<PAGE>
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
------------
FORM 10-Q
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
FOR THE QUARTERLY PERIOD ENDED MARCH 31, 2000
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
FOR THE TRANSITION PERIOD FROM ___ TO ___
COMMISSION FILE NUMBER 000-23541
NANOGEN, INC.
(EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)
DELAWARE 33-0489621
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
10398 PACIFIC CENTER COURT, SAN DIEGO, CA 92121
(Address of principal executive offices) (Zip code)
(858) 410-4600
(Registrant's telephone number, including area code)
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to
such filing requirements for the past 90 days.
YES X NO
------- -------
AS OF APRIL 17, 2000, 20,613,315 SHARES OF THE REGISTRANT'S COMMON STOCK WERE
OUTSTANDING.
<PAGE>
NANOGEN, INC.
FORM 10-Q
INDEX
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements:
Consolidated Balance Sheets at March 31, 2000
and December 31, 1999...........................................................3
Consolidated Statements of Operations for the Three
Months ended March 31, 2000 and 1999............................................4
Consolidated Statements of Cash Flows for the Three
Months ended March 31, 2000 and 1999............................................5
Notes to Consolidated Financial Statements........................................6
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations...............................................10
Item 3. Quantitative and Qualitative Disclosures About Market Risk........................20
PART II: OTHER INFORMATION
Item 6. Exhibits and Reports on Form 8-K..................................................21
SIGNATURES..........................................................................................22
EXHIBIT INDEX.......................................................................................23
</TABLE>
2
<PAGE>
PART I. FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
NANOGEN, INC.
CONSOLIDATED BALANCE SHEETS
(IN THOUSANDS, EXCEPT SHARE DATA)
<TABLE>
<CAPTION>
MARCH 31, DECEMBER 31,
2000 1999
----------------- ----------------
(unaudited)
<S> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents $ 111,626 $ 41,021
Receivables and other current assets 2,178 2,320
----------------- ----------------
Total current assets 113,804 43,341
Property and equipment, net 5,977 6,154
Acquired technology rights 955 1,005
Restricted cash 219 219
Other assets 69 66
----------------- ----------------
$ 121,024 $ 50,785
============== =============
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable $ 1,138 $ 598
Accrued liabilities 2,088 3,726
Deferred revenue 1,511 3,373
Current portion of capital lease obligations 2,137 2,136
----------------- ----------------
Total current liabilities 6,874 9,833
Capital lease obligations, less current portion 2,526 2,831
Stockholders' equity:
Convertible preferred stock, $.001 par value, 5,000,000 shares authorized; no
shares issued and outstanding at March 31, 2000
and December 31, 1999 - -
Common stock, $.001 par value, 50,000,000 shares authorized; 20,610,342 and
18,990,799 shares issued and outstanding
at March 31, 2000 and December 31, 1999, respectively 21 19
Additional paid-in capital 190,123 113,574
Deferred compensation (1,021) (1,473)
Notes receivable from officers (1,191) (1,369)
Accumulated deficit (76,308) (72,630)
----------------- ----------------
Total stockholders' equity 111,624 38,121
----------------- ----------------
$ 121,024 $ 50,785
================= ================
</TABLE>
See accompanying notes.
3
<PAGE>
NANOGEN, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
(UNAUDITED)
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<TABLE>
<CAPTION>
THREE MONTHS ENDED MARCH 31,
-----------------------------------
2000 1999
--------------- ----------------
<S> <C> <C>
Revenues:
Sponsored research $ 1,862 $ 1,353
Contract and grant revenue 450 577
--------------- ----------------
Total revenues 2,312 1,930
Operating expenses:
Research and development 4,243 6,860
General and administrative 2,281 1,837
--------------- ----------------
Total operating expenses 6,524 8,697
--------------- ----------------
Loss from operations (4,212) (6,767)
Interest income, net 534 568
Equity in loss of joint venture - (660)
--------------- ----------------
Net loss $ (3,678) $ (6,859)
=============== ================
Net loss per share -
basic and diluted $ (0.20) $ (0.38)
=============== ================
Number of shares used in computing
net loss per share - basic and diluted 18,818 17,846
=============== ================
</TABLE>
See accompanying notes.
4
<PAGE>
NANOGEN, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED)
(IN THOUSANDS)
<TABLE>
<CAPTION>
THREE MONTHS ENDED MARCH 31,
--------------------------------------
2000 1999
-------------- -------------
<S> <C> <C>
Cash flows from operating activities:
Net loss $ (3,678) $ (6,859)
Adjustments to reconcile net loss to net cash
used in operating activities:
Equity in loss of joint venture - 660
Depreciation and amortization 504 419
Amortization of deferred compensation 314 304
Stock based compensation expense 138 -
Interest capitalized on notes receivables from officers (10) (12)
Changes in operating assets and liabilities:
Accounts payable 540 370
Accrued liabilities (1,638) 11
Deferred revenue (1,862) (759)
Receivables and other current assets 139 (69)
-------------- -------------
Net cash used in operating activities (5,553) (5,935)
Cash flows from investing activities:
Purchase of equipment - (30)
-------------- -------------
Net cash used in investing activities - (30)
Cash flows from financing activities:
Decrease in restricted cash - (3)
Principal payments on capital lease obligations (581) (474)
Issuance of common stock, net of repurchases 76,575 14
Note receivable payments from officers 164 -
-------------- -------------
Net cash provided by (used in) financing activities 76,158 (463)
Increase/(decrease) in cash and cash equivalents 70,605 (6,428)
Cash and cash equivalents at beginning of period 41,021 62,245
-------------- -------------
Cash and cash equivalents at end of period $ 111,626 $ 55,817
============== =============
Supplemental disclosure of cash flow information:
Interest paid $ 120 $ 150
============== =============
Supplemental schedule of noncash investing and financing activities:
Equipment acquired under capital leases $ 277 $ 395
============== =============
</TABLE>
See accompanying notes.
5
<PAGE>
NANOGEN, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
MARCH 31, 2000
1. BASIS OF PRESENTATION
The accompanying unaudited consolidated financial statements have been
prepared in accordance with generally accepted accounting principles for
interim financial information and with the instructions to Form 10-Q and
Article 10 of Regulation S-X. Accordingly, they do not include all of the
information and footnotes required by generally accepted accounting
principles for complete financial statements. The consolidated balance sheet
as of March 31, 2000, consolidated statements of operations for the three
months ended March 31, 2000 and 1999, and the consolidated statements of
cash flows for the three months ended March 31, 2000 and 1999 are unaudited,
but include all adjustments (consisting of normal recurring adjustments)
which the Company considers necessary for a fair presentation of the
financial position, results of operations and cash flows for the periods
presented. The results of operations for the three months ended March 31,
2000 shown herein are not necessarily indicative of the results that may be
expected for the year ended December 31, 2000.
For more complete financial information, these financial statements, and
notes thereto, should be read in conjunction with the audited consolidated
financial statements for the year ended December 31, 1999 included in the
Nanogen, Inc. Form 10-K filed with the Securities and Exchange Commission.
NET LOSS PER SHARE
The Company computes net income per share in accordance with SFAS No. 128,
"Earnings per Share." Under the provisions of SFAS No. 128, basic net income
per share is computed by dividing the net income(loss) available to common
stockholders for the period by the weighted average number of common shares
outstanding during the period. Diluted net income(loss) per share is
computed by dividing the net income(loss) for the period by the weighted
average number of common shares outstanding during the period and dilutive
potential common shares outstanding. Weighted average common shares
outstanding during the period does not include shares issued pursuant to the
exercise of stock options prior to vesting. Due to the losses incurred by
the Company during the three months ended March 31, 2000 and 1999, common
stock equivalents resulting from the assumed exercise of outstanding stock
options and warrants have been excluded from the computation of diluted net
loss per share as their effect would be anti-dilutive.
SECONDARY PUBLIC OFFERING
In March 2000, the Company completed a secondary public offering of
1,500,000 shares of common stock, providing the Company with net proceeds of
$76.5 million.
2. ACCRUED LIABILITIES
Accrued liabilities are comprised of the following (in thousands):
<TABLE>
<CAPTION>
March 31, December 31,
2000 1999
----------------- -----------------
<S> <C> <C>
Accrued compensation and benefits $ 707 $ 2,034
Accrued product development costs 423 944
Other 958 748
----------------- -----------------
$ 2,088 $ 3,726
================= =================
</TABLE>
6
<PAGE>
NANOGEN, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
MARCH 31, 2000
3. COLLABORATIVE ALLIANCES
AVENTIS RESEARCH AND TECHNOLOGIES
In December 1997, the Company entered into an agreement with Aventis
Research and Technologies, an affiliate of Hoechst AG ("Aventis"), for,
among other things, an exclusive research and development collaboration
relating to the development of molecular recognition arrays. In December
1998, the Company entered into a Collaborative Research and Development
Agreement which, among other things, extended the guaranteed term of the
research program from two to three years. As a result of the signing of
this agreement, the Company agreed to issue to Aventis a warrant to
purchase 120,238 shares of common stock exercisable through March 2004 at
an exercise price of $8.75 per share. The Company has also agreed to issue
to Aventis, upon the achievement of certain milestones, warrants to
purchase up to approximately 360,000 additional shares of common stock at a
50 percent premium to the market price on the date the milestone is
achieved. These warrants will have five-year maximum terms.
In September 1999, the Company announced that two new technology
development programs would be added to the current program with Aventis and
would focus on the development of gene expression tools utilizing
electronic bioarrays and the development of high throughput screening tools
for kinase analyses. In total, the two new programs will provide a maximum
of $12.0 million in additional funding to the Company through December 31,
2001, including an up-front initiation fee of $2.0 million which was
received in the fourth quarter of 1999 and accounted for as deferred
revenue.
Revenue is primarily recognized under these agreements as expenses are
incurred, and totaled $1.9 million and $667,000 for the quarters ended
March 31, 2000 and 1999, respectively. Funding received in advance of
incurred expenses is recorded as deferred revenue until the expenses are
incurred, and totaled $1.5 million and $3.4 million at March 31, 2000 and
December 31, 1999, respectively.
BECTON, DICKINSON AND COMPANY
The Company entered into a Master Agreement with Becton, Dickinson and
Company ("Becton Dickinson") in October 1997 to develop and commercialize
products in the field of IN VITRO nucleic acid-based diagnostic and
monitoring technologies in the field of infectious diseases. Pursuant to
this Master Agreement, Becton Dickinson and the Company agreed to form The
Nanogen/Becton Dickinson Partnership (the "Partnership"). Pursuant to a
General Partnership Agreement, Becton Dickinson and the Company contributed
to the Partnership their respective rights under a Collaborative Research
and Development Agreement established in May 1997, certain Intellectual
Property Licenses and cash in the amount of approximately $8.6 million
through December 31, 1999, of which approximately $7.0 million was paid by
Becton Dickinson and approximately $1.6 million was paid by the Company.
The amounts paid or due to the Partnership by the Company have been
recorded as the Company 's share of the joint venture's loss in the period
paid or accrued, and totaled $660,000 for the period ended March 31, 1999.
The partners are considering modifications to the joint venture to take
advantage of potential third party opportunities on technology developed to
date. The partners are also considering field changes which would allow the
joint venture access to additional technologies or content in areas more
strategically aligned with business opportunities. Further joint venture
funding will be determined based upon a final decision regarding such
modifications and field changes. The Company has received no research
funding from Becton Dickinson since the third quarter of 1999, and it is
uncertain whether the Company will receive any additional funding from
Becton Dickinson. Concurrently with the execution of the joint venture
agreement, the Company entered into a worldwide, royalty-bearing,
nonexclusive license agreement with Becton Dickinson, relating to Becton
Dickinson's proprietary SDA technology for use by us outside the
Partnership in the fields of IN VITRO human genetic testing and IN VITRO
cancer diagnostics.
7
<PAGE>
NANOGEN, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
MARCH 31, 2000
3. COLLABORATIVE ALLIANCES (CONTINUED)
Revenue is recognized under the agreements as expenses are incurred, and
totaled $527,000 for the quarter ended March 31, 1999. No revenue was
recognized under the agreements during the quarter ended March 31, 2000.
ELAN CORPORATION, PLC
In December 1997, the Company entered into an agreement with Elan
Corporation, plc ("Elan") for a non-exclusive research and development
agreement for the development of genomics and gene expression research
tools. The Company and Elan have not yet agreed upon specific program
objectives with respect to the nonexclusive research and development
program. The Company is uncertain as to whether the Company will receive
any additional funding from Elan.
Revenue is recognized under the agreement as expenses are incurred, and
totaled $159,000 for the quarter ended March 31, 1999. No revenue was
recognized under the agreement during the quarter ended March 31, 2000.
HITACHI, LTD.
In January 2000, the Company executed an agreement with Hitachi, Ltd.
("Hitachi"), effective as of December 15, 1999, for the full-scale
commercial manufacturing and distribution of the NanoChip-TM- molecular
biology workstation in specified research markets. Hitachi's Instrument
Group will provide technology and technical support to aid in the
manufacturing scale up of the NanoChip-TM- molecular biology workstation's
components.
Hitachi will have the right to be the sole distributor of Hitachi-produced
NanoChip-TM- molecular biology workstation instruments in Japan. Hitachi
will also have the non-exclusive right to distribute NanoChip-TM-
cartridges in Japan. The Company retains the right to distribute, directly
or through others, Hitachi produced NanoChip-TM- molecular biology
workstations outside of Japan. In addition, the Company will develop and
manufacture the NanoChip-TM- cartridges for distribution worldwide. The
agreement is non-exclusive and excludes certain clinical markets, and the
Company continues to have the right to form other manufacturing and
distribution agreements for all markets and for all non-Hitachi produced
products. No revenue was recognized under the agreement during the quarter
ended March 31, 2000.
