMENTS FROM IE TO RTCOPD/SH/HJARTAVERND IN RELATION TO THE SALE OF
THE RESEARCH PROJECT
IE shall pay RTCOPD/SH/Hjartavernd [CONFIDENTIAL TREATMENT REQUESTED] on the
effective date of this Contract. Thereafter, IE shall pay an annual amount of
[CONFIDENTIAL TREATMENT REQUESTED] until a total of [CONFIDENTIAL TREATMENT
REQUESTED] have been paid including the initial payment.
Thus, the payments from IE under this chapter shall take place on the following
payment dates:
[CONFIDENTIAL TREATMENT REQUESTED]
In the event that the Research Project ends within five years from the signature
of this Contract, upon achieving the objective of the Research Project, IE shall
pay the remaining amount so that a total of [CONFIDENTIAL TREATMENT REQUESTED]
shall have been paid, pursuant to this chapter. Payments under this chapter are
additional and independent to conditional payments under Chapter 3.4.
In the event that IE/deCODE enters into a contract of sale, one or more, on the
results of the Research Project, in addition to the contract of sale already
made with a third party on the effective date of this Contract and referred to
in Paragraph 2 of Chapter 3.2., IE and RTCOPD shall start negotiating an
agreement on fixed payments from IE to RTCOPD/SH/Hjartavernd in response to such
a contract of sale. Such payments
<PAGE> 5
shall be based on the net proceeds of IE/deCODE from the latter sale of the
results of the research, the contribution of RTCOPD and whether the sale is a
total sale of rights attached to the Research Project or only a partial sale of
such rights. Payments pursuant to this paragraph shall, however, never exceed
the total amount of payments specified in Paragraph 2 of this sub-chapter.
3.4. PERFORMANCE-RELATED PAYMENTS FROM IE TO RTCOPD/SH/HJARTAVERND IN RELATION
TO THE SALE OF THE RESEARCH PROJECT
IE/deCODE have made an agreement with the Purchaser to the effect that the
Purchaser shall pay special conditional payments to IE/deCODE which shall be
totally dependent on the scientific and/or practical results achieved in the
performance of the Project. The performance-related milestones which activate
the Purchaser's obligation to pay are further specified in the contract between
IE/deCODE and the Purchaser. In the event that the above-mentioned milestones
are not achieved, no payments pursuant to this paragraph shall be made.
IE shall pay RTCOPD/SH/Hjartavernd [CONFIDENTIAL TREATMENT REQUESTED] of
payments from the Purchaser to IE/deCODE pursuant to Paragraph 1 of this
sub-chapter if success is achieved. All other payments from the Purchaser to
IE/deCODE in relation to the repayment of the cash outlay of IE for the Research
Project, as defined in the contract between IE and the Purchaser, and the
Purchaser's investment in IE/deCODE shall be paid in full to IE/deCODE.
IE shall report to RTCOPD as soon as the Purchaser has confirmed that a
milestone which activates the Purchaser's obligation to pay has been achieved.
The share of RTCOPD of the milestone-related payment shall be paid when the
milestone payment from the Purchaser has been delivered to IE/deCODE. RTCOPD is
authorised by IE/deCODE to seek the confirmation of the companies' auditor,
concurrently with the quarterly statement, of whether and when a milestone
payment has been achieved in relation to the Research Project.
Performance-related payments from IE to RTCOPD pursuant to this sub-chapter
shall also be calculated from the performance-related payments from purchasers
to IE/deCODE as regards contracts of sale other than the contract specified in
Paragraph 2 of Chapter 3.2. and which may be made after the effective date of
this Contract on the results of the Research Project, cf. Paragraph 4 of
Sub-Chapter 3.3.
3.5. PROVISO ON CO-OPERATION WITH RESEARCH PARTIES UNRELATED TO RTCOPD
The right of receiving payments pursuant to Sub-Chapters 3.3 and 3.4 is based on
the assumption that IE will not pay other parties than RTCOPD and institutions
which employ individual parties within RTCOPD for their contribution to the
Research Project and expertise to which it is necessary to gain access for the
achievement of the objectives of the Research Project in the view of the
Executive Committee. If the Executive Committee is of the opinion that it is
necessary to enter into co-operation with more parties pursuant to the above,
the provisions of Sub-Chapters 3.3. and 3.4. shall be reviewed on the basis that
the total payments from IE to RTCOPD and/or institutions related to them, on the
one hand, and a third party, on the other hand, shall remain unchanged from the
payments described in Chapters 3.3 and 3.4.
<PAGE> 6
3.6. ARRANGEMENT OF PAYMENTS AND DISPOSAL OF PAYMENTS FROM IE PURSUANT TO
CHAPTERS 3.3 AND 3.4., CF. ALSO CHAPTER 7.3 OF THE INSTITUTIONS AGREEMENT
All payments from IE to RTCOPD/SH/Hjartavernd pursuant to chapters 3.3. and 3.4.
of this Contract shall be divided and paid in the following manner, cf. the
provisions of Chapter 7.3. of the Institutions Agreement and the provisions of
the Institutions Agreement in other respects, cf. also the framework agreement
between IE and Hjartavernd. All payments to RTCOPD/SH pursuant to the above
shall be paid into a special fund in the custody of SH, cf. the final clause of
Paragraph 2 of Chapter 7.3 of the Institutions Agreement. The following division
of payments is based on an agreement between the parties to this Contract as
well as their evaluation of the contribution of each party to the Research
Project. According to the above, the division of payments shall be as follows:
[CONFIDENTIAL TREATMENT REQUESTED]
The above division of payments shall not be binding for IE before such time as
all health-care institutions participating in the Research Project have
confirmed this Contract by signature, cf. Paragraph 2 of Chapter 2 of the
Institutions Agreement.
The following paragraph applies only to the allocation of funds raised by
parties within RTCOPD who are employed by SH.
All funds raised by RTCOPD pursuant to the provisions of Chapters 3.3. and 3.4.
of this Contract the application of which will be governed by RTCOPD, pursuant
to the Institutions Agreement and further agreement between RTCOPD and SH, shall
be allocated by RTCOPD to the research of pulmonary diseases. Such funds may not
be used for any other purposes. All funds which will be in the custody of RTCOPD
pursuant to the above shall be put into the Research Fund of the Faculty of
Pulmonary Research of the State Hospitals, which operates according to an
organisational charter approved by the Ministry of Justice, cf. the Foundations
Act, currently Act No. 19/1988. The organisational charter is attached to this
Research Contract as Annex D. The accounting of the above fund shall be the
responsibility of SH. The financial management of the fund can, upon further
agreement, be in the hands of the its board of directors, according to the
provisions of its articles of association.
CHAPTER 4
MANAGEMENT AND LIABILITY
Decisions relating to the performance of the Research Project shall be made
jointly by RTCOPD and IE. A special Executive Committee shall be established to
supervise the performance of the Research Project. Initially, each party to the
Contract shall appoint two members to the Executive Committee. More members may
be added later, provided that there will an equal number of members from, on the
one hand, RTCOPD and, on the other hand, IE in the Committee. The Chief
Supervisor of the Research Project shall be elected from among the members of
the Executive Committee. It is also the responsibility of the Committee to
define the objectives of the Research Project and set forth the professional
requirements which the parties to this Contract agree to be satisfactory for its
performance. The Executive Committee
<PAGE> 7
shall also seek a settlement of disputes which may arise between the parties to
the Contract.
Plans on incurring expenses in relation to the Research Project shall be
submitted in advance and confirmed by the Executive Committee. When applicable,
the Executive Committee may enter into agreements with health-care institutions
or other qualified parties on the use of the their manpower and facilities for
performing individual tasks in relation to the clinical part of the research. In
November each year the Executive Committee shall prepare a budget for the
Research Project in the following calendar year.
