<PAGE> 1
AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON APRIL 10, 1998
REGISTRATION NO. 333-42791
================================================================================
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
------------------------
AMENDMENT NO. 3 TO
FORM S-1
REGISTRATION STATEMENT
UNDER
THE SECURITIES ACT OF 1933
------------------------
NANOGEN, INC.
(EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)
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<S> <C> <C>
DELAWARE 3826 33-0489621
(STATE OR OTHER JURISDICTION OF (PRIMARY STANDARD INDUSTRIAL (I.R.S. EMPLOYER
INCORPORATION OR ORGANIZATION) CLASSIFICATION CODE NUMBER) IDENTIFICATION NUMBER)
</TABLE>
10398 PACIFIC CENTER COURT
SAN DIEGO, CALIFORNIA 92121
(619) 546-7700
(ADDRESS, INCLUDING ZIP CODE, AND TELEPHONE NUMBER, INCLUDING AREA CODE, OF
REGISTRANT'S PRINCIPAL EXECUTIVE OFFICES)
HOWARD C. BIRNDORF
CHAIRMAN OF THE BOARD, CHIEF EXECUTIVE OFFICER AND CHIEF FINANCIAL OFFICER
NANOGEN, INC.
10398 PACIFIC CENTER COURT
SAN DIEGO, CALIFORNIA 92121
(619) 546-7700
(NAME, ADDRESS, INCLUDING ZIP CODE, AND TELEPHONE NUMBER, INCLUDING AREA CODE,
OF AGENT FOR SERVICE)
Copies to:
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THOMAS E. SPARKS, JR. DAVID J. SEGRE
JOHN L. DONAHUE ROBERT M. TARKOFF
WILLIAM A. HINES AMY E. REES
Pillsbury Madison & Sutro LLP ELIZABETH C. HEWITT
P.O. Box 7880 Wilson Sonsini Goodrich & Rosati
San Francisco, California 94120-7880 Professional Corporation
(415) 983-1000 650 Page Mill Road
Palo Alto, California 94304
(650) 493-9300
</TABLE>
APPROXIMATE DATE OF COMMENCEMENT OF PROPOSED SALE TO THE PUBLIC:
As soon as practicable after this Registration Statement becomes effective.
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 delivery of the prospectus is expected to be made pursuant to Rule 434,
please check the following box. [ ]
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======================================================================================================================
PROPOSED PROPOSED
MAXIMUM MAXIMUM AMOUNT OF
TITLE OF EACH CLASS OF AMOUNT TO BE OFFERING PRICE AGGREGATE REGISTRATION
SECURITIES TO BE REGISTERED REGISTERED(1) PER SHARE(2) OFFERING PRICE(2) FEE(3)
- ----------------------------------------------------------------------------------------------------------------------
Common Stock, $.001 par
value....................... 4,140,000 $12.00 $49,680,000 $14,656
======================================================================================================================
</TABLE>
(1) Includes 540,000 shares that the Underwriters have the option to purchase to
cover over-allotments, if any.
(2) Estimated solely for the purpose of calculating the registration fee.
(3) $11,800 of this filing fee has been previously paid; $2,856 is being paid in
connection with this amendment.
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
INFORMATION CONTAINED HEREIN IS SUBJECT TO COMPLETION OR AMENDMENT. A
REGISTRATION STATEMENT RELATING TO THESE SECURITIES HAS BEEN FILED WITH THE
SECURITIES AND EXCHANGE COMMISSION. THESE SECURITIES MAY NOT BE SOLD NOR MAY
OFFERS TO BUY BE ACCEPTED PRIOR TO THE TIME THE REGISTRATION STATEMENT BECOMES
EFFECTIVE. THIS PROSPECTUS SHALL NOT CONSTITUTE AN OFFER TO SELL OR THE
SOLICITATION OF AN OFFER TO BUY NOR SHALL THERE BE ANY SALE OF THESE SECURITIES
IN ANY STATE IN WHICH SUCH OFFER, SOLICITATION OR SALE WOULD BE UNLAWFUL PRIOR
TO REGISTRATION OR QUALIFICATION UNDER THE SECURITIES LAWS OF ANY SUCH STATE.
PROSPECTUS (Subject to Completion)
Issued April 10, 1998
3,600,000 Shares
Nanogen, Inc.
COMMON STOCK
NANOGEN LOGO
------------------------
ALL OF THE SHARES OF COMMON STOCK, $0.001 PAR VALUE OFFERED HEREBY ARE BEING
SOLD BY NANOGEN, INC. PRIOR TO THIS OFFERING, THERE HAS BEEN NO PUBLIC MARKET
FOR THE COMMON STOCK OF THE COMPANY. IT IS CURRENTLY ESTIMATED THAT THE INITIAL
PUBLIC OFFERING PRICE PER SHARE OF THE COMMON STOCK WILL BE BETWEEN $10 AND $12
PER SHARE. SEE "UNDERWRITERS" FOR A DISCUSSION OF THE FACTORS TO BE CONSIDERED
IN DETERMINING THE INITIAL PUBLIC OFFERING PRICE.
------------------------
CONCURRENT WITH THIS OFFERING, SUBJECT TO CERTAIN CONDITIONS, BECTON, DICKINSON
AND COMPANY, A SUBSIDIARY OF HOECHST AG AND ELAN CORPORATION, PLC HAVE AGREED TO
PURCHASE SHARES OF COMMON STOCK FROM THE COMPANY IN A PRIVATE PLACEMENT AT A
PRICE PER SHARE EQUAL TO THE PRICE TO PUBLIC, FOR AN AGGREGATE PURCHASE PRICE OF
$6.0 MILLION, $10.0 MILLION AND $5.0 MILLION, RESPECTIVELY, PURSUANT TO EXISTING
AGREEMENTS WITH THE COMPANY. SEE "BUSINESS -- COLLABORATIVE ALLIANCES."
------------------------
THE COMMON STOCK HAS BEEN APPROVED FOR QUOTATION ON THE NASDAQ
NATIONAL MARKET UNDER THE SYMBOL "NGEN."
------------------------
THIS OFFERING INVOLVES A HIGH DEGREE OF RISK.
SEE "RISK FACTORS" COMMENCING ON PAGE 7.
------------------------
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND
EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION, NOR HAS THE SECURITIES
AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION PASSED UPON THE
ACCURACY OR ADEQUACY OF THIS PROSPECTUS. ANY REPRESENTATION TO THE CONTRARY IS A
CRIMINAL OFFENSE.
------------------------
PRICE $ A SHARE
------------------------
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<CAPTION>
UNDERWRITING
PRICE TO DISCOUNTS AND PROCEEDS TO
PUBLIC COMMISSIONS (1) COMPANY (2)
-------- --------------- -----------
<S> <C> <C> <C>
Per Share........................ $ $ $
Total(3)......................... $ $ $
</TABLE>
- ------------
(1) The Company has agreed to indemnify the Underwriters against certain
liabilities, including liabilities under the Securities Act of 1933, as
amended. See "Underwriters."
(2) Before deducting expenses payable by the Company estimated at $900,000.
(3) The Company has granted the Underwriters an option, exercisable within
30 days of the date hereof, to purchase up to an aggregate of 540,000
additional shares of Common Stock at the price to public less
underwriting discounts and commissions for the purpose of covering
over-allotments, if any. If the Underwriters exercise such option in
full, the total price to public, underwriting discounts and commissions
and proceeds to company will be $ , $ and $ ,
respectively. See "Underwriters."
------------------------
The Shares are offered, subject to prior sale, when, as and if accepted by
the Underwriters named herein and subject to the approval of certain legal
matters by Wilson Sonsini Goodrich & Rosati, Professional Corporation, counsel
to the Underwriters. It is expected that the delivery of the Shares will be made
on or about April , 1998, at the office of Morgan Stanley & Co. Incorporated,
New York, N.Y., against payment therefor in immediately available funds.
------------------------
MORGAN STANLEY DEAN WITTER
LEHMAN BROTHERS
SBC WARBURG DILLON READ INC.
April , 1998
<PAGE> 3
THE NANOGEN SYSTEM
[Photo depicting instrument, disposable cartridge, semiconductor microchip and
cross-section of microchip]
The Company has not applied for FDA or other regulatory approvals with
respect to any of its products under development. There can be no assurance that
such approvals can be obtained on a timely basis, if at all. See "Risk
Factors -- No Assurance of Obtaining Regulatory Approvals; Government Regulatory
Process."
CERTAIN PERSONS PARTICIPATING IN THIS OFFERING 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,
AND MAY BID FOR, AND PURCHASE, SHARES OF COMMON STOCK IN THE OPEN MARKET. FOR A
DESCRIPTION OF THESE ACTIVITIES, SEE "UNDERWRITERS."
<PAGE> 4
ELECTRONIC ADDRESSING
Programming the Microchip
[Graphic depicting site by site electronic addressing]
An array of specifically bound DNA probes can be assembled or addressed site by
site, row by row on Nanogen's semiconductor microchip. A total of five sets of
different capture probes are electronically addressed to the microchip
illustrated above.
ELECTRONIC CONCENTRATION AND HYBRIDIZATION
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INTRODUCING THE TEST SAMPLE [Graphic depicting target DNA in solution
Add test sample containing target DNA to above test site on microchip]
microchip with DNA capture probes addressed
to test sites.
ELECTRONIC CONCENTRATION AND HYBRIDIZATION [Graphic depicting concentration of target
probes and hybridization to capture probes]
Apply positive electrical potential to
electrode at test site. The resulting
electric field in the solution concentrates
target DNA in the test sample at the test
site. Enhanced concentration of the target
DNA increases the rate of hybridization, or
binding, to the complementary DNA capture
probes.
FLUORESCENT DETECTION OF TEST RESULTS [Graphic depicting attachment of reporter
probes to captured target probe]
Apply negative electrical potential to
electrodes at test site. The resulting
electric field forces the sample DNA that is
not hybridized or incompletely hybridized
back into the test sample, leaving only
specifically hybridized target DNA at the
test site. Once hybridization is complete,
results are determined by scanning for
fluorescent dye-labeled reporter probes.
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<PAGE> 5
ELECTRONIC STRINGENCY CONTROL
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<S> <C>
Electronic stringency control is used to [Graphic depicting perfect match and single
ensure the accuracy of the hybridization base pair mismatch]
process. As part of this process, a positive
electrical potential is applied to the
electrode at each test site. A perfect match
for the target is shown on the left; a
single base pair mismatch G:A (see insert)
is present on the right.
To eliminate these mismatches, a precise [Graphic depicting mismatch being driven
negative potential is applied. The mismatch away while perfect match remains bound to
DNA is forced back into the solution away capture probe]
from the test site in a matter of minutes.
</TABLE>
<PAGE> 6
NO PERSON IS AUTHORIZED IN CONNECTION WITH THE OFFERING MADE HEREBY TO GIVE
ANY INFORMATION OR TO MAKE ANY REPRESENTATIONS NOT CONTAINED IN THIS PROSPECTUS,
AND, IF GIVEN OR MADE, SUCH INFORMATION OR REPRESENTATIONS MUST NOT BE RELIED
UPON AS HAVING BEEN AUTHORIZED BY THE COMPANY OR BY ANY UNDERWRITER. THIS
PROSPECTUS DOES NOT CONSTITUTE AN OFFER TO SELL OR A SOLICITATION OF AN OFFER TO
BUY THE COMMON STOCK OFFERED HEREBY TO ANY PERSON IN ANY JURISDICTION IN WHICH
IT IS UNLAWFUL FOR SUCH PERSON TO MAKE ANY SUCH OFFER OR SOLICITATION TO SUCH
PERSON. NEITHER THE DELIVERY OF THIS PROSPECTUS NOR ANY SALE MADE HEREUNDER
SHALL UNDER ANY CIRCUMSTANCES IMPLY THAT THE INFORMATION CONTAINED HEREIN IS
CORRECT AS OF ANY DATE SUBSEQUENT TO THE DATE HEREOF.
------------------------
UNTIL , 1998 (25 DAYS AFTER THE COMMENCEMENT OF THIS OFFERING),
ALL DEALERS EFFECTING TRANSACTIONS IN THE COMMON STOCK, WHETHER OR NOT
PARTICIPATING IN THIS DISTRIBUTION, MAY BE REQUIRED TO DELIVER A PROSPECTUS.
THIS DELIVERY REQUIREMENT IS IN ADDITION TO THE OBLIGATIONS OF DEALERS TO
DELIVER A PROSPECTUS WHEN ACTING AS UNDERWRITERS AND WITH RESPECT TO THEIR
UNSOLD ALLOTMENTS OR SUBSCRIPTIONS.
------------------------
TABLE OF CONTENTS
<TABLE>
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PAGE
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<S> <C>
Prospectus Summary.......................................... 4
Risk Factors................................................ 7
Use of Proceeds............................................. 17
Dividend Policy............................................. 17
Capitalization.............................................. 18
Dilution.................................................... 19
Selected Financial Data..................................... 20
Management's Discussion and Analysis of Financial Condition
and Results of Operations................................. 21
Business.................................................... 25
Management.................................................. 43
Certain Transactions........................................ 54
Principal Stockholders...................................... 58
Description of Capital Stock................................ 59
Shares Eligible for Future Sale............................. 62
Underwriters................................................ 64
Legal Matters............................................... 65
Experts..................................................... 65
Additional Information...................................... 66
Index to Financial Statements............................... F-1
</TABLE>
------------------------
The Company intends to furnish its stockholders with annual reports
containing consolidated financial statements audited by an independent certified
public accounting firm and quarterly reports for the first three quarters of
each year containing unaudited consolidated financial information.
------------------------
NANOGEN(R) AND THE COMPANY'S LOGO ARE TRADEMARKS OF THE COMPANY. THIS
PROSPECTUS ALSO INCLUDES TRADE NAMES AND TRADEMARKS OF COMPANIES OTHER THAN
NANOGEN.
3
<PAGE> 7
PROSPECTUS SUMMARY
The following summary is qualified in its entirety by the more detailed
information and financial statements and related notes appearing elsewhere in
this Prospectus. Except as set forth in the financial statements and notes
thereto or otherwise as specified herein, all information in this Prospectus
assumes no exercise of the Underwriters' over-allotment option and reflects (i)
the reincorporation of the Company from California into Delaware in November
1997, (ii) a two-for-three reverse split of the Company's Common Stock effected
in April 1998 (all Preferred Stock share amounts and prices have been similarly
adjusted) and (iii) the conversion of all of the Company's outstanding shares of
Preferred Stock into 9,254,876 shares of Common Stock upon the closing of this
offering. See "Description of Capital Stock" and "Underwriters." This Prospectus
contains, in addition to historical information, forward-looking statements that
involve risks and uncertainties. The Company's actual results could differ
materially from the results discussed in the forward-looking statements. Factors
that could cause or contribute to such differences include those discussed
below, as well as those discussed under "Risk Factors" and elsewhere in this
Prospectus.
THE COMPANY
Nanogen, Inc. ("Nanogen" or the "Company") integrates advanced
microelectronics and molecular biology into a platform technology with broad
commercial applications in the fields of medical diagnostics, biomedical
research, genomics, genetic testing and drug discovery. Nanogen's fully
automated system, which incorporates a proprietary semiconductor microchip,
provides a flexible tool for the rapid identification and analysis of any test
sample containing charged molecules. Through the use of microelectronics, the
Company's technology enables the active movement and concentration of charged
molecules to and from designated microlocations, or test sites, on the
semiconductor microchip. This electronic concentration of molecules greatly
accelerates molecular binding at each microlocation. In addition, Nanogen's
technology allows the simultaneous analysis of multiple test results, or
multiplexing, from a single sample. The open architecture design of the Nanogen
system enables the Company to offer microchips with arrays designed and built by
Nanogen for specific applications or with arrays that can be customized by the
end user. The Company believes its technology will accelerate the development of
products that capitalize on the increasing availability of genetic information
and its relationship to human disease. The Company further believes its
semiconductor based platform technology provides a low cost, highly efficient,
accurate and versatile integrated system that will shift the paradigm from
current manual and mechanical methods to microelectronic systems, thereby
significantly improving the quality of healthcare.
The Company has established corporate alliances in certain areas of
infectious disease diagnostics, drug discovery and genomics as part of its
strategy to expand the applications and accelerate the commercialization of
products derived from its technology. The Company is developing products to
expedite the diagnosis of infectious disease through its joint venture with
Becton, Dickinson and Company ("Becton Dickinson"). The Company has also entered
into agreements for the establishment of a collaboration and joint venture with
Hoechst AG ("Hoechst") to develop drug discovery tools, and a collaboration with
Elan Corporation, plc ("Elan") for genomic applications. In addition to their
commitments to provide research funding, these corporate partners have agreed to
purchase an aggregate of $21.0 million of Common Stock directly from the Company
in a private placement (the "Private Placement") to occur concurrent with this
offering. The Company's collaborations permit integration of the Company's
technology with the resources and technology of its partners, while allowing the
Company to independently pursue diagnostics, drug discovery and genomics
opportunities outside the scope of these collaborations.
The Company's commercialization strategy is to establish its platform
technology as the standard for molecular identification and analysis. Nanogen
will provide its products initially to leading research institutions and opinion
leaders to enable them to exploit the open architecture design in developing
additional novel applications. Concurrently, the Company is developing
commercial products in medical diagnostics, biomedical research, genomics,
genetic testing and drug discovery either by itself or with its corporate
partners. In addition, the Company believes its platform technology has the
potential to address a broad range of applications, including combinatorial
chemistry, industrial process control, forensics and environmental and
4
<PAGE> 8
food pathogen testing. The Company also plans to develop fully integrated
"sample-to-answer" systems for both the clinical research and point-of-care
settings using microelectronics to process and analyze samples in a wide variety
of applications.
The Company was incorporated in California in 1991 as Nanophore, Inc.
("Nanophore"), a wholly-owned subsidiary of Nanotronics, Inc. ("Nanotronics"),
and pursuant to a Plan of Corporate Separation and Reorganization, Nanophore
issued shares of its common stock to the Nanotronics shareholders and commenced
operations as Nanogen, Inc. in September 1993 (the "Spin-Off"). Nanogen
reincorporated in Delaware in November 1997. The terms "Nanogen" and the
"Company" refer to Nanogen, Inc., a Delaware corporation, and its predecessor.
The Company's executive offices are located at 10398 Pacific Center Court, San
Diego, California 92121 and its telephone number is (619) 546-7700.
5
<PAGE> 9
THE OFFERING
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Common Stock offered....................................... 3,600,000 shares
Common Stock to be outstanding after the offering.......... 17,941,843 shares(1)
Use of proceeds............................................ To fund research and development,
expansion of manufacturing operations and
activities, expansion of sales and
marketing activities, working capital and
for general corporate purposes. See "Use
of Proceeds."
Nasdaq National Market symbol.............................. NGEN
</TABLE>
SUMMARY FINANCIAL DATA
<TABLE>
<CAPTION>
PERIOD FROM
INCEPTION
(SEPTEMBER 1, 1993) YEARS ENDED DECEMBER 31,
TO DECEMBER 31, --------------------------------------
1993 1994 1995 1996 1997
-------------------- ------- ------- ------- --------
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
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STATEMENT OF OPERATIONS DATA:
Revenues:
Contract and grant revenue............ $ -- $ -- $ 318 $ 1,644 $ 2,123
Sponsored research.................... -- -- -- -- 1,243
------- ------- ------- ------- --------
Total revenues..................... -- -- 318 1,644 3,366
Operating expenses:
Research and development.............. 183 1,345 3,356 6,931 11,769
General and administrative............ 225 1,065 1,646 2,427 3,910
------- ------- ------- ------- --------
Total operating expenses........... 408 2,410 5,002 9,358 15,679
Interest income (expense), net.......... -- 34 96 (64) 975
------- ------- ------- ------- --------
Net loss................................ $ (408) $(2,376) $(4,588) $(7,778) $(11,338)
======= ======= ======= ======= ========
Pro forma net loss per share -- basic
and diluted(2)........................ $ (1.13)
========
Number of shares used in computing
pro forma net loss per share -- basic
and diluted(2)..................... 10,072
========
</TABLE>
<TABLE>
<CAPTION>
AS OF DECEMBER 31, 1997
--------------------------
ACTUAL AS ADJUSTED(3)
-------- --------------
(IN THOUSANDS)
<S> <C> <C>
BALANCE SHEET DATA:
Cash and cash equivalents................................... $ 19,498 $ 76,426
Working capital............................................. 16,775 73,703
Total assets................................................ 23,215 80,143
Capital lease obligations, less current portion............. 1,193 1,193
Accumulated deficit......................................... (26,488) (26,488)
Total stockholders' equity.................................. 18,599 75,527
</TABLE>
- ---------------
(1) Based on the number of shares outstanding at February 28, 1998. Includes an
aggregate of 1,909,089 shares of Common Stock (based on the assumed initial
public offering price of $11.00 per share) to be issued in the Private
Placement. Excludes 1,514,525 shares of Common Stock reserved for issuance
and available for grant or sale under the Company's Stock Option Plans,
under which there were options outstanding to purchase an aggregate of
521,109 shares of Common Stock as of February 28, 1998. Also excludes (i)
420,703 shares of Common Stock subject to outstanding warrants, (ii) 40,993
shares of Preferred Stock subject to outstanding warrants, which will
convert into warrants to purchase 40,993 shares of Common Stock upon the
closing of this offering and (iii) 6,000 shares of Preferred Stock subject
to outstanding warrants which will expire on the day prior to effectiveness
of the Registration Statement of which this Prospectus forms a part. See
"Capitalization," "Management -- Stock Option Plans," "Description of
Capital Stock -- Warrants," and Note 4 of Notes to Financial Statements.
(2) Computed on the basis described in Note 1 of Notes to Financial Statements.
(3) Adjusted to reflect the sale by the Company of (i) 3,600,000 shares of
Common Stock offered hereby at an assumed public offering price of $11.00
per share and (ii) 1,909,089 shares of Common Stock to be issued in the
Private Placement at an assumed price of $11.00 per share, and the
application of the estimated net proceeds therefrom. See "Use of Proceeds"
and "Capitalization."
6
<PAGE> 10
RISK FACTORS
An investment in the shares of Common Stock offered hereby involves a high
degree of risk. Prospective investors should consider carefully the following
risk factors in addition to the other information presented in this Prospectus,
before purchasing the shares of Common Stock offered hereby. This Prospectus
contains, in addition to historical information, forward-looking statements that
involve risks and uncertainties. When used herein, the words "expects,"
"anticipates," "estimates," "intends," "plans" and similar expressions are
intended to identify forward-looking statements. The Company's actual results
could differ materially from the results discussed in the forward-looking
statements. Factors that could cause or contribute to such differences include
those discussed below, as well as those discussed elsewhere in this Prospectus.
EARLY STAGE OF DEVELOPMENT; TECHNOLOGICAL UNCERTAINTY WHETHER PRODUCTS CAN BE
SUCCESSFULLY DEVELOPED
Nanogen is at an early stage of development. The Company has completed the
initial development of its platform and is developing products in the fields of
medical diagnostics, biomedical research, genomics, genetic testing and drug
discovery. There can be no assurances that the Company will be able to
successfully complete the development of products in any or all of these fields.
All of the Company's products are currently under development, and there can be
no assurance that such products will be successfully developed or commercialized
on a timely basis, if at all. Since the Company's commencement of operations in
1993, substantially all of the Company's resources have been dedicated to the
research and development of potential products based on its proprietary
semiconductor microchip technology, and no revenues have been generated from
product sales. The Company believes that its revenue growth and profitability
will depend substantially upon its ability to overcome significant technological
challenges and successfully introduce these new products into the marketplace.
In addition, the successful development of some of these new products will
depend on the development and incorporation of new technologies developed
through the Company's current and future collaborations. A number of
applications envisioned by the Company will require significant enhancements in
the basic technology platform including complete sample-to-answer capabilities.
If the Company is unable, for technological or other reasons, to complete the
development, introduction or scale-up of manufacturing of any new product, or if
such product does not achieve a significant level of market acceptance, the
Company's business, financial condition and results of operations would be
materially and adversely affected. See "Business -- Nanogen's Platform
Technology," "-- Applications and Products Under Development" and
"-- Manufacturing."
LACK OF MARKET ACCEPTANCE
The Company's strategy of using its proprietary semiconductor microchip
technology for the purposes of developing products in the fields of medical
diagnostics, biomedical research, genomics, genetic testing and drug discovery
is unproven and there can be no assurance that the Company will be able to
develop commercially viable products in any or all of these fields or that any
such products will be accepted in the marketplace. Additionally, there can be no
assurance that the Company will be successful in achieving adoption of its
system. Market acceptance will depend on many factors, including demonstrating
to customers that the Company's technology platform is a viable alternative to
currently available technologies. In addition, the Company's technology platform
could be adversely affected by limited funding available for capital
acquisitions by the Company's customers, as well as internal obstacles to
customer approvals of purchases of the Company's products. If the Company is
unable to achieve market acceptance, the Company's business, financial condition
and results of operations would be materially and adversely affected. See
"-- Dependence on Collaborative Alliances; Reliance on Collaborators."
DEPENDENCE ON COLLABORATIVE ALLIANCES; RELIANCE ON COLLABORATORS
The Company's strategy for development and commercialization of its
proprietary semiconductor microchip technology and related products includes and
depends on the formation of various strategic alliances and licensing
arrangements with collaborative partners. The Company's strategy is to enter
into collaborative arrangements with select companies to partially fund
development of, assist in obtaining regulatory approval and clearances for, and
commercialize its products. As a result, the Company's strategy for development
and commercialization of such products depends on the feasibility and continuity
of
7
<PAGE> 11
arrangements with existing and future collaborative partners and licensees.
There can be no assurance that the Company will be successful in entering into
or maintaining such collaborations to develop commercial applications of its
semiconductor microchip products. Failure to do so would have a material adverse
impact on the Company. The Company may have limited or no control over the time,
effort or financial resources that any partner may devote to the development or
marketing of the Company's products. There can be no assurance that any of the
Company's collaborative partners will perform their obligations as expected or
will devote sufficient resources to the development, clinical testing or
marketing of the Company's potential products. Any concomitant development by a
partner of competitive technologies, preclusion from entering into competitive
arrangements with other potential partners, disputes over ownership rights to
any intellectual property, know-how or technologies developed with a partner,
failure to obtain timely regulatory approvals or clearances, premature
termination of an agreement, or failure by a partner to devote sufficient
resources to the development and commercialization of the Company's products
could have a material adverse effect on the Company's business, financial
condition and results of operations of the Company.
Under the terms of the Company's joint venture arrangement with Becton
Dickinson, if the Company fails to achieve certain milestones by June 30, 1998,
the joint venture arrangement may be terminated, which could have a material
adverse effect on the Company's business, financial condition and results of
operations. The Company anticipates that the revenues derived from such
arrangement will be a significant source of funding for the Company's research
and development activities. In addition, certain milestones will need to be
agreed upon in the future. There can be no assurance that the parties will agree
to such milestones, and if agreed upon, there can be no assurances that such
milestones will be achieved. The Company will rely in part on Becton Dickinson
to manufacture certain components of its infectious disease products. Any
failure on the part of either the Company or Becton Dickinson to meet the
expected timelines could adversely affect the ability of the parties to achieve
timely submission of products for regulatory approval or to successfully
introduce the products in the commercial marketplace. Such delays in either the
regulatory process or the commercial introduction of such products would have a
material adverse effect on the Company's business, financial condition, and
results of operations. Additionally, the Company will rely on Becton Dickinson's
distribution capabilities to market the joint venture products. Any interruption
in this distribution channel or failure of Becton Dickinson to adequately fund
the marketing and sales commitments of the joint venture would have a material
adverse affect on the Company's business, financial condition and results of
operations. See "Business -- Collaborative Alliances--Becton, Dickinson and
Company."
The Company has recently signed agreements with Hoechst and Elan that
contemplate the commercialization of products resulting from research and
development collaboration agreements between the parties. There can be no
assurance that such agreements will result in commercially viable collaborations
between the parties, or that any resulting collaborations will be successful.
See "Business -- Collaborative Alliances -- Hoechst AG" and "-- Collaborative
Alliances -- Elan Corporation, plc."
HISTORY OF LOSSES AND ACCUMULATED DEFICIT; UNCERTAINTY OF FUTURE PROFITABILITY;
QUARTERLY FLUCTUATIONS
The Company has incurred net losses since its inception, and at December
31, 1997, had an accumulated deficit of approximately $26.5 million. For the
years ended December 31, 1995, 1996 and 1997, Nanogen had net losses of
approximately $4.6 million, $7.8 million and $11.3 million, respectively. The
Company anticipates that it will continue to incur additional operating losses
for at least the next several years. The estimates above and elsewhere in this
Prospectus of the minimum period during which the Company expects to incur
losses are forward-looking statements that involve risks and uncertainties.
There can be no assurance that the Company will not incur losses for periods of
time in excess of those set forth herein and elsewhere in this Prospectus and
actual results may differ materially. At this time, the Company has no products
available for sale and no revenues have been generated from commercialization of
products arising out of its technology. There can be no assurance that the
Company will ever attain profitability or will remain profitable on a quarterly
or annual basis in the future. The Company expects that its revenues will be
generated principally from the sale of its instrument system and the recurring
sale of its disposable cartridges. There can be no assurance that the Company
will sell a sufficient number of instruments and disposable cartridges at a
gross margin sufficient to achieve profitability. The Company intends to
significantly increase its investments in
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research and development, sales and marketing, manufacturing, clinical trials,
regulatory approvals and related infrastructure. As a result of the anticipated
increases in the Company's operating expenses, the Company's financial prospects
must be considered in light of the risks, expenses and difficulties frequently
encountered by early stage development companies, particularly companies in new
and rapidly evolving markets. The Company believes that future operating results
will be subject to quarterly fluctuations due to a variety of factors, including
the timing of payments from collaborators, whether and when new products are
successfully developed and introduced by the Company or its competitors, market
acceptance of future products, regulatory delays, product recalls, manufacturing
delays, shipment problems, product seasonality and changes in the mix of
products sold. See "Management's Discussion and Analysis of Financial Condition
and Results of Operations."
FUTURE CAPITAL REQUIREMENTS; UNCERTAINTY OF ADDITIONAL FUNDING
While the Company believes that its available cash, together with the
proceeds of this offering and the Private Placement, will be sufficient to
satisfy its funding needs for current operations for at least the next 24
months, the Company has incurred negative cash flow from operations since
inception and does not expect to generate positive cash flow to fund its
operations for at least the next several years. Thus, the Company may need to
raise additional capital to fund its research and development programs, to scale
up manufacturing activities and establish its sales and marketing capability.
The Company's current collaborations will, and future collaborations may,
require the Company to commit substantial amounts of capital. There can be no
assurance that the Company will be able to make such scheduled capital
contributions. The Company's future liquidity and capital funding requirements
will depend on numerous factors, including the extent to which the Company's
products under development are successfully developed and gain market
acceptance, the timing of regulatory actions regarding the Company's potential
products, the costs and timing of expansion of sales, marketing and
manufacturing activities, prosecution and enforcement of patents important to
the Company's business, the results of clinical trials, competitive
developments, and the Company's ability to enter into additional collaborative
arrangements. There can be no assurance that such additional capital will be
available on terms acceptable to the Company, if at all. Furthermore, any
additional equity financing may be dilutive to stockholders, and debt financing,
if available, may include restrictive covenants. If adequate funds are not
available, the Company may be required to curtail its operations significantly
or to obtain funds through entering into collaborative agreements or other
arrangements on less favorable terms. The failure by the Company to raise
capital on acceptable terms when needed could have a material adverse effect on
the Company's business, financial condition or results of operations. See "Use
of Proceeds" and "Management's Discussion and Analysis of Financial Condition
and Results of Operations -- Liquidity and Capital Resources."
DEPENDENCE ON KEY PERSONNEL
The Company's future success is highly dependent on the efforts of its
senior management and scientific team, including its Chief Executive Officer,
President, Vice President -- Research and Product Development and Chief
Technical Officer. The loss of the services of any member of its senior
management or scientific staff may significantly delay or prevent the
achievement of product development and other business objectives. Because of the
specialized scientific nature of the Company's business, the Company is highly
dependent on its ability to attract and retain qualified scientific and
technical personnel. There is intense competition among major pharmaceutical and
chemical companies, semiconductor companies, specialized biotechnology firms and
universities and other research institutions for qualified personnel in the
areas of the Company's activities. Loss of the services of, or failure to
recruit, key scientific and technical personnel could adversely affect the
Company's business, financial condition or results of operations. In addition, a
substantial portion of the stock and stock options currently held by many of the
Company's key employees is vested and the remaining portion may become fully
vested over the next several years before the Company achieves significant
revenues or profitability. The Company may have to grant more stock or stock
options to give these employees additional incentives to remain with the
Company, resulting in dilution to stockholders. There can be no assurance that
granting additional stock or stock options will be sufficient to attract or
retain key employees. See "Business -- Employees" and "Management -- Directors,
Executive Officers and Key Scientific Personnel and Consultants."
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INTENSE COMPETITION; COMPETING TECHNOLOGIES
As the Company develops applications for its technology, it expects to
encounter intense competition from a number of companies that offer products in
its targeted application areas. The Company anticipates that its competitors in
these areas will include health care companies that manufacture laboratory-based
tests and analyzers, diagnostic and pharmaceutical companies, as well as
companies developing drug discovery technologies. To the extent the Company is
successful in developing products in these areas, the Company will face
competition from established companies and numerous development-stage companies
that continually enter these markets.
In many instances, the Company's competitors have substantially greater
financial, technical, research and other resources and larger, more established
marketing, sales, distribution and service organizations than the Company.
Moreover, such competitors may offer broader product lines and have greater name
recognition than the Company, and may offer discounts as a competitive tactic.
In addition, several development stage companies are currently making or
developing products that compete with or will compete with those of the Company.
There can be no assurance that the Company's competitors will not succeed in
developing or marketing technologies or products that are more effective or
commercially attractive than the Company's current or future products, or that
would render the Company's technologies and products obsolete. Also, there can
be no assurance that the Company will have the financial resources, technical
expertise or marketing, distribution or support capabilities to compete
successfully in the future. The Company's future success will depend in large
part on its ability to maintain a competitive position with respect to the
technologies in which it competes. Rapid technological development by the
Company or others may result in competing products or technology. See
"Business -- Nanogen's Platform Technology," "-- Applications and Products Under
Development" and "-- Competition."
UNCERTAINTY OF PATENT AND PROPRIETARY TECHNOLOGY PROTECTION; POTENTIAL INABILITY
TO LICENSE TECHNOLOGY FROM THIRD PARTIES
The Company's commercial success will depend in part on obtaining and
maintaining meaningful patent protection on its inventions, technologies and
discoveries. The Company's strategy is to actively pursue patent protection in
the U.S. and foreign jurisdictions for technology it believes to be proprietary
and that offers competitive advantages for its products. The Company's ability
to compete effectively will therefore depend in part on its ability to develop
and maintain proprietary aspects of its technology, and to operate without
infringing the proprietary rights of others, or to obtain rights to such
third-party proprietary rights, if necessary. While Nanogen has four U.S. and
one foreign issued patents and is currently prosecuting additional patent
applications in the U.S. and with certain foreign patent offices, there can be
no assurance that any of the Company's pending patent applications will result
in the issuance of any patents, that the Company's patent applications will have
priority over others' applications, or that, if issued, any of the Company's
patents will offer protection against competitors with similar technologies.
There can be no assurance that any patents issued to the Company will not be
challenged, invalidated or circumvented in the future or that the rights created
thereunder will afford the Company a competitive advantage.
The commercial success of the Company also depends in part on the Company
neither infringing valid, enforceable patents or proprietary rights of third
parties, nor breaching any licenses that may relate to the Company's
technologies and products. The Company is aware of certain third-party patents
that may relate to the Company's technology. There can be no assurance that the
Company does not or will not infringe these patents or other patents or
proprietary rights of third parties. In addition, the Company has received and
may in the future receive notices claiming infringement from third parties as
well as invitations to take licenses under third-party patents. Any legal action
against the Company or its collaborative partners claiming damages and seeking
to enjoin commercial activities relating to the Company's products and processes
affected by third-party rights, in addition to subjecting the Company to
potential liability for damages, may require the Company or its collaborative
partners to obtain licenses in order to continue to manufacture or market the
affected products and processes. There can be no assurance that the Company or
its collaborative partners would prevail in any such action or that any license
(including licenses proposed by third parties) required under any such patent
would be made available on commercially acceptable terms, if at all. There are
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<PAGE> 14
a significant number of U.S. and foreign patents and patent applications held by
third parties in the Company's areas of interest, and the Company believes that
there may be significant litigation in the industry regarding patent and other
intellectual property rights. If the Company becomes involved in such
litigation, it could consume a substantial portion of the Company's managerial
and financial resources, which could have a material adverse effect on the
Company's business, financial condition and results of operations. Additionally,
the defense and prosecution of interference proceedings before the U.S. Patent
and Trademark Office ("USPTO") and related administrative proceedings will
result in substantial expense to the Company and significant diversion of effort
by the Company's technical and management personnel. There can be no assurance
that the Company will not in the future become subject to USPTO interference
proceedings to determine the priority of inventions. In addition, laws of
certain foreign countries do not protect intellectual property to the same
extent as do laws in the U.S., which may subject the Company to additional
difficulties in protecting its intellectual property in those countries.
The Company also relies upon trade secrets, technical know-how and
continuing inventions to develop and maintain its competitive position. There
can be no assurance that others will not independently develop substantially
equivalent proprietary information and techniques or otherwise gain access to
the Company's trade secrets or disclose such technology, that the Company can
meaningfully protect its trade secrets, or that the Company will be capable of
protecting its rights to its trade secrets. The Company seeks to protect its
proprietary technology and patents, in part, by confidentiality agreements with
its employees and certain contractors. There can be no assurance that the
Company's own employees will not breach their existing Proprietary Information,
Inventions, and Dispute Resolution Agreements or that such agreements will
otherwise protect the Company's intellectual property, each of which could have
a material adverse effect on the Company's business, financial condition and
results of operations. See "Business -- Proprietary Technology and Patents."
NO ASSURANCE OF OBTAINING REGULATORY APPROVALS; GOVERNMENT REGULATORY PROCESS
The Company anticipates that the manufacturing, labeling, distribution and
marketing of a number of its diagnostic products will be subject to regulation
in the U.S. and in certain other countries. In the U.S., the Federal Drug
Administration ("FDA") regulates, as medical devices, most diagnostic tests and
in vitro reagents that are marketed as finished test kits and equipment.
Pursuant to the Federal Food, Drug, and Cosmetic Act, and the regulations
promulgated thereunder, the FDA regulates the preclinical and clinical testing,
design, efficacy, safety, manufacture, labeling, distribution and promotion of
medical devices. The Company will not be able to commence marketing or
commercial sales in the U.S. of such products until it receives clearance or
approval from the FDA, which can be a lengthy, expensive and uncertain process.
The Company has not applied for FDA or other regulatory approvals with respect
to any of its products under development. There can be no assurance that the
Company will not experience difficulties that could delay or prevent the
successful development, introduction and marketing of these new products, that
regulatory clearance or approval or clearance of any new products will be
granted by the FDA or foreign regulatory authorities on a timely basis, if at
all, or that the new products will be successfully commercialized. Noncompliance
with applicable FDA requirements can result in, among other things,
administrative sanctions or judicially imposed sanctions such as injunctions,
civil penalties, recall or seizure of products, total or partial suspension of
production, failure of the government to grant premarket clearance or premarket
approval for devices, withdrawal of marketing clearances or approvals, and
criminal prosecution. The FDA also has the authority to request recall, repair,
replacement or refund of the cost of any device manufactured or distributed by
the Company.
Any devices manufactured or distributed by the Company pursuant to FDA
clearance or approvals are subject to pervasive and continuing regulation by the
FDA and certain state agencies. Before a new device can be introduced in the
U.S. market, the manufacturer must generally obtain FDA clearance of a 510(k)
notification or FDA approval of a premarket approval ("PMA") application. A
510(k) clearance will generally only be granted if the information submitted to
the FDA establishes that the device is "substantially equivalent" to a legally
marketed Class I or Class II device or a preamendment Class III device (i.e. a
device that has been on the market since before May 28, 1976) for which the FDA
has not called for PMAs. The
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PMA approval process is more expensive, uncertain and lengthy than the 510(k)
clearance process. To obtain a PMA, the Company, either alone or with the
assistance of its strategic partners, must submit extensive data, including
preclinical and clinical trial data, to demonstrate the safety and efficacy of a
product. There can be no assurance that with respect to any of the Company's
products in development, the FDA will not determine that the Company must adhere
to the more costly, lengthy and uncertain PMA approval process. Significant
modifications of the labeling, manufacturing and design of a cleared or approved
device will require clearance or approval by the FDA. There can be no assurance
that the Company will be able to obtain necessary regulatory approvals or
clearances for its products on a timely basis, if at all, and delays in receipt
of or failure to receive such approvals or clearances, the loss of previously
received approvals or clearances, limitations on intended uses imposed as a
condition of such approvals or clearances, or failure to comply with existing or
future regulatory requirements would have a material adverse effect on the
Company's business, financial condition and results of operations.
If marketed outside the U.S., the Company's products will be subject to
foreign regulatory requirements governing the conduct of clinical trials,
product licensing, pricing and reimbursement, which vary from country to country
and are becoming more restrictive throughout the European Union. The process of
obtaining foreign regulatory approvals can be lengthy and require the
expenditure of substantial capital and resources, and there can be no assurance
that the Company or its collaboration partners will be successful in obtaining
the necessary approvals. Any delay or failure by the Company or its
collaboration partners to obtain regulatory approvals for its products would
adversely affect the Company's ability to generate product and royalty revenues,
which could have a material adverse effect on the Company's business, financial
condition and operating results.
The Company intends to conduct clinical investigations of its products
under development, which will entail distributing them in the U.S. on an
Investigational Use Only ("IUO") basis. Although clinical investigations of most
devices are subject to the investigational device exemption ("IDE")
requirements, clinical investigations of in vitro diagnostic ("IVD") tests, such
as a number of the Company's products, are exempt from IDE requirements
including the need to obtain the FDA's prior approval, provided the testing is
noninvasive, does not require an invasive sampling procedure that presents a
significant risk, does not intentionally introduce energy into a patient, and is
not used as a diagnostic procedure without confirmation by another medically
established test procedure. In addition, the IVD must be labeled for Research
Use Only ("RUO") or IUO, and distribution controls must be in place to limit the
use of the product to such use. There can be no assurance that the FDA would
agree that the Company's IUO distribution of its IVD products under development
will meet the requirements for IDE exemption. Furthermore, failure by the
Company or the recipients of its products under development to maintain
compliance with the IDE exemption requirements could result in enforcement
action by the FDA, including, among other things, the loss of the IDE exemption
or the imposition of other restrictions on the Company's distribution of its
products under development, which would adversely affect the Company's ability
to conduct the clinical investigations necessary to support marketing clearance
or approval.
Subsequent to the receipt of an FDA approval or clearance, the Company will
be required to adhere to the Quality System Regulation ("QSR") (formerly Good
Manufacturing Practices), which includes testing, control and documentation
requirements. Manufacturers must also comply with Medical Device Reporting
("MDR") requirements that a manufacturer report to the FDA any incident in which
its product may have caused or contributed to a death or serious injury, or in
which its product malfunctioned and would be likely to cause or contribute to a
death or serious injury upon recurrence. Labeling and promotional activities are
subject to scrutiny by the FDA and, in certain circumstances, by the Federal
Trade Commission. Current FDA enforcement policy prohibits the marketing of
approved medical devices for unapproved uses.
The Company is subject to routine inspection by the FDA and certain state
agencies for compliance with QSR requirements, MDR requirements and other
applicable regulations. The recently finalized QSR requirements include design
controls that will likely increase the cost of compliance. There can be no
assurance that the Company will not incur significant costs to comply with laws
and regulations in the future or that such laws and regulations will not have a
material adverse effect upon the Company's business, financial condition and
results of operation.
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Any of the Company's customers using its diagnostic devices for clinical
use in the U.S. may be regulated under the Clinical Laboratory Improvement
Amendments of 1988 ("CLIA"). CLIA is intended to ensure the quality and
reliability of clinical laboratories in the U.S. by mandating specific standards
in the areas of personnel qualification, administration, participation in
proficiency testing, patient test management, quality control, quality assurance
and inspections. The regulations promulgated under CLIA establish three levels
of diagnostic tests ("waived," "moderately complex" and "highly complex") and
the standards applicable to a clinical laboratory depend on the level of the
tests it performs. CLIA requirements may prevent some clinical laboratories from
using certain of the Company's diagnostic products. Therefore, there can be no
assurance that the CLIA regulations and future administrative interpretations of
CLIA will not have a material adverse impact on the Company by limiting the
potential market for the Company's products. See "Business -- Government
Regulation."
DEPENDENCE ON SUPPLIERS
Certain key components and raw materials used in the manufacture of the
Company's products are currently provided from limited sources or in some cases
by single-source vendors. Although the Company believes that alternative sources
for such components and raw materials are available, any supply interruption in
a sole-sourced component of raw material would have a material adverse effect on
the Company's ability to manufacture its products until a new source of supply
is qualified and, as a result, could have a material adverse effect on the
Company's business, financial condition and results of operations. In addition,
an uncorrected impurity or supplier's variation in a raw material, either
unknown to the Company or incompatible with the Company's manufacturing process,
could have a material adverse effect on the Company's ability to manufacture
products. The Company may be unable to find a sufficient alternative supply
channel in a reasonable time period, or on commercially reasonable terms, if at
all. Failure to obtain a supplier for the manufacture of components of its
future products, if any, could have a material adverse effect on the Company's
business, financial condition and results of operations. See
"Business -- Manufacturing."
LIMITED MANUFACTURING EXPERIENCE; POTENTIAL INABILITY TO SCALE UP MANUFACTURING
The Company has no experience manufacturing products for commercial
purposes. The Company presently relies on subcontractors to manufacture the
limited quantities of semiconductor microchips and other components it currently
requires for internal and collaborative purposes, as well as for use in clinical
trials and prototype products. The Company is currently qualifying new contract
manufacturers for large scale wafer fabrication, and there can be no assurance
that the Company will qualify and secure sufficient capacity on satisfactory
terms for commercial production. There can be no assurance that manufacturing,
supply and quality control problems will not arise as the Company either alone
or with subcontractors attempts to scale up manufacturing procedures or that
such scale-up can be achieved in a timely manner or at a commercially reasonable
cost. Any such failure to surmount such problems could lead to delays or pose a
threat to the ultimate commercialization of the Company's products and result in
a material adverse effect on the Company. If the Company or any of its contract
manufacturers encounter future manufacturing difficulties, including problems
involving the ability to scale up manufacturing capacity, production yields,
quality control and assurance, or shortages of components or qualified
personnel, it could have a material adverse effect on the Company's business,
financial condition and results of operations. The Company's manufacturing
facilities and those of its contract manufacturers are or will be subject to
periodic regulatory inspections by the FDA and other federal and state
regulatory agencies and such facilities are subject to QSR requirements of the
FDA. Furthermore, prior to approval of a PMA, the Company's and any third-party
manufacturer's facilities, procedures and practices will be subject to a
pre-approved inspection by the FDA. Failure by the Company or its third-party
manufacturer to maintain its facilities in accordance with QSR regulations,
other international quality standards or other regulatory requirements would
have a material adverse effect on the Company's business, financial condition
and results of operations. See "Business -- Manufacturing."
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LIMITED MARKETING AND SALES CAPABILITY
Nanogen intends to market and sell its products, if successfully developed,
directly and through strategic alliances and distribution arrangements with
third parties, including its collaborative partners. There can be no assurance
that any efforts to establish such strategic alliances or distribution
arrangements will be successful. The Company currently has limited product
marketing and sales capabilities, although it intends to recruit experienced
marketing and sales personnel as the Company grows closer to product
commercialization. In attracting, establishing and maintaining a marketing and
sales force, or entering into third-party marketing or distribution arrangements
with other companies, the Company expects to incur significant additional
expenses. No assurance can be given that the Company will be able to
successfully establish such a sales and marketing capability or enter into
third-party marketing or distribution arrangements or that it will be successful
in achieving marketplace acceptance for its products. See "Business -- Sales and
Marketing."
MANAGEMENT OF GROWTH
The Company has recently experienced, and expects to continue to experience
growth in the number of its employees and the scope of its operating and
financial systems. This growth has resulted in an increase in responsibilities
for both existing and new management personnel. The Company's ability to manage
growth effectively will require it to continue to implement and improve its
operational, financial and management information systems and to recruit, train,
motivate and manage its employees. There can be no assurance that the Company
will be able to manage its growth and expansion, and a failure to do so could
have a material adverse effect on the Company's business, financial condition
and results of operations.
PRODUCT LIABILITY EXPOSURE; INADEQUACY OR UNAVAILABILITY OF INSURANCE COVERAGE
The testing, manufacturing and marketing of the Company's products entails
an inherent risk of product liability claims. To date, the Company has not
experienced any product liability claims, but any such claims arising in the
future could have a material adverse effect on the Company's business, financial
condition and results of operations. The Company intends to secure limited
product liability/clinical liability insurance coverage, but there can be no
assurance that the Company will be able to obtain such insurance on acceptable
terms with adequate coverage, or at reasonable costs. Potential product
liability claims may exceed the amount of the Company's insurance coverage or
may be excluded from coverage under the terms of the policy. There can be no
assurance that the Company's insurance once obtained can be renewed at a cost
and level of coverage comparable to that then in effect. Any claims against the
Company, regardless of their merit or eventual outcome, could have a material
adverse effect upon the Company's business, financial condition, and results of
operations.
ETHICAL AND PRIVACY CONSIDERATIONS
The Company's success in diagnostics and genetic testing applications will
depend in large part upon its ability to secure a market for certain of its
products under development. Genetic tests, including those performed using
Nanogen's technology platform, may be difficult to interpret and may lead to
misinformation or misdiagnosis. Even when a genetic test identifies the
existence of a mutation in an individual, the interpretation of the result is
often limited to the identification of a statistical probability that the tested
individual will develop the disease or condition for which the test is
performed. In addition, the inability to test for unknown genes which may cause
a particular genetic disorder may result in misdiagnosis. The prospect of
broadly available genetic testing has raised societal and governmental concerns
regarding the appropriate use and confidentiality of information provided by
such testing. Government authorities could, for social or other purposes, limit
the use of genetic testing or prohibit testing for genetic predisposition to
certain conditions, either of which could adversely affect the use of the
Company's products. In addition, there are additional issues regarding the
appropriate use of genetic testing information by entities such as insurance
companies and employers. It is possible that discrimination by insurance
companies could occur through the raising of premiums by insurers to prohibitive
levels, outright cancellation of insurance or unwillingness to provide coverage
to patients shown to have a genetic predisposition to a particular disease. In
addition, employers could discriminate against employees with a positive genetic
predisposition due to the increased risk for
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<PAGE> 18
disease resulting in possible cost increases for health insurance and the
potential for lost employment time. Legislation has been proposed to govern the
confidentiality of genetic testing information, but there can be no assurance
that such legislation will be widely adopted, if at all, or if adopted that it
will adequately protect the privacy interests of genetic testing patients. There
can be no assurance that ethical concerns about genetic testing will not
materially adversely affect market acceptance of the Company's technology for
diagnostic applications, which could materially and adversely affect the
Company's business, financial condition and operating results. See
"Business -- Applications and Products Under Development -- Genetic Testing
Applications."
CONTINUED CONTROL BY DIRECTORS, EXECUTIVE OFFICERS, PRINCIPAL STOCKHOLDERS AND
AFFILIATED ENTITIES
The Company's directors, executive officers, principal stockholders and
entities affiliated with them will, in the aggregate, beneficially own
approximately 41.3% of the Company's outstanding Common Stock following the
completion of this offering and the Private Placement. These stockholders, if
acting together, would be able to control substantially all matters requiring
approval by the stockholders of the Company, including the election of directors
and the approval of mergers or other business combination transactions. See
"Principal Stockholders."
LACK OF PRIOR PUBLIC MARKET AND POSSIBLE VOLATILITY OF STOCK PRICE
Prior to this offering, there has been no public market for the Common
Stock and there can be no assurance that an active public market for the Common
Stock will develop or be sustained after this offering. The initial public
offering price will be determined through negotiations between the Company and
the Underwriters and may bear no relationship to the price at which the Common
Stock will trade after the closing of this offering. In addition, the securities
markets have from time to time experienced significant price and volume
fluctuations that are unrelated to the operating performance of particular
companies. The market prices of the common stock of many publicly held medical
device companies have in the past been, and can in the future be, especially
volatile. Announcements of technological innovations or new products by the
Company or its competitors, clinical investigation results, release of reports
by securities analysts, developments or disputes concerning patents or
proprietary rights, regulatory developments, changes in regulatory or medical
reimbursement policies, economic and other external factors, as well as
period-to-period fluctuations in the Company's financial results, may have a
significant impact on the market price of the Common Stock. In the past,
securities class action litigation has often been instituted following periods
of volatility in the market price for a company's securities. Such litigation
could result in substantial costs and a diversion of management attention and
resources, which could have a material adverse effect on the Company's business,
financial condition and results of operations. See "Underwriters."
SHARES ELIGIBLE FOR FUTURE SALE
Future sales of Common Stock by existing stockholders under Rule 144 and
Rule 701 of the Securities Act of 1933, as amended (the "Securities Act"), or
through the exercise of outstanding registration rights or otherwise could have
an adverse effect on the price of the Company's Common Stock. The 3,600,000
shares of Common Stock being sold hereby, not including the Private Placement,
will be eligible for sale in the public market upon the effectiveness of this
offering. Excluding the shares of Common Stock being sold hereby and in the
Private Placement, the remaining 11,076,398 shares of Common Stock (excluding
shares purchased pursuant to the exercise of unvested options and subject to
repurchase by the Company) may be sold in the public market only if registered
or if they qualify for an exemption from registration under Rules 144, 144(k) or
701 promulgated under the Securities Act. As a result of lockups with the
Underwriters and the provisions of Rule 144 and 701, additional shares will be
available for sale in the public market as follows: (i) approximately 71,400
shares will be eligible for immediate sale on the date of this Prospectus, (ii)
approximately 10,969,000 shares of Common Stock will be eligible for sale 180
days after the date of this Prospectus upon expiration of lockup agreements, and
(iii) the remainder of the shares of Common Stock will be eligible for sale from
time to time thereafter upon expiration of their respective holding periods. The
holders of the 1,909,089 shares issued in the Private Placement (assuming an
initial public offering price of
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$11.00 per share) will have the right to register such shares for future sale
and such shares will otherwise be eligible for sale one year from the closing
date of this offering, subject to the limitations of Rule 144. The Company
intends to register approximately 2,800,000 shares of Common Stock reserved for
issuance under its stock plans as soon as practicable following the date of this
Prospectus. Certain existing stockholders have rights under certain
circumstances to require the Company to register their shares for future sale.
See "Description of Capital Stock -- Registration Rights" and "Shares Eligible
for Future Sale."
POTENTIAL ANTI-TAKEOVER EFFECTS OF CERTAIN CHARTER AND BYLAW PROVISIONS AND
DELAWARE LAW
Certain provisions of the Company's Certificate of Incorporation and Bylaws
may have the effect of making it more difficult for a third party to acquire, or
of discouraging a third party from attempting to acquire control of the Company.
Such provisions could limit the price that certain investors might be willing to
pay in the future for shares of the Company's Common Stock. Certain of these
provisions allow the Company to issue Preferred Stock without any vote or
further action by the stockholders, provide for a classified board of directors,
eliminate the right of stockholders to call special meetings of stockholders or
to act by written consent without a meeting. These provisions may make it more
difficult for stockholders to take certain corporate actions and could have the
effect of delaying or preventing a change in control of the Company. See
"Management" and "Description of Capital Stock."
IMMEDIATE AND SUBSTANTIAL DILUTION
The initial public offering price will be substantially higher than the net
tangible book value per share of Common Stock. Assuming an initial public
offering price of $11.00 per share, purchasers of shares of Common Stock in this
offering will incur immediate and substantial dilution of $6.76 per share. Such
purchasers will experience additional dilution upon the exercise of outstanding
stock options and warrants. Future capital funding transactions may also result
in dilution to purchasers in this offering. See "Dilution."
ABSENCE OF DIVIDENDS
The Company has never paid cash dividends on its capital stock and does not
anticipate paying any cash dividends in the foreseeable future. See "Dividend
Policy."
16
<PAGE> 20
USE OF PROCEEDS
The proceeds to the Company from the sale of the 3,600,000 shares of Common
Stock being offered by the Company are estimated to be approximately $35.9
million (approximately $41.5 million if the Underwriters' over-allotment option
is exercised in full), assuming an initial public offering price of $11.00 per
share and after deducting estimated underwriting discounts and commissions and
estimated offering expenses. Additionally, pursuant to the Private Placement,
and assuming an initial public offering price of $11.00 per share, the Company
plans to sell directly to Becton Dickinson, a subsidiary of Hoechst and Elan an
aggregate of 1,909,089 shares of its Common Stock for an aggregate purchase
price of $21.0 million.
Of the aggregate estimated net proceeds of $56.9 million, the Company
currently expects to use approximately $27.9 million for research and product
development, including internal development, acquisitions, licenses or as part
of commitments for third-party collaborative arrangements; approximately $13.2
million for operational and capital expenditures, including facilities
expansion, manufacturing scale-up and manufacturing and laboratory equipment;
and approximately $5.2 million for establishing regulatory and sales and
marketing capabilities. The Company will use the balance of approximately $10.6
million of the net proceeds for working capital and other general corporate
purposes. The cost, timing and amount of funds required by the Company cannot be
precisely determined at this time and will be based upon numerous factors,
including the following: the Company's progress in research and development; the
results of clinical trials; the timing and costs of obtaining regulatory
approvals; the ability of the Company to establish and receive payments under
collaborative agreements; the costs involved in preparing, filing, prosecuting,
maintaining, defending and enforcing patent claims; competing technological and
market developments; changes in the Company's existing research relationships;
evaluation of the commercial viability of potential products; effective
commercialization activities and arrangements; and the cost and availability of
alternative methods of financing. The Board of Directors has broad discretion in
determining how the proceeds of this offering will be applied. Pending such
uses, the Company intends to invest the net proceeds in short-term,
interest-bearing obligations.
DIVIDEND POLICY
The Company has never declared or paid dividends on its capital stock and
does not anticipate paying any dividends in the foreseeable future. The Company
currently intends to retain its earnings, if any, for the development and
expansion of its business.
17
<PAGE> 21
CAPITALIZATION
The following table sets forth the capitalization of the Company as of
December 31, 1997 (i) on a pro forma basis to give effect to the conversion of
all outstanding shares of the Company's Preferred Stock into Common Stock and
the authorization of 5,000,000 shares of Preferred Stock and 50,000,000 shares
of Common Stock upon the closing of this offering, and (ii) as adjusted to give
effect to the sale of 1,909,089 shares of Common Stock to be issued in the
Private Placement at an assumed price of $11.00 per share and the sale of the
3,600,000 shares of Common Stock being offered hereby at an assumed initial
public offering price of $11.00 per share and after deducting the estimated
underwriting discounts and commissions and estimated offering expenses payable
by the Company.
<TABLE>
<CAPTION>
DECEMBER 31, 1997
------------------------
PRO FORMA AS ADJUSTED
--------- -----------
(IN THOUSANDS)
<S> <C> <C>
Capital lease obligations, less current portion............. $ 1,193 $ 1,193
Stockholders' equity:
Preferred stock, $0.001 par value; 5,000,000 shares
authorized; no shares issued and outstanding, pro forma
and as adjusted........................................ -- --
Common stock, $0.001 par value; 50,000,000 shares
authorized, pro forma and as adjusted; 12,306,065
shares issued and outstanding, pro forma; 17,815,154
shares issued and outstanding, as adjusted(1).......... 12 18
Additional paid-in capital................................ 48,528 105,450
Notes receivable from stockholders........................ (1,130) (1,130)
Deferred compensation..................................... (2,323) (2,323)
Accumulated deficit....................................... (26,488) (26,488)
-------- --------
Total stockholders' equity............................. 18,599 75,527
-------- --------
Total capitalization.............................. $ 19,792 $ 76,720
======== ========
</TABLE>
- ---------------
(1) Based on the number of shares of Common Stock outstanding at December 31,
1997. Includes 1,543,939 shares of Common Stock purchased through early
exercise of incentive stock options which remain subject to repurchase by
the Company. Excludes (i) 1,508,852 shares of Common Stock reserved for
issuance and available for grant or sale under the Company's Stock Option
Plans, under which there were options outstanding to purchase an aggregate
of 416,716 shares of Common Stock as of December 31, 1997, (ii) warrants to
purchase 420,703 shares of Common Stock, (iii) warrants to purchase 40,993
shares of Preferred Stock, which will convert into warrants for the purchase
of 40,993 shares of Common Stock upon the closing of this offering and (iv)
warrants to purchase 6,000 shares of Preferred Stock which will expire on
the day prior to effectiveness of the Registration Statement of which this
Prospectus forms a part.
18
<PAGE> 22
DILUTION
The pro forma net tangible book value of the Company as of December 31,
1997 was approximately $18,599,000, or $1.51 per share. Pro forma net tangible
book value per share represents the amount of total tangible assets less total
liabilities of the Company, divided by the number of shares of Common Stock
outstanding (after giving effect to the conversion of all outstanding shares of
the Company's Preferred Stock). After giving effect to the sale of 1,909,089
shares of Common Stock in the Private Placement at a price of $11.00 per share,
the pro forma net tangible book value at December 31, 1997 would have been
approximately $39,599,000 or $2.79 per share. After giving effect to the sale of
the 3,600,000 shares of Common Stock offered by the Company hereby (at an
assumed initial public offering price of $11.00 per share and after deduction of
estimated underwriting discounts and commissions and estimated offering
expenses), the pro forma net tangible book value of the Company at December 31,
1997 would have been approximately $75,527,000 or $4.24 per share. This
represents an immediate increase in such net tangible book value of $1.45 per
share to existing stockholders and an immediate dilution of $6.76 per share to
new investors purchasing shares in this offering. The following table
illustrates this per share dilution:
<TABLE>
<S> <C> <C>
Assumed initial public offering price....................... $11.00
------
Pro forma net tangible book value before offering......... $ 1.51
Increase attributable to the Private Placement............ 1.28
------
Pro forma net tangible book value per share after the
Private Placement...................................... 2.79
Pro forma increase attributable to new investors.......... 1.45
------
Pro forma net tangible book value after offering............ 4.24 4.24
------
Dilution to new investors................................... $ 6.76
======
</TABLE>
The following table summarizes, on a pro forma basis as of December 31,
1997 (after giving effect to the Private Placement and the conversion of all
outstanding shares of Preferred Stock into Common Stock upon completion of this
offering), the differences between existing stockholders (including, without
limitation, Becton Dickinson, Hoechst and Elan) and new investors with respect
to the number of shares of Common Stock purchased from the Company, the total
consideration paid to the Company, and the average consideration paid per share
(based upon an assumed initial public offering price of $11.00 per share and
before deduction of estimated underwriting discounts and commissions and
offering expenses):
<TABLE>
<CAPTION>
SHARES PURCHASED TOTAL CONSIDERATION
---------------------- ----------------------- AVERAGE PRICE
NUMBER PERCENT AMOUNT PERCENT PER SHARE
----------- ------- ------------ ------- -------------
<S> <C> <C> <C> <C> <C>
Existing stockholders............ 14,215,154 79.8% $ 67,844,060 63.1% $ 4.77
New investors.................... 3,600,000 20.2 39,600,000 36.9 $11.00
----------- ----- ------------ -----
Total.................. 17,815,154 100.0% $107,444,060 100.0%
=========== ===== ============ =====
</TABLE>
The foregoing table assumes no exercise of the Underwriters' over-allotment
option or of any outstanding stock options or warrants. As of February 28, 1998,
there were (i) options to purchase an aggregate of 521,109 shares of Common
Stock at exercise prices ranging from $.02 to $3.00 per share, (ii) warrants to
purchase 420,703 shares of Common Stock, (iii) warrants to purchase 40,933
shares of Preferred Stock, which will convert into warrants for the purchase of
40,933 shares of Common Stock upon the closing of this offering and (iv)
warrants to purchase 6,000 shares of Preferred Stock which will expire on the
day prior to effectiveness of the Registration Statement of which this
Prospectus forms a part. To the extent these options and warrants are exercised,
there will be further dilution to new investors. See "Management -- Stock Option
Plans" and Note 4 of the Notes to Financial Statements.
19
<PAGE> 23
SELECTED FINANCIAL DATA
The selected financial data set forth below with respect to the Company's
statements of operations for each of the three years in the period ended
December 31, 1997, and the Company's balance sheet data at December 31, 1996 and
1997, are derived from the financial statements of the Company that have been
audited by Ernst & Young LLP, which are included elsewhere herein and are
qualified by reference to such financial statements. The balance sheet data at
December 31, 1993, 1994 and 1995, and the statement of operations data for the
period from inception (September 1, 1993) to December 31, 1993 and for the year
ended December 31, 1994, have been derived from financial statements audited by
Ernst & Young LLP which are not included herein. The selected financial data set
forth below should be read in conjunction with "Management's Discussion and
Analysis of Financial Condition and Results of Operations" and the Company's
financial statements and notes thereto appearing elsewhere in this Prospectus.
<TABLE>
<CAPTION>
PERIOD FROM
INCEPTION
(SEPTEMBER 1, 1993)
TO YEARS ENDED DECEMBER 31,
DECEMBER 31, -----------------------------------------
1993 1994 1995 1996 1997
--------------------- ------- ------- ------- -----------
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
<S> <C> <C> <C> <C> <C>
STATEMENT OF OPERATIONS DATA:
Revenues:
Contract and grant revenue......... $ -- $ -- $ 318 $ 1,644 $ 2,123
Sponsored research................. -- -- -- -- 1,243
------- ------- ------- ------- -----------
Total revenues.................. -- -- 318 1,644 3,366
Operating expenses:
Research and development........... 183 1,345 3,356 6,931 11,769
General and administrative......... 225 1,065 1,646 2,427 3,910
------- ------- ------- ------- -----------
Total operating expenses........ 408 2,410 5,002 9,358 15,679
Interest income (expense), net....... -- 34 96 (64) 975
------- ------- ------- ------- -----------
Net loss............................. $ (408) $(2,376) $(4,588) $(7,778) $ (11,338)
======= ======= ======= ======= ===========
Pro forma net loss per share -- basic
and diluted(1)..................... $ (1.13)
===========
Number of shares used in computing
pro forma net loss per
share -- basic and diluted(1)... 10,072,324
===========
</TABLE>
<TABLE>
<CAPTION>
AS OF DECEMBER 31,
------------------------------------------------
1993 1994 1995 1996 1997
------- ------- ------- ------- --------
(IN THOUSANDS)
<S> <C> <C> <C> <C> <C>
BALANCE SHEET DATA:
Cash and cash equivalents....................... $ 118 $ 206 $ 4,318 $16,775 $ 19,498
Working capital (deficit)....................... (264) (22) 3,931 14,853 16,775
Total assets.................................... 118 1,622 6,339 19,090 23,215
Capital lease obligations, less current
portion....................................... -- 347 631 935 1,193
Accumulated deficit............................. (408) (2,784) (7,372) (15,151) (26,488)
Total stockholders' equity (net capital
deficiency)................................... (264) 865 4,950 15,680 18,599
</TABLE>
- ---------------
(1) Computed on the basis described in Note 1 of Notes to Financial Statements.
20
<PAGE> 24
MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
This Prospectus contains, in addition to historical information,
forward-looking statements that involve risks and uncertainties. The Company's
actual results could differ materially from the results discussed in the
forward-looking statements. Factors that could cause or contribute to such
differences include those discussed below, as well as those discussed under
"Risk Factors" and elsewhere in this Prospectus.
OVERVIEW
Nanogen integrates advanced microelectronics and molecular biology into a
platform technology with broad commercial applications in the fields of medical
diagnostics, biomedical research, genomics, genetic testing and drug discovery.
Nanogen's fully automated system, which incorporates a proprietary semiconductor
microchip, provides a flexible tool for the rapid identification and analysis of
any test sample containing charged molecules. Through the use of
microelectronics, the Company's technology enables the active movement and
concentration of charged molecules to and from designated microlocations, or
test sites, on the semiconductor microchip. This electronic concentration of
molecules greatly accelerates molecular binding at each microlocation. In
addition, Nanogen's technology allows the simultaneous analysis of multiple test
results, or multiplexing, from a single sample. The open architecture design of
the Nanogen system enables the Company to offer microchips with arrays designed
and built by Nanogen for specific applications or with arrays that can be
customized by the end user. The Company believes its technology will accelerate
the development of products that capitalize on the increasing availability of
genetic information and its relationship to human disease. The Company further
believes its semiconductor based platform technology provides a low cost, highly
efficient, accurate and versatile integrated system that will shift the paradigm
from current manual and mechanical methods to microelectronic systems, thereby
significantly improving the quality of healthcare.