4. SUBSEQUENT EVENT
On April 28, 2000, the Company filed a complaint for declaratory judgment
against Motorola, Inc. ("Motorola"), Beckman Coulter, Inc. ("Beckman") and
Massachusetts Institute of Technology "(MIT"). The action was filed in the
United States District Court for the Southern District of California. Prior
to the filing of the complaint, the parties had been involved in licensing
discussions concerning U.S. Patent No. 5,693,939 entitled "Optical and
Electrical Methods and Apparatus For Molecule Detection" (the "'939
patent") which was licensed by MIT to Beckman in 1993 and to Genometrix,
Inc. ("Genometrix") in 1994. Genometrix subsequently granted its
sublicensing rights to Motorola in 1999. The inventions claimed in the `939
patent were made with United States government funding through a grant from
the Department of the Air Force. The complaint seeks, among other things, a
declaration that the Company is entitled to a license to the government
funded `939 patent and, in the event the Company proceeds to take a
license, that it is not required to obtain a license from both Motorola and
Beckman. Alternatively, the complaint seeks a declaratory judgment that the
claims of the `939 patent are invalid and not infringed by the Company. No
assurance can be made that a license to the `939 patent will be available
on commercially acceptable terms, or at all, or that the Company will
prevail in the lawsuit. In addition, one or more of the parties may file
answers to the complaint, assert defenses and/or file counterclaims seeking
monetary damages and/or injunctive relief. The Company may have to expend
considerable financial resources and
8
<PAGE>
NANOGEN, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
MARCH 31, 2000
4. SUBSEQUENT EVENT (CONTINUED)
managerial efforts prosecuting the lawsuit and defending against such
claims and we can make no assurance that the Company would prevail in any
such action which could have a material adverse effect on the Company.
9
<PAGE>
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
This report includes forward-looking statements about our business and
results of operations that are subject to risks and uncertainties that could
cause our actual results to vary materially from those reflected in the
forward-looking statements. Words such as "believes," "anticipates," "plans,"
"estimates," "future," "could," "may," "should," "expect," "envision,"
"potentially," variations of such words and similar expressions are intended to
identify such forward-looking statements. Factors that could cause or contribute
to these differences include those discussed below under the caption "Factors
that May Affect Results" and elsewhere in this Form 10-Q. Readers are cautioned
not to place undue reliance on these forward-looking statements, which speak
only as of the date hereof. We disclaim any intent or obligation to update these
forward-looking statements.
OVERVIEW
We integrate advanced microelectronics and molecular biology into a core
technology platform with broad and diverse commercial applications in the fields
of genomics, biomedical research, medical diagnostics, drug discovery,
forensics, agriculture, environmental testing and potentially the electronics
and telecommunications industries. The first application we have developed is an
integrated bioassay system, the NanoChip-TM- molecular biology workstation,
comprised of two automated instruments and a consumable cartridge. The
NanoChip-TM- cartridge, which incorporates a proprietary microchip, provides a
flexible tool for the rapid identification and precision analysis of biological
test samples containing charged molecules.
Since commencing operations in 1993, we have applied substantially all of
our resources to our research and development programs. We have incurred losses
since inception and, as of March 31, 2000, had an accumulated deficit of $76.3
million. We expect to incur significant losses over at least the next several
years as we expand our research and product development efforts and attempt to
commercialize our products.
We plan to introduce our first product into the marketplace in the second
half of 2000. We anticipate our main sources of revenues during at least 2000
will be payments under our sponsored research agreements, contracts and grants.
We believe our future operating results may be subject to quarterly fluctuations
due to a variety of factors, including the achievement of milestones under our
collaborative agreements, whether and when new products are successfully
developed and introduced by us or our competitors, and market acceptance of
products under development. Payments under contracts, grants and sponsored
research agreements will be subject to significant fluctuations in both timing
and amount and therefore our results of operations for any period may not be
comparable to the results of operations for any other period.
RESULTS OF OPERATIONS
REVENUES. For the three months ended March 31, 2000 and 1999, revenue
from sponsored research totaled $1.9 million and $1.4 million, respectively.
Revenues are primarily recorded under these arrangements as expenses are
incurred. Payments received in advance under these arrangements are recorded
as deferred revenue until the expenses are incurred. Sponsored research
revenue recognized during the three months ended March 31, 2000, was earned
in connection with our three technology development programs under our
research and development agreements entered into in December 1998 and
September 1999 with Aventis. Sponsored research revenue recognized during the
three months ended March 31, 1999, was earned in connection with our research
and development agreement with Aventis entered into in December 1998, our
joint venture collaboration with Becton Dickinson, and our nonexclusive
research and development agreement with Elan. We and Becton Dickinson are
considering modifications to the joint venture to take advantage of potential
third party opportunities on technology developed to date, as well as field
changes which would allow the joint venture access to additional technologies
or content in areas more strategically aligned with business opportunities.
Further joint venture funding will be determined based upon a final decision
regarding such modifications and field changes. We have received no research
funding from Becton Dickinson since the third quarter of 1999, and it is
uncertain whether we will receive any additional funding from Becton
Dickinson. We and Elan have not yet agreed upon specific program objectives
with respect to the nonexclusive research and development program, and are
uncertain as to whether we will receive any additional funding from Elan.
We fund some of our research and development efforts through contracts and
grants awarded by various federal and state agencies. Revenues are recognized
under these contracts and grants as expenses are incurred.
10
<PAGE>
Continuation of sponsored research agreements, contracts and grants is
dependent upon us achieving specific contractual milestones. The recognition of
revenue under sponsored research agreements, contracts and grants may vary from
quarter to quarter and may result in significant fluctuations in operating
results from year to year.
RESEARCH AND DEVELOPMENT EXPENSES. Research and development expenses were
$4.2 million for the three months ended March 31, 2000 compared to $6.9 million
for the same period in 1999. During this period, research and development
expenses include salaries for scientific, engineering and operations personnel,
product design and prototype development costs, lab supplies, consulting,
travel, facilities, and other expenditures associated with our current research
and product development activities. The decrease in research and development
expenses resulted from the different development stages of our initial product
from quarter to quarter. During the first quarter of 1999, the product was in an
advanced stage of prototype design and development. During this stage, we
incurred significant expenditures both internally and with outside vendors
related to engineering prototypes, as well as other costs associated with
testing and refining the product. In comparison, during the first quarter of
2000, many costs associated with the instrument were absorbed by our
manufacturing partner. In addition, research and development expenses during the
first quarter of 1999 included costs associated with the support of sponsored
research programs with Becton Dickinson and Elan. Research and development
spending may increase over the next several years as our research and product
development efforts continue.
GENERAL AND ADMINISTRATIVE EXPENSES. General and administrative expenses
totaled $2.3 and $1.8 million for the three months ended March 31, 2000 and
1999, respectively. This increase was primarily due to reclassifications of
certain personnel as well as increased legal costs associated with enhancing and
maintaining our intellectual property portfolio. General and administrative
expenses include deferred compensation expense which represents the excess of
the fair value for financial statement presentation purposes over the exercise
price for common stock issuable on exercise of stock options. General and
administrative expenses are expected to continue to increase as we continue to
expand our sales and marketing and general and administrative organizations and
as we continue to enhance our intellectual property portfolio.
INTEREST INCOME, NET. Net interest income was $534,000 and $568,000 for the
three months ended March 31, 2000 and 1999, respectively. The decrease in net
interest income can be attributed to the lower average cash balances available
during the first quarter of 2000 compared to the same period in 1999 as a result
of cash used for operations. Interest expense paid on capital leases was
consistent when comparing the first quarter of 2000 to the same period in 1999.
EQUITY IN LOSS OF JOINT VENTURE. We recognized a loss of $660,000 during the
three months ended March 31, 1999 from the joint venture with Becton Dickinson,
based on the loss allocation described in the Partnership Agreement stating that
losses will be allocated in proportion to and not to exceed required cash
contributions. There was no loss recognized during the first quarter of 2000, as
the sponsored research program with Becton Dickinson is currently being modified
and no joint venture funding occurred during the quarter ended March 31, 2000.
LIQUIDITY AND CAPITAL RESOURCES
At March 31, 2000, we had $111.6 million in cash and cash equivalents,
compared to $41.0 million at December 31, 1999. This increase is primarily due
to the completion of our secondary public offering of common stock in March 2000
generating net proceeds of $76.5 million, offset by net cash used in operations
during the quarter ended March 31, 2000.
Net cash used in operating activities was $5.6 and $5.9 million for the
three months ended March 31, 2000 and 1999, respectively. Cash used for
operations was primarily related to costs associated with entering the
commercialization stage of our initial product, supporting our continued
research and development efforts, and legal fees relating to establishing and
maintaining our intellectual property portfolio.
We fund most of our equipment acquisitions and leasehold improvements
through capital leasing facilities. During the first three months of 2000, we
received proceeds from equipment financing of $277,000, compared to $395,000 of
proceeds received during the same period in 1999. We anticipate that we will
continue to use capital equipment leasing or debt facilities to fund most of our
equipment acquisitions and leasehold improvements.
11
<PAGE>
We expect that our existing capital resources, combined with anticipated
revenues from potential product sales, sponsored research agreements, contracts
and grants will be sufficient to support our planned operations through at least
the next two years. This estimate of the period for which we expect our
available sources of liquidity to be sufficient to meet our capital requirements
is a forward-looking statement that involves risks and uncertainties, and actual
results may differ materially. Our future liquidity and capital funding
requirements will depend on numerous factors including, but not limited to, the
extent to which our products under development are successfully developed and
gain market acceptance, the timing of regulatory actions regarding our potential
products, the costs and timing of expansion of sales, marketing and
manufacturing activities, prosecution and enforcement of patents important to
our business and any litigation related thereto, the results of clinical trials,
competitive developments, and our ability to maintain existing collaborations
and to enter into additional collaborative arrangements. We have incurred
negative cash flow from operations since inception and do not expect to generate
positive cash flow to fund our operations for at least the next several years.
We may need to raise additional capital to fund our research and development
programs, to scale up manufacturing activities and expand our sales and
marketing efforts to support the commercialization of our products under
development. Additional capital may not be available on terms acceptable to us,
or at all. If adequate funds are not available, we may be required to curtail
our operations significantly or to obtain funds through entering into
collaborative agreements or other arrangements on unfavorable terms. Our failure
to raise capital on acceptable terms when needed could have a material adverse
effect on our business, financial condition or results of operations.
FACTORS THAT MAY AFFECT RESULTS
OUR PRODUCTS MAY NOT BE SUCCESSFULLY DEVELOPED, WHICH WOULD HARM US AND FORCE US
TO CURTAIL OR CEASE OPERATIONS.
We are at an early stage of development. All of our products are under
development. We have not sold any products and do not expect to sell any
products until at the earliest the last half of 2000. Our products may not be
successfully developed or commercialized on a timely basis, or at all. If we are
unable, for technological or other reasons, to complete the development,
introduction or scale-up of manufacturing of our new products, or if our
products do not achieve a significant level of market acceptance, we would be
forced to curtail or cease operations.
Our success will depend upon our ability to overcome significant
technological challenges and successfully introduce our products into the
marketplace. A number of applications envisioned by us need significant
enhancements to our basic technology platform.
LACK OF MARKET ACCEPTANCE OF OUR TECHNOLOGY WOULD HARM US.
We may not be able to develop commercially viable products. Even if we
develop a product it may not be accepted in the marketplace. If we are unable to
achieve market acceptance, we will not be able to generate sufficient product
revenue to become profitable. Market acceptance will depend on many factors,
including our ability to:
- - convince prospective strategic partners and customers that our
technology is an attractive alternative to other technologies;
- - manufacture products in sufficient quantities with acceptable quality
and at an acceptable cost; and
- - place and service sufficient quantities of our products.
In addition, our technology platform could be harmed by limited funding
available for product and technology acquisitions by our customers, as well as
internal obstacles to customer approvals of purchases of our products.
COMMERCIALIZATION OF SOME OF OUR POTENTIAL PRODUCTS DEPENDS ON COLLABORATIONS
WITH OTHERS. IF OUR COLLABORATORS ARE NOT SUCCESSFUL OR IF WE ARE UNABLE TO FIND
COLLABORATORS IN THE FUTURE, WE MAY NOT BE ABLE TO DEVELOP THESE PRODUCTS.
12
<PAGE>
Our strategy for the research, development and commercialization of some of
our products requires us to enter into contractual arrangements with corporate
collaborators, licensors, licensees and others. Our success depends in part upon
the performance by these collaborators of their responsibilities under these
arrangements. Some collaborators may not perform their obligations as we expect
or we may not derive any revenue from these arrangements.
We have collaborative agreements with several health care companies. We do
not know whether these companies will successfully develop and market any
products under our respective agreements. Moreover, some of our collaborators
are also researching competing technologies targeted by our collaborative
programs. We may be unsuccessful in entering into other collaborative
arrangements to develop and commercialize our products. In addition, disputes
may arise over ownership rights to intellectual property, know-how or
technologies developed with our collaborators.
We currently have agreements with Aventis, Becton Dickinson and Elan that
contemplate the commercialization of products resulting from research and
development collaboration agreements between the parties. In addition, we have a
manufacturing and distribution agreement with Hitachi. These collaborations may
not be successful. We have received no funding under our collaboration with
Becton Dickinson since the third quarter 1999 and we may never receive any
additional funds from Becton Dickinson. We have not yet agreed upon specific
program objectives with respect to our research and development agreement with
Elan, and we may never receive any additional funds from Elan.
WE HAVE A HISTORY OF NET LOSSES. WE EXPECT TO CONTINUE TO INCUR NET LOSSES AND
WE MAY NOT ACHIEVE OR MAINTAIN PROFITABILITY.
We have not sold any products and do not expect to sell any products until
at the earliest the last half of 2000. From our inception to March 31, 2000, we
have incurred cumulative net losses totaling approximately $76.3 million.
Moreover, our negative cash flow and losses from operations will continue and
increase for the foreseeable future. We may never generate sufficient product
revenue to become profitable. We also expect to have quarter-to-quarter
fluctuations in revenues, expenses and losses, some of which could be
significant.
To develop and sell our products successfully, we will need to increase our
spending levels in research and development, as well as in selling, marketing
and administration. We will have to incur these increased spending levels before
knowing whether our products can be sold successfully.
WE MAY NEED ADDITIONAL CAPITAL IN THE FUTURE. IF ADDITIONAL CAPITAL IS NOT
AVAILABLE, WE MAY HAVE TO CURTAIL OR CEASE OPERATIONS.