The Executive Committee shall supervise the processing of data and the
publication of conclusions in accordance with the rules of Chapter 5.
RTCOPD and individuals within the Team shall not be financially responsible to
IE or other parties with interests in the achievement of the commercial or
financial objectives of the research.
IE shall pay the expense of procuring liability insurance for individuals within
RTCOPD who are employed by SH on the effective date of this Contract as well as
staff employed by them. This applies to all work undertaken by these parties in
the interest of the Research Project.
CHAPTER 5
HANDLING, PROCESSING AND COMMUNICATION OF INFORMATION
The parties to this Contract undertake to maintain all personal information in
confidence in accordance with statutory provisions. The parties to this Contract
undertake to comply with the instructions of the Data Protection Commission and,
as applicable, the special representative (inspector) of the Data Protection
Commission on the handling and processing of such data, as well as with the
instructions and conditions of the Science Ethics Committee, which operates
pursuant to the Act on Patients' Rights. This entails that only information
which the Data Protection Commission has authorised access to may be used.
The findings of the Research Project shall be immediately published as soon as
they fulfil scientific requirements and are fit for publication. However, IE or
the Purchaser of the Project may have the publication of the findings postponed
for 90 days, if necessary to ensure patents and other rights of ownership
related to the findings of the Project.
The Executive Committee of the Project shall decide in advance who shall be
Chief Supervisor of the Research Project. As a rule, the first cited author of
scientific articles shall be Chief Supervisor. The order of authors shall be in
accordance with current rules in the international scientific community.
The parties to this Contract promise mutual confidentiality as regards
information in relation to the substance of this Contract, business plans, the
progress of the Project and its conclusions. Information of this kind may not be
communicated to an outside party without the consent of both parties.
<PAGE> 8
CHAPTER 6
LIMITATION ON CO-OPERATION WITH OTHER PARTIES
RTCOPD and individuals within the Team promise to work neither jointly nor
separately with other parties on research into the inheritability of COPD during
the Research Project. In the event that the Research Project leads to a
discovery which has financial significance for IE, RTCOPD and individual parties
within the Team promise not to enter into co-operation with other parties on the
part of the Research Project which led to the discovery for five years
immediately following the conclusion of the Project as defined in this Contract.
On the other hand, if the Research Project does not lead to such an achievement,
individual parties within the co-operating team have the right to enter into
co-operation with other parties on research into the inheritability of COPD
after the Research Project has ended.
IE promises not to begin collaboration with other parties in the research of the
inheritability of COPD during the Research Project, unless the Executive
Committee considers such collaboration necessary to achieve the objective of the
Research Project. If the addition of new co-operating parties to the Research
Project is considered necessary, the Executive Committee shall be in charge of
the selection of such a party. In the event of a dispute within the Executive
Committee, RTCOPD shall have the final decision on the selection of additional
co-operating parties. The provisions of this Paragraph shall not, however,
prevent IE from collaborating in the field of the Research Project with parties
that have negotiated the purchase of the Research Project, its conclusions or
findings, provided that such actions do not reduce the right to payments
pursuant to Chapter 3.
CHAPTER 7
TERM OF THE CONTRACT AND PROJECT COMPLETION
The effective date of this Contract shall be the date (hereinafter referred to
as the effective date) on which this Contract has been both signed by the
parties to the Contract and confirmed in signature by SH in accordance with
Paragraph 2 of Chapter 2 of the Institutions Agreement.
The Research Project shall have a duration of five years immediately following
the effective date, unless completed before such time in the view of the
Executive Committee. If either party has materially defaulted on the Contract,
the other party may terminate the Contract. In the event of a dispute on the
right of the parties to terminate the Contract, the settlement procedures
regarding such dispute shall be pursuant to Chapter 8.
The return of all original materials of RTCOPD shall be returned to RTCOPD,
unless an agreement to the contrary is made between RTCOPD and IE, e.g. if the
materials are used in another research in the field of genetics, on the
condition that the approval of the participants and a permit from the public
authorities with the authority to permit such an arrangement have been obtained.
The return of research materials from SH on completion of the Research Project
shall be in accordance with Paragraph 5 of Chapter 6 of the Institutions
Agreement.
<PAGE> 9
In the event that either or both parties see reason to continue the co-operation
after the agreed period, this shall be negotiated separately.
Notwithstanding a cessation of the research pursuant to this Contract, whether
as a result of the completion, cancellation or termination of the Project, the
obligation of IE/deCODE to effect payments pursuant to Chapter 3.4. shall remain
intact until such time as the right of IE /deCODE to payments from the Purchaser
is cancelled each time, e.g. when a patent expires.
CHAPTER 8
SETTLEMENT OF DISPUTES
In the event of a dispute between the parties to this Contract regarding
performance or compliance that cannot be resolved by the Executive Committee,
two persons, one from each party, shall endeavour to reach an agreement on its
settlement. If a settlement is not reached between those two persons within two
weeks of the submission of the dispute, each party to the Contract shall appoint
one arbitrator and then jointly request the appointment of an impartial third
arbitrator by the District Court of Reykjavik to assist in the resolution of the
dispute, thus forming a tribunal of three arbitrators. The arbitration tribunal
shall reach a decision in the matter within one months from the appointment of
the third arbitrator.
The cost of the work of the tribunal shall be determined by the tribunal at each
time. The work, procedure and rulings of the arbitration tribunal shall
otherwise be governed, as appropriate at any time, by Act No. 53/1989 on
Contractual Arbitration.
Notwithstanding the above provisions on arbitration, cases involving the
collection of payments under this Contract which are not in dispute between the
parties may be submitted to the public courts. The same applies to cases of
financial claims made by one party against the other, based on rulings of the
arbitration tribunal regarding non-performance or breach by the latter of this
Contract. Such cases shall be submitted to the District Court of Reykjavik.
<PAGE> 10
This Contract, which comprises 8 chapters on 9 pages, in addition to Appendices
A, B, C and D, is made in two identical copies, one copy to be held by each of
the parties to the Contract.
Reykjavik, 1 July 1999.
On behalf of the Research On behalf of Islensk
Team for COPD Erfoagreining ehf.
_____________________________________ __________________________________
[Foreign Character]orarinn Kari Stefansson [sign.]
Gislason [sign.] Senior Physician, SH CEO of IE
_____________________________________ __________________________________
Andres Sigvaldason [sign.] Kristjan Erlendsson [sign.]
Physician, SH VP for Clinical and Academic
Collaborations
_____________________________________
Vilmundur Guonason [sign.]
Physician, Hjartavernd
SH hereby confirms this
Research Contract,
Reykjavik, 20 August '99
_____________________________________
Magnus Petursson [sign.]
_____________________________________
Hjartavernd hereby confirms this
Research Contract, 20 August '99
Reykjavik,
_____________________________________
Gunnar Sigurosson [sign.]
_____________________________________
<PAGE> 1
Exhibit 23.1
PRICEWATERHOUSECOOPERS [LOGO]
- --------------------------------------------------------------------------------
PricewaterhouseCoopers ehf
Hofdabakki 9
113 Reykjavik
Iceland
Telephone +354-550 5300
Facsimile +354-550 5301
CONSENT OF INDEPENDENT ACCOUNTANTS
We hereby consent to the use in this Registration Statement on Form S-1/A
(No.333-31984) of our report dated March 8, 2000 relating to the consolidated
financial statements of deCODE genetics, Inc., which appears in such
Registration Statement. We also consent to the references to us under the
headings "Experts" and "Selected Consolidated Financial Data" in such
Registration Statement.