Since commencing operations in 1993, Nanogen has applied substantially all
of its resources to its research and development programs. The Company has
incurred losses since inception and, as of December 31, 1997, had an accumulated
deficit of approximately $26.5 million. The Company expects to incur significant
losses over at least the next several years as it expands its research and
product development efforts including clinical studies and regulatory approvals,
and expands its sales and marketing, manufacturing and related infrastructure.
The Company does not anticipate revenues from product sales for the next
several years and anticipates its main sources of revenues during such period
will be payments from contracts, grants and sponsored research. At this time,
the Company has no products available for sale and no revenues have been
generated from the sale of products arising out of its technology. There can be
no assurance that the Company will ever attain profitability or will remain
profitable on a quarterly or annual basis in the future. The Company believes
that future operating results will be subject to quarterly fluctuations due to a
variety of factors, including the achievement of certain milestones under its
collaborative agreements, whether and when new products are successfully
developed and introduced by the Company or its competitors, market acceptance of
products under development or new products, regulatory and manufacturing delays.
Payments under sponsored research contracts will be subject to significant
fluctuations in both timing and amount and therefore the Company's results of
operations for any period may not be comparable to the results of operations for
any other period. See "Risk Factors -- Early Stage of Development; Technological
Uncertainty Whether Products Can Be Successfully Developed," "-- Lack of Market
Acceptance," "-- History of Losses and Accumulated Deficit; Uncertainty of
Future Profitability; Quarterly Fluctuations," "Business -- Collaborative
Alliances -- Becton, Dickinson and Company," "-- Collaborative
Alliances -- Hoechst AG" and "-- Collaborative Alliances -- Elan Corporation,
plc."
21
<PAGE> 25
RESULTS OF OPERATIONS
YEARS ENDED DECEMBER 31, 1997, 1996, AND 1995
Revenues. For the year ended December 31, 1997, revenue from contracts,
grants and sponsored research totaled approximately $3.4 million compared to
approximately $1.6 million and approximately $300,000 for the years ended
December 31, 1996 and 1995, respectively. This increase was due to an increase
in the number of active contracts to six during the year ended December 31, 1997
from three and one during the years ended December 31, 1996 and 1995,
respectively. In 1997, the Company received funding from The National Institute
of Standards and Technology -- Advanced Technology Program (ATP II) under a $2.0
million two-year award initiated in May 1997, a one-year grant of $900,000 from
the Bode Technology Group ("Bode") initiated in May 1997, funding from The
National Institute of Justice under a $700,000 one-year award initiated in March
1997, and funding from The Potomac Institute for Policy Studies under an
approximately $128,000 grant initiated in August 1997. Additionally, the Company
entered into a sponsored research agreement with Becton Dickinson pursuant to
which the Company began generating revenue in May 1997. In October 1997, such
research agreement was superseded by a series of agreements between the Company
and Becton Dickinson in connection with the establishment of a joint venture
collaboration. See "Business -- Collaborative Alliances -- Becton, Dickinson and
Company." In 1996, the Company received funding from The National Institute of
Standards and Technology -- Advanced Technology Program ("ATP I") under a $2.0
million two-year award initiated in August 1995, as well as funding from the
California Trade and Commerce Agency Defense Conversion Program under a one-year
grant in the amount of approximately $250,000 initiated in June 1996, and a
one-year renewable grant of approximately $500,000 from Bode initiated in March
1996. In 1995, revenue was only recognized under the ATP I award. The Company
had no sponsored research revenue in 1996 or 1995.
Research and Development Expenses. Research and development expenses
increased to approximately $11.8 million during the year ended December 31, 1997
from approximately $6.9 million and $3.4 million in the years ended December 31,
1996 and 1995, respectively. Research and development expenses include salaries,
lab supplies, consulting, travel, facilities and other expenditures relating to
research and product development. The increases from year to year are
attributable to the continued growth of research activities, including hiring of
additional scientific personnel, increased purchases of laboratory supplies and
services to support the increased number of contracts and grants and the
sponsored research program with Becton Dickinson, and expansion of research and
development facilities. The Company expects research and development spending to
increase significantly over the next several years as the Company expands
research and product development efforts, including initiation of clinical
studies required to obtain regulatory approvals.
General and Administrative Expenses. General and administrative expenses
were approximately $3.9 million in 1997 compared to approximately $2.4 million
in 1996 and approximately $1.6 million in 1995, primarily due to the hiring of
additional personnel, administrative support and increased legal costs primarily
relating to the Company's intellectual property. General and administrative
expenses are expected to continue to increase over the next several years in
support of the Company's expanding operations, research and development efforts,
commercialization of products as well as the costs associated with operating as
a public company.
Interest Income (Expense), Net. The Company had net interest income of
approximately $975,000 in 1997 compared to net interest expense of approximately
$64,000 in 1996 and net interest income of $96,000 in 1995. The significant
increase in 1997 was primarily attributable to increased cash balances as a
result of private placements of the Company's equity securities between December
1996 and May 1997 totaling approximately $32.2 million.
LIQUIDITY AND CAPITAL RESOURCES
The Company has financed its operations since inception primarily through
the net proceeds received from private placements of preferred equity securities
and with certain short term borrowings that were subsequently converted into
equity securities. As of December 31, 1997, the Company had received net
proceeds aggregating approximately $44.1 million from these transactions. In
addition, the Company has
22
<PAGE> 26
received proceeds from equipment financing totaling approximately $3.4 million
through December 31, 1997. The Company anticipates that it will continue to use
capital equipment leasing facilities to fund certain of its equipment
acquisitions and leasehold improvements.
Net cash used in operating activities was approximately $9.6 million, $6.1
million and $4.2 million for 1997, 1996 and 1995, respectively. Cash used for
operations was primarily related to the funding of expanding research and
development activities along with the establishment of an administrative
infrastructure. Pursuant to the terms of a licensing agreement, at December 31,
1997 the Company was committed to expend $5.75 million over the next six years
for the further development of products utilizing technology licensed
thereunder. The Company will require additional capital to expand research and
product development efforts including clinical trials and regulatory approvals,
expand sales and marketing, manufacturing and related infrastructure, to expand
its leased research and administrative facility and to construct a manufacturing
facility.
At December 31, 1997, the Company's principal source of liquidity was
approximately $19.5 million in cash and cash equivalents. While the Company
believes that its sources of liquidity, together with the proceeds of this
offering and the Private Placement, will be sufficient to satisfy its funding
needs for current operations for at least the next 24 months, the Company has
incurred negative cash flow from operations since inception and does not expect
to generate positive cash flow to fund its operations for at least the next
several years. This estimate of the period for which the Company expects its
available sources of liquidity to be sufficient to meet its capital requirements
is a forward-looking statement that involves risks and uncertainties. There can
be no assurance that the Company will be able to meet its capital requirements
for this period as a result of certain factors set forth under "Risk
Factors -- Future Capital Requirements; Uncertainty of Additional Funding" and
elsewhere in this Prospectus. In the event the Company's capital requirements
are greater than estimated, the Company may need to raise additional capital to
fund its research and development programs, to scale up manufacturing activities
and expand its sales and marketing efforts to support the commercialization of
its products under development. The Company's future liquidity and capital
funding requirements will depend on numerous factors, including the extent to
which the Company's products under development are successfully developed and
gain market acceptance, the timing of regulatory actions regarding the Company's
potential products, the costs and timing of expansion of sales, marketing and
manufacturing activities, procurement and enforcement of patents important to
the Company's business, and results of clinical trials, regulatory approvals and
competition. There can be no assurance that such additional capital will be
available on terms acceptable to the Company, if at all. Furthermore, any
additional equity financing may be dilutive to stockholders, and debt financing,
if available, may include restrictive covenants. If adequate funds are not
available, the Company may be required to curtail its operations significantly
or to obtain funds through entering into collaborative agreements or other
arrangements on unfavorable terms. The failure by the Company to raise capital
on acceptable terms when needed could have a material adverse effect on the
Company's business, financial condition or results of operations.
In December 1997, the Company entered into an Agreement and Plan of Merger
with Nanotronics. Nanotronics' research, which is currently funded through
government grants with the Department of the Air Force, is exploratory in nature
and at a very early stage. The in-process technology, which was acquired as a
result of the Company's purchase of Nanotronics on January 29, 1998 relates
generally to nanotechnology and molecular electronics. Potential applications of
the technology include high density optical storage systems for electronics
applications and self-assembly applications relating to microfabrication and
nanofabrication. Currently, the Company anticipates that funding for Nanotronics
will continue primarily through government grant sources until feasibility is
demonstrated. If technological feasibility is demonstrated, the Company expects
to pursue corporate partnership opportunities. Given the early stage of the
technology and the recency of the acquisition, the Company has not yet
determined which applications may be developed and the extent of its resources
to be committed to each such application.
NET OPERATING LOSS CARRYFORWARDS
As of December 31, 1997, the Company had federal and California net
operating loss ("NOL") carryforwards of approximately $25.0 million and $6.1
million, respectively, and approximately $820,000 and
23
<PAGE> 27
$502,000 of research and development ("R&D") tax credits available to offset
future federal and state income taxes, respectively. The federal and California
NOL carryforwards, which are subject to alternative minimum tax limitations and
to examination by the tax authorities, will begin expiring in 2006 and 1998,
respectively, unless previously utilized. The federal and California R&D tax
credit carryforwards will begin expiring in 2007 unless previously utilized. The
Company believes that this offering combined with the Private Placement may
constitute a "change of ownership" under federal income tax regulations. As
such, the Company may be limited in the amount of NOLs incurred prior to this
offering which may be utilized to offset future taxable income. Similar
limitations may also apply to utilization of R&D tax credits to offset taxes
payable. However, the Company does not believe such limitations will have a
material impact on its ability to utilize such NOLs. See Note 5 of Notes to
Financial Statements.
YEAR 2000 ISSUES
The Company is currently developing a plan to insure that its systems and
software infrastructure are Year 2000 compliant. Key financial, information and
operational systems will be assessed and plans will be developed to address
required systems modifications. Given the relatively small size of the Company's
systems and the predominantly new hardware, software and operating systems,
management does not anticipate any significant delays in becoming Year 2000
compliant. However, the Company is unable to control whether its current and
future partners' systems are Year 2000 compliant. To the extent that partners
would be unable to order products or pay invoices or suppliers would be unable
to manufacture and ship product, the Company's operations could be affected.
However, management does not believe that Year 2000 changes will have a material
impact on the Company's business, financial condition or results of operations.
RECENT ACCOUNTING PRONOUNCEMENTS
In June 1997, the Financial Accounting Standards Board issued SFAS No. 130,
Reporting Comprehensive Income. This standard is effective for fiscal years
beginning after December 15, 1997. SFAS No. 130 requires that all components of
comprehensive income, including net income, be reported in the financial
statements in the period in which they are recognized. Comprehensive income is
defined as the change in equity during a period from transactions and other
events and circumstances from non-owner sources. Net income and other
comprehensive income, including foreign currency translation adjustments, and
unrealized gains and losses on investments, shall be reported, net of their
related tax effect, to arrive at comprehensive income. The Company does not
believe that comprehensive income will be materially different than net income
or loss.
24
<PAGE> 28
BUSINESS
OVERVIEW
Nanogen integrates advanced microelectronics and molecular biology into a
platform technology with broad commercial applications in the fields of medical
diagnostics, biomedical research, genomics, genetic testing and drug discovery.
Nanogen's fully automated system, which incorporates a proprietary semiconductor
microchip, provides a flexible tool for the rapid identification and analysis of
any test sample containing charged molecules. Through the use of
microelectronics, the Company's technology enables the active movement and
concentration of charged molecules to and from designated microlocations, or
test sites, on the semiconductor microchip. This electronic concentration of
molecules greatly accelerates molecular binding at each microlocation. In
addition, Nanogen's technology allows the simultaneous analysis of multiple test
results, or multiplexing, from a single sample. The open architecture design of
the Nanogen system enables the Company to offer microchips with arrays designed
and built by Nanogen for specific applications or with arrays that can be
customized by the end user. The Company believes its technology will accelerate
the development of products that capitalize on the increasing availability of
genetic information and its relationship to human disease. The Company further
believes its semiconductor based platform technology provides a low cost, highly
efficient, accurate and versatile integrated system that will shift the paradigm
from current manual and mechanical methods to microelectronic systems, thereby
significantly improving the quality of healthcare.
The Company has established corporate alliances in certain areas of
infectious disease diagnostics, drug discovery and genomics as part of its
strategy to expand the applications and accelerate the commercialization of
products derived from its technology. The Company is developing products to
expedite the diagnosis of infectious disease through its joint venture with
Becton Dickinson. The Company has also entered into agreements for the
establishment of a collaboration and joint venture with Hoechst to develop drug
discovery tools, and a collaboration with Elan for genomic applications. In
addition to their commitments to provide research funding, these corporate
partners have agreed to purchase an aggregate of $21.0 million of Common Stock
directly from the Company in the Private Placement to occur concurrent with this
offering. The Company's collaborations permit integration of the Company's
technology with the resources and technology of its partners, while allowing the
Company to independently pursue diagnostics, drug discovery and genomics
opportunities outside the scope of these collaborations.
The Company's commercialization strategy is to establish its platform
technology as the standard for molecular identification and analysis. Nanogen
will provide its products initially to leading research institutions and opinion
leaders to enable them to exploit the open architecture design in developing
additional novel applications. Concurrently, the Company is developing
commercial products in medical diagnostics, biomedical research, genomics,
genetic testing and drug discovery either by itself or with its corporate
partners. In addition, the Company believes its platform technology has the
potential to address a broad range of applications, including combinatorial
chemistry, industrial process control, forensics and environmental and food
pathogen testing. The Company also plans to develop fully integrated
sample-to-answer systems for both the clinical research and point-of-care
settings using microelectronics to process and analyze samples in a wide variety
of applications.
NANOGEN'S PLATFORM TECHNOLOGY
Nanogen's proprietary platform technology takes advantage of the fact that
most biological molecules are either positively or negatively charged and is
ideally suited to unravelling complex genetic information. Through the use of
microelectronics, Nanogen's technology enables the active movement and
concentration of electronically charged molecules to and from designated test
sites on its semiconductor microchip. These test sites are arranged in an array
on the Company's microchip. In addition, Nanogen's technology allows for the
simultaneous analysis of multiple test results, or "multiplexing," from a single
sample.
25
<PAGE> 29
Nanogen's proprietary technology has broad applications for the analysis of
any unknown charged biological molecule which is capable of binding specifically
to a known capture molecule on a microchip. The Company has initially focused on
DNA-based sample analysis in developing applications utilizing its platform.
The Company's technology allows small sequences of DNA capture probes to be
electronically placed at, or "addressed" to, specific sites on the microchip. A
test sample can then be analyzed for the presence of target DNA molecules by
determining which of the DNA capture probes on the array bind, or hybridize,
with complementary DNA in the test sample. In contrast to nonelectronic or
passive hybridization with conventional arrays on paper or glass "chips," the
use of electronically mediated active hybridization to move and concentrate
target DNA molecules accelerates hybridization so that hybridization occurs in
minutes rather than the hours required for passive hybridization techniques. In
addition to DNA applications, the Company believes its technology can be applied
to a number of other analyses, including antigen-antibody, enzyme-substrate,
cell-receptor and cell separation techniques.
The Nanogen system can integrate in a single platform the following
electronic operational features which are illustrated on the inside front cover:
Electronic Addressing. Electronic addressing is the placement of charged
molecules at specific test sites. Since DNA has a strong negative charge, it can
be electronically moved to an area of positive charge. A test site or a row of
test sites on the microchip is electronically activated with a positive charge.
A solution of DNA probes is introduced onto the microchip. The negatively
charged probes rapidly move to the positively charged sites, where they
concentrate and are chemically bound to that site. The microchip is then washed
and another solution of distinct DNA probes can be added. Site by site, row by
row, an array of specifically bound DNA probes can be assembled or addressed on
the microchip. In the electronic addressing illustration on the inside front
cover, a total of five sets of different capture probes have been electronically
addressed to the microchip. With the ability to electronically address capture
probes to specific sites, the Nanogen system allows end users to build custom
arrays through the placement of specific capture probes on a microchip. In
contrast to current technologies, these microchip arrays can be built in a
matter of minutes at a minimal cost, providing research professionals with a
powerful and versatile tool to process and analyze molecular information.
Electronic Concentration and Hybridization. Following electronic
addressing, Nanogen uses electronics to move and concentrate target molecules to
one or more test sites on the microchip. The electronic concentration of sample
DNA at each test site promotes rapid hybridization of sample DNA with
complementary capture probes. In contrast to the passive hybridization process,
the electronic concentration process has the distinct advantage of significantly
accelerating the rate of hybridization. To remove any unbound or nonspecifically
bound DNA from each site, the polarity or charge of the site is reversed to
negative, thereby forcing any unbound or nonspecifically bound DNA back into
solution away from the capture probes. In addition, since the test molecules are
electronically concentrated over the test site, a lower concentration of target
DNA molecules is required, thus reducing the time and labor otherwise required
for pre-test sample preparation.
Electronic Stringency Control. Electronic stringency control is the
reversal of electrical potential to quickly and easily remove unbound and
nonspecifically bound DNA as part of the hybridization process. Electronic
stringency provides quality control for the hybridization process and ensures
that any bound pairs of DNA are truly complementary. The precision, control, and
accuracy of Nanogen's platform technology, through the use of the controlled
delivery of current in the electronic stringency process, permits the detection
of single point mutations, single base pair mismatches, or other genetic
mutations, which have significant implications in a number of diagnostic and
research areas. Electronic stringency is achieved without the cumbersome
processing and handling otherwise required to achieve the same results through
conventional methods. In contrast to passive arrays, Nanogen's technology can
accommodate both short and long single-stranded fragments of DNA. The use of
longer probes increases the certainty that the DNA which hybridizes with the
capture probe is the correct target. Nanogen's electronic stringency control
reduces the required number of probes and therefore test sites on the microchip,
relative to conventional DNA arrays. In contrast, traditional passive
hybridization processes are difficult to control and require more replicants of
every possible base pair match so that correct matches can be positively
identified.
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<PAGE> 30
Electronic Multiplexing. Nanogen's electronic multiplexing feature allows
the simultaneous analysis of multiple tests from a single sample. Electronic
multiplexing is facilitated by the ability to independently control individual
test sites (for addressing of capture probes and concentration of test sample
molecules) which allows for the simultaneous use of biochemically unrelated
molecules on the same microchip. Sites on a conventional DNA array cannot be
individually controlled, and therefore the same process steps must be performed
on the entire array. The use of electronics in the Company's technology provides
increased versatility and flexibility over such conventional methods.
Strand Displacement Amplification. Strand Displacement Amplification
("SDA") is a proprietary target amplification process whereby very low numbers
of diagnostic targets in a test sample are enzymatically amplified to much
higher levels, greatly simplifying accurate detection of these targets. In
connection with forming its relationship with Becton Dickinson, the joint
venture was granted certain non-exclusive rights to Becton Dickinson's patents
relating to SDA in infectious disease diagnostics. In addition, the Company was
also granted certain nonexclusive rights to use SDA in the fields of in vitro
human genetic testing and cancer diagnostics. The Company believes that SDA will
be an important element in the development of sample-to-answer applications.
NANOGEN SYSTEM COMPONENTS
The Nanogen system, illustrated on the inside front cover, consists of both
a disposable cartridge containing a proprietary semiconductor microchip and a
fully automated instrument that controls all aspects of microchip operations,
processing, detection and reporting. The system has been designed so that the
operator simply inserts a disposable cartridge containing a test sample into the
instrument. All subsequent steps are handled automatically within minutes.
DISPOSABLE CARTRIDGE
The disposable cartridge consists of a proprietary semiconductor microchip
with electrical and fluidic connections to the instrument. Several prototypes of
the disposable cartridges have been completed, and the Company is finalizing
designs for manufacturing. The Company expects that the disposable cartridge and
microchip can be manufactured in high volumes at a low cost.
Semiconductor Microchip. Nanogen's proprietary microchip capitalizes on
advances in the semiconductor industry and is designed and constructed using
state-of-the-art microlithography and fabrication techniques. Nanogen's
microchip is coated with a permeation layer to which capture probes are attached
and is mounted on the disposable cartridge. The original microchip design
measures one square centimeter with an active area of one square millimeter
containing a five-by-five array of 25 electrodes, or independent test sites, per
microchip. Nanogen is currently testing additional microchip designs containing
100 electrodes fabricated with wire bonding techniques. In addition, the Company
has developed microchips containing 400 electrodes based on CMOS process
integrated circuit designs and is developing high density arrays of 10,000 or
more sites. The Company is aware of certain U.S. and corresponding foreign
patents and applications which are assigned to Affymax Technologies, N.V. and
which relate to certain devices having 1,000 or more groups of oligonucleotides
occupying a total area of less than 1 cm(2) on a substrate. In the event that
the Company proceeds with the development of arrays with more than 1,000 groups
of oligonucleotides, the Company expects to design its devices through, among
other things, the selection of the physical dimensions and methods of binding so
as to avoid infringing these patents. Recent microchip configurations are less
than half of the original size, but contain all of the functionality of the
original microchip. These new configurations significantly reduce manufacturing
costs and further size reductions are contemplated as development continues. The
microchip can be designed and built by Nanogen for specific applications or can
be individually customized by the end user.
Permeation Layer. The Company's proprietary permeation layer, which is
critical to the proper functioning of the Nanogen system, is the interface
between the surface of the microchip and the biological test environment. The
permeation layer isolates the biological materials from the harsh
electrochemical
27
<PAGE> 31
environment near the electrode surface and provides the chemistry necessary for
attachment of capture probes.
Capture Probes. Capture probes or other capture molecules are
electronically addressed to the desired microlocations and chemically attached
to the permeation layer. Because independent control can be applied at any test
site on Nanogen's microchip, different capture probes can be addressed on the
same microchip, allowing multiple tests to be processed simultaneously.
Nanogen's cartridges can be sold with preloaded sets of capture probes or can be
customized by the end user in build-your-own-chip applications which will allow
the customer to assemble specific probes onto a microchip to perform
individualized analyses.
NANOGEN INSTRUMENT
Nanogen's fully integrated instrument consists of three major subsystems:
(i) a highly sensitive, laser-based fluorescence scanner that detects molecular
binding, (ii) a fluid handling subsystem that controls test sample application
and washing steps, and (iii) computer hardware and software that allow the
operator to select assays from a simple, graphical user menu which controls all
microchip operations, tabulates test results, and prints test reports.
Fluorescent Array Scanner. The fluorescent scanner uses pattern recognition
software and optoelectronic technology to reduce instrument cost and size and
eliminate the need for complicated array positioning mechanics. In its present
configuration, the scanner is able to perform high sensitivity scans of 100 test
site arrays in less than two minutes. With this scanner, fluorescence is
detectable at levels of fewer than 500 molecules at each test site.
Fluidics Station. The instrument fully automates the movement of the
reagents and test sample onto the disposable cartridge. The fluidic subassembly
of the instrument includes a panel of precision syringe pumps, a
cartridge-mounted sample assembly and appropriate fluidic connections between
the instrument and the disposable cartridge.
Computer Hardware and Software System. An advanced multi-tasking operating
system and Pentium-based microprocessor control all aspects of machine
operation, including bar-coded assay selection, assay operation, fluorescent
signal detection and signal processing, calculation of assay results, and report
generation. Each of the individual array locations is separately controlled by
the microprocessor. Fluorescent signals emanating from positive test sites are
scanned, monitored and quantitated.
NANOGEN STRATEGY
Nanogen's objective is to develop commercial applications for its
proprietary platform technology and to promote its technology as the standard
for molecular identification and analysis. Key elements of the Company's
strategy to achieve this objective include the following:
Develop Research and Genomics Applications. The Company intends to pursue
the research and genomics markets by taking advantage of the open architecture
design of its technology that allows end users to customize microchips to meet
their individual research needs. The Company believes that this build-your-
own-chip capability will fulfill an unmet need for a powerful, versatile and
relatively inexpensive analytical tool. In addition, the Company believes that
acceptance of its technology by leading academic research centers will promote
more rapid commercial acceptance. The Company further believes that it has
developed a powerful tool which will enable users to develop unforeseen and
commercially attractive applications.
Develop Commercial Applications. The Company intends initially to develop
commercial applications for its platform technology in the infectious disease
diagnostic market through its joint venture with Becton Dickinson by exploiting
the increasing availability of genetic information and its relationship to human
disease. The Company also intends to leverage its technology in the rapidly
developing genetic testing, drug discovery, and pharmacogenetics markets. The
Company intends to build a recurring stream of revenue from the sale of low
cost, disposable cartridges. The Company believes that widespread market
penetration of its instruments and the open architecture of its systems will
promote sustained demand for its disposable cartridges. In addition, the
Company's semiconductor microchip manufacturing is scalable, allowing the
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<PAGE> 32
Company to produce substantial volumes of disposable cartridges at a low cost.
Other areas such as forensics and prenatal genetics also offer opportunities for
Nanogen's technology.
Establish Strategic Collaborations. The Company intends to continue to
enter into collaborations to expand applications of its technology platform and
to accelerate the commercialization of the Company's products. The Company is
developing products for the diagnosis of infectious disease through its joint
venture with Becton Dickinson. The Company has entered into a collaborative
research and development agreement with Hoechst to develop drug discovery tools.
The Company has also entered into a collaboration agreement with Elan for
genomics applications. By partnering with these multinational healthcare
companies, Nanogen believes that it can gain broader access to global markets,
without shifting its resources from the further development of its platform
technology. In addition, as part of these arrangements, Nanogen believes it can
better focus on introducing its technology into expanding markets while its
collaborative partners contribute their technology and expertise in areas such
as sales, marketing and regulatory approvals. The Company will pursue additional
collaborations in various forms, including research and development agreements,
licensing agreements and joint ventures. The Company's collaborations permit
integration of the technology and resources of its partners with the Company's
technology, while allowing the Company, independently or with other
collaborators to pursue diagnostics, drug discovery and genomics opportunities
outside the scope of these collaborations.
Develop Advanced Technologies and Point-of-Care Applications. The Company's
long term strategy is to develop sample-to-answer systems which integrate
otherwise time-consuming and labor-intensive sample preparation procedures on
the disposable cartridge through the use of active microelectronics. The Company
believes that the availability of this lab-on-a-chip technology would fulfill a
substantial unmet need in both academic research and commercial sectors.
Miniaturization of the Company's instrumentation together with this
lab-on-a-chip capability offers the potential to address the point-of-care
market.
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<PAGE> 33
APPLICATIONS AND PRODUCTS UNDER DEVELOPMENT
The Company is currently developing a broad range of applications and
products based upon the Company's platform technology, as summarized in the
following table:
<TABLE>
<CAPTION>
- --------------------------------------------------------------------------------------------------
U.S.
REGULATORY
REQUIRE- CURRENT
APPLICATIONS AND PRODUCTS DESCRIPTION MENTS(1) PARTNER(2)
------------------------- ----------- ---------- ----------
<S> <C> <C> <C>
INFECTIOUS DISEASE DIAGNOSTICS
PANELS
Diarrheal Culture Detection of enteric bacteria 510(k)/ Becton
from stool culture PMA Dickinson
Food Pathogen Detection of enteric bacteria USDA Becton
from food culture Dickinson
Molecular Respiratory Detection of organisms PMA Becton
associated with respiratory Dickinson
infections
Antibiotic Resistance Detection of antibiotic PMA Becton
resistance Dickinson
Diarrheal Direct Direct detection of enteric PMA Becton
bacteria from stool sample Dickinson
Food Pathogen Direct Direct detection of enteric USDA Becton
bacteria from food culture Dickinson
BIOMEDICAL RESEARCH, INDUSTRIAL AND Build-your-own-chip None Elan;
GENOMICS applications University
of Texas
Southwestern
GENETIC TESTING
Hemochromatosis Detection of hereditary PMA --
hemochromatosis
Molecular Oncology Detection of cancer-related PMA --
sequences
Pharmacogenetics Prediction of drug PMA --
performance in individuals
DRUG DISCOVERY Combinatorial chemical None Hoechst
synthesis for screening
LAB-ON-A-CHIP Automated sample preparation PMA --
</TABLE>
- ---------------
(1) The Company has not applied for FDA or other regulatory approvals with
respect to any of its products under development. The FDA regulatory
approval and clearance process requires many steps before a product can
be approved or cleared for marketing. Certain products will be subject
to the USDA regulatory process in order to be marketed. The terms
"510(k)" and "PMA" indicate the regulatory pathway the Company believes
will be applicable to a product, although there can be no assurance that
the FDA will agree that the pathway noted is the appropriate pathway for
the specific product. See "Risk Factors--No Assurance of Obtaining
Regulatory Approvals; Government Regulatory Process." For a description
of the terms 510(k) and PMA and the USDA requirements, see
"-- Government Regulation."
(2) For a description of the Company's collaborative arrangements, see
"--Collaborative Alliances."
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<PAGE> 34
INFECTIOUS DISEASE DIAGNOSTICS APPLICATIONS
The Company is applying its technology in the area of infectious disease to
develop automated tests to replace the manual and time-intensive procedures
currently used in hospitals and reference laboratories. The role of the clinical
microbiology laboratory is to detect, identify and determine antibiotic
sensitivity of disease causing microorganisms. To accomplish this task, colonies
of microorganisms from patient specimens are grown, or cultured, in various
growth media. Following colony growth, various direct and indirect techniques
are utilized to determine the identity and, as required, the sensitivity of the
microorganism to specific antibiotics. The entire process may take days or weeks
to complete while the patient, requiring immediate therapy, must be treated by
the clinician based upon the best clinical facts available at that time. Upon
receipt of the diagnostic analysis from the laboratory, the initial patient
treatment protocol may need to be modified in order to treat the patient
effectively.
Current culture-based methods detect a single microorganism at one time.
Because a particular infectious episode may be caused by one of many
microorganisms or several microorganisms together, multiple tests may be
required to determine the correct diagnosis. "Single tube" (one at a time) DNA
probe diagnostics, which were first introduced to the marketplace in the
mid-1980's, have been unsuccessful in displacing culture based diagnostic tests
due to their inability to identify several organisms simultaneously. Nanogen's
technology addresses shortcomings of current methods by allowing the
simultaneous analysis of multiple microorganisms from a single patient sample.
The Company believes its technology and integrated system will speed the time-
to-result for diagnostic tests and patient treatment and offer its customers the
opportunity to lower their costs and improve productivity by automating all or a
significant portion of their labor-intensive testing.
The Company, through its joint venture with Becton Dickinson, is developing
a broad range of products relating to the detection of infectious disease, each
of which may incorporate Becton Dickinson's proprietary SDA technology. The
joint venture contemplates that Nanogen will manufacture and supply the
disposable cartridge and related reagents while Becton Dickinson will
manufacture the system instrumentation and market the several infectious disease
products described below.
Diarrheal Culture Panel/Food Pathogen Panel. These panels will identify
four microorganisms commonly associated with food poisoning, or gastroenteritis:
Salmonella, Shigella, Campylobacter species and E. coli strains. The products
under development are being designed to provide test results to a physician in
approximately six hours, rather than the 24 to 72 hours required under currently
available immunoassay tests. Clinical trials are expected to commence no earlier
than 1999.
Molecular Respiratory Panel. Respiratory infections, particularly in the
very young, the critically ill and the aged, are often life-threatening. Nanogen
intends to develop a respiratory microchip to rapidly identify cause of
infection and allow the physician to provide the correct therapy in hours rather
than days, as is currently required. The Company believes that its technology
will be able to identify specific bacteria, including Group A Streptococcus, S.
aureus and E. coli, or viral pathogens from complex samples such as respiratory
tract fluids.
Antibiotic Resistance Panel. The increasing incidence of strains of
bacteria, viruses and other microorganisms resistant to antibiotic drug
therapies is a growing health care concern. The Company intends to develop a
panel to detect three principal antibiotic-resistant targets: (i)
methacillin-resistant S. aureus, a major cause of hospital acquired infections,
often adding days or weeks onto hospital stays, (ii) various microorganisms
resistant to vancomycin, an expensive antibiotic frequently used to treat
serious infections, and (iii) various microorganisms resistant to penicillin and
other B-lactam antibiotics. The Company believes that a resistance test capable
of rapid, accurate identification of both infectious bacteria and antibiotic
resistance will provide physicians with valuable information that will improve
patient care and shorten hospital stays.
Diarrheal Direct Panel/Food Pathogen Direct Panel. The Company believes
that significant time and cost savings can be achieved by replacing the
traditional sequential sample preparation and testing processes with a single
integrated diagnostic instrument. The Company believes that use of such an
integrated instrument will increase the demand for infectious disease diagnostic
testing in clinical and point-of-care settings. These products are in the early
stages of development.
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<PAGE> 35
BIOMEDICAL RESEARCH, INDUSTRIAL AND GENOMICS APPLICATIONS
Worldwide efforts, including the Human Genome Project and other public and
private genetic sequencing efforts, are identifying and sequencing genes of many
organisms. As these genes and their nucleotide sequences are identified,
additional research will focus on how the genetic content of the cell, its
genome, controls and influences biological function. Gene expression studies are
often used to elucidate which of the genes contained within the genome are
regulated during disease or in response to a variety of stimuli and how specific
mutations in a gene affect the normal expression and operation of that gene.
This basic understanding will allow the development of new diagnostic and
therapeutic approaches to cancer, inborn errors of metabolism, and other genetic
disease, according to their genetic profile.
The Company intends to pursue the research and genomics markets by taking
advantage of the open architecture design of its technology that allows end
users to customize microchips to meet their individual research needs. The
Company believes that this build-your-own-chip capability will fulfill an unmet
need for a powerful, versatile and relatively inexpensive analytical tool. The
Company has recently placed a prototype system at the University of Texas
Southwestern Medical Center ("UT Southwestern") for research studies.
Genetics research utilizing Nanogen's technology may be conducted by
genomics companies, industrial research labs and research institutions. The
Company's build-your-own-chip systems are intended to simplify genomics research
by allowing users to configure their own semiconductor microchips. These arrays
would then be used by the investigator to study gene expression in test samples,
to map or discover important genes, or for a variety of other research
applications. The Company believes that its research instrument system fulfills
a significant unmet need in the area of user definable arrays.
GENETIC TESTING APPLICATIONS
As the Human Genome Project and other public and private genetic sequencing
efforts yield increasing genetic information, the demand for genetic
predisposition testing will continue to grow. The combination of novel
therapeutic approaches, such as gene therapy, and the discovery of new genes
could lead to earlier and more precise diagnosis and more refined therapeutic
interventions which may further enhance this area as a commercial market
opportunity. Because a number of important genetic diseases are ideally suited
to diagnosis in multiplexed arrays, the Company believes that its technology
platform could contribute significantly to the expansion of testing in this
area.
The Company believes that the ability of its technology to screen
simultaneously for various DNA sequences and the ability to differentiate
between single base pair mismatches has potentially wide applicability to the
field of genetic testing. The ability to test simultaneously for many specific
mutations can be used for detecting patients predisposed to certain diseases and
for early detection of the disease itself, thereby permitting early preventive
and therapeutic intervention. For example, in cancer diagnostics, certain
mutations are indicative of a predisposition to certain types of cancer. Because
many diseases involve multiple mutations, the ability to analyze all possible
mutations has previously been expensive and impracticable. Nanogen's electronic
stringency control feature permits rapid and accurate testing for single point
mutations. The Company is currently developing products in the field of genetic
testing for hemochromatosis and molecular oncology.
Hemochromatosis. In March 1998, the Company entered into an agreement with
Billups-Rothenberg, Inc., ("BRI") to exclusively license certain patented
technology and has begun developing a test for hereditary hemochromatosis. In
connection therewith, the Company paid an initial license fee consisting of
$490,000 and 2,000 shares of its Common Stock, and is obligated to make certain
additional milestone and royalty payments. The Company also granted to BRI the
right to purchase up to $490,000 worth of Common Stock in this offering. This
disease is an iron metabolism disorder and represents one of the most common
inherited disorders in individuals of Northern European descent. If left
untreated, gradual accumulation of iron in the body often leads to serious
health problems such as cirrhosis, diabetes and heart failure. Many experts
believe there is a need for widespread hemochromatosis screening since simple,
periodic phlebotomies allow patients to easily manage this disease. Genetic
testing for hemochromatosis to date has been limited. The Company believes that
the demand for this testing will increase as the long term consequences of the
disease are more fully understood. The product is in the early stages of
development.
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<PAGE> 36
Molecular Oncology. Many clinically important mutations in cancerous tumors
involve discrete, single point mutations that may be predictive of certain types
of cancer and may correlate with known drug resistance patterns in specific
tumors. Nanogen's technology has the ability to rapidly detect single point
mutations in long DNA sequences. The Company's system can also analyze RNA,
another nucleic acid of diagnostic importance.
Pharmacogenetics. Pharmacogenetics refers to the way an individual person
may or may not respond to specific drugs. The Company intends to develop
pharmacogenetic products incorporating its proprietary array technology for use
in both hospital and reference laboratories, with anticipated applications in
multiple fields such as thiopurine toxicity relating to leukemia treatment, drug
metabolism, and toxicity/carcinogenicity associated with cigarette smoking.
DRUG DISCOVERY APPLICATIONS
The Company believes it has a powerful tool which will elucidate
appropriate pathways for therapeutic intervention, identify and evaluate lead
compounds and simultaneously assess the efficacy and toxicology of these
compounds in model systems. It is estimated that the preclinical drug discovery
process currently takes an average of six and one-half years. Consequently, the
Company believes there is a significant demand for improved tools which
accelerate the drug discovery process.
The Company believes the microelectronic array format and independent test
site control of the Nanogen system are ideally suited for applications in drug
discovery. The benefits of the Company's electronic technology will enable the
rapid manipulation of potential drug molecules against targets such as bacteria,
virus, tumor, or immune response cells addressed to the microchip to determine
drug efficacy, thus simplifying the drug discovery process. The combination of
electronic addressing and the electronic protection of specific areas of the
microchip allows the targeting of chemical building blocks to unique locations
on the array. The Company believes its system provides an efficient automated
method for drug lead optimization. Nanogen intends to develop a novel drug
discovery platform which can be used internally for drug screening or can be
licensed to other pharmaceutical companies. The Company has recently entered
into a collaborative research and development agreement with Hoechst to develop
applications utilizing the Company's technology in combination with Hoechst's
ELIAS and/or pRNA technology. See "-- Collaborative Alliances."
LAB-ON-A-CHIP
Patient samples are complex and comprised of a number of substances such as
proteins and carbohydrates. As a result, purification of DNA to release the
target DNA in a useable form is required prior to use in any DNA diagnostic
product. The Company's long term strategy is to develop sample-to-answer systems
which integrate otherwise time-consuming and labor-intensive sample preparation
procedures on the disposable cartridge through the use of active
microelectronics. The Company believes its proprietary microelectronic
technology can simplify the complex sample preparation process and could
potentially lead to the development of an integrated platform for point-of-care
testing.
COLLABORATIVE ALLIANCES
The Company has established collaborative alliances in certain areas of
infectious disease diagnostics, drug discovery and genomics as part of its
strategy to expand the applications and accelerate the commercialization of
products derived from its technology. The Company is developing products to
expedite the diagnosis of infectious disease through its joint venture with
Becton Dickinson. The Company has also entered into an agreement for a research
and development collaboration and the establishment of a joint venture with
Hoechst to develop drug discovery tools. Additionally, the Company has entered
into a research and development agreement with Elan for genomics applications.
BECTON, DICKINSON AND COMPANY
In May 1997, Becton Dickinson and Nanogen entered into a Collaborative
Research and Development Agreement (the "Prior R&D Agreement") to develop
products utilizing Nanogen's technology to detect
33
<PAGE> 37
microbial agents causing infectious disease and to determine their antibiotic
susceptibility or resistance. In connection with the Prior R & D Agreement,
Nanogen entered into a Series D Preferred Stock Purchase Agreement (the "Stock
Purchase Agreement") with Becton Dickinson pursuant to which Becton Dickinson
purchased 666,666 shares of Nanogen's Series D Preferred Stock. In addition,
Becton Dickinson agreed pursuant to the Stock Purchase Agreement to purchase
Common Stock worth an aggregate of $6.0 million directly from the Company in the
Private Placement.
As of October 1, 1997, Becton Dickinson and Nanogen entered into new
agreements which superseded the Prior R&D Agreement. Pursuant to a Master
Agreement entered into between the parties (the "Master Agreement"), Becton
Dickinson and Nanogen agreed to form The Nanogen/Becton Dickinson Partnership, a
Delaware general partnership (the "Partnership"), to develop and commercialize
products in the field of in vitro nucleic acid-based diagnostic and monitoring
technologies. The products will be based on Nanogen's proprietary semiconductor
technology and Becton Dickinson's proprietary SDA technology. NanoVenture LLC, a
Delaware limited liability company wholly-owned by Nanogen ("NanoVenture"), and
Becton Dickinson Venture LLC, a Delaware limited liability company wholly-owned
by Becton Dickinson ("Becton Dickinson Venture"), are the general partners of
the Partnership with (i) losses generally allocated in proportion to cash
funding, (ii) profits generally shared equally, and (iii) distributions
allocated 60% to Becton Dickinson Venture and 40% to NanoVenture until
unrecovered partner cash contributions are equalized and thereafter
distributions shared equally. The Master Agreement provides that the Partnership
will pay to Becton Dickinson certain minimum allowances of up to an aggregate of
$8,000,000 which Becton Dickinson will spend on the marketing, sale and
distribution of the Partnership's products, if developed. The Master Agreement
also contemplates that each of the parties will negotiate in good faith
additional agreements with the Partnership in furtherance of the Partnership's
business, including license agreements, manufacturing agreements and marketing
agreements. Pursuant to the Master Agreement, Nanogen has also granted to Becton
Dickinson Venture, acting on behalf of the Partnership, a right of first offer,
under certain circumstances, to negotiate licenses in certain limited additional
fields.
Cash and certain intellectual property rights were contributed by Nanogen
and Becton Dickinson in connection with the formation of the Partnership. Upon
the successful completion of certain defined milestones by December 31, 1997 and
June 30, 1998, minimum contributions for use in the research programs
aggregating approximately $6.7 million will be contributed to the Partnership
from July 1, 1998 through April 1, 1999, of which $5.0 million is to be paid by
Becton Dickinson and $1.7 million is to be paid by Nanogen. The December 31,
1997 milestones have been achieved, however there can be no assurance that any
of the June 30, 1998 milestones will be achieved in a timely fashion, if at all.
The General Partnership Agreement also contemplates additional research funding
aggregating approximately $14.3 million during the period from July 1, 1999
through April 1, 2001 conditioned upon the achievement of certain milestones to
be mutually agreed upon by the partners. Of such amount, $10.0 million is to be
paid by Becton Dickinson and $4.3 million is to be paid by the Company. There
can be no assurances that the parties will agree to such milestones, and if
agreed upon, there can be no assurances that such milestones will be achieved in
a timely fashion, if at all.
In addition to the above described payments, Becton Dickinson and Nanogen
have agreed to contribute certain additional amounts to fund marketing and
manufacturing of products commercialized by the Partnership. The success of the
Partnership will be dependent to a significant degree upon a mutuality of
interest between Nanogen and Becton Dickinson. Becton Dickinson is a large
company with alternate opportunities competing for its resources. There can be
no assurance that Becton Dickinson will make further capital contributions or
allocate sufficient management or other resources to the Partnership to complete
the development, manufacturing and marketing of Partnership products.
The Partnership has entered into a Collaborative Research and Development
and License Agreement with Nanogen and Becton Dickinson (the "Collaborative
Agreement"), pursuant to which each of Nanogen and Becton Dickinson has granted
to the Partnership, during the life of the Partnership, certain intellectual
property and patent rights and shall conduct research and development activities
with respect to the products on behalf of the Partnership.
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<PAGE> 38
Concurrently with the execution of the Master Agreement, Nanogen entered
into a worldwide, royalty-bearing, nonexclusive License Agreement with Becton
Dickinson, without a right to sublicense, relating to Becton Dickinson's
proprietary SDA technology for use by Nanogen outside the Partnership in the
fields of in vitro human genetic testing and in vitro cancer diagnostics.
Certain events, including a failure by the Partnership to achieve certain
milestones set forth in the Collaborative Agreement by June 30, 1998, could
result in termination of the Collaborative Agreement and the Master Agreement
and a concurrent dissolution of the Partnership. There can be no assurance that
such milestones will be achieved in a timely fashion, if at all. The failure to
achieve such milestones could have a material adverse effect on the Company's
business, financial condition and results of operations.
HOECHST AG
In December 1997, the Company entered into an agreement with Hoechst
Corporate Research and Technology ("CR&T"), an affiliate of Hoechst, for an
exclusive research and development collaboration relating to new drug discovery
tools and immunodiagnostics research and the establishment of a joint venture.
The objectives of the collaboration and joint venture are to develop and
commercialize microarray platforms and related devices and applications
utilizing the Company's technology in combination with CR&T's Exponential
Library by Association of Sublibraries ("ELIAS") technology and/or pRNA
technology. CR&T's ELIAS technology is its novel combinatorial approach for drug
screening and development and its pRNA technology is a novel DNA-like molecular
recognition polymer for drug screening. The arrangements for the
commercialization of products, if any, developed as a result of the
collaboration will be negotiated by the parties prior to completion of the
research and development phase.
It is expected that the initial term of the research phase of the
collaboration will be two years. After the first year, funding for the research
phase may be terminated upon the mutual consent of the parties. Each party will
perform certain aspects of the research, with funding provided primarily by CR&T
although Nanogen has currently budgeted an aggregate of $3.83 million for
materials costs during the first two years of the agreement. The agreement
contemplates the formation of a joint venture or other joint relationship to
facilitate the commercialization of products resulting from the collaboration.
Pursuant to the agreement, CR&T has agreed to purchase Common Stock worth
an aggregate of $10.0 million directly from the Company in the Private
Placement. The Company has agreed to issue to CR&T, upon the achievement of
certain milestones, warrants to purchase up to four percent of the Common Stock
based upon the number of shares of capital stock outstanding on December 5, 1997
as follows: (i) upon the execution of a definitive research and development
agreement between the parties, a warrant for the purchase of one percent of the
outstanding shares of Company Common Stock (assuming conversion of the Preferred
Stock into Common Stock) on December 5, 1997 (the "Baseline Outstanding Share
Amount") at a 25% premium to market price on the date of execution, (ii) upon
announcement by the parties of entry into the product development phase of the
research and development collaboration, a warrant for the purchase of 1.5% of
the Baseline Outstanding Share Amount at a 50% premium to market price on the
date of such entry and (iii) upon the first commercial sale by the joint venture
or other joint relationship, a warrant to purchase 1.5% of the Baseline
Outstanding Share Amount at a 50% premium to market price on the date of such
sale. The warrants will have five-year maximum terms, provided that with respect
to each such warrant issuance, if at any time subsequent to the issuance of the
warrant the price of the Company's Common Stock exceeds the exercise price by
50% or more, Hoechst must exercise such warrant no later than the end of its
next fiscal year.
ELAN CORPORATION, PLC
In December 1997, the Company entered into a nonexclusive research and
development agreement with Elan for the development of genomics and gene
expression research tools. The agreement contemplates that Nanogen will develop
products for discrimination of sequence variations such as single nucleotide
polymorphisms, allelic variations, genotyping and mutation detection. Nanogen
will also develop products for use in expression monitoring of RNA levels for
use in gene discovery, drug discovery, target validation, animal studies and
toxicity studies. The agreement contemplates that Elan will provide Nanogen with
an aggregate of $11.0 million over the five-year term of the research program,
subject to the achievement of certain
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milestones. There can be no assurance that such milestones will be achieved in a
timely fashion, if at all. Nanogen will pay Elan a royalty on net sales to third
parties of any products developed pursuant to the collaboration and shall make
its instrument platform available to Elan for beta testing. In addition, Elan
has agreed pursuant to the agreement to purchase Common Stock worth an aggregate
of $5.0 million directly from the Company in the Private Placement.
THE UNIVERSITY OF TEXAS SOUTHWESTERN MEDICAL CENTER
In July 1995, the Company entered into a collaborative research agreement
with UT Southwestern, pursuant to which the parties agreed to collaborate on the
analysis of polymorphisms and human genetic linkage studies using Nanogen's
technology. Under the terms of the agreement, Nanogen is to provide its
microchips, controller hardware and software in support of research to be
conducted by UT Southwestern. Additionally, the agreement specifies that UT
Southwestern is to have title to all inventions and discoveries arising solely
as a result of its research conducted thereunder, although (i) Nanogen has the
option to negotiate a license for any patented technology, and (ii) if the
parties are unable to negotiate a license on mutually agreeable terms within a
specified time period, Nanogen retains a right of first refusal with respect to
such patented technology for a period of two years. The agreement further
specifies that the parties are to have joint rights to patents and patented
technology invented jointly by Nanogen and UT Southwestern.
RESEARCH GRANTS
The Company currently has six active research grants administered by
various governmental agencies. Two of the grants, which aggregate approximately
$4.0 million, have been entered into with ATP for the development of a fully
integrated DNA testing system and the development of automated DNA sample
processing technology. In connection with the ATP awards, the Company was
awarded grants aggregating approximately $375,000 from the California Trade and
Commerce Agency Defense Conversion Program for developing polymer based
permeation systems for use in integrated microelectronic DNA diagnostic systems.
The Company has also received two grants, one from the National Institute of
Justice ("NIJ") and one from the Bode, to evaluate the feasibility of using
Nanogen's technology to perform rapid forensic DNA tests and the development of
microelectronic systems for analysis of fingerprints. The cumulative funding of
the NIJ and Bode grants is approximately $2.1 million. Additionally, Nanogen
received a small subcontracting agreement from the Potomac Institute of Policy
Studies to develop electronic microchip based immunoassays.
RESEARCH AND PRODUCT DEVELOPMENT
As of December 31, 1997, the Company had 78 employees in research and
development, of which 36 hold Ph.D. or M.D. degrees. The Company's research and
product development organization is dedicated to developing the DNA analysis
platform, leveraging basic technology across a number of different product
areas, planning system modifications for specific applications using a common
platform and enhancing chip design and capabilities to simplify instrument
design.
The Company's research and product development efforts are focused on the
further development of the Company's proprietary technology platform as well as
specific applications of the platform. The microelectronics, systems development
and chemistry groups are focusing on moving current designs into production and
on furthering developments and enhancements of the technology platform,
including developing more sophisticated microchip designs, next generation
instrumentation and enhanced operating software. The infectious disease products
group supports the research and development efforts of the joint venture with
Becton Dickinson. The genomics group is developing programs to exploit Nanogen
technology in genomics applications, both independently and through the Elan
collaboration. The molecular biology group is developing genetic analysis and
forensic applications and integrating the Becton Dickinson SDA technology with
the Company's platform. The advanced technology group is developing an advanced
sample-to-answer system. The Company will form a group to support its drug
discovery efforts, initially including the Hoechst collaboration. The Company
also has research groups to support its research grants.
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In addition to its internal research and development efforts the Company
has entered into agreements with third parties to further develop certain
aspects of its technology platform. In July 1996, the Company entered into a
letter of intent with Prolinx, Inc. ("Prolinx") for the development of an
enhanced sensitivity detection system for use with Nanogen's electronic
microchips. In December 1996, the Company and Prolinx entered into a sponsored
research agreement pursuant to which Nanogen is to fund research conducted by
Prolinx in three principal areas: (i) identification and development of
chromophore/fluorophore/luminescent detection reagents, (ii) refinement and
development of an amplification polymer, and (iii) application of Prolinx
proprietary chemical linkage system for immobilization and capture of probes
within the field of electronically addressable microarrays. Pursuant to the
sponsored research agreement, the Company is committed to spend $500,000
annually in research funding for the three year term of the agreement. The
letter of intent also contemplates a license agreement regarding the results of
the sponsored research program pursuant to which Nanogen will have certain
exclusive and nonexclusive rights to Prolinx technology and program inventions
in certain specified fields of use. Additionally, in February 1996, the Company
entered into a design and development agreement with RELA, Inc. ("RELA")
pursuant to which RELA assisted Nanogen in the design and development of a
prototype optical detection platform which has been integrated into the
Company's instrument. The Company continues to work with RELA on an as-needed
basis.
PROPRIETARY TECHNOLOGY AND PATENTS
The Company has four issued U.S. patents, one foreign issued patent, four
indications of allowability and 15 additional patent application families
pending in the U.S. Corresponding foreign patent applications have been filed in
a number of foreign countries. Additionally, in November 1997, the Company
entered into a licensing agreement with Syntro Corporation, pursuant to which
the Company obtained an exclusive license to U.S. Patent No. 4,787,963 relating
to methods and means of annealing complementary nucleic molecules in exchange
for payment of an initial fee, aggregate payments of $1 million during the
agreement's first two years and the potential payment of certain royalties. The
Company's current policy is to file patent applications on what it deems to be
important technological developments which might relate to products of the
Company or methods relating to such products. In addition to pursuing patents
and patent applications relating to its platform technology, the Company may
enter into certain other license arrangements to obtain rights to third-party
intellectual property where appropriate.
There can be no assurance that any of the Company's or its licensors'
patent applications will issue or whether any issued patents will be found valid
if challenged. In addition, there can be no assurance that the intellectual
property rights licensed by the Company will be successfully integrated into
commercial products or that others will not independently develop similar
technologies or duplicate any technology developed by the Company. Because of
the extensive time required for development, testing and regulatory review of a
potential product, it is possible that, before any of the Company's products can
be commercialized, any related patent may expire or remain in existence for only
a short period following commercialization, thus reducing any advantage of the
patent, which could adversely affect the Company's ability to protect future
product development and, consequently, its business, financial condition and
results of operations.
To date all of the Company's inventions have originated in the U.S. and all
patent applications were originally filed in the U.S. The Company also seeks to
protect these inventions through foreign counterpart applications filed in
selected other countries. Because patent applications in the U.S. are maintained
in secrecy until patents issue and since publication of discoveries in the
scientific or patent literature often lag behind actual discoveries, the Company
cannot be certain that it was the first to make the inventions covered by each
of its issued or pending patent applications or that it was the first to file
for protection of inventions set forth in such patent applications. There can be
no assurance that the Company's planned or potential products will not be
covered by third-party patents or other intellectual property rights, in which
case continued development and marketing of such products would require a
license under such patents or other intellectual property rights. There can be
no assurance that such required licenses will be available to the Company on
acceptable terms, if at all. If the Company does not obtain such licenses, it
could encounter delays in product introductions while it attempts to design
around such patents, or could find that the development, manufacture or sale of
products requiring such licenses is foreclosed. The Company is aware of certain
U.S. and
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corresponding foreign patents and applications which are assigned to Affymax
Technologies, N.V. and which relate to certain devices having 1,000 or more
groups of oligonucleotides occupying a total area of less than 1 cm(2) on a
substrate. In the event that the Company proceeds with the development of arrays
with more than 1,000 groups of oligonucleotides, the Company expects to design
its devices through, among other things, the selection of the physical
dimensions and methods of binding so as to avoid infringing these patents. The
Company is aware of certain U.S. and European patents and patent applications
owned by Isis Innovations Ltd. (E.M. Southern) ("Isis Innovations"). The Company
has opposed one such allowed European patent which had broad claims to certain
array technology for analyzing a predetermined polynucleotide sequence. Isis
Innovations' position with respect to the opposed patent is that such claims
relate to what it terms the "diagnostic mode." Those claims have now all been
narrowed to the point that, if such claims are accepted by the European Patent
Office, they would not be infringed by the Company's technology. It is not
possible to determine whether or not such claims will be accepted, additionally
narrowed or canceled in their entirety as a result of the opposition proceeding
or during prosecution or will be allowed and issued as patents. If the claims of
the original European patent survive the opposition or if an application
relating to arrays issues in another country with claims as broad as the
original European patent, the Company could be subject to infringement claims
that could delay or preclude sales of some or all of its anticipated diagnostic
products.
Litigation may be necessary to defend against or assert such claims of
infringement, to enforce patents issued to the Company, to protect trade secrets
or know-how owned by the Company or to determine the scope and validity of the
proprietary rights of others. In addition, interference proceedings declared by
the USPTO may be necessary to determine the priority of inventions with respect
to patent applications of the Company. Litigation or interference proceedings
could result in substantial costs to and diversion of effort by the Company, and
could have a material adverse effect on the Company's business, financial
condition and results of operations. There can be no assurance that these
efforts by the Company would be successful.
The Company may rely, in certain circumstances, on trade secrets to protect
its technology. However, trade secrets are difficult to protect. The Company
seeks to protect its proprietary technology and processes, in part, by
confidentiality agreements with its employees and certain contractors. There can
be no assurance that these agreements will not be breached, that the Company
will have adequate remedies for any breach, or that the Company's trade secrets
will not otherwise become known or be independently discovered by competitors.
To the extent that the Company's employees or its consultants or contractors use
intellectual property owned by others in their work for the Company, disputes
may also arise as to the rights in related or resulting know-how and inventions.
MANUFACTURING
The Company's strategy is to source semiconductor microchip fabrication and
disposable cartridge components from third-party contract manufacturers and
provide in-house deposition of the permeation layer, placement of DNA capture
probes and final electronic assembly and testing. The instrument will be
primarily sourced from third-party contract manufacturers, after which Nanogen
will provide final assembly and testing. The Company currently fabricates
microchips in limited quantities using a number of outside contract
manufacturers and is currently qualifying new contract manufacturers for large
scale wafer fabrication. The Company believes its technology allows for large
scale microchip production at a relatively low cost. The Company believes this
scalability and low cost will be one of its principal competitive advantages and
will promote the rapid acceptance of its proprietary semiconductor-based
platform technology as an industry standard. However, there can be no assurance
the Company will be successful in achieving the ability to scale up
manufacturing capacity. Under the terms of the Company's joint venture, Becton
Dickinson is expected to manufacture the instrument for infectious disease
diagnostics.
The Company has limited experience in manufacturing as well as limited
manufacturing capacity for its products and will be required to increase its
in-house manufacturing capability to manufacture additional products. The
Company intends to commence construction of a manufacturing facility during 1998
which is expected to be completed in 1999. The Company is currently recruiting
manufacturing management personnel. If the Company is unable to increase its
in-house manufacturing capability, the Company will need to obtain alternative
manufacturing facilities or establish additional contract manufacturing for its
products.
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The Company will be required to comply with QSR requirements in order to
produce products for sale in the United States and with applicable quality
system standards and directives in order to produce products for sale in the
European union. Any failure of the Company to comply with the QSR requirements
or applicable standards and directives may result in the Company being required
to take corrective actions, such as modification of its policies and procedures.
Pending such corrective actions, the Company could be unable to manufacture or
ship any products, which could have a material adverse effect on the Company's
business, financial condition and results of operation. Furthermore, the
Company's manufacturing facilities, and those of its third-party manufacturers,
are subject to periodic inspection by regulatory authorities, and its operations
must undergo QSR compliance inspections conducted by the FDA and corresponding
state agencies. Additionally, prior to approval of a PMA, the Company's and its
third-party manufacturers' facilities, procedures and practices will be subject
to preapproval QSR inspection. Failure to pass such inspections may have a
material adverse effect on the Company's business, financial condition and
results of operations.
If the Company or any of its contract manufacturers encounter future
manufacturing difficulties, including problems involving the ability to scale up
manufacturing capacity, production yields, quality control and quality
assurance, or shortages of components or qualified personnel, it could have a
material adverse effect on the Company's business, financial condition and
results of operations.
COMPETITION
The Company believes that there are no other currently available
technologies that offer a range of capabilities comparable to those offered by
the Company's technology. However, as it develops applications of its
technology, the Company expects to encounter intense competition from a number
of companies that offer products competing in its targeted applications. The
Company anticipates that its competitors in these areas will include health care
companies that manufacture laboratory-based tests and analyzers, diagnostic and
pharmaceutical companies, as well as companies developing drug discovery
technologies. To the extent the Company is successful in developing products in
these areas, the Company will face competition from established and numerous
development-stage companies that continually enter these markets.
In many instances, the Company's competitors have substantially greater
financial, technical, research and other resources and larger, more established
marketing, sales, distribution and service organizations than the Company.
Moreover, such competitors may offer broader product lines and have greater name
recognition than the Company, and may offer discounts as a competitive tactic.
In addition, several development stage companies are currently making or
developing products that compete with or will compete with those of the Company.
There can be no assurance that the Company's competitors will not succeed in
developing or marketing technologies or products that are more effective or
commercially attractive than the Company's current or future products, or that
would render the Company's technologies and products obsolete. Also, there can
be no assurance that the Company will have the financial resources, technical
expertise or marketing, distribution or support capabilities to compete
successfully in the future. The Company's future success will depend in large
part on its ability to maintain a competitive position with respect to its
technologies in which it competes. Rapid technological development by the
Company or others may result in competing products or technology. See "Risk
Factors -- Intense Competition; Competing Technologies."
GOVERNMENT REGULATION
The Company has not applied for FDA or other regulatory approvals with
respect to any of its products under development. The Company anticipates the
manufacturing, labeling, distribution and marketing of some or all of the
Company's diagnostics products will be subject to regulation in the U.S. and in
certain other countries. In addition to clinical diagnostic markets, Nanogen
also intends to pursue research, environmental, laboratory and industrial
applications for certain of its products which may be subject to different
government regulation. Aspects of the Company's manufacturing and marketing
activities may also be subject to federal, state and local regulation by various
governmental authorities.
In the U.S., the FDA regulates, as medical devices, most diagnostic tests
and in vitro reagents that are marketed as finished test kits and equipment.
Pursuant to the Federal Food, Drug, and Cosmetic Act, and the
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regulations promulgated thereunder, the FDA regulates the preclinical and
clinical testing, design manufacture, labeling, distribution and promotion of
medical devices. The Company will not be able to commence marketing or
commercial sales in the U.S. of new medical devices under development until it
receives clearance or approval from the FDA, which can be a lengthy, expensive
and uncertain process. Noncompliance with applicable requirements can result in,
among other things, administrative or judicially imposed sanctions such as
injunctions, civil penalties, recall or seizure of products, total or partial
suspension of production, failure of the government to grant premarket clearance
or premarket approval for devices, withdrawal of marketing clearances or
approvals, or criminal prosecution.
In the U.S., medical devices are classified into one of three classes
(i.e., Class I, II or III) on the basis of the controls deemed necessary by the
FDA to reasonably ensure their safety and effectiveness. Class I devices are
subject to general controls (e.g., labeling, premarket notification and
adherence to QSR). Class II devices are subject to general and special controls
(e.g., performance standards, postmarket surveillance, patient registries and
FDA guidelines). Generally, Class III devices are those which must receive
premarket approval by the FDA to ensure their safety and effectiveness (e.g.,
life-sustaining, life-supporting and implantable devices or new devices which
have been found not to be substantially equivalent to a legally marketed
devices). Before a new device can be introduced in the market, the manufacturer
must generally obtain FDA clearance of a 510(k) notification or approval of a
PMA application. The Company's products will vary significantly in the degree of
regulatory approvals required. The Company believes that certain of its products
for research, industrial, genomics and drug discovery applications will not
require regulatory approvals or clearance. Certain diagnostic products will
require 510(k) approvals while other diagnostic and genetic testing products
will require PMA approvals.
A 510(k) clearance will generally only be granted if the information
submitted to the FDA establishes that the device is "substantially equivalent"
to a legally marketed predicate device. For any devices that are cleared through
the 510(k) process, significant modifications or enhancements in the design or
intended use that could significantly affect safety or effectiveness will
require new 510(k) submissions. It generally takes from four to twelve months
from submission to obtain 510(k) premarket clearance but may take longer.
The PMA approval process is more expensive, uncertain and lengthy than the
510(k) clearance process. A PMA must prove the safety and effectiveness of the
device to the FDA's satisfaction, which typically requires extensive data,
including but not limited to, technical, preclinical, clinical trials,
manufacturing, and labeling to demonstrate the safety and effectiveness of the
device. Although clinical investigations of most devices are subject to the
investigational device exemption ("IDE") requirements, clinical investigations
of vitro diagnostic ("IVD") tests, such as the Company's products and products
under development, are exempt from the IDE requirements, including the need to
obtain the FDA's prior approval, provided the testing is noninvasive, does not
require an invasive sampling procedure that presents a significant risk, does
not intentionally introduce energy into the subject, and is not used as a
diagnostic procedure without confirmation by another medically established test
or procedure. In addition, the IVD must be labeled for research use only ("RUO")
or investigational use only ("IUO"), and distribution controls must be
established to assure that IVDs distributed for research or clinical
investigation are used only for those purposes.
There can be no assurance that with respect to any of the Company's
products in development, the FDA will not determine that the Company must adhere
to the more costly, lengthy and uncertain PMA approval process. Significant
modifications to the design, labeling or manufacturing process of an approved
device may require approval by the FDA of a PMA supplement or a new PMA
application.
After a PMA is accepted for filing, the FDA begins its review of the
submitted information, which generally takes between one and two years, but may
take significantly longer. During this review period, the FDA may request
additional information or clarification of information already provided. Also
during the review period, an advisory panel of experts from outside the FDA will
be convened to review and evaluate the application and provide recommendations
to the FDA as to the approvability of the device. There can be no assurance that
the Company will be able to obtain necessary approvals on a timely basis, if at
all, and delays in obtaining or failure to obtain such approvals, the loss of
previously obtained approvals, or failure to comply
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with existing or future regulatory requirements could have an adverse effect on
the Company's business, financial condition and results of operations.
Manufacturers of medical devices for marketing in the U.S. are required to
adhere to the QSR requirements (formerly Good Manufacturing Practices), which
include testing, control and documentation requirements. Manufacturers must also
comply with Medical Device Reporting ("MDR") requirements that a manufacturer
report to the FDA any incident in which its product may have caused or
contributed to a death or serious injury, or in which its product malfunctioned
and would be likely to cause or contribute to a death or serious injury upon
recurrence. Labeling and promotional activities are subject to scrutiny by the
FDA and, in certain circumstances, by the Federal Trade Commission. Current FDA
enforcement policy prohibits the marketing of approved medical devices for
unapproved uses.
The Company is subject to routine inspection by the FDA and certain state
agencies for compliance with QSR requirements, MDR requirements and other
applicable regulations. The recently finalized QSR requirements include design
controls that will likely increase the cost of compliance. There can be no
assurance that the Company will not incur significant costs to comply with laws
and regulations in the future or that such laws and regulations will not have a
material adverse effect upon the Company's business, financial condition and
results of operation.
Any of the Company's customers using its diagnostic devices for clinical
use in the U.S. may be regulated under the Clinical Laboratory Improvement
Amendments of 1988 ("CLIA"). CLIA is intended to ensure the quality and
reliability of clinical laboratories in the U.S. by mandating specific standards
in the areas of personnel qualification, administration, participation in
proficiency testing, patient test management, quality control, quality assurance
and inspections. The regulations promulgated under CLIA establish three levels
of diagnostic tests ("waived," "moderately complex" and "highly complex"), and
the standards applicable to a clinical laboratory depend on the level of the
tests it performs. CLIA requirements may prevent some clinical laboratories from
using certain of the Company's diagnostic products. Therefore, there can be no
assurance that the CLIA regulations and future administrative interpretations of
CLIA will not have a material adverse impact on the Company by limiting the
potential market for the Company's products.
The President recently signed into law the Food and Drug Administration
Modernization Act of 1997. This legislation makes changes to the device
provisions of the FDC Act and other provisions in the Act affecting the
regulation of devices. Among other things, the changes will affect the IDE,
510(k) and PMA processes, and also will affect device standards and data
requirements, procedures relating to humanitarian and breakthrough devices,
tracking and postmarket surveillance, accredited third-party review, and the
dissemination of off-label information. The Company cannot predict how or when
these changes will be implemented or what effect the changes will have on the
regulation of the Company's products. There can be no assurance that the new
legislation will not impose additional costs or lengthen review times for the
Company's products.
The Company's food pathogen products will be subject to the regulations of
various domestic and foreign government agencies which regulate food safety and
food adulteration, including the U.S. Department of Agriculture ("USDA").
Nanogen intends to consult with and, when appropriate, to hire personnel
with expertise in regulatory affairs to assist the Company in obtaining
appropriate regulatory approvals as required. Nanogen also intends to work with
its corporate partners that have experience in regulatory affairs to assist in
obtaining regulatory approvals for collaborative products.