We may need to raise more money to continue the research and development
necessary to bring our products to market and to establish manufacturing and
marketing capabilities. We may seek additional funds through public and private
stock offerings, arrangements with corporate partners, borrowings under lease
lines of credit or other sources. If we cannot raise more money we will have to
reduce our capital expenditures, scale back our development of new products,
reduce our workforce and license to others products or technologies that we
otherwise would seek to commercialize ourselves. The amount of money we will
need will depend on many factors, including among others:
- - the progress of our research and development programs;
- - the commercial arrangements we may establish;
- - the time and costs involved in:
- scaling up our manufacturing capabilities;
- obtaining necessary regulatory approvals; and
- filing, prosecuting, defending and enforcing patent claims and
litigation; and
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- - the scope and results of our future preclinical studies and clinical
trials, if any.
Additional capital may not be available on terms acceptable to us, or at
all. Any additional equity financing may be dilutive to stockholders, and debt
financing, if available, may include restrictive covenants.
COMPETING TECHNOLOGIES MAY ADVERSELY AFFECT US.
We expect to encounter intense competition from a number of companies that
offer products in our targeted application areas. We anticipate that our
competitors in these areas will include:
- - health care companies that manufacture laboratory-based tests and
analyzers;
- - diagnostic and pharmaceutical companies; and
- - companies developing drug discovery technologies.
If we are successful in developing products in these areas, we will face
competition from established companies and numerous development-stage companies
that continually enter these markets.
In many instances, our competitors have substantially greater financial,
technical, research and other resources and larger, more established marketing,
sales, distribution and service organizations than us. Moreover, these
competitors may offer broader product lines and have greater name recognition
than us 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 our potential
products. Our competitors may succeed in developing, obtaining FDA approval or
marketing technologies or products that are more effective or commercially
attractive than our potential products, or that render our technologies and
potential products obsolete. As these companies develop their technologies, they
may develop proprietary positions which may prevent us from successfully
commercializing products.
Also, we may not have the financial resources, technical expertise or
marketing, distribution or support capabilities to compete successfully in the
future.
THE UNCERTAINTY OF PATENT AND PROPRIETARY TECHNOLOGY PROTECTION MAY ADVERSELY
AFFECT US.
Our success will depend in part on obtaining and maintaining meaningful
patent protection on our inventions, technologies and discoveries. Our ability
to compete effectively will depend on our ability to develop and maintain
proprietary aspects of our technology, and to operate without infringing the
proprietary rights of others, or to obtain rights to third-party proprietary
rights, if necessary. Our pending patent applications may not result in the
issuance of patents. Our patent applications may not have priority over others'
applications, and even if issued, our patents may not offer protection against
competitors with similar technologies. Any patents issued to us may be
challenged, invalidated or circumvented and the rights created thereunder may
not afford us a competitive advantage.
We also rely upon trade secrets, technical know-how and continuing
inventions to develop and maintain our competitive position. Others may
independently develop substantially equivalent proprietary information and
techniques or otherwise gain access to our trade secrets or disclose our
technology and we may not be able to meaningfully protect our trade secrets, or
be capable of protecting our rights to our trade secrets. We seek to protect our
technology and patents, in part, by confidentiality agreements with our
employees and contractors. Our employees may breach their existing Proprietary
Information, Inventions, and Dispute Resolution Agreements and these agreements
may not protect our intellectual property. This could have a material adverse
effect on us.
OUR PRODUCTS COULD INFRINGE ON THE INTELLECTUAL PROPERTY RIGHTS OF OTHERS, WHICH
MAY SUBJECT US TO FUTURE LITIGATION AND CAUSE US TO BE UNABLE TO LICENSE
TECHNOLOGY FROM THIRD PARTIES.
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Our commercial success also depends in part on us neither infringing valid,
enforceable patents or proprietary rights of third parties, nor breaching any
licenses that may relate to our technologies and products. Besides the '939
patent described below, we are aware of other third-party patents that may
relate to our technology. It is possible that we may unintentionally infringe
these patents or other patents or proprietary rights of third parties. We 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
us or our collaborative partners claiming damages and seeking to enjoin
commercial activities relating to our products and processes affected by
third-party rights may require us or our collaborative partners to obtain
licenses in order to continue to manufacture or market the affected products and
processes. In addition, these actions may subject us to potential liability for
damages. We or our collaborative partners may not prevail in an action and any
license required under a patent may not be made available on commercially
acceptable terms, or at all.
There are many U.S. and foreign patents and patent applications held by
third parties in our areas of interest, and we believe that, besides our
litigation with Motorola, Beckman and MIT described below, there may be
significant other litigation in the industry regarding patent and other
intellectual property rights. Additional litigation could result in substantial
costs and the diversion of management's efforts regardless of the result of the
litigation. Additionally, the defense and prosecution of interference
proceedings before the U.S. Patent and Trademark Office, or USPTO, and related
administrative proceedings would result in substantial expense to us and
significant diversion of effort by our technical and management personnel. We
may in the future become subject to USPTO interference proceedings to determine
the priority of inventions. In addition, laws of some foreign countries do not
protect intellectual property to the same extent as do laws in the U.S., which
may subject us to additional difficulties in protecting our intellectual
property in those countries.
We are aware of U.S. and corresponding foreign patents and applications
which are assigned to Affymax Technologies, N.V., and Affymetrix, Inc. which
relate to certain devices having 1,000 or more groups of oligonucleotides
occupying a total area of less than 1 cm(2) and 400 different
oligonucleotides per cm(2) on a substrate. In the event that we proceed with
the development of arrays with more than 400 groups of oligonucleotides, we
expect to design our devices through, among other things, the selection of
the physical dimensions, methods of binding and selection of support
materials to avoid infringing these patents. We may not be able to design
around these patents. We are aware of U.S. and European patents and patent
applications owned by Isis Innovations Ltd. or Isis Innovations (E. M.
Southern). We have opposed one allowed European patent which had broad claims
to array technology for analyzing a predetermined polynucleotide sequence.
Isis Innovations' position with respect to the opposed patent is that the
claims relate to what it terms the "diagnostic mode." Those claims have now
all been narrowed to the point that if the claims are accepted by the
European Patent Office, they would not be infringed by our technology. On May
5, 1998, the Opposition Division of the European Patent Office issued a
provisional nonbinding opinion that the claims should be revoked. 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, we would be subject to infringement claims
that could delay or preclude sales of some or all of our anticipated
diagnostic products.
WE ARE INVOLVED IN INTELLECTUAL PROPERTY LITIGATION THAT MAY BE COSTLY,
TIME-CONSUMING AND MAY IMPACT OUR COMPETITIVE POSITION.
On April 28, 2000, we filed a complaint for declaratory judgment against
Motorola, Inc. or Motorola, Beckman Coulter, Inc. or Beckman and Massachusetts
Institute of Technology or MIT. The action was filed in the United States
District Court for the Southern District of California. Prior to the filing of
the complaint, the parties had been involved in licensing discussions concerning
U.S. Patent No. 5,693,939 entitled "Optical and Electrical Methods and Apparatus
For Molecule Detection" (the "'939 patent") which was licensed by MIT to Beckman
in 1993 and to Genometrix, Inc. or Genometrix in 1994. Genometrix subsequently
granted its sublicensing rights to Motorola in 1999. The inventions claimed in
the `939 patent were made with United States government funding through a grant
from the Department of the Air Force. The complaint seeks, among other things, a
declaration that we are entitled to a license to the government funded '939
patent and, in the event we proceed to take a license, that we are not required
to obtain a license from both Motorola and Beckman. Alternatively, the complaint
seeks a declaratory judgment that the claims of the '939 patent are invalid and
not infringed by us. No assurance can be made that a license to the '939 patent
will be available on commercially acceptable terms, or at all, or that we will
prevail in the lawsuit. In addition, one or more of the parties may file answers
to the complaint, assert defenses and/or file counterclaims seeking monetary
damages
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and/or injunctive relief. We may have to expend considerable financial resources
and managerial efforts prosecuting the lawsuit and defending against such claims
and we can make no assurance that we would prevail in any such action which
could have a material adverse effect on us.
THE REGULATORY APPROVAL PROCESS IS EXPENSIVE, TIME CONSUMING, UNCERTAIN AND MAY
PREVENT US FROM OBTAINING REQUIRED APPROVALS FOR THE COMMERCIALIZATION OF OUR
PRODUCTS.
We anticipate that the manufacturing, labeling, distribution and marketing
of a number of any diagnostic products will be subject to regulation in the U.S.
and other countries. These regulations could subject us to several problems such
as:
- - failure to obtain necessary regulatory approvals or clearances for our
products on a timely basis, or at all;
- - delays in receipt of or failure to receive approvals or clearances;
- - the loss of previously received approvals or clearances;
- - limitations on intended uses imposed as a condition of approvals or
clearances; or
- - failure to comply with existing or future regulatory requirements.
In the U.S., the Food and Drug Administration, or 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, the FDA regulates the preclinical and clinical testing, design,
efficacy, safety, manufacture, labeling, distribution and promotion of medical
devices. We will not be able to commence marketing or commercial sales in the
U.S. of these products until we receive clearance or approval from the FDA,
which can be a lengthy, expensive and uncertain process. We have not applied for
FDA or other regulatory approvals with respect to any of our products under
development. We may experience difficulties that could delay or prevent the
successful development, introduction and marketing of proposed products.
Regulatory clearance or approval or clearance of any proposed products may not
be granted by the FDA or foreign regulatory authorities on a timely basis, if at
all.
Noncompliance with applicable FDA requirements can result in:
- - 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 the recall, repair, replacement or
refund of the cost of any regulated device manufactured or distributed by us.
Any devices manufactured or distributed by us pursuant to FDA clearance or
approvals are subject to thorough and continuing regulation by the FDA and
certain state agencies.
WE DEPEND ON SUPPLIERS FOR MATERIALS WHICH COULD IMPAIR OUR ABILITY TO
MANUFACTURE OUR PRODUCTS.
Outside vendors provide key components and raw materials used by us and
Hitachi in the manufacture of our products. Although we believe that alternative
sources for these components and raw materials are available, any supply
interruption in a limited or sole source component or raw material would harm
our and Hitachi's ability to manufacture our products until a new source of
supply is identified and qualified. In addition, an uncorrected defect or
supplier's variation in a component or raw material, either unknown to us or
Hitachi or incompatible with our or Hitachi's manufacturing processes, could
harm our or Hitachi's ability to manufacture products. We or Hitachi may
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not be able to find a sufficient alternative supplier in a reasonable time
period, or on commercially reasonable terms, if at all. If we or Hitachi fail to
obtain a supplier for the manufacture of components of our potential products,
we may be forced to curtail or cease operations.
WE MAY NOT BE ABLE TO MANUFACTURE PRODUCTS ON A COMMERCIAL SCALE.
We rely on subcontractors to manufacture the limited quantities of
microchips and other components we require for internal and collaborative
purposes, as well as for use in prototype products.
Manufacturing, supply and quality control problems may arise as we or
Hitachi either alone, together or with subcontractors, attempt to scale up
manufacturing procedures. We or Hitachi may not be able to scale-up in a timely
manner or at a commercially reasonable cost. Problems could lead to delays or
pose a threat to the ultimate commercialization of our products and cause us to
fail.
We or Hitachi or any of our contract manufacturers could encounter
manufacturing difficulties, including:
- - the ability to scale up manufacturing capacity;
- - production yields;
- - quality control and assurance; or
- - shortages of components or qualified personnel.
Our manufacturing facilities and those of Hitachi and any other of our
contract manufacturers are or will be subject to periodic regulatory inspections
by the FDA and other federal, state and international regulatory agencies and
these facilities are subject to Quality System Regulation, or QSR, requirements
of the FDA. If we, Hitachi or our third-party manufacturers fail to maintain
facilities in accordance with QSR regulations, other international quality
standards or other regulatory requirements then the manufacture process could be
suspended or terminated which would harm us.
WE HAVE LITTLE MARKETING OR SALES EXPERIENCE, AND IF WE ARE UNABLE TO DEVELOP
OUR OWN SALES AND MARKETING CAPABILITY, WE MAY NOT BE SUCCESSFUL IN
COMMERCIALIZING OUR PRODUCTS.
In order to market and sell our proprietary products, we will need to
develop a sales force and a marketing group with relevant experience, or make
appropriate arrangements with strategic partners to market and sell these
products. Developing a marketing and sales force is expensive and time consuming
and could delay any product launch. Our inability to successfully employ
qualified marketing and sales personnel and develop our sales and marketing
capabilities will harm our business.
IF WE FAIL TO MANAGE OUR GROWTH, OUR BUSINESS COULD BE IMPAIRED.
We expect to continue to experience growth in the number of our employees
and the scope of our operating and financial systems. This growth has resulted
in an increase in responsibilities for both existing and new management
personnel. Our ability to manage growth effectively will require us to continue
to implement and improve our operational, financial and management information
systems and to recruit, train, motivate and manage our employees. We may not be
able to manage our growth and expansion, which would impair our business.
WE MAY HAVE SIGNIFICANT PRODUCT LIABILITY EXPOSURE.
We face an inherent business risk of exposure to product liability and other
claims in the event that our technologies or products are alleged to have caused
harm. These risks are inherent in the testing, manufacturing and marketing of
our products. We may not be able to obtain insurance for such potential
liability on acceptable terms with adequate coverage, or at reasonable costs.
Any potential product liability claims could exceed the amount of our insurance
coverage or may be excluded from coverage under the terms of the policy. Our
insurance, once obtained, may not be renewed at a cost and level of coverage
comparable to that then in effect.
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IF WE LOSE OUR KEY PERSONNEL OR ARE UNABLE TO ATTRACT AND RETAIN ADDITIONAL
PERSONNEL, WE MAY NOT BE ABLE TO PURSUE COLLABORATIONS OR DEVELOP OUR OWN
PRODUCTS.
We are highly dependent on the principal members of our scientific,
manufacturing, marketing and management personnel, the loss of whose services
might significantly delay or prevent the achievement of our objectives. We face
competition from other companies, academic institutions, government entities and
other organizations in attracting and retaining personnel.
HEALTH CARE REFORM AND RESTRICTIONS ON REIMBURSEMENT MAY LIMIT OUR RETURNS ON
POTENTIAL PRODUCTS.
Our ability to earn sufficient returns on our products will depend in part
on the extent to which reimbursement for our products and related treatments
will be available from:
- - government health administration authorities;
- - private health coverage insurers;
- - managed care organizations; and
- - other organizations.
If appropriate reimbursement cannot be obtained, we could be prevented from
successfully commercializing our potential products.
There are efforts by governmental and third party payors to contain or
reduce the costs of health care through various means. We expect that there will
continue to be a number of legislative proposals to implement government
controls. The announcement of proposals or reforms could impair our ability to
raise capital. The adoption of proposals or reforms could impair our business.