PricewaterhouseCoopers ehf
Reykjavik Iceland
May 4, 2000
/s/ VALDIMAR GUDNASON /s/ VIGNIR R. GISLASON
- ------------------------------ -----------------------------
Valdimar Gudnason Vignir R. Gislason
WARNING: THE EDGAR SYSTEM ENCOUNTERED ERROR(S) WHILE PROCESSING THIS SCHEDULE.
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM OUR DECEMBER
31, 1997, 1998 AND 1999 FINANCIAL STATEMENTS AND IS QUALIFIED IN ITS ENTIRETY BY
REFERENCE TO SUCH FINANCIAL STATEMENTS.
</LEGEND>
<S> <C> <C> <C> <C>
<PERIOD-TYPE> YEAR YEAR YEAR 3 MONTH
<FISCAL-YEAR-END> DEC-31-1997 DEC-31-1998 DEC-31-1999 DEC-31-2000
<PERIOD-START> JAN-01-1997 JAN-01-1998 JAN-01-1999 JAN-01-2000
<PERIOD-END> DEC-31-1997 DEC-31-1998 DEC-31-1999 MAR-31-2000
<CASH> 2,714,225 25,075,844 29,668,249 40,530,449
<SECURITIES> 0 0 0 0
<RECEIVABLES> 226,984 979,998 35,695,960 2,845,183
<ALLOWANCES> 0 0 0 0
<INVENTORY> 0 0 0 0
<CURRENT-ASSETS> 2,941,209 26,055,842 65,364,209 43,375,632
<PP&E> 2,824,824 14,528,695 17,802,672 20,544,852
<DEPRECIATION> 590,810 2,044,422 4,794,035 5,564,819
<TOTAL-ASSETS> 6,770,492 38,540,115 79,130,186 59,335,157
<CURRENT-LIABILITIES> 2,743,285 6,657,829 26,071,030 11,335,155
<BONDS> 1,331,156 6,946,330 4,874,291 4,474,275
0 0 0 0
12,603,990 43,158,079 121,589,367 124,030,726
<COMMON> 6,035 9,382 9,604 9,633
<OTHER-SE> (9,907,939) (18,231,505) (73,414,106) (80,514,632)
<TOTAL-LIABILITY-AND-EQUITY> 6,770,492 38,540,115 79,130,186 59,335,157
<SALES> 0 12,705,000 16,444,075 4,437,222
<TOTAL-REVENUES> 0 12,705,000 16,444,075 4,437,222
<CGS> 0 0 0 0
<TOTAL-COSTS> 8,047,780 24,175,566 39,687,249 11,463,266
<OTHER-EXPENSES> 0 0 1,484,081 119,284
<LOSS-PROVISION> 0 0 0 0
<INTEREST-EXPENSE> 8,461 (562,336) (1,549,481) (636,624)
<INCOME-PRETAX> 8,056,241 10,908,230 23,177,774 6,508,704
<INCOME-TAX> 0 0 0 0
<INCOME-CONTINUING> 8,056,241 10,908,230 23,177,774 6,508,704
<DISCONTINUED> 0 0 0 0
<EXTRAORDINARY> (620,385) (2,571,523) (38,429,831) (2,379,378)
<CHANGES> 0 0 0 0
<NET-INCOME> (8,676,626) (13,479,753) (61,607,605) (8,888,082)
<EPS-BASIC> (3.85) (3.06) (9.56) (1.20)
<EPS-DILUTED> (3.85) (3.06) (9.56) (1.20)
</TABLE>
<PAGE> 1
Exhibit 99.1
OFFICER'S CERTIFICATE
I, the undersigned, do hereby certify and represent that:
1. I am the duly elected Chairman, President and Chief Executive
Officer of deCODE genetics, Inc., a Delaware Corporation.
2. Pursuant to Rule 306(a) of Regulation S-T, the following exhibit
99.1 to deCODE genetics, Inc.'s Registration Statement on Form S-1 is a fair and
accurate English translation of a document prepared in the Icelandic language.
IN WITNESS WHEREOF, I have signed this Officer's Certificate in my
capacity as Chairman, President and Chief Executive Officer of deCODE genetics,
Inc. on this 25th day of April, 2000.
By: /s/ Kari Stefansson
-------------------------------------------------------
Name: Kari Stefansson
Title: Chairman, President and Chief Executive Officer
<PAGE> 2
GOVERNMENT REGULATION
ON A HEALTH SECTOR DATABASE
CHAPTER I
GENERAL PROVISIONS
Article 1
Scope
This Regulation applies to the creation and operation of a centralised Health
Sector Database, cf. Article 2 of Act No. 139/1998 on a Health Sector Database.
Article 2
Definitions
In this Regulation, the following terms shall have the respective meanings
indicated below:
Operating Licence: An operating licence for the creation and operation of a
centralised Health Sector Database pursuant to Act No. 139/1998 on a Health
Sector Database, issued by the Minister for Health and Social Security.
Monitoring Committee: A committee on the creation and operation of a centralised
Health Sector Database pursuant to Article 6 of Act No. 139/1998.
Science Ethics Committee: The Science Ethics Committee pursuant to Article 1 of
Government Regulation No 552/1999 on scientific health research, cf. Article 29
of Act No.74/1997, on Patients' Rights.
Technology, Security and Organization Terms: The technology, security and
organization terms of the Data Protection Commission pursuant to Article 5,
Paragraph 1, Sub-Section 2 of Act No. 139/1998 on a Health Sector Database.
Query layer: Software intended to process research or queries in the Health
Sector Database.
Query Classes: Specific types of queries which are comparable and processed
using the software in query layer in the Health Sector Database.
Article 3
Assessment of Conditions
The issue of the Operating Licence for the creation and operation of a Health
Sector Database is subject to the provisions of Act No. 139/1998 on a Health
Sector Database. The Minister for Health and Social Security shall assess
whether the conditions laid down in Paragraph 1 of Article 5 of the Act are met
before issuing an Operating Licence. Prior to the issue of the Operating Licence
the Technology, Security and Organisation Terms of the Data Protection
Commission shall be available, cf. Article 5, Paragraph 1, Sub-Section 2 of the
Act.
Article 4
GOVT. REGULATION ON HEALTH SECTOR DATABASE 1
<PAGE> 3
Further Conditions in the Operating Licence and Monitoring of Compliance
The Minister may attach further conditions to the Operating Licence beyond the
conditions established in Paragraph 1 of Article 5 of the Act. The Minister may
set the condition in the Operating Licence that individual work components in
the preparation, creation and operation of the Health Sector Database shall not
begin until such time as certain conditions further elaborated in the Operating
Licence have been met. The Monitoring Committee and Data Protection Commission
shall be responsible for monitoring that conditions established in the Operating
Licence regarding individual work components are met as further provided in the
Operating Licence and in accordance with the division of tasks among the
Monitoring Committee and Data Protection Commission pursuant to Act No. 139/1998
and this Regulation.
The Minister may, at a later stage, e.g. on the recommendation of the Monitoring
Committee, the Data Protection Commission, the Interdisciplinary Ethics
Committee or the Licensee, establish new conditions in addition to the
conditions stipulated in the Operating Licence regarding the security of data in
the Database, its creation and other aspects in the event of issues or
difficulties requiring action.
Article 5
Assessment of an Independent Systems Security Expert
Processing in the Health Sector Database shall not begin until an assessment has
been performed by an independent expert on the security of information systems.
The Monitoring Committee shall ensure that such an assessment is conducted.
Article 6
Rules on Science Ethics
The collection, transfer and processing of data in the Health Sector Database
shall at all times be conducted in full compliance with recognised international
rules on science ethics and rules established on their basis and current in
Iceland at any time.