SALES AND MARKETING
Pursuant to the terms of its joint venture with Becton Dickinson, the
Company's potential products relating to infectious disease will be marketed by
Becton Dickinson. Nanogen intends to market and sell other potential products
directly or indirectly through strategic alliances and distribution arrangements
with third parties, including its collaborative partners. There can be no
assurance that any efforts to establish such
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strategic alliances or distribution arrangements will be successful. The Company
is currently recruiting senior marketing management personnel to formulate and
implement the Company's sales and marketing strategies.
FACILITIES
Nanogen currently leases approximately 45,000 square feet of commercial
real estate in San Diego, California, under a lease expiring in 2005. The
Company has an option to renew the lease on this facility for two additional
five-year terms. Currently, Nanogen occupies 27,000 square feet of the facility
which accommodates Nanogen's administrative offices and research and development
laboratories. The remainder of the leased premises are under construction in
anticipation of the Company's expanded research and development activities, with
occupancy expected in May 1998. The Company intends to commence construction of
a manufacturing facility in close proximity to its existing facility during 1998
which is expected to be completed in 1999. As currently planned, this new
facility will accommodate the Company's final electronic assembly, permeation
layer deposition, DNA probe placement, quality control and instrument final
assembly and testing.
EMPLOYEES
As of December 31, 1997, the Company had 90 full-time employees, of whom 37
hold Ph.D. or M.D. degrees and six hold other advanced degrees. None of the
Company's employees is covered by a collective bargaining agreement, and
management considers relations with its employees to be good.
LEGAL PROCEEDINGS
The Company is not a party to any material legal proceedings.
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MANAGEMENT
DIRECTORS, EXECUTIVE OFFICERS AND KEY SCIENTIFIC PERSONNEL AND CONSULTANTS
The directors, executive officers and key scientific personnel of the
Company are as follows:
<TABLE>
<CAPTION>
NAME AGE POSITION
---- --- --------
<S> <C> <C>
Directors and Executive Officers
Howard C. Birndorf.............. 48 Chairman of the Board, Chief Executive Officer and
Chief Financial Officer
Tina S. Nova, Ph.D.(1).......... 44 President, Chief Operating Officer and Director
W. J. Kitchen, Sc.D............. 55 Senior Vice President, Operations
Harry J. Leonhardt, Esq......... 41 Vice President, General Counsel and Secretary
James P. O'Connell, Ph.D........ 51 Vice President, Research and Product Development
Kieran T. Gallahue.............. 34 Vice President, Strategic Marketing
Brook H. Byers.................. 52 Director
Robert E. Curry, Ph.D.(2)....... 51 Director
Cam L. Garner(2)................ 49 Director
David G. Ludvigson.............. 47 Director
Thomas G. Lynch(1)(2)........... 41 Director
Andrew E. Senyei, M.D.(1)....... 47 Director
Key Scientific Personnel and
Consultants
Michael J. Heller, Ph.D......... 53 Chief Technical Officer
Donald E. Ackley, Ph.D.......... 44 Senior Director, Microelectronics
Richard R. Anderson, Ph.D....... 47 Senior Director, Drug Discovery
Mark L. Collins, Ph.D........... 43 Senior Director, Advanced Technology
Patrick J. Dillon, Ph.D......... 36 Senior Director, Genomics
John J. Carrino, Ph.D........... 39 Director, Assay Development
John R. Havens, Ph.D............ 40 Director, Chemistry
Michael I. Nerenberg, M.D....... 42 Director, Molecular Biology
Thomas H. Adams, Ph.D........... 55 Consultant
</TABLE>
- ---------------
(1) Member of Audit Committee of the Board of Directors.
(2) Member of Compensation Committee of the Board of Directors.
Howard C. Birndorf, a founder of the Company, has served as Chairman of the
Board and Chief Executive Officer since October 1993, and Chief Financial
Officer since December 1997. He previously served as Chief Financial Officer
from September 1993 to October 1997. Mr. Birndorf was a co-founder and Chairman
Emeritus of Ligand Pharmaceuticals, Incorporated ("Ligand") where from January
1988 to November 1991 he was President and Chief Executive Officer. He was also
a co-founder, director and Executive Vice President of Gen-Probe Incorporated
("Gen-Probe"), co-founder and Vice President of Corporate Development at
Hybritech, Incorporated ("Hybritech"), co-founder and director of IDEC
Pharmaceuticals Corporation ("IDEC Pharmaceuticals") and was involved in the
formation of Gensia Pharmaceuticals, Inc. (currently known as Gensia Sicor Inc.)
where he was a director. From November 1991 to January 1994, Mr. Birndorf was
President of Birndorf Technology Development, an investment and consulting
company. He was a director of Neurocrine Biosciences, Inc., from 1992 to
December 1997 and is currently a director of the Cancer Center of the University
of California, San Diego. Mr. Birndorf received an M.S. in Biochemistry from
Wayne State University.
Tina S. Nova, Ph.D. has been a director of the Company since April 1994 and
has served as President and Chief Operating Officer since February 1994. Dr.
Nova began her scientific career at Hybritech, where she was responsible for the
development of several diagnostic products commonly used in clinical
laboratories
43
<PAGE> 47
today. She joined Ligand as Executive Director of Development where she
developed the automated high-throughput screening assay utilized today in their
drug discovery efforts. She then joined PRIZM Pharmaceuticals ("PRIZM") from
1992 to February 1994 where she was Vice President and Chief Operating Officer.
Dr. Nova has published in numerous scientific journals, and is an inventor on
several patents and patent applications in the area of assay development. Dr.
Nova is a director of The Solaris Group, a division of Monsanto, and currently
serves on the Board of Directors of BIOCOM in San Diego, the Cancer Center of
the University of California, San Diego and the Doris Howell Foundation for
Women's Healthcare. Dr. Nova received a Ph.D. in Biochemistry from the
University of California, Riverside followed by a postdoctoral fellowship in
Dermatology and Pharmacology at New York University Medical School.
W.J. Kitchen, Sc.D. joined the Company in December 1997 as Senior Vice
President, Operations. From May 1993 to December 1997, Dr. Kitchen served as
Corporate Vice President, Director of Technology and Quality of the Automotive,
Energy and Components Sector of Motorola, Inc. ("Motorola"). He joined
Motorola's Semiconductor Products Sector in 1982 where his various positions
included Vice President, Director Strategic R&D, Vice President Technology, Vice
President, Director, Advanced Technology Center, and Director, Semiconductor R&D
Laboratories. Prior to joining Motorola, Dr. Kitchen was a Senior Executive with
the National Security Agency where he was responsible for the development and
manufacturing of secure communications equipment. He received a B.S. in
Electrical Engineering with distinction from Virginia Military Institute, an
M.S. and Doctor of Science degrees in Electrical Engineering from the University
of Virginia and an M.B.A. from the Industrial College of the Armed Forces.
Harry J. Leonhardt, Esq. has served as Vice President, General Counsel and
Secretary since July 1996. From 1990 to 1996, Mr. Leonhardt served in various
capacities at Allergan, Inc., as Senior Attorney and Head of Intellectual
Property Litigation, Assistant General Counsel and Head of Worldwide Litigation,
and during a two-year expatriate assignment at its European headquarters in
England, served as General Counsel for Allergan's European Operations. From 1983
to 1990, Mr. Leonhardt was an associate attorney with the patent firm of Lyon &
Lyon LLP in Los Angeles, where he represented a number of high technology
clients in the fields of biotechnology, pharmaceuticals, diagnostic devices,
genetic probes and genetic engineering. Mr. Leonhardt received a B.Sc. in
Pharmacy from the Philadelphia College of Pharmacy and Science and a J.D. from
the University of Southern California Law Center.
James P. O'Connell, Ph.D. has served as Vice President, Research and
Product Development since December 1994. From August 1988 to December 1994, he
was Vice President, Research and Development and Central Operations for Ortho
Diagnostic Systems, a Johnson & Johnson Company, where he was responsible for
general management of research and development, manufacturing and industrial
engineering, purchasing and procurement. Dr. O'Connell was also responsible for
the research activities of the Johnson & Johnson Biotechnology Center in La
Jolla, California. Prior to October 1988, Dr. O'Connell was Director of
Immunodiagnostics Research and Development at Becton Dickinson. He received a
M.S. and Ph.D. in Microbiology and Public Health from the University of North
Carolina.
Kieran T. Gallahue has served as Vice President, Strategic Marketing since
January 1998. From 1995 to 1997, he served as Vice President of the Critical
Care Business Unit for Instrumentation Laboratory ("IL") where he was
responsible for the worldwide strategic sales and marketing, and research and
development efforts for the product line. From 1992 to 1995, he held a variety
of sales and marketing positions within IL. In addition, Mr. Gallahue has held
various marketing positions within Procter & Gamble from 1991 to 1992 and the
General Electric Company from 1985 to 1989. Mr. Gallahue holds an MBA from the
Harvard Business School.
Brook H. Byers has been a director of the Company since 1994. Mr. Byers is
a general partner of Kleiner Perkins Caufield & Byers ("KPCB"), a venture
capital firm which he joined in 1977. He has been the founding president and
chairman of four life sciences companies: Hybritech, IDEC Pharmaceuticals,
InSite Vision Inc. and Ligand. Mr. Byers currently serves as a director of Arris
Pharmaceutical Corporation and a number of privately-held technology companies.
Mr. Byers serves on the Board of Directors of the University of California, San
Francisco Foundation.
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<PAGE> 48
Robert E. Curry, Ph.D. has been a director of the Company since 1995. Dr.
Curry joined the Sprout Group ("Sprout"), a submanager of various venture
capital funds within the Donaldson, Lufkin & Jenrette organization, as a general
partner of several of the partnerships comprising Sprout in May 1991 and is
currently a divisional Vice President of DLJ Capital Corporation ("DLJ"), a
wholly-owned subsidiary of Donaldson, Lufkin & Jenrette, Inc. Prior to joining
Sprout, Dr. Curry served in various capacities with Merrill Lynch R&D Management
and Merrill Lynch Venture Capital from 1984, including as President of both
organizations from January 1990 to May 1991. Previously, Dr. Curry was a Vice
President of Becton Dickinson from May 1980 to July 1984, and General Manager of
BioRad Laboratory Inc.'s Diagnostics Systems Division from August 1976 to May
1980. He currently is a director of AutoCyte, Inc., Biocircuits Corporation,
Diatide, Inc. and Photon Technology International, Inc. Dr. Curry received a
B.S. from the University of Illinois and an M.S. and Ph.D. in Chemistry from
Purdue University.
Cam L. Garner has been a director of the Company since September 1997.
Since May 1990, Mr. Garner has been President and Chief Executive Officer of
Dura Pharmaceuticals, Inc. ("Dura") and since 1995 has served as Dura's Chairman
of the Board of Directors. Mr. Garner also currently serves as a director of
Spiros Development Corp. II, Inc., a special purpose corporation developing a
pulmonary drug delivery system. Prior to joining Dura, Mr. Garner served as
President of Syntro Corporation, a biotechnology company, from November 1987 to
June 1989. Mr. Garner is currently a director of Safeskin Corporation, a
manufacturer of medical supplies, CardioDynamics International and Trega
Biosciences, Inc. Mr. Garner received a B.S. in Biology from Virginia Wesleyan
College and an M.B.A. from Baldwin-Wallace College.
David G. Ludvigson has been a director of the Company since 1996. Since
February 1996, Mr. Ludvigson has been President and Chief Operating Officer of
NeTpower. From 1992 to 1995, Mr. Ludvigson was Senior Vice President and Chief
Financial Officer of IDEC Pharmaceuticals. Prior to that time, he served as
Senior Vice President of Sales and Marketing for Conner Peripherals and as
Executive Vice President, Chief Financial Officer and a director of MIPS
Computer Systems, Inc., a RISC microprocessor developer and systems
manufacturer. Mr. Ludvigson received a B.S. and an M.A.S. from the University of
Illinois.
Thomas G. Lynch has been a director of the Company since February 1997. Mr.
Lynch is Executive Vice President, Chief Financial Officer and a director of
Elan, a leading drug delivery and biopharmaceutical company headquartered in
Dublin, Ireland, where he is responsible for finance, treasury, strategic
planning and corporate and investor relations. He is also a member of the
executive committee of Elan's board of directors. Prior to his appointment at
Elan in 1993, Mr. Lynch was a partner with KPMG Peat Marwick where he
specialized in securities matters and business advisory and accounting services.
Mr. Lynch is also a director of Pembroke Capital Limited, Icon Research Limited,
Axogen Limited and Warner Chilcott, plc.
Andrew E. Senyei, M.D., a founder of the Company, has been a director of
the Company since September 1993. He has been a general partner of Enterprise
Management Partners, a venture capital firm, since 1988. Prior to joining
Enterprise Management Partners, Dr. Senyei was co-founder and the first
President of Molecular Biosystems, Inc. Dr. Senyei then served as Assistant
Professor in the Departments of Obstetrics, Gynecology and Pediatrics at the
University of California, Irvine. Dr. Senyei received a B.A. in Biology from
Occidental College and a M.D. from Northwestern University.
Michael J. Heller, Ph.D. is a founder of the Company and has served as its
Chief Technical Officer since September 1993. In November 1991, Dr. Heller
co-founded Nanogen's former parent company, Nanotronics, and since that time has
served as Nanotronics' Vice President for Research. Dr. Heller co-founded and
served as President and Chief Operating Officer of Integrated DNA Technologies
from 1987 to 1989, and from 1984 to 1987 served as Director of Molecular Biology
for Molecular Biosystems, Inc. Prior to 1984, he served as Supervisor of DNA
Technology and Molecular Biology for Standard Oil Company. Dr. Heller received a
Ph.D. in Biochemistry from Colorado State University.
Donald E. Ackley, Ph.D. joined the Company in June 1996 as Senior Director
of Microelectronics. Dr. Ackley served as Chief Scientist for Motorola's
Photonics Technology Center from March 1993 to May 1996 where he was responsible
for projects that included bioelectronics, chemical sensors, virtual displays,
packaging, and optoelectronic devices for data communications. From November
1990 to March 1993, Dr. Ackley served as Manager of Motorola's Optoelectronics
Device Research Group. Prior to
45
<PAGE> 49
joining Motorola, Dr. Ackley worked in a wide variety of semiconductor
technologies including molecular beam epitaxy, optoelectronics devices, and
optical sensors at companies such as RCA's David Sarnoff Research Center,
Siemens Corporation and the Hewlett-Packard Company. He has also participated in
two successful start-ups in the field of semiconductor-based devices. Dr. Ackley
received a B.Sc., M.Sc. and Ph.D. from Brown University.
Richard A. Anderson, Ph.D. joined the Company in January 1998 as Senior
Director of Drug Discovery. From April 1988 to January of 1998, Dr. Anderson
held technical and managerial positions at Biosite Diagnostics Incorporated
("Biosite"), which he co-founded. While at Biosite, Dr. Anderson served as
Director of Product Development where he led the development of all of Biosite's
current immunodiagnostic products and was a co-inventor on several patents. From
March 1984 to April 1988, Dr. Anderson was employed by Hybritech, Inc. where he
developed several immunodiagnostic products for use in clinical laboratories and
held the position of Scientific Investigator. From July 1981 to February 1984,
Dr. Anderson was a Research Scientist with the Ames Division of Miles
Laboratories where he developed products for clinical laboratories. Dr. Anderson
received a Ph.D. in Physical Chemistry from the University of California, Davis
and from 1979 to 1981 held postdoctoral fellowships in the departments of
chemistry at the University of California, Davis and the University of Chicago.
Mark L. Collins, Ph.D. joined the Company in July 1997 as Senior Director
of Advanced Technology. From June 1994 to July 1997, Dr. Collins was Associate
Director of Research in the Hybridization Technology Group at Chiron
Corporation, and was a Senior Scientist in the Probe Design Group from September
1991 to June 1994. Prior to that, he was Director of the Sample Processing Group
and Manager, Basic Research Group, at Gene-Trak Systems. Dr. Collins received a
Ph.D. in Biochemistry from Ohio State University.
Patrick J. Dillon, Ph.D. joined the Company in August 1997 as Senior
Director of Genomics. From March 1993 to August 1997, Dr. Dillon was employed by
Human Genome Sciences, Inc. ("HGS"), where he was Director of Gene Discovery and
Exploratory Research from July 1995 to August 1997 and was an Associate Director
of Molecular Biology from August 1993 to June 1995. Prior to his four years at
HGS, he was a Senior Scientist in the Molecular Biology Group at R.W. Johnson
Pharmaceutical Research Institute from 1992 to 1993. Dr. Dillon received a Ph.D.
in Immunology from Rush University, and from 1988 to 1992 completed Postdoctoral
Fellowships in the Department of Molecular Oncology & Virology and in the
Department of Gene Regulation at the Roche Institute of Molecular Biology.
John J. Carrino, Ph.D. joined the Company in July 1997 as Director of Assay
Development. From March 1994 to June 1997, Dr. Carrino was Section Manager,
LCR/PCR Core Technology and New Assay Development for Abbott Laboratories, where
he was responsible for the development of diagnostic assays utilizing nucleic
acid amplification methodology. Before joining Abbott in 1988 as a Senior
Molecular Biologist, Dr. Carrino was a postdoctoral fellow at the University of
Chicago in the Department of Medicine. He received a Ph.D. in
Microbiology/Immunology from Northwestern University.
John R. Havens, Ph.D. joined the Company in February 1997 as Director of
Chemistry. From September 1984 to February 1997, Dr. Havens held technical and
managerial positions at Raychem Corporation. During his tenure at Raychem, Dr.
Havens served as Principal Scientist of the Display Products Group where he led
the development of a polymerdispersed liquid crystal material designed for
compact, bright video projectors. Other assignments included the development of
a plastic display based on the laser processing of thin-film transistors, with
Lawrence Livermore National Laboratory; and the position of Quality
Assurance/Quality Control Manager of the U.S. Materials Division. Dr. Havens
received a Ph.D. in Macromolecular Science from Case Western Reserve University,
and from 1982 to 1984 served as National Research Council Postdoctoral Fellow,
Polymers Division, for the National Bureau of Standards.
Michael I. Nerenberg, M.D. joined the Company in July 1996 as Director of
Molecular Biology. From July 1989 to July 1996, Dr. Nerenberg served at the
Scripps Research Institute ("Scripps") in the Department of Neuropharmacology
and Molecular and Experimental Medicine, where he directed a research laboratory
in retroviral oncogenesis. Dr. Nerenberg was a medical staff fellow in the
laboratory of molecular virology at the National Institutes of Health until 1987
and a postdoctoral fellow at Scripps. Dr. Nerenberg
46
<PAGE> 50
received a B.A. in Chemistry from the University of Chicago, and a M.D. from
Yale University School of Medicine. Dr. Nerenberg completed his residency in
Internal Medicine at the University of Pennsylvania in 1984.
Thomas H. Adams, Ph.D. is an exclusive consultant to the Company, and
served as a Company director from 1994 to 1997. Dr. Adams is Chairman Emeritus
of Genta Incorporated, and served as that company's Chairman of the Board and
Chief Executive Officer from 1989 to 1997. He previously served as Chairman of
the Board and Chief Executive Officer of Gen-Probe Incorporated ("Gen-Probe"),
which he co-founded in 1984. Prior to founding Gen-Probe, Dr. Adams held the
positions of Senior Vice-President of Research and Development and Chief
Technical Officer at Hybritech Incorporated. Dr. Adams is a director of Biosite
Diagnostics Incorporated, La Jolla Pharmaceuticals and Life Technologies, Inc.
BOARD COMMITTEES
The Board of Directors has established an Audit Committee and a
Compensation Committee. The Audit Committee, which consists of Mr. Lynch, Dr.
Senyei and Dr. Nova, reviews the results and scope of the annual audit and the
services provided by the Company's independent auditors. The Compensation
Committee, which consists of Dr. Curry, Mr. Garner and Mr. Lynch, makes
recommendations to the Board of Directors with respect to general and specific
compensation policies and practices of the Company and administers the Company's
1997 Stock Incentive Plan (the "1997 Stock Plan") and the Employee Stock
Purchase Plan (the "ESPP").
COMPENSATION COMMITTEE INTERLOCKS AND INSIDER PARTICIPATION
The members of the Company's Compensation Committee during 1996 were Dr.
Curry, Dr. Senyei and Dr. Adams, a former director of the Company. There were no
interlocks or other relationships among the Company's executive officers and
directors that are required to be disclosed under applicable executive
compensations disclosure applications.
The Company currently has authorized eight directors. Upon the closing of
this offering, the Company will have three classes of directors serving
staggered three-year terms. All directors are elected to hold office until the
next annual meeting of stockholders of the Company in which their three-year
term expires and until their successors have been elected. Officers are elected
at the first board of directors meeting following the stockholders' meeting at
which the directors are elected and serve at the discretion of the Board of
Directors. There are no family relationships among any of the directors or
executive officers of the Company.
COMPENSATION OF DIRECTORS
Directors do not receive any fees for service on the Board of Directors,
although they are reimbursed for certain expenses incurred in connection with
attendance at Board and Committee meetings. At the time Messrs. Ludvigson, Lynch
and Garner became members of the Board of Directors, the Company granted to each
of them an option to purchase 16,666 shares of Common Stock under the Company's
1995 Stock Option/Stock Issuance Plan or the 1997 Stock Plan. All of these
options were exercisable immediately, although unvested shares issued upon
exercise are subject to repurchase by the Company. The Company's right of
repurchase lapses as to 25% of the shares covered by the respective options on
the first anniversary of the date of grant, and lapses ratably on a monthly
basis thereafter, with the repurchase right terminating in full on the fourth
anniversary of the date of grant. Directors are eligible to participate in the
Company's 1997 Stock Plan described below.
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<PAGE> 51
EXECUTIVE COMPENSATION
The following table summarizes all compensation paid to the Company's Chief
Executive Officer and to the Company's three other most highly compensated
executive officers other than the Chief Executive Officer whose total annual
salary and bonus exceeded $100,000, for services rendered in all capacities to
the Company during the fiscal years ended December 31, 1996 and 1997.
SUMMARY COMPENSATION TABLE
<TABLE>
<CAPTION>
LONG-TERM
COMPENSATION
AWARDS
ANNUAL COMPENSATION ------------
-------------------------------------------------- SECURITIES
OTHER ANNUAL UNDERLYING
NAME AND PRINCIPAL POSITION YEAR SALARY($) BONUS($) COMPENSATION($) OPTIONS(#)
--------------------------- ---- --------- -------- --------------- ------------
<S> <C> <C> <C> <C> <C>
Howard C. Birndorf
Chief Executive Officer and
Chief Financial Officer........ 1997 $285,010 $75,000 $ -- 437,496
1996 270,005 60,000 -- 183,333
Tina S. Nova, Ph.D.
President and Chief Operating
Officer........................ 1997 225,007 60,000 -- 160,379
1996 198,004 39,600 -- 50,000
James P. O'Connell, Ph.D.
Vice President, Research and
Product Development............ 1997 218,007 35,000 -- 106,096
1996 206,004 38,600 19,428(1) 33,333
Harry J. Leonhardt, Esq.
Vice President, General Counsel
and Secretary.................. 1997 190,006 60,000(3) 42,138(1) 85,200
1996 92,503(2) 20,000(3) 20,860(1) 66,666
</TABLE>
- ---------------
(1) Amount represents reimbursement of expenses and related income taxes
incurred in relocating to San Diego.
(2) Mr. Leonhardt joined the Company in July 1996. Mr. Leonhardt's salary for
1996 reflects a partial year of service.
(3) $20,000 of Mr. Leonhardt's bonus in each of 1996 and 1997 constitutes a
bonus granted to Mr. Leonhardt in connection with his hiring in July 1996.
The following tables set forth certain information as of December 31, 1997
and for the fiscal year then ended with respect to stock options granted to and
exercised by the individuals named in the Summary Compensation Table above.
OPTION GRANTS IN 1997
<TABLE>
<CAPTION>
INDIVIDUAL GRANTS POTENTIAL REALIZABLE
------------------------------------------------------ VALUE AT ASSUMED
NUMBER OF % OF ANNUAL RATES OF STOCK
SECURITIES TOTAL OPTIONS PRICE APPRECIATION POTENTIAL REALIZABLE
UNDERLYING GRANTED TO EXERCISE FOR OPTION TERM(3) VALUE AT INITIAL
OPTIONS EMPLOYEES IN PRICE EXPIRATION --------------------- PUBLIC OFFERING
NAME GRANTED(#) FISCAL YEAR ($/SH)(1) DATE(2) 5%($) 10%($) PRICE($)(4)
---- ----------- -------------- --------- ---------- --------- --------- ---------------------
<S> <C> <C> <C> <C> <C> <C> <C>
Howard C. Birndorf.... 437,496(5) 27.5808% $.90 5/16/07 $247,625 $627,530 $4,418,710
Tina S. Nova, Ph.D.... 160,379(5) 10.1107 .90 5/16/07 90,775 230,043 1,619,828
James P. O'Connell,
Ph.D................ 106,096(5) 6.6885 .90 5/16/07 60,051 152,181 1,071,570
Harry J. Leonhardt,
Esq................. 85,200(5) 5.3712 .90 5/16/07 48,224 122,208 860,520
</TABLE>
48
<PAGE> 52
- ---------------
(1) The exercise price on the date of grant was equal to 100% of the fair market
value on the date of grant.
(2) All options granted in 1997 have been exercised in full.
(3) The 5% and 10% assumed rates of appreciation are suggested by the rules of
the Securities and Exchange Commission and do not represent the Company's
estimate or projection of the future Common Stock price. There can be no
assurance that any of the values reflected in the table will be achieved.
(4) This value assumes (i) an initial public offering price of $11.00 per share,
(ii) that the options are exercised in full and (iii) that the Company's
right of repurchase and any contractual and legal restrictions on the sale
of shares issued upon exercise do not apply.
(5) These incentive stock options are exercisable in full immediately, but the
shares issued upon exercise are subject to repurchase by the Company. The
Company's right of repurchase lapses ratably on a monthly basis from the
date of grant, with the repurchase right terminating in full on the fourth
anniversary of the date of grant. Under the terms of the Stock Option Plans,
the committee designated by the Board of Directors to administer the Stock
Option Plans retains the discretion, subject to certain limitations within
the Stock Option Plans, to modify, extend or renew outstanding options and
to reprice outstanding options. Options may be repriced by canceling
outstanding options and reissuing new options with an exercise price equal
to the fair market value on the date of reissue, which may be lower than the
original exercise price of such canceled options.
AGGREGATED OPTION EXERCISES IN LAST FISCAL YEAR
AND 1997 YEAR END OPTION VALUES
<TABLE>
<CAPTION>
NUMBER OF SECURITIES VALUE OF
UNDERLYING UNEXERCISED UNEXERCISED
OPTIONS AT IN-THE-MONEY OPTIONS AT
DECEMBER 31, 1997(#) DECEMBER 31, 1997($)
------------------------ -------------------------
SHARES ACQUIRED VALUE EXERCISABLE/ EXERCISABLE/
NAME ON EXERCISE(#) REALIZED($)(1) UNEXERCISABLE UNEXERCISABLE
---- ----------------- -------------- ------------------------ -------------------------
<S> <C> <C> <C> <C>
Howard C. Birndorf........ 437,496(2) -- --/-- --/--
Tina S. Nova, Ph.D........ 160,379(2) -- --/-- --/--
James P. O'Connell,
Ph.D.................... 106,096(2) -- --/-- --/--
Harry J. Leonhardt,
Esq..................... 85,200(2) -- --/-- --/--
</TABLE>
- ---------------
(1) Calculated on the basis of the fair market value of the underlying
securities at the exercise date minus the exercise price.
(2) In connection with the acquisition of shares, the officer received a loan
from the Company pursuant to a five-year full recourse promissory note,
which note is secured by the shares acquired.
STOCK OPTION PLANS
1993 STOCK OPTION PLAN AND 1995 STOCK OPTION/ISSUANCE PLAN
In 1993, the Company's Board of Directors adopted the Company's 1993 Stock
Plan, and in April 1995, the Board of Directors adopted the 1995 Stock
Option/Stock Issuance Plan (the "Prior Stock Plans"). The Prior Stock Plans were
amended at various times from their adoptions to the date of this Prospectus to
increase the number of shares available under the Prior Stock Plans.
Under the Prior Stock Plans, all employees (including officers) and
directors of the Company or any subsidiary and any independent contractor or
advisor who performs services for the Company or a subsidiary were eligible to
purchase shares of Common Stock and to receive awards of shares or grants of
nonstatutory stock options ("NSOs"). Employees were also eligible to receive
grants of incentive stock options ("ISOs") intended to qualify under Section
422A of the Internal Revenue Code of 1986, as amended ("Code"). The Prior Stock
Plans are administered by a committee of the Board of Directors of the Company,
which selects
49
<PAGE> 53
the persons to whom shares will be sold or awarded or options will be granted,
determines the number of shares to be made subject to each sale, award or grant,
and prescribes other terms and conditions, including the type of consideration
to be paid to the Company upon sale or exercise and vesting schedules, in
connection with each sale, award or grant.
The exercise price under the NSOs generally must be at least 85% of the
fair market value of the Common Stock on the date of grant. The exercise price
under ISOs cannot be lower than 100% of the fair market value of the Common
Stock on the date of grant and, in the case of ISOs granted to holders of more
than 10% of the voting power of the Company, not less than 110% of such fair
market value. The term of an option cannot exceed ten years, and the term of an
ISO granted to a holder of more than 10% of the voting power of the Company
cannot exceed five years. Options generally expire not later than 90 days
following a termination of employment, six months following the optionee's
disability unless extended to not later than twelve months if permitted by the
Board of Directors in accordance with the terms of the Plan, or not later than
twelve months following the optionee's death. The purchase price of shares sold
under the Prior Stock Plans generally must be at least 85% of the fair market
value of the Common Stock and, in the case of a holder of more than 10% of the
voting power of the Company, not less than 110% of such fair market value. Under
the Prior Stock Plans, options granted pursuant to the Prior Stock Plans
generally vest ratably over a period of four years.
As of February 28, 1998, the Company had outstanding options to purchase an
aggregate of 152,147 shares of Common Stock at exercise prices ranging from $.02
to $.90 per share, or a weighted average exercise price per share of $.22 under
the Prior Stock Plans. At the date of adoption of the 1997 Stock Plan of the
Company a total of 342,419 shares of Common Stock were available for future
issuance under the Prior Stock Plans, which shares are available for grants
under the 1997 Stock Plan. If any option granted under the Prior Stock Plans
expires or terminates for any reason without having been exercised in full, then
the unpurchased shares subject to that option will become available for
additional option grants under the 1997 Stock Plan, as described below.
1997 STOCK INCENTIVE PLAN
The 1997 Stock Plan was adopted by the Board of Directors and was approved
by the stockholders as of August 1, 1997 and replaces the Prior Stock Plans.
Although all future awards will be made under the 1997 Stock Plan, awards made
under the Prior Stock Plans will continue to be administered in accordance with
the 1993 Stock Plan or the 1995 Stock Option/Issuance Plan, as applicable (the
1997 Plan together with the Prior Stock Plans are referred to as the "Stock
Option Plans").
The 1997 Stock Plan authorizes a total of 2,241,341 shares of Company
Common Stock for grant. This amount will be increased by any forfeited or
unexercised shares under the Prior Stock Plans. Also, forfeited or unexercised
shares under the 1997 Stock Plan generally become available for new grants under
the 1997 Stock Plan. The 1997 Stock Plan is administered by the Board of
Directors or its delegate, currently the Compensation Committee. The Board of
Directors, or its delegate, selects the employees of the Company who will
receive awards, determines the size of any award and establishes any vesting or
other conditions. Employees, directors, consultants and advisors of the Company
(or any subsidiary of the Company) are eligible to participate in the 1997 Stock
Plan, although incentive stock options may be granted only to employees. No
individual may receive options or stock appreciation rights ("SARs") covering
more than 500,000 shares in any calendar year. The participation of the outside
directors of the Company is limited to 25% of shares available under the 1997
Stock Plan.
The 1997 Stock Plan provides for awards in the form of restricted shares,
stock units, options or SARs, or any combination thereof. No payment is required
upon receipt of an award, except that a recipient of newly issued restricted
shares must pay the par value of such restricted shares to the Company.
Restricted shares are shares of Common Stock that are subject to repurchase
by the Company at the employee's purchase price in the event that the applicable
vesting conditions are not satisfied, and they are nontransferable prior to
vesting (except for certain transfers to a trustee). Restricted shares have the
same voting and dividend rights as other shares of Common Stock.
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<PAGE> 54
The recipient of restricted shares or stock units may pay all projected
withholding taxes relating to the award with Common Stock rather than cash if
permitted by the Stock Option Committee.
Options may include NSOs as well as ISOs intended to qualify for special
tax treatment. The term of an ISO cannot exceed ten years (five years for 10%
stockholders), and the exercise price of an ISO must be equal to or greater than
the fair market value of the Common Stock on the date of grant (or 110% of fair
market value at the date of grant for 10% stockholders). The exercise price of
an NSO must be equal to or greater than the par value of the Common Stock on the
date of grant.
The exercise price of an option may be paid in any lawful form permitted by
the Board of Directors or its delegate, including (without limitation) the
surrender of shares of Common Stock or restricted shares already owned for at
least six months by the optionee. The Board of Directors or its delegate may
likewise permit optionees to satisfy their withholding tax obligation upon
exercise of an NSO by surrendering a portion of their option shares to the
Company. The 1997 Stock Plan also allows the optionee to pay the exercise price
of an option by giving "exercise/sale" or "exercise/pledge" directions. If
exercise/sale directions are given, a number of option shares sufficient to pay
the exercise price and any withholding taxes are issued directly to a securities
broker selected by the Company who, in turn, sells these shares in the open
market. The broker remits to the Company the proceeds from the sale of these
shares, and the optionee receives the remaining option shares. If
exercise/pledge directions are given, the option shares are issued directly to a
securities broker or other lender selected by the Company. The broker or other
lender will hold the shares as security and will extend credit for up to 50% of
their market value. The loan proceeds will be paid to the Company to the extent
necessary to pay the exercise price and any withholding taxes. Any excess loan
proceeds may be paid to the optionee. If the loan proceeds are insufficient to
cover the exercise price and withholding taxes, the optionee will be required to
pay the deficiency to the Company at the time of exercise.
An SAR permits the participant to elect to receive any appreciation in the
value of the underlying stock from the Company, either in shares of Common Stock
or in cash or a combination of the two, with the Board of Directors or its
delegate having the discretion to determine the form in which such payment will
be made. The amount payable on exercise of an SAR is measured by the difference
between the market value of the underlying stock at exercise and the exercise
price. SARs may, but need not, be granted in conjunction with options. Upon
exercise of an SAR granted in tandem with an option, the corresponding portion
of the related option must be surrendered and cannot thereafter be exercised.
Conversely, upon exercise of an option to which an SAR is attached, the SAR may
no longer be exercised to the extent that the corresponding option has been
exercised. A participant may receive not more than 200,000 SARs within one
calendar year. Unless otherwise permitted by the Board of Directors or its
delegate, all options and SARs are nontransferable prior to the optionee's
death.
As noted above, the Board of Directors or its delegate determines the
number of restricted shares, stock units, options or SARs to be included in the
award as well as the vesting and other conditions. The vesting conditions may be
based on the employee's service, his or her individual performance, the
Company's performance or other appropriate criteria. In general, the vesting
conditions will be based on the employee's service after the date of grant.
Vesting may be accelerated as determined by the Board of Directors or its
delegate in the event of the employee's death, disability or retirement or in
the event of a change in control with respect to the Company. The Board of
Directors has in the past granted and may in the future grant options which
provide for mandatory acceleration of vesting in the event of a change in
control.
For purposes of the 1997 Stock Plan, the term "change in control" does not
include this offering or the consequences of this offering but thereafter occurs
(i) if any person is or becomes the beneficial owner, directly or indirectly, of
at least 50% of the combined voting power of the Company's outstanding
securities ordinarily having the right to vote at elections of directors, (ii)
upon a merger or consolidation of the Company with or into another corporation
or entity or any other corporate reorganization in which over 50% of the
combined voting power of the continuing or surviving entity immediately after
the merger, consolidation or reorganization is owned by persons who were not
stockholders of the Company immediately prior to the merger, consolidation or
reorganization, or (iii) upon a change in the composition of the Board of
Directors in
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<PAGE> 55
which fewer than half of the incumbent directors had been directors 24 months
prior to the change or were elected or nominated with the affirmative votes of
directors 24 months prior to the change.
The 1997 Stock Plan provides that if any payment (or transfer) by the
Company causes the employee to recognize a "golden parachute" excise tax under
Section 4999 of the Internal Revenue Code, then the Company shall make such cash
payments as are necessary to reimburse the employee for all additional taxes
caused thereby.
The Board of Directors is authorized, within the provisions of the 1997
Stock Plan, to amend the terms of outstanding restricted shares or stock units,
to modify or extend outstanding options or SARs or to exchange new options for
outstanding options, including outstanding options with a higher exercise price
than the new options.
Members of the Company's Board of Directors who are not employees of the
Company are eligible for awards under the 1997 Stock Plan. However, such outside
directors are not eligible for ISO grants. Total shares available to outside
directors is limited to 25% of total shares available under the 1997 Stock Plan.
As of February 28, 1998, under the 1997 Stock Plan the Company had
outstanding options to purchase an aggregate of 368,962 shares of Common Stock
at a weighted average exercise price of $2.05 per share. The total number of
restricted shares, stock units, options and SARs available for grant under the
1997 Stock Plan is 650,997 (subject to anti-dilution provisions), increased by
the amount of all remaining shares available for grant under the Prior Stock
Plans as of August 1, 1997. If any restricted shares, stock units, options or
SARs are forfeited, or if options or SARs terminate for any other reason prior
to exercise (other than the exercise of a related SAR or option, and including
any forfeiture or termination under the Prior Stock Plans), then they again
become available for awards under the 1997 Stock Plan.
EMPLOYEE STOCK PURCHASE PLAN
The ESPP was adopted by the Board of Directors on November 21, 1997,
effective upon the completion of this offering. The ESPP provides employees of
the Company with an opportunity to purchase Common Stock at a discount and pay
for their purchases through payroll deductions. All expenses incurred in
connection with the implementation and administration of the ESPP will be paid
by the Company. A pool of 300,000 shares of Common Stock has been reserved for
issuance under the ESPP (subject to anti-dilution provisions). Each regular
full-time and part-time employee who works an average of over 20 hours per week
will be eligible to participate in the ESPP at the beginning of the first
participation period after the employee completes one month of service.
Eligible employees may elect to contribute up to 15% of their cash
compensation under the ESPP. Each calendar year is divided into two six-month
"accumulation periods," except that the entire period from the date of this
offering to June 30, 1998, will be a single accumulation period. At the end of
each accumulation period, the Company will apply the amount contributed by the
participant during that period to purchase shares of Common Stock for him or
her. The purchase price will be equal to 85% of the lower of (a) the market
price of Common Stock immediately before the beginning of the applicable
"offering period" or (b) the market price of Common Stock on the last business
day of the accumulation period. In general each offering period is 24 months
long, but a new offering period begins every six months. Thus up to four
overlapping periods may be in effect at the same time. If the market price of
Common Stock is lower when a subsequent offering period begins, the subsequent
offering period automatically becomes the applicable offering period. No
participant may purchase more than 1,666 shares per accumulation period, and the
value of the Common Stock purchased each calendar year (measured at the
beginning of the offering periods) may not exceed $25,000 per participant. In no
event may a participant be granted a right to purchase Common Stock under the
ESPP if such purchase would increase participant's ownership to greater than 5%.
Participants may withdraw their contributions at any time before the close of
the accumulation period. If a participant terminates employment during an
accumulation period all previous contributions made during the period will be
returned to the participant.
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<PAGE> 56
LIMITATION OF LIABILITY AND INDEMNIFICATION MATTERS
The Company has adopted provisions in its Restated Certificate of
Incorporation that limit the liability of its directors for monetary damages for
breach of their fiduciary duty as directors, except for liability that cannot be
eliminated under the Delaware General Corporation Law ("Delaware Law"). The
Delaware Law provides that directors of a company will not be personally liable
to the Company or its stockholders for monetary damages for breach of their
fiduciary duty as directors, except for liability (i) for any breach of their
duty of loyalty to the company or its stockholders, (ii) for acts or omissions
not in good faith or which involve intentional misconduct or a knowing violation
of law, (iii) for unlawful payment of dividend or unlawful stock repurchase or
redemption, as provided Section 174 of the Delaware Law, or (iv) for any
transaction from which the director derived an improper benefit. If the Delaware
Law is amended to authorize corporate action further eliminating or limiting the
personal liability of a director, then the liability of a Company director shall
be so amended by the approval of the holders of shares representing at least
66 2/3% of the shares of the Company entitled to vote in the election of
directors, voting as one class. The provision in the Restated Certificate of
Incorporation does not eliminate a director's duty of care, and, in appropriate
circumstances, equitable remedies such as injunctive or other forms of
non-monetary relief will remain available under Delaware Law. This provision
does not affect a director's responsibilities under any other law, such as the
federal securities laws or state or federal environmental laws.
The Company's Certificate of Incorporation and Bylaws also provide that the
Company shall indemnify its directors and officers to the fullest extent
permitted by the Delaware Law. The Company has entered into separate
indemnification agreements with its directors and executive officers that could
require the Company, among other things, to indemnify them against certain
liabilities that may arise by reason of their status or service as directors and
to advance their expenses incurred as a result of any proceeding against them as
to which they could be indemnified. The Company believes that the limitation of
liability provision in its Restated Certificate of Incorporation and the
indemnification agreements will facilitate the Company's ability to continue to
attract and retain qualified individuals to serve as directors and officers of
the Company.
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<PAGE> 57
CERTAIN TRANSACTIONS
PREFERRED STOCK AND WARRANT FINANCINGS
The Company issued shares of Preferred Stock and warrants between February
10, 1994 and January 1998 in the following private placement transactions: (i)
an aggregate of 1,559,769 shares of Series A Preferred Stock at $2.25 per share,
(ii) an aggregate of 2,493,725 shares of Series B Preferred Stock at $3.75 per
share, (iii) an aggregate of 4,369,049 shares of Series C Preferred Stock at
$6.00 per share, and (iv) an aggregate of 832,333 shares of Series D Preferred
Stock at $9.00 per share. The Company also issued to purchasers of Series B
Preferred Stock warrants exercisable for an aggregate of 420,703 shares of
Common Stock at an exercise price of $.375 per share (collectively, "Common
Stock Warrants"). Certain purchasers of Series B Preferred Stock also received
warrants exercisable for an aggregate of 40,000 shares of Series B Preferred
Stock at an exercise price of $2.25 per share ("Series B Warrants") in
consideration of loans made to the Company. Each share of Preferred Stock will
convert into one share of Common Stock and each Series B Warrant will convert
into a warrant for the purchase of an equivalent number of shares of Common
Stock upon the consummation of this offering. The purchasers of Series A, Series
B, Series C and Series D Preferred Stock, the Common Stock Warrants and the
Series B Warrants include, among others, the following officers and directors of
the Company and entities who beneficially own 5% or more of the Company's Common
Stock.
<TABLE>
<CAPTION>
TOTAL
SERIES A SERIES B SERIES C SERIES D COMMON TOTAL
PREFERRED PREFERRED PREFERRED PREFERRED STOCK SERIES B
INVESTORS STOCK STOCK STOCK STOCK WARRANTS WARRANTS
--------- --------- --------- --------- --------- -------- --------
<S> <C> <C> <C> <C> <C> <C>
Enterprise Management Partners(1)........ 666,666 399,999 92,276 76,079 66,666 20,000
Kleiner Perkins Caufield &
Byers VI (2)........................... 666,666 400,000 92,277 -- 66,666 20,000
Sprout Capital VII, L.P.(3).............. -- 794,666 68,707 -- 132,444 --
Interwest Partners(4).................... -- 666,666 57,677 -- 111,111 --
Howard C. Birndorf....................... 133,333 160,000 25,376 -- 26,666 --
Harry J. Leonhardt, Esq.................. -- 16,666 -- -- 2,778 --
Elan Corporation, plc(5)................. -- -- 833,333 -- -- --
Oracle Strategic Partners, L.P........... -- -- 833,333 -- -- --
Becton, Dickinson and Company............ -- -- -- 666,666 -- --
Thomas G. Lynch(6)....................... -- -- -- 22,222 -- --
Cam L. Garner............................ -- -- -- 11,111 -- --
</TABLE>
- ---------------
(1) Represents (i) 606,060 shares of Series A Preferred Stock, 363,636 shares of
Series B Preferred Stock, 83,888 shares of Series C Preferred Stock, 60,606
Common Stock Warrants and 18,182 Series B Warrants purchased by Enterprise
Partners II, L.P. ("Enterprise Partners"), (ii) 60,606 shares of Series A
Preferred Stock, 36,363 shares of Series B Preferred Stock, 8,388 shares of
Series C Preferred Stock, 6,060 Common Stock Warrants and 1,818 Series B
Warrants purchased by Enterprise Associates II, L.P. ("Enterprise
Associates"), (iii) 6,820 shares of Series D Preferred Stock received by
Enterprise Partners III, L.P. in connection with the Company's purchase of
Nanotronics and (iv) 480 shares of Series D Preferred Stock received by
Enterprise Partners III Associates, L.P. in connection with the Company's
purchase of Nanotronics. Andrew E. Senyei, a director of the Company, is a
general partner of Enterprise Management Partners II, L.P., and the general
partner of each of Enterprise Partners and Enterprise Associates.
(2) Represents (i) 578,000 shares of Series A Preferred Stock, 346,800 shares of
Series B Preferred Stock, 92,277 shares of Series C Preferred Stock, 57,800
Common Stock Warrants and 17,340 Series B Warrants purchased by Kleiner
Perkins Caufield & Byers VI ("KPCB VI"), and (ii) 88,666 shares of Series A
Preferred Stock, 53,200 shares of Series B Preferred Stock, 8,866 Common
Stock Warrants and 2,660 Series B Warrants purchased by KPCB Founders Fund
VI, L.P., which merged with and into KPCB VI in 1997. Brook H. Byers, a
director of the Company, is a General Partner of KPCB VI.
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<PAGE> 58
(3) Represents (i) 61,062 shares of Series B Preferred Stock, 5,279 shares of
Series C Preferred Stock and 10,177 Common Stock Warrants purchased by DLJ
and (ii) 733,604 shares of Series B Preferred Stock, 63,428 shares of Series
C Preferred Stock and 122,267 Common Stock Warrants purchased by Sprout
Capital VII, L.P. Robert E. Curry, a director of the Company, is an officer
of DLJ, which is the Managing General Partner of Sprout Capital VII, L.P.
(4) Represents (i) 662,500 shares of Series B Preferred Stock, 57,317 shares of
Series C Preferred Stock and 110,416 Common Stock Warrant Shares purchased
by Interwest Partners V, L.P., and (ii) 4,166 shares of Series B Preferred
Stock, 360 shares of Series C Preferred Stock and 694 Common Stock Warrants
purchased by Interwest Investors V.
(5) Includes 833,333 shares of Series C Preferred Stock purchased by Elan
International Services Limited, a wholly-owned subsidiary of Elan
Corporation, plc. Thomas G. Lynch, a director of the Company, is Executive
Vice President and Chief Financial Officer of Elan Corporation, plc.
(6) Does not include shares purchased by Elan International Services Limited.
TRANSACTIONS WITH DIRECTORS, OFFICERS AND RELATED PARTIES
In September 1993, in connection with the Spin-Off, certain affiliates of
the Company received from Nanotronics an aggregate of 512,224 shares of Common
Stock, including Enterprise Partners, 289,514 shares; Enterprise Associates,
26,319 shares (both Enterprise Partners and Enterprise Associates are entities
affiliated with director Andrew Senyei); and Howard C. Birndorf, a founder of,
Chairman of the Board, Chief Executive Officer and Chief Financial Officer of
the Company, 41,684 shares.
During the period May 1993 through January 1994 salary and administrative
of $115,000 expenses were incurred by Birndorf Biotechnology Development, an
entity affiliated with Mr. Birndorf, on behalf of the Company. These expenses
were repaid to Birndorf Biotechnology Development in the form of partial
consideration for the issuance to Mr. Birndorf of 133,333 shares of the
Company's Series A Preferred Stock.
In June 1993, Enterprise Partners loaned $200,000 to the Company at an
interest rate of 5.0% per annum pursuant to a promissory note payable on demand,
which note was canceled as partial consideration for the issuance to Enterprise
of 666,666 shares of the Company's Series A Preferred Stock.
In January 1994, November 1994, May 1996 and December 1997, the Company
entered into agreements with Tina S. Nova, Ph.D., President and Chief Operating
Officer of the Company, James P. O'Connell, Ph.D., Vice President, Research and
Product Development of the Company, Harry J. Leonhardt, Esq., Vice President,
General Counsel and Secretary of the Company, and Kieran T. Gallahue, Vice
President, Strategic Marketing of the Company, respectively, pursuant to which,
in the event of termination without cause (or if Dr. O'Connell or Mr. Leonhardt
terminates his employment for good reason), such employee will be paid an amount
equal to six months of such employee's respective base salary. Mr. Gallahue's
right to such payment expires one year from the commencement of his employment.
In addition, 50% of the remaining unvested shares purchased by Dr. O'Connell and
Mr. Leonhardt pursuant to their respective agreements will vest in the event
such employee is terminated without cause or if such employee terminates his
employment for good reason. In December 1997, the Company entered into an
agreement with W.J. Kitchen, Sc.D., Senior Vice President, Operations of the
Company pursuant to which, in the event of termination without cause within two
years of the commencement of his employment, he will be paid an amount equal to
two years of his base salary.
In February 1994, Mr. Birndorf purchased 100,071 shares of Common Stock for
$751 ($.075 per share), and in June 1995, purchased another 100,000 shares of
Common Stock for $15,000 ($.15 per share) pursuant to the Company's 1995 Stock
Option/Stock Issuance Plan. In connection with the purchase of these 100,000
shares, the Company loaned $15,000 to Mr. Birndorf at an interest rate of 6.7%
per annum pursuant to a five-year promissory note, which note is secured by the
100,000 shares of Common Stock. As of December 31, 1997, 66,666 of these shares
are vested. In August 1996, Mr. Birndorf purchased an additional 183,333 shares
of Common Stock at $.15 per share. In connection with such purchase, the Company
loaned Mr. Birndorf $27,500 at an interest rate of 6.3% per annum pursuant to a
five-year promissory note, which note is secured by the 183,333 shares of Common
Stock. Of the 183,333 shares purchased by Mr. Birndorf, 66,666 shares were
issued pursuant to the Company's 1995 Stock Option/Stock Issuance Plan. The
remaining 116,667 shares are
55
<PAGE> 59
performance-based options which vest based on the attainment of specified
milestones. As of December 31, 1997, 222,916 of these shares are vested. In May
1997, Mr. Birndorf was granted an option to purchase 437,496 shares of Common
Stock pursuant to the Company's 1997 Stock Incentive Plan. As of December 31,
1997, 63,800 of these shares were vested.
In February 1994, Dr. Nova purchased 100,071 shares of Common Stock for
$7,505 ($.075 per share). As of December 31, 1997, 95,902 of these shares were
vested. In June 1995, Dr. Nova purchased another 100,000 shares of Common Stock
for $15,000.00 ($.15 per share) pursuant to the 1995 Stock Option/Stock Issuance
Plan. In connection with the purchase of these 100,000 shares, the Company
loaned $15,000.00 to Dr. Nova at an interest rate of 6.7% per annum pursuant to
a five-year promissory note, which note is secured by the 100,000 shares of
Common Stock. As of December 31, 1997, 66,666 of these shares were vested. In
August 1996, Dr. Nova purchased an additional 50,000 shares of Common Stock at
the price of $.15 per share. In connection with such purchase, the Company
loaned Dr. Nova $7,500 at an interest rate of 6.3% per annum pursuant to a
five-year promissory note, which note is secured by the 50,000 shares of Common
Stock. Of the 50,000 shares purchased by Dr. Nova, 16,666 shares were issued
pursuant to the Company's 1995 Stock Option/Stock Issuance Plan. The remaining
33,334 shares are performance-based options which have vested based on the
attainment of certain prescribed milestones. As of December 31, 1997, 41,319 of
these shares were vested. In May 1997, Dr. Nova was granted an option to
purchase 160,379 shares of Common Stock pursuant to the Company's 1997 Stock
Incentive Plan. As of December 31, 1997, 23,388 of these shares were vested.
On January 23, 1995, in connection with a bridge financing, Enterprise
Partners and KPCB VI, an entity affiliated with director Brook H. Byers, each
loaned $300,000 to the Company pursuant to a promissory note payable thirty days
after the issue date or on demand thereafter, which notes were canceled as
partial consideration for the issuance of 400,000 shares of the Company's Series
B Preferred Stock to each investor. Additionally, in connection with the
issuance of the promissory notes, the Company issued warrants to purchase 20,000
shares of Series B Preferred Stock to each investor exercisable from April 1995
to April 2000 at an exercise price of $2.25 per share.
In connection with their respective purchases of Series B Preferred Stock,
Mr. Birndorf and the entities associated with KPCB, Enterprise Partners, and
Sprout entered into a Shareholders' Agreement to vote their respective shares as
necessary to obtain or maintain a seat on the Board of Directors for the Chief
Executive Officer of the Company and at least one representative designated by
each of Enterprise Partners, KPCB and Sprout. The Agreement will terminate upon
the consummation of this offering.
In September 1996 and November 1996, entities associated with Enterprise
Partners, KPCB, Sprout, InterWest Partners, DLJ and an affiliate of DLJ and Mr.
Birndorf agreed to loan the Company an aggregate of $2.0 million to fund ongoing
operations of the Company, pursuant to demand promissory notes bearing interest
at 6% per annum, which notes and accrued interest thereon were canceled in
exchange for an aggregate of 336,774 shares of Series C Preferred Stock in
December 1996.
In May 1997, the Company entered into a series of agreements with Becton
Dickinson pursuant to which Becton Dickinson agreed to purchase 666,666 shares
of the Company's Series D Preferred Stock and to fund certain product
development costs. See "Business -- Collaborative Alliances -- Becton, Dickinson
and Company." Becton Dickinson has also committed to purchase shares of Common
Stock directly from the Company at a price per share equal to the price to
public for an aggregate purchase price of $6.0 million, subject to the
completion of this offering.
In November and December 1997 and March 1998, certain officers and
directors of the Company exercised options to purchase an aggregate of 1,155,838
shares of the Company's Common Stock. As consideration for such shares the
Company received full recourse promissory notes, bearing interest at 6.01%, from
directors and officers Birndorf (an aggregate of 437,496 shares for $393,747)
and Nova (an aggregate of 160,379 shares for $144,341) and officers Leonhardt
(85,200 shares for $76,680), O'Connell (106,096 shares for $95,486), Kitchen
(233,333 shares for $210,000) and Gallahue (133,333 shares for $400,000). The
principal and accrued interest on such promissory notes will be payable in
November 2002 or December 2002. The payment of each promissory note is secured
by a pledge of the shares purchased by such director and/or officer.
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<PAGE> 60
On December 18, 1997, the Company entered into an Agreement and Plan of
Merger with its former parent corporation, Nanotronics, Inc., a California
corporation ("Nanotronics"), pursuant to which a wholly-owned California
subsidiary of the Company merged with and into Nanotronics, which was the
surviving corporation. Nanotronics' assets are primarily intellectual property
and certain government grants. Andrew Senyei, a director of Nanogen, is a
director of Nanotronics and an affiliate of the principal Nanotronics
shareholders. Mr. Birndorf is a shareholder of Nanotronics. Under the Agreement
and Plan of Merger, Nanogen issued upon the effective date of the merger an
aggregate of 132,334 shares of its Series D Preferred Stock and a warrant for
the purchase of 993 shares of Series D Preferred Stock.
In December 1997, the Company entered into a collaborative research and
development agreement with Elan. Thomas G. Lynch, a director of the Company, is
Executive Vice President, Chief Financial Officer and a director of Elan. In
March 1998, the Company loaned W.J. Kitchen $200,000 pursuant to a four-year
promissory note in connection with his relocation to San Diego. The loan bears
interest at 6.01% per annum and is secured by a deed of trust.
The Company believes that the foregoing transactions were in its best
interests. As a matter of policy these transactions were, and all future
transactions between the Company and its officers, directors or principal
stockholders will be, approved by a majority of the independent and
disinterested members of the Board of Directors, on terms no less favorable to
the Company than could be obtained from unaffiliated third parties and in
connection with bona fide business purposes of the Company.
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<PAGE> 61
PRINCIPAL STOCKHOLDERS
The following table sets forth certain information regarding beneficial
ownership of the Company's Common Stock as of February 28, 1998 and as adjusted
to reflect the sale by the Company of the shares offered hereby and the Private
Placement by: (i) each person who is known by the Company to beneficially own
more than 5% of the Company's Common Stock, (ii) each of the Company's
directors, (iii) each of the Company's officers named under
"Management -- Summary Compensation Table," and (iv) all directors and executive
officers of the Company as a group.
<TABLE>
<CAPTION>
PERCENT BENEFICIALLY
OWNED
SHARES --------------------
BENEFICIALLY BEFORE AFTER
NAME AND ADDRESS OF BENEFICIAL OWNER OWNED OFFERING OFFERING
------------------------------------ ------------ -------- --------
<S> <C> <C> <C>
Entities Affiliated with Enterprise
Management Partners II, L.P.(1)........................... 1,637,519 13.1% 9.1%
7979 Ivanhoe, Suite 550
La Jolla, CA 92037
Kleiner Perkins Caufield & Byers VI(2)...................... 1,245,609 9.9% 6.9%
2750 Sand Hill Road
Menlo Park, CA 94025
Howard C. Birndorf(3)(13)................................... 1,215,348 9.8% 6.8%
Nanogen, Inc.
10398 Pacific Center Court
San Diego, CA 92121
Entities Affiliated with Sprout Group(4).................... 1,002,497 8.0% 5.5%
3000 Sand Hill Road, Bldg. 4, Suite 270
Menlo Park, CA 94025
Elan Corporation, plc(5).................................... 833,333 6.7% 7.2%
Lincoln House
Dublin 2
Ireland
Oracle Strategic Partners, L.P.............................. 833,333 6.7% 4.6%
712 Fifth Ave., 45th Floor
New York, NY 10019
Entities Affiliated with Interwest Partners(6).............. 835,454 6.7% 4.6%
3000 Sand Hill Road, Bldg. 4, Suite 255
Menlo Park, CA 94025
Becton, Dickinson and Company(7)............................ 666,666 5.4% 6.8%
1 Becton Drive
Franklin Lakes, NJ 07417-1880
Hoechst AG(8)............................................... -- -- 5.1%
D-65926 Frankfurt am Main
Germany
Brook H. Byers(2)........................................... 1,245,609 9.9% 6.9%
Robert E. Curry, Ph.D.(4)................................... 1,002,497 8.0% 5.5%
Cam L. Garner(9)............................................ 27,777 * *
David Ludvigson............................................. 16,666 * *
Thomas G. Lynch(5)(9)....................................... 872,221 7.0% 7.4%
Tina S. Nova, Ph.D.(13)..................................... 410,450 3.3% 2.2%
Andrew E. Senyei, M.D.(1)................................... 1,637,519 13.1% 9.1%
James P. O'Connell, Ph.D.(10)(13)........................... 242,539 1.9% 1.3%
Harry J. Leonhardt, Esq.(11)(13)............................ 171,310 1.4% *
All Directors and Executive Officers as a group (12
persons)(12)(13).......................................... 7,184,602 55.3% 41.3%
</TABLE>
- ---------------
* Less than 1% of the outstanding shares of Common Stock.
(1) Includes (i) 1,406,199 shares held by Enterprise Partners II, L.P. (ii)
137,354 shares held by Enterprise Partners II Associates, L.P. ("Enterprise
Associates"), (iii) 6,820 shares held by Enterprise Partners III, L.P. and
(iv) 480 shares held by Enterprise Partners III Associates, L.P. Also
includes 78,788 shares issuable to Enterprise Partners and 7,878 shares
issuable to Enterprise Associates upon the exercise of outstanding warrants
exercisable within 60 days of February 28, 1998. Andrew E. Senyei, a
director of the Company, is a general partner of Enterprise Management
Partners II, L.P., the general partner of each of Enterprise Partners and
Enterprise Associates, and as such, may be deemed to share
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<PAGE> 62
voting and investment power with respect to the shares held by such
entities. Dr. Senyei disclaims beneficial ownership of all such shares
except to the extent of his pecuniary interest therein.
(2) Includes 86,666 shares issuable to KPCB VI upon the exercise of outstanding
warrants exercisable within 60 days of February 28, 1998. Mr. Byers is a
general partner of KPCB VI, and as such, may be deemed to share voting and
investment power with respect to the shares held by such entity. Mr. Byers
disclaims beneficial ownership of all such shares except to the extent of
his pecuniary interest therein.
(3) Includes 26,666 shares issuable upon the exercise outstanding warrants
exercisable within 60 days of February 28, 1998.
(4) Includes 66,341 shares held by DLJ, 797,032 shares held by Sprout Capital
VII, L.P. ("Sprout Capital") and 5,792 shares held by an affiliate of DLJ.
Also includes 122,267 shares issuable to Sprout Capital, 10,177 shares
issuable to DLJ and 888 shares issuable to an affiliate of DLJ upon the
exercise of outstanding warrants exercisable within 60 days of February 28,
1998. Dr. Curry, a director of the Company, is an officer of DLJ, the
Managing General Partner of Sprout Capital, and as such, may be deemed to
share voting and investment power with respect to the shares held by such
entities. Dr. Curry disclaims beneficial ownership of all such shares
except to the extent of his pecuniary interest therein.
(5) Includes 833,333 shares held by Elan International Services Limited ("Elan
International"). Mr. Lynch, a director of the Company, is Executive Vice
President and Chief Financial Officer of Elan, the parent company of Elan
International, and as such, may be deemed to share voting and investment
power with respect to the shares held by Elan International. Includes
454,545 shares that Elan has agreed to purchase directly from the Company
in the Private Placement. Mr. Lynch disclaims beneficial ownership of all
such shares except to the extent of his pecuniary interest therein.
(6) Includes 723,983 shares held by Interwest Partners V, L.P. ("Interwest
Partners V") and 360 shares held by its investment affiliate Interwest
Investors V. Also includes 111,111 shares issuable to Interwest Partners V
upon the exercise of outstanding warrants exercisable within 60 days of
February 28, 1998.
(7) Includes 545,454 shares that Becton Dickinson has agreed to purchase
directly from the Company in the Private Placement.
(8) Includes 909,090 shares that Hoechst has agreed to purchase directly from
the Company in the Private Placement.
(9) Includes 16,666 shares issuable to each of Mr. Lynch and Mr. Garner upon
the exercise of options exercisable within 60 days of February 28, 1998,
subject to repurchase of unvested shares.
(10) Includes 33,333 shares issuable upon the exercise of options within 60 days
of February 28, 1998, subject to repurchase of unvested shares, and 444
shares issuable upon the exercise of warrants exercisable within 60 days of
February 28, 1998.
(11) Includes 2,778 shares issuable upon the exercise of outstanding warrants
exercisable within 60 days of February 28, 1998.
(12) Includes an aggregate of 199,998 shares issuable upon the exercise of
options exercisable within 60 days of February 28, 1998, subject to
repurchase of unvested shares, and an aggregate of 336,552 shares issuable
upon the exercise of outstanding warrants exercisable within 60 days of
February 28, 1998.
(13) Includes unvested shares subject to repurchase by the Company at February
28, 1998, as follows: Mr. Birndorf, 415,678 shares; Dr. Nova, 167,462
shares; Dr. O'Connell, 111,204 shares; and Mr. Leonhardt, 109,503 shares.
DESCRIPTION OF CAPITAL STOCK
Upon the closing of this offering, the authorized capital stock of the
Company, after giving effect to the conversion of all outstanding Preferred
Stock into Common Stock, and the amendment of the Company's Certificate of
Incorporation, will consist of 50,000,000 shares of Common Stock, $.001 par
value, and 5,000,000 shares of Preferred Stock, $.001 par value.
59
<PAGE> 63
COMMON STOCK
As of February 28, 1998 there were 12,432,754 shares of Common Stock
outstanding held by approximately 90 stockholders of record. Such amounts assume
the conversion of each outstanding share of Preferred Stock upon the closing of
this offering.
The holders of Common Stock are entitled to one vote for each share held of
record on all matters submitted to a vote of the stockholders. Subject to
preferences that may be applicable to any then outstanding Preferred Stock,
holders of Common Stock are entitled to receive ratably such dividends, if any,
as may be declared by the Board of Directors out of funds legally available
therefor. See "Dividend Policy." In the event of a liquidation, dissolution or
winding up of the Company, holders of the Common Stock and the Preferred Stock
are entitled to share ratably on an as-converted basis in all assets remaining
after payment of liabilities and the liquidation preference of any then
outstanding Preferred Stock. The Common Stock has no preemptive or conversion
rights or other subscription rights and there are no redemptive or sinking funds
provisions applicable to the Common Stock. All outstanding shares of Common
Stock are, and the Common Stock to be outstanding upon completion of this
offering will be, fully paid and nonassessable.
PREFERRED STOCK
Upon the closing of this offering, all outstanding shares of Preferred
Stock will be converted into Common Stock. See Note 4 of Notes to Financial
Statements for a description of the currently outstanding Preferred Stock.
Following the conversion, the Company's Certificate of Incorporation will be
restated to delete all references to the prior series of Preferred Stock, and
5,000,000 shares of undesignated Preferred Stock will be authorized. The Board
of Directors has the authority, without further action by the stockholders, to
issue from time to time the Preferred Stock in one or more series and to fix the
number of shares, designations, preferences, powers, and relative,
participating, optional or other special rights and the qualifications or
restrictions thereof. The preferences, powers, rights and restrictions of
different series of Preferred Stock may differ with respect to dividend rates,
amounts payable on liquidation, voting rights, conversion rights, redemption
provisions, sinking fund provisions, and purchase funds and other matters. The
issuance of Preferred Stock could decrease the amount of earnings and assets
available for distribution to holders of Common Stock or affect adversely the
rights and powers, including voting rights, of the holders of Common Stock, and
may have the effect of delaying, deferring or preventing a change in control of
the Company. The Company has no present plan to issue any shares of Preferred
Stock.
WARRANTS
As of February 28, 1998 the Company had outstanding (i) Common Stock
Warrants exercisable for an aggregate of 420,703 shares of Common Stock at
prices ranging from $.02 to $.38 per share (ii) Series B Warrants exercisable
for an aggregate of 40,000 shares of Series B Preferred Stock (which
automatically convert into warrants for the purchase of 40,000 shares of Common
Stock upon the consummation of this offering) exercisable at $2.25 per share,
(iii) Series C Warrants exercisable for an aggregate of 6,000 shares of Series C
Preferred Stock exercisable at $6.00 per share, and (iv) Series D Warrants
exercisable for an aggregate of 993 shares of Series D Preferred Stock (which
automatically convert into warrants for the purchase of 993 shares of Common
Stock upon the consummation of this offering) exercisable at $7.68 per share.
Common Stock Warrants for the purchase of 415,612 shares expire upon the
effective date of this offering, and Common Stock Warrants for the purchase of
5,091 shares expire on September 1, 1999. The Series C Warrants will expire on
the day prior to the effective date of this offering. The Series B Warrants
expire in April 2000 and the Series D Warrants expire upon the earlier of
September 11, 1999 or the third anniversary of this offering. Pursuant to the
Amended and Restated Investors' Rights Agreement, dated as of May 5, 1997, among
the Company and certain of its securityholders set forth therein, holders of
shares issuable upon exercise of certain of the Warrants are entitled to certain
demand and piggyback registration rights. See "-- Registration Rights."