Additionally, third party payors are increasingly challenging the price of
medical products and services. If purchasers or users of our products are not
able to obtain adequate reimbursement for the cost of using our products, they
may forego or reduce their use. Significant uncertainty exists as to the
reimbursement status of newly approved health care products, and whether
adequate third party coverage will be available.
IF ETHICAL AND OTHER CONCERNS SURROUNDING THE USE OF GENETIC INFORMATION BECOME
WIDESPREAD, WE MAY HAVE LESS DEMAND FOR OUR PRODUCTS.
Genetic testing has raised ethical issues regarding confidentiality and the
appropriate uses of the resulting information. For these reasons, governmental
authorities may call for limits on or regulation of the use of genetic testing
or prohibit testing for genetic predisposition to certain conditions,
particularly for those that have no known cure. Any of these scenarios could
reduce the potential markets for our products, which could seriously harm our
business, financial condition and results of operations.
WE USE HAZARDOUS MATERIALS IN OUR BUSINESS. ANY CLAIMS RELATING TO IMPROPER
HANDLING, STORAGE OR DISPOSAL OF THESE MATERIALS COULD BE TIME CONSUMING AND
COSTLY.
Our research and development processes involve the controlled storage, use
and disposal of hazardous materials including biological hazardous materials and
radioactive compounds. We are subject to federal, state and local regulations
governing the use, manufacture, storage, handling and disposal of materials and
waste products. Although we believe that our safety procedures for handling and
disposing of these hazardous materials comply with the standards prescribed by
law and regulation, the risk of accidental contamination or injury from
hazardous materials cannot be completely eliminated. In the event of an
accident, we could be held liable for any damages that result, and any liability
could exceed the limits or fall outside the coverage of our insurance. We may
not be able to maintain insurance on acceptable terms, or at all. We could be
required to incur significant costs to comply with current or future
environmental laws and regulations.
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OUR STOCK PRICE COULD CONTINUE TO BE HIGHLY VOLATILE AND OUR STOCKHOLDERS MAY
NOT BE ABLE TO RESELL THEIR SHARES AT OR ABOVE THE PRICE THEY PAID FOR THEM.
The market price of our common stock, like that of many other life sciences
companies, has been highly volatile and is likely to continue to be highly
volatile. The following factors, among others, could have a significant impact
on the market price of our common stock:
- - the results of our premarket studies and clinical trials or those of
our collaborators or competitors or for DNA testing in general;
- - evidence of the safety or efficacy of our potential products or the
products of our competitors;
- - the announcement by us or our competitors of technological innovations
or new products;
- - announcements or developments relating to our litigation against
Motorola, Beckman and MIT;
- - developments concerning our patents or other proprietary rights or
those of our competitors, including other litigation or patent office
proceedings;
- - loss of key personnel;
- - governmental regulatory actions;
- - changes or announcements in reimbursement policies;
- - developments with our collaborators;
- - period-to-period fluctuations in our operating results;
- - market conditions for life science stocks in general; and
- - changes in estimates of our performance by securities analysts.
OUR ANTI-TAKEOVER PROVISIONS COULD DISCOURAGE POTENTIAL TAKEOVER ATTEMPTS AND
MAKE ATTEMPTS BY STOCKHOLDERS TO CHANGE MANAGEMENT MORE DIFFICULT.
The approval of two-thirds of our voting stock is required to approve some
transactions and to take some stockholder actions, including the calling of a
special meeting of stockholders and the amendment of any of the anti-takeover
provisions contained in our certificate of incorporation. Further, pursuant to
the terms of our stockholder rights plan adopted in November 1998, we have
distributed a dividend of one right for each outstanding share of common stock.
These rights will cause substantial dilution to the ownership of a person or
group that attempts to acquire us on terms not approved by our board of
directors and may have the effect of deterring hostile takeover attempts.
IF WE MAKE ANY ACQUISITIONS, WE WILL INCUR A VARIETY OF COSTS AND MAY NEVER
REALIZE THE ANTICIPATED BENEFITS.
If appropriate opportunities become available, we may attempt to acquire
businesses, technologies, services or products that we believe are a strategic
fit with our business. We currently have no commitments or agreements with
respect to any material acquisitions. If we do undertake any transaction of this
sort, the process of integrating an acquired business, technology, service or
product may result in operating difficulties and expenditures and may absorb
significant management attention that would otherwise be available for ongoing
development of our business. Moreover, we may never realize the anticipated
benefits of any acquisition. Future acquisitions could result in potentially
dilutive issuances of equity securities, the incurrence of debt, contingent
liabilities and/or amortization expenses related to goodwill and other
intangible assets, which could adversely affect our results of operations and
financial condition.
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ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
We invest our excess cash primarily in U.S. government securities and marketable
debt securities of financial institutions and corporations with strong credit
ratings. These instruments have maturities of three months or less when
acquired. We do not utilize derivative financial instruments, derivative
commodity instruments or other market risk sensitive instruments, positions or
transactions in any material fashion. Accordingly, we believe that, while the
instruments we hold are subject to changes in the financial standing of the
issuer of such securities, we are not subject to any material risks arising from
changes in interest rates, foreign currency exchange rates, commodity prices,
equity prices or other market changes that affect market risk sensitive
instruments.
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NANOGEN, INC.
PART II - OTHER INFORMATION
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits
10.1 Reader, Loader and Cassette Low Cost Engineering and
Manufacturing Agreement by and between Hitachi, Ltd. and Nanogen,
Inc., dated as of December 15, 1999.+
27.1 Financial Data Schedule.
-------------
+ Confidential treatment has been requested with respect to certain
portions of this agreement.
(b) Reports on Form 8-K
No Reports on Form 8-K were filed during the three months ended March
31, 2000.
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NANOGEN, INC.
SIGNATURES
PURSUANT TO THE REQUIREMENTS OF THE SECURITIES EXCHANGE ACT OF 1934, THE
REGISTRANT HAS DULY CAUSED THIS REPORT TO BE SIGNED ON ITS BEHALF BY THE
UNDERSIGNED THEREUNTO DULY AUTHORIZED.
NANOGEN, INC.
DATE MAY 12, 2000 /s/ HOWARD C. BIRNDORF
------------------------ ----------------------------------
HOWARD C. BIRNDORF
CHAIRMAN OF THE BOARD,
CHIEF EXECUTIVE OFFICER AND
PRESIDENT
(PRINCIPAL EXECUTIVE OFFICER)
DATE MAY 12, 2000 /s/ KIERAN T. GALLAHUE
------------------------ ----------------------------------
KIERAN T. GALLAHUE
SENIOR VICE PRESIDENT, CHIEF
FINANCIAL OFFICER AND TREASURER
(PRINCIPAL FINANCIAL AND
ACCOUNTING OFFICER)
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NANOGEN, INC.
EXHIBIT INDEX
EXHIBIT NO. DESCRIPTION
10.1 Reader, Loader and Cassette Low Cost Engineering and
Manufacturing Agreement by and between Hitachi, Ltd.
and Nanogen, Inc., dated as of December 15, 1999.+
27.1 Financial Data Schedule
- ------------
+ Confidential treatment has been requested with respect
to certain portions of this agreement.
<PAGE>
Exhibit 10.1
[CONFIDENTIAL TREATMENT REQUESTED.
Confidential portions of this
agreement have been redacted and
have been separately filed with the
Securities and Exchange Commission.]
NANOGEN/HITACHI
READER, LOADER AND CASSETTE
LOW COST ENGINEERING AND MANUFACTURING AGREEMENT
<TABLE>
<S> <C>
1. DEFINITIONS
2. REPRESENTATIONS AND WARRANTIES
3. PRODUCT ENGINEERING AND MANUFACTURING
4. MARKETING, SUPPLY AND DISTRIBUTION; TRADEMARKS
5. FORECAST
6. PURCHASE ORDERS; SALES CONTRACTS
7. PRICE AND PAYMENT; COMMISSIONS
8. DELIVERY
9. INSPECTION AND ACCEPTANCE
10. PACKING AND PACKAGING
11. PRODUCT WARRANTY
12. LIMITATION OF LIABILITY
13. TRAINING AND TECHNICAL ADVICE
14. MODIFICATION OF PRODUCTS
15. OTHER INTELLECTUAL PROPERTY MATTERS
16. CONFIDENTIAL INFORMATION AND PROPRIETARY RIGHTS
17. TERM OF AGREEMENT; TERMINATION
18. OBLIGATIONS AFTER TERMINATION
19. FORCE MAJEURE
20. ARBITRATION; GOVERNING LAW
21. MISCELLANEOUS
22. EXHIBIT A
23. EXHIBIT B
</TABLE>
<PAGE>
READER, LOADER AND CASSETTE
LOW COST ENGINEERING AND MANUFACTURING AGREEMENT
This Agreement is made and entered into as of December 15, 1999 (the
"Effective Date"), by and between Nanogen, Inc., a corporation organized and
existing under the laws of Delaware, and having its principal place of
business at 10398 Pacific Center Court, San Diego, California, USA 92121
(hereinafter called "NANOGEN"), and Hitachi, Ltd., a corporation organized
and existing under the laws of Japan, through its Instrument Group, and
having its principal place of business at 5-1, Marunouchi 1-chome,
Chiyoda-ku, Tokyo, 100 Japan (hereinafter referred to as "HITACHI"). NANOGEN
and HITACHI are sometimes referred to herein individually as a "Party," or
collectively as the "Parties."
R E C I T A L S
A. WHEREAS, HITACHI has special expertise, proprietary technology and
know-how in low cost engineering and manufacture of high quality instruments
in high volume for worldwide distribution. NANOGEN has special expertise,
proprietary technology and know-how in the development of certain biochip
based instrumentation and products. NANOGEN and HITACHI desire to jointly
produce products as outlined in this Agreement, with each Party to make its
current and future technology available to support that effort. The Parties
anticipate that such joint production will initially involve production of
prototype products during a pilot production phase, with full-scale
commercial production dependent on the mutually satisfactory completion of
the pilot production phase; and
B. WHEREAS, NANOGEN desires to have HITACHI manufacture the HITACHI
Products using existing NANOGEN technology, with each Party to add its
current and future technology as necessary. Assuming that the Parties proceed
to full-scale commercial production (i) NANOGEN further desires to have
HITACHI both sell the HITACHI Products in Japan, and to sell the HITACHI
Products to NANOGEN for distribution outside of Japan, and HITACHI desires to
undertake such manufacturing and sales activities, and (ii) NANOGEN further
desires to sell NANOGEN Products to HITACHI for HITACHI to distribute in
Japan in connection with HITACHI's distribution of the HITACHI Products, and
HITACHI desires to purchase the NANOGEN Products from NANOGEN for sale by
HITACHI in Japan; and
C. WHEREAS, HITACHI desires to have Hitachi Instruments, Inc., an
affiliate of HITACHI, participate as an agent of HITACHI for certain purposes
related hereto, and to be permitted to assign and delegate to Hitachi
Instruments, Inc. certain of HITACHI's rights and obligations hereunder
related to sales to and purchase from NANOGEN; and
D. WHEREAS, the Parties acknowledge that this Agreement is based upon the
terms of the Draft Term Sheet, which is attached as EXHIBIT B for purposes of
convenient reference, provided that such Draft Term Sheet shall have not be
part of this
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Agreement and is subject to the provisions of Article 21.6 of this Agreement.
NOW, THEREFORE in consideration of the promises and mutual
covenants hereinafter contained, the Parties hereto agree as follows.
Article 1.
DEFINITIONS
As used herein, the following terms shall have the meanings
indicated.
1.1 "Collaboration Intellectual Property Rights" means all intellectual
property rights of any kind, including patents, patent applications,
copyrights, trade secrets, and trademarks which cover any Collaboration
Technology.
1.2 "Collaboration Technology" means all inventions and discoveries
arising out of work performed pursuant to this Agreement which are jointly
conceived during the term of this Agreement by one or more employees or
agents of HITACHI, and by one or more employees or agents of NANOGEN, and
related to the HITACHI Products or NANOGEN Products.
1.3 "Commercial Production Determination" means the agreement of the
Parties contemplated by Section 3.4.
1.4 "Field" means the research market for HITACHI Products and NANOGEN
Products, excluding government regulated clinical diagnostics and point of
care (POC) testing.
1.5 "HII" means Hitachi Instruments, Inc., a California corporation having
its principal place of business at 3100 North Street, San Jose, California
95134.
1.6 "HITACHI" means Hitachi, Ltd., Instrument Group.
1.7 "HITACHI Improvement Technology" means any proprietary information,
know-how, software, technology or other information which HITACHI conveys to
NANOGEN pursuant to this Agreement, either orally, in documents or other
materials, or incorporated in any HITACHI Products, and which constitutes an
enhancement of or other improvement to the Reader and Loader or the NANOGEN
Products.
1.8 "HITACHI Intellectual Property Rights" means all intellectual property
rights of any kind, including patents, patent applications, copyrights, trade
secrets, and trademarks, which may be now or hereafter owned by HITACHI, or
pursuant to which HITACHI has a right to grant licenses or sublicenses.
Hitachi's trademarks included herein shall include only such trademarks as
are incorporated in the HITACHI/NANOGEN
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Trademark.
1.9 "HITACHI/NANOGEN Trademark" means the joint trademark to be agreed by
the Parties pursuant to Section 4.4.
1.10 "HITACHI Products" means the Reader and Loader manufactured by HITACHI
(including the Prototype Products), together with related components,
instrument accessories and spare parts incorporated in or used with such
items. HITACHI Products do not include Other Products.
1.11 "NANOGEN" means NANOGEN, Inc.
1.12 "NANOGEN Improvement Technology" means any proprietary information,
know-how, software, technology or other information which NANOGEN conveys to
HITACHI pursuant to this Agreement, either orally, in documents or other
materials, or incorporated in any NANOGEN Products, and which constitutes an
enhancement of or other improvement to HITACHI Improvement Technology.
1.13 "NANOGEN Intellectual Property Rights" means all intellectual property
rights of any kind, including patents, patent applications, copyrights, trade
secrets, and trademarks, which may be now or hereafter owned by NANOGEN, or
pursuant to which NANOGEN has a right to grant licenses or sublicenses.
NANOGEN's trademarks included herein shall include only such trademarks as
are incorporated in the HITACHI/NANOGEN Trademark.