CHAPTER II
FINANCIAL SEGREGATION
Article 7
Segregated Accounts
The operation of the Health Sector Database shall be financially segregated from
other activities of the Licensee, cf. Paragraph 2 of Article 14 of the
Competition Act No. 8/1993. The operation of the Health Sector Database shall be
conducted within a separate operating unit or department, and keep separate
accounts. Accounting shall be conducted pursuant to the Act on Financial
Accounts. A separate Initial Balance Sheet shall be made. Assets regarded as
pertaining to the activities covered by the Operating Licence shall be appraised
at market value where possible, or at the replacement value following reasonable
depreciation. Liabilities of the activities covered by the Operating Licence
shall include only liabilities connected with such activities alone.
Article 8
Pricing of Joint Use and Day-to-Day Management
All joint use of the operation subject to the Operating Licence and the
competitive operations of the Licensee, such as use of real estate, machinery
and human resources, shall be valued at market price on an arm's length basis.
In the event that market price is not available, the value
GOVT. REGULATION ON HEALTH SECTOR DATABASE 3
<PAGE> 4
shall be based on cost price plus a reasonable mark-up. Similarly, business
between the operation subject to the Operating Licence and other departments
shall be conducted on an arm's length basis.
When the utilisation of the Health Sector Database has begun, the party
responsible for the day-to-day administration of the operation subject to the
Operating Licence shall not be responsible for the administration of the
departments of the Licensee engaged in competitive activities.
CHAPTER III
COLLECTION, HANDLING AND PROCESSING OF INFORMATION
Article 9
Licensed Health-Care Professionals
The employees of the health institutions in question or self-employed health
service workers shall prepare data for transfer to the Health Sector Database
and such work shall be performed or managed by employees who are licensed
health-care professionals. The handling of health data by the Licensee shall
also be performed or managed by personnel who are licensed health-care
professionals. Those employees of health institutions and self-employed health
service workers who are directly employed in the transfer of health data to the
Health Sector Database shall not be involved in the Licensee's operation of the
Database. The Operating License shall be accompanied by a list of licensed
health-care professions at the time of issue of the Operating Licence.
Article 10
Access to Data by Health Authorities
The Ministry of Health and Social Security and the Directorate of Public Health
shall at all times have access to statistical data from the Database, cf.
Article 9 of Act No. 139/1998. The data shall be in accessible form and meet the
specifications of the health authorities as current at any time.
Article 11
Medical Records System
The Operating Licence shall establish general specifications for medical records
systems. The Licensee shall meet all conditions and requirements contained in
the specifications of the Operating Licence and also any later requirements and
conditions which the Minister may regard as necessary to achieve the objectives
of Act No. 139/1998.
Article 12
Patients' Rights
A patient may at any time request that information concerning him is not
transferred to the Health Sector Database. A patient's request may involve all
information already available on the patient in medical records or which may be
recorded, or further specified information. Such a request from a patient shall
also be observed after his death.
In the event that a patient wishes to have information on him transferred to the
Health Sector Database, despite the fact that a health institution or
self-employed health service worker has not entered into an agreement on such
transfer of information, the patient shall submit a request to this effect to
the Directorate of Public Health. The Directorate of Public Health shall ensure
that such a request from a patient is carried out.
GOVT. REGULATION ON HEALTH SECTOR DATABASE 4
<PAGE> 5
CHAPTER IV
ACCESS CONTROL
Article 13
Access to the Health Sector Database
The Licensee may not grant direct access to the Health Sector Database.
Before processing is begun in the Database, the Licensee shall inform the
Monitoring Committee which parties in his employ work with the Database, its
operation and development of software and which parties in his employ have
access to the query layer. Furthermore, their roles and responsibilities shall
be defined, as well as their access authorisation. The Licensee shall notify the
Monitoring Committee of any intentions to confer responsibilities on new parties
pursuant to this provision and ensure that the Security Terms of the Data
Protection Commission are strictly observed.
Article 14
Data from the Health Sector Database
Providing information on individuals from the Health Sector Database is
prohibited. Only statistical information involving groups of individuals may be
provided.
CHAPTER V
MONITORING COMMITTEE
Article 15
Composition, Staff and Facilities
The Minister for Health and Social Security shall appoint a committee of three
members, the Monitoring Committee, for a term of four years to supervise the
creation and operation of the Health Sector Database. One member shall be a
health sector worker with knowledge in the field of epidemology, another shall
be knowledgeable in the field of information and/or computer science. The third
shall be a lawyer and serve as Chairman of the Committee. Alternate members
shall be appointed in the same way.
The Committee shall be provided with staff and working facilities. The Committee
shall employ a Managing Director with a law degree. The Committee shall seek
expert advice as required.
Article 16
Supervision of the Making of Agreements
The Monitoring Committee shall oversee the making of agreements between the
Licensee, on the one hand, and health institutions and self-employed health
service workers, on the other hand. The Committee shall protect the interests of
the public health authorities, health institutions, self-employed health service
workers and scientists in negotiating agreements. The negotiating parties shall
inform the Committee of the status of negotiations. Members of the Committee are
permitted to attend meetings of the negotiating parties at their discretion.
The Monitoring Committee shall, i.a., ensure co-ordination of the terms of the
Licensee's agreements with individual institutions to the extent possible, e.g.
as regards processing of health data, design of software, costs and payments.
GOVT. REGULATION ON HEALTH SECTOR DATABASE 5
<PAGE> 6
The Monitoring Committee shall ensure that software for use in standardised
recording in health institutions and self-employed health service workers is
consistent with the specifications included in the Operating Licence and any
later specifications and requirements, cf. Articles 10 and 11 hereof. The
Committee shall ensure that the software enables data processing that will meet
the needs of individual health institutions and self-employed health service
workers for a co-ordinated information system, the needs of specialist fields
and the needs of public health authorities for access to statistical data from
the Database in accessible form so as to be useful in the preparation of health
reports, plans, policies and other projects of these parties. Measures shall
also be taken to ensure that the data can be used for scientific research.
Confirmation by the Monitoring Committee of an agreement between the Licensee
and individual health institutions or self-employed health service workers is a
prerequisite for the validity of the agreement. The parties shall be notified of
the Committee's conclusion within two weeks from the time that the agreement was
delivered to the Committee for confirmation.
Article 17
Surveillance
The Monitoring Committee shall monitor the day-to-day operation of the Database
and ensure that its creation and operation are consistent with the provisions of
law, regulations and the Operating Licence to the extent that such is not the
role of the Data Protection Commission under law.
Article 18
Access to Data
The Monitoring Committee may require from the Licensee and persons in the employ
of the Licensee any information necessary for the Committee to perform its tasks
pursuant to Act No. 139/1998, this Regulation and provisions of the Operating
Licence.
The Licensee shall ensure, e.g., that the Monitoring Committee always has access
to information on all research or queries or classes of queries submitted to the
Licensee for processing as well as to information on the research parties and
parties submitting queries in a form permitted by the Security Terms of the Data
Protection Commission.
The members of the Monitoring Committee and persons directly or indirectly in
its employ shall not divulge any confidential information that they acquire in
the course of their duty. The confidentiality obligation shall remain in force
even when employment ceases.
Article 19
Advice on Use of Data
The Monitoring Committee shall advise the Ministry of Health and Social Security
and the Directorate of Public Health on utilisation of data in the Database.
Article 20
Backup Copies
The Monitoring Committee shall preserve backup copies of the Database in a bank
safety deposit box or in some other secure manner. The Backup copy shall be
updated regularly pursuant to the further decision of the Committee as new data
is entered into the Database. The Operating Licence shall contain further
provisions on backing up the Database pursuant to the Technology, Security and
Organization terms of the Data Protection Commission.