REGISTRATION RIGHTS
Pursuant to the Investors' Rights Agreement, the holders of approximately
9,632,471 shares of Common Stock, including (i) shares issued upon conversion of
the Company's Series A Preferred Stock, Series B Preferred Stock, Series C
Preferred Stock and Series D Preferred Stock and (ii) shares issuable pursuant
to
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<PAGE> 64
exercise of certain of the Series B Warrants, Series D Warrants and Common Stock
Warrants (collectively, "Registrable Shares"), or their permitted transferees,
are entitled to certain rights with respect to the registration of such shares
under the Securities Act of 1933, as amended (the "Securities Act"). The holders
of the 1,909,089 shares issued in the Private Placement will also be entitled to
similar rights with respect to the registration of such shares under the
Securities Act. If the Company proposes to register any of its securities under
the Securities Act, either for its own account or for the account of other
security holders, holders of Registrable Shares are entitled to notice of such
registration and are entitled to include, at the Company's expense, such
Registrable Shares therein, provided, among other conditions, that the
underwriters of any such offering have the right to limit the number of shares
included in such registration. In addition, commencing 180 days after the
effective date of this offering, holders of at least 20% of the Registrable
Shares then outstanding (or a lesser percent, if the anticipated aggregate
offering price of such shares, net of underwriting discounts and commissions,
would exceed $7,500,000), may require the Company to prepare and file a
registration statement under the Securities Act, at the Company's expense,
covering such Registrable Shares, and the Company is required to use its best
efforts to effect such registration, subject to certain conditions and
limitations. The Company is not obligated to effect more than two of these
stockholder-initiated registrations. Further, holders of Registrable Shares may
require the Company to file additional registration statements on Form S-3,
subject to certain conditions and limitations.
DELAWARE ANTI-TAKEOVER LAW AND CERTAIN CHARTER PROVISIONS
The Company is subject to the provisions of Section 203 of the Delaware
Law, an anti-takeover law. In general, the statute prohibits a publicly held
Delaware corporation from engaging in a business combination with an "interested
stockholder" for a period of three years after the date of the transaction in
which the person became an interested stockholder, unless the business
combination is approved in a prescribed manner. A "business combination"
includes a merger, asset sale or other transaction resulting in financial
benefit to the stockholder. An "interested stockholder" is a person who,
together with affiliates and associates, owns (or within three years prior, did
own) 15% or more of the corporation's voting stock.
Upon the closing of this offering, the Company's Certification of
Incorporation will be amended to require that any action permitted to be taken
by stockholders of the Company must be effected at a duly-called annual or
special meeting of stockholders and will not be able to be effected by a consent
in writing. The Board of Directors will be composed of a classified board where
only one-third of the directors are eligible for election in any given year. The
Company's Certificate of Incorporation will also be amended to require the
approval of at least two-thirds of the total number of authorized directors in
order to adopt, amend or repeal the Company's Bylaws. In addition, the Company's
Certificate of Incorporation will similarly be amended to permit the
stockholders to adopt, amend or repeal the Company's Bylaws only upon the
affirmative vote of the holders of at least two-thirds of the voting power of
all then outstanding shares of stock entitled to vote. Lastly, the foregoing
provisions of the Certificate of Incorporation and certain other provisions
pertaining to the limitation of liability and indemnification of directors will
be able to be amended or repealed only with the affirmative vote of the holders
of at least two-thirds of the voting power of all then outstanding shares of
stock entitled to vote. These provisions may have the effect of deterring
hostile takeovers or delaying changes in control or management of the Company.
Upon the closing of this offering, the Company's Bylaws will also be
amended to contain certain of the above provisions found in the Company's
Certificate of Incorporation. The Company's Bylaws, as amended (the "Restated
Bylaws"), will not permit stockholders to call a special meeting. In addition,
the Company's Restated Bylaws will establish an advance notice procedure with
regard to the nomination, other than by or at the direction of the Board of
Directors, of candidates for election as directors and with regard to certain
matters to be brought before an annual meeting of stockholders of the Company.
Also, a director will be removable only for cause. In addition, the Restated
Bylaws will provide that the business permitted to be conducted in any annual
meeting or special meeting of stockholders will be limited to business properly
brought before the meeting.
TRANSFER AGENT AND REGISTRAR
The transfer agent and registrar for the Common Stock is BankBoston, N.A.
61
<PAGE> 65
SHARES ELIGIBLE FOR FUTURE SALE
Prior to this offering there has been no public market for the Common Stock
of the Company, and no predictions can be made regarding the effect, if any,
that market sales of shares or the availability of shares for sale will have on
the market price prevailing from time to time. As described below, only a
limited number of shares will be available for sale shortly after this offering
due to certain contractual and legal restrictions on resale. Nevertheless, sales
of substantial amounts of Common Stock of the Company in the public market after
the restrictions lapse could adversely affect the prevailing market price.
Upon closing of this offering and the Private Placement, the Company will
have outstanding 17,941,843 shares of Common Stock based on the number of shares
of Preferred Stock and Common Stock outstanding as of December 31, 1997, and
assuming no exercise of the Underwriters over-allotment option. Of these shares,
the 3,600,000 shares of Common Stock being sold hereby, not including the shares
sold in the Private Placement, will be freely tradable (other than by an
"affiliate" of the Company as such term is defined in the Securities Act)
without restriction or registration under the Securities Act. All remaining
shares were issued and sold by the Company in private transactions ("Restricted
Shares") and are eligible for public sale if registered under the Securities Act
or sold in accordance with Rule 144 or Rule 701 thereunder.
The Company's directors, executive officers and certain stockholders, who
collectively hold an aggregate of approximately 11,000,000 shares of Common
Stock, have agreed pursuant to certain agreements that they will not sell any
Common Stock owned by them without the prior written consent of Morgan Stanley &
Co. Incorporated for a period of 180 days from the date of this Prospectus (the
"Lockup Period"). Excluding the shares of Common Stock being sold hereby and in
the Private Placement, the remaining 11,076,398 shares of Common Stock
(excluding shares purchased pursuant to the exercise of unvested options and
subject to repurchase by the Company) may be sold in the public market only if
registered or if they qualify for an exemption from registration under Rules
144, 144(k) or 701 promulgated under the Securities Act. As a result of lockups
with the Underwriters and the provisions of Rule 144 and 701, additional shares
will be available for sale in the public market as follows: (i) approximately
71,400 shares will be eligible for immediate sale on the date of this
Prospectus, (ii) approximately 10,969,000 shares of Common Stock will be
eligible for sale upon expiration of the Lockup Period, and (iii) the remainder
of the shares of Common Stock will be eligible for sale from time to time
thereafter upon expiration of their respective holding periods. The holders of
the 1,909,089 shares issued in the Private Placement will have the right to
register such shares for future sale and such shares will otherwise be eligible
for sale one year from the closing date of this offering, subject to the
limitations of Rule 144. See "Description of Capital Stock -- Registration
Rights."
In general, under Rule 144 as currently in effect, beginning 90 days after
the date of this Prospectus, an affiliate of the Company, or a holder of
Restricted Shares who beneficially owns shares that were not acquired from the
Company or an affiliate of the Company within the previous year, would be
entitled to sell within any three-month period a number of shares that does not
exceed the greater of 1% of the then outstanding shares of Common Stock
(approximately 179,418 shares immediately after this offering, assuming no
exercise of the Underwriters' over-allotment option) or the average weekly
trading volume of the Common Stock during the four calendar weeks preceding the
date on which notice of the sale is filed with the Securities and Exchange
Commission (the "Commission"). Sales under Rule 144 are subject to certain
requirements relating to manner of sale, notice and availability of current
public information about the Company. However, a person (or persons whose shares
are aggregated) who is not deemed to have been an affiliate of the Company at
any time during the 90 days immediately preceding the sale and who owns
beneficially Restricted Shares is entitled to sell such shares under Rule 144(k)
without regard to the limitations described above; provided that at least two
years have elapsed since the later of the date the shares were acquired from the
Company or from an affiliate of the Company. The foregoing is a summary of Rule
144 and is not intended to be a complete description of it.
Subject to certain limitations on the aggregate offering price of a
transaction and other conditions, Rule 701 may be relied upon with respect to
the resale of securities originally purchased from the Company by its employees,
directors, officers, consultants or advisors prior to the closing of this
offering, pursuant to written compensatory benefit plans or written contracts
relating to the compensation of such persons. In addition, the
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<PAGE> 66
Commission has indicated that Rule 701 will apply to stock options granted by
the Company before this offering, along with the shares acquired upon exercise
of such options. Securities issued in reliance on Rule 701 are deemed to be
Restricted Shares and, beginning 90 days after the date of this Prospectus
(unless subject to the contractual restrictions described above), may be sold by
persons other than affiliates subject only to the manner of sale provisions of
Rule 144 and by affiliates under Rule 144 without compliance with its one-year
minimum holding period requirements.
The Company intends to file registration statements under the Securities
Act covering approximately 2,800,000 shares of Common Stock reserved for
issuance under its stock plans. Such registration statements are expected to be
filed soon after the date of this Prospectus and will automatically become
effective upon filing. Accordingly, shares registered under such registration
statement will be available for sale in the open market, unless such shares are
subject to vesting restrictions with the Company or the contractual restrictions
described above.
In addition, after this offering, the holders of approximately 9,632,471
shares of Common Stock (including certain shares issuable upon the exercise of
certain of the Series B Warrants, Series D Warrants and Common Stock Warrants)
and the holders of the 1,909,089 shares issued in the Private Placement will be
entitled to certain rights to cause the Company to register the sale of such
shares under the Securities Act. Registration of such shares under the
Securities Act would result in such shares becoming freely tradable without
restriction under the Securities Act (except for shares purchased by affiliates
of the Company) immediately upon the effectiveness of such registration. See
"Description of Capital Stock -- Registration Rights."
63
<PAGE> 67
UNDERWRITERS
Under the terms and subject to the conditions contained in the Underwriting
Agreement dated as of the date hereof, the Underwriters named below, for whom
Morgan Stanley & Co. Incorporated, Lehman Brothers Inc. and SBC Warburg Dillon
Read Inc. are serving as Representatives (the "Representatives"), have severally
agreed to purchase, and the Company has agreed to sell to them severally, the
respective numbers of shares of Common Stock set forth opposite their names
below:
<TABLE>
<CAPTION>
NUMBER
NAME OF SHARES
---- -----------
<S> <C>
Morgan Stanley & Co. Incorporated...........................
Lehman Brothers Inc.........................................
SBC Warburg Dillon Read Inc.................................
---------
Total............................................. 3,600,000
=========
</TABLE>
The Underwriting Agreement provides that the obligations of the several
Underwriters to pay for and accept delivery of the shares of Common Stock
offered hereby are subject to the approval of certain legal matters by their
counsel and to certain other conditions. The Underwriters are obligated to take
and pay for all the shares of Common Stock offered hereby (other than the shares
covered by the overallotment option described below) if any such shares are
taken.
The Underwriters propose to offer part of the shares of Common Stock
directly to the public at the public offering price set forth on the cover page
hereof and part to certain dealers at a price which represents a concession not
in excess of $ per share under the initial public offering price. The
Underwriters may allow, and such dealers may re-allow, a concession not in
excess of $ per share to other Underwriters or to certain other
dealers. After the initial offering of the Common Stock, the offering price and
other selling terms may from time to time be varied by the Representatives.
Pursuant to the Underwriting Agreement, the Company has granted to the
Underwriters an option, exercisable for 30 days from the date of this
Prospectus, to purchase up to 540,000 additional shares of Common Stock at the
initial public offering price set forth on the cover page hereof, less
underwriting discounts and commissions. The Underwriters may exercise such
option solely for the purpose of covering overallotments, if any, incurred in
the sale of the shares of Common Stock offered hereby. To the extent such option
is exercised, each Underwriter will become obligated, subject to certain
conditions, to purchase approximately the same percentage of such additional
shares as the number set forth next to such Underwriter's name in the preceding
table bears to the total number of shares of Common Stock offered hereby to the
Underwriters.
The Representatives have informed the Company that the Underwriters do not
intend to confirm sales in excess of five percent of the number of shares of
Common Stock offered hereby to accounts over which they exercise discretionary
authority.
The Company and the Underwriters have agreed to indemnify each other
against certain liabilities, including liabilities under the Securities Act.
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<PAGE> 68
See "Shares Eligible for Future Sale" for a description of certain
arrangements by which all officers, directors, stockholders and option holders
of the Company have agreed not to sell or otherwise dispose of Common Stock or
convertible securities of the Company for up to 180 days after the date of this
Prospectus without the prior consent of Morgan Stanley & Co. Incorporated. The
Company has agreed in the Underwriting Agreement that it will not, directly or
indirectly, without the prior written consent of Morgan Stanley & Co.
Incorporated, 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, or otherwise transfer or dispose of any shares of Common Stock or any
securities convertible into or exchangeable for Common Stock, for a period of
180 days after the date of this Prospectus, except under certain circumstances.
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 overallot 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
Common Stock in the open market. Finally, the underwriting syndicate may reclaim
selling concessions allowed to an underwriter or a dealer for distributing the
Common Stock in the offering, if the syndicate repurchases previously
distributed Common Stock in transactions to cover syndicate short positions, in
stabilization transactions or otherwise. Any of these activities may stabilize
or maintain the market price of the Common Stock above independent market
levels. The Underwriters are not required to engage in these activities and may
end any of these activities at any time.
The Underwriters have reserved for sale, at the initial public offering
price, up to five percent of the Common Stock offered hereby for employees and
directors of the Company and certain others who have expressed an interest in
purchasing such shares of Common Stock in this offering. The Company has entered
into an agreement with BRI to exclusively license certain patented technology
for the identification of hereditary hemochromatosis. Pursuant to the terms of
the agreement, BRI has the right to purchase up to $490,000 of the Common Stock
in this offering. The number of shares available for sale to the general public
will be reduced to the extent such persons purchase such reserved shares. Any
reserved shares not so purchased will be offered by the Underwriters to the
general public on the same basis as other shares offered hereby.
Prior to this offering, there has been no public market for the Common
Stock of the Company. The initial public offering price for the Common Stock
will be determined by negotiations among the Company and the Representatives.
Among the factors to be considered in determining the initial public offering
price will be the future prospects of the Company and its industry in general,
sales, earnings and certain other financial and operating information of the
Company 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 the Company. The estimated
initial public offering price range set forth on the cover page of this
Preliminary Prospectus is subject to change as a result of market conditions and
other factors.
LEGAL MATTERS
Certain legal matters with respect to the validity of the Common Stock
offered hereby will be passed upon for the Company by Pillsbury Madison & Sutro
LLP, San Francisco, California. A member of Pillsbury Madison & Sutro LLP owns
5,000 shares of Common Stock. Certain legal matters in connection with this
offering will be passed upon for the Underwriters by Wilson Sonsini Goodrich &
Rosati, Professional Corporation, Palo Alto, California.
EXPERTS
The financial statements of Nanogen, Inc. at December 31, 1996 and 1997,
and for each of the three years in the period ended December 31, 1997, appearing
in this Prospectus and Registration Statement have been audited by Ernst & Young
LLP, independent auditors, as set forth in their report thereon appearing
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<PAGE> 69
elsewhere herein, and are included in reliance upon such report given upon the
authority of such firm as experts in accounting and auditing.
The statements in this Prospectus as set forth under the captions "Risk
Factors -- Uncertainty of Patent and Proprietary Technology Protection;
Potential Inability to License Technology from Third Parties" and in
"Business -- Proprietary Technology and Patents" have been passed upon by Lyon &
Lyon LLP, Costa Mesa, California, patent counsel to the Company, and experts on
such matters, and are included herein in reliance upon its review and approval.
ADDITIONAL INFORMATION
The Company has filed with the Commission a Registration Statement under
the Securities Act with respect to the Common Stock offered hereby. This
Prospectus does not contain all of the information set forth in the Registration
Statement and the exhibits and schedules thereto. For further information with
respect to the Company and the Common Stock offered hereby, reference is hereby
made to such Registration Statement, exhibits and schedules. Statements
contained in this Prospectus regarding the contents of any contract or other
document are not necessarily complete; with respect to each such contract or
document filed as an exhibit to the Registration Statement, reference is made to
the exhibit for a more complete description of the matter involved, and each
such statement shall be deemed qualified in its entirety by such reference. A
copy of the Registration Statement, including the exhibits and schedules
thereto, may be inspected without charge at the principal office of the
Commission, 450 Fifth Street, N.W., Washington, D.C. 20549, and copies of such
material may be obtained from such office upon payment of the fees prescribed by
the Commission. In addition, the Commission maintains a World Wide Web site on
the Internet at http://www.sec.gov that contains reports, proxy and information
statements and other information regarding registrants that file electronically
with the Commission.
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<PAGE> 70
NANOGEN, INC.
INDEX TO FINANCIAL STATEMENTS
<TABLE>
<S> <C>
Report of Ernst & Young LLP, Independent Auditors........... F-2
Balance Sheets at December 31, 1996 and 1997................ F-3
Statements of Operations for each of the three years in the
period ended December 31, 1997............................ F-4
Statements of Stockholders' Equity for each of the three
years in the period ended December 31, 1997............... F-5
Statements of Cash Flows for each of the three years in the
period ended December 31, 1997............................ F-6
Notes to Financial Statements............................... F-7
</TABLE>
F-1
<PAGE> 71
REPORT OF ERNST & YOUNG LLP, INDEPENDENT AUDITORS
The Board of Directors and Stockholders
Nanogen, Inc.
We have audited the accompanying balance sheets of Nanogen, Inc. as of December
31, 1996 and 1997, and the related statements of operations, stockholders'
equity, and cash flows for each of the three years in the period ended December
31, 1997. These financial statements are the responsibility of the Company's
management. Our responsibility is to express an opinion on these financial
statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the financial position of Nanogen, Inc. at December 31,
1996 and 1997 and the results of its operations and its cash flows for each of
the three years in the period ended December 31, 1997, in conformity with
generally accepted accounting principles.
ERNST & YOUNG LLP
San Diego, California
January 16, 1998
except for the last paragraph of Note 4, as to which the date is
January 29, 1998
F-2
<PAGE> 72
NANOGEN, INC.
BALANCE SHEETS
<TABLE>
<CAPTION>
PRO FORMA
STOCKHOLDERS'
DECEMBER 31, EQUITY AT
--------------------------- DECEMBER 31,
1996 1997 1997
------------ ------------ -------------
<S> <C> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents.......................... $ 16,775,228 $ 19,498,293
Grant receivables and other current assets......... 554,018 699,595
------------ ------------
Total current assets................................. 17,329,246 20,197,888
Property and equipment, net.......................... 1,315,540 2,439,941
Restricted cash...................................... 409,267 358,858
Other assets......................................... 36,225 218,376
------------ ------------
$ 19,090,278 $ 23,215,063
============ ============
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable................................... $ 479,967 $ 597,211
Accrued liabilities................................ 1,422,533 1,008,951
Deferred revenue................................... -- 1,012,186
Current portion of capital lease obligations....... 573,641 804,495
------------ ------------
Total current liabilities............................ 2,476,141 3,422,843
Capital lease obligations, less current portion...... 934,544 1,193,221
Commitments
Stockholders' equity:
Convertible preferred stock, $.001 par value,
15,500,000 shares authorized; 10,785,428 and
13,683,865 shares issued and outstanding at
December 31, 1996 and 1997, respectively
(5,000,000 shares authorized, no shares issued
and outstanding pro forma); liquidation
preference $45,375,393 at December 31, 1997..... 10,785 13,684 $ --
Common stock, $.001 par value, 40,000,000 shares
authorized; 1,832,383 and 3,183,523 shares
issued and outstanding at December 31, 1996 and
1997, respectively (50,000,000 shares
authorized, 12,306,065 shares issued and
outstanding pro forma).......................... 1,832 3,184 12,306
Additional paid-in capital......................... 30,885,668 48,523,140 48,527,702
Deferred compensation.............................. -- (2,322,850) (2,322,850)
Notes receivable from officers..................... (68,127) (1,129,509) (1,129,509)
Accumulated deficit................................ (15,150,565) (26,488,650) (26,488,650)
------------ ------------ ------------
Total stockholders' equity........................... 15,679,593 18,598,999 $ 18,598,999
------------ ------------ ============
$ 19,090,278 $ 23,215,063
============ ============
</TABLE>
See accompanying notes.
F-3
<PAGE> 73
NANOGEN, INC.
STATEMENTS OF OPERATIONS
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31,
----------------------------------------
1995 1996 1997
----------- ----------- ------------
<S> <C> <C> <C>
Revenues:
Contract and grant revenue........................... $ 317,628 $ 1,644,078 $ 2,122,912
Sponsored research................................... -- -- 1,242,810
----------- ----------- ------------
Total revenues......................................... 317,628 1,644,078 3,365,722
Operating expenses:
Research and development............................. 3,356,167 6,931,535 11,768,951
General and administrative........................... 1,645,526 2,426,923 3,910,078
----------- ----------- ------------
Total operating expenses............................... 5,001,693 9,358,458 15,679,029
----------- ----------- ------------
Loss from operations................................... (4,684,065) (7,714,380) (12,313,307)
Interest income (expense), net......................... 96,256 (63,957) 975,222
----------- ----------- ------------
Net loss............................................... $(4,587,809) $(7,778,337) $(11,338,085)
=========== =========== ============
Pro forma net loss per share -- basic and diluted...... $ (1.13)
============
Number of shares used in computing pro forma net loss
per share -- basic and diluted....................... 10,072,324
============
</TABLE>
See accompanying notes.
F-4
<PAGE> 74
NANOGEN, INC.
STATEMENTS OF STOCKHOLDERS' EQUITY
<TABLE>
<CAPTION>
CONVERTIBLE NOTES
PREFERRED STOCK COMMON STOCK ADDITIONAL RECEIVABLE
-------------------- ------------------- PAID-IN DEFERRED FROM
SHARES AMOUNT SHARES AMOUNT CAPITAL COMPENSATION OFFICERS
---------- ------- --------- ------- ----------- ------------ -----------
<S> <C> <C> <C> <C> <C> <C> <C>
Balance at December 31, 1994............ 2,339,667 $2,339 918,308 $ 918 $ 3,645,841 $ -- $ --
Issuance of common stock.............. -- -- 217,661 218 24,032 -- --
Repurchase of common stock............ -- -- (4,486) (4) (332) -- --
Issuance of Series B convertible
preferred stock..................... 3,234,800 3,235 -- -- 8,047,313 -- --
Issuance of Series B convertible
preferred stock in connection with
conversion of debt.................. 240,000 240 -- -- 599,760 -- --
Exercise of stock options in exchange
for notes receivable and accrued
interest............................ -- -- 200,000 200 29,800 -- (31,008)
Net loss.............................. -- -- -- -- -- -- --
---------- ------- --------- ------ ----------- ----------- -----------
Balance at December 31, 1995............ 5,814,467 5,814 1,331,483 1,332 12,346,414 -- (31,008)
Issuance of common stock.............. -- -- 283,499 283 42,243 -- --
Repurchase of common stock............ -- -- (15,930) (16) (1,567) -- --
Issuance of Series B convertible
preferred stock..................... 240,800 241 -- -- 601,609 -- --
Issuance of Series C convertible
preferred stock..................... 4,225,000 4,225 -- -- 15,842,063 -- --
Issuance of Series C convertible
preferred stock in connection with
conversion of debt.................. 505,161 505 -- -- 2,020,139 -- --
Exercise of stock options in exchange
for notes receivable and accrued
interest............................ -- -- 233,331 233 34,767 -- (37,119)
Net loss.............................. -- -- -- -- -- -- --
---------- ------- --------- ------ ----------- ----------- -----------
Balance at December 31, 1996............ 10,785,428 10,785 1,832,383 1,832 30,885,668 -- (68,127)
Issuance of common stock.............. -- -- 207,103 207 129,179 -- --
Repurchase of common stock............ -- -- (30,635) (30) (4,424) -- --
Issuance of Series C preferred
stock at............................ 1,823,437 1,824 -- -- 7,173,892 -- --
Issuance of Series B preferred
stock............................... 25,000 25 -- -- 62,475 -- --
Issuance of Series D preferred
stock............................... 1,050,000 1,050 -- -- 6,286,544 -- --
Deferred compensation related to stock
options............................. -- -- -- -- 2,933,774 (2,933,774) --
Amortization of deferred
compensation........................ -- -- -- -- -- 610,924 --
Exercise of stock options in exchange
for notes receivable and accrued
interest............................ -- -- 1,174,672 1,175 1,056,032 -- (1,061,382)
Net loss.............................. -- -- -- -- -- -- --
---------- ------- --------- ------ ----------- ----------- -----------
Balance at December 31, 1997............ 13,683,865 $13,684 3,183,523 $3,184 $48,523,140 $(2,322,850) $(1,129,509)
========== ======= ========= ====== =========== =========== ===========
<CAPTION>
TOTAL
STOCKHOLDERS'
ACCUMULATED EQUITY
DEFICIT (DEFICIT)
------------ -------------
<S> <C> <C>
Balance at December 31, 1994............ $(2,784,419) $ 864,679
Issuance of common stock.............. -- 24,250
Repurchase of common stock............ -- (336)
Issuance of Series B convertible
preferred stock..................... -- 8,050,548
Issuance of Series B convertible
preferred stock in connection with
conversion of debt.................. -- 600,000
Exercise of stock options in exchange
for notes receivable and accrued
interest............................ -- (1,008)
Net loss.............................. (4,587,809) (4,587,809)
------------ ------------
Balance at December 31, 1995............ (7,372,228) 4,950,324
Issuance of common stock.............. -- 42,526
Repurchase of common stock............ -- (1,583)
Issuance of Series B convertible
preferred stock..................... -- 601,850
Issuance of Series C convertible
preferred stock..................... -- 15,846,288
Issuance of Series C convertible
preferred stock in connection with
conversion of debt.................. -- 2,020,644
Exercise of stock options in exchange
for notes receivable and accrued
interest............................ -- (2,119)
Net loss.............................. (7,778,337) (7,778,337)
------------ ------------
Balance at December 31, 1996............ (15,150,565) 15,679,593
Issuance of common stock.............. -- 129,386
Repurchase of common stock............ -- (4,454)
Issuance of Series C preferred
stock at............................ -- 7,175,716
Issuance of Series B preferred
stock............................... -- 62,500
Issuance of Series D preferred
stock............................... -- 6,287,594
Deferred compensation related to stock
options............................. -- --
Amortization of deferred
compensation........................ -- 610,924
Exercise of stock options in exchange
for notes receivable and accrued
interest............................ -- (4,175)
Net loss.............................. (11,338,085) (11,338,085)
------------ ------------
Balance at December 31, 1997............ $(26,488,650) $ 18,598,999
============ ============
</TABLE>
See accompanying notes.
F-5
<PAGE> 75
NANOGEN, INC.
STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31,
-----------------------------------------
1995 1996 1997
----------- ------------ ------------
<S> <C> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net loss.................................................... $(4,587,809) $ (7,778,337) (11,338,085)
Adjustments to reconcile net loss to net cash used in
operating activities:
Depreciation and amortization............................. 289,572 351,003 527,381
Interest expense converted into convertible preferred
stock................................................... -- 20,644 --
Amortization of deferred compensation..................... -- -- 610,924
Changes in operating assets and liabilities:
Accounts payable........................................ 10,521 276,329 117,244
Accrued liabilities..................................... 247,231 1,175,302 (413,582)
Unearned revenue........................................ -- -- 1,012,186
Grant receivables and other current assets.............. (189,381) (181,960) (145,577)
----------- ------------ ------------
Net cash used in operating activities....................... (4,229,866) (6,137,019) (9,629,509)
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchase of equipment....................................... 35,797 (114,106) (492,308)
----------- ------------ ------------
Net cash used in investing activities....................... (35,797) (114,106) (492,308)
CASH FLOWS FROM FINANCING ACTIVITIES:
Restricted cash............................................. 55,228 55,916 50,409
Principal payments on capital lease obligations............. (355,993) (427,270) (669,943)
Proceeds from capital lease financing....................... -- 593,059 --
Issuance of notes payable to stockholders................... 600,000 2,000,000 --
Issuance of common stock, net of repurchases................ 22,906 38,824 120,757
Issuance of convertible preferred stock, net of issuance
costs..................................................... 8,050,548 16,448,138 13,525,810
Other assets................................................ 4,590 -- (182,151)
----------- ------------ ------------
Net cash provided by financing activities................... 8,377,279 18,708,667 12,844,882
----------- ------------ ------------
Increase in cash and cash equivalents....................... 4,111,616 12,457,542 2,723,065
Cash and cash equivalents at beginning of year.............. 206,070 4,317,686 16,775,228
----------- ------------ ------------
Cash and cash equivalents at end of year.................... $ 4,317,686 $ 16,775,228 $ 19,498,293
=========== ============ ============
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION:
Interest paid............................................... $ 125,208 $ 188,273 $ 224,504
=========== ============ ============
SUPPLEMENTAL SCHEDULE OF NONCASH INVESTING AND FINANCING
ACTIVITIES:
Equipment acquired under capital leases..................... $ 730,100 $ 404,125 $ 1,159,474
=========== ============ ============
Issuance of convertible preferred stock in exchange for
cancellation of debt and related accrued interest......... $ 600,000 $ 2,020,644 $ --
=========== ============ ============
</TABLE>
See accompanying notes.
F-6
<PAGE> 76
NANOGEN, INC.
NOTES TO FINANCIAL STATEMENTS
1. ORGANIZATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Organization and Business Activity
Nanogen, Inc. ("Nanogen" or the "Company") was incorporated in California
on November 6, 1991 as Nanophore, Inc. ("Nanophore"), a wholly-owned subsidiary
of Nanotronics, Inc. ("Nanotronics"), and pursuant to a Plan of Corporate
Separation and Reorganization, Nanophore issued shares of its common stock to
the Nanotronics shareholders and commenced operations as Nanogen, Inc. on
September 1, 1993. The Company was established to develop products in the area
of medical diagnostics, biomedical research, genomics, genetic testing and drug
discovery using advanced microelectronics and molecular biology. Through
December 31, 1996, the Company was considered to be in the development stage.
The Company commenced planned commercial operations upon consummation of the
collaborative agreement with Becton Dickinson in May 1997, (see Note 6), and is
no longer considered to be in the development stage.
Cash and Cash Equivalents
Cash and cash equivalents consist of cash and highly liquid investments
which include debt securities with remaining maturities of three months or less
when acquired.
Concentration of Credit Risk
Cash and cash equivalents are financial instruments which potentially
subject the Company to concentration of credit risk. The Company invests its
excess cash primarily in U.S. government securities and marketable debt
securities of financial institutions and corporations with strong credit
ratings. The Company has established guidelines relative to diversification and
maturities to maintain safety and liquidity. These guidelines are reviewed
periodically and modified to take advantage of trends in yields and interest
rates. The Company has not experienced any material losses on its investments.
At December 31, 1996 and 1997, all of the Company's investments were with
financial institutions and organizations with strong credit ratings with
maturities of ninety days or less when acquired.
Restricted Cash
During 1994, the Company obtained an irrevocable standby letter of credit
in the amount of $463,775 to secure its building lease. The letter of credit is
secured by a certificate of deposit which is shown as restricted cash in the
accompanying balance sheet. The letter of credit expires by approximately
$50,000 annually.
Property and Equipment
Property and equipment is stated at cost and depreciated over the estimated
useful lives of the assets (2 to 5 years) using the straight-line method.
Leasehold improvements are stated at cost and amortized on a straight-line basis
over the shorter of the estimated useful life of the assets or the lease term.
Revenue Recognition
Contract, grant and sponsored research revenue are recorded as the costs
and expenses to perform the research are incurred. Payments received in advance
under these arrangements are recorded as deferred revenue until the expenses are
incurred. Continuation of certain contracts, grants, and research agreements are
dependent upon the company achieving specific contractual milestones.
Contract and grant revenue from one customer amounted to approximately
100%, 70% and 45% of total revenues in 1995, 1996 and 1997, respectively.
Contract and grant revenue from a second customer amounted to 23% and 13% in
1996 and 1997, respectively. Additionally, sponsored research (see Note 6) was
37% of total revenue in 1997.
F-7
<PAGE> 77
NANOGEN, INC.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
1. ORGANIZATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
New Accounting Standards
In June 1997, the Financial Accounting Standards Board issued SFAS No. 130,
Reporting Comprehensive Income, and SFAS No. 131, Segment Information. Both of
these standards are effective for fiscal years beginning after December 15,
1997. SFAS No. 130 requires that all components of comprehensive income,
including net income, be reported in the financial statements in the period in
which they are recognized. Comprehensive income is defined as the change in
equity during a period from transactions and other events and circumstances from
non-owner sources. Net income and other comprehensive income, including foreign
currency translation adjustments, and unrealized gains and losses on
investments, shall be reported, net of their related tax effect, to arrive at
comprehensive income. The Company does not believe that comprehensive income or
loss will be materially different than net income or loss. SFAS No. 131 amends
the requirements for public enterprises to report financial and descriptive
information about its reportable operating segments. Operating segments, as
defined in SFAS No. 131, are components of an enterprise for which separate
financial information is available and is evaluated regularly by the Company in
deciding how to allocate resources and in assessing performance. The financial
information is required to be reported on the basis that is used internally for
evaluating the segment performance. The Company believes it operates in one
business and operating segment and does not believe adoption of SFAS No. 131
will have a material impact on the Company's financial statements.
Net Loss Per Share
Historical basic net loss per share is computed using the weighted average
number of common shares outstanding during the periods presented. Common
equivalent shares resulting from convertible preferred stock, options to
purchase common stock and warrants to purchase convertible preferred stock are
excluded from the computation.
Historical basic net loss per share information is as follows:
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31,
-----------------------------
1995 1996 1997
------- ------- ---------
<S> <C> <C> <C>
Basic net loss per share............................... $ (5.95) $ (8.04) $ (8.79)
======= ======= =========
Shares used in computing basic net loss per share...... 770,706 966,920 1,289,989
======= ======= =========
</TABLE>
Pro Forma Net Loss Per Share
Pro forma net loss per share has been computed as described above and also
gives effect to the conversion of the convertible preferred stock, which will
convert to common stock upon completion of the Company's initial public
offering, using the as if-converted method from the original date of issuance.
Stock-Based Compensation
As permitted by Statement of Financial Accounting Standards No. 123, the
Company has elected to follow Accounting Principles Board Opinion No. 25,
Accounting for Stock Issued to Employees, and related Interpretations ("APB
25"), in accounting for its employee stock options. Under APB 25, when the
exercise price of the Company's employee stock options is not less than the fair
value of the underlying stock on the date of grant, no compensation expense is
recognized.
F-8
<PAGE> 78
NANOGEN, INC.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
1. ORGANIZATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
Use of Estimates
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities and
related disclosures at the date of the financial statements, and the amounts of
revenues and expenses reported during the period. Actual results could differ
from those estimates.
Pro Forma Stockholders' Equity
In November 1997, the Company reincorporated in Delaware and established
$.001 par value common and preferred stock. The accompanying financial
statements have been retroactively reclassified to reflect the effects of the
reincorporation.
In December 1997, the Board of Directors authorized management of the
Company to file a Registration Statement with the Securities and Exchange
Commission for the Company to sell shares of its common stock in an initial
public offering. If the initial public offering contemplated by this Prospectus
is consummated under the terms presently anticipated, all outstanding shares of
convertible preferred stock at December 31, 1997 will automatically convert into
9,122,542 common shares. Upon closing of the initial public offering, the
Company will effect a 2-for-3 reverse split. All common stock shares have been
retroactively adjusted to reflect this 2-for-3 reverse split.
2. PROPERTY AND EQUIPMENT
Property and equipment consist of the following:
<TABLE>
<CAPTION>
DECEMBER 31,
-------------------------
1996 1997
---------- -----------
<S> <C> <C>
Scientific equipment............................... $1,242,172 $ 2,058,766
Office furniture and equipment..................... 706,944 945,938
Leasehold improvements............................. 49,823 646,017
---------- -----------
1,998,939 3,650,721
Less accumulated depreciation and amortization..... (683,399) (1,210,780)
---------- -----------
$1,315,540 $ 2,439,941
========== ===========
</TABLE>
3. COMMITMENTS
Licensing and Research Agreement
The Company is a party to a licensing agreement under which it has obtained
exclusive licenses to technology, or technology claimed, in certain patents and
pending patent applications. Under the terms of the agreement, the Company
issued 27,282 shares of its common stock in 1993 as a nonrefundable license fee.
At December 31, 1997, the Company is committed to expend $5.75 million over the
next six years for the further development of products utilizing the licensed
technology. The Company is also required to pay additional amounts if certain
milestones are achieved and to pay royalties on future sales, if any, on
licensed products covered by the agreement.
The Company has entered into a sponsored research agreement to develop
certain technologies. The agreement is for three years effective December 18,
1996. Under the terms of the agreement, the Company is committed to expend
$500,000 annually, payable in monthly installments of $41,667, for the term of
the agreement. The Company, at its sole discretion, may terminate the agreement
without cause at any time after the first year, with no further financial
obligations.
F-9
<PAGE> 79
NANOGEN, INC.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
3. COMMITMENTS (CONTINUED)
Leases
The Company leases its facilities and certain equipment under operating
lease agreements that expire at various dates through 2004. The minimum annual
rents are subject to specified annual rental increases. Rent expense was
$378,440, $442,560, and $460,800 in 1995, 1996, and 1997, respectively.
The Company leases certain equipment under capital lease obligations. Cost
and accumulation amortization of equipment under capital lease were $1,881,974
and $636,082 at December 31, 1996 and $3,364,536 and $1,141,733 at December 31,
1997, respectively.
Annual future minimum obligations for operating and capital leases as of
December 31, 1997 are as follows:
<TABLE>
<CAPTION>
CAPITAL
OPERATING LEASE
LEASES OBLIGATIONS
---------- -----------
<S> <C> <C>
YEAR ENDING DECEMBER 31:
1998.............................................. $ 561,434 $1,006,136
1999.............................................. 604,881 724,608
2000.............................................. 624,694 500,285
2001.............................................. 639,094 136,855
2002.............................................. 664,495 --
Thereafter........................................ 1,591,253 --
---------- ----------
Total minimum lease payments...................... $4,685,851 2,367,884
==========
Less amount representing interest................. 370,168
----------
Present value of future minimum capital lease
obligations.................................... 1,997,716
Less amounts due in one year...................... 804,495
----------
Long term portion of capital lease obligations.... $1,193,221
==========
</TABLE>
As of December 31, 1997, the Company has approximately $3.1 million of
available funding under equipment lease lines.
4. STOCKHOLDERS' EQUITY
Convertible Preferred Stock
A summary of Convertible Preferred Stock issued and outstanding as of
December 31, 1997 is as follows:
<TABLE>
<CAPTION>
LIQUIDATION
LIQUIDATION PREFERENCE
SHARES PREFERENCE PER SHARE
---------- ----------- ------------
<S> <C> <C> <C>
Series A............................ 2,339,667 $ 3,509,501 $1.50
Series B............................ 3,740,600 9,351,500 $2.50
Series C............................ 6,553,598 26,214,392 $4.00
Series D............................ 1,050,000 6,300,000 $6.00
---------- -----------
13,683,865 $45,375,393
========== ===========
</TABLE>
In 1995, in connection with the sale of Series B Convertible Preferred
Stock, the Company issued warrants to purchase 386,080 shares of common stock
exercisable from February 1997 to September 2000 at an exercise price of $.38
per share. Additionally, in connection with the issuance of notes payable which
were converted to Series B Convertible Preferred Stock, the Company issued
warrants to purchase 60,000 shares of
F-10
<PAGE> 80
NANOGEN, INC.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
4. STOCKHOLDERS' EQUITY (CONTINUED)
Series B Convertible Preferred Stock exercisable from April 1995 to April 2000
at an exercise price of $1.50 per share.
In 1996, in connection with the sale of Series B Convertible Preferred
Stock, the Company issued warrants to purchase 26,754 shares of common stock
exercisable from February 1997 to September 2001 at an exercise price of $.38
per share.
In 1997, in connection with the sale of Series B Convertible Preferred
Stock, the Company issued warrants to purchase 2,778 shares of common stock
exercisable from August 1997 to August 2002 at an exercise price of $.38 per
share.
The Series A, B, C and D Convertible Preferred Stock are convertible, at
the option of the holder, into 1,559,769, 2,493,725, 4,369,049 and 699,999
shares, respectively, of common stock, subject to certain anti-dilution
adjustments. The Series A, B, C and D Convertible Preferred Stock are
automatically convertible into common stock, at the then applicable conversion
rate, upon the closing of an underwritten public offering of shares of common
stock of the Company for total gross offering proceeds of not less than
$7,500,000, but only if the public offering price of the Company's common stock
in such offering is not less than $6.00 per share.
Noncumulative annual dividends of $.12, $.20, $.32 and $.48 per share are
payable on the Series A, B, C and D Convertible Preferred Stock, respectively,
whenever funds are legally available, when and if declared by the Board of
Directors.
Warrants
In addition to the warrants issued in connection with the sale of
Convertible Preferred Stock, the Company issued warrants in connection with
certain financing arrangements. In 1991, a warrant was issued to purchase 7,637
shares of common stock exercisable through September 1999 at an exercise price
of $.01. In 1996, a warrant was issued to purchase 9,000 shares of Series C
Convertible Preferred Stock exercisable through the earlier of August 2002 or
upon completion of an initial public offering at an exercise price of not less
than $4.00.
The following table summarizes the warrants outstanding at December 31,
1997:
<TABLE>
<CAPTION>
TITLE OF SECURITIES NUMBER DATE EXERCISE
CALLED FOR BY WARRANTS OF SHARES EXERCISABLE PRICE
---------------------- --------- ----------- --------
<S> <C> <C> <C>
Series B Preferred Stock 40,000 Through April 2000 $2.25
Series C Preferred Stock 6,000 Through August 2002 $6.00
Common Stock 5,091 Through September 1999 $ .02
Common Stock 415,612 Various dates through August 2002 $0.38
-------
466,703
=======
</TABLE>
Stock Option Plans
Under the Company's 1993 Stock Option Plan (the "1993 Plan"), as amended in
April 1995, 654,671 shares of common stock were reserved for issuance upon
exercise of stock options granted by the Company. In April 1995, the Board of
Directors adopted the 1995 Stock Option/Stock Issuance Plan (the "1995 Plan")
under which 333,333 shares of common stock were reserved for issuance. In April
1996, an additional 650,000 shares of common stock were reserved for issuance
under the 1995 Plan. The plans provide for the grant of stock options to
officers, directors, and employees of, and consultants and advisors to, the
Company. In August 1997, the Board of Directors adopted the 1997 Stock Incentive
Plan (the "1997 Plan" and together with the 1993 Plan and 1995 Plan, the "Stock
Option Plans"), under which 1,641,341 shares of common stock
F-11
<PAGE> 81
NANOGEN, INC.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
4. STOCKHOLDERS' EQUITY (CONTINUED)
were reserved for issuance upon exercise of stock options granted by the
Company. In November 1997, an additional 600,000 shares were reserved for
issuance under the 1997 Plan.
The exercise price of incentive stock options to be granted under the Stock
Option Plans shall not be less than 100% of the fair value of such shares on the
date of grant. The exercise price of nonqualified stock options to be granted
under the plans shall not be less than 85% of the fair value of such shares on
the date of grant. The options are generally exercisable immediately; however,
the shares generally vest at the rate of one fourth after one year and the
remainder ratably over the remaining three years. Options granted have a term of
up to ten years.
As of December 31, 1997, 1,092,136 shares are available for future grant
under the Stock Option Plans. The following table summarizes stock option
activity through December 31, 1997:
<TABLE>
<CAPTION>
WEIGHTED
AVERAGE
EXERCISE
NUMBER OF PRICE PER
SHARES SHARE
---------- ---------
<S> <C> <C>
Outstanding at December 31, 1994.................... 91,998 $.08
Granted........................................... 463,528 $.15
Exercised......................................... (417,661) $.13
Cancelled......................................... (23,333) $.15
----------
Outstanding at December 31, 1995.................... 114,532 $.15
Granted........................................... 665,146 $.15
Exercised......................................... (516,830) $.15
Cancelled......................................... (28,973) $.15
----------
Outstanding at December 31, 1996.................... 233,875 $.15
Granted........................................... 1,586,223 $.89
Exercised......................................... (1,381,766) $.86
Cancelled......................................... (21,616) $.53
----------
Outstanding at December 31, 1997.................... 416,716 $.60
==========
</TABLE>
As of December 31, 1997, 884,188 shares issued pursuant to early exercises
of options or issuable under outstanding options were vested. The Company has
the option to repurchase, at the original issue price, the unvested shares
issued pursuant to early exercise of options in the event of termination of
employment or engagement. At December 31, 1997, 1,543,939 shares issued under
the Stock Option Plans were subject to repurchase by the Company.
The Company recognized an aggregate of $2,933,774 through December 31, 1997
as deferred compensation for the excess of the deemed fair value for financial
statement presentation purposes of the common stock issuable on exercise of such
options over the exercise price. Compensation expense related to options granted
during the year ended December 31, 1997 was $610,924. The deferred compensation
expense is being recognized over the vesting period of the options.
F-12
<PAGE> 82
NANOGEN, INC.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
4. STOCKHOLDERS' EQUITY (CONTINUED)
Following is a further breakdown of the options outstanding as of December
31, 1997:
<TABLE>
<CAPTION>
WEIGHTED
WEIGHTED AVERAGE
AVERAGE WEIGHTED EXERCISE
RANGE OF REMAINING AVERAGE PRICE OF
EXERCISE OPTIONS LIFE IN EXERCISE OPTIONS OPTIONS
PRICES OUTSTANDING YEARS PRICE EXERCISABLE EXERCISABLE
- ---------- ----------- --------- -------- ----------- -----------
<S> <C> <C> <C> <C> <C>
$ .02 4,000 5.67 $.02 4,000 $.02
$ .15 144,411 7.06 $.15 144,411 $.15
$ .38 23,866 9.10 $.38 23,866 $.38
$ .90 244,439 9.69 $.90 244,439 $.90
--------- ---------
$.02-.90 416,716 8.71 $.60 416,716 $.60
========= =========
</TABLE>
Adjusted pro forma information regarding net loss is required by SFAS 123
and has been determined as if the Company had accounted for its employee stock
options under the fair value method of SFAS 123. The fair value for these
options was estimated at the date of grant using the Minimum Value method for
option pricing with the following assumptions for 1995, 1996 and 1997: a
risk-free interest rate of 6.5%, a dividend yield of 0% and a weighted average
expected life of the option of five years.
For purposes of adjusted pro forma disclosures, the estimated fair value of
the options are amortized to expense over the vesting period. The Company's
adjusted pro forma information is as follows:
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31,
----------------------------------------
1995 1996 1997
----------- ----------- ------------
<S> <C> <C> <C>
Adjusted pro forma net loss.......... $(4,588,195) $(7,780,757) $(11,383,330)
Adjusted pro forma net loss per
share.............................. $(5.95) $(8.05) $(8.82)
</TABLE>
The weighted average fair value of options granted during 1995, 1996 and
1997 was $.01, $.01 and $(.16), respectively.
The pro forma effect on net loss for 1995, 1996 and 1997 is not likely to
be representative of the pro forma effects on reported net income or loss in
future years because these amounts reflect 3 or fewer years of vesting.
Shares Reserved for Future Issuance
The following shares of common stock are reserved for future issuance at
December 31, 1997:
<TABLE>
<S> <C>
Convertible preferred stock.............................. 9,122,542
Stock options............................................ 1,508,853
Warrants................................................. 466,703
----------
11,098,098
==========
</TABLE>
Nanotronics
In December 1997, the Company entered into an Agreement and Plan of Merger
(the "Agreement") with Nanotronics, pursuant to which a wholly-owned California
subsidiary of the Company will merge with and into Nanotronics. Upon the
effective date of the merger, the Company will issue approximately 200,000
shares of its Series D Convertible Preferred Stock at $6.00 per share in
exchange for all of the outstanding shares of Nanotronics. The transaction will
be accounted for using the purchase method. The operations and net assets of
Nanotronics are not material to the Company's financial position or results of
operations. The technological feasibility of the acquired technology has not
been established nor have alternative uses been identified, therefore, the
purchase price of $1.2 million will be allocated primarily to
F-13
<PAGE> 83
NANOGEN, INC.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
4. STOCKHOLDERS' EQUITY (CONTINUED)
acquired in-process technology and will be reflected as a charge in the
Company's statement of operations upon closing, which occurred on January 29,
1998.
5. INCOME TAXES
Significant components of the Company's deferred tax assets and liabilities
as of December 31, 1996 and 1997 are shown below. A valuation allowance of
$11,279,000, of which $4,783,000 relates to 1997, as of December 31, 1997 has
been recognized to offset the deferred tax assets as realization of such assets
is uncertain.
<TABLE>
<CAPTION>
1996 1997
----------- ------------
<S> <C> <C>
Deferred tax assets:
Net operating loss carryforwards....................... $ 5,477,000 $ 9,120,000
Research and development credits....................... 533,000 1,146,000
Capitalized research expenses.......................... 540,000 1,050,000
Other.................................................. 61,000 114,000
----------- ------------
Total deferred tax assets................................ 6,611,000 11,430,000
Valuation allowance for deferred tax assets.............. (6,496,000) (11,279,000)
----------- ------------
Net deferred tax assets.................................. 115,000 151,000
Deferred tax liabilities:
Depreciation........................................... (115,000) (151,000)
----------- ------------
Net deferred tax assets.................................. $ -- $ --
=========== ============
</TABLE>
At December 31, 1997, the Company has federal and California net operating
loss carryforwards of approximately $25,048,000 and $6,143,000, respectively.
The difference between the federal and California tax loss carryforwards is
primarily attributable to the capitalization of research and development
expenses for California tax purposes and the fifty percent limitation on
California loss carryforwards. The federal and California tax loss carryforwards
will begin expiring in 2006 and 1998, respectively, unless previously utilized.
The Company also has federal and California research and development tax credit
carryforwards of approximately $820,000 and $502,000, respectively, which will
begin expiring in 2007 unless previously utilized.
Under Sections 382 and 383 of the Internal Revenue Code, the annual use of
the Company's net operating loss and credit carryforwards may be limited because
of cumulative changes in ownership of more than 50% which occurred during 1995
and 1997. However, the Company does not believe such limitations will have a
material impact upon the ultimate utilization of these carryforwards.
6. SPONSORED RESEARCH AGREEMENTS
Becton, Dickinson and Company
In May 1997, Becton, Dickinson and Company ("Becton Dickinson") and Nanogen
entered into a Collaborative Research and Development Agreement to develop
products utilizing Nanogen's technology to detect microbial agents causing
infectious disease to determine their antibiotic susceptibility or resistance
(the "Prior R&D Agreement"). In connection with the Prior R&D Agreement, Nanogen
entered into a Series D Preferred Stock Purchase Agreement (the "Stock Purchase
Agreement") with Becton Dickinson pursuant to which Becton Dickinson purchased
1,000,000 shares of Nanogen's Series D Preferred Stock for $6.0 million. In
addition, Becton Dickinson agreed, pursuant to the Stock Purchase Agreement, to
purchase common stock worth an aggregate of $6.0 million, at the initial public
offering price, upon the completion of this offering. This purchase will be made
as part of a private placement (the "Private Placement") concurrent with this
offering.
F-14
<PAGE> 84
NANOGEN, INC.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
6. SPONSORED RESEARCH AGREEMENTS (CONTINUED)
As of October 1, 1997, Becton Dickinson and Nanogen entered into new
agreements which superseded the Prior R&D Agreement. Pursuant to a Master
Agreement entered into between the parties (the "Master Agreement"), Becton
Dickinson and Nanogen agreed to form The Nanogen/Becton Dickinson Partnership, a
Delaware general partnership (the "Partnership") to develop and commercialize
products in the field of in vitro nucleic acid-based diagnostic and monitoring
technologies. NanoVenture LLC, a Delaware limited liability company wholly-owned
by Nanogen ("NanoVenture") and Becton Dickinson Venture LLC, a Delaware limited
liability company wholly-owned by Becton Dickinson ("Becton Dickinson Venture"),
are the general partners of the Partnership with (i) losses allocated in
proportion to cash funding, (ii) profits shared equally, and (iii) distributions
allocated 60% to Becton Dickinson and 40% to NanoVenture until partner
contributions are equalized and thereafter distributions shared equally.
Pursuant to a General Partnership Agreement between NanoVenture and Becton
Dickinson Venture, Becton Dickinson and Nanogen have contributed to the
Partnership their respective rights under the Prior R&D Agreement, certain
Intellectual Property Licenses and, as of December 31, 1997, cash in the
aggregate of $1,275,000. Upon the successful completion of certain defined
milestones by December 31, 1997 and June 30, 1998, contributions for use in the
research programs aggregating approximately $6.7 million will be made to the
Partnership from July 1, 1998 through April 1, 1999 of which $5.0 million is to
be paid by Becton Dickinson and $1.7 million is to be paid by Nanogen. The
December 31, 1997 milestones have been achieved, however, there can be no
assurance that the June 30, 1998 milestones will be achieved in a timely
fashion, if at all. The General Partnership Agreement also contemplates
additional research funding aggregating approximately $14.3 million during the
period from July 1, 1999 through April 1, 2001, conditioned upon the achievement
of certain milestones to be mutually agreed upon by the partners. There can be
no assurances that the parties will agree to such milestones, and if agreed
upon, there can be no assurances that such milestones will be achieved in a
timely fashion, if at all. In addition to the above described payments, Becton
Dickinson and Nanogen have agreed to contribute certain additional amounts to
fund marketing and manufacturing startup.
Hoechst AG
In December 1997, the Company entered into an agreement with Hoechst
Corporate Research and Technology, an affiliate of Hoechst AG ("Hoechst"), for
an exclusive research and development collaboration and the establishment of a
joint venture relating to new tools in molecular recognition and Nanogen's
technology. Pursuant to the agreement, the Company has agreed to issue to
Hoechst, upon the achievement of certain milestones, warrants to purchase up to
4% of the Company's common stock based on the number of shares outstanding on
December 5, 1997, at a price based on a premium to the then current market
price. The warrants will be exercisable for 5 years from the date of grant.
Additionally, Hoechst has agreed to purchase Company common stock worth an
aggregate of $10.0 million at the public offering price, upon the completion of
this offering. This purchase will be made as part of the Private Placement.
E( 1/8)lan Corporation, plc
In December 1997, the Company entered into an agreement with E( 1/8)lan
Corporation, plc ("E( 1/8)lan") for a non-exclusive research and development
agreement for the development of genomics and gene expression research tools.
Pursuant to the agreement, Elan has agreed to purchase Company common stock
worth an aggregate of $5.0 million at the public offering price, upon the
completion of this offering. This purchase will be made as part of the Private
Placement.
F-15
<PAGE> 85
NANOGEN MICROCHIP EXPERIMENTAL DESIGNS
[Photo of Nanogen Microchips]
The microchip designs illustrated above are representative of various
experimental prototypes designed by Nanogen. Several of these designs are
currently being used to further develop Nanogen's prototype assay system. Future
commercial production designs may differ from those depicted above based upon
advances in materials and design and fabrication techniques and will be driven
by specific product applications.
Certain of the above designs are currently under development, and there can
be no assurance that any of the above designs will be incorporated into any
products which will be successfully developed or commercialized, on a timely
basis, if at all. Certain product applications utilizing the Company's
technology platform will require FDA or other applicable regulatory approvals
prior to commercialization. The Company has not applied for such regulatory
approvals with respect to any of its products under development. There can be no
assurance that such approvals for such products can be obtained on a timely
basis, if at all.
<PAGE> 86
Nanogen logo
<PAGE> 87
PART II
INFORMATION NOT REQUIRED IN PROSPECTUS
ITEM 13. OTHER EXPENSES OF ISSUANCE AND DISTRIBUTION
The following table sets forth the various expenses expected to be incurred
by the Registrant in connection with the sale and distribution of the securities
being registered hereby, other than underwriting discounts and commissions. All
amounts are estimated except the Securities and Exchange Commission registration
fee, the National Association of Securities Dealers, Inc. filing fee and the
Nasdaq listing fee.
<TABLE>
<CAPTION>
PAYABLE BY
REGISTRANT
----------
<S> <C>
SEC registration fee........................................ $ 11,800
National Association of Securities Dealers, Inc. filing
fee....................................................... 4,500
Nasdaq listing fee.......................................... 50,000
Blue Sky fees and expenses.................................. 10,000
Accounting fees and expenses................................ 200,000
Legal fees and expenses..................................... 300,000
Printing and engraving expenses............................. 175,000
Registrar and Transfer Agent's fees......................... 5,000
Miscellaneous fees and expenses............................. 143,700
--------
Total............................................. $900,000
========
</TABLE>
ITEM 14. INDEMNIFICATION OF DIRECTORS AND OFFICERS
Section 145 of the Delaware General Corporation Law provides for the
indemnification of officers, directors, and other corporate agents in terms
sufficiently broad to indemnify such persons under certain circumstances for
liabilities (including reimbursement for expenses incurred) arising under the
Securities Act of 1933, as amended (the "Act"). Article XI of the Registrant's
Restated Certificate of Incorporation (Exhibit 3.(i)(2) hereto) and Article 6 of
the Registrant's Bylaws (Exhibit 3.(ii)(2) hereto) provide for indemnification
of the Registrant's directors, officers, employees and other agents to the
extent and under the circumstances permitted by the Delaware General Corporation
Law. The Registrant has also entered into agreements with its directors and
officers that will require the Registrant, among other things, to indemnify them
against certain liabilities that may arise by reason of their status or service
as directors or executive officers to the fullest extent not prohibited by law.
The Underwriting Agreement (Exhibit 1.1) provides for indemnification by
the Underwriters of the Registrant, its directors and officers, and by the
Registrant of the Underwriters, for certain liabilities, including liabilities
arising under the Act, and affords certain rights of contribution with respect
thereto.
ITEM 15. RECENT SALES OF UNREGISTERED SECURITIES
Since February 1, 1994, the Registrant has sold and issued the following
unregistered securities (numbers do not reflect the proposed two-for-three
reverse split of the Company's capital stock):
(a) In February, March and June, 1994 the Registrant issued (i)
2,129,667 shares of Series A Convertible Preferred Stock to a total of 28
accredited investors at a price per share of $1.50, for an aggregate
consideration of $3,194,501 and (ii) 210,000 shares of Series A Convertible
Preferred Stock in exchange for cancellation of indebtedness in the amount
of $315,000. The Registrant relied on the exemption provided by Rule 506
under Regulation D and Section 4(2) of the Act.
(b) Between April 1995 and August 1997, the Registrant issued to a
total of 33 accredited investors (i) 3,740,600 shares of Series B
Convertible Preferred Stock and warrants for the purchase of 60,000 shares
of Series B Convertible Preferred Stock, at an exercise price of $1.50 per
share, in exchange for cancellation of indebtedness in the amount of
$600,000. The Registrant relied on the exemption provided by Rule 506 under
Regulation D and Section 4(2) of the Act.
II-1
<PAGE> 88
(c) In December 1996, the Registrant issued to accredited investors
(i) 4,225,000 shares of Series C Convertible Preferred Stock at a price per
share of $4.00, for an aggregate consideration of $26,214,392 and (ii)
505,161 shares of Series C Convertible Preferred Stock in exchange for
cancellation of indebtedness in the amount of $2,020,644. In January 1997,
the Registrant issued to accredited investors 1,823,437 shares of Series C
Convertible Preferred Stock a price per share of $4.00, for an aggregate
consideration of $7,293,748. The Registrant relied on the exemption
provided by Rule 506 under Regulation D and Section 4(2) of the Act.
(d) In May and September 1997, the Registrant issued 1,050,000 shares
of Series D Convertible Preferred Stock to a total of three accredited
investors at a price per share of $6.00, for an aggregate consideration of
$6,300,000. The Registrant relied on the exemption provided by Rule 506
under Regulation D and Section 4(2) of the Act.
(e) In January 1998, the Registrant issued an aggregate of 200,000
shares of Series D Preferred Stock to the shareholders of Nanotronics, Inc.
("Nanotronics") in exchange for all of the outstanding shares of
Nanotronics. The Registrant relied on the exemption provided by Rule 506
under Regulation D and Section 4(2) of the Act.
(f) On various dates between December 1994 and February 1998, the
Registrant issued 3,555,739 shares of its Common Stock to approximately 90
employees and directors pursuant to the exercise of options granted under
the 1993 Stock Plan, the 1995 Stock Option/Issuance Plan and the 1997 Stock
Incentive Plan. The exercise prices per share ranged from $.005 to $.60,
for an aggregate consideration of $1,319,890. The Registrant relied on the
exemption provided by Rule 701 under the Act.
The recipients of the above-described securities represented their
intention to acquire the securities for investment only and not with a view to
distribution thereof. Appropriate legends were affixed to the stock certificates
and warrants issued in such transactions. All recipients had adequate access,
through employment or other relationships, to information about the Registrant.
ITEM 16. EXHIBITS AND FINANCIAL STATEMENT SCHEDULES
(b) EXHIBITS
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION OF DOCUMENT
- -------- -----------------------
<C> <S>
1.1 Form of Underwriting Agreement.
2.1* Agreement and Plan of Merger among the Registrant,
Nanotronics, Inc. ("Nanotronics") and the shareholders of
Nanotronics, dated as of December 18, 1997.
3.(i)1 Restated Certificate of Incorporation.
3.(i)2 Certificate of Amendment of Restated Certificate of
Incorporation, as filed with the Delaware Secretary of State
on April 6, 1998.
3.(i)3* Form of Restated Certificate of Incorporation, to be filed
upon the closing of the offering to which this Registration
Statement relates.
3.(ii)1* Bylaws of the Registrant.
3.(ii)2* Form of Amended and Restated Bylaws of the Registrant, to be
effective upon the closing of the offering to which this
Registration Statement relates.
4.1* Form of Common Stock Certificate.
5.1 Legal opinion of Pillsbury Madison & Sutro LLP.
10.1* Nanophore, Inc. 1993 Stock Option Plan.
10.2* Nanogen, Inc. 1995 Stock Option/Stock Issuance Plan.
10.3 1997 Stock Incentive Plan of Nanogen, Inc. ("1997 Plan").
10.4* Form of Incentive Stock Option Agreement under the 1997
Plan.
10.5* Form of Nonqualified Stock Option Agreement under the 1997
Plan.
10.6 Nanogen, Inc. Employee Stock Purchase Plan.
</TABLE>
II-2
<PAGE> 89
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION OF DOCUMENT
- -------- -----------------------
<C> <S>
10.7* Form of Indemnification Agreement between the Registrant and
its directors and executive officers.
10.8*(+) Agreement between the Registrant and Elan Corporation, plc
dated December 19, 1997.
10.9*(+) Agreement between the Registrant and Hoechst AG, dated
December 4, 1997.
10.10*(+) Agreement between the Registrant and Syntro Corporation,
dated of November 24, 1997.
10.11*(+) Master Agreement between the Registrant and Becton,
Dickinson and Company, dated as of October 1, 1997, with
related attachments.
10.12(+) Exclusive Option Agreement between the Registrant and
Billups-Rothenberg, Inc., dated as of September 12, 1997.
10.13*(+) Sponsored Research Agreement between the Registrant and
Prolinx, Inc, dated as of December 18, 1996.
10.14*(+) Collaborative Research Agreement between the Registrant and
The University of Texas Southwestern Medical Center at
Dallas, dated as of August 1, 1995.
10.15*(+) License Agreement between the Registrant and The Salk
Institute for Biological Studies, dated as of April 1, 1993.
10.16* Series D Preferred Stock Purchase Agreement between the
Registrant and Becton, Dickinson and Company, dated as of
May 5, 1997.
10.17* Form of Series B Preferred Stock Purchase Warrant, between
the Registrant and certain purchasers of its Series B
Preferred Stock, dated April 11, 1995.
10.18 Amended and Restated Investors' Rights Agreement between the
Registrant and certain securityholders set forth therein,
dated as of May 5, 1997, as amended.
10.19* Master Lease Agreement between the Registrant and Mellon US
Leasing, dated September 11, 1997.
10.20* Lease Agreement between the Registrant and LMP Properties,
Ltd., dated June 29, 1994.
10.21* Lease Agreement between the Registrant and Lease Management
Services, Inc., dated April 26, 1994, as amended on December
13, 1994 and June 13, 1996.
10.22* Form of Nanogen, Inc. Restricted Stock Issuance Agreement
between the Registrant and certain of its directors and
executive officers, dated as of November 7, 1997.
10.23* Form of Promissory Note between the Registrant and certain
of its executive officers, dated August 22, 1996.
10.24* Form of Promissory Note between the Registrant and certain
of its executive officers, dated June 30, 1995.
10.25* Form of Common Stock Purchase Agreement.
10.26* Forms of Performance Stock Option Agreement.
10.27* Agreement between the Registrant and Tina S. Nova, Ph.D.,
dated January 5, 1994.
10.28* Agreement between the Registrant and W. J. Kitchen, dated
October 28, 1997.
10.29* Agreement between the Registrant and James P. O'Connell,
Ph.D., dated November 15, 1994.
10.30* Agreement between the Registrant and Harry J. Leonhardt,
dated May 24, 1996.
10.31* Agreement between the Registrant and Kieran T. Gallahue,
dated December 18, 1997.
10.32* Secured Promissory Note and Deed of Trust, between the
Registrant and W.J. Kitchen, dated March 16, 1998.
10.33* Series D Preferred Stock Purchase Warrant between the
Registrant and Dominion Fund II, dated January 26, 1998.
10.34(+) License Agreement between the Registrant and
Billups-Rothenberg, Inc., dated as of March 18, 1998.
</TABLE>
II-3
<PAGE> 90
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION OF DOCUMENT
- -------- -----------------------
<C> <S>
11.1 Statement of computation of net loss per share.
23.1 Consent of Ernst & Young LLP, independent auditors.
23.2 Consent of Pillsbury Madison & Sutro LLP (included in
Exhibit 5.1).
23.3 Consent of Lyon & Lyon LLP.
24.1* Power of Attorney.
27.1 Financial Data Schedule.
</TABLE>
- ---------------
* Previously filed.
+ Certain portions of this exhibit have been omitted pursuant to a request for
confidential treatment.
(b) FINANCIAL STATEMENT SCHEDULES
All schedules have been omitted because they are not applicable or not
required or because the information is included elsewhere in the Financial
Statements or the notes thereto.
ITEM 17. UNDERTAKINGS
Insofar as indemnification for liabilities arising under the Securities Act
of 1933, as amended (the "Act"), may be permitted to directors, officers and
controlling persons of the Registrant pursuant to the foregoing provisions, or
otherwise, the Registrant has been advised that in the opinion of the Securities
and Exchange Commission such indemnification is against public policy as
expressed in the Act and is, therefore, unenforceable. In the event that a claim
for indemnification against such liabilities (other than the payment by the
Registrant of expenses incurred or paid by a director, officer or controlling
person of the Registrant in the successful defense of any action, suit or
proceeding) is asserted by such director, officer or controlling person in
connection with the securities being registered, the Registrant will, unless in
the opinion of its counsel the matter has been settled by controlling precedent,
submit to a court of appropriate jurisdiction the question whether such
indemnification by it is against public policy as expressed in the Act and will
be governed by the final adjudication of such issue.
The undersigned Registrant hereby undertakes that:
(1) For purposes of determining any liability under the 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 the Registrant pursuant to Rule 424(b)(1) or (4) or
497(h) under the Act shall 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 Act, each
post-effective amendment that contains a form of prospectus shall be deemed
to be a new registration statement relating to the securities offered
therein, and the offering of such securities at that time shall be deemed
to be the initial bona fide offering thereof.
(3) It will provide to the underwriters at the closing(s) specified in
the underwriting agreement certificates in such denominations and
registered in such names as required by the underwriters to permit prompt
delivery to each purchaser.
II-4
<PAGE> 91
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933, the Registrant
has duly caused this Amendment to Registration Statement to be signed on its
behalf by the undersigned, thereunto duly authorized, in the City of San Diego,
State of California, on the 9th day of April, 1998.
NANOGEN, INC.
By: *
------------------------------------
Howard C. Birndorf
Chairman of the Board,
Chief Executive Officer
and Chief Financial Officer
Pursuant to the requirements of the Securities Act of 1933, this Amendment
to Registration Statement has been signed below by the following persons in the
capacities and on the dates indicated.
<TABLE>
<CAPTION>
NAME TITLE DATE
---- ----- ----
<S> <C> <C>
* Chairman of the Board, Chief April 9, 1998
- ----------------------------------- Executive Officer and Chief
Howard C. Birndorf Financial Officer (Principal
Executive Officer and Principal
Financial Officer)
/s/ DANA A. KRZYSTON Controller (Principal Accounting April 9, 1998
- ----------------------------------- Officer)
Dana A. Krzyston
* President and Chief Operating April 9, 1998
- ----------------------------------- Officer, Director
Tina S. Nova, Ph.D.
* Director April 9, 1998
- -----------------------------------
Brook H. Byers
* Director April 9, 1998
- -----------------------------------
Robert E. Curry, Ph.D.
* Director April 9, 1998
- -----------------------------------
Cam L. Garner
* Director April 9, 1998
- -----------------------------------
David Ludvigson
* Director April 9, 1998
- -----------------------------------
Thomas G. Lynch
* Director April 9, 1998
- -----------------------------------
Andrew E. Senyei, M.D.