1.14 "NANOGEN Products" means consumable biochip cartridges for use in
HITACHI Products, which cartridges are more particularly described in EXHIBIT
A, together with user interface, instrument control, applications and data
handling software for use with HITACHI Products. NANOGEN Products do not
include Other Products.
1.15 "NANOGEN Technology" means any proprietary information, know-how,
software, technology or other information now or hereafter owned or possessed
by NANOGEN, which is necessary or useful for the manufacture or distribution
of the Reader and Loader.
1.16 "Other Products" means any reagents, chemicals and consumables to be
used in conjunction with either HITACHI Products or NANOGEN Products.
1.17 "Product Specifications" means the specifications set forth in EXHIBIT
A for the HITACHI Products and the NANOGEN Products, as such specifications
may be modified from time to time by the agreement of the Parties.
1.18 "Prototype Products" means the prototypes of the Reader and Loader
described on EXHIBIT A to be manufactured by HITACHI.
1.19 "Reader and Loader" means the existing NANOGEN designed Reader and
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Loader and related software more particularly described in EXHIBIT A, as such
items may be modified or otherwise developed pursuant to this Agreement. This
covers NANOGEN desktop or larger biochip based products only. It also does
not include any products in other fields, including products in the fields of
sample processing, integrated amplification, Graviton technology, Nanotronics
technology, and microelectrophoresis.
1.20 "Spare Parts" means all spare parts for HITACHI Products.
Article 2.
REPRESENTATIONS AND WARRANTIES
Each Party represents and warrants to the other Party that:
2.1 Such Party (a) is a corporation duly organized, validly existing and
in good standing under the laws of the jurisdiction in which it is
incorporated; (b) has the corporate power and authority and the legal right
to own and operate its property and assets, to lease the property and assets
it operates under lease, and to carry on its business as it is now being
conducted; and (c) is in compliance with all requirements of applicable law,
except to the extent that any noncompliance would not have a material adverse
effect on the properties, business, financial or other condition of such
Party and would not materially adversely affect such Party's ability to
perform its obligation under the Agreement.
2.2 Such Party (a) has the corporate power and authority and the legal
right to enter into the Agreement and to perform its obligations hereunder
and (b) has taken all necessary corporate action on its part to authorize the
execution and delivery of the Agreement and the performance of its
obligations hereunder. The Agreement has been duly executed and delivered on
behalf of such Party, and constitutes a legal, valid, and binding obligation,
enforceable against such Party in accordance with its terms.
2.3 All necessary consents, approvals and authorizations of all
governmental authorities and other persons required to be obtained by such
Party in connection with the Agreement have been obtained.
2.4 The execution and delivery of the 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 such Party.
Article 3.
PRODUCT ENGINEERING AND MANUFACTURING
3.1 In order to assist HITACHI to manufacture the HITACHI Products,
NANOGEN shall initially provide HITACHI with all current design and related
documentation
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concerning the Reader and Loader hardware, together with one unit of each
product. NANOGEN shall use its reasonable best efforts to complete such
transfer as soon as practical, no later than [***]. Thereafter, NANOGEN shall
periodically provide HITACHI with all relevant information and materials
regarding any updates, modifications, improvements or corrections to any such
products or software which may be made by NANOGEN. The Parties shall discuss
and mutually agree upon any NANOGEN or HITACHI requirements that cause
changes to be made to the HITACHI Product and the impact such changes may
have on schedules and any additional costs related to such changes.
3.2 Following the initial transfer pursuant to Section 3.1, HITACHI shall
use its reasonable best efforts to manufacture the Prototype Products and to
sell and deliver the Prototype Products to NANOGEN no later than [***].
NANOGEN shall purchase the Prototype Products from HITACHI subject to
agreement on transfer price pursuant to Section 7.1.1. HITACHI shall
manufacture and sell to NANOGEN, and NANOGEN shall purchase from HITACHI,
such additional Prototype Products as the Parties may agree.
3.3 Following the completion of the production of the Prototype Products,
HITACHI shall use its reasonable best efforts to redesign the Reader and
Loader to permit lower cost manufacturing while preserving or improving
performance compliant with the Product Specifications. NANOGEN shall
cooperate in such effort. The Parties desire to achieve a reduction in
manufacturing costs so as to permit an initial transfer price for sales of
HITACHI Products to NANOGEN estimated as the base unit price set forth on
EXHIBIT A.
3.4 If the Parties are successful in the cost reduction efforts described
in Section 3.3 and agree to proceed to full-scale commercial manufacturing
and distribution in accordance with this Agreement, the Parties shall confirm
that agreement in writing as promptly as practicable thereafter but not later
than [***] (the "Commercial Production Determination"). At such time, if the
Parties do not so agree to full-scale commercial manufacturing and
distribution, then this Agreement will terminate and, subject to Article 18,
shall be of no further force and effect.
3.5 The Parties shall periodically share relevant market and related
information concerning the Field in order to seek to ensure that (1) the
HITACHI Products and NANOGEN Products conform to the technical specifications
required by customers and include appropriate innovations and (2) the HITACHI
Products and NANOGEN Products are distributed under competitive terms and
conditions.
3.6 Following the Commercial Production Determination, HITACHI shall
manufacture the HITACHI Products for sale to NANOGEN and for sale by HITACHI
within Japan, and NANOGEN shall develop and manufacture the NANOGEN Products
for sale to HITACHI, in each case in accordance with the Product
Specifications. NANOGEN responsibilities related thereto include final
analytical performance of
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HITACHI Products, all necessary design and development costs for NANOGEN
Products, including biochip cartridges, user interface, instrument control
and applications and data handling software. Within [***] of the Effective
Date, NANOGEN shall assure that the above referenced software is validated in
accordance with applicable laws and FDA regulations. NANOGEN and HITACHI
shall promptly meet and agree on documentation standards and test criteria
that establish conformance to HITACHI's standards and quality approval. If
the software does not meet HITACHI's quality standards through demonstrated
conformance to the test criteria within the time period to be agreed between
the Parties, the Parties shall discuss and agree on a course of action.
NANOGEN grants to HITACHI the right to modify NANOGEN's user interface and
instrument control software consistent with HITACHI's responsibility for
hardware, and all such changes and improvements will be licensed to NANOGEN
solely during the term of this Agreement on a fully paid-up, royalty-free
basis, worldwide. NANOGEN also grants to HITACHI the right to design unique
user interface software for the HITACHI Products sold in Japan. NANOGEN and
HITACHI shall grant each other solely during the term of this Agreement a
fully paid-up, royalty-free, worldwide license to software improvements
developed by either Party for HITACHI Products in the areas of user
interface, instrument control, applications and data handling.
3.7 NANOGEN hereby grants to HITACHI solely during the term of this
Agreement a license within the Field under all NANOGEN Intellectual Property
Rights and NANOGEN Technology provided by NANOGEN to HITACHI to exclusively
manufacture, have manufactured, use, and sell or otherwise distribute the
HITACHI Products to NANOGEN, and, subject to the Commercial Production
Determination, to third parties in Japan, including the right to copy,
translate, and create derivative works of any software or technical materials
included in or related to the HITACHI Products for such purposes.
3.8 Each Party will assist the other Party in matters pertaining to
engineering and manufacturing responsibilities hereunder that are within the
capabilities of a Party and as the Parties may mutually agree. HITACHI and
NANOGEN shall seek to jointly integrate HITACHI Products with NANOGEN
Products. NANOGEN is solely responsible for final analytical performance of
HITACHI Products, including, without limitation, user interface, instrument
control, applications and data handling software. Within thirty (30) days
after the Commercial Production Determination, the Parties shall meet and
agree on the level of assistance required from each Party to fulfill the
engineering, manufacturing and integration objectives contemplated by this
Section 3.8, provided, however, that such agreement shall be subject to
adjustment based on actual requirements and based on discussions between the
Parties on at least an annual basis throughout the term hereof.
3.9 Existing production and test equipment currently located at NANOGEN
facilities, which HITACHI cannot purchase from outside vendors, will be
available free of charge and transferred to HITACHI's facility for HITACHI's
use in connection with HITACHI's performance of its obligations under this
Agreement.
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<PAGE>
3.10 HITACHI and NANOGEN shall periodically discuss the development of any
new product in the Field other than the HITACHI Products or NANOGEN Products.
If either Party determines to develop such a new product in the Field, such
Party shall so notify the other Party, in which case the parties shall
discuss the possible joint development of such new product.
3.11 Except as otherwise provided herein, any intellectual property rights
of any kind which may arise from the Parties' activities under or related to
this Agreement shall remain the sole property of the Party which performed
the work which gave rise to such rights, or the right to obtain such rights
(including, in the case of patent rights, the making of an invention or
discovery of a patentable invention under 35 U.S.C.). Except as expressly
provided herein, no license or other right is provided by either Party hereto
to use any such rights.
3.12 HITACHI hereby grants to NANOGEN solely during the term of this
Agreement a royalty-free, worldwide, non-exclusive license, with the right to
sublicense to NANOGEN affiliates and suppliers to NANOGEN, under all HITACHI
Intellectual Property Rights, to use the HITACHI Improvement Technology for
any and all purposes within the Field.
3.13 NANOGEN hereby grants to HITACHI solely during the term of this
Agreement a royalty-free, worldwide, non-exclusive license, with the right to
sublicense to HITACHI affiliates and suppliers to HITACHI, under all NANOGEN
Intellectual Property Rights, to use the NANOGEN Improvement Technology for
any and all purposes within the Field.
3.14 The Parties shall be joint owners of undivided interests in all
Collaboration Technology and all Collaboration Intellectual Property Rights,
except to the extent that obtaining or perfecting any such Collaboration
Intellectual Property Right requires further action beyond the creation of
the Collaboration Technology, including, without limitation, the filing of a
patent application. Each Party shall have the right to deal freely with any
such joint ownership interest, including by transferring such interest or by
licensing such interest, without any accounting or other obligation to the
other Party. If further action is required in order to obtain or perfect a
Collaboration Intellectual Property Right in any jurisdiction, including,
without limitation, the filing of a patent application, a Party which desires
to obtain or perfect such right shall notify the other Party. If the other
Party desires to be a joint owner of such right, the Parties shall then
cooperate in the procedure to obtain or perfect such right, including by
sharing all costs associated with such procedure, with any resulting right to
be jointly owned by both Parties and subject to the terms hereof. If the
other Party does not desire to participate in such procedure, the first Party
may then proceed with such procedure alone, and shall be the sole owner of
any such right thereby obtained or perfected, provided that such Party owning
such right shall be deemed to have granted to the other Party a perpetual,
royalty-free, worldwide, non-exclusive license, with the right to sublicense,
under such right for any and all purposes.
7
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3.15 If either Party believes that a third party is infringing any
jointly-owned Collaboration Intellectual Property Rights and desires to take
any action against such third party with respect to such infringement, such
Party shall first contact the other Party and the Parties shall use their
reasonable best efforts to coordinate any such action.
3.16 If either Party receives a claim of infringement from any third party
which relates to any Collaboration Technology or any jointly-owned
Collaboration Intellectual Property Rights, such Party shall immediately
notify the other Party and the Parties shall then use their reasonable best
efforts to coordinate any defense of or other response to such claim.
Article 4.
MARKETING, SUPPLY AND DISTRIBUTION; TRADEMARKS
4.1 Subject to and dependent upon the Parties executing the Commercial
Production Determination, NANOGEN shall grant HITACHI the right to market,
distribute and service the HITACHI Products on an exclusive basis, and the
NANOGEN Products on a non-exclusive basis, within Japan. NANOGEN shall market
and distribute the HITACHI Products and NANOGEN Products in all countries
other than Japan. Subject to the Commercial Production Determination, HITACHI
shall use its reasonable best efforts to develop and service demand for the
HITACHI Products and NANOGEN Products in Japan.
4.2 It shall be the responsibility of HITACHI to provide technical support
for, and to respond to all technical inquiries and requests made by NANOGEN
relating to, HITACHI Products purchased by NANOGEN hereunder. Within thirty
(30) days after the Commercial Production Determination, the Parties shall
meet and agree on the level of assistance required by HITACHI to fulfill the
technical support objectives of this Section 4.2, provided, however, that
such agreement shall be subject to adjustment based on actual requirements
and based on discussions between the Parties on at least an annual basis
throughout the Term hereof.
4.3 Subject to the Commercial Production Determination, each Party shall
use its reasonable best efforts to support the other Party's marketing, sales
and service of the HITACHI Products and NANOGEN Products in the other Party's
territory. Within thirty (30) days after the Commercial Production
Determination the Parties shall meet and agree on the level of assistance
required from each Party to fulfill the marketing, sales and service
objectives contemplated by this Section 4.3, provided, however, that such
agreement shall be subject to adjustment based on actual requirements and
based on discussions between the Parties on at least an annual basis
throughout the Term hereof.
4.4 Promptly following the Commercial Production Determination, the
Parties shall agree upon a joint trademark incorporating NANOGEN and HITACHI
trademarks. HITACHI shall affix the HITACHI/NANOGEN Trademark on the HITACHI
Products to
8
<PAGE>
be distributed in Japan. HITACHI shall affix a trademark designated by
NANOGEN on HITACHI Products to be sold by HITACHI to NANOGEN, provided that
the parties may later determine also to affix the HITACHI/NANOGEN Trademark
to HITACHI Products to be sold by HITACHI to NANOGEN.
4.5 Subject to the Commercial Production Determination, if either Party
develops or offers for sale an Other Product which would be suitable for sale
with HITACHI Products or NANOGEN Products, that Party shall offer such
product to the other Party at a mutually agreed reasonable transfer price.
4.6 Subject to the Commercial Production Determination , if either Party
develops a product in the Field which is not a HITACHI Product or a NANOGEN
Product, at the time such product is available for commercialization, such
Party (the "First Party") shall notify the other Party (the "Second Party")
of such fact and provide all relevant details concerning such product to that
Second Party. If the Second Party is interested in purchasing such product
from the First Party, or, if the Second Party in such case is HITACHI, in
manufacturing such Product, under terms similar to those set forth herein,
the Second Party shall so notify the First Party within [***] of the receipt
of the original notice. Upon such notification of interest, the parties shall
negotiate in good faith for a reasonable period of time (not to exceed [***]
to seek to add such new product to this Agreement, or to otherwise reach
agreement on such terms upon which such sale or manufacturing may proceed.