GOVT. REGULATION ON HEALTH SECTOR DATABASE 6
<PAGE> 7
Article 21
Information to the Science Ethics Committee
The Monitoring Committee shall deliver to the Science Ethics Committee at least
once every three months a list of all queries or query classes submitted to the
Health Sector Database together with information on the parties submitting the
queries, in a form permitted by the Technology, Security, and Organization Terms
of the Data Protection Commission.
Article 22
Notification of Impropriety
The Monitoring Committee shall inform the Minister and the Data Protection
Commission without delay if the Committee has reason to believe that there is
any impropriety in the operation of the Database.
Article 23
Temporary Operation of the Health Sector Database
In the event of revocation of the Operating Licence, or if the Licensee is
deprived of the Operating Licence, the Monitoring Committee shall operate the
Database in the interests of the public health authorities, health institutions
and self-employed health service workers, e.g., in the interests of scientific
research, until such time as the Minister has arrived at a decision on its
future operation.
The Committee shall submit to the Minister its opinion regarding the continued
operation of the Health Sector Database following the expiration of the term of
the Licence pursuant to its provisions. The same applies if the Operating
Licence is revoked or the Licensee is deprived of his Licence.
Article 24
Report to the Minister
No later than 1 March of each year, the Monitoring Committee shall submit to the
Minister a report on the operation of the Health Sector Database and the work of
the Committee over the preceding year. Furthermore, the Committee shall keep a
record of its minutes and deliver a copy of the minutes to the Minister
following each meeting.
CHAPTER VI
INTERDISCIPLINARY ETHICS COMMITTEE
Article 25
Composition of the Committee and Expert Assistance
The Minister for Health and Social Security shall appoint an Interdisciplinary
Ethics Committee of three members for a term of four years. One member shall be
appointed pursuant to the nomination of the Directorate of Public Health; one
member shall be appointed pursuant to the nomination of the Minister for
Education, and one member shall be appointed by the Minister for Health and
Social Security without nomination to serve as Chairman of the Committee.
Alternate members shall be appointed in the same manner. Steps shall be taken to
ensure that the Committee is composed of individuals with expert knowledge in
the field of health sciences, research ethics and human rights. The Committee
may summon experts for consultation as necessary.
GOVT. REGULATION ON HEALTH SECTOR DATABASE 7
<PAGE> 8
Article 26
Role
The Interdisciplinary Ethics Committee shall ensure that processing of data in
the Health Sector Database is at all times conducted in full compliance with
recognised international rules on science ethics and rules established on the
basis of such international rules and current in Iceland at any time. The
Committee shall base its opinions on those rules.
The Licensee shall submit to the Interdisciplinary Ethics Committee a request
for research and individual queries or query classes which are intended for
processing using data from the Health Sector Database. This applies to research
which is conducted exclusively within the enterprise of the Licensee or in
co-operation with other parties. A request pursuant to this provision shall be
accompanied by a detailed description and other data pursuant to further
provision of the rules of procedure of the Committee.
Research, queries or query classes shall not be processed without the prior
consent of the Interdisciplinary Ethics Committee.
The Interdisciplinary Ethics Committee shall respond to requests within two
weeks of receiving all documents. In the event of unusually extensive research
or queries, the Committee may extend this deadline by two weeks.
Article 27
Appeal
Decisions of the Interdisciplinary Ethics Committee may be appealed to the
Minister for Health and Social Security. The Minister shall seek the opinion of
the Science Ethics Committee before returning a decision.
Article 28
Surveillance and Revocation
The Interdisciplinary Ethics Committee shall monitor the progress of research
and processing of queries which it has approved in the Health Sector Database.
The Committee may require that the Licensee submit reports to the Committee to
enable the Committee to ascertain that work is conducted in accordance with
information submitted to the Committee and/or instructions of the Committee on
processing.
The Interdisciplinary Ethics Committee may withdraw its permission to use
specific classes of research or queries if it is of the opinion that their
conduct is not consistent with the documents submitted information submitted to
the Committee and/or the instructions of the Committee on their use.
If the permission of the Committee is revoked, the research or processing of
queries shall be stopped immediately.
Article 29
Rules of Procedure
The Minister shall establish rules of procedure for the Interdisciplinary Ethics
Committee pursuant to the recommendations of the Interdisciplinary Ethics
Committee and comments of the Science Ethics Committee.
GOVT. REGULATION ON HEALTH SECTOR DATABASE 8
<PAGE> 9
CHAPTER VII
THE DATA PROTECTION COMMISSION
Article 30
Requirements for Technology, Security and Organisation
The Data Protection Commission shall establish Technology, Security and
Organisation terms to be met by the Licensee in the creation and operation of
the Health Sector Database.
The Data Protection Commission may review the Technology, Security and
Organisation Terms to be met by the Licensee in the light of new technology,
experience or changed assessment of the Technology, Security, and Organization
Terms, and establish a deadline for the Licensee to comply with the new
requirements.
The Licensee shall not make any alterations in matters of Technology, Security
and Organisation, including changes in software or hardware, except pursuant to
rules established by the Data Protection Commission.
In the event of circumstances where the security of data may be at risk, the
Data Protection Commission may prohibit further processing in the Database until
such time as the Data Protection Commission is satisfied that data security is
adequate.
Article 31
The Data Protection Commission Encryption Agency
The Data Protection Commission shall operate an Encryption Agency which shall
carry out the transfer of all data to the Health Sector Database.
Personal identifiers shall be encrypted by one-way encryption at Health
Institutions or at the location of self-employed health service workers who have
concluded an agreement with the Licensee. Medical data processed by these
parties shall be sent in encrypted form to the Encryption Agency of the Data
Protection Commission. The Directorate of Public Health shall provide the
Encryption Agency of the Data Protection Commission with an encrypted list of
those patients who have requested to be excluded from the Health Sector
Database, and the Encryption Agency shall delete all data processed from their
medical records.
The Encryption Agency of the Data Protection Commission is responsible for
further encryption of personal identifiers before the data is sent to the Health
Sector Database using methods which in the opinion of the Agency will best
ensure personal privacy.
Article 32
Cross-referencing of Data
The Licensee shall establish rules of procedure and work processes which meet
the conditions of the Data Protection Commission in order to ensure privacy
protection in the cross-referencing of data from the Health Sector Database, a
genealogical database and a database containing genetic data.
The Data Protection Commission shall attach such conditions to its approval of
the rules of procedure and work processes of the Licensee as it considers
necessary at any time to ensure privacy protection and data security in the
Health Sector Database. Data from the Health Sector Database shall not be
cross-referenced with genetic data unless such data has been obtained in
accordance with the rules current in Iceland at any time.
Among the conditions for the approval of the Data Protection Commission is that
the results should be non-personally identifiable. If it becomes evident that
results obtained from cross-
GOVT. REGULATION ON HEALTH SECTOR DATABASE 9
<PAGE> 10
referencing of data are personally identifiable, the Data Protection Commission
may withdraw its approval and order the destruction of such results in their
entirety or in part. During the course of investigation, the Data Protection
Commission may prohibit further cross-referencing of data on the basis of its
approval and take custody of the results
In the event that the Licensee does not observe the conditions of the Data
Protection Commission on the cross-referencing of data, the Data Protection
Commission may revoke its approval pursuant to this provision.
Article 33
Transfer of Medical Data
In order to preserve the security of personal data, the Data Protection
Commission may establish rules to be observed during the collection,
registration and processing of medical data in the medical records system in
preparation for their transfer to the Encryption Agency of the Data Protection
Commission.
Health Institutions and self-employed health service workers are responsible for
the delivery of health data to the Encryption Agency of the Data Protection
Commission, and shall observe the conditions established by the Data Protection
Commission.