* /s/ HARRY J. LEONHARDT
- -----------------------------------
Attorney-In-Fact
</TABLE>
II-5
<PAGE> 92
EXHIBIT INDEX
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION OF DOCUMENT
- -------- -----------------------
<C> <S>
1.1 Form of Underwriting Agreement.
2.1* Agreement and Plan of Merger among the Registrant,
Nanotronics, Inc. ("Nanotronics") and the shareholders of
Nanotronics, dated as of December 18, 1997.
3.(i)1 Restated Certificate of Incorporation.
3.(i)2 Certificate of Amendment of Restated Certificate of
Incorporation, as filed with the Delaware Secretary of State
on April 6, 1998.
3.(i)3* Form of Restated Certificate of Incorporation, to be filed
upon the closing of the offering to which this Registration
Statement relates.
3.(ii)1* Bylaws of the Registrant.
3.(ii)2* Form of Amended and Restated Bylaws of the Registrant, to be
effective upon the closing of the offering to which this
Registration Statement relates.
4.1* Form of Common Stock Certificate.
5.1 Legal opinion of Pillsbury Madison & Sutro LLP.
10.1* Nanophore, Inc. 1993 Stock Option Plan.
10.2* Nanogen, Inc. 1995 Stock Option/Stock Issuance Plan.
10.3 1997 Stock Incentive Plan of Nanogen, Inc. ("1997 Plan").
10.4* Form of Incentive Stock Option Agreement under the 1997
Plan.
10.5* Form of Nonqualified Stock Option Agreement under the 1997
Plan.
10.6 Nanogen, Inc. Employee Stock Purchase Plan.
10.7* Form of Indemnification Agreement between the Registrant and
its directors and executive officers.
10.8*(+) Agreement between the Registrant and Elan Corporation, plc
dated December 19, 1997.
10.9*(+) Agreement between the Registrant and Hoechst AG, dated
December 4, 1997.
10.10*(+) Agreement between the Registrant and Syntro Corporation,
dated of November 24, 1997.
10.11*(+) Master Agreement between the Registrant and Becton,
Dickinson and Company, dated as of October 1, 1997, with
related attachments.
10.12(+) Exclusive Option Agreement between the Registrant and
Billups-Rothenberg, Inc., dated as of September 12, 1997.
10.13*(+) Sponsored Research Agreement between the Registrant and
Prolinx, Inc, dated as of December 18, 1996.
10.14*(+) Collaborative Research Agreement between the Registrant and
The University of Texas Southwestern Medical Center at
Dallas, dated as of August 1, 1995.
10.15*(+) License Agreement between the Registrant and The Salk
Institute for Biological Studies, dated as of April 1, 1993.
10.16* Series D Preferred Stock Purchase Agreement between the
Registrant and Becton, Dickinson and Company, dated as of
May 5, 1997.
10.17* Form of Series B Preferred Stock Purchase Warrant, between
the Registrant and certain purchasers of its Series B
Preferred Stock, dated April 11, 1995.
10.18 Amended and Restated Investors' Rights Agreement between the
Registrant and certain securityholders set forth therein,
dated as of May 5, 1997, as amended.
10.19* Master Lease Agreement between the Registrant and Mellon US
Leasing, dated September 11, 1997.
10.20* Lease Agreement between the Registrant and LMP Properties,
Ltd., dated June 29, 1994.
</TABLE>
<PAGE> 93
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION OF DOCUMENT
- -------- -----------------------
<C> <S>
10.21* Lease Agreement between the Registrant and Lease Management
Services, Inc., dated April 26, 1994, as amended on December
13, 1994 and June 13, 1996.
10.22* Form of Nanogen, Inc. Restricted Stock Issuance Agreement
between the Registrant and certain of its directors and
executive officers, dated as of November 7, 1997.
10.23* Form of Promissory Note between the Registrant and certain
of its executive officers, dated August 22, 1996.
10.24* Form of Promissory Note between the Registrant and certain
of its executive officers, dated June 30, 1995.
10.25* Form of Common Stock Purchase Agreement.
10.26* Forms of Performance Stock Option Agreement.
10.27* Agreement between the Registrant and Tina S. Nova, Ph.D.,
dated January 5, 1994.
10.28* Agreement between the Registrant and W. J. Kitchen, dated
October 28, 1997.
10.29* Agreement between the Registrant and James P. O'Connell,
Ph.D., dated November 15, 1994.
10.30* Agreement between the Registrant and Harry J. Leonhardt,
dated May 24, 1996.
10.31* Agreement between the Registrant and Kieran T. Gallahue,
dated December 18, 1997.
10.32* Secured Promissory Note and Deed of Trust, between the
Registrant and W.J. Kitchen, dated March 16, 1998.
10.33* Series D Preferred Stock Purchase Warrant between the
Registrant and Dominion Fund II, dated January 26, 1998.
10.34(+) License Agreement between the Registrant and
Billups-Rothenberg, Inc., dated as of March 18, 1998.
11.1 Statement of computation of net loss per share.
23.1 Consent of Ernst & Young LLP, independent auditors.
23.2 Consent of Pillsbury Madison & Sutro LLP (included in
Exhibit 5.1).
23.3 Consent of Lyon & Lyon LLP.
24.1* Power of Attorney.
27.1 Financial Data Schedule.
</TABLE>
- ---------------
* Previously filed.
+ Certain portions of this exhibit have been omitted pursuant to a request for
confidential treatment.
<PAGE> 1
EXHIBIT 1.1
3,600,000 Shares
NANOGEN, INC.
Common Stock
$0.001 par value
UNDERWRITING AGREEMENT
April __, 1998
<PAGE> 2
April __, 1998
Morgan Stanley & Co. Incorporated
Lehman Brothers Inc.
SBC Warburg Dillon Read Inc.
as Representatives of the several Underwriters
named in Schedule I hereto
c/o Morgan Stanley & Co. Incorporated
1585 Broadway
New York, New York 10036
Ladies and Gentlemen:
Nanogen, Inc., a Delaware corporation (the "Company"), proposes to issue
and sell to the several Underwriters named in Schedule I hereto (the
"Underwriters"), an aggregate of 3,600,000 shares of its common stock ($0.001
per share par value) (the "Firm Shares").
The Company also proposes to issue and sell to the several Underwriters
not more than an additional 540,000 shares of its common stock ($0.001 per share
par value) (the "Additional Shares"), if and to the extent that you, as managers
of the offering, shall have determined to exercise, on behalf of the
Underwriters, the right to purchase such shares of common stock granted to the
Underwriters in Article II hereof. The Firm Shares and the Additional Shares are
hereinafter collectively referred to as the "Shares." The shares of common
stock, ($0.001 per share par value), of the Company to be outstanding after
giving effect to the sales contemplated hereby are hereinafter referred to as
the "Common Stock."
The Company has filed with the Securities and Exchange Commission (the
"Commission") a registration statement, including a prospectus, relating to the
Shares. The registration statement as amended at the time it becomes effective,
including the information (if any) deemed to be part of the registration
statement at the time of effectiveness pursuant to Rule 430A under the
Securities Act of 1933, as amended (the "Securities Act"), is hereinafter
referred to as the "Registration Statement;" the prospectus in the form first
used to confirm sales of Shares is hereinafter referred to as the "Prospectus."
If the Company files a registration statement to register a portion of the
Shares and relies on Rule 462(b) under the Securities Act for such registration
statement to become effective upon filing with the Commission (the "Rule 462
Registration Statement"), then any reference to the "Registration Statement"
shall be deemed to refer to both the registration statement referred to above
(Commission File No. 333-42791) and the Rule 462 Registration Statement, in each
case as amended from time to time.
<PAGE> 3
As part of the offering contemplated by this Agreement, Morgan Stanley &
Co. Incorporated ("Morgan Stanley") has agreed to reserve out of the Shares set
forth opposite its name on Schedule I to this Agreement, up to 180,000 shares,
for sale to the Company's employees, officers, and directors and other parties
associated with the Company (collectively, "Participants"), as set forth in the
Prospectus under the heading "Underwriting" (the "Directed Share Program"). The
Shares to be sold by Morgan Stanley pursuant to the Directed Share Program (the
"Directed Shares") will be sold by Morgan Stanley pursuant to this Agreement at
the public offering price. Any Directed Shares not orally confirmed for purchase
by any Participants by the end of the first business day after the date on which
this Agreement is executed will be offered to the public by Morgan Stanley as
set forth in the Prospectus.
I.
The Company represents and warrants to each of the Underwriters that:
(a) The Registration Statement has become effective, no stop order
suspending the effectiveness of the Registration Statement is in effect, and no
proceedings for such purpose are pending before or threatened by the Commission.
(b) (i) Each part of the Registration Statement, when such part became
effective, did not contain and each such part, as amended or supplemented, if
applicable, will not contain any untrue statement of a material fact or omit to
state a material fact required to be stated therein or necessary to make the
statements therein not misleading, (ii) the Registration Statement and the
Prospectus comply and, as amended or supplemented, if applicable, will comply in
all material respects with the Securities Act and the applicable rules and
regulations of the Commission thereunder and (iii) the Prospectus does not
contain and, as amended or supplemented, if applicable, will not contain any
untrue statement of a material fact or omit to state a material fact necessary
in order to make the statements therein, in the light of the circumstances under
which they were made, not misleading, except that the representations and
warranties set forth in this paragraph (b) do not apply to statements or
omissions in the Registration Statement or the Prospectus based upon information
relating to any Underwriter furnished to the Company in writing by such
Underwriter through you expressly for use therein.
(c) The Company has been duly incorporated, is validly existing as a
corporation in good standing under the laws of the State of Delaware, has the
corporate power and authority to own its property and to conduct its business as
described in the Prospectus and is duly qualified to transact business and is in
good standing in each jurisdiction in which the conduct of its business or its
ownership or leasing of property requires such qualification, except to the
extent that the failure to be so qualified or be in good standing would not have
a material adverse effect on the Company.
(d) The Company does not own or control, directly or indirectly, any
interest in any other corporation, association, or other business entity, other
than Nanotronics, Inc., a California corporation ("Nanotronics"), NanoVenture
LLC, a Delaware limited liability company, The
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<PAGE> 4
Nanogen/Becton Dickinson Partnership, a Delaware general partnership, and
instruments or interests in which the Company invests its excess cash.
(e) The Company has good and marketable title in fee simple to all real
property and good and marketable title to all personal property owned by it
which is material to the business of the Company in each case free and clear of
all liens, encumbrances and defects except such as are described in the
Prospectus or such as do not materially affect the value of such property and do
not interfere with the use made and proposed to be made of such property by the
Company; and any real property and buildings held under lease by the Company are
held by it under valid, subsisting and enforceable leases with such exceptions
as are not material and do not interfere with the use made and proposed to be
made of such property and buildings by the Company except as described in or
contemplated by the Prospectus.
(f) The authorized capital stock of the Company conforms as to legal
matters to the description thereof contained in the Prospectus.
(g) The shares of Common Stock outstanding prior to the issuance of the
Shares to be sold by the Company have been duly authorized and are validly
issued, fully paid and non-assessable. Except as set forth in the Prospectus,
the Company does not have outstanding any options to purchase, or any preemptive
rights or other rights to subscribe for or to purchase, any securities or
obligations convertible into, or any contracts or commitments to issue or sell,
shares of its capital stock or any such options, rights, convertible securities
or obligations, other than non-material amounts of options granted pursuant to
the Company's Stock Plans described in the Prospectus. All outstanding shares of
capital stock and options and other rights to acquire capital stock have been
issued in compliance with the registration and qualification provisions of all
applicable securities laws and were not issued in violation of any preemptive
rights, rights of first refusal or other similar rights.
(h) The Shares have been duly authorized and, when issued and delivered
in accordance with the terms of this Agreement, will be validly issued, fully
paid and non-assessable, and the issuance of such Shares will not be subject to
any preemptive rights, rights of first refusal or similar rights.
(i) This Agreement has been duly authorized, executed and delivered by
the Company.
(j) The execution and delivery by the Company of, and the performance by
the Company of its obligations under, this Agreement will not contravene any
provision of applicable law or the certificate of incorporation or bylaws of the
Company, or any agreement or other instrument binding upon the Company that is
material to the Company, taken as a whole, or any judgment, order or decree of
any governmental body, agency or court having jurisdiction over the Company, and
no consent, approval, authorization or order of or qualification with any
governmental body or agency is required for the performance by the Company of
its obligations under this Agreement, except such as may be required by the
securities or Blue Sky laws of the various states in connection with the offer
and sale of the Shares.
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<PAGE> 5
(k) There has not occurred any material adverse change, or any
development involving a prospective material adverse change, in the condition,
financial or otherwise, or in the earnings, business or operations of the
Company from that set forth in the Prospectus.
(l) Subsequent to the respective dates as of which information is given
in the Registration Statement and the Prospectus, (i) the Company has not
incurred any material liability or obligation, direct or contingent, nor entered
into any material transaction not in the ordinary course of business; (ii) the
Company has not purchased any of its outstanding capital stock, nor declared,
paid or otherwise made any dividend or distribution of any kind on its capital
stock other than ordinary and customary dividends; and (iii) there has not been
any material change in the capital stock, short-term debt or long-term debt of
the Company, except in each case as described in or contemplated by the
Prospectus.
(m) There are no legal or governmental proceedings pending or, to the
Company's knowledge, threatened to which the Company is a party or to which any
of the properties of the Company is subject that are required to be described in
the Registration Statement or the Prospectus and are not so described or any
statutes, regulations, contracts or other documents that are required to be
described in the Registration Statement or the Prospectus or to be filed as
exhibits to the Registration Statement that are not described or filed as
required.
(n) The Company has all necessary consents, authorizations, approvals,
orders, certificates and permits of and from, and has made all declarations and
filings with, all federal, state, local and other governmental authorities, all
self-regulatory organizations and all courts and other tribunals, to own, lease,
license and use its properties and assets and to conduct its business in the
manner described in the Prospectus, except to the extent that the failure to
obtain or file would not have a material adverse effect on the Company.
(o) Each preliminary prospectus filed as part of the registration
statement as originally filed or as part of any amendment thereto, or filed
pursuant to Rule 424 or Rule 462 under the Securities Act, complied when so
filed in all material respects with the Securities Act and the rules and
regulations of the Commission thereunder.
(p) The Company is not and, after giving effect to the offering and sale
of the Shares and the application of the proceeds thereof as described in the
Prospectus, will not be an "investment company" or an entity "controlled" by an
"investment company" as such terms are defined in the Investment Company Act of
1940, as amended.
(q) There is no owner of any securities of the Company who has any
rights, not effectively satisfied or waived, to require registration of any
shares of capital stock of the Company in connection with the filing of the
Registration Statement or the sale of any shares thereunder.
(r) The Company is insured by insurers of recognized financial
responsibility against such losses and risks and in such amounts as are prudent
and customary in the businesses in which it is engaged; the Company has not been
refused any insurance coverage sought or applied for; and the
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<PAGE> 6
Company has no reason to believe that it will not be able to renew its existing
insurance coverage as and when such coverage expires or to obtain similar
coverage from similar insurers as may be necessary to continue its business at a
cost that would not materially and adversely affect the condition, financial or
otherwise, or the earnings, business or operations of the Company, except as
described in or contemplated by the Prospectus.
(s) The Company (i) is in compliance with any and all applicable
foreign, federal, state and local laws and regulations relating to the
protection of human health and safety, the environment or hazardous or toxic
substances or wastes, pollutants or contaminants (collectively, "Environmental
Laws"), (ii) has received all permits, licenses or other approvals required of
them under applicable Environmental Laws to conduct their respective businesses
and (iii) is in compliance with all terms and conditions of any such permit,
license or approval, except where such noncompliance with Environmental Laws,
failure to receive required permits, licenses or other approvals or failure to
comply with the terms and conditions of such permits, licenses or approvals
would not, singly or in the aggregate, have a material adverse effect on the
Company.
(t) In the ordinary course of its business, the Company conducts a
periodic review of the effect of Environmental Laws on the business, operations
and properties of the Company, in the course of which it identifies and
evaluates associated costs and liabilities (including, without limitation, any
capital or operating expenditures required for clean-up, closure of properties
or compliance with Environmental Laws or any permit, license or approval, any
related constraints on operating activities and any potential liabilities to
third parties). On the basis of such review, the Company has reasonably
concluded that such associated costs and liabilities would not, singly or in the
aggregate, have a material adverse effect on the Company.
(u) The Company owns or possesses adequate licenses or other rights to
use all patents, copyrights, trademarks, service marks, trade names, technology
and know-how necessary (in any material respect) to conduct its business in the
manner described in the Prospectus, the Company is not obligated to pay any
material royalty, grant a material license, or provide other material
consideration to any third party in connection with its patents, copyrights,
trademarks, service marks, trade names, or technology other than as disclosed in
the Prospectus, and, except as disclosed in the Prospectus, the Company has not
received any notice of infringement or conflict with (and the Company knows of
any infringement or conflict with) asserted rights of others with respect to any
patents, copyrights, trademarks, service marks, trade names, technology or
know-how which could result in any material adverse effect upon the Company and,
except as disclosed in the Prospectus, the discoveries, inventions, products or
processes of the Company referred to in the Prospectus do not, to the best
knowledge of the Company, infringe or conflict with any right or valid and
enforceable patent of any third party, or any discovery, invention, product or
process which is the subject of a patent application filed by any third party,
known to the Company which could have a material adverse effect on the Company.
Except as described in the Prospectus or referenced in the opinion provided
pursuant to paragraph (e) of Section IV hereof, no third party, including any
academic or governmental organization, possesses rights to the Company's
patents, copyrights, trademarks, service marks, trade names, or technology
which, if exercised, could enable such third party to develop products
competitive to those of the Company which could have a material adverse
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<PAGE> 7
effect on the Company or could have a material adverse effect on the ability of
the Company to conduct its business in the manner described in the Prospectus.
(v) The Company possesses all consents, approvals, orders, certificates,
authorizations and permits issued by and has made all declarations and filings
with, all appropriate federal, state or foreign governmental or self-regulatory
authorities and all courts and other tribunals necessary to conduct its business
and to own, lease, license and use its properties in the manner described in the
Prospectus, and the Company has not received any notice of proceedings related
to the revocation or modification of any such certificate, authorization or
permit which, singly or in the aggregate, if the subject of any unfavorable
decision, ruling or finding, or failure to obtain or file would result in a
material adverse change in the condition, financial or otherwise, or in the
earnings, business or operations of the Company, except as described in or
contemplated by the Prospectus.
(w) The Company maintains a system of internal accounting controls
sufficient to provide reasonable assurance that (i) transactions are executed in
accordance with management's general or specific authorizations; (ii)
transactions are recorded as necessary to permit preparation of financial
statements in conformity with generally accepted accounting principles and to
maintain asset accountability; (iii) access to assets is permitted only in
accordance with management's general or specific authorization; and (iv) the
recorded accountability for assets is compared with the existing assets at
reasonable intervals and appropriate action is taken with respect to any
differences.
(x) No material labor dispute with the employees of the Company exists,
except as described in or contemplated by the Prospectus, or, to the best
knowledge of the Company, is imminent; and the Company is not aware of any
existing, threatened or imminent labor disturbance by the employees of any of
its principal suppliers, manufacturers or contractors that could result in any
material adverse change in the condition, financial or otherwise, or in the
earnings, business or operations of the Company.
(y) With the exception of approximately 71,400 shares outstanding as of
the Effective Date, all outstanding shares of Common Stock, and all securities
convertible into or exercisable or exchangeable for Common Stock, including but
not limited to outstanding options issued under the Company's 1993 Stock Plan
and 1995 Stock Option/Stock Issuance Plan, are subject to valid, binding and
enforceable agreements (collectively, the "Lock-up Agreements") that restrict
the holders thereof from (1) offering, pledging, selling, contracting to sell,
selling any option or contract to purchase, purchasing any option or contract to
sell, granting any option, right, or warrant for the purchase of, or otherwise
transferring or disposing of, directly or indirectly, any shares of Common Stock
or any securities convertible into or exercisable or exchangeable for Common
Stock, or (2) entering into any swap or similar agreement that transfers, in
whole or in part, the economic risk of ownership of Common Stock, whether any
such transaction described in clause (1) or (2) above is to be settled by
delivery of Common Stock or such other securities, in cash or otherwise,
otherwise than (i) as a bona fide gift or gifts, (ii) by will or intestacy to
the holder's immediate family or to a trust the beneficiaries of which are
exclusively the holder and/or a member or members of the holder's immediate
family, (iii) as a distribution to limited partners or shareholders of the
holder, or (iv) with the prior written consent of Morgan Stanley; proved that a
gift, transfer or distribution pursuant to
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<PAGE> 8
clause (i), (ii) or (iii) above shall be conditioned upon such donee, transferee
or distributee executing and delivering a copy of a Lock-up Agreement to Morgan
Stanley and further that such holders will not make any demand for or exercise
any right with respect to, the registration of any shares of Common Stock or any
security convertible into or exercisable or exchangeable for Common Stock prior
to the expiration of 180 days after the date of the Prospectus.
(z) As of the date the Registration Statement becomes effective, the
Common Stock will be authorized for quotation on the Nasdaq National Market upon
official notice of issuance.
(aa) The Company has complied with all provisions of Section 517.075,
Florida Statutes (Chapter 92-198, Laws of Florida), relating to issuers doing
business with Cuba.
(bb) The execution and delivery of the Agreement and Plan of Merger
dated as of November 10, 1997 (the "Merger Agreement") between Nanogen, Inc., a
California corporation (the "California Corporation"), and the Company,
effecting the reincorporation of the California Corporation under the laws of
the State of Delaware, was duly authorized by all necessary corporate action on
the part of each of the California Corporation and the Company. Each of the
California Corporation and the Company had all corporate power and authority to
execute and deliver the Merger Agreement, to file the Merger Agreement with the
Secretary of State of California and the Secretary of State of Delaware and to
consummate the reincorporation contemplated by the Merger Agreement, and the
Merger Agreement at the time of execution and filing constituted a valid and
binding obligation of each of the California Corporation and the Company.
(cc) The Company has not offered, or caused the Underwriters to offer,
Shares to any person pursuant to the Directed Share Program with the specific
intent to unlawfully influence (i) a customer or supplier of the Company to
alter the customer's or supplier's level or type of business with the Company,
or (ii) a trade journalist or publication to write or publish favorable
information about the Company or its products.
(dd) The Agreement and Plan of Merger among the Company, Nanotronics and
Nanogen Merger Subsidiary, Inc. ("Acquisition Subsidiary"), dated as of December
18, 1997 (the "Plan of Merger"), was duly authorized by all necessary corporate
action on the part of each of the Company and the Acquisition Subsidiary. Each
of the Company and Acquisition Subsidiary had the corporate power and authority
to execute and deliver the Plan of Merger and to consummate the transactions
contemplated thereby, and the Plan of Merger at the time of filing with the
California Secretary of State constituted a valid and binding obligation on each
of the Company, Nanotronics, and Acquisition Subsidiary.
Furthermore, the Company represents and warrants to Morgan Stanley that
(I) the Registration Statement, the Prospectus and any preliminary prospectus
comply, and any further amendments or supplements thereto will comply, with any
applicable laws or regulations of foreign jurisdictions in which the Prospectus
or any preliminary prospectus, as amended or supplemented, if applicable, are
distributed in connection with the Directed Share Program, and that (ii) no
authorization, approval, consent, license, order, registration or qualification
of or with any
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<PAGE> 9
government, governmental instrumentality or court, other than such as have been
obtained, is necessary under the securities laws and regulations of foreign
jurisdictions in which the Directed Shares are offered outside the United
States.
II.
The Company hereby agrees to sell to the several Underwriters, and each
Underwriter, upon the basis of the representations and warranties herein
contained, but subject to the conditions hereinafter stated, agrees, severally
and not jointly, to purchase from the Company the respective number of Firm
Shares (subject to such adjustments to eliminate fractional shares as you may
determine) set forth in Schedule I hereto opposite the name of such Underwriter
at $_____ a share (the purchase price).
On the basis of the representations and warranties contained in this
Agreement, and subject to its terms and conditions, the Company hereby agrees to
issue and sell to the Underwriters the Additional Shares, and the Underwriters
shall have a one-time right to purchase, severally and not jointly, up to
540,000 Additional Shares at the purchase price. Additional Shares may be
purchased as provided in Article IV hereof solely for the purpose of covering
over-allotments made in connection with the offering of the Firm Shares. If any
Additional Shares are to be purchased, each Underwriter agrees, severally and
not jointly, to purchase the number of Additional Shares (subject to such
adjustments to eliminate fractional shares as you may determine) that bears the
same proportion to the total number of Additional Shares to be purchased as the
number of Firm Shares set forth in Schedule I hereto opposite the name of such
Underwriter bears to the total number of Firm Shares.
The Company hereby agrees that, without the prior written consent of
Morgan Stanley on behalf of the Underwriters, it will not, during the period
ending 180 days after the date of the Prospectus, (1) 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, 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 (2) enter into any swap or similar arrangement that transfers,
in whole or in part, the economic consequences of ownership of the Common Stock,
whether any such transaction described in clause (1) or (2) above is to be
settled by delivery of Common Stock or such other securities, in cash or
otherwise, other than (i) the Shares to be sold hereunder and as otherwise
disclosed in the Prospectus, (ii) any shares of Common Stock sold by the Company
upon the exercise of an option or warrant or other right to acquire shares of
the Company or the conversion of a security outstanding on the date hereof
described in the Prospectus, (iii) any options or other rights to purchase or
acquire any shares of Common Stock or any shares of Common Stock issuable upon
exercise of such options or other rights granted in connection with any
compensatory arrangement with a director, officer, employee, consultant or
advisor, so long as such person is otherwise subject to a Lock-Up Agreement, or
(iv) any shares of Common Stock or other right to acquire shares of the Company
issued pursuant to equipment or lease financing activities entered into in the
ordinary course of the Company's business, so long as each person or entity
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<PAGE> 10
acquiring shares of Common Stock or any securities convertible into or
exercisable or exchangeable for Common Stock is otherwise subject to a Lock-Up
Agreement.
III.
The Company is advised by you that the Underwriters propose to make a
public offering of the Shares as soon after the Registration Statement and this
Agreement have become effective as in your judgment is advisable. The Company is
further advised by you that the Shares are to be offered to the public initially
at $_____ a share (the public offering price) and to certain dealers selected by
you at a price that represents a concession not in excess of $_____ a share
under the public offering price, and that any Underwriter may allow, and such
dealers may reallow, a concession, not in excess of $_____ a share, to any
Underwriter or to certain other dealers.
IV.
Payment for the Firm Shares shall be made in Federal or other funds
immediately available in New York City against delivery of such Firm Shares for
the respective accounts of the several Underwriters, at 7:00 a.m., California
time, on April __, 1997, or at such other time on the same or such other date,
not later than April __, 1997, as shall be designated in writing by you. The
time and date of each such payment are hereinafter referred to as the Closing
Date.
Payment for any Additional Shares shall be made to the Company in
Federal or other funds immediately available in New York City against delivery
of such Additional Shares for the respective accounts of the several
Underwriters, at 7:00 a.m., California time, on such date (which may be the same
as the Closing Date but shall in no event be earlier than the Closing Date nor
later than ten business days after the giving of the notice hereinafter referred
to) as shall be designated in a written notice from you to the Company of your
determination, on behalf of the Underwriters, to purchase a number, specified in
said notice, of Additional Shares, or on such other date, in any event not later
than May __, 1997 as shall be designated in writing by you. The time and date of
such payment are hereinafter referred to as the "Option Closing Date". The
notice of the determination to exercise the option to purchase Additional Shares
and of the Option Closing Date may be given at any time within 30 days after the
date of this Agreement.
Certificates for the Firm Shares and Additional Shares shall be in
definitive form and registered in such names and in such denominations as you
shall request in writing not later than two full business days prior to the
Closing Date or the Option Closing Date, as the case may be. The certificates
evidencing the Firm Shares and Additional Shares shall be delivered to you on
the Closing Date or the Option Closing Date, as the case may be, for the
respective accounts of the several Underwriters, with any transfer taxes payable
in connection with the transfer of the Shares to the Underwriters duly paid,
against payment of the purchase price therefor.
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<PAGE> 11
V.
The obligations of the Company and the several obligations of the
Underwriters hereunder are subject to the condition that the Registration
Statement shall have become effective not later than the date hereof.
The several obligations of the Underwriters hereunder are subject to the
following further conditions:
(a) Subsequent to the execution and delivery of this Agreement and prior
to the Closing Date:
(i) there shall not have occurred any downgrading, nor
shall any notice have been given of any intended or potential downgrading or of
any review for a possible change that does not indicate the direction of the
possible change, in the rating accorded any of the Company's securities by any
"nationally recognized statistical rating organization," as such term is defined
for purposes of Rule 436(g)(2) under the Securities Act, and
(ii) there shall not have occurred any change, or any
development involving a prospective change, in the condition, financial or
otherwise, or in the earnings, business or operations, of the Company and its
subsidiaries, taken as a whole, from that set forth in the Registration
Statement that, in your judgment, is material and adverse and that makes it, in
your judgment, impracticable to market the Shares on the terms and in the manner
contemplated in the Prospectus.
(b) The Underwriters shall have received on the Closing Date a
certificate, dated the Closing Date and signed by the chief executive officer
and the chief financial officer of the Company, to the effect set forth in
clause (a)(i) above, and to the effect that the representations and warranties
of the Company contained in this Agreement are true and correct as of the
Closing Date and that the Company has complied with all of the agreements and
satisfied all of the conditions on its part to be performed or satisfied
hereunder on or before the Closing Date.
The officers signing and delivering such certificate may rely upon the
best of their knowledge as to proceedings threatened.
(c) You shall have received on the Closing Date an opinion of Pillsbury
Madison & Sutro LLP, counsel for the Company, dated the Closing Date, to the
effect that
(i) the Company has been duly incorporated, is validly
existing as a corporation in good standing under the laws of the State of
Delaware, has the corporate power and authority to own its property and to
conduct its business as described in the Prospectus and is duly qualified to
transact business and is in good standing in each jurisdiction in which the
conduct of its business or its ownership or leasing of property requires such
qualification, except to the extent that
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<PAGE> 12
the failure to be so qualified or be in good standing would not have a material
adverse effect on the Company;
(ii) the authorized capital stock of the Company conforms
as to legal matters to the description thereof contained in the Prospectus;
(iii) the shares of Common Stock outstanding prior to the
issuance of the Shares to be sold by the Company have been duly authorized and
are validly issued, non-assessable and to such counsel's knowledge, fully paid;
(iv) the Shares to be sold by the Company have been duly
authorized, and, when issued and delivered in accordance with the terms of this
Agreement, will be validly issued and non-assessable, and to such counsel's
knowledge, fully paid, and the issuance of such Shares will not be subject to
any preemptive rights, and to such counsel's knowledge, rights of first refusal
or similar rights;
(v) the Company has corporate power and authority to enter
into this Agreement and to issue, sell and deliver to the Underwriters the
Shares to be issued and sold by the Company. This Agreement has been duly
authorized, executed and delivered by the Company;
(vi) the execution and delivery by the Company of, and the
performance by the Company of its obligations under, this Agreement will not
contravene any provision of applicable law or the certificate of incorporation
or bylaws of the Company or, to such counsel's knowledge, any agreement or other
instrument binding upon the Company that is material to the Company, taken as a
whole, or, to such counsel's knowledge, any judgment, order or decree of any
governmental body, agency or court having jurisdiction over the Company, and no
consent, approval, authorization or order of or qualification with any
governmental body or agency is required for the performance by the Company of
its obligations under this Agreement, except such as may be required by the
securities or Blue Sky laws of the various states and jurisdictions in
connection with the offer and sale of the Shares;
(vii) the statements (1) in the Prospectus under the
captions "Risk Factors -- Shares Eligible for Future Sale," "Risk Factors --
Dependence on Collaborative Alliances; Reliance on Collaborators," "Business --
Collaborative Alliances," "Management," "Certain Transactions," "Description of
Capital Stock" and "Shares Eligible for Future Sale" and (2) in the Registration
Statement in Items 14 and 15, in each case insofar as such statements constitute
summaries of the legal matters, documents or proceedings referred to therein,
fairly present the information called for with respect to such legal matters,
documents and proceedings and fairly summarize the matters referred to therein;
(viii) after due inquiry, such counsel does not know of
any legal, regulatory or governmental proceeding pending or threatened to which
the Company or any of its subsidiaries is a party or to which any of the
properties of the Company is subject that is required to be described in the
Registration Statement or the Prospectus and is not so described or of any
contracts or other
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documents that are required to be described in the Registration Statement or the
Prospectus or to be filed as exhibits to the Registration Statement that are not
described or filed as required;
(ix) the Company is not an "investment company" as such
term is defined in the Investment Company Act of 1940, as amended;
(x) to the knowledge of such counsel, there is no legal or
beneficial owner of any securities of the Company who has any rights, not
effectively satisfied or waived, to require registration of any shares of
capital stock of the Company in connection with the filing of the Registration
Statement;
(xi) the execution and delivery of the Merger Agreement,
effecting the reincorporation of the California Corporation under the laws of
the State of Delaware, was duly authorized by all necessary corporate action on
the part of each of the California Corporation and the Company; and
(xii) each of the California Corporation and the Company
had all corporate power and authority to execute and deliver the Merger
Agreement, to file the Merger Agreement with the Secretary of State of
California and the Secretary of State of Delaware and to consummate the
reincorporation contemplated by the Merger Agreement, and the Merger Agreement
at the time of execution and filing constituted a valid and binding obligation
of each of the California Corporation and the Company.
(xiii) each of the Company and Acquisition Subsidiary had
all corporate power and authority to execute and deliver the Plan of Merger, and
to consummate the transactions contemplated by the Plan of Merger, and the Plan
of Merger at the time of execution constituted a valid and binding obligation of
each of the Company and Acquisition Subsidiary.
(xiv) to the knowledge of such counsel: (1) the
Registration Statement has become effective under the Securities Act, no stop
order proceedings with respect thereto have been instituted or are pending or
threatened under the Securities Act and nothing has come to such counsel's
attention to lead it to believe that such proceedings are contemplated; and (2)
any required filing of the Prospectus and any supplement thereto pursuant to
Rule 424(b) under the Securities Act has been made in the manner and within the
time period required by such Rule 424(b);
(xv) the Shares to be sold under this Agreement to the
Underwriters are duly authorized for quotation on the Nasdaq National Market;
and
(xvi) such counsel shall also state that (i) they believe
that the Registration Statement and the Prospectus (except for financial
statements and schedules and other financial data therein, as to which they need
express no belief) complied as to form in all material respects with the
requirements of the Act and the rules and regulations of the Commission
thereunder and (ii) they confirm that they have no reason to believe that
(except for financial statements and schedules and other financial data therein,
and except for the matters covered in the opinion provided pursuant to
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<PAGE> 14
paragraph (e) below, as to which they need express no belief) the Registration
Statement (and the prospectus included therein) as of its effective date,
contained any untrue statement of a material fact or omitted to state a material
fact required to be stated therein or necessary to make the statements therein
not misleading or that (except for financial statements and schedules and other
financial data therein, and except for the matters covered in the opinion
provided pursuant to paragraph (e) below, as to which they need express no
belief) the Prospectus, as of the date of the Prospectus and such date or dates
as such opinion is delivered, contains any untrue statement of a material fact
or omits to state a material fact necessary in order to make the statements
therein, in light of the circumstances under which they were made, not
misleading.
(d) You shall have received on the Closing Date an opinion of Wilson
Sonsini Goodrich & Rosati, Professional Corporation, counsel for the
Underwriters, dated the Closing Date, covering the matters referred to in
subparagraphs (v), the last sentence of subparagraph (vi), (viii) (but only as
to the statements in the Prospectus under "Description of Capital Stock"),
stating that such counsel has read the first four paragraphs and the sixth
paragraph of the portion of the Registration Statement and the Prospectus
entitled "Underwriters" (the "Underwriter Portion"), and (xvi) of paragraph (c)
above and to the effect that the statements in the Underwriter Portion, insofar
as such statements constitute a summary of this Agreement, fairly present the
information called for with respect to such Agreement.
With respect to subparagraph (xvi) of paragraph (c) above, Pillsbury
Madison & Sutro LLP and Wilson Sonsini Goodrich & Rosati, Professional
Corporation, may state that their belief is based upon their participation in
the preparation of the Registration Statement and Prospectus and any amendments
or supplements thereto and review and discussion of the contents thereof, but is
without independent check or verification except as specified.
(e) You shall have received on the Closing Date an opinion of Lyon &
Lyon, LLP, intellectual property counsel for the Company, dated the Closing
Date, to the effect that:
(i) such counsel represents the Company in certain matters
relating to intellectual property, including patents, specifically counsel has
served as principal outside patent counsel to the Company since at least June
1993 and has been the exclusive counsel regarding new patent application filings
and patent prosecution since March 1994;
(ii) such counsel is familiar with the technology used by
the Company in its business and the manner of its use as described in the
Company's patents and patent applications and invention disclosures provided to
counsel, and as further disclosed by the Company to counsel, and has read the
portions of the Registration Statement and the Prospectus entitled "Risk Factors
- --Uncertainty of Patent and Proprietary Technology Protection Potential
Inability to License Technology from Third Parties" and "Business -- Proprietary
Technology and Patents" (collectively, the "Intellectual Property Portion");
(iii) the Intellectual Property Portion contains accurate
descriptions of the Company's issued patents, patent applications and patents
and patent applications licensed to the
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<PAGE> 15
Company and fairly summarizes the material legal matters, documents and
proceedings relating thereto;
(iv) based upon a review of the third party rights made
known to counsel, including those patents listed on Exhibit A hereto, and
discussions with Company scientific personnel, except as disclosed in the
Registration Statement, such counsel is not aware of any valid, enforceable
United States or foreign patent that is or would, in counsel's opinion, be
infringed by the activities of the Company in the manufacture, use, sale, offer
for sale or importation of any presently proposed product, the technologies
employed by the Company in any presently proposed product or the method of their
use in any presently proposed product, each as described in the Prospectus;
(v) such counsel has reviewed the patent applications
filed by the Company in the United States and outside the United States (the
"Applications") and in the opinion of such counsel the Applications have been
properly prepared and filed on behalf of the Company, and are being diligently
pursued in accordance with good practice by the Company; the inventions
described in the Applications are assigned or licensed to the Company; to the
best of such counsel's knowledge, subject to the Schedule of Exceptions appended
to the opinion, no other entity or individual has any right or claim in any of
the inventions, Applications, or any patent to be issued therefrom, and in such
counsel's opinion each of the Applications discloses patentable subject matter;
(vi) such counsel is aware of no pending or threatened
judicial or governmental proceedings relating to patents or proprietary
information to which the Company is a party or of which any property of the
Company is subject and such counsel is not aware of any pending or threatened
action, suit or claim by others that the Company is infringing or otherwise
violating any patent rights of others, based upon review of the Applications
such counsel is not aware of any rights of third parties to any of the Company's
inventions described in the Applications, issued, approved or licensed patents
which could reasonably be expected to materially affect the ability of the
Company to conduct its business as described in the Prospectus, including the
commercialization of its products currently under development; and
(vii) such counsel has no reason to believe that the
information contained in the Intellectual Property Portion of the Registration
Statement or the Prospectus at the time it became effective contained any untrue
statement of a material fact or omitted to state any material fact required to
be stated therein or necessary to make the statements therein not misleading or
that, at the Closing Date, the information contained in the Intellectual
Property Portion of the Prospectus or any amendment or supplement to the
Intellectual Property Portion of the Prospectus contains any untrue statement of
a material fact or omits to state a material fact necessary in order to make the
statements therein, in the light of the circumstances under which they were
made, not misleading.
The opinion of Pillsbury Madison & Sutro LLP described in paragraph (c)
and the opinion of Lyon & Lyon described in paragraph (e) above shall each be
rendered to the Representatives at the request of the Company, and shall so
state therein.
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<PAGE> 16
(f) You shall have received, on each of the date hereof and the Closing
Date, a letter dated the date hereof or the Closing Date, as the case may be, in
form and substance satisfactory to you, from Ernst & Young LLP, independent
public accountants, containing statements and information of the type ordinarily
included in accountants' "comfort letters" to underwriters with respect to the
financial statements and certain financial information contained in the
Registration Statement and the Prospectus.
(g) The Lock-up Agreements between the Underwriters and certain
stockholders, officers and directors of the Company relating to sales of shares
of Common Stock of the Company or any securities convertible into or exercisable
or exchangeable for such Common Stock, delivered to Morgan Stanley on or before
the date hereof, shall be in full force and effect on the Closing Date.
(h) The shares of Common Stock of the Company shall have received
approval for listing, upon official notice of issuance, on the Nasdaq National
Market.
(i) The Company shall have complied with the provisions of paragraph (a)
of Section VI hereof with respect to the furnishing of Prospectuses on the
business day next succeeding the date of this Agreement in such quantities as
you may reasonably request.
(j) The Company shall have delivered all other certificates as may be
reasonably requested by Wilson Sonsini Goodrich & Rosati, Professional
Corporation, counsel for the Underwriters.
All the agreements, opinions, certificates and letters mentioned above
or elsewhere in this Agreement shall be deemed in compliance with the provisions
hereof only if Wilson Sonsini Goodrich & Rosati, Professional Corporation,
counsel for the Underwriters, shall be reasonably satisfied that they comply in
form and scope.
The several obligations of the Underwriters to purchase Additional
Shares hereunder are subject to the delivery to you on the Option Closing Date
of such documents as you may reasonably request with respect to the good
standing of the Company, the due authorization and issuance of the Additional
Shares, other matters related to the issuance of the Additional Shares and an
opinion or opinions of Pillsbury Madison & Sutro LLP and Lyon & Lyon, LLP in
form and substance satisfactory to Wilson Sonsini Goodrich & Rosati,
Professional Corporation, counsel for the Underwriters.
VI.
In further consideration of the agreements of the Underwriters herein
contained, the Company covenants as follows:
(a) To furnish to you, without charge, five (5) signed copies of the
Registration Statement (including exhibits thereto) and for delivery to each
other Underwriter a conformed copy of the
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<PAGE> 17
Registration Statement (without exhibits thereto) and, during the period
mentioned in paragraph (c) below, as many copies of the Prospectus and any
supplements and amendments thereto or to the Registration Statement as you may
reasonably request. In the case of the Prospectus, to furnish copies of the
Prospectus in New York City, prior to 3:00 p.m., on the business following the
date of this Agreement, in such quantities as you reasonably request.
(b) Before amending or supplementing the Registration Statement or the
Prospectus, to furnish to you a copy of each such proposed amendment or
supplement and to file no such proposed amendment or supplement to which you
reasonably object.
(c) If, during such period after the first date of the public offering
of the Shares as in the opinion of Wilson Sonsini Goodrich & Rosati,
Professional Corporation, counsel for the Underwriters, the Prospectus is
required by law to be delivered in connection with sales by an Underwriter or
dealer, any event shall occur or condition exist as a result of which it is
necessary to amend or supplement the Prospectus in order to make the statements
therein, in the light of the circumstances when the Prospectus is delivered to a
purchaser, not misleading, or if, in the opinion of your counsel, it is
necessary to amend or supplement the Prospectus to comply with law, forthwith to
prepare, file with the Commission and furnish, at its own expense, to the
Underwriters and to the dealers (whose names and addresses you will furnish to
the Company) to which Shares may have been sold by you on behalf of the
Underwriters and to any other dealers upon request, either amendments or
supplements to the Prospectus so that the statements in the Prospectus as so
amended or supplemented will not, in the light of the circumstances when the
Prospectus is delivered to a purchaser, be misleading or so that the Prospectus,
as amended or supplemented, will comply with law.
(d) To endeavor to qualify the Shares for offer and sale under the
securities or Blue Sky laws of such jurisdictions as you shall reasonably
request and to pay all expenses (including fees and disbursements of counsel) in
connection with such qualification and in connection with any review of the
offering of the Shares by the National Association of Securities Dealers, Inc.
(e) To make generally available to the Company's security holders and to
you as soon as practicable an earnings statement covering the twelve-month
period ending December 31, 1998 that satisfies the provisions of Section 11(a)
of the Securities Act and the rules and regulations of the Commission
thereunder.
(f) During a period of three years from the effective date of the
Registration Statement, the Company will furnish to you copies of (i) all
reports to its stockholders and (ii) all reports, financial statements and proxy
or information statements filed by the Company with the Commission or any
national securities exchange.
(g) The Company will apply the proceeds from the sale of the Shares as
set forth under in "Use of Proceeds" in the Prospectus.
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<PAGE> 18
(h) The Company will use its best efforts to obtain and maintain in
effect the quotation of the Shares on the Nasdaq National Market and will take
all necessary steps to cause the Shares to be included on the Nasdaq National
Market as promptly as practicable and to maintain such inclusion for a period of
three years after the date hereof or until such earlier date as the Shares shall
be listed for regular trading privileges on the Nasdaq National Market or
another national securities exchange approved by you.
(i) The Company will comply with all registration, filing and reporting
requirements of the Securities Exchange Act of 1934, as amended (the "Exchange
Act"), which may from time to time be applicable to the Company.
(j) The Company will comply with all provisions of all undertakings
contained in the Registration Statement.
(k) Prior to the Closing Date or the Option Closing Date, as the case
may be, the Company will not, directly or indirectly, issue any press release or
other communication directly or indirectly and will not hold any press
conference with respect to the Company, or its financial condition, results of
operations, business, properties, assets or prospects, or this offering, without
your prior written consent.
(l) If at any time during the 25-day period after the Registration
Statement becomes effective any rumor, publication or event relating to or
affecting the Company shall occur as a result of which in your opinion the
market price for the Stock has been or is likely to be materially affected
(regardless of whether such rumor, publication or event necessitates a
supplement to or amendment of the Prospectus), the Company will, after written
notice from you advising the Company to the effect set forth above, forthwith
prepare, consult with you concerning the substance of, and disseminate a press
release or other public statement, reasonably satisfactory to you, responding to
or commenting on such rumor, publication or event.
(m) The Company agrees: (i) to issue stop-transfer instructions to the
transfer agent for the Common Stock with respect to any transaction or
contemplated transaction that would constitute a breach of or default under the
applicable Lock-up Agreement, and (ii) upon written request of Morgan Stanley,
to release from the Lock-up Agreements those shares of Common Stock held by
those holders set forth in such request. In addition, except with the prior
written consent of Morgan Stanley, the Company agrees (i) not to amend or
terminate, or waive any right under, any Lock-up Agreement or take any other
action that would directly or indirectly have the same effect as an amendment or
termination, or waiver of any right under, any Lock-up Agreement that would
permit any holder of shares of Common Stock, or securities convertible into or
exercisable or exchangeable for Common Stock, to offer, pledge, sell, contract
to sell, sell any option or contract to purchase, purchase any option or
contract to sell, make any short sale of, grant any option, right, or warrant
for the purchase of, enter into any swap or similar agreement that transfers, in
whole or in part, the economic risk of ownership of Common Stock, or otherwise
transfer or dispose of, directly or indirectly, any of such shares of Common
Stock or other securities prior to the expiration of 180 days after the date of
the Prospectus, (ii) not to release any such stop-transfer instruction as
described in
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<PAGE> 19
(ii) above prior to the expiration of 180 days after the date of the Prospectus,
and (iii) not to consent to any sale, short sale, grant of an option for the
purchase of, or other disposition or transfer of shares of Common Stock, or
securities convertible into or exercisable or exchangeable for Common Stock,
subject to a Lock-up Agreement.
(n) The Company will place a restrictive legend on any shares of Common
Stock acquired pursuant to the exercise, after the date hereof and prior to the
expiration of the 180-day period after the date of the initial public offering
of the Shares, of any option granted under either of the Option Plans or
pursuant to the exercise of any warrant, which legend shall restrict the
transfer of such shares prior to the expiration of such 180-day period. In
addition, the Company agrees that, without the prior written consent of Morgan
Stanley, it will not release any stockholder, option holder or warrant holder
from the market standoff provision imposed by the Company pursuant to the terms
of either Option Plan, or earlier than 180 days after the date of the initial
public offering of the Shares.
(o) In connection with the Directed Share Program, the Company will
ensure that the Directed Shares will be restricted to the extent required by the
National Association of Securities Dealers, Inc. (the "NASD") or the NASD rules
from sale, transfer, assignment, pledge or hypothecation for a period of three
months following the date of the effectiveness of the Registration Statement.
Morgan Stanley will notify the Company as to which Participants will need to be
so restricted. At the request of Morgan Stanley, the Company will direct the
transfer agent to place stop transfer restrictions upon such securities for such
period of time.
(p) To pay fees and disbursements of counsel incurred by the
Underwriters in connection with the Directed Share Program and stamp duties,
similar taxes or duties or other taxes, if any, incurred by the Underwriters in
connection with the Directed Share Program.
Furthermore, the Company covenants with Morgan Stanley that the Company
will comply with all applicable securities and other applicable laws, rules and
regulations in each foreign jurisdiction in which the Directed Shares are
offered in connection with the Directed Share Program.
VII.
The Company agrees to pay all costs and expenses incident to the
performance of the obligations of the Company under this Agreement, including,
but not limited to, all expenses incident to (i) the preparation and filing of
the Registration Statement (including all exhibits thereto) and the Prospectus
and all amendments and supplements thereto, (ii) the preparation, issuance and
delivery of the Shares, including any transfer taxes payable in connection with
the transfer and sale of the Shares to the Underwriters, (iii) the fees and
disbursements of the Company's counsel and accountants, (iv) the qualification
of the Shares under state securities or Blue Sky laws in accordance with the
provisions of paragraph (d) of Article VI hereof, including filing fees and the
fees and disbursements of counsel for the Underwriters in connection therewith
and in connection with the
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preparation of any Blue Sky or Legal Investment Memoranda, (v) the printing and
delivery to the Underwriters, in quantities as hereinabove stated, of copies of
the Registration Statement (including all exhibits thereto) and all amendments
thereto and of each preliminary prospectus and the Prospectus and any amendments
or supplements thereto, (vi) the printing and delivery to the Underwriters of
copies of any Blue Sky or Legal Investment Memoranda, (vii) the filing fees and
expenses, if any, incurred with respect to any filing with the National
Association of Securities Dealers, Inc., made in connection with the offering of
the Shares, (viii) any expenses incurred by the Company in connection with a
"road show" presentation to potential investors, and (ix) the listing of the
Common Stock on the Nasdaq National Market.
VIII.
The Company agrees to indemnify and hold harmless each Underwriter and
each person, if any, who controls any Underwriter within the meaning of either
Section 15 of the Securities Act or Section 20 of the Exchange Act, or is under
common control with, or is controlled by, any Underwriter, from and against any
and all losses, claims, damages and liabilities (including, without limitation,
any legal or other expenses reasonably incurred in connection with defending or
investigating any such action or claim) caused by any untrue statement or
alleged untrue statement of a material fact contained in the Registration
Statement or any amendment thereof, any preliminary prospectus or the Prospectus
(as amended or supplemented if the Company shall have furnished any amendments
or supplements thereto), or caused by any omission or alleged omission to state
therein a material fact required to be stated therein or necessary to make the
statements therein not misleading, except insofar as such losses, claims,
damages or liabilities are caused by any such untrue statement or omission or
alleged untrue statement or omission based upon information relating to any
Underwriter furnished to the Company in writing by such Underwriter through you
expressly for use therein; provided, however, that the foregoing indemnity
agreement with respect to any preliminary prospectus shall not inure to the
benefit of any Underwriter or any person controlling such Underwriter, from whom
the person asserting any such losses, claims, damages or liabilities purchased
Shares, if a copy of the Prospectus (as then amended or supplemented, if the
Company shall have furnished any amendments or supplements thereto) was not sent
or given by or on behalf of such Underwriter to such person, if required by law
so to have been delivered, at or prior to the written confirmation of the sale
of the Shares to such person, and if the Prospectus (as so amended or
supplemented) would have cured the defect giving rise to such loss, claim,
damage or liability.
The Company agrees to indemnify and hold harmless Morgan Stanley and
each person, if any, who controls Morgan Stanley within the meaning of either
Section 15 of the Securities Act or Section 20 of the Exchange Act ('Morgan
Stanley Entities"), from and against any and all losses, claims, damages and
liabilities (including, without limitation, any legal or other expenses
reasonable incurred in connection with defending or investigating any such
action or claim) (I) caused by any untrue statement or alleged untree statement
of a material fact contained in the prospectus wrapper material prepared by or
with the consent of the Company for distribution in foreign jurisdictions in
connection with the Directed Share Program attached to the Prospectus or any
preliminary prospectus, or caused by any omission or alleged omission to state
therein a material fact required to
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be stated therein or necessary to make the statement therein, when considered in
conjunction with the Prospectus or any applicable preliminary prospectus, not
misleading; (ii) caused by the failure of any Participant to pay for and accept
delivery of the shares which, immediately following the effectiveness of the
Registration Statement, were subject to a properly confirmed agreement to
purchase; or (iii) related to, arising out of, or in connection with the
Directed Share Program, provided that, the Company shall not be responsible
under this subparagraph (iii) for any losses, claim, damages or liabilities (or
expenses relating thereto) that are finally judicially determined to have
resulted from the bad faith or gross negligence of Morgan Stanley Entities.
Each Underwriter agrees, severally and not jointly, to indemnify and
hold harmless the Company, the directors of the Company, the officers of the
Company who sign the Registration Statement and each person, if any, who
controls the Company within the meaning of either Section 15 of the Securities
Act or Section 20 of the Exchange Act from and against any and all losses,
claims, damages and liabilities (including, without limitation, any legal or
other expenses reasonably incurred in connection with defending or investigating
any such action or claim) caused by any untrue statement or alleged untrue
statement of a material fact contained in the Registration Statement or any
amendment thereof, any preliminary prospectus or the Prospectus (as amended or
supplemented if the Company shall have furnished any amendments or supplements
thereto), or caused by any omission or alleged omission to state therein a
material fact required to be stated therein or necessary to make the statements
therein not misleading, but only with reference to information relating to such
Underwriter furnished to the Company in writing by such Underwriter through you
expressly for use in the Registration Statement, any preliminary prospectus, the
Prospectus or any amendments or supplements thereto.
In case any proceeding (including any governmental investigation) shall
be instituted involving any person in respect of which indemnity may be sought
pursuant to any of the two preceding paragraphs, such person (the "Indemnified
Party") shall promptly notify the person against whom such indemnity may be
sought (the "Indemnifying Party") in writing and the Indemnifying Party, upon
request of the Indemnified Party, shall retain counsel reasonably satisfactory
to the Indemnified Party to represent the Indemnified Party and any others the
Indemnifying Party may designate in such proceeding and shall pay the fees and
disbursements of such counsel related to such proceeding. In any such
proceeding, any Indemnified Party shall have the right to retain its own
counsel, but the fees and expenses of such counsel shall be at the expense of
such Indemnified Party unless (i) the Indemnifying Party and the Indemnified
Party shall have mutually agreed to the retention of such counsel or (ii) the
named parties to any such proceeding (including any impleaded parties) include
both the Indemnifying Party and the Indemnified Party and representation of both
parties by the same counsel would be inappropriate due to actual or potential
differing interests between them. It is understood that the Indemnifying Party
shall not, in respect of the legal expenses of any Indemnified Party in
connection with any proceeding or related proceedings in the same jurisdiction,
be liable for (a) the fees and expenses of more than one separate firm (in
addition to any local counsel) for all Underwriters and all persons, if any, who
control any Underwriter within the meaning of either Section 15 of the
Securities Act or Section 20 of the Exchange Act, and (b) the fees and expenses
of more than one separate firm (in addition to any local counsel) for the
Company, its directors, its officers who sign the Registration Statement and
each person, if any, who controls
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<PAGE> 22
the Company within the meaning of either such Section, and that all such fees
and expenses shall be reimbursed as they are incurred. In the case of any such
separate firm for the Underwriters and such control persons of Underwriters,
such firm shall be designated in writing by Morgan Stanley. In the case of any
such separate firm for the Company, and such directors, officers and control
persons of the Company, such firm shall be designated in writing by the Company.
The Indemnifying Party shall not be liable for any settlement of any proceeding
effected without its written consent, but if settled with such consent or if
there be a final judgment for the plaintiff, the Indemnifying Party agrees to
indemnify the Indemnified Party from and against any loss or liability by reason
of such settlement or judgment. Notwithstanding the foregoing sentence, if at
any time an Indemnified Party shall have requested an Indemnifying Party to
reimburse the Indemnified Party for fees and expenses of counsel as contemplated
by the second and third sentences of this paragraph, the Indemnifying Party
agrees that it shall be liable for any settlement of any proceeding effected
without its written consent if (i) such settlement is entered into more than 30
days after receipt by such Indemnifying Party of the aforesaid request and (ii)
such Indemnifying Party shall not have reimbursed the Indemnified Party in
accordance with such request prior to the date of such settlement. No
Indemnifying Party shall, without the prior written consent of the Indemnified
Party, effect any settlement of any pending or threatened proceeding in respect
of which any Indemnified Party is or could have been a party and indemnity could
have been sought hereunder by such Indemnified Party, unless such settlement
includes an unconditional release of such Indemnified Party from all liability
on claims that are the subject matter of such proceeding.
Notwithstanding anything contained herein to the contrary, if indemnity
may be sought pursuant to the second paragraph of Article 8 hereof in respect of
such action or proceeding, then in addition to such separate firm for the
indemnified parties, the indemnifying party shall be liable for the reasonable
fees and expenses of not more than one separate firm (in addition to any local
counsel) for Morgan Stanley for the defense of any losses, claims, damages and
liabilities arising out of the Directed Share Program, and all persons, if any,
who control Morgan Stanley within the meaning of either Section 15 of the Act or
Section 20 of the Exchange Act.
If the indemnification provided for in the first or second paragraph of
this Article VIII is unavailable to an Indemnified Party or insufficient in
respect of any losses, claims, damages or liabilities referred to therein, then
each Indemnifying Party under such paragraph, in lieu of indemnifying such
Indemnified Party thereunder, shall contribute to the amount paid or payable by
such Indemnified Party as a result of such losses, claims, damages or
liabilities (i) in such proportion as is appropriate to reflect the relative
benefits received by the Indemnifying Party or parties on the one hand and the
Indemnified Party or parties on the other hand from the offering of the Shares
or (ii) if the allocation provided by clause (i) above is not permitted by
applicable law, in such proportion as is appropriate to reflect not only the
relative benefits referred to in clause (i) above but also the relative fault of
the Indemnifying Party or parties on the one hand and of the Indemnified Party
or parties on the other hand in connection with the statements or omissions that
resulted in such losses, claims, damages or liabilities, as well as any other
relevant equitable considerations. The relative benefits received by the Company
on the one hand and the Underwriters on the other hand in connection with the
offering of the Shares shall be deemed to be in the same respective proportions
as the net proceeds from the offering of the Shares (before deducting expenses)
received
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by the Company and the total underwriting discounts and commissions received by
the Underwriters, in each case as set forth in the table on the cover of the
Prospectus, bear to the aggregate public offering price of the Shares. The
relative fault of the Company on the one hand and the Underwriters on the other
hand shall be determined by reference to, among other things, whether the untrue
or alleged untrue statement of a material fact or the omission or alleged
omission to state a material fact relates to information supplied by the Company
or by the Underwriters and the parties' relative intent, knowledge, access to
information and opportunity to correct or prevent such statement or omission.
The Underwriters' respective obligations to contribute pursuant to this Article
VIII are several in proportion to the respective number of Shares they have
purchased hereunder, and not joint.
The Company and the Underwriters agree that it would not be just or
equitable if contribution pursuant to this Article VIII were determined by pro
rata allocation (even if the Underwriters were treated as one entity for such
purpose) or by any other method of allocation that does not take account of the
equitable considerations referred to in the immediately preceding paragraph. The
amount paid or payable by an Indemnified Party as a result of the losses,
claims, damages and liabilities referred to in the immediately preceding
paragraph shall be deemed to include, subject to the limitations set forth
above, any legal or other expenses reasonably incurred by such Indemnified Party
in connection with investigating or defending any such action or claim.
Notwithstanding the provisions of this Article VIII, no Underwriter shall be
required to contribute any amount in excess of the amount by which the total
price at which the Shares underwritten by it and distributed to the public were
offered to the public exceeds the amount of any damages that such Underwriter
has otherwise been required to pay by reason of such untrue or alleged untrue
statement or omission or alleged omission. No person guilty of fraudulent
misrepresentation (within the meaning of Section 11(f) of the Securities Act)
shall be entitled to contribution from any person who was not guilty of such
fraudulent misrepresentation. The remedies provided for in this Article VIII are
not exclusive and shall not limit any rights or remedies which may otherwise be
available to any Indemnified Party at law or in equity.
The indemnity and contribution provisions contained in this Article VIII
and the representations and warranties of the Company contained in this
Agreement shall remain operative and in full force and effect regardless of (i)
any termination of this Agreement, (ii) any investigation made by or on behalf
of any Underwriter or any person controlling any Underwriter, or the Company,
its officers or directors or any person controlling the Company and (iii)
acceptance of and payment for any of the Shares.
IX.
This Agreement shall be subject to termination by notice given by you to
the Company, if (a) after the execution and delivery of this Agreement and prior
to the Closing Date (i) trading generally shall have been suspended or
materially limited on or by, as the case may be, any of the New York Stock
Exchange, the American Stock Exchange, the National Association of Securities
Dealers, Inc., the Chicago Board of Options Exchange, the Chicago Mercantile
Exchange or the
22
<PAGE> 24
Chicago Board of Trade, (ii) trading of any securities of the Company shall have
been suspended on any exchange or in any over-the-counter market, (iii) a
general moratorium on commercial banking activities in New York shall have been
declared by either Federal or New York State authorities, or (iv) there shall
have occurred any outbreak or escalation of hostilities or any change in
financial markets or any calamity or crisis that, in your sole judgment, is
material and adverse and (b) in the case of any of the events specified in
clauses (a)(i) through (iv), such event singly or together with any other such
event makes it, in your sole judgment, impracticable to market the Shares on the
terms and in the manner contemplated in the Prospectus.
X.
This Agreement shall become effective upon execution and delivery hereof
by the parties hereto.
If, on the Closing Date or the Option Closing Date, as the case may be,
any one or more of the Underwriters shall fail or refuse to purchase Shares that
it or they have agreed to purchase hereunder on such date, and the aggregate
number of Shares which such defaulting Underwriter or Underwriters agreed but
failed or refused to purchase is not more than one-tenth of the aggregate number
of the Shares to be purchased on such date, the other Underwriters shall be
obligated severally in the proportions that the number of Firm Shares set forth
opposite their respective names in Schedule I bears to the aggregate number of
Firm Shares set forth opposite the names of all such non-defaulting
Underwriters, or in such other proportions as you may specify, to purchase the
Shares which such defaulting Underwriter or Underwriters agreed but failed or
refused to purchase on such date; provided, however, that in no event shall the
number of Shares that any Underwriter has agreed to purchase pursuant to Article
II be increased pursuant to this Article X by an amount in excess of one-ninth
of such number of Shares without the written consent of such Underwriter. If, on
the Closing Date or the Option Closing Date, as the case may be, any Underwriter
or Underwriters shall fail or refuse to purchase Shares and the aggregate number
of Shares with respect to which such default occurs is more than one-tenth of
the aggregate number of Shares to be purchased on such date, and arrangements
satisfactory to you and the Company for the purchase of such Shares are not made
within 36 hours after such default, this Agreement shall terminate without
liability on the part of any non-defaulting Underwriter or the Company. In any
such case either you or the Company shall have the right to postpone the Closing
Date or the Option Closing Date, as the case may be, but in no event for longer
than seven days, in order that the required changes, if any, in the Registration
Statement and in the Prospectus or in any other documents or arrangements may be
effected. Any action taken under this paragraph shall not relieve any defaulting
Underwriter from liability in respect of any default of such Underwriter under
this Agreement.
If this Agreement shall be terminated by the Underwriters, or any of
them, because of any failure or refusal on the part of the Company to comply
with the terms or to fulfill any of the conditions of this Agreement, or if for
any reason the Company shall be unable to perform its obligations under this
Agreement, the Company will reimburse the Underwriters or such Underwriters as
have so terminated this Agreement with respect to themselves, severally, for all
23
<PAGE> 25
out-of-pocket expenses (including the fees and disbursements of their counsel)
reasonably incurred by such Underwriters in connection with this Agreement or
the offering contemplated hereunder.
24
<PAGE> 26
This Agreement may be signed in two or more counterparts, each of which
shall be an original, with the same effect as if the signatures thereto and
hereto were upon the same instrument.
This Agreement shall be governed by and construed in accordance with the
internal laws of the State of New York.
Very truly yours,
Nanogen, Inc.
By
--------------------------------------------
Howard C. Birndorf,
Chairman and Chief Executive Officer
Accepted, April __, 1998
Morgan Stanley & Co., Incorporated
Lehman Brothers Inc.
SBC Warburg Dillon Read, Inc.
Acting severally on behalf of themselves and the several Underwriters named
herein.
By: Morgan Stanley & Co. Incorporated
By
-----------------------------
Bryan W. Andrzejewski,
Vice President
<PAGE> 27
SCHEDULE I
<TABLE>
<CAPTION>
UNDERWRITER NUMBER OF FIRM SHARES
TO BE PURCHASED
<S> <C>
Morgan Stanley & Co. Incorporated..................
Lehman Brothers Inc................................
SBC Warburg Dillon Read, Inc.......................
------------------
Total............................... 3,600,000
</TABLE>
<PAGE> 28
EXHIBIT A
5,631,128
5,409,810
5,445,934
5,527,670
5,670,832
5,639,423
27
<PAGE> 1
EXHIBIT 3.(i)1
RESTATED
CERTIFICATE OF INCORPORATION
OF NANOGEN (DELAWARE), INC.
Nanogen (Delaware), Inc., a corporation organized and existing under the
laws of the State of Delaware, hereby certifies as follows:
ONE: The name of the corporation is Nanogen (Delaware), Inc.
TWO: The original Certificate of Incorporation of the corporation was
filed with the Secretary of State of Delaware on September 10, 1997.
THREE: The Certificate of Incorporation of said corporation shall be
amended and restated to read in full as follows:
ARTICLE I
The name of this corporation is NANOGEN (DELAWARE), INC.
ARTICLE II
The address of the registered office of the corporation in the State of
Delaware is 1209 Orange Street, in the City of Wilmington, County of New Castle.
The name of its registered agent at such address is The Corporation Trust
Company.
ARTICLE III
The purpose of this 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.
ARTICLE IV
The total number of shares of stock and the classes of stock which the
corporation shall have authority to issue is as follows:
A. Classes of Stock. 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 this corporation is authorized to issue is
Fifty-Five Million Five Hundred Thousand
<PAGE> 2
(55,500,000) shares, of which Forty Million (40,000,000) shares of the par value
of One-Tenth of One Cent ($.001) shall be Common Stock and Fifteen Million Five
Hundred Thousand (15,500,000) shares of the par value of One-Tenth of One Cent
($.001) shall be Preferred Stock. The Preferred Stock authorized by this
Certificate of Incorporation shall be issued by series as set forth herein. The
first series of Preferred Stock shall be designated "Series A Preferred Stock"
and shall consist of Two Million Three Hundred Thirty-Nine Thousand Six Hundred
Sixty-Seven (2,339,667) shares. The second series of Preferred Stock shall be
designated "Series B Preferred Stock" and shall consist of Three Million Eight
Hundred Thousand Six Hundred (3,800,600) shares. The third series of Preferred
Stock shall be designated "Series C Preferred Stock" and shall consist of Six
Million Seven Hundred Thousand (6,700,000) shares. The fourth series of
Preferred Stock shall be designated "Series D Preferred Stock" and shall consist
of Two Million Fifty Thousand (2,050,000) shares.
B. Powers, Preferences and Rights and Qualifications, Limitations and
Restrictions of Preferred Stock. The Preferred Stock authorized by this
Certificate of Incorporation may be issued from time to time in series. The
powers, preferences and rights, and the qualifications, limitations and
restrictions granted to and imposed on the Series A Preferred Stock, Series B
Preferred Stock, Series C Preferred Stock and Series D Preferred Stock are as
set forth below in this Division B of Article IV. The Board of Directors is
hereby authorized to fix or alter the powers, preferences and rights, and the
qualifications, limitations and restrictions granted to or imposed upon
additional series of Preferred Stock, and the number of shares constituting any
such series and the designation thereof, or of any of them. Subject to
compliance with applicable protective voting rights which have been or may be
granted to the Series A Preferred Stock, Series B Preferred Stock, Series C
Preferred Stock, Series D Preferred Stock or other series of Preferred Stock in
Certificates of Determination or the corporation's Certificate of Incorporation
as amended from time to time ("Protective Provisions"), but notwithstanding any
other rights of the Series A Preferred Stock, Series B Preferred Stock, Series C
Preferred Stock, Series D Preferred Stock or any other series of Preferred
Stock, the powers, preferences and rights of, and the qualifications,
limitations and restrictions on, any such additional series may be subordinated
to, pari passu with (including, without limitation, inclusion in provisions with
respect to liquidation and acquisition preferences and/or approval of matters by
vote or written consent), or senior to any of those of any present or future
class or series of Preferred or Common Stock. Subject to compliance with
applicable Protective Provisions, the Board of Directors is also authorized to
increase or decrease the number of shares of any series (other than the Series A
Preferred Stock, Series B Preferred Stock, Series C Preferred Stock and Series D
Preferred Stock), prior or subsequent to the issue of any 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.