Article 5.
FORECAST
5.1 At the beginning of every month following the Commercial Production
Determination, a purchasing Party, HITACHI or NANOGEN, as the case may be,
shall provide the selling Party with a rolling forecast of the quantities of
the selling Party's products, HITACHI Products or NANOGEN Products, as the
case may be, which the purchasing Party expects to order in each of the [***]
months beginning with the month following the month in which the forecast is
given. The selling Party expects to use these forecasts as advance
information for orders to be placed by the purchasing Party in the future,
which will be helpful for the selling Party to shorten the delivery time as
much as possible. The quantity forecast by the purchasing Party to be ordered
in the month two months after the month in which the forecast is given (e.g.
the forecast for August given in June), may not be reduced when forecast in
the next month (e.g. the forecast for August given in July), but may be
increased by the purchasing Party up to [***]. The purchasing Party shall
each month place orders for at least the quantity last forecast for that
month pursuant to this Section 5.1.
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Article 6.
PURCHASE ORDERS; SALES CONTRACTS
6.1 NANOGEN shall order the HITACHI Products and Spare Parts from HITACHI
by submitting a written purchase order to HITACHI through HII, for
transmittal by HII to HITACHI. HITACHI shall order the NANOGEN Products by
submitting a written purchase order to NANOGEN through HII, for transmittal
by HII to NANOGEN. Those purchase orders shall state the following terms,
which shall be in full conformity with the terms and conditions of this
Agreement:
(1) The purchase order number and date;
(2) The type and quantity of the product ordered;
(3) The unit and total prices of the product ordered;
(4) The requested delivery date or dates; and
(5) All relevant shipping information, including the mode of
transportation and the destination to which the product is to be
shipped.
Such purchase orders shall be subject to written acceptance by a Party. When
a Party accepts a purchase order, such Party may communicate such acceptance
through HII, and HII shall be authorized to advise the other Party of such
acceptance of such purchase order.
6.2 An individual sales contract shall be concluded between the Parties
upon any acceptance of all or part of a Party's purchase order by the other
Party pursuant to Section 6.1. The terms and conditions of that sales
contract shall be limited to the terms contained in a Party's purchase order
which are referred to in Section 6.1 (to the extent accepted by the other
Party) and the terms and conditions set forth in this Agreement, provided
that in the event of any conflict between such terms, the terms and
conditions set forth in this Agreement shall prevail. Unless otherwise
expressly agreed in a single writing signed by both parties, no other terms
and conditions, including, without limitation, any preprinted or other terms
and conditions set forth in a Party's purchase order or in the other Party's
acknowledgment of a purchase order, shall be part of that sales contract.
Article 7.
PRICE AND PAYMENT; COMMISSIONS
7.1 HITACHI Products
7.1.1 In consideration of HITACHI's manufacture and sale to NANOGEN of the
Prototype Products described in Section 3.2, NANOGEN shall notify
HITACHI
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of the total quantity of units to be ordered at the time of the
completion of the initial transfer pursuant to Section 3.1 ([***]),
and the Parties shall then seek to agree upon an appropriate transfer
price for those Prototype Products. Such transfer price shall be
agreed to no later than March 31, 2000.
7.1.2 Following the completion of the production of the Prototype Products
(on or before [***]), HITACHI and NANOGEN shall seek to agree upon an
appropriate transfer price for HITACHI Products consistent with
Section 3.3. If the Parties are able to agree upon such a price, that
shall then be the price for all HITACHI Products, other than Prototype
Products, ordered by NANOGEN through [***], except as adjusted pursuant
to Section 7.3 or as the Parties may otherwise agree in writing.
7.1.3 At least [***] days prior to October 1st of each year, NANOGEN will
provide HITACHI with a forecast of the minimum quantity of HITACHI
Products to be ordered by NANOGEN and delivered by HITACHI during the
year commencing on such October 1st. HITACHI shall then prepare and
submit to NANOGEN a price schedule based on that quantity. The Parties
shall seek to agree upon the pricing of HITACHI Products to be
effective for such following year and, if agreed, such price shall be
the price in effect for such following year, except as adjusted
pursuant to Section 7.3 or as the Parties may otherwise agree in
writing. NANOGEN must purchase and take delivery of at least the
minimum quantity of HITACHI Products that NANOGEN forecast for that
year. Additionally, HITACHI shall provide NANOGEN with HITACHI's
forecast of HITACHI Products to be sold by HITACHI in Japan during the
same one year period. HITACHI must purchase and take delivery of at
least the minimum quantity of NANOGEN Products that HITACHI forecast
for that year.
7.2 NANOGEN Products
7.2.1 NANOGEN shall supply to HITACHI all products pursuant to Section 3.1,
and NANOGEN Products required by HITACHI to manufacture the Prototype
Products, without charge. The Parties will agree on or before [***] on
the number of NANOGEN Products to be supplied to HITACHI per month
pursuant to this section 7.2.1.
7.2.2 Following the completion of the production of the Prototype Products,
HITACHI and NANOGEN shall seek to agree upon an appropriate transfer
price for NANOGEN Products. If the Parties are able to agree upon such
a price, that shall then be the price for all NANOGEN Products, other
than NANOGEN Products covered by Section 7.2.1, ordered by HITACHI
through [***], except as adjusted pursuant to Section 7.3 or as the
Parties may otherwise agree in writing.
7.2.3 At least [***] prior to October 1st of each year, HITACHI will provide
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NANOGEN with a forecast of the intended minimum quantity of NANOGEN
Products to be ordered by HITACHI during the year commencing
on such October 1st. NANOGEN shall then prepare and submit to HITACHI a
price schedule based on that quantity. The Parties shall seek to agree
upon the pricing of NANOGEN Products to be effective for such following
year, and if agreed, such price shall be the price in effect for such
following year, except as adjusted pursuant to Section 7.3 or as the
Parties may otherwise agree in writing.
7.2.4 [***]
7.3 The base prices as determined pursuant to Sections 7.1.2, 7.1.3, 7.2.2
and 7.2.3 shall be adjusted twice each year based on an average U.S.
Dollar/Japanese Yen exchange rate in accordance with the following provisions:
7.3.1 Such base price for each six (6) month period shall be adjusted based
on the average exchange rate (the "Average Rate") of the previous six
(6) month period. Each six (6) month fixed price period shall be for
the period between April 1 and September 30 and between October 1 and
March 31 for each year, respectively.
7.3.2 The exchange rate on every 1st and 15th day of each month shall be
utilized for this calculation. In case any such day falls on a Japanese
holiday or weekend, the exchange rate on the next Japanese business day
shall be utilized. For the purpose of easier implementation of use of
the average six (6) month exchange rate, the calculation period will
begin 15 days prior to the beginning of the current expiring fixed
price period as follows:
(1) For the April 1 to September 30 fixed price period, the
calculation period will commence the previous September 15th
(first time) and end March 1st (12th time).
(2) For the October 1 to March 31 fixed price period, the
calculation period will commence the previous March 15th (1st
time) and end September 1st (12th time).
7.3.3 In calculating the average six (6) month exchange rate, the highest and
lowest rates shall be eliminated from the twelve (12) exchange rates
utilized in order to avoid any irregular movement of currency. The
remaining ten (10) exchange rates shall be averaged.
7.3.4 The source of the exchange rate information is the final exchange rate
of the Tokyo market for the subject day as reported in the Nihon Keizai
Shimbun newspaper. Internet address: http://www.nni.nikkei.co.jp
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7.3.5 HITACHI shall advise NANOGEN of the applicable Average Rate as well as
the revised unit base price of HITACHI Products and NANOGEN Products
pursuant to Sections 7.1.2, 7.1.3, 7.2.2 and 7.2.3. Except as otherwise
set forth herein, such revised base prices shall be effective for any
purchase orders placed by NANOGEN and HITACHI during the periods
covered by those revised prices.
The prices of the HITACHI Products and NANOGEN Products shall be
adjusted in accordance with the formula:
[***]
7.3.6 NANOGEN and HITACHI shall equally share in the difference between the
U.S. Dollar/Japanese Yen exchange rate in effect at the beginning of
the subject period (the "Base Rate") and the above determined Average
Rate. The initial Base Rate is set forth in EXHIBIT A of the Agreement.
The Average Rate determined for a six month period shall become the
Base Rate to be used for the following six month period.
7.4 In case a change of the base price of the HITACHI Products or NANOGEN
Products becomes necessary for any reason, including a model change of the
HITACHI Products or NANOGEN Products, a major change of the competitive
situation in the relevant territory with respect to price performance, or any
other reasonable cause, the Parties shall, in good faith, negotiate a new
base price from HITACHI to NANOGEN, or NANOGEN to HITACHI, as the case may be.
7.5 HITACHI shall invoice NANOGEN at the time of shipment by HITACHI, and
NANOGEN shall invoice HITACHI at the time of shipment by NANOGEN. Payment
shall be made in U.S. dollars from NANOGEN to HII (with HII authorized to
receive such payment on behalf of HITACHI), and HII to NANOGEN (with HII
authorized to make such payment on behalf of HITACHI), within thirty (30)
days after the issuance of such invoice.
7.6 Following the Commercial Production Determination, HITACHI shall pay
NANOGEN a sales commission on sales of HITACHI Products made by HITACHI in
the Japanese market during the term of this Agreement. The initial sales
commission shall equal [***] of the estimated average sales price of such
HITACHI Products. Such estimated average sales price shall be determined by
the Parties at the same time as the prices for HITACHI Products are
determined pursuant to
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Sections 7.1.2 and 7.1.3, and shall be effective through September 30 of the
subject year. Such sales commission shall be calculated on the basis of sales
made and invoiced by HITACHI during each calendar quarter, and shall be paid
by HITACHI to NANOGEN within forty five (45) days of the close of each
calendar quarter. Such commissions shall be paid in U.S. Dollars, with the
conversion of Japanese Yen denominated sales proceeds to U.S. Dollars
determined based on the U.S. Dollar/Japanese Yen exchange rate in effect at
the end of the subject calendar quarter. If in any such year or portion
thereof ending with September 30 the total commissions paid are not equal to
an agreed minimum commission, HITACHI shall, following the end of such year
or portion thereof, pay NANOGEN the difference between the actual commissions
paid during such year and that minimum commission amount. That minimum
commission for the first year, ending with [***], shall be discussed at the
time of the Commercial Production Determination and mutually agreed to by the
Parties. The minimum commission for subsequent years shall be negotiated in
good faith by the Parties at the same time as the prices for HITACHI Products
for such year are determined pursuant to Section7.1.3, based on HITACHI's
forecast of HITACHI Products sales in Japan during such year.
7.7 If HITACHI develops or purchases Other Products from a third party for
sale in the Japanese market with HITACHI Products or NANOGEN Products during
the term of this Agreement, HITACHI shall pay NANOGEN a sales commission on
such sales in accordance with Section 7.6.
7.8 If HITACHI has reasonable grounds to conclude that the withholding of
tax is required under applicable Japanese law on any payment to be made to
NANOGEN hereunder, HITACHI may withhold such amount from such payment and pay
such amount to the applicable tax authorities, with the balance of such
payment to be made to NANOGEN. In such event, HITACHI shall notify NANOGEN of
such payment, and, as soon as possible following such payment, shall provide
NANOGEN with evidence of such tax payment and other documentation which would
be reasonably required for a U.S. taxpayer to meet the requirements for
claiming a tax credit on a U.S. federal income tax return. NANOGEN shall use
its reasonable efforts to credit any such tax withheld by HITACHI against
NANOGEN's U.S. tax liability, and if NANOGEN is able to so credit all or any
amount of such withheld tax, NANOGEN shall promptly reimburse to HITACHI
one-half of the amount of such credit. NANOGEN shall, upon HITACHI's request
from time to time, report to HITACHI as to whether any such tax credit has
been taken by NANOGEN.
7.9 The prices of Other Products and/or Spare Parts shall be mutually
agreed.
Article 8.
DELIVERY
8.1 Following the Commercial Production Determination, HITACHI and NANOGEN
shall use their reasonable best efforts to deliver HITACHI Products and Spare
Parts within [***] calendar days after HITACHI's receipt of a purchase order
14
[***] CONFIDENTIAL TREATMENT REQUESTED
<PAGE>
from NANOGEN and NANOGEN Products within [***] calendar days after receipt of
a purchase order from HITACHI, provided that the quantity ordered in that
month is no more than [***] of the quantity last forecast to be ordered in
that month pursuant to Section 5.1. If a Party's requirements exceed [***] of
the quantity last forecast to be ordered in that month pursuant to Section
5.1, the other Party shall use its reasonable best efforts to deliver product
within [***] days after such Party's receipt of the other Party's purchase
order. A Party's compliance with agreed delivery dates is further conditioned
on prompt receipt from the other Party of all necessary shipping information.
8.2 Delivery by HITACHI to NANOGEN shall be F.O.B. an airport or seaport
within Japan, and title and all risk of loss shall pass to NANOGEN at that
point. Delivery by NANOGEN to HITACHI shall be F.O.B. an airport or seaport
in the continental United States, and title and risk of loss shall pass to
HITACHI at that point.
Article 9.
INSPECTION AND ACCEPTANCE
9.1 Upon receipt of a product purchased by a Party, that Party shall
inspect the product in order to determine its conformity to the requirements
of this Agreement. If the product fails to so conform, that Party shall
deliver notice thereof to the other Party within [***] days after delivery of
the product, which notice shall contain an explanation of the nature and
details of that nonconformity. In the absence of such timely and proper
notice, the purchasing Party shall be deemed to have accepted all product
included in such shipment.
9.2 Each Party selling a product hereunder shall thoroughly inspect each
product, as appropriate, and shall conduct performance tests before shipment
and enclose a record of such inspection and/or tests to the product as
appropriate. The purchasing Party or its duly authorized representative shall
have the right and opportunity to observe such inspection and/or tests, and
the selling Party shall furnish, without additional charge, all reasonable
facilities and assistance for the safety and convenience of a purchasing
Party or its representative observing the performance of such inspection
and/or tests. Observing or failure to observe such inspection and/or tests by
a purchasing Party shall in no way impair that Party's rights regarding any
nonconforming product.