Article 34
Inspections and Monitoring Activities of the Data Protection Commission
The Data Protection Commission is responsible for monitoring the creation and
operation of the Health Sector Database as regards the recording and processing
of personal data and the security of data in the Health Sector Database.
The Data Protection Commission shall take measures to monitor observance of the
conditions established by the Commission.
The Data Protection Commission may inspect the technology, security and
organisation aspects of the Health Sector Database whenever necessary. The Data
Protection Commission may conduct any test, inspection or take any surveillance
action it may regard as necessary and demand the required assistance of the
personnel of the Licensee in taking such action.
The Data Protection Commission may require from the Licensee and any of the
Licensee's employees any information necessary for the Commission to perform its
tasks, including information to determine whether a particular activity falls
under the provisions of this Regulation and the Act on a Health Sector Database.
The Data Protection Commission may also summon personnel of the Licensee and
persons employed by the Licensee to appear before the Commission and provide
oral information and explanations.
In the course of its surveillance duties, the Data Protection Commission shall
have free access to the premises where the Health Sector Database is preserved
and processing takes place.
The Data Protection Commission may, by a special resolution, entrust specific
employees and consultants with certain aspects of the work entrusted to the Data
Protection Commission pursuant to this Regulation and the Act on a Health Sector
Database.
Article 35
Report of the Data Protection Commission
The Data Protection Commission shall advise the Minister on the continued
operation of the Health Sector Database following the expiration of the term of
the Operating Licence pursuant to
GOVT. REGULATION ON HEALTH SECTOR DATABASE 10
<PAGE> 11
its provisions. The same applies if the Operating Licence is revoked or the
Licensee deprived of his Licence.
CHAPTER VIII
DISPOSAL OF THE HEALTH SECTOR DATABASE FOLLOWING THE END OF THE TERM OF THE
LICENSE
Article 36
Disposal and Operation Following the End of the Term of the Licence
When the term of the Licence expires pursuant to the provisions of the Operating
Licence, or if the Licence is terminated for other reasons, the Minister for
Health and Social Security shall, on the recommendation of the Monitoring
Committee and the Data Protection Commission, decide on the disposal and
operation of the Database.
Article 37
Rights to Software, Database and other Rights Necessary for the
Operation of the Database
The Licensee shall ensure that the Ministry of Health and Social Security, or
such party as the Minister may entrust with the operation of the Database, is
granted, without time limits, the use of all software and rights necessary for
the creation and operation of the Health Sector Database, as further provided in
the Operating Licence, following the expiration or termination of the Operating
Licence.
On the termination or expiration of the Operating Licence the Licensee shall
deliver to the Ministry of Health and Social Security, or such party as the
Minister may entrust with the operation of the Database, the software, rights
and hardware necessary for the creation and operation of the Health Sector
Database, as further provided in the Operating Licence.
Article 38
Limitations on Disposal Rights
The Licence and the Health Sector Database are neither assignable nor subject to
enforcement of claims. The Operating Licence and the Database may not be pledged
against any financial liability.
CHAPTER IX
PAYMENT OF COSTS
Article 39
Payment of costs, Budget and Procedure in the Event of Disputes
The Licensee shall bear all costs incurred by the Ministry of Health and Social
Security, the Monitoring Committee, Data Protection Commission,
Interdisciplinary Ethics Committee and Directorate of Public Health from the
tasks assigned to those parties pursuant to Act No. 139/1998 on a Health Sector
Database, this Regulation, or the Operating Licence for the creation and
operation of a Health Sector Database.
Prior to 15 August of each year, the Ministry of Health and Social Security and
the Ministry of Justice, acting on behalf of the Data Protection Commission,
shall present to the Licensee their budgets and work plans, referred to in
Paragraph 1 of this Article [39], in respect of the activities of the Licensee
in the creation and operation of a Health Sector Database in the subsequent
GOVT. REGULATION ON HEALTH SECTOR DATABASE 11
<PAGE> 12
operating year. The Licensee shall, before 15 September of each year, submit his
comments on such plans if he sees reason to do so.
Following the end of each month the State Treasury shall invoice the Licensee
for costs incurred in the preceding month, cf. Paragraph 1 hereof. The Licensee
shall pay the invoice within 15 days of its issue.
In the event of any dispute regarding payments, the opinion of the National
Audit Bureau shall be sought. The opinion of the National Audit Bureau shall be
binding on both parties.
Article 40
Costs Pursuant to Agreements
The Licensee shall pay all costs incurred in the processing of data for transfer
to the Health Sector Database, as well as the cost of producing an integrated
information system for health institutions and self-employed health service
workers pursuant to further provisions in agreements [of the Licensee] with
health institutions and self-employed health service workers.
CHAPTER X
CONFIDENTIALITY, PROCEDURAL RULES, FURTHER CLAIMS AND CONDITIONS ETC.
Article 41
Confidentiality
Parties working for public authorities in the enforcement of Act No. 139/1998 on
a Health Sector Database, regulations issued pursuant to that Act or the
Operating Licence shall not divulge any matters on which they may obtain
information in the course of their work and which are subject to
confidentiality. The confidentially shall remain in force even when work is
ceased.
Article 42
Administrative Law
To the extent applicable, the provisions of the Administrative Act No. 37/1993
shall be observed in all procedure pursuant to Act No. 139/1998 on a Health
Sector Database, this Regulation and the provisions of the Operating Licence,
cf., i.a., the provisions of the Administrative Act on competence, speed of
procedure, proportionality, the right to be heard and the publication and
revocation of decisions.
Article 43
Further Requirements and Conditions
Through amendment of this Regulation, the Minister may establish further
requirements and conditions regarding the creation and operation of a Health
Sector Database following the issue of the Operating Licence in the event of any
issues arising on which Act No. 139/1998 on a Health Sector Database, this
Regulation or the Operating Licence contain no provisions.
Article 44
Effect and Legal Basis
This Regulation, issued on the basis of Article 18 of Act No. 139/1998 on a
Health Sector Database, cf. Article 6, Paragraph 2 of Article 10, and Paragraph
3 of Article 12 of the same Act, shall take effect on its publication.
GOVT. REGULATION ON HEALTH SECTOR DATABASE 12
<PAGE> 13
TEMPORARY PROVISIONS
Payment of Incidental Costs Prior to the Issue of the Operating Licence and
Costs Incurred in the Year 2000
Following the issue of the Operating Licence the costs which can reasonably and
fairly be regarded as relating to the preparation and issue of the Operating
Licence pursuant to Act No. 139/1998 on a Health Sector Database shall be
calculated and the Licensee invoiced for such costs. The Licensee shall have 15
days to comment on the invoice and itemisation of costs if he so chooses. In the
event of any dispute regarding individual items the binding opinion of the
National Audit Bureau shall be sought regarding the dispute.
The Licensee shall reimburse the State Treasury for all costs pursuant to this
Paragraph 1 with six equal monthly payments, the first such payment to be made
no later than 45 days after the date of the invoice pursuant to this Article.
Following the end of each month of the year 2000 the Ministry of Health and
Social Security shall, in respect of costs incurred by the Monitoring Committee,
the Interdisciplinary Ethics Committee and the Directorate of Public Health and
the Ministry of Justice, instruct the State Treasury to collect the accrued
costs of the said parties in the preceding month arising from the performance by
such parties of the tasks entrusted to them pursuant to Act No. 139/1998 on a
Health Sector Database.
The Licensee shall have 15 days to submit his comments on invoices pursuant to
Paragraph 3. In the event of disputes regarding individual cost items the
binding opinion of the National Audit Bureau shall be sought regarding the
dispute.