1. Dividend Provisions. Subject to the rights of any additional
series of Preferred Stock which may from time to time come into
existence, the holders of shares of the Series A Preferred Stock, Series
B Preferred Stock, Series C Preferred Stock and Series D Preferred Stock
shall be entitled to receive dividends, out of any assets legally
available therefor, prior and in preference to any declaration or
payment of any dividend (payable other than in Common Stock
-2-
<PAGE> 3
or other securities and rights convertible into or entitling the holder
thereof to receive, directly or indirectly, additional shares of Common
Stock of this corporation) on the Common Stock of this corporation, at
the rate of $0.12 per share of Series A Preferred Stock, $0.20 per share
of Series B Preferred Stock, $0.32 per share of Series C Preferred Stock
and $.48 per share of Series D Preferred Stock (each subject to
appropriate adjustments for stock splits, stock dividends, combinations
or other recapitalizations) per annum, payable quarterly when, as and if
declared by the Board of Directors. Such dividends shall not be
cumulative. No cash dividends shall be declared or paid with respect to
the Series A Preferred Stock, Series B Preferred Stock, Series C
Preferred Stock or Series D Preferred Stock unless at the same time a
like proportionate cash dividend for the same dividend period, ratably
in proportion to the respective annual dividend rates set forth in
above, is declared and paid with respect to the Series A Preferred
Stock, Series B Preferred Stock, Series C Preferred Stock and Series D
Preferred Stock.
2. Liquidation Preference.
(a) In the event of any liquidation, dissolution or winding up of
this corporation, either voluntary or involuntary, subject to the rights
of any additional series of Preferred Stock which may from time to time
come into existence, the holders of the Series A Preferred Stock, Series
B Preferred Stock, Series C Preferred Stock and Series D Preferred Stock
shall be entitled to receive, prior and in preference to any
distribution of any of the assets of this corporation to the holders of
Common Stock by reason of their ownership thereof, an amount per share
equal to the sum of (A) $1.50 for each outstanding share of Series A
Preferred Stock (subject to appropriate adjustments for stock splits,
stock dividends, combinations or other recapitalizations and hereafter
referred to as the "Original Series A Issue Price"), (B) $2.50 for each
outstanding share of Series B Preferred Stock (subject to appropriate
adjustments for stock splits, stock dividends, combinations or other
recapitalizations and hereafter referred to as the "Original Series B
Issue Price"), (C) $4.00 for each outstanding share of Series C
Preferred Stock (subject to appropriate adjustments for stock splits,
stock dividends, combinations or other recapitalizations and hereafter
referred to as the "Original Series C Issue Price"), (D) $6.00 for each
outstanding share of Series D Preferred Stock (subject to appropriate
adjustments for stock splits, stock dividends, combinations or other
recapitalizations and hereafter referred to as the "Original Series D
Issue Price"), and (E) an amount equal to declared but unpaid dividends
on such share of the Series A Preferred Stock, Series B Preferred Stock,
Series C Preferred Stock or Series D Preferred Stock, as the case may
be. If upon the occurrence of such event, the assets and funds thus
distributed among the holders of the Series A Preferred Stock, Series B
Preferred Stock, Series C Preferred Stock and Series D Preferred Stock
shall be insufficient to permit the payment to such holders of the full
aforesaid preferential amount, then, subject to the rights of any
additional series of Preferred Stock which may from time to time come
into existence, the entire assets and funds of the corporation legally
available
-3-
<PAGE> 4
for distribution shall be distributed ratably among the holders of the
Series A Preferred Stock, Series B Preferred Stock, Series C Preferred
Stock and Series D Preferred Stock in proportion to the aggregate
liquidation preferences of the respective series, and ratably among the
holders of that series in proportion to the amount of such stock owned
by each such holder.
(b) After the distributions described in subsection (a) above
have been paid and subject to the rights of any additional series of
Preferred Stock which may from time to time come into existence, the
remaining assets of the corporation available for distribution to
stockholders shall be distributed among the holders of the Series A
Preferred Stock, Series B Preferred Stock, Series C Preferred Stock,
Series D Preferred Stock and Common Stock pro rata based on the number
of shares of Common Stock held by each (assuming conversion of all such
Series A Preferred Stock, Series B Preferred Stock, Series C Preferred
Stock and Series D Preferred Stock).
(c) A consolidation or merger of this corporation with or into
any other corporation or corporations, or a sale, conveyance or
disposition of all or substantially all of the assets of this
corporation or the effectuation by the corporation of a transaction or
series of related transactions in which more than fifty percent (50%) of
the voting power of the corporation is disposed of, shall be deemed to
be a liquidation, dissolution or winding up within the meaning of this
Section 2.
3. Conversion. The holders of the Series A Preferred Stock,
Series B Preferred Stock, Series C Preferred Stock and Series D
Preferred Stock shall have conversion rights as follows (the "Conversion
Rights"):
(a) Right to Convert.
(i) Subject to subsection (c) below, each share of the
Series A Preferred Stock, Series B Preferred Stock, Series C
Preferred Stock and Series D Preferred Stock shall be
convertible, at the option of the holder thereof, at any time
after the date of issuance of such share at the office of this
corporation or any transfer agent for the Series A Preferred
Stock, Series B Preferred Stock, Series C Preferred Stock and
Series D Preferred Stock, into such number of fully paid and
nonassessable shares of Common Stock as is determined by dividing
(i) the Original Series A Issue Price for each share of Series A
Preferred Stock, (ii) the Original Series B Issue Price for each
share of Series B Preferred Stock, (iii) the Original Series C
Issue Price for each share of Series C Preferred Stock and (iv)
the Original Series D Issue Price for each share of Series D
Preferred Stock, in each case by the applicable Conversion Price
at the time in effect for such share. The initial Conversion
Price per share for shares of Series A Preferred Stock
-4-
<PAGE> 5
shall be the Original Series A Issue Price, for shares of Series
B Preferred Stock shall be the Original Series B Issue Price,
for shares of Series C Preferred Stock shall be the Original
Series C Issue Price, and for shares of Series D Preferred Stock
shall be the Original Series D Issue Price; provided, however,
that the Conversion Price for the Series A Preferred Stock,
Series B Preferred Stock, Series C Preferred Stock and Series D
Preferred Stock shall each be subject to adjustment as set forth
in subsection 3(c).
(ii) Each share of the Series A Preferred Stock, Series B
Preferred Stock, Series C Preferred Stock and Series D Preferred
Stock shall automatically be converted into shares of Common
Stock at the Conversion Price for such Series A Preferred Stock,
Series B Preferred Stock, Series C Preferred Stock and Series D
Preferred Stock immediately upon the earlier of (a) the
consummation of the corporation's sale of its Common Stock in a
bona fide, firm commitment underwriting pursuant to a
registration statement on Form S-1 under the Securities Act of
1933, as amended, the public offering price of which was not less
than $7.50 per share (adjusted to reflect subsequent stock
dividends, stock splits, stock combinations or recapitalizations)
and $7,500,000 in the aggregate or (b) the receipt of the
approval or consent to such conversion by at least seventy-five
percent (75%) of the then-outstanding shares of the Series A
Preferred Stock, Series B Preferred Stock, Series C Preferred
Stock and Series D Preferred Stock voting together as a class.
(b) Mechanics of Conversion. Before any holder of the Series A
Preferred Stock, Series B Preferred Stock, Series C Preferred Stock or
Series D Preferred Stock shall be entitled to convert the same into
shares of Common Stock, he shall surrender the certificate or
certificates therefor, duly endorsed, at the office of this corporation
or of any transfer agent for the Series A Preferred Stock, Series B
Preferred Stock, Series C Preferred Stock or Series D Preferred Stock,
and shall give written notice by mail, postage prepaid, to this
corporation at its principal corporate office, of the election to
convert the same and shall state therein the name or names in which the
certificate or certificates for shares of Common Stock are to be issued.
This corporation shall as soon as practicable thereafter, issue and
deliver at such office to such holder of the Series A Preferred Stock,
Series B Preferred Stock, Series C Preferred Stock or Series D Preferred
Stock, or to the nominee or nominees of such holder, a certificate or
certificates for the number of shares of Common Stock to which such
holder shall be entitled as aforesaid. Such conversion shall be deemed
to have been made immediately prior to the close of business on the date
of such surrender of the shares of the Series A Preferred Stock, Series
B Preferred Stock, Series C Preferred Stock or Series D Preferred Stock
to be converted, and the person or persons entitled to
-5-
<PAGE> 6
receive the shares of Common Stock issuable upon such conversion shall
be treated for all purposes as the record holder or holders of such
shares of Common Stock as of such date. If the conversion is in
connection with an underwritten offer of securities registered pursuant
to the Securities Act of 1933, as amended, the conversion may, at the
option of any holder tendering the Series A Preferred Stock, Series B
Preferred Stock, Series C Preferred Stock or Series D Preferred Stock
for conversion, be conditioned upon the closing with the underwriter of
the sale of securities pursuant to such offering, in which event the
person(s) entitled to receive the Common Stock issuable upon such
conversion of the Series A Preferred Stock, Series B Preferred Stock,
Series C Preferred Stock or Series D Preferred Stock shall not be deemed
to have converted such Series A Preferred Stock, Series B Preferred
Stock, Series C Preferred Stock or Series D Preferred Stock until
immediately prior to the closing of such sale of securities.
(c) Conversion Price Adjustments of Preferred Stock. The
Conversion Price of the Series A Preferred Stock, Series B Preferred
Stock, Series C Preferred Stock and Series D Preferred Stock shall be
subject to adjustment from time to time as follows:
(i) (A) If this corporation shall issue any Additional
Stock (as defined below) without consideration or for a
consideration per share less than the Conversion Price for the
Series A Preferred Stock, Series B Preferred Stock, Series C
Preferred Stock or Series D Preferred Stock, as the case may be,
in effect immediately prior to the issuance of such Additional
Stock the new Conversion Price for such Series of Preferred Stock
shall be determined by multiplying the Conversion Price for such
series of Preferred Stock in effect immediately prior to the
issuance of Additional Stock by a fraction:
(x) the numerator of which shall be the number of
shares of Common Stock outstanding immediately prior to
such issuance (for purposes of this calculation only,
including the number of shares of Common Stock then
issuable upon the conversion of all outstanding shares of
Preferred Stock at the Conversion Price for such shares in
effect immediately prior to such issuance of Additional
Stock) plus the number of shares of Common Stock
equivalents which the aggregate consideration received by
this corporation for the shares of such Additional Stock
so issued would purchase at the Conversion Price for the
shares of the series of Preferred Stock with respect to
which the adjustment is being made; and
(y) the denominator of which shall be the number of
shares of Common Stock outstanding immediately prior
-6-
<PAGE> 7
to such issuance (for purposes of this calculation only,
including the number of shares of Common Stock then
issuable upon the conversion of all outstanding shares of
Preferred Stock at the Conversion Prices for such shares
in effect immediately prior to such issuance of Additional
Stock) plus the number of such shares of Additional Stock
so issued.
Any series of issuances of Additional Stock consisting of Common
Stock or the same series of Preferred Stock, issued at the same price
and occurring within a three-month period, shall be treated as one
issuance of Additional Stock for the purposes of this calculation.
(B) No adjustment of the Conversion Price for such series
of Preferred Stock shall be made in an amount less than one cent
per share, provided that any adjustments which are not required
to be made by reason of this sentence shall be carried forward
and shall be either taken into account in any subsequent
adjustment made prior to three years from the date of the event
giving rise to the adjustment being carried forward, or shall be
made at the end of three years from the date of the event giving
rise to the adjustment being carried forward. Except to the
limited extent provided for in subsections (E)(3) and (E)(4), no
adjustment of such Conversion Price for such series of Preferred
Stock pursuant to this subsection 3(c)(i) shall have the effect
of increasing the Conversion Price for such series of Preferred
Stock above the Conversion Price for such series in effect
immediately prior to such adjustment.
(C) In the case of the issuance of Common Stock for cash,
the consideration shall be deemed to be the amount of cash paid
therefor before deducting any reasonable discounts, commissions
or other expenses allowed, paid or incurred by this corporation
for any underwriting or otherwise in connection with the issuance
and sale thereof.
(D) In the case of the issuance of the Common Stock for a
consideration in whole or in part other than cash, the
consideration other than cash shall be deemed to be the fair
value thereof as determined by the Board of Directors
irrespective of any accounting treatment.
(E) In the case of the issuance of options to purchase or
rights to subscribe for Common Stock, securities by their terms
convertible into or exchangeable for Common Stock or options to
purchase or rights to subscribe for such convertible or
-7-
<PAGE> 8
exchangeable securities (which are not excluded from the
definition of Additional Stock), the following provisions shall
apply:
(1) The aggregate maximum number of shares of
Common Stock deliverable upon exercise of such options to
purchase or rights to subscribe for Common Stock shall be
deemed to have been issued at the time such options or
rights were issued and for a consideration equal to the
consideration (determined in the manner provided in
subsections 3(c)(i)(C) and (c)(i)(D)), if any, received by
the corporation upon the issuance of such options or
rights plus the minimum purchase price provided in such
options or rights for the Common Stock covered thereby.
(2) The aggregate maximum number of shares of
Common Stock deliverable upon conversion of or in exchange
for any such convertible or exchangeable securities or
upon the exercise of options to purchase or rights to
subscribe for such convertible or exchangeable securities
and subsequent conversion or exchange thereof shall be
deemed to have been issued at the time such securities
were issued or such options or rights were issued and for
a consideration equal to the consideration, if any,
received by this corporation for any such securities and
related options or rights (excluding any cash received on
account of accrued interest or accrued dividends), plus
the additional consideration, if any, to be received by
this corporation upon the conversion or exchange of such
securities or the exercise of any related options or
rights (the consideration in each case to be determined in
the manner provided in subsections 3(c)(i)(C) and
(c)(i)(D)).
(3) In the event of any change in the number of
shares of Common Stock deliverable or any increase in the
consideration payable to this corporation upon exercise of
such options or rights or upon conversion of or in
exchange for such convertible or exchangeable securities,
including, but not limited to, a change resulting from the
anti-dilution provisions thereof, the Conversion Price of
the Series A Preferred Stock, Series B Preferred Stock,
Series C Preferred Stock or Series D Preferred Stock, as
the case may be, obtained with respect to the adjustment
which was made upon the issuance of such options, rights
or securities, and any subsequent adjustments based
thereon, shall be recomputed to reflect such change, but
no further adjustment shall be made for the actual
issuance of
-8-
<PAGE> 9
Common Stock or any payment of such consideration upon the
exercise of any such options or rights or the conversion
or exchange of such securities; provided, however, that
this section shall not have any effect on any conversion
of such series of Preferred Stock prior to such change or
increase.
(4) Upon the expiration of any such options or
rights, the termination of any such rights to convert or
exchange or the expiration of any options or rights
related to such convertible or exchangeable securities,
the Conversion Price of the Series A Preferred Stock,
Series B Preferred Stock, Series C Preferred Stock or
Series D Preferred Stock, as the case may be, obtained
with respect to the adjustment which was made upon the
issuance of such options, rights or securities or options
or rights related to such securities, and any subsequent
adjustments based thereon, shall be recomputed to reflect
the issuance of only the number of shares of Common Stock
actually issued upon the exercise of such options or
rights upon the conversion or exchange of such securities
or upon the exercise of the options or rights related to
such securities; provided, however, that this section
shall not have any effect on any conversion of such series
of Preferred Stock prior to such expiration or
termination.
(ii) "Additional Stock" shall mean any shares of Common Stock
issued (or deemed to have been issued pursuant to subsection 3(c)(i)(E))
by this corporation after the date of the issuance of the Series A
Preferred Stock, other than
(A) Common Stock issued pursuant to a transaction
described in subsection 3(c)(iii) hereof,
(B) Common Stock issued or issuable to employees,
directors, consultants or advisors under stock option and
restricted stock purchase agreements approved by the Board of
Directors of this corporation, or
(C) Common Stock issued or issuable upon conversion of the
Series A Preferred Stock, Series B Preferred Stock, Series C
Preferred Stock or Series D Preferred Stock, or
(D) Common Stock issued, or issued or issuable upon
conversion or exercise of securities issued, in connection with
research and development partnerships, licensing or collaborative
arrangements, leasing arrangements and other similar transactions
between this corporation and other institutions or entities,
which issuance has been approved by the Board of Directors of the
corporation, or
-9-
<PAGE> 10
(E) 631,072 shares of Common Stock issued or issuable upon
the exercise of Stock Purchase Warrants dated April 11, 1995,
June 30, 1995, September 22, 1995, February 21, 1995, April 30,
1996 and August 29, 1997, issued in connection with the sale of
Series B Preferred Stock, or
(F) 7,637 shares of Common Stock issued or issuable upon
the exercise of the Stock Purchase Warrant dated September 1,
1993 issued to Dominion Ventures, Inc., or
(G) 60,000 Shares of Series B Preferred Stock issued or
issuable upon exercise of Warrants issued to Enterprise Partners
and Kleiner, Perkins, Caufield & Byers.
(H) 9,000 Shares of Series C Preferred Stock issued or
issuable upon exercise of that certain Warrant issued to Lease
Management Services, Inc.
(iii) In the event the corporation should at any time or from
time to time after the date upon which any shares of Series D Preferred
Stock were first issued (the "Purchase Date") fix a record date for the
effectuation of a split or subdivision of the outstanding shares of
Common Stock or the determination of holders of Common Stock entitled to
receive a dividend or other distribution payable in additional shares of
Common Stock or other securities or rights convertible into, or
entitling the holder thereof to receive directly or indirectly,
additional shares of Common Stock (hereinafter referred to as "Common
Stock Equivalents") without payment of any consideration by such holder
for the additional shares of Common Stock or the Common Stock
Equivalents (including the additional shares of Common Stock issuable
upon conversion or exercise thereof), then, as of such record date (or
the date of such dividend distribution, split or subdivision if no
record date is fixed), the Conversion Price of the Series A Preferred
Stock, Series B Preferred Stock, Series C Preferred Stock and Series D
Preferred Stock shall be appropriately decreased so that the number of
shares of Common Stock issuable on conversion of each share of such
series shall be increased in proportion to such increase of the
aggregate of shares of Common Stock outstanding and those issuable with
respect to such Common Stock Equivalents.
(iv) If the number of shares of Common Stock outstanding at any
time after the Purchase Date is decreased by a combination of the
outstanding shares of Common Stock, then, following the record date of
such combination, the Conversion Price for the Series A Preferred Stock,
Series B Preferred Stock, Series C Preferred Stock and Series D
Preferred Stock shall be appropriately increased so that the number of
shares of Common Stock issuable on conversion of each share of such
series shall be decreased in proportion to such decrease in outstanding
shares.
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<PAGE> 11
(d) Other Distributions. In the event this corporation shall declare a
distribution payable in securities of other persons, evidences of indebtedness
issued by this corporation or other persons, assets (excluding cash dividends)
or options or rights, then, in each such case for the purpose of this subsection
3(d), the holders of the Series A Preferred Stock, Series B Preferred Stock,
Series C Preferred Stock and Series D Preferred Stock shall be entitled to a
proportionate share of any such distribution as though they were the holders of
the number of shares of Common Stock of the corporation into which their shares
of the Series A Preferred Stock, Series B Preferred Stock, Series C Preferred
Stock or Series D Preferred Stock are convertible as of the record date fixed
for the determination of the holders of Common Stock of the corporation entitled
to receive such distribution.
(e) Recapitalizations. If at any time or from time to time there shall
be a recapitalization of the Common Stock (other than a subdivision, combination
or merger or sale of assets transaction provided for elsewhere in this Section 3
or in Section 2) provision shall be made so that the holders of the Series A
Preferred Stock, Series B Preferred Stock, Series C Preferred Stock and Series D
Preferred Stock shall thereafter be entitled to receive upon conversion of the
Series A Preferred Stock, Series B Preferred Stock, Series C Preferred Stock and
Series D Preferred Stock the number of shares of stock or other securities or
property of the Company or otherwise, to which a holder of Common Stock
deliverable upon conversion would have been entitled on such recapitalization.
In any such case, appropriate adjustment shall be made in the application of the
provisions of this Section 3 with respect to the rights of the holders of the
Series A Preferred Stock, Series B Preferred Stock, Series C Preferred Stock and
Series D Preferred Stock after the recapitalization to the end that the
provisions of this Section 3 (including adjustment of the Conversion Price then
in effect and the number of shares deliverable upon conversion of the Series A
Preferred Stock, Series B Preferred Stock, Series C Preferred Stock and Series D
Preferred Stock) shall be applicable after that event as nearly equivalent as
may be practicable.
(f) No Impairment. This corporation will not, by amendment of its
Certificate of Incorporation or through any reorganization, recapitalization,
transfer of assets, consolidation, merger, dissolution, issue or sale of
securities or any other voluntary action, avoid or seek to avoid the observance
or performance of any of the terms to be observed or performed hereunder by this
corporation, but will at all times in good faith assist in the carrying out of
all the provisions of this Section 3 and in the taking of all such action as may
be necessary or appropriate in order to protect the Conversion Rights of the
holders of the Series A Preferred Stock, Series B Preferred Stock, Series C
Preferred Stock and Series D Preferred Stock against impairment.
(g) No Fractional Shares. No fractional shares shall be issued upon
conversion of the Series A Preferred Stock, Series B Preferred Stock, Series C
Preferred Stock or Series D Preferred Stock, and the number of shares of Common
Stock to be issued shall be rounded to the nearest whole share. Whether or not
fractional shares are issuable upon such conversion shall be determined on the
basis of the total number of shares of the Series A Preferred Stock, Series B
Preferred Stock, Series C Preferred Stock or Series D Preferred Stock the holder
is at the time converting into Common Stock and the number of shares of Common
Stock issuable upon such aggregate conversion.
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<PAGE> 12
(h) Notices of Record Date; Certificates of Adjustment.
(i) In the event of any taking by this 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 (other than
a cash dividend) or other distribution, any right to subscribe for,
purchase or otherwise acquire any shares of stock of any class or any
other securities or property, or to receive any other right, this
corporation shall mail to each holder of the Series A Preferred Stock,
Series B Preferred Stock, Series C Preferred Stock and Series D
Preferred Stock, at least 20 days prior to the date specified therein, a
notice specifying the date on which any such record is to be taken for
the purpose of such dividend, distribution or right, and the amount and
character of such dividend, distribution or right.
(ii) Upon the occurrence of each adjustment or readjustment of
the Conversion Price of Series A Preferred Stock, Series B Preferred
Stock, Series C Preferred Stock or Series D Preferred Stock, pursuant to
this Section 3, this corporation, at its expense, shall promptly compute
such adjustment or readjustment in accordance with the terms hereof and
prepare and furnish to each holder of such series of Preferred Stock a
certificate setting forth such adjustment or readjustment and showing in
detail the facts upon which such adjustment or readjustment is based.
This corporation shall, upon the written request at any time of any
holder of such series of Preferred Stock furnish or cause to be
furnished to such holder a like certificate setting forth (A) such
adjustment and readjustment, (B) the Conversion Price at the time in
effect, and (C) the number of shares of Common Stock and the amount, if
any, of other property which at the time would be received upon the
conversion of a share of such series of Preferred Stock.
(i) Reservation of Stock Issuable Upon Conversion. This 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 Stock, Series B Preferred Stock, Series C
Preferred Stock and Series D Preferred Stock 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 Stock, Series B Preferred Stock,
Series C Preferred Stock and Series D Preferred Stock; and 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 Stock, Series B Preferred Stock, Series C Preferred Stock and Series D
Preferred Stock in addition to such other remedies as shall be available to the
holder of such Series A Preferred Stock, Series B Preferred Stock, Series C
Preferred Stock and Series D Preferred Stock, this 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 purposes.
(j) Notices. Any notice required by the provisions of this Section 3 to
be given to the holders of shares of the Series A Preferred Stock, Series B
Preferred Stock, Series C Preferred Stock and Series D Preferred Stock shall be
deemed given if deposited in the United
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<PAGE> 13
States mail, first class postage prepaid, and addressed to each holder of record
at his address appearing on the books of this corporation.
4. Voting Rights. The holder of each share of the Series A Preferred
Stock, Series B Preferred Stock, Series C Preferred Stock and Series D Preferred
Stock shall have the right to one vote for each share of Common Stock into which
such Series A Preferred Stock, Series B Preferred Stock, Series C Preferred
Stock and Series D Preferred Stock could then be converted (with any fractional
share determined on an aggregate conversion basis being rounded to the nearest
whole share), and with respect to such vote, such holder shall have full voting
rights and powers equal to the voting rights and powers of the holders of Common
Stock, and shall be entitled, notwithstanding any provision hereof, to notice of
any stockholders' meeting in accordance with the bylaws of this corporation, and
shall be entitled to vote, together with holders of Common Stock, with respect
to any matter upon which holders of Common Stock have the right to vote.
5. Protective Provisions. So long as at least an aggregate of 100,000
shares of the Series A Preferred Stock, Series B Preferred Stock, Series C
Preferred Stock and Series D Preferred Stock are outstanding, this corporation
shall not without first obtaining the approval (by vote or written consent, as
provided by law) of the holders of at least a majority of the voting power of
the then outstanding shares of the Series A Preferred Stock, Series B Preferred
Stock, Series C Preferred Stock and Series D Preferred Stock, voting together as
a single class:
(a) sell, convey, or otherwise dispose of or encumber all or
substantially all of its property or business or merge into or
consolidate with any other corporation (other than a wholly owned
subsidiary corporation) or effect any transaction or series of related
transactions in which more than 50% of the voting power of the
corporation is disposed of; or
(b) alter or change the powers, preferences and rights of, and
the qualifications, limitations and restrictions on, the shares of the
Series A Preferred Stock, Series B Preferred Stock, Series C Preferred
Stock or Series D Preferred Stock so as to affect adversely the shares;
or
(c) increase the authorized number of shares of Preferred Stock,
Series A Preferred Stock, Series B Preferred Stock, Series C Preferred
Stock or Series D Preferred Stock; or
(d) create any new class or series of stock or any other
securities convertible into equity securities of the corporation having
a preference over, or being on a parity with, the Series A Preferred
Stock, Series B Preferred Stock, Series C Preferred Stock or Series D
Preferred Stock with respect to voting, redemption, dividends or upon
liquidation or having rights equal or superior to the Series A Preferred
Stock, Series B Preferred Stock, Series C Preferred Stock or Series D
Preferred Stock under this Section 5.
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<PAGE> 14
6. Status of Converted or Redeemed Stock. In the event any shares of the
Series A Preferred Stock, Series B Preferred Stock, Series C Preferred Stock or
Series D Preferred Stock shall be converted pursuant to Section 3 hereof, the
shares so converted shall be canceled and shall not be issuable by the
corporation, and the Certificate of Incorporation of this corporation shall be
appropriately amended to effect the corresponding reduction in the corporation's
authorized capital stock.
7. No Preemptive Rights. The holders of the Preferred Stock shall not by
virtue of this Certificate of Incorporation have any preemptive rights.
C. Common Stock.
1. Dividend Rights. Subject to the prior rights of holders of all
classes of stock at the time outstanding having prior rights as to dividends,
the holders of the Common Stock shall be entitled to receive, when and as
declared by the Board of Directors, out of any assets of the corporation legally
available therefor, such dividends as may be declared from time to time by the
Board of Directors.
2. Liquidation Rights. Upon the liquidation, dissolution or winding up
of the corporation, the assets of the corporation shall be distributed as
provided in Section 2 of Division B of this Article IV.
3. Redemption. The Common Stock is not redeemable.
4. Voting Rights. The holder of each share of Common Stock shall have
the right to one vote, and shall be entitled to notice of any stockholders'
meeting in accordance with the bylaws of this corporation, and shall be entitled
to vote upon such matters and in such manner as may be provided by law.
5. No Preemptive Rights. The holders of the Common Stock shall not by
virtue of this Certificate of Incorporation have any preemptive rights.
ARTICLE V
The corporation is to have perpetual existence.
ARTICLE VI
In furtherance and not in limitation of the powers conferred by the laws
of the State of Delaware:
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<PAGE> 15
A. The board of directors of the corporation is expressly authorized to
adopt, amend or repeal the bylaws of the Corporation; provided, however, that
the bylaws may only be amended in accordance with the provisions thereof.
B. Elections of directors need not be by written ballot unless the
bylaws of the corporation shall so provide.
C. The books of the corporation may be kept at such place within or
without the State of Delaware as the bylaws of the corporation may provide or as
may be designated from time to time by the board of directors of the
corporation.
ARTICLE VII
Whenever a compromise or arrangement is proposed between the Corporation
and its creditors or any class of them and/or between the Corporation and its
stockholders or any class of them, any court of equitable jurisdiction within
the State of Delaware may, on the application in a summary way of the
Corporation or of any creditor or stockholder thereof or on the application of
any receivers appointed for the Corporation under the provisions of section 291
of Title 8 of the Delaware Code or on the application of trustees in dissolution
or of any receiver or receivers appointed for the Corporation under the
provisions of section 279 of Title 8 of the Delaware Code order a meeting of the
creditors or class of creditors, and/or the stockholders or class of
stockholders of the Corporation, as the case may be, to be summoned in such
manner as the said court directs. If a majority, in number representing
three-fourths in value of the creditors or class of creditors, and/or of the
stockholders or class of stockholders of the Corporation, as the case may be,
agree to any compromise or arrangement and to any reorganization of this
Corporation as consequence of such compromise or arrangement, the said
compromise or arrangement and the said reorganization shall if sanctioned by the
court to which the said application has been made, be binding on all the
creditors or class of creditors, and/or on all the stockholders or class of
stockholders, of the Corporation, as the case may be, and also on the
Corporation.
ARTICLE VIII
A. No Personal Liability. A director of the Corporation shall not be
personally liable to the Corporation or its stockholders for monetary damages
for breach of fiduciary duty as a director, except for liability (1) for any
breach of the director's duty of loyalty to the Corporation and its
stockholders; (2) for acts or omissions not in good faith or which involve
intentional misconduct or knowing violations of law; (3) under section 174 of
the Delaware General Corporation law; or (4) for any transaction from which the
director derived an improper personal benefit.
B. Indemnification. Each person who is or is made a party or is
threatened to be made a party to or is involved in any action, suit or
proceeding, whether civil, criminal, administrative or investigative
(hereinafter a "proceeding"), by reason of the fact that he or she, or a person
of whom he or she is the legal representative, is or was a director or officer
of the
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<PAGE> 16
corporation or is or was serving at the request of the corporation as a
director, officer, employee or agent of another corporation or of a partnership,
joint venture, trust or other enterprise, including service with respect to
employee benefit plans, whether the basis of such proceeding is alleged action
in an official capacity as a director, officer, employee or agent or in any
other capacity while serving as a director, officer, employee or agent, shall be
indemnified and held harmless by the corporation to the fullest extent
authorized by the Delaware General Corporation Law, as the same exists or may
hereafter be amended (but, in the case of any such amendment, only to the extent
that such amendment permits the corporation to provide broader indemnification
rights than said law permitted the corporation to provide prior to such
amendment), against all expense, liability and loss (including attorneys' fees,
judgments, fines, ERISA excise taxes or penalties and amounts paid or to be paid
in settlement) reasonably incurred or suffered by such person in connection
therewith and such indemnification shall continue as to a person who has ceased
to be a director, officer, employee or agent and shall inure to the benefit of
his or her heirs, executors and administrators; provided, however, that, except
as provided in the second paragraph hereof, the corporation shall indemnify any
such person seeking indemnification in connection with a proceeding (or part
thereof) initiated by such person only if such proceeding (or part thereof) was
authorized by the Board of Directors of the corporation. The right to
indemnification conferred in this section shall be a contract right and shall
include the right to be paid by the corporation for any expenses incurred in
defending any such proceeding in advance of its final disposition; provided,
however, that, if the Delaware General Corporation Law requires, the payment of
such expenses incurred by a director or officer in his or her capacity as a
director or officer (and not in any other capacity in which service was or is
rendered by such person while a director or officer, including, without
limitation, service to an employee benefit plan) in advance of the final
disposition of a proceeding, shall be made only upon delivery to the corporation
of an undertaking, by or on behalf of such director or officer, to repay all
amounts so advanced if it shall ultimately be determined that such director or
officer is not entitled to be indemnified under this section or otherwise. The
corporation may, by action of its Board of Directors, provide indemnification to
employees and agents of the corporation with the same scope and effect as the
foregoing indemnification of directors and officers.
If a claim under the first paragraph of this section is not paid in full
by the corporation within thirty (30) days after a written claim has been
received by the corporation, the claimant may at any time thereafter bring suit
against the corporation to recover the unpaid amount of the claim and, if
successful in whole or in part, the claimant shall be entitled to be paid also
the expense of prosecuting such claim. It shall be a defense to any such action
(other than an action brought to enforce a claim for expenses incurred in
defending any proceeding in advance of its final disposition where the required
undertaking, if any is required, has been tendered to the corporation) that the
claimant has not met the standards of conduct which make it permissible under
the Delaware General Corporation Law for the corporation to indemnify the
claimant for the amount claimed, but the burden of proving such defense shall be
on the corporation. Neither the failure of the corporation (including its Board
of Directors, independent legal counsel, or its stockholders) to have made a
determination prior to the commencement of such action that indemnification of
the claimant is proper in the circumstances because he or she has met the
applicable standard of conduct set forth in the Delaware General Corporation
Law, nor an actual determination by the corporation (including its Board of
Directors, independent legal counsel, or its stockholders) that the claimant has
not met such applicable standard of conduct, shall be a
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<PAGE> 17
defense to the action or create a presumption that the claimant has not met the
applicable standard of conduct.
The right to indemnification and the payment of expenses incurred in
defending a proceeding in advance of its final disposition conferred in this
section shall not be exclusive of any other right which any person may have or
hereafter acquire under any statute, provision of the Restated Certificate of
Incorporation, by-law, agreement, vote of stockholders or disinterested
directors or otherwise.
C. Insurance. The corporation may maintain insurance, at its expense, to
protect itself and any director, officer, employee or agent of the corporation
or another corporation, partnership, joint venture, trust or other enterprise
against any such expense, liability or loss, whether or not the corporation
would have the power to indemnify such person against such expense, liability or
loss under the Delaware General Corporation Law.
D. Repeal and Modification. Any repeal or modification of the foregoing
provisions of this Article VIII shall not adversely affect any right or
protection of an director, officer, employee or agent of the corporation
existing at the time of such repeal or modification.
E. Vote Required to Amend or Repeal. The amendment or repeal of this
Article VIII shall require the approval of the holders of shares representing at
least sixty six and two-thirds percent (66-2/3%) of the shares of the
corporation entitled to vote in the election of directors, voting as one class.
ARTICLE IX
This corporation reserves the right to amend or repeal any provision
contained in this Certificate of Incorporation, in the manner now or hereafter
prescribed by statute, and all rights conferred upon a stockholder herein are
granted subject to this reservation.
* * * * *
FOURTH: This Restated Certificate of Incorporation was duly adopted by
the Board of Directors of the corporation.
FIFTH: This Restated Certificate of Incorporation was duly adopted by
the written consent of the sole stockholder of the corporation in accordance
with Sections 242 and 245 of the General Corporation Law of the State of
Delaware and written notice of such action has been given as provided in Section
228.
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<PAGE> 18
IN WITNESS WHEREOF, Nanogen (Delaware), Inc. has caused this certificate
to be signed by the undersigned officer, thereunto duly authorized, this 7th day
of November 1997.
By: /s/ TINA S. NOVA, PH.D.
------------------------------------
Tina S. Nova, Ph.D.
President and Chief Operating Officer
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<PAGE> 1
EXHIBIT 3.(i)2
CERTIFICATE OF AMENDMENT TO
RESTATED CERTIFICATE OF INCORPORATION
OF
NANOGEN, INC.,
(A DELAWARE CORPORATION)
The undersigned, Harry J. Leonhardt, Esq., hereby certifies that:
1. He is the Secretary of Nanogen, Inc., a Delaware corporation.
2. Section A of Article IV of the Restated Certificate of Incorporation
of this Corporation is amended to read in its entirety as follows:
" A. Classes of Stock. 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 this corporation is
authorized to issue is Fifty-Five Million Five Hundred Thousand
(55,500,000) shares, of which Forty Million (40,000,000) shares of the
par value of One-Tenth of One Cent ($.001) shall be Common Stock and
Fifteen Million Five Hundred Thousand (15,500,000) shares of the par
value of One-Tenth of One Cent ($.001) shall be Preferred Stock. At the
time this amendment becomes effective, each three shares of the Common
Stock, par value of One Tenth of One Cent ($.001) per share, issued and
outstanding at such time shall be, and hereby are, reduced and converted
into two fully paid and nonassessable shares of Common Stock, par value
of One Tenth of One Cent ($.001) per share, of the corporation as herein
authorized. Each outstanding stock certificate of this corporation which
immediately prior to the time this amendment becomes effective
represented one or more shares of Common Stock, par value of One Tenth
of One Cent ($.001) per share, shall thereafter represent the number of
whole shares of Common Stock, par value of One Tenth of One Cent ($.001)
per share, determined by dividing the number of shares represented by
such certificate immediately prior to the time this amendment becomes
effective by 1.5 and rounding such number down to the nearest whole
integer. The amount of capital represented by the post-split shares in
the aggregate at the time this Certificate of Amendment becomes
effective shall be adjusted by the transfer of One Tenth of One Cent
($.001) from the capital account of the Common Stock to the additional
paid in capital account for each post-split share issued, such transfer
to be made at such time. The corporation shall not be required to issue
or deliver any fractional shares of Common Stock. Cash shall be paid in
lieu of fractional shares. There shall be designated as capital in
respect of such post-split shares an amount equal to the aggregate par
value of such shares. Upon surrender by a holder of Common Stock of a
certificate or certificates for Common Stock, par value of One Tenth of
One Cent ($.001), duly endorsed, at the office of the corporation, the
corporation shall, as soon as
<PAGE> 2
practicable thereafter, issue and deliver at such office to such holder
of Common Stock, or to the nominee or nominees of such holder, a
certificate or certificates for the number of shares of Common Stock,
par value of One Tenth of One Cent ($.001) per share and cash equal to
the fair market value of any fractional share of Common Stock on the
date this Certificate of Amendment to the Restated Certificate of
Incorporation is filed, to which such holder shall be entitled as
aforesaid.
The Preferred Stock authorized by this Restated Certificate of
Incorporation, as amended, shall be issued by series as set forth
herein. The first series of Preferred Stock shall be designated "Series
A Preferred Stock" and shall consist of Two Million Three Hundred
Thirty-Nine Thousand Six Hundred Sixty-Seven (2,339,667) shares. The
second series of Preferred Stock shall be designated "Series B Preferred
Stock" and shall consist of Three Million Eight Hundred Thousand Six
Hundred (3,800,600) shares. The third series of Preferred Stock shall be
designated "Series C Preferred Stock" and shall consist of Six Million
Seven Hundred Thousand (6,700,000) shares. The fourth series of
Preferred Stock shall be designated "Series D Preferred Stock" and shall
consist of Two Million Two Hundred Fifty Thousand (2,250,000) shares."
3. Section (B)(3)(a)(ii) of Article IV of the Restated Certificate of
Incorporation of this Corporation is amended to read in its entirety as follows:
"(a) Each share of the Series A Preferred Stock, Series B Preferred
Stock, Series C Preferred Stock and Series D Preferred Stock shall
automatically be converted into shares of Common Stock at the Conversion
Price for such Series A Preferred Stock, Series B Preferred Stock,
Series C Preferred Stock and Series D Preferred Stock immediately upon
the earlier of (a) the consummation of the corporation's sale of its
Common Stock in a bona fide, firm commitment underwriting pursuant to a
registration statement on Form S-1 under the Securities Act of 1933, as
amended, the public offering price of which was not less than $9.00 per
share (after giving effect to the two-for-three reverse stock split
referenced in Article IV, Section A hereof, and adjusted to reflect any
stock dividends, stock splits, stock combinations or recapitalizations
occurring subsequent to the time this Certificate of Amendment becomes
effective) and $7,500,000 in the aggregate or (b) the receipt of the
approval or consent to such conversion by at least seventy-five percent
(75%) of the then-outstanding shares of the Series A Preferred Stock,
Series B Preferred Stock, Series C Preferred Stock and Series D
Preferred Stock voting together as a class."
4. Section (B)(3)(g) of Article IV of the Restated Certificate of
Incorporation of this Corporation is amended to read in its entirety as follows:
"(g) No Fractional Shares. No fractional shares shall be issued upon
conversion of the Series A Preferred Stock, Series B Preferred Stock, Series C
Preferred Stock or Series D Preferred Stock. Whether or not fractional shares
are issuable upon such conversion shall be determined on the basis of the total
number of shares of the Series A Preferred Stock, Series B Preferred Stock,
Series C Preferred Stock or Series D Preferred Stock the holder is at the time
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<PAGE> 3
converting into Common Stock and the number of shares of Common Stock issuable
upon such aggregate conversion. If a fractional share interest arises upon any
conversion of the Series A Preferred Stock, Series B Preferred Stock, Series C
Preferred Stock or Series D Preferred Stock, the corporation shall eliminate
such fractional share interest upon payment to the former holder of such
converted stock of an amount of cash computed by multiplying such fractional
interest by the current market value of a full share of Common Stock."
5. The foregoing amendments to the Restated Certificate of Incorporation
have been duly approved by resolution of the Board of Directors.
6. The foregoing amendment have been duly adopted by the required vote
of stockholders in accordance with Section 242 of the General Corporation Law of
the State of Delaware. Such amendment was approved and adopted by written
consent of the stockholders. The number of shares voting in favor of the
amendment equaled or exceeded the vote required. The percentage vote required
was (i) more than 50% of the outstanding shares of Common Stock and Preferred
Stock, voting together as a single class and (ii) more than 50% of the Preferred
Stock voting as a separate class.
IN WITNESS WHEREOF, Nanogen, Inc. has caused this certificate to be
signed by the undersigned officer, thereunto duly authorized, this 6th day of
April 1998 in the City of San Diego, State of California.
By: /s/ Harry J. Leonhardt, Esq.
------------------------------------------
Harry J. Leonhardt, Esq.
Vice President, General Counsel
and Secretary
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<PAGE> 1
Exhibit 5.1
PILLSBURY MADISON & SUTRO LLP
P.O. BOX 7880
SAN FRANCISCO, CA 94120
Tel: (415) 983-1000
Fax: (415) 983-1200
April 9, 1998
Nanogen, Inc.
10398 Pacific Center Court
San Diego, California 92121
Re: Registration Statement on Form S-1
Ladies and Gentlemen:
We are acting as counsel for Nanogen, Inc., a Delaware corporation (the
"Company"), in connection with the registration under the Securities Act of
1933, as amended, of 4,140,000 shares of Common Stock, par value $.001 per share
(the "Common Stock"), of the Company (including 540,000 shares subject to the
underwriters' over-allotment option) to be offered and sold by the Company. In
this regard we have participated in the preparation of a Registration Statement
on Form S-1 relating to such 4,140,000 shares of Common Stock. (Such
Registration Statement, as amended, and including any registration statement
related thereto and filed pursuant to Rule 462(b) under the Securities Act (a
"Rule 462(b) registration statement") is herein referred to as the "Registration
Statement.")
We are of the opinion that the shares of Common Stock to be offered and
sold by the Company (including any shares of Common Stock registered pursuant to
a Rule 462(b) registration statement) have been duly authorized and, when issued
and sold by the Company in the manner described in the Registration Statement
and in accordance with the resolutions adopted by the Board of Directors of the
Company, will be legally issued, fully paid and nonassessable.
We hereby consent to the filing of this opinion as Exhibit 5.1 to the
Registration Statement and to the use of our name under the caption "Legal
Matters" in the Registration Statement and in the Prospectus included therein.
Very truly yours,
PILLSBURY MADISON & SUTRO LLP
<PAGE> 1
EXHIBIT 10.3
1997 STOCK INCENTIVE PLAN OF
NANOGEN, INC.
(Adopted Effective as of August 1, 1997)
<PAGE> 2
TABLE OF CONTENTS
<TABLE>
<S> <C> <C>
ARTICLE 1. INTRODUCTION . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1
ARTICLE 2. ADMINISTRATION . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1
2.1 Committee Composition . . . . . . . . . . . . . . . . . . . . . . . . . 1
2.2 Committee Responsibilities . . . . . . . . . . . . . . . . . . . . . . 2
ARTICLE 3. SHARES AVAILABLE FOR GRANTS. . . . . . . . . . . . . . . . . . . . . . 2
3.1 Basic Limitation . . . . . . . . . . . . . . . . . . . . . . . . . . . 2
3.2 Additional Shares . . . . . . . . . . . . . . . . . . . . . . . . . . . 2
3.3 Dividend Equivalents . . . . . . . . . . . . . . . . . . . . . . . . . 2
ARTICLE 4. ELIGIBILITY . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2
4.1 General Rules . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2
4.2 Outside Directors . . . . . . . . . . . . . . . . . . . . . . . . . . . 3
4.3 Incentive Stock Options . . . . . . . . . . . . . . . . . . . . . . . . 3
ARTICLE 5. OPTIONS . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 3
5.1 Stock Option Agreement . . . . . . . . . . . . . . . . . . . . . . . . 3
5.2 Number of Shares . . . . . . . . . . . . . . . . . . . . . . . . . . . 3
5.3 Exercise Price . . . . . . . . . . . . . . . . . . . . . . . . . . . . 3
5.4 Exercisability and Term . . . . . . . . . . . . . . . . . . . . . . . . 4
5.5 Effect of Change in Control . . . . . . . . . . . . . . . . . . . . . . 4
5.6 Modification or Assumption of Options. . . . . . . . . . . . . . . . . 4
5.7 Other Requirements Prior to Company's Initial Public Offering . . . . . 4
ARTICLE 6. PAYMENT FOR OPTION SHARES . . . . . . . . . . . . . . . . . . . . . . . 4
6.1 General Rule . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 4
6.2 Surrender of Stock . . . . . . . . . . . . . . . . . . . . . . . . . . 5
6.3 Exercise/Sale . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 5
6.4 Exercise/Pledge . . . . . . . . . . . . . . . . . . . . . . . . . . . . 5
6.5 Promissory Note . . . . . . . . . . . . . . . . . . . . . . . . . . . . 5
6.6 Other Forms of Payment . . . . . . . . . . . . . . . . . . . . . . . . 5
ARTICLE 7. STOCK APPRECIATION RIGHTS . . . . . . . . . . . . . . . . . . . . . . . 5
7.1 SAR Agreement . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 5
7.2 Number of Shares . . . . . . . . . . . . . . . . . . . . . . . . . . . 6
7.3 Exercise Price . . . . . . . . . . . . . . . . . . . . . . . . . . . . 6
7.4 Exercisability and Term . . . . . . . . . . . . . . . . . . . . . . . . 6
7.5 Effect of Change in Control . . . . . . . . . . . . . . . . . . . . . . 6
7.6 Exercise of SARs . . . . . . . . . . . . . . . . . . . . . . . . . . . 6
7.7 Modification or Assumption of SARs. . . . . . . . . . . . . . . . . . . 6
ARTICLE 8. RESTRICTED SHARES AND STOCK UNITS . . . . . . . . . . . . . . . . . . . 7
8.1 Time, Amount and Form of Awards . . . . . . . . . . . . . . . . . . . . 7
8.2 Payment for Awards . . . . . . . . . . . . . . . . . . . . . . . . . . 7
8.3 Vesting Conditions . . . . . . . . . . . . . . . . . . . . . . . . . . 7
8.4 Form and Time of Settlement of Stock Units . . . . . . . . . . . . . . 7
8.5 Death of Recipient . . . . . . . . . . . . . . . . . . . . . . . . . . 8
8.6 Creditors' Rights . . . . . . . . . . . . . . . . . . . . . . . . . . . 8
</TABLE>
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<PAGE> 3
<TABLE>
<S> <C> <C>
ARTICLE 9. VOTING AND DIVIDEND RIGHTS . . . . . . . . . . . . . . . . . . . . . . 8
9.1 Restricted Shares . . . . . . . . . . . . . . . . . . . . . . . . . . . 8
9.2 Stock Units . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 8
ARTICLE 10. PROTECTION AGAINST DILUTION . . . . . . . . . . . . . . . . . . . . . . 8
10.1 Adjustments . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 8
10.2 Reorganizations . . . . . . . . . . . . . . . . . . . . . . . . . . . . 9
ARTICLE 11. AWARDS UNDER OTHER PLANS . . . . . . . . . . . . . . . . . . . . . . . 9
ARTICLE 12. PAYMENT OF DIRECTOR'S FEES IN SECURITIES . . . . . . . . . . . . . . . 9
12.1 Effective Date . . . . . . . . . . . . . . . . . . . . . . . . . . . . 9
12.2 Elections to Receive NSOs, Restricted Shares or Stock Units . . . . . . 9
12.3 Number and Terms of NSOs, Restricted Shares or Stock Units . . . . . . 9
ARTICLE 13. LIMITATION ON RIGHTS . . . . . . . . . . . . . . . . . . . . . . . . . 10
13.1 Retention Rights . . . . . . . . . . . . . . . . . . . . . . . . . . . 10
13.2 Stockholders' Rights . . . . . . . . . . . . . . . . . . . . . . . . . 10
13.3 Regulatory Requirements . . . . . . . . . . . . . . . . . . . . . . . . 10
ARTICLE 14. LIMITATION ON PAYMENTS . . . . . . . . . . . . . . . . . . . . . . . . 10
14.1 Gross-Up Payment . . . . . . . . . . . . . . . . . . . . . . . . . . . 10
14.2 Determination by Accountant . . . . . . . . . . . . . . . . . . . . . . 10
14.3 Underpayments and Overpayments . . . . . . . . . . . . . . . . . . . . 11
14.4 Related Corporations . . . . . . . . . . . . . . . . . . . . . . . . . 11
ARTICLE 15. WITHHOLDING TAXES . . . . . . . . . . . . . . . . . . . . . . . . . . . 12
15.1 General . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 12
15.2 Share Withholding . . . . . . . . . . . . . . . . . . . . . . . . . . . 12
ARTICLE 16. ASSIGNMENT OR TRANSFER OF AWARDS . . . . . . . . . . . . . . . . . . . 12
16.1 General . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 12
16.2 Trusts . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 12
ARTICLE 17. FUTURE OF THE PLAN . . . . . . . . . . . . . . . . . . . . . . . . . . 13
17.1 Term of the Plan . . . . . . . . . . . . . . . . . . . . . . . . . . . 13
17.2 Amendment or Termination . . . . . . . . . . . . . . . . . . . . . . . 13
ARTICLE 18. DEFINITIONS . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 13
ARTICLE 19. EXECUTION . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 17
</TABLE>
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<PAGE> 4
1997 STOCK INCENTIVE PLAN OF
NANOGEN, INC.
ARTICLE 1. INTRODUCTION.
The Plan was adopted by the Board effective as of August 1, 1997, and
was approved by the Company's stockholders as of August 1, 1997. The Plan is
effective as of August 1, 1997. However, Articles 7, 8 and 9 shall not apply
prior to the Company's initial public offering. Effective November 21, 1997
the Plan was amended to increase the number of shares under the Plan by 600,000
(post-split) shares.
The purpose of the Plan is to promote the long-term success of the
Company and the creation of stockholder value by (a) encouraging Key Employees
to focus on critical long-range objectives, (b) encouraging the attraction and
retention of Key Employees with exceptional qualifications and (c) linking Key
Employees directly to stockholder interests through increased stock ownership.
The Plan seeks to achieve this purpose by providing for Awards in the form of
Restricted Shares, Stock Units, Options (which may constitute incentive stock
options or nonstatutory stock options) or stock appreciation rights.
The Plan shall be governed by, and construed in accordance with, the
laws of the State of California.
ARTICLE 2. ADMINISTRATION.
2.1 Committee Composition. The Plan shall be administered by
the Committee. Except as provided below, the Committee shall consist
exclusively of directors of the Company, who shall be appointed by the Board.
In addition, the composition of the Committee shall satisfy:
(a) Such requirements, if any, as the Securities and
Exchange Commission may establish for administrators acting under
plans intended to qualify for exemption under Rule 16b-3 (or its
successor) under the Exchange Act; and
(b) Such requirements as the Internal Revenue Service may
establish for outside directors acting under plans intended to qualify
for exemption under section 162(m)(4)(C) of the Code.
The Board may act on its own behalf with respect to Outside Directors and may
also appoint one or more separate committees composed of one or more officers
of the Company who need not be directors of the Company and who need not
satisfy the foregoing requirements, who may administer the Plan with respect to
Key Employees who are not "covered employees" under section 162(m)(3) of the
Code and who are not required to report pursuant to Section 16(a) of the
Exchange Act.
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2.2 Committee Responsibilities. The Committee shall (a) select
the Key Employees who are to receive Awards under the Plan, (b) determine the
type, number, vesting requirements and other features and conditions of such
Awards, (c) interpret the Plan and (d) make all other decisions relating to the
operation of the Plan. The Committee may adopt such rules or guidelines as it
deems appropriate to implement the Plan. The Committee's determinations under
the Plan shall be final and binding on all persons.
ARTICLE 3. SHARES AVAILABLE FOR GRANTS.
3.1 Basic Limitation. Common Shares issued pursuant to the Plan
may be authorized but unissued shares or treasury shares. The aggregate number
of Common Shares available for Restricted Shares, Stock Units, Options and SARs
awarded under the Plan shall not exceed 2,241,341 (after giving effect to the
two-for-three reverse split of the Company's capital stock in April 1998. Of
the Common Shares available hereunder, no more than 25% in aggregate shall be
available with respect to Outside Directors. The limitation of this Section 3.1
shall be subject to adjustment pursuant to Article 10. The number of Common
Shares available under this Plan shall be increased by unexercised or forfeited
Common Shares under the Company's 1993 and 1995 Stock Plans.
3.2 Additional Shares. If Stock Units, Options or SARs are
forfeited or if Options or SARs terminate for any other reason before being
exercised, then the corresponding Common Shares shall again become available
for Awards under the Plan. If Restricted Shares are forfeited before any
dividends have been paid with respect to such Shares, then such Shares shall
again become available for Awards under the Plan. If Stock Units are settled,
then only the number of Common Shares (if any) actually issued in settlement of
such Stock Units shall reduce the number available under Section 3.1 and the
balance shall again become available for Awards under the Plan. If SARs are
exercised, then only the number of Common Shares (if any) actually issued in
settlement of such SARs shall reduce the number available under Section 3.1 and
the balance shall again become available for Awards under the Plan.
3.3 Dividend Equivalents. Any dividend equivalents distributed
under the Plan shall not be applied against the number of Restricted Shares,
Stock Units, Options or SARs available for Awards, whether or not such dividend
equivalents are converted into Stock Units.
ARTICLE 4. ELIGIBILITY.
4.1 General Rules. Only Key Employees (including, without
limitation, independent contractors who are not members of the Board) shall be
eligible for designation as Participants by the Committee.
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4.2 Outside Directors. The Committee may provide that the NSOs
that otherwise would be granted to an Outside Director under this Plan shall
instead be granted to an affiliate of such Outside Director. Such affiliate
shall then be deemed to be an Outside Director for purposes of the Plan,
provided that the service-related vesting and termination provisions pertaining
to the NSOs shall be applied with regard to the service of the Outside
Director.
4.3 Incentive Stock Options. Only Key Employees who are
common-law employees of the Company, a Parent or a Subsidiary shall be eligible
for the grant of ISOs. In addition, a Key Employee who owns more than 10% of
the total combined voting power of all classes of outstanding stock of the
Company or any of its Parents or Subsidiaries shall not be eligible for the
grant of an ISO unless the requirements set forth in section 422(c)(6) of the
Code are satisfied.
ARTICLE 5. OPTIONS.
5.1 Stock Option Agreement. Each grant of an Option under the
Plan shall be evidenced by a Stock Option Agreement between the Optionee and
the Company. Such Option shall be subject to all applicable terms of the Plan
and may be subject to any other terms that are not inconsistent with the Plan.
The Stock Option Agreement shall specify whether the Option is an ISO or an
NSO. The provisions of the various Stock Option Agreements entered into under
the Plan need not be identical. Options shall be granted in consideration of
services rendered to the Company or a Subsidiary. A Stock Option Agreement may
provide that a new Option will be granted automatically to the Optionee when he
or she exercises a prior Option and pays the Exercise Price in the form
described in Section 6.2.
5.2 Number of Shares. Each Stock Option Agreement shall specify
the number of Common Shares subject to the Option and shall provide for the
adjustment of such number in accordance with Article 10. Options granted to
any Optionee in a single calendar year shall in no event cover more than
750,000 Common Shares, subject to adjustment in accordance with Article 10.
5.3 Exercise Price. Each Stock Option Agreement shall specify
the Exercise Price; provided that the Exercise Price under an ISO shall in no
event be less than 100% of the Fair Market Value of a Common Share on the date
of grant and the Exercise Price under an NSO shall in no event be less than the
par value of the Common Shares subject to such NSO. In the case of an NSO, a
Stock Option Agreement may specify an Exercise Price that varies in accordance
with a predetermined formula while the NSO is outstanding, provided that prior
to the Company's initial public offering, the NSO Exercise Price shall be at
least 85% (110% for 10% shareholders) of the Fair Market Value of a Common
Share of Stock on the date of grant.
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5.4 Exercisability and Term. Each Stock Option Agreement shall
specify the date when all or any installment of the Option is to become
exercisable, provided that prior to the Company's initial public offering,
Options shall become exercisable pursuant to a schedule providing for at least
20% vesting per year over a five-year period (or, in the case of performance
options, to the extent permitted under applicable regulations of the California
Department of Corporations). The Stock Option Agreement shall also specify the
term of the Option; provided that the term of an ISO shall in no event exceed
10 years from the date of grant. A Stock Option Agreement may provide for
accelerated exercisability in the event of the Optionee's death, disability or
retirement or other events and may provide for expiration prior to the end of
its term in the event of the termination of the Optionee's service.
Options may be awarded in combination with SARs, and such an Award may
provide that the Options will not be exercisable unless the related SARs are
forfeited. NSOs may also be awarded in combination with Restricted Shares or
Stock Units, and such an Award may provide that the NSOs will not be
exercisable unless the related Restricted Shares or Stock Units are forfeited.
Options must be exercised within 90 days of the termination of
employment (six months for termination on account of death or disability).
5.5 Effect of Change in Control. The Committee may determine,
at the time of granting an Option or thereafter, that such Option shall become
fully exercisable as to all Common Shares subject to such Option in the event
that a Change in Control occurs with respect to the Company.
5.6 Modification or Assumption of Options. Within the
limitations of the Plan, the Committee may modify, extend or assume outstanding
options or may accept the cancellation of outstanding options (whether granted
by the Company or by another issuer) in return for the grant of new options for
the same or a different number of shares and at the same or a different
exercise price. The foregoing notwithstanding, no modification of an Option
shall, without the consent of the Optionee, alter or impair his or her rights
or obligations under such Option.
5.7 Other Requirements Prior to Company's Initial Public
Offering. Prior to the Company's initial public offering, Optionees shall
receive Company financial statements at least annually.
ARTICLE 6. PAYMENT FOR OPTION SHARES.
6.1 General Rule. The entire Exercise Price of Common Shares
issued upon exercise of Options shall be payable in cash at the time when such
Common Shares are purchased, except as follows:
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(a) In the case of an ISO granted under the Plan, payment
shall be made only pursuant to the express provisions of the
applicable Stock Option Agreement. The Stock Option Agreement may
specify that payment may be made in any form(s) described in this
Article 6.
(b) In the case of an NSO, the Committee may at any time
accept payment in any form(s) described in this Article 6.
6.2 Surrender of Stock. To the extent that this Section 6.2 is
applicable, payment for all or any part of the Exercise Price may be made with
Common Shares which have already been owned by the Optionee for more than six
months. Such Common Shares shall be valued at their Fair Market Value on the
date when the new Common Shares are purchased under the Plan.
6.3 Exercise/Sale. To the extent that this Section 6.3 is
applicable, payment may be made by the delivery (on a form prescribed by the
Company) of an irrevocable direction to a securities broker approved by the
Company to sell Common Shares and to deliver all or part of the sales proceeds
to the Company in payment of all or part of the Exercise Price and any
withholding taxes.
6.4 Exercise/Pledge. To the extent that this Section 6.4 is
applicable, payment may be made by the delivery (on a form prescribed by the
Company) of an irrevocable direction to pledge Common Shares to a securities
broker or lender approved by the Company, as security for a loan, and to
deliver all or part of the loan proceeds to the Company in payment of all or
part of the Exercise Price and any withholding taxes.
6.5 Promissory Note. To the extent that this Section 6.5 is
applicable, payment may be made with a full-recourse promissory note; provided
that the par value of the Common Shares shall be paid in cash.
6.6 Other Forms of Payment. To the extent that this Section 6.6
is applicable, payment may be made in any other form that is consistent with
applicable laws, regulations and rules.
ARTICLE 7. STOCK APPRECIATION RIGHTS.
7.1 SAR Agreement. Each grant of an SAR under the Plan shall be
evidenced by an SAR Agreement between the Optionee and the Company. Such SAR
shall be subject to all applicable terms of the Plan and may be subject to any
other terms that are not inconsistent with the Plan. The provisions of the
various SAR Agreements entered into under the Plan need not be identical. SARs
may be granted in consideration of a reduction in the Optionee's other
compensation.
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<PAGE> 9
7.2 Number of Shares. Each SAR Agreement shall specify the
number of Common Shares to which the SAR pertains and shall provide for the
adjustment of such number in accordance with Article 10. SARs granted to any
Optionee in a single calendar year shall in no event pertain to more than
300,000 Common Shares, subject to adjustment in accordance with Article 10.
7.3 Exercise Price. Each SAR Agreement shall specify the
Exercise Price. An SAR Agreement may specify an Exercise Price that varies in
accordance with a predetermined formula while the SAR is outstanding.
7.4 Exercisability and Term. Each SAR Agreement shall specify
the date when all or any installment of the SAR is to become exercisable. The
SAR Agreement shall also specify the term of the SAR. An SAR Agreement may
provide for accelerated exercisability in the event of the Optionee's death,
disability or retirement or other events and may provide for expiration prior
to the end of its term in the event of the termination of the Optionee's
service. SARs may also be awarded in combination with Options, Restricted
Shares or Stock Units, and such an Award may provide that the SARs will not be
exercisable unless the related Options, Restricted Shares or Stock Units are
forfeited. An SAR may be included in an ISO only at the time of grant but may
be included in an NSO at the time of grant or thereafter. An SAR granted under
the Plan may provide that it will be exercisable only in the event of a Change
in Control.
7.5 Effect of Change in Control. The Committee may determine,
at the time of granting an SAR or thereafter, that such SAR shall become fully
exercisable as to all Common Shares subject to such SAR in the event that a
Change in Control occurs with respect to the Company.
7.6 Exercise of SARs. The exercise of an SAR shall be subject
to the restrictions imposed by Rule 16b-3 (or its successor) under the Exchange
Act, if applicable. If, on the date when an SAR expires, the Exercise Price
under such SAR is less than the Fair Market Value on such date but any portion
of such SAR has not been exercised or surrendered, then such SAR shall
automatically be deemed to be exercised as of such date with respect to such
portion. Upon exercise of an SAR, the Optionee (or any person having the right
to exercise the SAR after his or her death) shall receive from the Company (a)
Common Shares, (b) cash or (c) a combination of Common Shares and cash, as the
Committee shall determine. The amount of cash and/or the Fair Market Value of
Common Shares received upon exercise of SARs shall, in the aggregate, be equal
to the amount by which the Fair Market Value (on the date of surrender) of the
Common Shares subject to the SARs exceeds the Exercise Price.
7.7 Modification or Assumption of SARs. Within the limitations
of the Plan, the Committee may modify, extend or assume outstanding SARs or may
accept the cancellation of outstanding
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<PAGE> 10
SARs (whether granted by the Company or by another issuer) in return for the
grant of new SARs for the same or a different number of shares and at the same
or a different exercise price. The foregoing notwithstanding, no modification
of an SAR shall, without the consent of the Optionee, alter or impair his or
her rights or obligations under such SAR.
ARTICLE 8. RESTRICTED SHARES AND STOCK UNITS.
8.1 Time, Amount and Form of Awards. Awards under the Plan may
be granted in the form of Restricted Shares, in the form of Stock Units, or in
any combination of both. Restricted Shares or Stock Units may also be awarded
in combination with NSOs or SARs, and such an Award may provide that the
Restricted Shares or Stock Units will be forfeited in the event that the
related NSOs or SARs are exercised.
8.2 Payment for Awards. To the extent that an Award is granted
in the form of newly issued Restricted Shares, the Award recipient, as a
condition to the grant of such Award, shall be required to pay the Company in
cash an amount equal to the par value of such Restricted Shares. To the extent
that an Award is granted in the form of Restricted Shares from the Company's
treasury or in the form of Stock Units, no cash consideration shall be required
of the Award recipients.
8.3 Vesting Conditions. Each Award of Restricted Shares or
Stock Units shall become vested, in full or in installments, upon satisfaction
of the conditions specified in the Stock Award Agreement. A Stock Award
Agreement may provide for accelerated vesting in the event of the Participant's
death, disability or retirement or other events. The Committee may determine,
at the time of making an Award or thereafter, that such Award shall become
fully vested in the event that a Change in Control occurs with respect to the
Company.
8.4 Form and Time of Settlement of Stock Units. Settlement of
vested Stock Units may be made in the form of (a) cash, (b) Common Shares or
(c) any combination of both, as determined by the Committee. The actual number
of Stock Units eligible for settlement may be larger or smaller than the number
included in the original Award, based on predetermined performance factors.
Methods of converting Stock Units into cash may include (without limitation) a
method based on the average Fair Market Value of Common Shares over a series of
trading days. Vested Stock Units may be settled in a lump sum or in
installments. The distribution may occur or commence when all vesting
conditions applicable to the Stock Units have been satisfied or have lapsed, or
it may be deferred to any later date. The amount of a deferred distribution
may be increased by an interest factor or by dividend equivalents. Until an
Award of Stock Units is settled, the number of such Stock Units shall be
subject to adjustment pursuant to Article 10.
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<PAGE> 11
8.5 Death of Recipient. Any Stock Units Award that becomes
payable after the recipient's death shall be distributed to the recipient's
beneficiary or beneficiaries. Each recipient of a Stock Units Award under the
Plan shall designate one or more beneficiaries for this purpose by filing the
prescribed form with the Company. A beneficiary designation may be changed by
filing the prescribed form with the Company at any time before the Award
recipient's death. If no beneficiary was designated or if no designated
beneficiary survives the Award recipient, then any Stock Units Award that
becomes payable after the recipient's death shall be distributed to the
recipient's estate.
8.6 Creditors' Rights. A holder of Stock Units shall have no
rights other than those of a general creditor of the Company. Stock Units
represent an unfunded and unsecured obligation of the Company, subject to the
terms and conditions of the applicable Stock Award Agreement.
ARTICLE 9. VOTING AND DIVIDEND RIGHTS.
9.1 Restricted Shares. The holders of Restricted Shares awarded
under the Plan shall have the same voting, dividend and other rights as the
Company's other stockholders. A Stock Award Agreement, however, may require
that the holders of Restricted Shares invest any cash dividends received in
additional Restricted Shares. Such additional Restricted Shares shall be
subject to the same conditions and restrictions as the Award with respect to
which the dividends were paid. Such additional Restricted Shares shall not
reduce the number of Common Shares available under Article 3.
9.2 Stock Units. The holders of Stock Units shall have no
voting rights. Prior to settlement or forfeiture, any Stock Unit awarded under
the Plan may, at the Committee's discretion, carry with it a right to dividend
equivalents. Such right entitles the holder to be credited with an amount
equal to all cash dividends paid on one Common Share while the Stock Unit is
outstanding. Dividend equivalents may be converted into additional Stock
Units. Settlement of dividend equivalents may be made in the form of cash, in
the form of Common Shares, or in a combination of both. Prior to distribution,
any dividend equivalents which are not paid shall be subject to the same
conditions and restrictions as the Stock Units to which they attach.