9.3 Should a purchasing Party determine prior to acceptance of a product
that such product fails to conform to any of the applicable warranties in
Section 11 in any respect, that Party may reject the product, inform the
other Party in writing of the nonconformity and return it to the other Party
at the other Party's risk and expense, in which case such other Party shall
promptly, at its option, deliver a new product to the rejecting Party or
repair the returned product to cause it to conform to the applicable
warranties and send such repaired product back to the rejecting Party at the
other Party's risk and expense,
15
[***] CONFIDENTIAL TREATMENT REQUESTED
<PAGE>
including costs such as freight charges between the Parties.
9.4 A Party's right to reject and return product under Section 9.3 above
shall apply only until acceptance in accordance with Section 9.1 has
occurred. After acceptance, all rights and remedies with respect to product
shall be governed by the warranty provisions herein.
Article 10.
PACKING AND PACKAGING
10.1 Unless otherwise specified, each Party shall pack product in such a
manner as to be reasonably safe from damage or deterioration while in transit
or storage under generally foreseeable circumstances.
10.2 HITACHI shall package the HITACHI Products in a suitable cover that is
dimensionally similar and of a style, including paint color, consistent with
other HITACHI products, with the exception of labeling. HITACHI and NANOGEN
shall mutually agree on the industrial design of such a cover and any future
changes to the cover that may be requested by either Party.
Article 11.
PRODUCT WARRANTY
11.1 Unless otherwise expressly agreed between the Parties in writing, the
HITACHI Products shall be warranted to conform to the Product Specifications
applicable to the HITACHI Products, and shall be free of defects in material
and workmanship for [***] months after delivery, or [***] months after
installation, whichever period ends soonest, provided that such warranty
shall not apply to any nonconformities which are caused by improper
transportation, storage, handling, installation, maintenance or operation of
the HITACHI Products, or to any HITACHI Products that have been altered,
modified or changed by NANOGEN and/or its customers. Prior to the Commercial
Production Determination, to the extent that any portion of a HITACHI Product
is based on NANOGEN's design, HITACHI further disclaims any warranty or other
responsibility with respect to the performance of the HITACHI Product, other
than to the extent arising from defects in material and workmanship, or other
failure to conform to the physical requirements of the Product
Specifications. After the Commercial Production Determination, HITACHI shall
accept all warranty responsibility for HITACHI Products.
11.2 Unless otherwise expressly agreed between the Parties in writing, the
NANOGEN Products shall be warranted to conform to the Product Specifications
applicable to the NANOGEN Products and shall be free of defects in material
and workmanship for the shelf life of the NANOGEN Products which is
designated on the individual NANOGEN Product container, provided that such
warranty shall not apply to any nonconformities which are caused by improper
transportation, storage, handling, installation, or operation of the NANOGEN
Products, or to any NANOGEN Products
16
[***] CONFIDENTIAL TREATMENT REQUESTED
<PAGE>
which has been altered, modified or changed by HITACHI and/or its customers.
11.3 Regulatory approvals shall be prepared by a Party as indicated in the
Product Specification section of EXHIBIT A. Each Party shall provide the
other Party with a "Declaration of Conformity" to such approval for all
products sold hereunder by such Party, and warrants that such products will
conform to the applicable requirements. Additional approvals and any
reapplication, caused by a change in an already covered regulation, will be
applied for as mutually agreed.
11.4 If any product fails to conform to the warranty set forth in Section
11.1 or Section 11.2, the selling Party shall, without delay, at its option
(1) supply and ship to the purchasing Party free of charge, with
transportation charge prepaid, a replacement product, or (2) repair the
nonconforming product and return that repaired product to the purchasing
Party. In either case, the purchasing Party shall return the nonconforming
product to the selling Party's plant with transportation charges collect. The
replacement or repaired product will be shipped to the purchasing Party
prepaid. Any other costs incurred will be covered by the purchasing Party.
This shall constitute each Party's sole remedy for failure of a product to
conform to the warranty set forth in Section 11.1 or Section 11.2.
11.5 For product or parts of a product normally consumed in operation or
which have a normal life inherently shorter than the warranty period set
forth under Section 11.1 or Section 11.2, the selling Party's warranty shall
apply only for the normal life of such product or parts thereof. The Parties
shall separately agree upon such parts or product and their appropriate
normal life.
11.6 The Parties shall agree upon a report form, which will be used by a
Party to inform the other Party of product nonconformities pursuant hereto.
11.7 Unless otherwise mutually agreed by the Parties, a selling Party's
warranty under Section 11.1 or Section 11.2 does not apply to any software
(or copies thereof) or parts supplied to such selling Party by the other
Party, to any equipment warranted by another manufacturer, or to expendable,
consumable or limited life items.
11.8 THE WARRANTIES SET FORTH IN THIS ARTICLE 11 ARE A PARTY'S SOLE AND
EXCLUSIVE WARRANTIES OF QUALITY OR CONDITION WITH RESPECT TO ANY PRODUCT.
EACH PARTY DISCLAIMS ALL OTHER WARRANTIES, EXPRESS OR IMPLIED, INCLUDING ANY
WARRANTIES OF MERCHANTABILITY OR FITNESS OF ANY PRODUCT FOR ANY PARTICULAR
PURPOSE, OR ANY WARRANTY REGARDING NON-INFRINGEMENT OF ANY THIRD PARTY'S
INTELLECTUAL PROPERTY RIGHTS.
Article 12.
LIMITATION OF LIABILITY
12.1 IN NO EVENT SHALL A PARTY BE LIABLE TO THE OTHER FOR
17
<PAGE>
COSTS OF PROCUREMENT OF SUBSTITUTE GOODS AND SERVICES, LOSS OF USE OR
PROFITS, OR ANY OTHER SPECIAL, INCIDENTAL, INDIRECT, OR CONSEQUENTIAL
DAMAGES, ARISING OUT OF OR RELATED TO THIS AGREEMENT OR THE USE OR
PERFORMANCE OF ANY PRODUCT, HOWEVER CAUSED, AND ON ANY THEORY OF LIABILITY,
WHETHER IN AN ACTION FOR CONTRACT OR TORT (INCLUDING NEGLIGENCE) OR
OTHERWISE, AND WHETHER OR NOT A PARTY HAS BEEN ADVISED OF THE POSSIBILITY OF
SUCH DAMAGES.
12.2 Each limitation on liability or limited or exclusive remedy set forth
in this Agreement is independent of any other limitation or remedy and if any
such limitation or remedy fails of its essential purpose or is otherwise held
to be unenforceable, that shall not affect the validity of any other such
limitation or remedy.
Article 13.
TRAINING AND TECHNICAL ADVICE
13.1 At a purchasing Party's request, the selling Party shall provide
technical information regarding the sales, service and quality assurance for
the selling Party's products in English at no cost.
13.2 At a purchasing Party's request, the selling Party shall provide
technical training for its products at a location as mutually agreed. The
time of the training shall be in accordance with product launches. The
detailed conditions of the training will be negotiated and settled between
the Parties on a case by case basis. Within [***] days after the Commercial
Production Determination, the Parties shall meet and agree on the level of
assistance required from each Party to fulfill the technical training
objectives contemplated by this Section 13.2, provided, however, that such
agreement shall be subject to adjustment based on actual requirements and
based on discussions between the Parties on at least an annual basis
throughout the Term hereof. Each Party assumes the responsibility for
training its sales, support and service personnel at its own facilities and
at its own expense.
13.3 HITACHI shall provide, free of charge, a reasonable amount of
technical training and support in the form of documentation and/or
consultation to enable NANOGEN's software engineers to develop applications
for the HITACHI Products. Such assistance shall be at times and locations as
mutually agreed between the Parties.
13.4 NANOGEN will provide HITACHI with NANOGEN's current instruction and
maintenance manuals written in English. HITACHI will then assume
responsibility to supply NANOGEN with updated draft copies of each the
documents described in keeping with any changes to HITACHI Products as
HITACHI may make. NANOGEN shall have the responsibility to edit and reproduce
these documents for distribution to their customers.
13.5 If a Party alters the documents supplied to the other Party pursuant to
Sections
18
[***] CONFIDENTIAL TREATMENT REQUESTED
<PAGE>
13.1, 13.3 and 13.4, such Party shall immediately give the other Party notice
of such alteration and supply that Party with a reproducible copy of the
documents as amended.
Article 14.
MODIFICATION OF PRODUCTS
14.1 A selling Party shall inform the purchasing Party of any change in
design of the selling Party's products. No changes that diminish the
performance as set forth in the applicable Product Specification may be made
without the concurrence of the purchasing Party.
14.2 A purchasing Party may not modify the published specifications for the
selling Party's products at any time to state or suggest performance
parameters greater than those specified in EXHIBIT A without the prior
written approval of the selling Party. A purchasing Party will advise the
selling Party in writing of any such requested changes to those published
specifications.
Article 15.
OTHER INTELLECTUAL PROPERTY MATTERS
15.1 NANOGEN shall indemnify, defend and hold harmless HITACHI, and any of
HITACHI's affiliates, employees, representatives, agents and/or customers
(each an "Indemnified Party"), from and against any and all claims, demands,
suits, actions, liabilities, damages, costs and expenses, including, without
limitation, attorneys' fees and any and all amounts paid in settlement of any
such claim, demand, suit or action, which are asserted against, imposed upon,
or incurred or suffered directly or indirectly by any Indemnified Party as a
result of, arising from or relating to any infringement of any third party's
intellectual right, which intellectual property right arises under any law
other than that of Japan, by any HITACHI Products, or the use or distribution
thereof, which HITACHI Products have been sold by HITACHI to NANOGEN
hereunder at any time prior to Commercial Production Determination, including
any claim, demand, suit or action brought by a third party asserting matters
which, if true, would result in such an infringement, provided that such
obligations shall not apply to the extent that such infringement arises from
a portion of the HITACHI Product which has been solely designed by HITACHI.
15.2 Following the Commercial Production Determination, each Party shall
indemnify, defend and hold harmless the other Party, and any of the other
Party's affiliates, employees, representatives, agents and/or customers (each
an "Indemnified Party"), from and against any and all claims, demands, suits,
actions, liabilities, damages, costs and expenses, including, without
limitation, attorneys' fees and any and all amounts paid in settlement of any
such claim, demand, suit or action, which are asserted against, imposed upon,
or incurred or suffered directly or indirectly by any Indemnified Party as a
result of, arising from or relating to any infringement of any third party's
intellectual property rights by any the HITACHI Products or the NANOGEN
Products sold
19
<PAGE>
hereunder following the Commercial Production Determination, including any
claim, demand, suit or action brought by a third party asserting matters
which, if true, would result in such an infringement, to the extent that such
infringement arises from a portion of the subject product which has been
designed by, or for which the design has otherwise been provided by, the
Party providing the indemnification hereunder.
15.3 NANOGEN shall cooperate with and assist HITACHI in the protection of
any patent, copyright, trademark, trade secret or any other intellectual
property right relating to the HITACHI Products which is owned by HITACHI or
licensed by HITACHI to NANOGEN, and shall inform HITACHI immediately of any
infringement or other improper action with respect to any such patent,
copyright, trademark, trade secret or any other intellectual property right
that shall come to the attention of NANOGEN.
15.4 HITACHI shall cooperate with and assist NANOGEN in the protection of
any patent, copyright, trademark, trade secret or any other intellectual
property right relating to the HITACHI Products and NANOGEN Products which is
owned by NANOGEN or licensed by NANOGEN to HITACHI, and shall inform NANOGEN
immediately of any infringement or other improper action with respect to any
such patent, copyright, trademark, trade secret or any other intellectual
property right that shall come to the attention of HITACHI.
Article 16.
CONFIDENTIAL INFORMATION AND PROPRIETARY RIGHTS
16.1 Each Party (the "Disclosing Party") will furnish to the other Party
(the "Recipient") under this Agreement certain confidential or proprietary
information ("Confidential Information") of the Disclosing Party, including
information relating to design, manufacturing and applications of HITACHI
Products and NANOGEN Products, and procedures and techniques enabling the
products to be manufactured and to operate. Only information that is clearly
marked by the Disclosing Party as "Confidential" shall be considered as
Confidential Information hereunder, and the Recipient has the right to refuse
the acceptance of all or part of such Confidential Information. Information
will not also not be considered as Confidential Information if it is or
becomes a matter of public knowledge without the fault of Recipient, is
developed by Recipient without reference to any Confidential Information
received from the Disclosing Party, or is received by Recipient from a third
person under circumstances permitting its disclosure and free use. The
Recipient shall not disclose Confidential Information to any third parties,
permit the use of Confidential Information by any third parties, or use such
Confidential Information, except in accordance with the uses permitted under
this Agreement, or as the Parties may otherwise agree. Upon termination of
this Agreement the Recipient shall cease using, and shall forthwith deliver
to the Disclosing Party, all Confidential Information of the Disclosing Party
that the Recipient then possesses.
20
<PAGE>
Article 17.
TERM OF AGREEMENT; TERMINATION
17.1 This Agreement shall become effective on Effective Date and shall
continue in full force for an initial term of [***] unless sooner terminated
pursuant to this Section 17.
17.2 At the end of the initial term, or any additional term, this Agreement
shall be automatically extended for an additional term of [***] year, unless
either Party hereto gives to the other Party written notice of termination at
least [***] days prior to the expiration of the then current term, in which
case the Agreement shall terminate at the end of the then current term.
17.3 Either Party may in its sole discretion, at any time, for any reason
and with or without cause, terminate this Agreement upon giving the other
Party at least [***] days written notice. If NANOGEN terminates this
Agreement under this Section 17.3 during the first [***] of the initial [***]
year term hereof, HITACHI may invoice NANOGEN, in which event NANOGEN shall
pay HITACHI, within thirty (30) days of such invoice, a non-recurring
engineering fee ("NRE fee") to cover the actual cost incurred by HITACHI
pursuant to Article 3 for the engineering, design and manufacture of HITACHI
Products. The amount of such NRE fee to be paid by NANOGEN shall be
determined by the year during such initial term in which the notice of
termination is given by NANOGEN to HITACHI as follows:
<TABLE>
<CAPTION>
- ------------------------------------------------------- -----------------------------------------------------
YEAR OF TERM IN WHICH AGREEMENT IS TERMINATED BY AMOUNT PAYABLE BY NANOGEN TO HITACHI
NANOGEN PURSUANT TO SECTION 17.3
- ------------------------------------------------------- -----------------------------------------------------
<S> <C>
[***] [***]
- ------------------------------------------------------- -----------------------------------------------------
[***] [***]
- ------------------------------------------------------- -----------------------------------------------------
[***] [***]
- ------------------------------------------------------- -----------------------------------------------------
[***] [***]
- ------------------------------------------------------- -----------------------------------------------------
[***] [***]
- ------------------------------------------------------- -----------------------------------------------------
</TABLE>
Other than pursuant to this Section 17.3, HITACHI shall be solely responsible
for costs incurred in connection with the engineering, design and manufacture
of the HITACHI Products. The Parties anticipate that, upon the Commercial
Production Determination, they will reevaluate the right to terminate without
cause pursuant to this Section 17.3 and decide at that time whether such
right should be preserved in its current form for the balance of the term of
the Agreement, or modified.