Ministry of Health and Social Security, 22 January 2000
Ingibjorg Palmadottir [sign.]
Davio A Gunnarsson [sign.]
GOVT. REGULATION ON HEALTH SECTOR DATABASE 13
<PAGE> 1
Exhibit 99.2
OFFICER'S CERTIFICATE
I, the undersigned, do hereby certify and represent that:
1. I am the duly elected Chairman, President and Chief Executive
Officer of deCODE genetics, Inc., a Delaware Corporation.
2. Pursuant to Rule 306(a) of Regulation S-T, the following exhibit
99.2 to deCODE genetics, Inc.'s Registration Statement on Form S-1 is a fair and
accurate English translation of a document prepared in the Icelandic language.
IN WITNESS WHEREOF, I have signed this Officer's Certificate in my
capacity as Chairman, President and Chief Executive Officer of deCODE genetics,
Inc. on this 25th day of April, 2000.
By: /s/ Kari Stefansson
------------------------------------
Name: Kari Stefansson
Title: Chairman, President and Chief Executive Officer
<PAGE> 2
Act on a Health Sector Database no. 139/1998
(Passed by Parliament at 123rd session, 1998-99)
SECTION I
General terms
Art. 1
Objectives
The objective of this legislation is to authorise the creation and
operation of a centralised database of non-personally identifiable health data
with the aim of increasing knowledge in order to improve health and health
services.
Art. 2
Scope
This legislation extends to the creation and operation of a
centralised health sector database. The legislation does not apply to the
medical record systems of individual health and research institutions, data
collections made in connection with scientific research into individual diseases
or groups of diseases, nor to records kept by health and social security
authorities on users of the health service and operation of the health service.
The legislation does not apply to the storage or handling of, or access to,
biological samples.
Art. 3
Definitions
In this legislation the following definitions apply:
1. Health sector database: A collection of data containing
information on health and other related information, recorded in a standardised
systematic fashion on a single centralised database, intended for processing and
as a source of information.
2. Personal data: all data on a personally identified or personally
identifiable individual.
An individual shall be counted as personally identifiable if he can
be identified, directly or indirectly, especially by reference to an identity
number, or one or more factors specific to his physical, physiological, mental,
economic, cultural or social identity.
3. Non-personally identifiable data: data on a person who is not
personally identifiable as defined in clause 2.
4. Coding: the transformation of words or numbers into an
incomprehensible series of symbols.
5. One-way coding: the transformation of words or series of digits
into an incomprehensible series of symbols which cannot be traced by means of a
decoding key.
6. Health data: information on the health of individuals, including
genetic information.
7. Genetic data: any data; of whatever type, concerning the
hereditary characteristics of an individual or concerning the pattern of
inheritance of such characteristics within a related group of individuals. It
also refers to all data on the
<PAGE> 3
carrying of any genetic information (genes) in an individual or genetic line
relating to any aspect of health or disease, whether present as identifiable
characteristics or not.
SECTION II
Licence and committee on the creation and operation of a health sector database
Art. 4
Grant of operating licence and payments by licensee
The creation and operation of a health sector database are only
permitted to those who have an operating licence by the terms of this
legislation.
When an application has been received, the Minister of Health may
grant an operating licence to create and operate a health sector database
subject to the further terms of this legislation.
The licensee shall pay a fee for the grant of the licence in order
to meet the costs of preparing and issuing the licence. The licensee shall also
pay a yearly fee equivalent to the costs of the work of the committee under the
terms of Art. 6, and other costs pertaining to service and monitoring of the
operation, including monitoring by the Data Protection Commission under the
terms of legislation on the recording and handling of personal data, and costs
of publication and publicity cp. Art.8.
The licensee shall pay all costs of processing information for
entry onto the database, cp. Clause 8, Art 5.
The minister and licensee may agree on further payments to the
Treasury, which shall be devoted to promoting the health service, research and
development.
Art. 5
Conditions of licence etc.
An operating licence for the creation and operation of a health
sector database is contingent upon the following conditions:
1. The database must be located exclusively here in Iceland.
2. Technical, security and organisational standards meet the
requirements of the Data Protection Commission.
3. The recording and processing of health data shall be carried out
by, or under the supervision of, people who are professionally qualified in the
health sector.
4. Detailed information shall be available on the area of activity
and projects of the applicant for a licence.
5. A detailed work plan from the applicant shall be available,
which shall fulfil the conditions and objectives of this Act regarding working
arrangements and progress.
6. The operation of the database shall be financially separate from
the licensee's other business.
7. The Ministry of Health and Social Security and the Director
General of Public Health shall at all times have access to statistical data from
the database in accessible form, so that they will be of use in statistical
processing for compiling health reports and planning, policy-making and other
projects of the parties specified.
8. The licensee shall pay all costs of processing data from health
institutions and self-employed health workers for entry onto the database. The
data shall be
<PAGE> 4
processed in a manner that fulfils the needs of the relevant institution or
self-employed health worker for a standardised information system, the needs of
medical specialist fields and the requirements of health authorities, cp. Clause
7, and so that it can be used in scientific research.
9. The licence shall be temporary, and it shall not be granted for
more than 12 years at a time.
10. The licensee shall hand over to the committee cp. art. 6 a copy
of the database, which shall be updated regularly, to be further specified in
the licence. A copy of the database shall always be stored in a bank safety
deposit box, or in some other secure manner, to be further specified in the
licence.
11. The licensee shall ensure that after the expiry of the period
of the licence, the Minister of Health and Social Security, or the party
assigned by the Minister to operate the database, shall receive indefinite use
of all software and right required for the maintenance and operation of the
database.
The Minister may make the licence subject to further conditions
than those specified above.
At the end of the period of the licence by the terms of the
licence, the Minister shall make a decision on the operation of the database,
after receiving the opinion of the committee cp. art. 6 and the Data Protection
Commission. The same applies if the licence is revoked or if the licence is
withdrawn from the licensee by the terms of this legislation.
The licence and database under the terms of this legislation cannot
be transferred, nor can they be subjected to attachment for debt. Neither the
licence nor the database may be used as collateral for financial liabilities.
Art. 6.
Committee on the creation and operation of a health service database
The Minister shall appoint a committee on the creation and
operation of a database under the terms of this legislation. The committee shall
comprise three people and three substitutes, appointed for four years at a time.
One shall be a health sector worker with a knowledge of epidemiology, another
shall have knowledge of information technology and/or computer science, and the
third shall be a lawyer, and shall chair the committee.
Their substitutes shall fulfil the same conditions.
The role of the committee is to ensure that the creation and
operation of the database are in keeping with the terms of this legislation,
regulations made on the basis of the legislation, and conditions laid down in
the operating licence, in so far as this does not fall within the ambit of the
Data Protection Commission. The committee shall supervise the negotiation of
contracts between the licensee on the one hand and health institutions and
self-employed health workers on the other. It shall protect the interests of
health authorities, health institutions, self-employed health workers and
scientists in the drawing up of agreements. The sum to be paid by the licensee
under the terms of para.3 art. 4. shall be negotiated by the committee, as shall
recompense in the form of access to data from the database for health
institutions, self-employed health workers and their staff for purposes of
scientific research.
The committee shall advise the Ministry of Health and the Director
General of Public Health on the utilisation of data from the database. Should
the operating licence be revoked or the licence withdrawn from the licensee, the
database shall be
<PAGE> 5
operated by the committee until the Minister has reached a decision on its
long-term operation, cp. Para. 3, Art. 5.
The committee shall be provided with staff and working facilities.
The committee shall seek specialist assistance as deemed necessary.
The committee shall inform the Minister and the Data Protection
Commission without delay if it believes that there is some defect in the
operation of the database.