ARTICLE 10. PROTECTION AGAINST DILUTION.
10.1 Adjustments. In the event of a subdivision of the
outstanding Common Shares, a declaration of a dividend payable in Common
Shares, a declaration of a dividend payable in a form other than Common Shares
in an amount that has a material effect on the price of Common Shares, a
combination or consolidation of the outstanding Common Shares (by
reclassification or otherwise) into a lesser number of Common Shares, a
recapitalization, a spinoff or a similar occurrence, the Committee shall make
such adjustments as
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it, in its sole discretion, deems appropriate in one or more of (a) the number
of Options, SARs, Restricted Shares and Stock Units available for future Awards
under Article 3, (b) the limitations set forth in Sections 5.2 and 7.2, (c) the
number of NSOs to be granted to Outside Directors under Section 4.2, (d) the
number of Stock Units included in any prior Award which has not yet been
settled, (e) the number of Common Shares covered by each outstanding Option and
SAR or (f) the Exercise Price under each outstanding Option and SAR. Except as
provided in this Article 10, a Participant shall have no rights by reason of
any issue by the Company of stock of any class or securities convertible into
stock of any class, any subdivision or consolidation of shares of stock of any
class, the payment of any stock dividend or any other increase or decrease in
the number of shares of stock of any class.
10.2 Reorganizations. In the event that the Company is a party
to a merger or other reorganization, outstanding Options, SARs, Restricted
Shares and Stock Units shall be subject to the agreement of merger or
reorganization. Such agreement may provide, without limitation, for the
assumption of outstanding Awards by the surviving corporation or its parent,
for their continuation by the Company (if the Company is a surviving
corporation), for accelerated vesting and accelerated expiration (provided the
Company has previously had its initial public offering), or for settlement in
cash.
ARTICLE 11. AWARDS UNDER OTHER PLANS.
The Company may grant awards under other plans or programs. Such
awards may be settled in the form of Common Shares issued under this Plan.
Such Common Shares shall be treated for all purposes under the Plan like Common
Shares issued in settlement of Stock Units and shall, when issued, reduce the
number of Common Shares available under Article 3.
ARTICLE 12. PAYMENT OF DIRECTOR'S FEES IN SECURITIES.
12.1 Effective Date. No provision of this Article 12 shall be
effective unless and until the Board has determined to implement such
provision.
12.2 Elections to Receive NSOs, Restricted Shares or Stock Units.
An Outside Director may elect to receive his or her annual retainer payments
and meeting fees from the Company in the form of cash, NSOs, Restricted Shares,
Stock Units, or a combination thereof, as determined by the Board. Such NSOs,
Restricted Shares and Stock Units shall be issued under the Plan. An election
under this Article 12 shall be filed with the Company on the prescribed form.
12.3 Number and Terms of NSOs, Restricted Shares or Stock Units.
The number of NSOs, Restricted Shares or Stock Units to be granted to Outside
Directors in lieu of annual retainers and meeting fees that would otherwise be
paid in cash shall be calculated
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in a manner determined by the Board. The terms of such NSOs, Restricted Shares
or Stock Units shall also be determined by the Board.
ARTICLE 13. LIMITATION ON RIGHTS.
13.1 Retention Rights. Neither the Plan nor any Award granted
under the Plan shall be deemed to give any individual a right to remain an
employee, consultant or director of the Company, a Parent or a Subsidiary. The
Company and its Parents and Subsidiaries reserve the right to terminate the
service of any employee, consultant or director at any time, with or without
cause, subject to applicable laws, the Company's certificate of incorporation
and by-laws and a written employment agreement (if any).
13.2 Stockholders' Rights. A Participant shall have no dividend
rights, voting rights or other rights as a stockholder with respect to any
Common Shares covered by his or her Award prior to the issuance of a stock
certificate for such Common Shares. No adjustment shall be made for cash
dividends or other rights for which the record date is prior to the date when
such certificate is issued, except as expressly provided in Articles 8, 9 and
10.
13.3 Regulatory Requirements. Any other provision of the Plan
notwithstanding, the obligation of the Company to issue Common Shares under the
Plan shall be subject to all applicable laws, rules and regulations and such
approval by any regulatory body as may be required. The Company reserves the
right to restrict, in whole or in part, the delivery of Common Shares pursuant
to any Award prior to the satisfaction of all legal requirements relating to
the issuance of such Common Shares, to their registration, qualification or
listing or to an exemption from registration, qualification or listing.
ARTICLE 14. LIMITATION ON PAYMENTS.
14.1 Gross-Up Payment. In the event that it is determined that
any payment or transfer by the Company under the Plan to or for the benefit of
(the "Payment") would be subject to the excise tax imposed by section 4999 of
the Code or any interest or penalties with respect to such excise tax (such
excise tax, together with any such interest or penalties, are collectively
referred to as the "Excise Tax"), then the Participant shall be entitled to
receive an additional payment (a "Gross-Up Payment") in an amount that shall
fund the payment by the Participant of any Excise Tax on the Payment as well as
all income taxes imposed on the Gross-Up Payment, any Excise Tax imposed on the
Gross- Up Payment and any interest or penalties imposed with respect to taxes
on the Gross-Up Payment or any Excise Tax.
14.2 Determination by Accountant. All mathematical
determinations and all determinations of whether any of the Payments
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are "parachute payments" (within the meaning of section 280G of the Code)
including all determinations of whether a Gross-Up Payment is required, of the
amount of such Gross-Up Payment and of amounts determined under Section 14.3
shall be made by the independent auditors most recently selected by the Board
(the "Auditors"), which shall provide its determination (the "Determination"),
together with detailed supporting calculations regarding the amount of any
Gross-Up Payment and any other relevant matters, both to the Company and to the
Participant within seven business days of the Participant's termination date,
if applicable, or such earlier time as is requested by the Company or by the
Participant (if the Participant reasonably believes that any of the Total
Payments may be subject to the Excise Tax). If the Accounting Firm determines
that no Excise Tax is payable by the Participant, it shall furnish the
Participant with a written statement that the Auditors have concluded that no
Excise Tax is payable (including the reasons therefor) and that the Participant
has substantial authority not to report any Excise Tax on the Participant's
federal income tax return. If a Gross-Up Payment is determined to be payable,
it shall be paid to the Participant within five business days after the
Determination is delivered to the Company or the Participant. Any
determination by the Auditors shall be binding upon the Company and the
Participant, absent manifest error.
14.3 Underpayments and Overpayments. As a result of uncertainty
in the application of section 4999 of the Code at the time of the initial
determination by the Auditors hereunder, it is possible that Gross-Up Payments
not made by the Company should have been made ("Underpayments") or that
Gross-Up Payments will have been made by the Company which should not have been
made ("Overpayments"). In either event, the Auditors shall determine the
amount of the Underpayment or Overpayment that has occurred. In the case of an
Underpayment, the amount of such Underpayment shall promptly be paid by the
Company to or for the benefit of the Employee. In the case of an Overpayment,
the Employee shall, at the direction and expense of the Company, take such
steps as are reasonably necessary (including the filing of returns and claims
for refund), follow reasonable instructions from, and procedures established
by, the Company and otherwise reasonably cooperate with the Company to correct
such Overpayment; provided, however, that (i) the Employee shall in no event be
obligated to return to the Company an amount greater than the net after-tax
portion of the Overpayment that the Employee has retained or has recovered as a
refund from the applicable taxing authorities and (ii) this provision shall be
interpreted in a manner consistent with the intent of this Article 14, which is
to make the Employee whole, on an after-tax basis, for the application of the
Excise Tax, it being understood that the correction of an Overpayment may
result in the Employee's repaying to the Company an amount which is less than
the Overpayment.
14.4 Related Corporations. For purposes of this Article 14, the
term "Company" shall include affiliated corporations to the
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extent determined by the Auditors in accordance with section 280G(d)(5) of the
Code.
ARTICLE 15. WITHHOLDING TAXES.
15.1 General. To the extent required by applicable federal,
state, local or foreign law, a Participant or his or her successor shall make
arrangements satisfactory to the Company for the satisfaction of any
withholding tax obligations that arise in connection with the Plan. The
Company shall not be required to issue any Common Shares or make any cash
payment under the Plan until such obligations are satisfied.
15.2 Share Withholding. The Committee may permit a Participant
to satisfy all or part of his or her withholding or income tax obligations by
having the Company withhold all or a portion of any Common Shares that
otherwise would be issued to him or her or by surrendering all or a portion of
any Common Shares that he or she previously acquired. Such Common Shares shall
be valued at their Fair Market Value on the date when taxes otherwise would be
withheld in cash. Any payment of taxes by assigning Common Shares to the
Company may be subject to restrictions, including any restrictions required by
rules of the Securities and Exchange Commission.
ARTICLE 16. ASSIGNMENT OR TRANSFER OF AWARDS.
16.1 General. An Award granted under the Plan shall not be
anticipated, assigned, attached, garnished, optioned, transferred or made
subject to any creditor's process, whether voluntarily, involuntarily or by
operation of law, except as approved by the Committee. Notwithstanding the
foregoing, ISOs and, prior to the Company's initial public offering, NSOs may
not be transferable. However, this Article 16 shall not preclude a Participant
from designating a beneficiary who will receive any outstanding Awards in the
event of the Participant's death, nor shall it preclude a transfer of Awards by
will or by the laws of descent and distribution.
16.2 Trusts. Neither this Article 16 nor any other provision of
the Plan shall preclude a Participant from transferring or assigning Restricted
Shares to (a) the trustee of a trust that is revocable by such Participant
alone, both at the time of the transfer or assignment and at all times
thereafter prior to such Participant's death, or (b) the trustee of any other
trust to the extent approved in advance by the Committee in writing. A
transfer or assignment of Restricted Shares from such trustee to any person
other than such Participant shall be permitted only to the extent approved in
advance by the Committee in writing, and Restricted Shares held by such trustee
shall be subject to all of the conditions and restrictions set forth in the
Plan and in the applicable Stock Award Agreement, as if such trustee were a
party to such Agreement.
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ARTICLE 17. FUTURE OF THE PLAN.
17.1 Term of the Plan. The Plan, as set forth herein, was
adopted on _____________, 1997, and became effective August 1, 1997, except
that Articles 7, 8 and 9 shall not be effective prior to the date of the
Company's initial public offering. The Plan shall remain in effect until it is
terminated under Section 17.2, except that no ISOs shall be granted after July
31, 2007.
17.2 Amendment or Termination. The Board may, at any time and
for any reason, amend or terminate the Plan. An amendment of the Plan shall be
subject to the approval of the Company's stockholders only to the extent
required by applicable laws, regulations or rules. No Awards shall be granted
under the Plan after the termination thereof. The termination of the Plan, or
any amendment thereof, shall not affect any Award previously granted under the
Plan.
ARTICLE 18. DEFINITIONS.
18.1 "Award" means any award of an Option, an SAR, a Restricted
Share or a Stock Unit under the Plan.
18.2 "Board" means the Company's Board of Directors, as
constituted from time to time.
18.3 "Change in Control" shall mean the occurrence of any of the
following events:
(a) The consummation of a merger or consolidation of the
Company with or into another entity or any other corporate
reorganization, if more than 50% of the combined voting power of the
continuing or surviving entity's securities outstanding immediately
after such merger, consolidation or other reorganization is owned by
persons who were not stockholders of the Company immediately prior to
such merger, consolidation or other reorganization;
(b) A change in the composition of the Board, as a result
of which fewer than one-half of the incumbent directors are directors
who either:
(A) Had been directors of the Company 24 months
prior to such change; or
(B) Were elected, or nominated for election, to
the Board with the affirmative votes of at least a majority
of the directors who had been directors of the Company 24
months prior to such change and who were
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still in office at the time of the election or nomination;
or
(c) Any "person" (as such term is used in sections 13(d)
and 14(d) of the Exchange Act) by the acquisition or aggregation of
securities is or becomes the beneficial owner, directly or indirectly,
of securities of the Company representing 50% or more of the combined
voting power of the Company's then outstanding securities ordinarily
(and apart from rights accruing under special circumstances) having
the right to vote at elections of directors (the "Base Capital
Stock"); except that any change in the relative beneficial ownership
of the Company's securities by any person resulting solely from a
reduction in the aggregate number of outstanding shares of Base
Capital Stock, and any decrease thereafter in such person's ownership
of securities, shall be disregarded until such person increases in any
manner, directly or indirectly, such person's beneficial ownership of
any securities of the Company. Thus, for example, any person who owns
less than 50% of the Company's outstanding shares, shall cause a
Change in Control to occur as of any subsequent date if such person
then acquires an additional interest in the Company which, when added
to the person's previous holdings, causes the person to hold more than
50% of the Company's outstanding shares.
The term "Change in Control" shall not include the Company's initial public
offering or a transaction, the sole purpose of which is to change the state of
the Company's incorporation.
18.4 "Code" means the Internal Revenue Code of 1986, as amended.
18.5 "Committee" means a committee of the Board, as described in
Article 2.
18.6 "Common Share" means one share of the common stock of the
Company.
18.7 "Company" means Nanogen, Inc., a Delaware corporation.
18.8 "Exchange Act" means the Securities Exchange Act of 1934, as
amended.
18.9 "Exercise Price," in the case of an Option, means the amount for
which one Common Share may be purchased upon exercise of such Option, as
specified in the applicable Stock Option Agreement. "Exercise Price," in the
case of an SAR, means an amount, as specified in the applicable SAR Agreement,
which is subtracted from the Fair Market Value of one Common Share in
determining the amount payable upon exercise of such SAR.
18.10 "Fair Market Value" means the market price of Common Shares,
determined by the Committee as follows:
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(a) If the Common Shares were traded over-the-counter on
the date in question but was not traded on the Nasdaq Stock Market or
the Nasdaq National Market, then the Fair Market Value shall be equal
to the mean between the last reported representative bid and asked
prices quoted for such date by the principal automated inter-dealer
quotation system on which the Common Shares are quoted or, if the
Common Shares are not quoted on any such system, by the "Pink Sheets"
published by the National Quotation Bureau, Inc.;
(b) If the Common Shares were traded over-the-counter on
the date in question and were traded on the Nasdaq Stock Market or the
Nasdaq National Market, then the Fair Market Value shall be equal to
the last-transaction price quoted for such date by the Nasdaq Stock
Market or the Nasdaq National Market;
(c) If the Common Shares were traded on a stock exchange on
the date in question, then the Fair Market Value shall be equal to the
closing price reported by the applicable composite transactions report
for such date; and
(d) If none of the foregoing provisions is applicable, then
the Fair Market Value shall be determined by the Committee in good
faith on such basis as it deems appropriate.
Whenever possible, the determination of Fair Market Value by the Committee
shall be based on the prices reported in the Western Edition of The Wall Street
Journal. Such determination shall be conclusive and binding on all persons.
18.11 "ISO" means an incentive stock option described in section
422(b) of the Code.
18.12 "Key Employee" means (a) a common-law employee of the Company,
a Parent or a Subsidiary, (b) an Outside Director and (c) a consultant or
adviser who provides services to the Company, a Parent or a Subsidiary as an
independent contractor. Service as an Outside Director or as an independent
contractor shall be considered employment for all purposes of the Plan, except
as provided in Sections 4.2 and 4.3.
18.13 "NSO" means a stock option not described in sections 422 or 423
of the Code.
18.14 "Option" means an ISO or NSO granted under the Plan and
entitling the holder to purchase one Common Share.
18.15 "Optionee" means an individual or estate who holds an Option or
SAR.
18.16 "Outside Director" shall mean a member of the Board who is not
a common-law employee of the Company, a Parent or a Subsidiary.
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18.17 "Parent" means any corporation (other than the Company) in an
unbroken chain of corporations ending with the Company, if each of the
corporations other than the Company owns stock possessing 50% or more of the
total combined voting power of all classes of stock in one of the other
corporations in such chain. A corporation that attains the status of a Parent
on a date after the adoption of the Plan shall be considered a Parent
commencing as of such date.
18.18 "Participant" means an individual or estate who holds an Award.
18.19 "Plan" means this 1997 Stock Incentive Plan of Nanogen, Inc.,
as amended from time to time.
18.20 "Restricted Share" means a Common Share awarded under the Plan.
18.21 "SAR" means a stock appreciation right granted under the Plan.
18.22 "SAR Agreement" means the agreement between the Company and an
Optionee which contains the terms, conditions and restrictions pertaining to
his or her SAR.
18.23 "Stock Award Agreement" means the agreement between the Company
and the recipient of a Restricted Share or Stock Unit which contains the terms,
conditions and restrictions pertaining to such Restricted Share or Stock Unit.
18.24 "Stock Option Agreement" means the agreement between the
Company and an Optionee which contains the terms, conditions and restrictions
pertaining to his or her Option.
18.25 "Stock Unit" means a bookkeeping entry representing the
equivalent of one Common Share, as awarded under the Plan.
18.26 "Subsidiary" means any corporation (other than the Company) in
an unbroken chain of corporations beginning with the Company, if each of the
corporations other than the last corporation in the unbroken chain owns stock
possessing 50% or more of the total combined voting power of all classes of
stock in one of the other corporations in such chain. A corporation that
attains the status of a Subsidiary on a date after the adoption of the Plan
shall be considered a Subsidiary commencing as of such date.
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ARTICLE 19. EXECUTION.
To record the adoption of the Plan by the Board, the Company has
caused its duly authorized officer to affix the corporate name and seal hereto.
NANOGEN, INC.
By /s/ Harry J. Leonhardt
-----------------------------------
Harry J. Leonhardt, Esq.
Vice President, General
Counsel and Secretary
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<PAGE> 1
EXHIBIT 10.6
NANOGEN, INC.
EMPLOYEE STOCK PURCHASE PLAN
SECTION 1. PURPOSE OF THE PLAN.
The Plan was adopted by the Company's Board of Directors on November 21,
1997 and amended by the Board of Directors effective as of April 3, 1998,
subject to approval of the Company's stockholders. The Plan effective date is
the effective date of the Company's initial underwritten public offering.
The purpose of the Plan is to provide Eligible Employees with an
opportunity to increase their proprietary interest in the success of the Company
by purchasing Stock from the Company on favorable terms and to pay for such
purchases through payroll deductions. The Plan is intended to qualify under
section 423 of the Internal Revenue Code of 1986, as amended.
SECTION 2. ADMINISTRATION OF THE PLAN.
(a) The Committee. The Plan shall be administered by the Committee. The
interpretation and construction by the Committee of any provision of the Plan or
of any right to purchase Stock granted under the Plan shall be conclusive and
binding on all persons.
(b) Rules and Forms. The Committee may adopt such rules and forms under
the Plan as it considers appropriate.
SECTION 3. ENROLLMENT AND PARTICIPATION.
(a) Offering Periods. While the Plan is in effect, two overlapping
Offering Periods shall commence in each calendar year. Except for the first
Offering Period, Offering Periods shall consist of the 24-month periods
commencing on each January 1 and July 1. The first Offering Period shall
commence on the effective date of the Company's initial public offering and end
on December 31, 1999.
(b) Accumulation Periods. While the Plan is in effect, two Accumulation
Periods shall commence in each calendar year. Except for the first Accumulation
Period, Accumulation Periods shall consist of the six-month periods commencing
on each January 1 and July 1. The first Accumulation Period shall commence on
the effective date of the Company's initial public offering and end on June 30,
1998.
(c) Enrollment. Any individual who, on the day preceding the first day
of an Offering Period, qualifies as an
<PAGE> 2
Eligible Employee may elect to become a Participant in the Plan for such
Offering Period by executing the enrollment form prescribed for this purpose by
the Committee. The enrollment form shall be filed with the Company not later
than one week prior to the last working day prior to the commencement of such
Offering Period.
(d) Duration of Participation. Once enrolled in the Plan, a Participant
shall continue to participate until he or she ceases to be an Eligible Employee,
withdraws from the Plan or reaches the end of the Accumulation Period in which
he or she discontinued contributions. A Participant who discontinued
contributions under Section 4(d) or withdrew from the Plan under Section 5(a)
may again become a Participant, if he or she then is an Eligible Employee, by
following the procedure described in Subsection (c) above.
(e) Applicable Offering Period. For purposes of calculating the Purchase
Price under Section 7(b), the applicable Offering Period shall be determined as
follows:
(i) Once a Participant is enrolled in the Plan for an Offering
Period, such Offering Period shall continue to apply to him or her until
the earliest of (A) the end of such Offering Period, (B) the end of his
or her participation under Subsection (d) above or (C) reenrollment in a
subsequent Offering Period under Paragraph (ii) below.
(ii) In the event that the Fair Market Value of Stock on the last
trading day before the commencement of the Offering Period in which the
Participant is enrolled is higher than on the last trading day before
the commencement of any subsequent Offering Period, the Participant
shall automatically be re-enrolled for such subsequent Offering Period.
(iii) When a Participant reaches the end of an Offering Period
but his or her participation is to continue, then such Participant shall
automatically be re-enrolled for the Offering Period that commences
immediately after the end of the prior Offering Period.
SECTION 4. EMPLOYEE CONTRIBUTIONS.
(a) Frequency of Payroll Deductions. A Participant may purchase shares
of Stock under the Plan solely by means of payroll deductions. Payroll
deductions, as designated by the Participant pursuant to Subsection (b) below,
shall occur on each payday during participation in the Plan.
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<PAGE> 3
(b) Amount of Payroll Deductions. An Eligible Employee shall designate
on the enrollment form the portion of his or her Compensation that he or she
elects to have withheld for the purchase of Stock. Such portion shall be a whole
percentage of the Eligible Employee's Compensation, but not less than 1% nor
more than 15%.
(c) Changing Withholding Rate. If a Participant wishes to change the
rate of payroll withholding, he or she may do so by filing a new enrollment form
with the Company not later than one week prior to the last working day prior to
the commencement of the Accumulation Period for which such change is to be
effective.
(d) Discontinuing Payroll Deductions. If a Participant wishes to
discontinue employee contributions entirely, he or she may do so by filing a new
enrollment form at any time. Payroll withholding shall cease as soon as
reasonably practicable after such form has been received by the Company.
SECTION 5. WITHDRAWAL FROM THE PLAN.
(a) Withdrawal. A Participant may elect to withdraw from the Plan by
filing the prescribed form with the Company at any time before the last day of
an Accumulation Period. As soon as reasonably practicable thereafter, payroll
deductions shall cease and the entire amount credited to the Participant's Plan
Account shall be refunded to him or her in cash, without interest. No partial
withdrawals shall be permitted.
(b) Re-Enrollment After Withdrawal. A former Participant who has
withdrawn from the Plan shall not be a Participant until he or she re-enrolls in
the Plan under Section 3(b).
SECTION 6. TERMINATION OF EMPLOYMENT OR DEATH.
(a) Termination of Employment. Termination of employment as an Eligible
Employee for any reason, including death, shall be treated as an automatic
withdrawal from the Plan under Section 5(a). (A transfer from one Participating
Company to another shall not be treated as a termination of employment.)
(b) Death. In the event of the Participant's death, the amount credited
to his or her Plan Account shall be paid to a beneficiary designated by him or
her for this purpose on the prescribed form or, if none, to the Participant's
estate. Such form shall be valid only if it was filed with the Company before
the Participant's death.
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SECTION 7. PLAN ACCOUNTS AND PURCHASE OF SHARES.
(a) Plan Accounts. The Company shall maintain a Plan Account on its
books in the name of each Participant. Whenever an amount is deducted from the
Participant's Compensation under the Plan, such amount shall be credited to the
Participant's Plan Account. No interest shall be credited to Plan Accounts.
(b) Purchase Price. The Purchase Price for each share of Stock purchased
at the close of an Accumulation Period shall be the lower of:
(i) 85% of the Fair Market Value of such share on the last
trading day before the commencement of the applicable Offering Period
(as determined under Section 3(e)); or
(ii) 85% of the Fair Market Value of such share on the last
trading day in such Accumulation Period.
(c) Number of Shares Purchased. As of the last day of each Accumulation
Period, each Participant shall be deemed to have elected to purchase the number
of shares of Stock calculated in accordance with this Subsection (c), unless the
Participant has previously elected to withdraw from the Plan in accordance with
Section 5(a). The amount then in the Participant's Plan Account shall be divided
by the Purchase Price, and the number of shares that results shall be purchased
from the Company with the funds in the Participant's Plan Account. The foregoing
notwithstanding, no Participant shall purchase more than a maximum of 2,500
shares of Stock with respect to any Accumulation Period nor shares of Stock in
excess of the amounts set forth in Sections 8 and 12(a). The Committee may
determine with respect to all Participants that any fractional share, as
calculated under this Subsection (c), shall be rounded down to the next lower
whole share.
(d) Available Shares Insufficient. In the event that the aggregate
number of shares that all Participants elect to purchase during an Accumulation
Period exceeds the maximum number of shares remaining available for issuance
under Section 12(a), then the number of shares to which each Participant is
entitled shall be determined by multiplying the number of shares available for
issuance by a fraction, the numerator of which is the number of shares that such
Participant has elected to purchase and the denominator of which is the number
of shares that all Participants have elected to purchase.
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<PAGE> 5
(e) Issuance of Stock. Certificates representing the shares of Stock
purchased by a Participant under the Plan shall be issued to him or her as soon
as reasonably practicable after the close of the applicable Accumulation Period,
except that the Committee may determine that such shares shall be held for each
Participant's benefit by a broker designated by the Committee (unless the
Participant has elected that certificates be issued to him or her). Shares may
be registered in the name of the Participant or jointly in the name of the
Participant and his or her spouse as joint tenants with right of survivorship or
as community property.
(f) Unused Cash Balances. An amount remaining in the Participant's Plan
Account that represents the Purchase Price for any fractional share shall be
carried over in the Participant's Plan Account to the next Accumulation Period.
Any amount remaining in the Participant's Plan Account that represents the
Purchase Price for whole shares that could not be purchased by reason of
Subsection (c) above or Section 12(a) shall be refunded to the Participant in
cash, without interest.
(g) Failure of Shareholders to Approve Plan.
In the event shareholders of the Company do not approve this Plan, the
Participant's Plan Account shall be repaid to the Participant in cash and no
Company shares will be purchased for the Participant under this Plan.
SECTION 8. LIMITATIONS ON STOCK OWNERSHIP.
Any other provision of the Plan notwithstanding, no Participant shall be
granted a right to purchase Stock under the Plan if:
(a) Such Participant, immediately after his or her election to
purchase such Stock, would own stock possessing more than 5% of the
total combined voting power or value of all classes of stock of the
Company or any parent or Subsidiary of the Company; or
(b) Under the terms of the Plan, such Participant's rights to
purchase stock under this and all other qualified employee stock
purchase plans of the Company or any parent or Subsidiary of the Company
would accrue at a rate that exceeds $25,000 of the fair market value of
such stock (determined at the time when such right is granted) for each
calendar year for which such right or option is outstanding at any time.
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EXHIBIT 10.6
Ownership of stock shall be determined after applying the attribution rules of
section 424(d) of the Internal Revenue Code of 1986, as amended. For purposes of
this Section 8, each Participant shall be considered to own any stock that he or
she has a right or option to purchase under this or any other plan, and each
Participant shall be considered to have the right to purchase 25,000 shares of
Stock under this Plan with respect to each Accumulation Period.
SECTION 9. RIGHTS NOT TRANSFERABLE.
The rights of any Participant under the Plan, or any Participant's
interest in any Stock or moneys to which he or she may be entitled under the
Plan, shall not be transferable by voluntary or involuntary assignment or by
operation of law, or in any other manner other than by beneficiary designation
or the laws of descent and distribution. If a Participant in any manner attempts
to transfer, assign or otherwise encumber his or her rights or interest under
the Plan, other than by beneficiary designation or the laws of descent and
distribution, then such act shall be treated as an election by the Participant
to withdraw from the Plan under Section 5(a).
SECTION 10. NO RIGHTS AS AN EMPLOYEE.
Nothing in the Plan shall be construed to give any person the right to
remain in the employ of a Participating Company. Each Participating Company
reserves the right to terminate the employment of any person at any time, with
or without cause.
SECTION 11. NO RIGHTS AS A STOCKHOLDER.
A Participant shall have no rights as a stockholder with respect to any
shares that he or she has purchased, or may have a right to purchase, under the
Plan until the date of issuance of a stock certificate for such shares.
SECTION 12. STOCK OFFERED UNDER THE PLAN.
(a) Authorized Shares. The aggregate number of shares of Stock available
for purchase under the Plan shall be 300,000 (after giving effect to the 2-for-3
reverse split of the Company's capital stock), subject to adjustment pursuant to
this Section 12.
(b) Anti-Dilution Adjustments. The aggregate number of shares of Stock
offered under the Plan, the 2,500-share limitation described in Section 7(c) and
the price of shares that any Participant has elected to purchase shall be
adjusted proportionately by the Committee for any increase or decrease in the
number of outstanding shares of Stock resulting from a subdivision or
consolidation of shares, the
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<PAGE> 7
payment of a stock dividend, any other increase or decrease in such shares
effected without receipt or payment of consideration by the Company or the
distribution of the shares of a Subsidiary to the Company's stockholders.
(c) Reorganizations. In the event of a dissolution or liquidation of the
Company, or a merger or consolidation to which the Company is a constituent
corporation, the Plan shall terminate unless the plan of merger, consolidation
or reorganization provides otherwise, and all amounts that have been withheld
but not yet applied to purchase Stock hereunder shall be refunded, without
interest. The Plan shall in no event be construed to restrict in any way the
Company's right to undertake a dissolution, liquidation, merger, consolidation
or other reorganization.
SECTION 13. AMENDMENT OR DISCONTINUANCE.
The Board of Directors shall have the right to amend, suspend or
terminate the Plan at any time and without notice. Except as provided in Section
12, any increase in the aggregate number of shares of Stock to be issued under
the Plan shall be subject to approval by a vote of the stockholders of the
Company. In addition, any other amendment of the Plan shall be subject to
approval by a vote of the stockholders of the Company to the extent required by
an applicable law or regulation.
SECTION 14. DEFINITIONS.
(a) "Accumulation Period" means a six-month period during which
contributions may be made toward the purchase of Stock under the Plan, as
determined pursuant to Section 3(b).
(b) "Board of Directors" means the Board of Directors of the Company, as
constituted from time to time.
(c) "Committee" means a committee of the Board of Directors, consisting
of one or more directors appointed by the Board of Directors.
(d) "Company" means Nanogen, Inc., a Delaware corporation.
(e) "Compensation" means the total compensation paid in cash to a
Participant by a Participating Company, including salaries, wages, overtime pay
and commissions, but excluding bonuses, incentive compensation, moving or
relocation allowances, car allowances, imputed income attributable to cars or
life insurance, taxable fringe benefits and similar items, all as determined by
the Committee.
-7-
<PAGE> 8
(f) "Eligible Employee" means any employee of a Participating Company:
(i) Whose customary employment is for more than five months per
calendar year and for more than 20 hours per week; and
(ii) Who has been an employee of a Participating Company for not
less than one month.
(g) "Fair Market Value" shall mean the market price of Stock, determined
by the Committee as follows:
(i) If Stock was traded over-the-counter on the date in question
but was not traded on the Nasdaq Stock Market or the Nasdaq National
Market, then the Fair Market Value shall be equal to the mean between
the last reported representative bid and asked prices quoted for such
date by the principal automated inter-dealer quotation system on which
Stock is quoted or, if the Stock is not quoted on any such system, by
the "Pink Sheets" published by the National Quotation Bureau, Inc.;
(ii) If Stock was traded over-the-counter on the date in question
and was traded on the Nasdaq Stock Market or the Nasdaq National Market,
then the Fair Market Value shall be equal to the last-transaction price
quoted for such date by the Nasdaq Stock Market or the Nasdaq National
Market;
(iii) If the Stock was traded on a stock exchange on the date in
question, then the Fair Market Value shall be equal to the closing price
reported by the applicable composite transactions report for such date;
and
(iv) If none of the foregoing provisions is applicable, then the
Fair Market Value shall be determined by the Committee in good faith on
such basis as it deems appropriate.
Whenever possible, the determination of Fair Market Value by the Committee shall
be based on the prices reported in the Western Edition of The Wall Street
Journal or as reported directly to the Company by Nasdaq or a comparable
exchange. Such determination shall be conclusive and binding on all persons.
(h) "Offering Period" means a 24-month period with respect to which the
right to purchase Stock may be granted under the Plan, as determined pursuant to
Section 3(a).
-8-
<PAGE> 9
(i) "Participant" means an Eligible Employee who elects to participate
in the Plan, as provided in Section 3(c).
(j) "Participating Company" means the Company and each present or future
Subsidiary, except Subsidiaries excluded by the Committee.
(k) "Plan" means this Nanogen, Inc. Employee Stock Purchase Plan, as
amended from time to time.
(l) "Plan Account" means the account established for each Participant
pursuant to Section 6(a).
(m) "Purchase Price" means the price at which Participants may purchase
Stock under the Plan, as determined pursuant to Section 7(b).
(n) "Stock" means the Common Stock of the Company.
(o) "Subsidiary" means a corporation, 50% or more of the total combined
voting power of all classes of stock of which is owned by the Company or by
another Subsidiary.
SECTION 15. EXECUTION.
To record the adoption of the Plan by the Board of Directors, the
Company has caused its duly authorized officer to affix the corporate name and
seal hereto.
NANOGEN, INC.
By: ____________________________________
Its: ___________________________
-9-
<PAGE> 1
[CONFIDENTIAL TREATMENT REQUESTED. CONFIDENTIAL PORTIONS OF THIS
AGREEMENT HAVE BEEN REDACTED AND HAVE BEEN SEPARATELY FILED
WITH THE COMMISSION]
EXHIBIT 10.12
EXCLUSIVE OPTION AGREEMENT
BETWEEN BILLUPS-ROTHENBERG, INC.
AND
NANOGEN, INC. ON
HEMOCHROMATOSIS
This Exclusive Option Agreement (hereinafter referred to as the
"Agreement") is made and effective this 12th of September 1997 (hereinafter
referred to as the "Effective Date") by and between Billups-Rothenberg, Inc.,
having its place of business at 11555 Sorrento Valley Road, Suite E, San Diego,
California 92121 (hereinafter referred to as "Licensor") and Nanogen, Inc.,
having its place of business at 10398 Pacific Center Count, San Diego,
California 92121 (hereinafter referred to as "Licensee").
RECITALS
WHEREAS, certain inventions, generally characterized as methods to
identify hemochromatosis, hereinafter collectively referred to as the
"Invention," were made in the course of research conducted by Barry E.
Rothenberg, Ph.D., which Invention was assigned to Licensor in its entirety;
WHEREAS, Licensor has provided certain Confidential Information relating
to the Invention to Licensee pursuant to a Mutual Confidential Disclosure
Agreement between the parties dated May 14,1997.
WHEREAS, Licensor is desirous of granting an exclusive option to the
Invention to Licensee; and
WHEREAS, Licensee is desirous of obtaining an exclusive option to the
Invention from Licensor;
1. DEFINITIONS
1.1 "BRI Patent Rights" means existing and any future subject matter on
the Invention claimed in or covered by U.S. Patent Application Serial No.
08/349883 entitled Methods to Identify Hemochromatosis by Barry E. Rothenberg,
Ph.D. and assigned to Licensor; any continuing applications thereof including
divisionals, continuations, continuations-in-part; any patents issuing on said
applications or continuing applications, including reissues; and all
corresponding foreign applications.
1.2 "BRI Know-How" means BRI's DNA-based hemochromatosis detection
know-how to practice the BRI Patent Rights in the Field of Use.
*** CONFIDENTIAL MATERIAL REDACTED AND FILED SEPARATELY WITH THE COMMISSION
<PAGE> 2
1.3 "Field of Use" means DNA-based in vitro detection, diagnosis,
screening and monitoring of hereditary hemochromatosis.
1.4 "Exclusive License Agreement" means the exclusive license agreement
between Licensor and Licensee that shall be executed if Licensee exercises the
option pursuant to Paragraph 4.1.
1.5 "Option Fee" means the option consideration recited in Paragraph
3.1.
1.6 "Option Period" means the option time period recited in Paragraph
2.2.
2. OPTION FOR EXCLUSIVE LICENSE
2.1 Licensor hereby grants to Licensee an exclusive option to acquire an
exclusive worldwide license (including the right to sublicense) in the Field of
Use under BRI Patent Rights and BRI Know-How. As part of the exclusive option,
the parties also contemplate entering into a Sponsored Research Agreement as
described in Paragraph 5.1.
2.2 Said option shall be for a period of three (3) months commencing on
the Effective Date of this Agreement.
3. OPTION CONSIDERATION
3.1 In exchange for the grant of the its exclusive option, Licensee
shall pay to BRI a non-refundable Option Fee of $40,000 within five (5) days of
the Effective Date of this Agreement.
3.2 Should Licensee exercise the exclusive option pursuant to this
Agreement, the Option Fee shall be fully creditable against future royalties
payable under the Exclusive License Agreement.
4. EXERCISE OF THE OPTION
4.1 If Licensee elects to exercise its exclusive option rights to secure
an exclusive license under Paragraph 2.1 hereof, Licensee shall notify Licensor
in writing to Article I (Notices) prior to the expiration of this Agreement.
Failure of Licensee to so notify Licensor shall be deemed to be an election by
Licensee not to secure a license.
5. TERMS OF PROPOSED LICENSE
5.1 If Licensee exercises its exclusive option under Paragraph 4.1,
Licensee and Licensor shall enter into an Exclusive License Agreement and
Sponsored Research
*** CONFIDENTIAL MATERIAL REDACTED AND FILED SEPARATELY WITH THE COMMISSION
<PAGE> 3
Agreement in accordance with the attached Exhibit A term sheet.
5.2 In the event Licensee enters into a hemochromatosis-related
licensing, option or similar transaction with *** (or its parent or affiliate)
within *** after the conclusion of the Option Period, and assuming there is no
material adverse development relating to the validity of the BRI Patent Rights
or BRI Know-How, Licensee and Licensor shall enter into an Exclusive License
Agreement and a Sponsored Research Agreement in accordance with the attached
Exhibit A term sheet. For purposes of this paragraph, the determination of
whether there has been such a material adverse development shall be made by an
independent third party mutually agreeable to the parties hereto. This paragraph
shall survive termination of this Agreement by Licensee, provided however that
neither party shall be required to enter into an Exclusive License Agreement and
Sponsored Research Agreement if, during the *** period specified above, Licensor
has licensed, optioned or otherwise sold the BRI Patent Rights or BRI Know-How
to a third party.
6. PATENT PROSECUTION AND MAINTENANCE
6.1 During the term of this Agreement, Licensor shall diligently
prosecute and maintain, and shall keep Licensee apprised of all developments in
connection with the prosecution and maintenance of, the patent applications
comprising the BRI Patent Rights relating to the Field of Use. Licensor shall
promptly provide Licensee with copies of all relevant documentation relating to
the above during the term of this Agreement. Licensee agrees to maintain in
confidence all such documentation.
6.2 During the term of this Agreement, all costs incurred by Licensor in
connection with the further foreign filing, prosecution and maintenance of BRI
Patent Rights shall be borne by Licensor.
7. STANDSTILL
7.1 In partial consideration for the payment of the Option Fee
hereunder, Licensor hereby agrees to extend the "Standstill Period" of the
parties' June 18, 1997 Standstill Agreement (as amended July 3, 1997) to be
coextensive with the Option Period.
8. TERMINATION BY LICENSOR
8.1 If Licensee should violate or fail to perform any term or covenant
of this Agreement, Licensor may give written notice of such default (Notice of
Default) to Licensee. If Licensee fails to remedy such default within fifteen
(15) days of the effective date of such notice, Licensor shall have the right to
terminate this Agreement by a second written notice (Notice of Termination) to
Licensee. If a Notice of Termination is sent to Licensee, this Agreement shall
automatically terminate on the effective date of such notice. The above
referenced notices shall be subject to the provisions of Paragraph 11.1.
*** CONFIDENTIAL MATERIAL REDACTED AND FILED SEPARATELY WITH THE COMMISSION
<PAGE> 4
9. TERMINATION BY LICENSEE
9.1 Licensee shall have the right at any time to terminate this
Agreement by giving notice in writing to Licensor. Such Notice of Termination
shall be subject to the provisions of Paragraphs 5.2 and 11.1 and such
termination shall be effective on the effective date of such notice.
10. AUTHORITY TO GRANT OPTION
10.1 Licensor represents and warrants that it has the full and lawful
right and authority to grant this option.
11. NOTICES
11.1 Any notices or payment required to be given to either party shall
be deemed to have been properly given and to be effective (a) on the date of
delivery if delivered in person, or (b) five (5) days after mailing if mailed by
first-class certified mail, postage prepaid, to the respective addresses provide
below:
If to Licensor: BILLUPS-ROTHENBERG, INC.
1555 Sorrento Valley Road, Suite E
San Diego, CA 92121
ATTENTION: Barry E. Rothenberg, Ph.D.
If to Licensee: NANOGEN, INC.
10398 Pacific Center Court
San Diego, CA 92121
ATTENTION: Harry J. Leonhardt, Esq.
12. ASSIGNABILITY
12.1 This Agreement is binding upon and shall inure to the benefit of
Licensor and Licensee and their respective successors and assigns.
13. WAIVER
13.1 It is hereby agreed that no waiver by either party hereto of any
breach or default of any of the covenants or agreements herein shall be deemed a
waiver as to any subsequent and/or similar breach or default.
14. GOVERNING LAW
14.1 This Agreement shall be interpreted and construed in accordance
with the laws of the State of California.
<PAGE> 5
15. MISCELLANEOUS
15.1 The headings of the several sections are inserted for convenience
of reference only and are not intended to be a part of or to affect the meaning
or interpretation of this Agreement.
15.2 This Agreement will not be binding upon the parties until it has
been signed below on behalf of each party, in which event, it shall be effective
as of the date recited on page one.
15.3 No amendment or modification hereof shall be valid or binding upon
the parties unless made in writing and signed on behalf of each party.
15.4 This Agreement and the Mutual Confidential Disclosure Agreement
between the parties dated May 14, 1997 embody the entire understanding of the
parties and shall supersede all previous communications, representations and
understandings, both oral and written, between the parties relating to the
subject matter hereof.
15.5 In case any of the provisions contained in this Agreement shall be
held to be invalid, illegal or unenforceable in any respect, such invalidity,
illegality or unenforceability shall not affect any other provisions hereof, but
this Agreement shall be construed as if such invalid or illegal or unenforceable
provisions had never been contained herein.
IN WITNESS WHEREOF, both Licensor and Licensee have executed this
Agreement, in duplicate originals, by their respective authorized
representatives, as hereinafter set forth.
BILLUPS-ROTHENBERG, INC. NANOGEN, INC.
By: /s/ Barry E. Rothenberg, Ph.D. By: /s/ Harry J. Leonhardt, Esq.
Name: Barry E. Rothenberg, Ph.D. Name: Harry J. Leonhardt, Esq.
Title:President Title:Vice President, General Counsel and
Date: September 15, 1997 Secretary
Date: September 12, 1997
<PAGE> 6
EXHIBIT A
TERM SHEET
I. EXCLUSIVE LICENSE AGREEMENT
LICENSE GRANT
- - BRI to grant Nanogen an exclusive worldwide license (including the
exclusive right to grant sublicenses) in the Field of Use under "BRI
Patent Rights" and "BRI Know- How" (as those terms are defined in the
Exclusive Option Agreement). New inventions not claimed in or covered
under U.S. Patent Application Serial No. ***, its continuing and
divisional applications and its foreign equivalents are not included in
the license grant except to the extent agreed between the parties in a
separate Sponsored Research Agreement.
FOLD OF USE
- - DNA-based in vitro detection, diagnosis, screening and monitoring of
hereditary hemochromatosis in humans.
LICENSE FEE
- - Upon execution of the Exclusive License Agreement, Nanogen will pay BRI a
nonrefundable license fee of $500,000 (less credits of $10,000 paid to
BRI pursuant to the Standstill Agreement) and issue BRI 2000 shares of
Nanogen's common stock.
- - BRI shall have the right to purchase, for cash, shares of Nanogen common
stock in Nanogen's Initial Public Offering ("IPO") up to the full amount
of $490,000 at the IPO per share price.
ROYALTY OBLIGATIONS
- - Nanogen to pay BRI royalties equal to ***% of end user net sales of
licensed products made and/or sold by Nanogen and its affiliates.
- - Royalty rate decreases to ***% in the event Nanogen licenses one or more
third party patents to practice the licensed technology.
- - In non-patent countries, royalty rate will be ***% of the applicable
rate above.
- - Nanogen shall not be required to pay royalties (excluding possible
sublicensing royalties from third parties) until (i) *** or (ii) ***,
whichever is earlier.
*** CONFIDENTIAL MATERIAL REDACTED AND FILED SEPARATELY WITH THE COMMISSION
<PAGE> 7
- - Subject to standard termination and walkaway provisions [to be agreed],
Nanogen shall commence payment of minimum annual royalty payments based
on end user net sales of licensed product commencing with the occurrence
of the earlier of (i) or (ii) above according to the following schedule:
<TABLE>
<S> <C>
Year One $ ***
Year Two $ ***
Year Three $ ***
Year Four $ ***
and thereafter for the life of the licensed patents.
</TABLE>
- - Annual minimum royalties are fully creditable against all royalties due
and payable for that year.
REVENUE DILUTION
- - In the case of multiple analyte chips and multiple sample chips, Nanogen
to pay BRI a minimum of $*** royalty per chip based on annual sales of
$*** or less and a minimum of $*** per chip based on annual sales in
excess of $***.
SUBLICENSES
- - BRI grants Nanogen the full right to grant worldwide sublicenses within
the prescribed Field of Use. For the avoidance of doubt, this grant does
not extend to sublicenses for genomics applications.
- - Nanogen to pay BRI ***% of all consideration, including royalties,
received by Nanogen or its affiliates from sublicensees for non-reference
lab applications and ***% of all-consideration, including royalties,
received by Nanogen or its affiliates from sublicensees for reference lab
applications.
- - Non-monetary consideration to Nanogen to be appraised in determining
consideration due BRI.
MILESTONE PAYMENTS
- - Nanogen shall pay milestone payments to BRI upon receipt of applicable
regulatory approvals to Nanogen or Nanogen's partner according to the
following schedule:
<TABLE>
<S> <C>
U.S. approval $***
First approval in Europe $***
First approval in ROW $***
</TABLE>
*** CONFIDENTIAL MATERIAL REDACTED AND FILED SEPARATELY WITH THE COMMISSION
<PAGE> 8
PATENT PROSECUTION
- - Nanogen to reimburse BRI for patent prosecution fees incurred for
services rendered ***.
- - Upon the effective date of the Exclusive License Agreement, Nanogen to
assume responsibility for prosecution and maintenance of licensed patents
at its own expense.
PATENT ENFORCEMENT
- - Standard infringement notification clauses
- - Nanogen to promptly review infringing activities upon issuance of patent
and send out cease and desist letters where appropriate.
- - In consideration of Nanogen's undertaking patent enforcement, Nanogen
receives full proceeds of litigation until all litigation expenses have
been fully reimbursed. Any remaining proceeds shall be split in
accordance with the allocation set forth in the SUBLICENSES section
above.
- BRI to cooperate fully with patent enforcement activities.
- BRI to be compensated at standard consulting rates for assistance
in patent enforcement.
- - If Nanogen elects not to pursue a substantial continuing infringement
within *** months of receipt of notice, BRI shall have the right to
pursue infringement at its own cost/own recovery.
- Nanogen to cooperate fully with patent enforcement activities.
- Nanogen to be compensated at standard consulting rates for
assistance in patent enforcement.
PERFORMANCE CLAUSE
- - Nanogen will use commercially reasonable efforts to develop and
commercialize in vitro diagnostic products in the licensed Field of Use.
- - If Nanogen or a sublicensee fails to market a royalty-bearing in vitro
diagnostic product in the U.S. on or before *** from the effective date
of the Exclusive License Agreement, at the option of BRI, the license
grant may become non-exclusive and the parties hereto shall engage in
good faith negotiations toward concluding a mutually acceptable
non-exclusive license on mutually agreeable terms.
*** CONFIDENTIAL MATERIAL REDACTED AND FILED SEPARATELY WITH THE COMMISSION
<PAGE> 9
WALKAWAY PROVISIONS
- - [Needs further discussion]
COVENANT NOT TO SUE
- - BRI to provide Nanogen with a covenant not to sue for patent infringement
on any other intellectual property rights owned or controlled by BRI or
its affiliates in the Field of Use as of the effective date of the
Exclusive License Agreement.
II. SPONSORED RESEARCH AGREEMENT
- - Nanogen to fund a *** R&D program at BRI based on a research plan and
budget to be mutually agreed. The objectives of the program are to
identify additional gene(s) relating to hereditary hemochromatosis and to
develop improvements to existing technology. [BRI to provide draft]
- - Annual funding requirements shall be $*** payable in monthly
installments.
- - A separate Sponsored Research Agreement shall be prepared outlining a ***
research program. The Sponsored Research Agreement will be renewable at
Nanogen's option for *** periods.
- - All intellectual property, improvements end 'know-hong developed from the
foregoing Sponsored Research Agreement during the respective R&D funding
period(s) shall be included as a part of the licensed technology in the
licensed Field of Use in the Exclusive License Agreement between the
parties.
III. OTHER TERMS AND CONDITIONS
- - The Exclusive License Agreement and Sponsored Research Agreement will
incorporate such additional terms and conditions as are customary in such
agreements generally, consistent with the terms and conditions set forth
above.
*** CONFIDENTIAL MATERIAL REDACTED AND FILED SEPARATELY WITH THE COMMISSION
<PAGE> 1
EXHIBIT 10.18
AMENDED AND RESTATED
INVESTORS' RIGHTS AGREEMENT
THIS INVESTORS' RIGHTS AGREEMENT is made as of the 5th day of May 1997, by
and between Nanogen, Inc., a California corporation (the "Company"), and the
investors listed on Schedule A hereto, each of which is herein referred to as an
"Investor."
RECITALS
WHEREAS, the Company and certain of the Investors are parties to (i) the
Series A Preferred Stock Purchase Agreement dated February 10, 1994, as amended
(the "Series A Agreement"), (ii) the Series B Preferred Stock and Warrant
Purchase Agreement, dated as of April 11, 1995, as amended ("Series B
Agreement") and (iii) the Series C Preferred Stock Purchase Agreement dated as
of December 19, 1996, as amended ("Series C Agreement");
WHEREAS, the Company previously entered into an Investors' Rights
Agreement dated December 19, 1996 (the "1996 Agreement"), with Dominion Ventures
and certain holders of the Series A, Series B and Series C Preferred Stock (the
"Prior Investors") pursuant to which the Company agreed to grant such
shareholders certain registration rights, information rights, rights of first
refusal and other rights;
WHEREAS, in order to induce Investor to purchase the Company's Series D
Preferred Stock pursuant to the Series D Preferred Stock Purchase Agreement
dated as of May 4, 1997 (the "Series D Agreement"), the Prior Investors holding
rights under the 1996 Agreement desire to amend and restate the 1996 Agreement
as set forth herein; and
WHEREAS, the holders of the Company's Series D Preferred Stock desire to
enter into this Agreement and to accept the rights created pursuant hereto.
NOW THEREFORE, in consideration of the mutual promises and covenants set
forth herein, the Prior Investors who are parties to the 1996 Agreement hereby
agree that the 1996 Agreement shall be superseded and replaced in its entirety
by this Agreement, and the parties hereto further agree as follows:
<PAGE> 2
EXHIBIT 10.18
1. Registration Rights. The Company covenants and agrees as follows:
1.1 Definitions. For purposes of this Section 1:
(a) The term "register," "registered," and "registration"
refer to a registration effected by preparing and filing a registration
statement or similar document in compliance with the Act, and the declaration or
ordering of effectiveness of such registration statement or document;
(b) The term "Registrable Securities" means (1) the Common
Stock issuable or issued upon conversion of the Series A Preferred Stock, Series
B Preferred Stock, Series C Preferred Stock and Series D Preferred Stock, (2)
the Common Stock issuable or issued upon exercise of the warrant issued to
Dominion Ventures, Inc. (which expires September 11, 1999), (3) the Common Stock
issuable or issued upon exercise of the warrants issued to purchasers of Series
B Preferred Stock pursuant to the Series B Agreement, (4) the Common Stock
issued to Elan Corporation, plc, Hoechst Research and Technology Deutschland
Verwaltungs GmbH and Becton, Dickinson in a private placement taking place
concurrently with the Company's initial public offering, and (5) any Common
Stock of the Company issued as (or issuable upon the conversion or exercise of
any warrant, right or other security which is issued as) a dividend or other
distribution with respect to, or in exchange for or in replacement of, such
Series A Preferred Stock, Series B Preferred Stock, Series C Preferred Stock,
Series D Preferred Stock or Common Stock, excluding in all cases, however, any
Registrable Securities sold by a person in a transaction in which his rights
under this Section 1 are not assigned;
(c) The number of shares of "Registrable Securities then
outstanding" shall be determined by the number of shares of Common Stock
outstanding which are, and the number of shares of Common Stock issuable
pursuant to then exercisable or convertible securities which are, Registrable
Securities.
(d) The term "Holder" means any Investor who holds or has
the right to acquire Registrable Securities or any assignee thereof in
accordance with Section 1.13 hereof; and
(e) The term "Initiating Holder" shall mean (i) prior to the
Company's initial public offering of securities, any Holder or Holders who in
the aggregate are Holders of more than 50% of the then outstanding Registrable
Securities and (ii) after the Company's initial public offering of securities,
any Holder or Holders who request to register Registrable Securities that would
have an aggregate price to the public of at least $7,500,000.
(f) The term "Form S-3" means such form under the Act as in
effect on the date hereof or any registration form under the Act subsequently
adopted by the Securities and Exchange Commission ("SEC") which permits
inclusion or incorporation of substantial information by reference to other
documents filed by the Company with the SEC.
-2-
<PAGE> 3
(g) The term "Act" means the Securities Act of 1933, as
amended.
1.2 Request for Registration.
(a) If the Company shall receive at any time after the
earlier of (i) January 1, 2000, or (ii) six (6) months after the effective date
of the first registration statement for a public offering of securities of the
Company (other than a registration statement relating either to the sale of
securities to employees of the Company pursuant to a stock option, stock
purchase or similar plan or a SEC Rule 145 transaction), a written request from
an Initiating Holder that the Company file a registration statement under the
Act covering the registration of at least twenty percent (20%) of the
Registrable Securities then outstanding (or a lesser percent if the anticipated
aggregate offering price, net of underwriting discounts and commissions, would
exceed $7,500,000), then the Company shall, within ten (10) days of the receipt
thereof, give written notice of such request to all Holders and shall, subject
to the limitations of subsection 1.2(b), effect as soon as practicable, and in
any event within 60 days of the receipt of such request, the registration under
the Act of all Registrable Securities which the Holders request to be registered
within twenty (20) days of the mailing of such notice by the Company in
accordance with Section 3.5.
(b) If the Holders initiating the registration request
hereunder ("Initiating Holders") intend to distribute the Registrable Securities
covered by their request by means of an underwriting, they shall so advise the
Company as a part of their request made pursuant to this Section 1.2 and the
Company shall include such information in the written notice referred to in
subsection 1.2(a). The underwriter will be selected by a majority in interest of
the Initiating Holders and shall be reasonably acceptable to the Company. In
such event, the right of any Holder to include his Registrable Securities in
such registration shall be conditioned upon such Holder's participation in such
underwriting and the inclusion of such Holder's Registrable Securities in the
underwriting (unless otherwise mutually agreed by a majority in interest of the
Initiating Holders and such Holder) to the extent provided herein. All Holders
proposing to distribute their securities through such underwriting shall
(together with the Company as provided in subsection 1.4(e)) enter into an
underwriting agreement in customary form with the underwriter or underwriters
selected for such underwriting by a majority in interest of the Initiating
Holders. Notwithstanding any other provision of this Section 1.2, if the
underwriter advises the Initiating Holders in writing that marketing factors
require a limitation of the number of shares to be underwritten, then the
Initiating Holders shall so advise all Holders of Registrable Securities which
would otherwise be underwritten pursuant hereto, and the number of shares of
Registrable Securities that may be included in the underwriting shall be
allocated among all Holders thereof, including the Initiating
-3-
<PAGE> 4
Holders, in proportion (as nearly as practicable) to the amount of Registrable
Securities of the Company owned by each Holder; provided, however, that the
number of shares of Registrable Securities to be included in such underwriting
shall not be reduced unless all other securities are first entirely excluded
from the underwriting.
(c) The Company is obligated to effect only two (2) such
registrations pursuant to this Section 1.2.
(d) Notwithstanding the foregoing, if the Company shall
furnish to Holders requesting a registration statement pursuant to this Section
1.2, a certificate signed by the President of the Company stating that in the
good faith judgment of the Board of Directors of the Company, it would be
seriously detrimental to the Company and its shareholders for such registration
statement to be filed and it is therefore essential to defer the filing of such
registration statement, the Company shall have the right to defer such filing
for a period of not more than 60 days after receipt of the request of the
Initiating Holders; provided, however, that the Company may not utilize this
right more than once in any twelve month period.
1.3 Company Registration. If (but without any obligation to do so)
the Company proposes to register (including for this purpose a registration
effected by the Company for shareholders other than the Holders) any of its
stock or other securities under the Act in connection with the public offering
of such securities solely for cash (other than a registration relating solely to
the sale of securities to participants in a Company stock plan, or a
registration on any form which does not include substantially the same
information as would be required to be included in a registration statement
covering the sale of the Registrable Securities), the Company shall, at each
such time, promptly give each Holder written notice of such registration. Upon
the written request of each Holder given within twenty (20) days after mailing
of such notice by the Company in accordance with Section 3.5, the Company shall,
subject to the provisions of Section 1.8, cause to be registered under the Act
all of the Registrable Securities that each such Holder has requested to be
registered.
1.4 Obligations of the Company. Whenever required under this
Section 1 to effect the registration of any Registrable Securities, the Company
shall, as expeditiously as reasonably possible:
(a) Prepare and file with the SEC a registration statement
with respect to such Registrable Securities and use its best efforts to cause
such registration statement to become effective, and, upon the request of the
Holders of a majority of the Registrable Securities registered thereunder, keep
such registration statement effective for up to one hundred twenty (120) days.
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(b) Prepare and file with the SEC such amendments and
supplements to such registration statement and the prospectus used in connection
with such registration statement as may be necessary to comply with the
provisions of the Act with respect to the disposition of all securities covered
by such registration statement.
(c) Furnish to the Holders such numbers of copies of a
prospectus, including a preliminary prospectus, in conformity with the
requirements of the Act, and such other documents as they may reasonably request
in order to facilitate the disposition of Registrable Securities owned by them.
(d) Use its best efforts to register and qualify the
securities covered by such registration statement under such other securities or
Blue Sky laws of such jurisdictions as shall be reasonably requested by the
Holders, provided that the Company shall not be required in connection therewith
or as a condition thereto to qualify to do business or to file a general consent
to service of process in any such states or jurisdictions.
(e) In the event of any underwritten public offering, enter
into and perform its obligations under an underwriting agreement, in usual and
customary form, with the managing underwriter of such offering. Each Holder
participating in such underwriting shall also enter into and perform its
obligations under such an agreement.
(f) Cause all such securities to be listed on each
securities exchange on which similar securities issued by the Company are then
listed.
(g) Provide a transfer agent and registrar for all such
securities not later than the effective date of such registration statement.
(h) With respect solely to an underwritten offering, make
available for inspection by any seller of securities, any underwriter
participating in any disposition pursuant to such registration statement, and
any attorney, accountant or other agent retained by any such seller or
underwriter, all financial and other records, pertinent corporate documents and
properties of the Company, and cause the Company's officers, directors,
employees and independent accountants to supply all information reasonably
requested by any such seller, underwriter, attorney, accountant or agent in
connection with such registration statement, subject to non-disclosure
obligations by the recipients of such information.
(i) Notify each Holder of Registrable Securities covered by
such registration statement at any time when a prospectus relating thereto is
required to be delivered under the Act of the happening of any event as a result
of which the prospectus included in such registration statement, as then in
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effect, includes an untrue statement of a material fact or omits to state a
material fact required to be stated therein or necessary to make the statements
therein not misleading in the light of the circumstances then existing.
1.5 Furnish Information. It shall be a condition precedent
to the obligations of the Company to take any action pursuant to this Section 1
with respect to the Registrable Securities of any selling Holder that such
Holder shall furnish to the Company such information regarding itself, the
Registrable Securities held by it, and the intended method of disposition of
such securities as shall be required to effect the registration of such Holder's
Registrable Securities.
1.6 Expenses of Demand Registration. All expenses other than
underwriting discounts and commissions incurred in connection with
registrations, filings or qualifications pursuant to Section 1.2, including
(without limitation) all registration, filing and qualification fees, printing
and accounting fees, fees and disbursements of counsel for the Company, and the
reasonable fees and disbursements of one counsel for the selling Holders shall
be borne by the Company; provided, however, that the Company shall not be
required to pay for any expenses of any registration proceeding begun pursuant
to Section 1.2 if the registration request is subsequently withdrawn at the
request of the Holders of a majority of the Registrable Securities to be
registered (in which case all Participating Holders shall bear such expenses),
unless the Holders of a majority of the Registrable Securities agree to forfeit
their right to one demand registration pursuant to Section 1.2; provided
further, however, that if at the time of such withdrawal, the Holders have
learned of a material adverse change in the condition, business, or prospects of
the Company from that known to the Holders at the time of their request and have
withdrawn the request with reasonable promptness following disclosure by the
Company of such material adverse change, then the Holders shall not be required
to pay any of such expenses and shall retain their rights pursuant to Section
1.2.
1.7 Expenses of Company Registration. The Company shall bear
and pay all expenses incurred in connection with any registration, filing or
qualification of Registrable Securities with respect to the registrations
pursuant to Section 1.3 for each Holder (which right may be assigned as provided
in Section 1.13), including (without limitation) all registration, filing and
qualification fees, printing and accounting fees relating or apportionable
thereto, fees and disbursement of counsel for the Company, and the reasonable
fees and disbursements of one counsel for the selling Holders selected by them,
but excluding underwriting discounts and commissions relating to Registrable
Securities.
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1.8 Underwriting Requirements. In connection with any
offering involving an underwriting of shares of the Company's capital stock, the
Company shall not be required, subject to the limitations set forth below, under
Section 1.3 to include any of the Holders' securities in such underwriting
unless they accept the terms of the underwriting as agreed upon between the
Company and the underwriters selected by it (or by other persons entitled to
select the underwriters), and then only in such quantity as the underwriters
determine in their sole discretion will not jeopardize the success of the
offering by the Company. If the total amount of securities, including
Registrable Securities, requested by shareholders to be included in such
offering exceeds the amount of securities sold other than by the Company that
the underwriters determine in their sole discretion is compatible with the
success of the offering, then the Company shall be required to include in the
offering only that number of such securities, including Registrable Securities,
which the underwriters determine in their sole discretion will not jeopardize
the success of the offering (the securities so included to be apportioned pro
rata among the selling shareholders according to the total amount of securities
entitled to be included therein owned by each selling shareholder or in such
other proportions as shall mutually be agreed to by such selling shareholders)
but in no event shall (i) the amount of securities of the selling Holders
included in the offering be reduced below thirty percent (30%) of the total
amount of securities included in such offering unless such offering is the
initial public offering of the Company's securities in which case the selling
shareholders may be excluded entirely if the underwriters make the determination
described above and no other shareholder's securities are included or (ii)
notwithstanding (i) above, any shares being sold by a shareholder exercising a
demand registration right similar to that granted in Section 1.2 be excluded
from such offering. For purposes of the preceding parenthetical concerning
apportionment, for any selling shareholder which is a holder of Registrable
Securities and which is a partnership or corporation, the partners, retired
partners and shareholders of such holder, or the estates and family members of
any such partners and retired partners and any trusts for the benefit of any of
the foregoing persons shall be deemed to be a single "selling shareholder", and
any pro-rata reduction with respect to such "selling shareholder" shall be based
upon the aggregate amount of shares carrying registration rights owned by all
entities and individuals included in such "selling shareholder", as defined in
this sentence.
1.9 Delay of Registration. No Holder shall have any right to
obtain or seek an injunction restraining or otherwise delaying any such
registration as the result of any controversy that might arise with respect to
the interpretation or implementation of this Section 1.
1.10 Indemnification. In the event any Registrable Securities
are included in a registration statement under this Section 1:
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(a) To the extent permitted by law, the Company
will indemnify and hold harmless each Holder, any underwriter (as defined in the
Act) for such Holder, any officer, director, partner or agent thereof, and each
person, if any, who controls such Holder or underwriter within the meaning of
the Act or the Securities Exchange Act of 1934, as amended (the "1934 Act"),
against any losses, claims, damages, or liabilities (joint or several) to which
they may become subject under the Act, the 1934 Act or other United States
federal or state securities law, insofar as such losses, claims, damages, or
liabilities (or actions in respect thereof) arise out of or are based upon any
of the following statements, omissions or violations (collectively a
"Violation"): (i) any untrue statement or alleged untrue statement of a material
fact contained in such registration statement, including any preliminary
prospectus or final prospectus contained therein or any amendments or
supplements thereto, (ii) the omission or alleged omission to state therein a
material fact required to be stated therein, or necessary to make the statements
therein not misleading, or (iii) any violation or alleged violation by the
Company of the Act, the 1934 Act or other United States federal or state
securities law, or any rule or regulation promulgated under the Act, the 1934
Act or other United States federal or state securities law; and the Company will
pay to each such Holder, underwriter or controlling person any legal or other
expenses reasonably incurred by them in connection with investigating or
defending any such loss, claim, damage, liability, or action as incurred;
provided, however, that the indemnity agreement contained in this subsection
1.10(a) shall not apply to amounts paid in settlement of any such loss, claim,
damage, liability, or action if such settlement is effected without the consent
of the Company (which consent shall not be unreasonably withheld), nor shall the
Company be liable in any such case for any such loss, claim, damage, liability,
or action to the extent that it arises out of or is based upon a Violation which
occurs in reliance upon and in conformity with written information furnished
expressly for use in connection with such registration by any such Holder,
underwriter or controlling person.
(b) To the extent permitted by law, each selling Holder will
indemnify and hold harmless the Company, each of its directors, each of its
officers who has signed the registration statement, each person, if any, who
controls the Company within the meaning of the Act, any underwriter, any other
Holder selling securities in such registration statement, any officer, director,
partner or agent thereof and any controlling person of any such underwriter or
other Holder, against any losses, claims, damages, or liabilities (joint or
several) to which any of the foregoing persons may become subject, under the
Act, the 1934 Act or other United States federal or state securities law insofar
as such losses, claims, damages, or liabilities (or actions in respect thereto)
arise out of or are based upon any Violation, in each case to the extent (and
only to the extent) that such Violation occurs in reliance upon and in
conformity with written information
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<PAGE> 9
furnished by such Holder expressly for use in connection with such registration;
and each such Holder will pay any legal or other expenses reasonably incurred by
any person intended to be indemnified pursuant to this subsection l.10(b), in
connection with investigating or defending any such loss, claim, damage,
liability, or action; provided, however, that the indemnity agreement contained
in this subsection 1.10(b) shall not apply to amounts paid in settlement of any
such loss, claim, damage, liability or action if such settlement is effected
without the consent of the Holder, which consent shall not be unreasonably
withheld; provided, that, in no event shall any indemnity under this subsection
1.10(b) exceed the proceeds (net of underwriting discounts and commissions) from
the offering received by such Holder.
(c) After receipt by an indemnified party under this Section
1.10 of notice of the commencement of any action (including any governmental
action), such indemnified party will, if a claim in respect thereof is to be
made against any indemnifying party under this Section 1.10, deliver to the
indemnifying party a written notice of the commencement thereof and the
indemnifying party shall have the right to participate in, and, to the extent
the indemnifying party so desires, jointly with any other indemnifying party
similarly noticed, to assume the defense thereof with counsel mutually
satisfactory to the parties; provided, however, that an indemnified party
(together with all other indemnified parties which may be represented without
conflict by one counsel) shall have the right to retain one separate counsel,
with the fees and expenses to be paid by the indemnifying party, if
representation of such indemnified party by the counsel retained by the
indemnifying party would be inappropriate due to actual or potential differing
interests between such indemnified party and any other party represented by such
counsel in such proceeding. The failure to deliver written notice to the
indemnifying party within a reasonable time of the commencement of any such
action, if prejudicial to its ability to defend such action, shall relieve such
indemnifying party of any liability to the indemnified party under this Section
1.10, but the omission so to deliver written notice to the indemnifying party
will not relieve it of any liability that it may have to any indemnified party
otherwise than under this Section l.10.