17.4 A Party may, in addition to any other available remedies, terminate
this Agreement, and any individual sales contracts concluded pursuant hereto,
at any time by delivery of written notice to the other Party stating such
decision to terminate, if the other Party fails to perform any duty or other
obligation required by this Agreement when due and fails to cure that breach
within one hundred twenty (120) days of receipt of notice
21
[***] CONFIDENTIAL TREATMENT REQUESTED
<PAGE>
from the non-breaching Party; provided, however, that if that obligation is
one to pay money, it shall be cured within ten (10) calendar days.
17.5 A Party may terminate this Agreement immediately upon notice to the
other Party in the event of one or more of the following:
(1) Appointment of trustee or receiver for all or any part of this
assets of the other Party;
(2) Insolvency or bankruptcy of the other Party;
(3) Assignment by the other Party for the benefit of creditors;
(4) Attachment of the assets of the other Party; or
(5) Dissolution or liquidation of the other Party.
If either Party is involved in any of the events enumerated in paragraph (1)
through paragraph (5) of this Section 17.5, such Party shall immediately
notify the other Party of the occurrence of such event.
Article 18.
OBLIGATIONS AFTER TERMINATION
The provisions of Sections 3.11, 3.14, 3.15, 3.16, 4.2, and 17.3 and Articles
12, 15, 16, 18, 20 and 21, shall survive the termination of this Agreement.
All other rights and obligations arising hereunder which have not accrued
prior to such termination, including, without limitation, all licenses
granted hereunder, shall terminate upon such termination.
Article 19.
FORCE MAJEURE
If delivery of products by a selling Party is delayed as a result of acts of
God, acts of any governmental authority, riot, revolution, fires or war or
other circumstances beyond the reasonable control of that Party, the date of
shipment or delivery shall be extended for a period equal to the time lost by
reason of such delay. If the delay extends for more than thirty (30) days,
the Parties shall enter into negotiations concerning a change in the shipment
or delivery schedule. If the delay continues for more than three (3) months
with respect to any products, the purchasing Party may cancel its individual
sales contract for such affected products without any termination charges or
other liability.
22
<PAGE>
Article 20.
ARBITRATION; GOVERNING LAW
20.1 All disputes arising in connection with this Agreement shall be
finally settled under the Rules of Conciliation and Arbitration of the
International Chamber of Commerce by one or more arbitrators appointed in
accordance with the said Rules. If such arbitration is demanded by NANOGEN,
the arbitration proceeding shall be held in Tokyo, Japan. If such Arbitration
is demanded by HITACHI, the arbitration proceeding shall be held in San
Diego, California. In the event of a dispute each Party will bear its owns
attorneys fees and related costs.
20.2 This Agreement and the performance of all obligations hereunder shall
be governed by and construed in accordance with the laws of California,
without application of any choice of law rules or the provisions of the 1980
United Nations Convention on Contracts for the International Sale of Goods,
and provided that the Federal Arbitration Act shall apply in place of and
instead of the California Arbitration Act and the California International
Arbitration Act.
Article 21.
MISCELLANEOUS
21.1 Both Parties shall comply with any and all applicable laws, rules and
regulations of all governmental authorities.
21.2 HITACHI shall obtain any and all export licenses and/or government
approvals that may be required with respect to exporting the HITACHI Products
from Japan. NANOGEN shall obtain any and all export licenses and/or
government approvals that may be required with respect to exporting the
NANOGEN Products from the United States. A Party shall not sell the PRODUCT
to, or for the use of, any ultimate purchaser with which the other Party
could not deal under laws or regulations applicable in any country having
jurisdiction, including the export laws and regulations of the United States
and Japan which may prohibit certain products from being diverted,
transshipped, or re-exported to any destination not described in the shipping
documents without prior authorization from the United States or Japanese
Government. Each Party shall comply with all laws and regulations applicable
in all countries having jurisdiction with respect to the HITACHI Products and
NANOGEN Products, their sale and this Agreement. Each Party recognizes that
performance by the other Party is subject to receipt of export license(s)
from government(s) of the country/countries of origin of the HITACHI Products
and NANOGEN Products and/or of the materials they contain and/or of the
technology on which they are based. Each Party shall be free from all
liability in case of non-receipt or late receipt of such export license(s).
21.3 The relationship of the Parties established by this Agreement is that
of independent contractors, and nothing contained in this Agreement shall be
construed to
23
<PAGE>
give either Party the power to direct or control the day-to-day activities of
the other, (ii) constitute the Parties as partners, joint venturers,
co-owners or otherwise as participants in a joint or common undertaking, or
(iii) allow either Party to create or assume any obligation on behalf of the
other Party for any purpose whatsoever.
21.4 A waiver of a breach or default under this Agreement shall not be a
waiver of any other or subsequent breach or default. Failure or delay by
either Party to enforce compliance with any term or condition of this
Agreement shall not constitute a waiver of such term or condition.
21.5 Neither Party may assign or delegate any of its rights or obligations
arising under this Agreement, whether voluntarily or by operation of law,
without the express written consent of the other Party, and any such
purported assignment or delegation shall be void and without effect, provided
that (i) if HITACHI desires to have HII act as a buyer and reseller for sales
of HITACHI Products and NANOGEN Products between HITACHI and NANOGEN, HITACHI
may assign and delegate its rights and obligations hereunder relating to such
sales and purchases to HII, provided that HITACHI shall remain responsible
for the performance of all other obligations under this Agreement, and (ii)
HITACHI may subcontract manufacturing of HITACHI Products to its affiliate,
Naka Instruments Co., Ltd.
21.6 This Agreement contains the entire understanding of the Parties with
respect to the matters contained herein and supersedes all previous
negotiations, agreements and commitments related thereto, including without
limitation the Draft Term Sheet dated November 12, 1999 between the Parties.
There are no promises, covenants or undertakings other than those expressly
set forth herein. No modification or amendment to this Agreement shall be
valid unless made in writing and signed by duly authorized representatives of
both Parties.
21.7 Any and all notices required or authorized hereunder shall be in
writing and shall be delivered by any reasonable means, including by personal
delivery, registered or certified mail, or facsimile to the following address
of the Party to which that notice is to be given:
To HITACHI:
Hitachi, Ltd.
Instrument Group
5-1, Marunouchi 1-chome, Chiyoda-ku
Tokyo, 100 Japan
Attn: General Manager. Environmental Systems Cluster
Fax: 011-81-3-3212-1493
24
<PAGE>
To NANOGEN:
Nanogen, Inc.
10398 Pacific Center Court
San Diego, CA 92121
Attn: Chief Executive Officer
Fax: 858-410-4949
with a copy to General Counsel
If such address changes for any Party, such Party shall immediately inform
the other Party of such change.
21.8 All technical information provided from HITACHI to NANOGEN under this
Agreement shall be in English using metric or English measurement units.
IN WITNESS WHEREOF, the Parties shall have caused this Agreement to be signed
by their respective duly authorized representatives as of the Effective Date.
HITACHI, LTD. NANOGEN, INC.
INSTRUMENT GROUP
By: /s/ Yoshio Maeda By: /s/ Harry J. Leonhardt
---------------------------------- --------------------------------
Yoshio Maeda Harry J. Leonhardt
General Manager Senior Vice President, General
Environmental Systems Cluster Counsel and Secretary
25
<PAGE>
EXHIBIT A
I. INITIAL PROTOTYPE PRODUCTS
Quantity Product Name Estimated Parts and Materials Cost *
- -------- ------------ ------------------------------------
TBD Reader TBD
TBD Loader TBD
(TBD = To Be Determined.)
["*" -Actual pricing shall be determined in accordance with Article 7.1.1.]
II. HITACHI PRODUCTS - COMMERCIAL PRODUCTION
Estimated Base
Item No. Product Name Unit Price **
- -------- ------------ -------------
1 Reader (HITACHI Product) [***]
2 Loader (HITACHI Product) [***]
["**" - Estimate only, based upon a minimum production lot of twenty
five (25) pieces. Actual pricing shall be determined in accordance with
Article 7.1.2]
III. INITIAL BASE EXCHANGE RATE
The initial "Base Rate" shall be [***]
IV. INITIAL MINIMUM FORECAST
NANOGEN's forecast of its minimum purchase of HITACHI Products during the
first year of this Agreement following any Commercial Production
Determination is [***].
V. PRODUCT SPECIFICATIONS
See attached initial Reader, Loader and Cassette specifications. NANOGEN and
HITACHI shall discuss and agree upon the Product Specification and jointly
prepare such specification in writing. NANOGEN has complete responsibility
for the final analytical performance of both the HITACHI Product and the
NANOGEN Product. The parties shall meet and agree on the initial
specifications by [***].
26
[***] CONFIDENTIAL TREATMENT REQUESTED
<PAGE>
PRODUCT REQUIREMENTS DOCUMENT
FOR THE
RESEARCH INSTRUMENT READER
Document [***]
[***]
[***]
Prepared for:
Nanogen
10398 Pacific Center Court
San Diego, California 92121
USA
[***] CONFIDENTIAL TREATMENT REQUESTED
<PAGE>
CONFIDENTIAL
REVISION HISTORY
[***]
- -------------------------------------------------------------------------------
Product Requirement Document for the Research Instrument Reader Page ii
Document [***]
[***] CONFIDENTIAL TREATMENT REQUESTED
<PAGE>
CONFIDENTIAL
TABLE OF CONTENTS
[***]
- -------------------------------------------------------------------------------
Product Requirement Document for the Research Instrument Reader Page iii
Document [***]
[***] CONFIDENTIAL TREATMENT REQUESTED
<PAGE>
CONFIDENTIAL
[***]
- -------------------------------------------------------------------------------
Product Requirement Document for the Research Instrument Reader Page iv
Document [***]
[***] CONFIDENTIAL TREATMENT REQUESTED
<PAGE>
CONFIDENTIAL
[***]
- -------------------------------------------------------------------------------
Product Requirement Document for the Research Instrument Reader Page v
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EXHIBIT B
DRAFT TERM SHEET
NOVEMBER 12, 1999
<TABLE>
<S> <C>
1. SCOPE: Non-exclusive instrument development and
manufacturing, exclusive distribution within defined
territory.
2. TERRITORY: HITACHI...Japan distribution and service of
instruments and consumables.
NANOGEN...Rest of World distribution of instruments
and consumables.
The Parties will discuss and mutually agree
concerning service of instruments in NANOGEN's
territory.
3. FIELD: All fields except government regulated clinical
diagnostics and Point of Care.
4. LIMITATIONS: [***]
5. PRODUCT
CONFIGURATIONS: Covers desktop or larger systems only, which are not
used with Point of Care testing.
6. RESPONSIBILITIES: HITACHI to provide all necessary design and
development costs for hardware and manufacturing of
the instruments. NANOGEN to provide all necessary
design and development costs for cartridges and user
interface, instrument control, applications and data
handling related software and will control
development and manufacturing of the cartridges and
software.
NANOGEN is responsible to integrate instrument
control and applications software.
7. DISTRIBUTION FOR
JAPAN: A) HITACHI will pay a [***] commission to NANOGEN on
all related sales of HITACHI Products. Such
commission rate to be negotiated annually.
B) Blank cartridge transfer price to be mutually
agreed compared to the market price of competitive
products and
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"most favored nation" status of HITACHI.
C) Minimum annual commission to be paid by HITACHI to
NANOGEN to be discussed and mutually agreed.
D) Reagents, chemicals and consumables developed by a
Party will be sold to the other Party at a mutually
agreed transfer price. If HITACHI sells third party
reagents, chemicals and consumables for use with
HITACHI Products or NANOGEN Products, HITACHI shall
pay NANOGEN a commission [***].
8. EQUITY: HITACHI will provide its design and manufacturing
technology and any necessary intellectual property,
that is available from HITACHI, for the development
of mutually agreed products.
9. IMPROVEMENTS: NANOGEN and HITACHI will add the necessary product
improvements to remain competitive in the market
place.
10. PURCHASE
GUARANTEE: HITACHI will sell products to NANOGEN at a mutually
agreed transfer price. Annual minimum purchases to be
mutually agreed. Currency adjustments will be made
once each [***] months using an average exchange rate
from the previous [***] months. Any exchange rate
fluctuation will be shared equally between the
Parties.
11. TERM OF THE
AGREEMENT: [***]. After year [***] automatically renewed in
[***] increments unless a Party provides 120 days
notice of termination to the other Party.
12. RELEASE: If NANOGEN requires a release from this agreement
within the initial [***] term of the agreement,
NANOGEN agrees to pay HITACHI a prorated portion of
HITACHI design costs as follows:
[***]
[***]
[***]
[***]
[***]
</TABLE>
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<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> DEC-31-2000
<PERIOD-START> JAN-01-2000
<PERIOD-END> MAR-31-2000
<CASH> 111,626
<SECURITIES> 0
<RECEIVABLES> 2,178
<ALLOWANCES> 0
<INVENTORY> 0
<CURRENT-ASSETS> 113,804
<PP&E> 10,413
<DEPRECIATION> 4,436
<TOTAL-ASSETS> 121,024
<CURRENT-LIABILITIES> 6,874
<BONDS> 0
0
0
<COMMON> 21
<OTHER-SE> 111,603
<TOTAL-LIABILITY-AND-EQUITY> 121,024
<SALES> 0
<TOTAL-REVENUES> 2,312
<CGS> 0
<TOTAL-COSTS> 0
<OTHER-EXPENSES> 6,524
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> (534)
<INCOME-PRETAX> (3,678)
<INCOME-TAX> 0
<INCOME-CONTINUING> (3,678)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (3,678)
<EPS-BASIC> (.20)
<EPS-DILUTED> (.20)
</TABLE>