The committee shall, no later than 1 March each year, submit a
report to the Minister on the operations of the past year
SECTION III
Collection of information
Art. 7
Access to data from health records
With the consent of health institutions or self-employed health
workers, the licensee may be provided with data derived from medical records for
entry onto a health sector database. The health institutions shall confer with
the physicians' council and specialist management of the relevant institution
before contracts are concluded with the licensee.
In the handling of records, other data and information, the
conditions deemed necessary by the Data Protection Commission at any time shall
be complied with.
Personal identification shall be coded before entry on the
database, so that it is ensured that the licensee's staff work only with
non-personally identifiable data. The staff of the relevant health institution
or self-employed health workers shall prepare the data for entry on the
health-sector database. Health data shall be transferred in coded form in order
to ensure their security. Personal identification shall be coded one-way, i.e.
by coding that cannot be traced using a decoding key. The Data Protection
Commission shall carry out further coding of personal identification, using
those methods that the commission deems to ensure confidentiality best.
With regard to access to data from medical records, this shall
otherwise be subject to the Acts on the rights of patients, on physicians, on
the health service and on the recording and handling of personal data.
Art. 8
Rights of patients
A patient may request at any time that information on him/her not
be entered onto the health-sector database. The patient's request may apply to
all existing information on him/her or that which may be recorded in the future,
or to some specific information.
Such a request must be complied with. The patient shall inform the
Director General of Public Health of his/her wish. The Director General of
Public Health shall produce forms for giving such notice, and shall ensure that
these are available at health institutions and at the premises of self-employed
health workers. The Director General of Public Health shall ensure that a coded
register of the relevant patients is always accessible for those who carry out
the entry of data onto the health-sector database.
<PAGE> 6
The Director General of Public Health shall ensure that information
on the health-sector database and on the rights of patients cp. para. 1 shall be
accessible to the public.
Health institutions and self-employed health workers shall have
this information available to patients on their premises.
SECTION IV
Access to the database and utilisation of data, etc.
Art. 9
Access by health authorities to data on the health-sector database
The Ministry of Health and Director General of Public Health shall
always be entitled to statistical data from the health sector database so that
it may be used in statistical processing for the making of health reports and
planning, policy-making and other projects of these bodies. This information to
the specified parties shall be provided free of charge.
Art. 10.
Utilisation of the health sector database
Data recorded or acquired by processing on the health-sector
database may be used to develop new or improved methods of achieving better
health, prediction, diagnosis and treatment of disease, to seek the most
economic ways of operating health services, and for making reports in the health
sector.
The licensee shall be authorised to process data on the health
sector database from the health data recorded there, provided that data are
processed and connected in such a way that they cannot be linked to identifiable
individuals. The licensee shall develop methods and protocols that meet the
requirements of the Data Protection Commission in order to ensure
confidentiality in connecting data from the health-sector database, from a
database of genealogical data, and from a database of genetic data. With regard
to linking the data on the health-sector database with other databases than
those specified here, the Act on recording and handling of personal data shall
apply. It is not permissible to give information on individuals, and this shall
be ensured e.g. by limitation of access.
The licensee may not grant direct access to data on the database.
The licensee is authorised during the period of the licence to use
the data on the database for purposes of financial profit, under the conditions
laid down in this legislation and the licence.
The health service database may not be transported out of Iceland,
and processing of it may only be carried out here in Iceland.
Art. 11
Confidentiality
Employees of the licensee, including contractors, are bound by an
obligation of confidentiality on matters that they become aware of in their work
which should remain confidential, by law or by their nature. They shall sign an
oath of confidentiality before they begin work. The obligation of
confidentiality remains in force, even if employment ceases.
<PAGE> 7
SECTION V
Monitoring
Art. 12
Monitoring of the creation and operation of a health-sector
database
The Data Protection Commission shall monitor the creation and
operation of the health sector database with regard to recording and handling of
personal data and the security of data on the database, and is responsible for
monitoring compliance with conditions laid down by the commission.
The committee on the operation of the database, cp. Art. 6, shall
be responsible for monitoring the compliance in every way of the activities of
the health sector database with the terms of this legislation, regulations
issued under the terms of this legislation, and the conditions of the licence.
The committee shall monitor all questions to and processing from the database.
It shall regularly send to the Science Ethics Committee a record of all
questions processed on the database, together with information on the enquirers.
The minister shall issue regulations on an interdisciplinary ethics
committee which shall assess studies carried out within the licensee's company
and questions which are received. The committee's evaluation must reveal that
there is no scientific or ethical reason to prevent the study in question being
carried out, or the questions processed from the database.
SECTION VI
Penalties
Art. 13
Revocation of licence
The Minister may revoke the licence under the terms of this
legislation if the licensee or the licensee's employees violate the terms of
legislation, if the conditions of the licence are not fulfilled, or if the
licensee becomes unable to operate the database. Should the licensee violate the
terms of this legislation or not comply with the conditions of the licence, the
Minister shall give the licensee a written warning, allowing a reasonable period
of grace to rectify matters. Should the licensee not comply with such a warning,
the licence shall be revoked. In the case of deliberate violation or gross
negligence, the Minister may revoke the licence without notice and without
allowing time for rectification.
Art. 14
Penalties
Violation of the terms of this legislation entails fines or
imprisonment for up to three years, unless a more severe penalty is prescribed
in other legislation.
The same penalties apply to failure to comply with the conditions
for granting of an operating licence under the terms of this legislation, or
government regulations under the terms of the legislation, or failure to comply
with a command or prohibition under the terms of the legislation, or government
regulations under the terms of the legislation.
A legal entity may be sentenced to pay fines due to violation of
this Act or regulations based on it. A legal entity may be fined regardless of
the guilt of its
<PAGE> 8
employees. The legal entity shall be responsible for payment of a fine imposed
upon an employee of the legal entity, provided that the offence is connected to
the employee's work for the legal entity.
Art. 15
Withdrawal of licence etc.
The licensee may, in addition to the penalties specified in Art.
14, be subject to revocation of the licence by legal verdict, in the case of
deliberate violation or gross negligence.
Equipment which has been used for serious violation of this
legislation may be confiscated, together with the profits of the violation, cp.
Art. 69 of the Penal Code no. 19/1940.
Art. 16
Attempted violation, and participation in violation, of this
legislation are subject to penalties as stated in section III of the Penal Code,
no. 19/1940.
Art. 17
Compensation
Should the licensee, an employee of the licensee or a person
assigned to process data violate the provisions of this Act with regard to
confidentiality, regulations issued on the basis of them, or the conditions laid
down by the Data Protection Commission, the licensee shall compensate the person
to whom the data relate for financial loss which this has caused.
The licensee, however, is not obliged to compensate for loss which
the licensee proves not to be attributable to a mistake or negligence on the
licensee's part, or that of an employee or processor.
SECTION VII
Various provisions
Art. 18
Regulations
The Minister may prescribe further terms on the practice of this
Act by issuing regulations.
The Minister shall issue regulations on the activity of the
committee on operation of a health sector database under Art. 6, and on
limitation of access under para. 2 art. 10.
Art. 19
Enactment
This Act shall take force immediately.
This Act shall be reviewed no later than 10 years after its
enactment.
Provisional clauses
I
<PAGE> 9
The licensee's licence fee under para. 3, Art. 4 shall for the
first year be based upon estimated costs pertaining to the preparation and
monitoring of the operations of the health sector database.
II
The entry of data onto the health-sector database shall not
commence until six months after the enactment of this Act.
III
Before processing begins on the health-sector database, the
committee on the operation of the database cp. art. 6 shall ensure that the
assessment of an independent expert on the security of information systems has
been sought.
Passed by the Albingi 17 December 1998.