(d) If the indemnification provided for in this Section 1.10
is held by a court of competent jurisdiction to be unavailable to an indemnified
party with respect to any loss, liability, claim, damage, or expense referred to
therein, then the indemnifying party, in lieu of indemnifying such indemnified
party hereunder, shall contribute to the amount paid or payable by such
indemnified party as a result of such loss, liability, claim, damage, or expense
in such proportion as is appropriate to reflect the relative fault of the
indemnifying party on the one hand and of the indemnified party on the other in
connection with the statements or omissions that resulted in such loss,
liability, claim, damage, or expense as well as any other relevant equitable
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considerations; provided, however, that, in any such case, (A) no such Holder
will be required to contribute any amount in excess of the proceeds (net of
underwriting discounts and commissions) received by such Holder from all
Registrable Securities offered and sold by such Holder pursuant to the
registration statement; and (B) no person or entity guilty of fraudulent
misrepresentation (within the meaning of Section 11(f) of the Securities Act)
will be entitled to contribution from any person or entity who was not guilty of
such fraudulent misrepresentation. The relative fault of the indemnifying party
and of the indemnified party shall be determined by reference to, among other
things, whether the Violation relates to information supplied by the
indemnifying party or by the indemnified party and the parties' relative intent,
knowledge, access to information, and opportunity to correct or prevent such
statement or omission.
(e) Notwithstanding the foregoing, to the extent that the
provisions on indemnification and contribution contained in the underwriting
agreement entered into in connection with the underwritten public offering are
in conflict with the foregoing provisions, the provisions in the underwriting
agreement shall control.
(f) The obligations of the Company and Holders under this
Section 1.10 shall survive the completion of any offering of Registrable
Securities in a registration statement under this Section 1, and otherwise.
1.11 Reports Under Securities Exchange Act of 1934. With a view to
making available to the Holders the benefits of Rule 144 promulgated under the
Act and any other rule or regulation of the SEC that may at any time permit a
Holder to sell securities of the Company to the public without registration or
pursuant to a registration on Form S-3, the Company agrees to:
(a) make and keep public information available, as those
terms are understood and defined in SEC Rule 144, at all times after the
effective date of the first registration statement filed by the Company for the
offering of its securities to the general public;
(b) file with the SEC in a timely manner all reports and
other documents required of the Company under the Act and the 1934 Act; and
(c) furnish to any Holder, so long as the Holder owns any
Registrable Securities, forthwith upon request (i) a written statement by the
Company that it has complied with the reporting requirements of SEC Rule 144 (at
any time after ninety (90) days after the effective date of the first
registration statement filed by the Company), the Act and the 1934 Act (at any
time after it has become subject to such reporting requirements), or that it
qualifies as a registrant whose securities may be resold pursuant to Form S-3
(at any time after it so qualifies),
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(ii) a copy of the most recent annual or quarterly report of the Company and
such other reports and documents so filed by the Company, and (iii) such other
information as may be reasonably requested in availing any Holder of any rule or
regulation of the SEC which permits the selling of any such securities without
registration or pursuant to such form.
1.12 Form S-3 Registration. In case the Company shall receive from
one or more Holders a written request or requests that the Company effect a
registration on Form S-3 and any related qualification or compliance with
respect to all or a part of the Registrable Securities owned by such Holder or
Holders, provided that the number of shares requested to be sold would have an
aggregate price to the public of at least $1,000,000, the Company will:
(a) promptly give written notice of the proposed
registration, and any related qualification or compliance, to all other Holders;
and
(b) as soon as practicable, effect such registration and all
such qualifications and compliances as may be so requested and as would permit
or facilitate the sale and distribution of all or such portion of such Holder's
or Holders' Registrable Securities as are specified in such request, together
with all or such portion of the Registrable Securities of any other Holder or
Holders joining in such request as are specified in a written request given
within 15 days after receipt of such written notice from the Company; provided,
however, that the Company shall not be obligated to effect any such
registration, qualification or compliance, pursuant to this Section 1.12: (1) if
Form S-3 is not available for such offering by the Holders; (2) if the Holders,
together with the holders of any other securities of the Company entitled to
inclusion in such registration, propose to sell Registrable Securities and such
other securities (if any) at an aggregate price to the public (net of any
underwriters' discounts or commissions) of less than $1,000,000; (3) if the
Company shall furnish to the Holders a certificate signed by the President of
the Company stating that in the good faith judgment of the Board of Directors of
the Company, it would be seriously detrimental to the Company and its
shareholders for such Form S-3 Registration to be effected at such time, in
which event the Company shall have the right to defer the filing of the Form S-3
registration statement for a period of not more than 60 days after receipt of
the request of the Holder or Holders under this Section 1.12; provided, however,
that the Company shall not utilize this right more than once in any twelve month
period; (4) if the Company has, within the twelve (12) month period preceding
the date of such request, already effected two registrations on Form S-3 for the
Holders pursuant to this Section 1.12; or (5) in any particular jurisdiction in
which the Company would be required to qualify to do business or to execute a
general consent to service of process in effecting such registration,
qualification or compliance.
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(c) Subject to the foregoing, the Company shall file a
registration statement covering the Registrable Securities and other securities
so requested to be registered as soon as practicable after receipt of the
request or requests of the Holders. All expenses incurred in connection with the
first two registrations requested pursuant to Section 1.12, including (without
limitation) all registration, filing and qualification fees, printing and
accounting fees, fees and disbursements of counsel for the Company and the
reasonable fees and disbursements of one counsel for the selling Holder or
Holders, but excluding any underwriters' discounts or commissions associated
with Registrable Securities, shall be borne by the Company, and the expenses of
any subsequent registration shall be borne pro rata by the Holder or Holders
participating in the Form S-3 Registration. Registrations effected pursuant to
this Section 1.12 shall not be counted as demands for registration or
registrations effected pursuant to Section 1.2.
1.13 Assignment of Registration Rights. The rights to cause the
Company to register Registrable Securities pursuant to this Section 1 may be
assigned (but only with all related obligations) by a Holder to a transferee or
assignee of such securities who, after such assignment or transfer, holds at
least 175,000 shares of Registrable Securities (subject to appropriate
adjustment for stock splits, stock dividends, combinations and other
recapitalizations), provided the Company is, within a reasonable time after such
transfer, furnished with written notice of the name and address of such
transferee or assignee and the securities with respect to which such
registration rights are being assigned; and provided, further, that such
assignment shall be effective only if immediately following such transfer the
further disposition of such securities by the transferee or assignee is
restricted under the Act. For the purposes of determining the number of shares
of Registrable Securities held by a transferee or assignee, the holdings of
transferees and assignees of a partnership who are partners or retired partners
of such partnership (including spouses and ancestors, lineal descendants and
siblings of such partners or spouses who acquire Registrable Securities by gift,
will or intestate succession) shall be aggregated together and with the
partnership.
1.14 Limitations on Subsequent Registration Rights. From and after
the date of this Agreement, the Company shall not, without the prior written
consent of the Holders of a majority of the outstanding Registrable Securities,
enter into any agreement with any holder or prospective holder of any securities
of the Company which would allow such holder or prospective holder (a) to
include such securities in any registration filed under Section 1.2 hereof,
unless under the terms of such agreement, such holder or prospective holder may
include such securities in any such registration only to the extent that the
inclusion of his securities will not reduce the amount of the Registrable
Securities of the Holders which is included or (b) to make a demand registration
which could result in such registration
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statement being declared effective prior to the earlier of either of the dates
set forth in subsection 1.2(a) or within one hundred twenty (120) days of the
effective date of any registration effected pursuant to Section 1.2.
1.15 "Market Stand-Off" Agreement. Each Investor hereby agrees
that, during the period specified by the Company's underwriter (such period not
to exceed 180 days following the effective date of the Company's registration
statement filed under the Act relating to its initial public offering), it shall
not, to the extent requested by the Company and such underwriter, directly or
indirectly sell, offer to sell, contract to sell (including, without limitation,
any short sale), grant any option to purchase or otherwise transfer or dispose
of (other than to donees who agree to be similarly bound) any Registrable
Securities of the Company held by it at any time during such period except
common stock included in such registration, so long as all then-current officers
and directors of the Company enter into similar agreements.
In order to enforce the foregoing covenant, the Company may
impose stop-transfer instructions with respect to the Registrable Securities of
each Investor (and the shares or securities of every other person subject to the
foregoing restriction) until the end of such period.
1.16 Termination of Registration Rights. No Holder shall be
entitled to exercise any right provided for in this Section 1 after (a) five (5)
years following the consummation of the sale of securities pursuant to a
registration statement filed by the Company under the Act in connection with the
initial firm commitment underwritten offering of its securities to the general
public (the "IPO"), or (b) after the one-year anniversary of the effective date
of the IPO, as to any Holder (or permitted assignee) who can sell all
Registrable Securities held by such Holder under Rule 144(k) and owns less than
0.4% of the Company's outstanding Common Stock.
2. Covenants of the Company.
2.1 Delivery of Financial Statements. The Company shall deliver to
each Investor:
(a) as soon as practicable, but in any event within ninety
(90) days after the end of each fiscal year of the Company, an income statement
for such fiscal year, a balance sheet of the Company and statement of
shareholder's equity as of the end of such year, and a schedule as to the
sources and applications of funds for such year, such year-end financial reports
to be in reasonable detail, prepared in accordance with generally accepted
accounting principles ("GAAP"), and audited and certified by independent public
accountants of nationally recognized standing selected by the Company;
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(b) as soon as practicable, but in any event within
forty-five (45) days after the end of each of the first three (3) quarters of
each fiscal year of the Company, an unaudited profit or loss statement, schedule
as to the sources and application of funds for such fiscal quarter, an unaudited
balance sheet and a statement of shareholder's equity as of the end of such
fiscal quarter and a statement showing the number of shares of each class and
series of capital stock and securities convertible into or exercisable for
shares of capital stock outstanding at the end of the period, the number of
common shares issuable upon conversion or exercise of any outstanding securities
convertible or exercisable for common shares and the exchange ratio or exercise
price applicable thereto, all in sufficient detail as to permit the Investor to
calculate its percentage equity ownership in the Company;
(c) and to each Investor who holds at least 100,000 shares
of the Company's Preferred Stock, within thirty (30) days of the end of each
month, an unaudited income statement and schedule as to the sources and
application of funds and balance sheet for and as of the end of such month, in
reasonable detail;
(d) and to each Investor who holds at least 100,000 shares
of the Company's Preferred Stock, within 30 days prior to the close of each
fiscal year, a comprehensive operating budget for the next fiscal year
forecasting the Company's revenues, expenses and cash position, prepared on a
monthly basis;
(e) with respect to the financial statements called for in
subsections (b) and (c) of this Section 2.1, an instrument executed by the Chief
Financial Officer or President of the Company and certifying that such
financials were prepared in accordance with GAAP consistently applied with prior
practice for earlier periods (with the exception of footnotes that may be
required by GAAP) and fairly present the financial condition of the Company and
its results of operation for the period specified, subject to year-end audit
adjustment;
(f) such other information relating to the financial
condition, business, prospects or corporate affairs of the Company as the
Investor or any assignee of the Investor may from time to time request,
provided, however, that the Company shall not be obligated under this subsection
(f) or any other subsection of Section 2.1 to provide information which it deems
in good faith to be a trade secret or similar confidential information.
2.2 Inspection. The Company shall permit each Investor who holds
at least 100,000 shares of the Company's Preferred Stock, at such Investor's
expense, to visit and inspect the Company's properties, to examine its books of
account and records and to discuss the Company's finances and accounts with its
officers, all at such reasonable times as may be requested by
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<PAGE> 15
the Investor; provided, however, that the Company shall not be obligated
pursuant to this Section 2.2 to provide access to any information which it
reasonably considers to be a trade secret or similar confidential information.
2.3 Termination of Information and Inspection Covenants. The
covenants set forth in subsections 2.1(c), (d), (e) and (f) and Section 2.2
shall terminate as to Investors and be of no further force or effect when the
sale of securities pursuant to a registration statement filed by the Company
under the Act in connection with the firm commitment underwritten offering of
its securities to the general public is consummated or when the Company first
becomes subject to the periodic reporting requirements of Sections 12(g) or
15(d) of the 1934 Act, whichever event shall first occur.
2.4 Right of First Offer. Subject to the terms and conditions
specified in this paragraph 2.4, the Company hereby grants to each Major
Investor (as hereinafter defined) a right of first offer with respect to future
sales by the Company of its Shares (as hereinafter defined). For purposes of
this Section 2.4, a Major Investor shall mean (i) any Investor signatory to this
Agreement who holds at least 10% of the original investment such Investor made
in the Company pursuant to the Series A Agreement, the Series B Agreement, the
Series C Agreement or Series D Agreement and who has not waived all rights of
first offer pursuant to Section 2.4 of the 1996 Agreement and (ii) any person
who acquires at least 10% of the Series A Preferred Stock, Series B Preferred
Stock, Series C Preferred Stock or Series D Preferred Stock (or the Common Stock
issued upon conversion thereof) issued pursuant to the Series A Agreement,
Series B Agreement, Series C Agreement, or Series D Agreement and who has not
waived all rights of first offer pursuant to Section 2.5 of the 1996 Agreement.
For purposes of this Section 2.4, Investor includes any general partners and
affiliates of an Investor. An Investor shall be entitled to apportion the right
of first offer hereby granted it among itself and its partners and affiliates in
such proportions as it deems appropriate.
Each time the Company proposes to offer any shares of, or
securities convertible into or exercisable for any shares of, any class of its
capital stock ("Shares"), the Company shall first make an offering of such
Shares to each Major Investor in accordance with the following provisions:
(a) The Company shall deliver a notice by certified mail
("Notice") to the Major Investors stating (i) its bona fide intention to offer
such Shares, (ii) the number of such Shares to be offered, and (iii) the price
and terms, if any, upon which it proposes to offer such Shares.
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EXHIBIT 10.18
(b) Within 20 calendar days after giving of the Notice, any
Major Investor may elect to purchase or obtain, at the price and on the terms
specified in the Notice, up to that portion of such Shares which equals the
proportion that the number of shares of Common Stock issuable upon conversion of
the Series A Preferred Stock, Series B Preferred Stock, Series C Preferred Stock
and Series D Preferred Stock then held by such Major Investor bears to the total
number of shares of Common Stock issuable upon conversion of the Series A,
Series B, Series C and Series D Preferred Stock then held by all the Major
Investors. The Company shall promptly, in writing, inform each Major Investor
which purchases all the shares available to it ("Fully-Exercising Investor") of
any other Major Investor's failure to do likewise. During the ten-day period
commencing after such information is given, each Fully-Exercising Investor shall
be entitled to obtain that portion of the Shares not subscribed for by the Major
Investors which is equal to the proportion that the number of shares of Common
Stock issuable upon conversion of Series A, Series B, Series C and Series D
Preferred Stock then held, by such Fully-Exercising Investor bears to the total
number of shares of Common Stock issuable upon conversion of the Series A,
Series B, Series C and Series D Preferred Stock then held, by all
Fully-Exercising Investors who wish to purchase some of the unsubscribed shares.
(c) If all Shares which Investors are entitled to obtain
pursuant to subsection 2.4(b) are not elected to be obtained as provided in
subsection 2.4(b) hereof, the Company may, during the 30-day period following
the expiration of the period provided in subsection 2.4(b) hereof, offer the
remaining unsubscribed portion of such Shares to any person or persons at a
price not less than, and upon terms no more favorable to the offeree than those
specified in the Notice. If the Company does not enter into an agreement for the
sale of the Shares within such period, or if such agreement is not consummated
within 30 days of the execution thereof, the right provided hereunder shall be
deemed to be revived and such Shares shall not be offered unless first reoffered
to the Major Investors in accordance herewith.
(d) The right of first offer in this paragraph 2.4 shall not
be applicable (i) to the issuance or sale of Common Stock (or options therefor)
to employees, officers, directors or consultants for the primary purpose of
soliciting or retaining their service, (ii) to or after consummation of a bona
fide, firmly underwritten public offering of shares of common stock, registered
under the Act pursuant to a registration statement on Form S-1, at an offering
price of at least $9.00 per share after giving effect to the two-for-three
reverse split of the Company's capital stock in April 1998, and (appropriately
adjusted for any stock split, dividend, combination or other recapitalization)
and $7,500,000 in the aggregate, (iii) the issuance of securities pursuant to
the conversion or exercise of convertible or exercisable securities, (iv) the
issuance of securities in connection with a bona fide business acquisition of or
by the Company, whether by merger, consolidation, sale of assets, sale or
exchange of stock or
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<PAGE> 17
otherwise (v) the issuance of stock, warrants or other securities or rights in
connection with a strategic alliance, research and development partnership or
agreement, license agreement or other similar business relationship, or (vi) the
issuance of stock, warrants or other securities or rights to persons or entities
with which the Company has business relationships provided such issuances are
for other than primarily equity financing purposes.
2.5 Pay to Play.
(a) In the event a Major Investor does not purchase ("a
Failure to Purchase") its Pro Rata Amount of a Future Issuance (as defined
below) subsequent to the initial sale of Series D Preferred Stock, such Major
Investor (and any transferee of all or any part of such Major Investor's shares
of Series A, Series B, Series C and Series D Preferred Stock) shall
automatically waive any and all rights of first offer pursuant to Section 2.4
with respect to any and all Future Issuances of Shares of the Company's capital
stock subsequent to such Failure to Purchase.
(b) "Future Issuance" means an issuance of Shares which is
designated and allocated by resolution at a duly held meeting of the Board of
Directors of the Company for issuance to the holders of Series A, Series B,
Series C and Series D Preferred Stock less any of such stock issuable to one or
more new investors approved by the Board.
(c) "Pro Rata Amount" means the number of shares of Series
A, Series B, Series C and Series D Preferred Stock which such Investor holds on
the date of this Agreement divided by the number of shares of Series A, Series
B, Series C and Series D Preferred Stock held on the date of this Agreement by
all Investors.
2.6 Termination of Certain Covenants. The covenants set forth in
this Section 2 shall terminate and be of no further force or effect upon the
consummation of the sale of securities pursuant to a registration statement
filed by the Company under the Act in connection with the firm commitment
underwritten offering of its securities to the general public.
3. Miscellaneous.
3.1 Successors and Assigns. Except as otherwise provided herein,
the terms and conditions of this Agreement shall inure to the benefit of and be
binding upon the respective successors and assigns of the parties (including
transferees of any shares of Registrable Securities). Nothing in this Agreement,
express or implied, is intended to confer upon any party other than the parties
hereto or their respective successors and assigns any rights, remedies,
obligations, or liabilities under or by reason of this Agreement, except as
expressly provided in this Agreement.
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<PAGE> 18
3.2 Governing Law. This Agreement shall be governed by and
construed under the laws of the State of California as applied to agreements
among California residents entered into and to be performed entirely within
California.
3.3 Counterparts. This Agreement may be executed in two or more
counterparts, each of which shall be deemed an original, but all of which
together shall constitute one and the same instrument.
3.4 Titles and Subtitles. The titles and subtitles used in this
Agreement are used for convenience only and are not to be considered in
construing or interpreting this Agreement.
3.5 Notices. Unless otherwise provided, any notice required or
permitted under this Agreement shall be given in writing and shall be deemed
effectively given upon personal delivery to the party to be notified (or upon
the date of attempted delivery where delivery is refused) or, if sent by
telecopier, telex, telegram, or other facsimile means, upon receipt of
appropriate confirmation of receipt, or upon deposit with the United States
Postal Service, by registered or certified mail, or next day air courier, with
postage and fees prepaid and addressed to the party entitled to such notice at
the address indicated for such party on the signature page hereof, or at such
other address as such party may designate by 10 days' advance written notice to
the other parties to this Agreement.
3.6 Expenses. If any action at law or in equity is necessary to
enforce or interpret the terms of this Agreement, the prevailing party shall be
entitled to reasonable attorneys' fees, costs and necessary disbursements in
addition to any other relief to which such party may be entitled.
3.7 Amendments and Waivers. Any term of this Agreement may be
amended and the observance of any term of this Agreement may be waived (either
generally or in a particular instance and either retroactively or
prospectively), only with the written consent of the Company and the holders of
a majority of the Registrable Securities then outstanding. Any amendment or
waiver effected in accordance with this paragraph shall be binding upon each
holder of any Registrable Securities then outstanding, each future holder of all
such Registrable Securities, and the Company.
3.8 Severability. If one or more provisions of this Agreement are
held to be unenforceable under applicable law, such provision shall be excluded
from this Agreement and the balance of the Agreement shall be interpreted as if
such provision were so excluded and shall be enforceable in accordance with its
terms.
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<PAGE> 19
3.9 Aggregation of Stock. All shares of Registrable Securities
held or acquired by affiliated entities or persons shall be aggregated together
for the purpose of determining the availability of any rights under this
Agreement.
[REMAINDER OF PAGE INTENTIONALLY LEFT BLANK]
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<PAGE> 20
3.10 Entire Agreement. This Agreement (including the Exhibits
hereto, if any) constitutes the full and entire understanding and agreement
between the parties with regard to the subjects hereof and thereof.
IN WITNESS WHEREOF, the parties have executed this Agreement as of the
date first above written.
NANOGEN, INC.
By: /s/ Howard C. Birndorf
-------------------------------------
Howard C. Birndorf, Chief
Executive Officer
Address: 10398 Pacific Center Court
San Diego, CA 92121
<PAGE> 1
EXHIBIT 10.34
[CONFIDENTIAL TREATMENT REQUESTED. CERTAIN PORTIONS OF THIS AGREEMENT HAVE BEEN
MARKED CONFIDENTIAL AND HAVE BEEN SEPARATELY FILED WITH THE COMMISSION]
LICENSE AGREEMENT
THIS LICENSE AGREEMENT dated as of March 18, 1998 (this "Agreement"),
is entered into among Billups-Rothenberg, Inc., a California corporation
("BRI"), having a place of business located at 11555 Sorrento Valley Road,
Suite E, San Diego, California 92121, Barry E. Rothenberg, Ph.D., an
individual ("Dr. Rothenberg"), having an address at 149 12th Street, Del Mar,
California 92014 (BRI and Dr. Rothenberg, collectively, "Licensor"), and
Nanogen, Inc., a Delaware corporation ("Licensee"), having a place of business
located at 10398 Pacific Center Court, San Diego, California 92121.
W I T N E S S E T H:
WHEREAS, Dr. Rothenberg is the inventor of those certain methods to
identify hemochromatosis (the "Methods") claimed in United States Patent No.
5,674,681, issued October 7, 1997, entitled "Methods to Identify
Hemochromatosis."
WHEREAS, Dr. Rothenberg and BRI are joint owners of the United States
and foreign patent rights (including United States Patent No. 5,674,681,
issued October 7, 1997, entitled "Methods to Identify Hemochromatosis") which
claim the Methods, together with certain know-how related thereto.
WHEREAS, Licensee desires to obtain an exclusive worldwide license
under Licensor's rights in such patent rights and know-how, on the terms and
conditions of this Agreement, to develop and commercialize products and
services for use in DNA-based in vitro detection, diagnosis, screening and
monitoring of hereditary hemochromatosis in humans.
NOW, THEREFORE, in consideration of the foregoing premises and the
mutual covenants herein contained, the parties hereby agree as follows:
ARTICLE 1
DEFINITIONS
For purposes of this Agreement, the terms defined in this Article 1
shall have the respective meanings set forth below:
1.1 "Affiliate" shall mean, with respect to any Person, any other
Person which directly or indirectly controls, is controlled by, or is under
common control with, such Person. A Person shall
<PAGE> 2
be regarded as in control of another Person if it owns, or directly or
indirectly controls, at least forty percent (40%) of the voting stock or other
ownership interest of the other Person, or if it directly or indirectly
possesses the power to direct or cause the direction of the management and
policies of the other Person by any means whatsoever.
1.2 "Field" shall mean DNA-based in vitro detection, diagnosis,
screening and monitoring of hereditary hemochromatosis in humans.
1.3 "First Commercial Sale" shall mean, with respect to any Product
or Service, the first sale by Licensee or its Affiliates for use by the general
public of such Product or Service.
1.4 "Licensed Know-How" shall mean all information and data which is
not generally known (including, but not limited to, formulae, procedures,
protocols, techniques and results of experimentation and testing) and which is
necessary for Licensee either (a) to practice the Methods, or (b) to develop,
make, have made, use, offer for sale, sell or import the Research Inventions in
the Field, which is owned by Licensor as of the date hereof or during the term
of the Research Agreement.
1.5 "Licensed Patent Rights" shall mean (a) United States Patent No.
5,674,681, issued October 7, 1997, entitled "Methods to Identify
Hemochromatosis" (the "'681 Patent"); (b) subject to Section 9.4 below, all
United States patent applications filed hereafter that claim Research
Inventions for use in the Field; (c) all foreign counterpart patent
applications thereto; (d) all United States and foreign patents that have
issued or in the future issue from such patent applications, including utility,
model and design patents and certificates of invention; and (e) all
divisionals, continuations, continuations-in-part, reissues, renewals,
extensions or additions to any such patent applications and patents; which are
owned by Licensor.
1.6 "Licensed Technology" shall mean, collectively, the Licensed
Patent Rights and the Licensed Know-How.
1.7 "Net Sales" shall mean, (a) with respect to any Product, the
invoiced sales price of such Product billed by Licensee or its Affiliates to
independent customers (that are not Affiliates), less to the extent included in
the invoiced sales price (i) credits, allowances, discounts and rebates to, and
chargebacks from the account of, such customers for spoiled, damaged,
out-dated, rejected or returned Product; (ii) actual freight and insurance
costs incurred in transporting such Product in final form to such customers;
(iii) cash, quantity and trade discounts and other price reductions; (iv)
sales, use, value-added and other direct taxes incurred; and (v) customs
duties, surcharges and other governmental charges incurred in connection with
the exportation or importation of such Product in final form; and (b) with
respect to any Service, the invoiced sales price of such
-2-
<PAGE> 3
Service billed by Licensee or its Affiliates to independent customers (that are
not Affiliates), less to the extent included in the invoiced sales price (i)
cash, quantity and trade discounts and other price reductions; and (ii) sales,
use, value-added and other direct taxes incurred.
1.8 "Person" shall mean an individual, corporation, partnership,
limited liability company, trust, business trust, association, joint stock
company, joint venture, pool, syndicate, sole proprietorship, unincorporated
organization, governmental authority or any other form of entity not
specifically listed herein.
1.9 "Product" shall mean any product for use in the Field which (a)
if developed, made, have made, used, offered for sale, sold or imported but for
the license granted by this Agreement would infringe a Valid Claim, (b)
otherwise contains, incorporates, uses or is based on the Methods or the
Research Inventions, or (c) is directed to the detection, diagnosis, screening
and monitoring of a composition which is a Research Invention.
1.10 "Research Agreement" shall mean the Research Agreement dated as
of the date hereof between BRI and Licensee (as amended, modified or restated
from time to time).
1.11 "Research Inventions" shall mean any and all inventions and
discoveries in the Field (including, without limitation, any and all
improvements to the methods set forth in the claims of the '681 Patent, any and
all genes and corresponding mutations thereof responsible for idiopathic
hemochromatosis, and all uses thereof in the Field), which are conceived or
discovered by BRI during the term of, and in the course of performing research
pursuant to, the Research Agreement.
1.12 "Royalty Term" shall mean, with respect to each Product or
Service in each country, (a) if the manufacture, use or sale of such Product or
the performance of such Service in such country was at the time of the First
Commercial Sale in such country covered by a Valid Claim, the term for which
such Valid Claim remains in effect and would be infringed but for the license
granted by this Agreement, or (b) otherwise, ten (10) years from the date of
the First Commercial Sale of such Product or Service in such country.
1.13 "Service" shall mean any service in the Field, the performance
of which (a) if performed but for the license granted by this Agreement would
infringe a Valid Claim, (b) otherwise contains, incorporates, uses or is based
on the Methods or the Research Inventions, or (c) is directed to the detection,
diagnosis, screening and monitoring of a composition which is a Research
Invention.
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<PAGE> 4
1.14 "Sublicense Revenues" shall mean all consideration, including
royalties, received by Licensee or its Affiliates from sublicensees of the
Licensed Technology, other than cash consideration (a) to fund the performance
of the future research or development of Products or Services (at the cost to
Licensee or its Affiliates therefor) or (b) for the issuance of the equity
securities of Licensee or its Affiliates (at the fair market value of such
securities). The fair market value of any non-monetary consideration received
by Licensee or its Affiliates from sublicensees of the Licensed Technology
shall be determined in good faith by the mutual agreement of the parties, or if
no agreement, by the determination of an independent appraisal firm selected by
the mutual agreement of the parties.
1.15 "Third Party" shall mean any Person other than Licensor,
Licensee and their respective Affiliates.
1.16 "Valid Claim" shall mean a claim of an issued and unexpired
patent included within the Licensed Patent Rights, which has not been held
permanently revoked, unenforceable or invalid by a decision of a court or other
governmental agency of competent jurisdiction, unappealable or unappealed
within the time allowed for appeal, and which has not been admitted to be
invalid or unenforceable through reissue or disclaimer or otherwise.
ARTICLE 2
REPRESENTATIONS AND WARRANTIES
2.1 Mutual Representations and Warranties. Each party hereby
represents and warrants to the other parties as follows:
2.1.1 Corporate Existence. Such party (other than Dr.
Rothenberg) is a corporation duly organized, validly existing and in good
standing under the laws of the state in which it is incorporated.
2.1.2 Authorization and Enforcement of Obligations. Such
party (a) has the requisite power and authority and the legal right to enter
into this Agreement and to perform its obligations hereunder, and (b) has taken
all requisite action on its part to authorize the execution and delivery of
this Agreement and the performance of its obligations hereunder. This
Agreement has been duly executed and delivered on behalf of such party, and
constitutes a legal, valid, binding obligation, enforceable against such party
in accordance with its terms.
2.1.3 No Consents. All necessary consents, approvals and
authorizations of all governmental authorities and other Persons required to be
obtained by such party in connection with this Agreement have been obtained.
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<PAGE> 5
2.1.4 No Conflict. The execution and delivery of this
Agreement and the performance of such party's obligations hereunder (a) do not
conflict with or violate any requirement of applicable laws or regulations, and
(b) do not conflict with, or constitute a default under, any contractual
obligation of it.
2.2 Representations and Warranties by Licensor. Licensor hereby
represents and warrants to Licensee as follows:
2.2.1 Ownership of Licensed Technology. BRI and Dr.
Rothenberg are the sole owner(s) of the Licensed Technology existing as of the
date hereof. As of the date of this Agreement, Licensor has not granted to any
Third Party any license or other interest in the Licensed Technology.
2.2.2 Allocation of Consideration. BRI and Dr. Rothenberg
have mutually agreed upon the allocation between them of all consideration to
the party specified in, and otherwise in accordance with the provisions of,
this Agreement. BRI and Dr. Rothenberg shall defend, indemnify and hold
Licensee harmless from all losses, liabilities, damages and expenses (including
reasonable attorneys' fees and costs) incurred as a result of any claim,
demand, action or proceeding by either of them arising out of or relating to
the allocation between them of any consideration pursuant to this Agreement,
provided that such consideration is paid or otherwise given to the party
specified in, and otherwise in accordance with the provisions of, this
Agreement.
2.3 Representations and Warranties by Dr. Rothenberg. Dr.
Rothenberg hereby represents and warrants to Licensee as follows:
2.3.1 Ownership of BRI Shares. Dr. Rothenberg is the owner
of all the issued and outstanding shares of capital stock of BRI. There are no
outstanding warrants, options or other rights in favor of any Person to acquire
any additional shares of capital stock or other additional equity interest in
BRI.
2.3.2 Investment Intent. Dr. Rothenberg is acquiring the
shares of Common Stock of Licensee pursuant to Section 4.6 hereof for
investment for his own account only and not with a view to, or for resale in
connection with, any "distribution" thereof within the meaning of the
Securities Act of 1933, as amended (the "Securities Act"). Dr. Rothenberg
understands that such shares of Common Stock have not been registered under the
Securities Act or registered or qualified under any state securities law in
reliance on specific exemptions therefrom, which exemptions may depend upon,
among other things, the bona fide nature of Dr. Rothenberg's investment intent
as expressed herein.
2.3.3 Investment Experience. Dr. Rothenberg is an individual
and is aware of Licensee's business affairs and financial condition and has
acquired sufficient information about Licensee to reach an informed and
knowledgeable decision to acquire such shares of Common Stock. Dr. Rothenberg
has such
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<PAGE> 6
business and financial experience as is required to give it the capacity to
protect his own interests in connection with the acquisition of such shares of
Common Stock.
2.3.4 Compliance with Securities Laws and Regulations. All
subsequent offers and sales of the shares of Common Stock of Licensee acquired
by Dr. Rothenberg pursuant to Section 4.6 hereof shall be made pursuant to
registration under the Securities Act and qualification under the applicable
state securities laws or pursuant to exemptions from registration and
qualification.
ARTICLE 3
LICENSE GRANT
3.1 Licensed Technology. Licensor hereby grants to Licensee an
exclusive worldwide license under the Licensed Technology (a) to develop, make,
have made, use, offer for sale, sell and import Products for use in the Field,
and (b) to develop, perform, offer for sale and sell Services for use in the
Field.
3.2 Sublicenses. Licensee shall have the right to grant sublicenses
(without the right to grant further sublicenses) under the licenses granted
under Section 3.1. Licensee shall give Licensor a copy of each sublicense
granted under this Agreement promptly after granting such sublicense. Each
sublicense shall be subject to the terms and conditions of this Agreement.
3.3 Availability of the Licensed Technology. Licensor has provided
Licensee with all information available to Licensor as of the date hereof
regarding the Licensed Technology. Thereafter, Licensor shall provide Licensee
with such additional Licensed Technology as is discovered, conceived or
developed after the date hereof, promptly after it becomes available to
Licensor. For a period of two (2) years after the date hereof, Licensor shall
provide technical assistance to Licensee regarding the Licensed Technology at
no cost to Licensee, upon the reasonable request of Licensee, during normal
business hours, not to exceed four (4) days in period of three (3) consecutive
calendar months.
ARTICLE 4
LICENSE FEES, MILESTONES AND ROYALTIES
4.1 Direct Royalties.
4.1.1 Royalty Rate. Except as provided in Sections 4.1.2
through 4.1.7 hereof, and subject to the other terms and conditions hereof, in
partial consideration for the licenses granted to Licensee herein, during the
Royalty Term, Licensee shall pay royalties to Dr. Rothenberg equal to (a) [***]
percent [***] of Net Sales of Products and Services on sales in countries
***CONFIDENTIAL MATERIAL REDACTED AND FILED SEPARATELY WITH THE COMMISSION.
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<PAGE> 7
where there is a Valid Claim, and (b) equal to [***] percent [***] of Net Sales
of Products and Services on sales in countries where there is not a Valid Claim.
4.1.2 Cartridges and Instruments. If Licensee, its Affiliate
or distributor sells a Product which is a cartridge, reagent or other
consumable item (excluding instrument maintenance reagents and other consumable
items) (collectively, the "Cartridge"), and a Product which is an instrument to
read and process the samples on, in or with Cartridges (the "Instrument"), then
the "Products" for the sole purpose of calculating the royalties owing under
this Section 4.1 shall be only the Cartridges and shall not include the
Instruments; provided, however, that the relative invoiced sales prices of the
Cartridges and the Instruments in relation to each other shall be established
in good faith.
4.1.3 Combination Product. In the event a Product is sold in a
combination with other analyte components, royalty payments on such combination
Product shall be the greater of (a)(i) [***] per combination Product on annual
sales of such combination Product of [***] or less, and (ii) [***] per
combination Product on annual sales in excess of [***] for such combination
Product, or (b) the royalty calculated pursuant to Section 4.1.1 above where Net
Sales are calculated by multiplying Net Sales of such combination Product by the
fraction A/B, where A is the gross selling price of the Product sold without
other analyte, and B is the gross selling price of the combination Product.
4.1.4 Combination Service. In the event a Service is sold in
a combination with a service to detect, diagnose, screen or monitor for the
presence of other analytes, royalty payments on such combination Service shall
be the royalty calculated pursuant to Section 4.1.1 above where Net Sales are
calculated by multiplying Net Sales of such combination Service by the fraction
A/B, where A is the gross selling price of the Service sold without detection,
diagnosis, screening or monitoring for the other analyte, and B is the gross
selling price of the combination Service.
4.1.5 Multiple Patient Sample Product. In the event a Product
is sold for use with multiple patient samples, royalty payments on such multiple
patient sample Product shall be not less than (a) [***] per potential patient
sample on annual sales of such combination Product of [***] or less, and (b)
[***] per potential patient sample on annual sales in excess of [***] for such
multiple patient sample Product.
4.1.6 Third Party Royalties. If Licensee or its Affiliates
obtains a license under the claims of an issued patent of any Third Party that
requires Licensee or its Affiliates to pay
***CONFIDENTIAL MATERIAL REDACTED AND FILED SEPARATELY WITH THE COMMISSION.
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<PAGE> 8
royalties to such Third Party which Licensee or its Affiliate believes necessary
or desirable in order to exercise its rights hereunder to practice the Methods
regarding a Product or Service for use in the Field, then the royalty rate owing
to Dr. Rothenberg under Section 4.1.1 above with respect to sales of such
Product or Service shall be reduced to [***] of Net Sales of such Product or
Service by or on behalf of Licensee or its Affiliates in countries where there
is a Valid Claim, and [***] percent [***] of Net Sales of such Product or
Service by or on behalf of Licensee or its Affiliates in countries where there
is not a Valid Claim.
4.1.7 Credit of Option Fee. The option fee in the amount of
[***] dollars [***], previously paid by Licensee to BRI pursuant to the
Exclusive Option Agreement effective September 12, 1997, between BRI and
Licensee, shall be fully creditable against the minimum royalties due and
payable to Dr. Rothenberg under Section 4.3 below.
4.2 Sublicensee Payments and Royalties. In partial consideration for
the licenses granted to Licensee herein, Licensee shall pay Dr. Rothenberg (a)
if [***] or its Affiliates ("[***]") has exclusive license rights under patent
rights of [***] or its Affiliates related to the HFE gene, [***] percent [***]
of all Sublicense Revenues received by Licensee or its Affiliates from [***] in
connection with the use of the Licensed Technology; (b) except as set forth in
clause (a) above, if the Licensed Technology is sublicensed without a concurrent
sublicense under the patent rights of any Third Party, [***] percent [***] of
all Sublicense Revenues received by Licensee or its Affiliates; and (c) except
as set forth in clause (a) above, if the Licensed Technology is sublicensed with
a concurrent sublicense under the patent rights of any Third Party, [***]
percent [***] of all Sublicense Revenues received by Licensee or its Affiliates.
4.3 Minimum Royalties. Subject to the provisions of Article 10 hereof,
annually commencing on the payment date for royalties owing for the calendar
quarter in which occurred the date of the [***] (if such date occurred within
the first 45 days of such calendar quarter) or the payment date for royalties
owing for the next immediately following calendar quarter (if such date occurred
after the first 45 days of such calendar quarter), Licensee shall pay Dr.
Rothenberg minimum annual royalties in the following amounts:
<TABLE>
<S> <C>
Year One . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ [***]
Year Two . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ [***]
Year Three . . . . . . . . . . . . . . . . . . . . . . . . . . . $ [***]
Year Four (and thereafter
during the Royalty Term) . . . . . . . . . . . . . . . . . . . $ [***]
</TABLE>
***CONFIDENTIAL MATERIAL REDACTED AND FILED SEPARATELY WITH THE COMMISSION.
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<PAGE> 9
Minimum annual royalties are fully creditable against royalties due and payable
under Section 4.1 for the calendar quarter for which they are payable and for
the three immediately following calendar quarters.
4.4 License Fee.
4.4.1 Upon execution of this Agreement, (a) Licensee shall pay
BRI a non-refundable licensee fee of fifty thousand dollars $50,000; (b)
Licensee shall pay Dr. Rothenberg a non-refundable licensee fee of four hundred
forty thousand dollars ($440,000); and (c) Licensee shall issue to Dr.
Rothenberg 2,000 shares of Licensee's Common Stock, appropriately legended. Dr.
Rothenberg shall in addition have the right, but not the obligation, to purchase
in Licensee's initial public offering of Common Stock registered under the
Securities Act of 1933, as amended, up to four hundred ninety thousand dollars
($490,000) of Licensee's Common Stock at the price such shares are initially
offered to the public.
4.4.2 Licensee shall be entitled to credit the aggregate amount
of four hundred ninety thousand dollars ($490,000) paid to BRI and Dr.
Rothenberg under clauses (a) and (b) of Section 4.4.1 above against up to one
third (1/3) of the amount of each payment owing to Dr. Rothenberg under Sections
4.1 and 4.2 above until Licensee has taken an aggregate credit of four hundred
ninety thousand dollars ($490,000).
4.4.3 Within thirty (30) days after the date (the "Trigger
Date") which the later of (a) the date on which the aggregate Net Sales of
Products and Services by Licensee, its Affiliates and sublicensees equals or
exceeds five million dollars ($5,000,000), or (b) the date on which the
aggregate credit taken by Licensee under Section 4.4.2 above equals four hundred
ninety thousand dollars ($490,000), and on each of the first through third
anniversaries of the Trigger Date, Licensee shall pay to Dr. Rothenberg the sum
of one hundred twenty two thousand five hundred dollars $122,500. The total
amount payable by Licensee to Dr. Rothenberg under this Section 4.4.3 shall be
four hundred ninety thousand dollars ($490,000).
4.5 Milestone Payments. Licensee shall pay the following milestone
payments to Dr. Rothenberg upon receipt of applicable regulatory approvals to
market a Product or Service by Licensee, its Affiliates or sublicensees
according to the following schedule:
<TABLE>
<S> <C>
First regulatory approval for
marketing in United States . . . . . . . . . . . . . . . . . . . . . . $ [***]
First regulatory approval for
marketing in Europe . . . . . . . . . . . . . . . . . . . . . . . . . . $ [***]
First regulatory approval
for marketing outside of
United States or Europe . . . . . . . . . . . . . . . . . . . . . . . . $ [***]
</TABLE>
***CONFIDENTIAL MATERIAL REDACTED AND FILED SEPARATELY WITH THE COMMISSION.
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No milestone payments will be due for any subsequent regulatory approvals for
marketing.
ARTICLE 5
ROYALTY REPORTS AND ACCOUNTING
5.1 Royalty Reports. During the term of this Agreement following the
First Commercial Sale of a Product or Service or the receipt of any Sublicense
Revenues by Licensee or its Affiliate, Licensee shall furnish to Dr. Rothenberg
a quarterly written report showing in reasonably specific detail (a) the gross
sales of each Product and Service sold by Licensee and its Affiliates to
independent customers (that are not Affiliates) during the reporting period and
the calculation of Net Sales from such gross sales; (b) the Sublicense Revenues
received by Licensee or its Affiliates during the reporting period; (c) the
royalties payable, if any, which shall have accrued hereunder based upon such
Net Sales and Sublicense Revenues; and (d) withholding taxes, if any, required
by law to be deducted in respect of such Net Sales and Sublicense Revenues.
With respect to sales of Products and Services invoiced in United States
dollars, the gross sales, Net Sales, Sublicense Revenues and royalties payable
shall be expressed in United States dollars. With respect to sales of Products
and Services invoiced in a currency other than United States dollars, the gross
sales, Net Sales, Sublicense Revenues and royalties payable shall be expressed
in the domestic currency of the party making the sale together with the United
States dollar equivalent of the royalty payable, calculated using the average
closing buying rate for such currency quoted in the continental terms method of
quoting exchange rates (local currency per US$1) by Bank of America NT&SA in
London, England on each of the last business day of each month in the quarter
prior to the date of payment. Reports shall be due on the sixtieth (60th) day
following the close of each quarter. Licensee shall keep complete and accurate
records in sufficient detail to properly reflect all gross sales, Net Sales and
Sublicense Revenues and to enable the royalties payable hereunder to be
determined.
5.2 Audits.
5.2.1 Upon the written request of Dr. Rothenberg and not more
than once in each calendar year, Licensee shall permit an independent certified
public accounting firm selected by Dr. Rothenberg and reasonably acceptable to
Licensee, at Dr. Rothenberg's expense, to have access during normal business
hours to such of the records of Licensee as may be reasonably necessary to
verify the accuracy of the royalty reports hereunder for any year ending not
more than thirty six (36) months prior to the date of such request. The
accounting firm shall disclose to Dr. Rothenberg only whether the reports are
correct or not and the specific details concerning any discrepancies. No other
information shall be shared.
-10-
<PAGE> 11
5.2.2 If such accounting firm concludes that additional
royalties were owed during such period, Licensee shall pay the additional
royalties within thirty (30) days of the date Dr. Rothenberg delivers to
Licensee such accounting firm's written report so concluding. The fees charged
by such accounting firm shall be paid by Dr. Rothenberg; provided, however, if
the audit correctly discloses that the royalties payable by Licensee for the
audited period are more than [***] of the royalties actually paid for such
period, then Licensee shall pay the reasonable fees and expenses charged by such
accounting firm.
5.3 Confidential Financial Information. Dr. Rothenberg shall treat
all financial information subject to review under this Article 5 as
confidential, and shall cause its accounting firm to retain all such financial
information in confidence under Article 8 below.
ARTICLE 6
PAYMENTS
6.1 Payment Terms. Royalties shown to have accrued by each royalty
report provided for under Article 5 above shall be due on the date such royalty
report is due. Payment of royalties in whole or in part may be made in advance
of such due date.
6.2 Exchange Control. If at any time legal restrictions prevent the
prompt remittance of part or all royalties with respect to any country where
the Product is sold, Licensee shall have the right, in its sole discretion, to
make such payments by depositing the amount thereof in local currency to Dr.
Rothenberg's account in a bank or other depository institution in such country.
If the royalty rate specified in this Agreement should exceed the permissible
rate established in any country, the royalty rate for sales in such country
shall be adjusted to the highest legally permissible or government-approved
rate.
6.3 Withholding Taxes. Licensee shall be entitled to deduct the
amount of any withholding taxes, value-added taxes or other taxes, levies or
charges with respect to such amounts, other than United States taxes, payable
by Licensee, its Affiliates or sublicensees, or any taxes required to be
withheld by Licensee, its Affiliates or sublicensees, to the extent Licensee,
its Affiliates or sublicensees pay to the appropriate governmental authority on
behalf of Dr. Rothenberg such taxes, levies or charges. Licensee shall use
reasonable efforts to minimize any such taxes, levies or charges required to be
withheld on behalf of Dr. Rothenberg by Licensee, its Affiliates or
sublicensees. Licensee promptly shall deliver to Dr. Rothenberg proof of
payment of all such taxes, levies and other charges, together with copies of
all communications from or with such governmental authority with respect
thereto.
***CONFIDENTIAL MATERIAL REDACTED AND FILED SEPARATELY WITH THE COMMISSION.
-11-
<PAGE> 12
ARTICLE 7
DILIGENCE
7.1 Diligence Efforts. Licensee shall use its commercially
reasonable efforts (whether alone or with or through its Affiliates) to conduct
such research, development and preclinical and human clinical trials as
Licensee determines are necessary or desirable to obtain regulatory approval to
manufacture and market such Products and Services as Licensee determines are
commercially feasible, and shall use its commercially reasonable efforts to
obtain regulatory approval to market, and (upon approval) to commence marketing
and market each such Product in such countries as Licensee determines are
commercially feasible.
7.2 Failure to Market an Approved Product. If, five years from the
date hereof, Licensee or its Affiliate has not commenced marketing a Product
(which has received regulatory approval for marketing in the United States or
Europe), then:
7.2.1 Licensee may terminate this Agreement, in its sole
discretion, upon sixty (60) days prior written notice to Licensor.
7.2.2 In the event Licensee does not exercise its right to
terminate this Agreement pursuant to Section 7.2.1, then at the option of
Licensor, the licenses granted hereunder by Licensor shall become non-exclusive
upon written notice to Licensee thereof, and Licensor and Licensee shall engage
in good faith negotiations toward concluding the terms of a non-exclusive
license agreement with respect to the Licensed Technology. Any such
non-exclusive license shall provide that (a) Licensee shall have no right
thereafter to grant further sublicenses, (b) the royalty provisions of Section
4.2 shall remain unchanged with respect to pre-existing sublicenses, (c)
Licensee shall have no obligation thereafter to pay minimum annual royalties
under Section 4.3, and (d) the other terms and conditions (including the
royalty provisions of Section 4.1) shall be modified in accordance with the
change in scope of the license as the parties mutually agree in good faith.
ARTICLE 8
CONFIDENTIALITY
8.1 Confidential Information. During the term of this Agreement,
and for a period of four (4) years following the expiration or earlier
termination hereof, Licensor and Licensee shall maintain in confidence all
information of the other (including samples) disclosed by the other and
identified as, or acknowledged to be, confidential (the "Confidential
Information"), and shall not use, disclose or grant the use of the Confidential
Information except on a need-to-know basis to those directors,
***CONFIDENTIAL MATERIAL REDACTED AND FILED SEPARATELY WITH THE COMMISSION.
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<PAGE> 13
officers, affiliates, employees, permitted licensees, permitted assignees and
agents, consultants, clinical investigators or contractors, to the extent such
disclosure is reasonably necessary in connection with such party's activities
as expressly authorized by this Agreement. To the extent that disclosure is
authorized by this Agreement, prior to disclosure, each party hereto shall
obtain agreement (which may be in the form of its customary employee or
consulting agreement, provided that such agreement is consistent with the
provisions of this Agreement) of any such Person to hold in confidence and not
make use of the Confidential Information for any purpose other than those
permitted by this Agreement. Each party shall notify the others promptly upon
discovery of any unauthorized use or disclosure of the other party's
Confidential Information.
8.2 Permitted Disclosures. The confidentiality obligations
contained in Section 8.1 above shall not apply to the extent that (a) any
receiving party (the "Recipient") is required (i) to disclose information by
law, order or regulation of a governmental agency or a court of competent
jurisdiction, or (ii) to disclose information to any governmental agency for
purposes of obtaining approval to test or market a product, provided in either
case that the Recipient shall provide written notice thereof to the other party
and sufficient opportunity to object to any such disclosure or to request
confidential treatment thereof; or (b) the Recipient can demonstrate that (i)
the disclosed information was public knowledge at the time of such disclosure
to the Recipient, or thereafter became public knowledge, other than as a result
of actions of the Recipient in violation hereof; (ii) the disclosed information
was rightfully known by the Recipient (as shown by its written records) prior
to the date of disclosure to the Recipient by the other party hereunder; (iii)
the disclosed information was disclosed to the Recipient from a source
unrelated to any party to this Agreement and not under a duty of
confidentiality to the other party; or (iv) the disclosed information was
independently developed by the Recipient without use of the Confidential
Information disclosed by the other party. Notwithstanding any other provision
of this Agreement, Licensee may disclose Confidential Information of Licensor
to any Person with whom Licensee has, or is proposing to enter into, a business
relationship, as long as such Person has entered into a confidentiality
agreement with Licensee.
8.3 Terms of this Agreement. Except as otherwise provided in Section
8.2 above, no party shall disclose any terms or conditions of this Agreement to
any Third Party without the prior consent of the other parties.
Notwithstanding the foregoing, prior to execution of this Agreement, the
parties shall agree upon the substance of information that can be used to
describe the terms of this transaction, and the parties may disclose such
information, as modified by mutual agreement from time to time, without the
other parties' consent.
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<PAGE> 14
ARTICLE 9
PATENTS
9.1 Patent Prosecution and Maintenance. Subsequent to the date
hereof, Licensee shall be responsible for and shall control, at its sole cost,
the preparation, filing, prosecution and maintenance of the Licensed Patent
Rights. In doing so, Licensee shall use its reasonable efforts to obtain a
commercially reasonable patent position regarding the Licensed Patent Rights
and shall consider in good faith the interest of Licensor. Licensee (a) shall
give Licensor an opportunity to review and comment on the text of each patent
application subject to this Section 9.1 before filing and supply Licensor with
a copy of such patent application as filed, together with notice of its filing
date and serial number; (b) shall consult with Licensor regarding the
prosecution and maintenance of the Licensed Patent Rights, and shall conduct
such prosecution and maintenance consistent with the reasonable requests of
Licensor with respect thereto; (c) shall inform Licensor promptly of any
material substantive action or proposed action with respect to the Licensed
Patent Rights, shall provide Licensor with advance copies of proposed responses
thereto, and shall implement reasonable requests of Licensor with respect
thereto; (d) shall not abandon or materially narrow the substantive claims of
the Licensed Patent Rights without the prior express written consent of
Licensor; (e) shall provide Licensor with copies of filings, submissions and
correspondence with the applicable patent authorities regarding any material
substantive action or proposed action with respect to the Licensed Patent
Rights; (f) shall inform Licensor promptly of the allowance and issuance of
each patent included in the Licensed Patent Rights, together with the date and
patent number thereof, and provide Licensor with a copy of such patent as
issued; and (g) shall prosecute reexaminations and reissues as reasonably
requested by Licensor. Licensor shall reasonably cooperate with Licensee,
execute such lawful papers and instruments and make all rightful oaths and
declarations as may be necessary in the preparation, prosecution and
maintenance of the Licensed Patent Rights. Licensee shall reimburse Licensor
for all expenses (including reasonable attorneys' fees and costs) incurred by
Licensor for actions taken [***] in the preparation, filing and prosecution
of the Licensed Patent Rights.
9.2 Notification of Infringement. Each party shall notify the other
parties of any infringement known to such party of any Licensed Patent Rights
and shall provide the other parties with the available evidence, if any, of
such infringement.
9.3 Enforcement of Patent Rights. Licensee, at its sole expense,
shall have the right to determine the appropriate course of action to enforce
Licensed Patent Rights or otherwise abate the infringement thereof, to take (or
refrain from taking) appropriate action to enforce Licensed Patent Rights, to
control any litigation or other enforcement action and to enter into, or
***CONFIDENTIAL MATERIAL REDACTED AND FILED SEPARATELY WITH THE COMMISSION.
-14-
<PAGE> 15
permit, the settlement of any such litigation or other enforcement action with
respect to Licensed Patent Rights, and shall consider, in good faith, the
interests of Licensor in so doing. If Licensee does not, within [***] of receipt
of notice from Licensor, abate the infringement or file suit to enforce the
Licensed Patent Rights against at least one infringing party in a country,
Licensor shall have the right to take whatever action it deems appropriate to
enforce the Licensed Patent Rights in such country. The party controlling any
such enforcement action shall not settle the action or otherwise consent to an
adverse judgment in such action that diminishes the rights or interests of the
non-controlling party without the prior written consent of the non-controlling
party. All monies recovered upon the final judgment or settlement of any such
suit to enforce the Licensed Patent Rights shall be shared, after reimbursement
of expenses, by Licensor and Licensee in accordance with the allocations set
forth in Section 4.2 above. Notwithstanding the foregoing, Licensor and Licensee
shall reasonably cooperate with each other in the planning and execution of any
action to enforce the Licensed Patent Rights. The controlling party shall
compensate the non-controlling party for all such assistance in enforcing the
Licensed Patent Rights, conducted at the request of the controlling party, at
reasonable consulting rates mutually agreed to by the parties prior to providing
such assistance.
9.4 Licensed Patent Rights on Research Inventions.
Notwithstanding anything to the contrary in this Agreement, if Licensee fails
to file a patent application in the United States or Europe on or before the
fourth anniversary of the termination of the Research Agreement claiming a
Research Invention for use in the Field, then Licensee thereafter shall have no
right or license under Patent Rights which claim such Research Invention.
ARTICLE 10
TERMINATION
10.1 Expiration. Subject to the provisions of Sections 10.2 and 10.3
below, this Agreement shall expire on the expiration of Licensee's obligation
to pay royalties to Dr. Rothenberg under Article 4 above.
10.2 Termination by Licensee. If Licensee determines to abandon in
its entirety the development and commercialization by Licensee (both alone or
with or through its Affiliates and sublicensees of the Licensed Technology) of
products and services for use in the Field principally due to unforeseen social
or political issues, then Licensee may terminate this Agreement, in its sole
discretion, upon sixty (60) days prior written notice to Licensor.
10.3 Termination for Cause. Except as otherwise provided in Article
12, Licensor or Licensee may terminate this Agreement upon
***CONFIDENTIAL MATERIAL REDACTED AND FILED SEPARATELY WITH THE COMMISSION.
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<PAGE> 16
or after the breach of any material provision of this Agreement by the other if
the other has not cured such breach within sixty (60) days after notice thereof
by the non-breaching party. Notwithstanding the foregoing, if there exists a
good faith dispute between the parties regarding the occurrence (or the
purported cure) of any default, the non-breaching party shall have no right to
terminate this Agreement for a reasonable period of time, not to exceed one
hundred twenty (120) days after written notice to the breaching party under
this Section 10.3 (or such longer period as the parties mutually agree in
writing), provided that during such period the breaching party is diligently
attempting in good faith to resolve such dispute.
10.4 Effect of Expiration or Termination. Upon expiration of this
Agreement under Section 10.1 above, Licensee shall have a paid-up,
non-exclusive license under the Licensed Know-How (a) to develop, make, have,
made, use, offer for sale, sell and import Products for use in the Field, and
(b) to develop, perform, offer for sale and sell Services for use in the Field.
Expiration or termination of this Agreement shall not relieve the parties of
any obligation accruing prior to such expiration or termination, and the
provisions of Articles 8 and 11 shall survive the expiration or termination of
this Agreement.
ARTICLE 11
INDEMNIFICATION
11.1 Indemnification.
11.1.1 By Licensee. Licensee shall defend, indemnify and
hold Licensor harmless from all losses, liabilities, damages and expenses
(including reasonable attorneys' fees and costs) incurred as a result of any
claim, demand, action or proceeding by any Third Party arising out of or
relating to (a) any breach of any representation, warranty or covenant of
Licensee under this Agreement; (b) the development, making, using, offering for
sale, selling or importing of Products by Licensee, its Affiliates and
sublicensees; (c) the development, performing, offering for sale or selling of
Services by Licensee, its Affiliates and sublicensees; (d) the use of the
Products or Services by their respective customers; or (e) any other practice
of the Methods or other use of the Licensed Technology by or on behalf of
Licensee, its Affiliates and sublicensees.
11.1.2 By Licensor. Licensor shall defend, indemnify and
hold Licensee harmless from all losses, liabilities, damages and expenses
(including reasonable attorneys' fees and costs) incurred as a result of any
claim, demand, action or proceeding by any Third Party arising out of or
relating to any breach of any representation, warranty or covenant of Licensor
under this Agreement.
-16-
<PAGE> 17
11.2 Procedure. If Licensor or Licensee, as applicable (the
"Indemnitee"), intends to claim indemnification under this Article 11, it
promptly shall notify Licensee or Licensor, as the case may be (the
"Indemnitor"), of any claim, demand, action or proceeding in respect of which
the Indemnitee intends to claim such indemnification. The Indemnitor shall
have the right to participate in, and, to the extent the Indemnitor so desires,
jointly with any other indemnitor similarly noticed, to assume the defense
thereof with counsel selected by the Indemnitor; provided, however, that the
Indemnitee shall have the right to retain its own counsel, at its sole expense,
if representation of the Indemnitee by the counsel retained by the Indemnitor
would be inappropriate due to actual or potential differing interests between
the Indemnitee and any other party represented by such counsel in such
proceedings. The indemnity agreement in this Article 11 shall not apply to
amounts paid in settlement of any claim, demand, action or other proceeding if
such settlement is effected without the consent of the Indemnitor, which
consent shall not be withheld unreasonably. The failure to deliver notice to
the Indemnitor within a reasonable time after the commencement of any such
action or other proceeding, if prejudicial to its ability to defend such action
or other proceeding, shall relieve the Indemnitor of any liability to the
Indemnitee under this Article 11, but the omission so to deliver notice to the
Indemnitor will not relieve it of any liability that it may have to the
Indemnitee otherwise than under this Article 11. The Indemnitee, its employees
and agents shall reasonably cooperate with the Indemnitor and its legal
representatives in the investigation and defense of any claim, demand, action
or other proceeding covered by this indemnification.
11.3 Insurance. Licensee shall maintain insurance with respect to
the development of Products and Services in such amount as Licensee customarily
maintains with respect to the development and commercialization of its similar
products and services. Licensee shall maintain such insurance for so long as
it, its Affiliates or sublicensees continue to develop or commercialize any
Products or Services, and thereafter for so long as Licensee customarily
maintains insurance covering the development and commercialization of its
similar products and services.
ARTICLE 12
FORCE MAJEURE
No party shall be held liable or responsible to the other parties nor
be deemed to have defaulted under or breached this Agreement for failure or
delay in fulfilling or performing any term of this Agreement to the extent, and
for so long as, such failure or delay is caused by or results from causes
beyond the reasonable control of the affected party including but not limited
to fire, floods, embargoes, war, acts of war (whether war be declared or not),
insurrections, riots, civil commotions, strikes,
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<PAGE> 18
lockouts or other labor disturbances, acts of God or acts, omissions or delays
in acting by any governmental authority or the other parties.
ARTICLE 13
MISCELLANEOUS
13.1 Notices. Any consent, notice or report required or permitted to
be given or made under this Agreement by one of the parties hereto to the other
parties shall be in writing, delivered by any lawful means to the other parties
at the applicable address indicated below, or to such other address as the
addressee shall have last furnished in writing to the addressor and (except as
otherwise provided in this Agreement) shall be effective upon receipt by the
addressee.
If to Licensor: Billups-Rothenberg, Inc.
P.O. Box 977
Del Mar, CA 92014
Attention: Barry E. Rothenberg, Ph.D.
with a copy to: Pillsbury Madison & Sutro LLP
101 West Broadway, Suite 1800
San Diego, CA 92101
Attention: Mark R. Wicker, Esq.
If to Licensee: Nanogen, Inc.
10398 Pacific Center Court
San Diego, CA 92121
Attention: Harry J. Leonhardt, Esq.
with a copy to: Pillsbury Madison & Sutro LLP
235 Montgomery Street, 16th Floor
San Francisco, CA 94104
Attention: Thomas E. Sparks, Jr., Esq.
13.2 Governing Law. This Agreement shall be governed by and
construed in accordance with the laws of the State of California, without
regard to the conflicts of law principles thereof.
13.3 Assignment. Licensee shall not assign its rights or obligations
under this Agreement without the prior written consent of Licensor; provided,
however, that Licensee may, without such consent, assign this Agreement and its
rights and obligations hereunder in connection with the transfer or sale of all
or substantially all of its business, or in the event of its merger,
consolidation, change in control or similar transaction. Any permitted
assignee shall assume all obligations of its assignor under this Agreement.
13.4 Waivers and Amendments. No change, modification, extension,
termination or waiver of this Agreement, or any of the
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<PAGE> 19
provisions herein contained, shall be valid unless made in writing and signed
by duly authorized representatives of the parties hereto.
13.5 Entire Agreement. This Agreement and the Research Agreement
embody the entire agreement between the parties and supersede any prior
representations, understandings and agreements between the parties regarding
the subject matter hereof. There are no representations, understandings or
agreements, oral or written, between the parties regarding the subject matter
hereof and thereof that are not fully expressed herein and therein.
13.6 Severability. Any of the provisions of this Agreement which are
determined to be invalid or unenforceable in any jurisdiction shall be
ineffective to the extent of such invalidity or unenforceability in such
jurisdiction, without rendering invalid or unenforceable the remaining
provisions hereof and without affecting the validity or enforceability of any
of the terms of this Agreement in any other jurisdiction.
13.7 Waiver. The waiver by any party hereto of any right hereunder
or the failure to perform or of a breach by any other party shall not be deemed
a waiver of any other right hereunder or of any other breach or failure by any
other party whether of a similar nature or otherwise.
13.8 Covenant Not to Sue. Licensor covenants not to sue Licensee
based upon any claim that the practice of any of the Methods in the Field
infringes the claims of any patent, or any other intellectual property rights,
owned or controlled by Licensor or its Affiliates as of the date of this
Agreement.
13.9 Counterparts. This Agreement may be executed in two or more
counterparts, each of which shall be deemed an original, but
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<PAGE> 20
all of which together shall constitute one and the same instrument.
IN WITNESS WHEREOF, the parties have executed this Agreement as of the
date first set forth above.
BILLUPS-ROTHENBERG, INC.
By /s/ BARRY E. ROTHENBERG
-------------------------------------
Title President
----------------------------------
/s/ BARRY E. ROTHENBERG
----------------------------------------
BARRY E. ROTHENBERG, Ph.D.
NANOGEN, INC.
By /s/ Harry J. Leonhardt
-------------------------------------
Title Vice President
----------------------------------
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<PAGE> 1
EXHIBIT 11.1
STATEMENT OF COMPUTATION OF NET LOSS PER SHARE
(IN THOUSANDS EXCEPT PER SHARE DATA)
<TABLE>
<CAPTION>
Years ended December 31,
1995 1996 1997
------- ------- --------
<S> <C> <C> <C>
HISTORICAL NET LOSS PER SHARE:
Net loss $(4,588) $(7,778) $(11,338)
======= ======= ========
Weighted average common shares
outstanding 1,168 1,502 2,015
Adjustments to reflect unvested
shares subject to repurchase (397) (535) (725)
------- ------- --------
Adjusted shares outstanding 771 967 1,290
======= ======= ========
Historical net loss per share $ (5.95) $ (8.04) $ (8.79)
======= ======= ========
<CAPTION>
Year ended
December 31,
1997
--------
PRO FORMA NET LOSS PER SHARE:
Net loss $(11,338)
========
Adjusted shares outstanding 1,290
Effect of assumed conversion at original
date of issuance of preferred shares 8,782
--------
Adjusted shares outstanding 10,072
========
Pro forma net loss per share $ (1.13)
========
</TABLE>
<PAGE> 1
EXHIBIT 23.1
CONSENT OF ERNST & YOUNG LLP, INDEPENDENT AUDITORS
We consent to the reference to our firm under the caption "Experts" and
"Selected Financial Data" and to the use of our report dated January 16, 1998,
except for the last paragraph of Note 4 as to which the date is January 29,
1998, in Amendment No. 3 to the Registration Statement (Form S-1 No. 333-42791)
and related Prospectus of Nanogen, Inc. for the registration of shares of its
common stock.
ERNST & YOUNG LLP
San Diego, California
April 8, 1998
<PAGE> 1
EXHIBIT 23.3
CONSENT OF COUNSEL
Lyon & Lyon consents to the reference to it under the caption EXPERTS in
the Registration Statement and related Prospectus of Nanogen, Inc. for the
registration of Nanogen's common stock.
Date: April 8, 1998 By: /s/ DAVID B. MURPHY
-----------------------------------
David B. Murphy
Partner
LYON & LYON LLP
<TABLE> <S> <C>
<ARTICLE> 5
<S> <C> <C>
<PERIOD-TYPE> YEAR YEAR
<FISCAL-YEAR-END> DEC-31-1996 DEC-31-1997
<PERIOD-START> JAN-01-1996 JAN-01-1997
<PERIOD-END> DEC-31-1996 DEC-31-1997
<CASH> 16,775,228 19,498,293
<SECURITIES> 0 0
<RECEIVABLES> 0 0
<ALLOWANCES> 0 0
<INVENTORY> 0 0
<CURRENT-ASSETS> 17,329,246 20,197,888
<PP&E> 1,998,939 3,650,721
<DEPRECIATION> 683,399 1,210,780
<TOTAL-ASSETS> 19,090,278 23,215,063
<CURRENT-LIABILITIES> 2,476,141 3,422,843
<BONDS> 1,508,185 1,997,716
0 0
10,785 13,684
<COMMON> 1,832 3,184
<OTHER-SE> 15,666,976 18,582,131
<TOTAL-LIABILITY-AND-EQUITY> 19,090,278 23,215,063
<SALES> 0 0
<TOTAL-REVENUES> 1,644,078 3,365,722
<CGS> 0 0
<TOTAL-COSTS> 9,358,458 15,679,029
<OTHER-EXPENSES> 0 0
<LOSS-PROVISION> 0 0
<INTEREST-EXPENSE> 63,957 (975,222)
<INCOME-PRETAX> (7,778,337) (11,338,085)
<INCOME-TAX> 0 0
<INCOME-CONTINUING> (7,778,337) (11,338,085)
<DISCONTINUED> 0 0
<EXTRAORDINARY> 0 0
<CHANGES> 0 0
<NET-INCOME> (7,778,337) (11,338,085)
<EPS-PRIMARY> (1.54) (1.13)
<EPS-DILUTED> 0 0
</TABLE>
