<PAGE>
AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON MARCH 17, 2000
REGISTRATION NO. 333-
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
------------------------------
FORM S-1
REGISTRATION STATEMENT
UNDER
THE SECURITIES ACT OF 1933
------------------------------
ROSETTA INPHARMATICS, INC.
(Exact Name of Registrant as Specified in Its Charter)
<TABLE>
<S> <C> <C>
DELAWARE 8731 91-1770023
(State or Other Jurisdiction of (Primary Standard Industrial (I.R.S. Employer
Incorporation or Organization) Classification Code Number) Identification Number)
</TABLE>
12040 115(TH) AVENUE N.E.
KIRKLAND, WA 98034
(425) 820-8900
(Address, Including Zip Code, and Telephone Number, Including Area Code, of
Registrant's Principal Executive Offices)
------------------------------
STEPHEN H. FRIEND, M.D., PH.D.
PRESIDENT AND CHIEF EXECUTIVE OFFICER
12040 115(TH) AVENUE N.E.
KIRKLAND, WA 98034
(425) 820-8900
(Name, Address Including Zip Code, and Telephone Number Including Area Code, of
Agent for Service)
------------------------------
COPIES TO:
<TABLE>
<S> <C>
MARK J. HANDFELT WILLIAM T. WHELAN
JOHN W. ROBERTSON IVOR R. ELRIFI
MEGAN L. MUIR MINTZ, LEVIN, COHN, FERRIS, GLOVSKY AND
VENTURE LAW GROUP POPEO, P.C.
A PROFESSIONAL CORPORATION ONE FINANCIAL CENTER
4750 CARILLON POINT BOSTON, MA 02111
KIRKLAND, WA 98033 (617) 542-6000
(425) 739-8700
</TABLE>
------------------------------
APPROXIMATE DATE OF COMMENCEMENT OF PROPOSED SALE TO THE PUBLIC:
AS SOON AS PRACTICABLE AFTER THE EFFECTIVE DATE OF THIS REGISTRATION STATEMENT.
------------------------------
If any of the securities being registered on this form are to be offered on
a delayed or continuous basis pursuant to Rule 415 under the Securities Act of
1933, check the following box. / /
If this form is filed to register additional securities for an offering
pursuant to Rule 462(b) under the Securities Act, please check the following box
and list the Securities Act registration statement number of the earlier
effective registration statement for the same offering. / / __________
If this form is a post-effective amendment filed pursuant to Rule 462(c)
under the Securities Act, check the following box and list the Securities Act
registration statement number of the earlier effective registration statement
for the same offering.
/ / __________
If this form is a post-effective amendment filed pursuant to Rule 462(d)
under the Securities Act, check the following box and list the Securities Act
registration statement number of the earlier effective registration statement
for the same offering.
/ / __________
If delivery of the prospectus is expected to be made pursuant to Rule 434,
please check the following box. / /
------------------------------
CALCULATION OF REGISTRATION FEE
<TABLE>
<CAPTION>
PROPOSED MAXIMUM
TITLE OF EACH CLASS OF SECURITIES AGGREGATE AMOUNT OF
TO BE REGISTERED OFFERING PRICE(1) REGISTRATION FEE
<S> <C> <C>
Common Stock, par value $0.001 $115,000,000 $30,360
</TABLE>
(1) Estimated solely for the purpose of computing the amount of the registration
fee pursuant to Rule 457(o) under the Securities Act.
------------------------------
THE REGISTRANT HEREBY AMENDS THIS REGISTRATION STATEMENT ON SUCH DATE OR
DATES AS MAY BE NECESSARY TO DELAY ITS EFFECTIVE DATE UNTIL THE REGISTRANT SHALL
FILE A FURTHER AMENDMENT WHICH SPECIFICALLY STATES THAT THIS REGISTRATION
STATEMENT SHALL THEREAFTER BECOME EFFECTIVE IN ACCORDANCE WITH SECTION 8(a) OF
THE SECURITIES ACT OF 1933 OR UNTIL THIS REGISTRATION STATEMENT SHALL BECOME
EFFECTIVE ON SUCH DATE AS THE COMMISSION, ACTING PURSUANT TO SAID SECTION 8(a),
MAY DETERMINE.
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
<PAGE>
PRELIMINARY PROSPECTUS Subject to completion, dated March 17, 2000
THE INFORMATION IN THIS PRELIMINARY PROSPECTUS IS NOT COMPLETE AND MAY BE
CHANGED. THESE SECURITIES MAY NOT BE SOLD UNTIL THE REGISTRATION STATEMENT FILED
WITH THE SECURITIES AND EXCHANGE COMMISSION BECOMES EFFECTIVE. THIS PRELIMINARY
PROSPECTUS IS NOT AN OFFER TO SELL THESE SECURITIES AND WE ARE NOT SOLICITING AN
OFFER TO BUY THESE SECURITIES IN ANY STATE WHERE THE OFFER OR SALE IS NOT
PERMITTED.
<PAGE>
- --------------------------------------------------------------------------------
Shares
[LOGO]
Common Stock
- ------------------------------------------------------------
This is our initial public offering of shares of common stock. No public market
currently exists for our common stock. We expect the initial public offering
price to be between $ and $ per share.
We have applied to have our common stock listed on the Nasdaq National Market
under the symbol "RSTA."
BEFORE BUYING ANY SHARES YOU SHOULD READ THE DISCUSSION OF MATERIAL RISKS OF
INVESTING IN OUR COMMON STOCK UNDER "RISK FACTORS" BEGINNING ON PAGE 6.
NEITHER THE SECURITIES AND EXCHANGE COMMISSION NOR ANY STATE SECURITIES
COMMISSION HAS APPROVED OR DISAPPROVED OF THESE SECURITIES OR DETERMINED IF THIS
PROSPECTUS IS TRUTHFUL OR COMPLETE. ANY REPRESENTATION TO THE CONTRARY IS A
CRIMINAL OFFENSE.
<TABLE>
<CAPTION>
Per Share Total
<S> <C> <C>
- --------------------------------------------------------------------------------
PUBLIC OFFERING PRICE $ $
- --------------------------------------------------------------------------------
UNDERWRITING DISCOUNTS AND COMMISSIONS $ $
- --------------------------------------------------------------------------------
PROCEEDS, BEFORE EXPENSES, TO ROSETTA $ $
- --------------------------------------------------------------------------------
</TABLE>
The underwriters may also purchase up to shares of common stock from
us at the public offering price, less the underwriting discounts and
commissions, within 30 days from the date of this prospectus. This option may be
exercised to cover over-allotments, if any. If the option is exercised in full,
the total underwriting discounts and commissions will be $ , and the total
proceeds, before expenses, to Rosetta Inpharmatics, Inc. will be $ .
The underwriters are offering the common stock as set forth under
"Underwriting." Delivery of the shares will be made on or about ,
2000.
Warburg Dillon Read LLC
Lehman Brothers
Prudential Vector Healthcare
a unit of Prudential
Securities
<PAGE>
[INSIDE FRONT COVER]
[COLOR ARTWORK-stylized graphic depicting a DNA microarray]
THE FIELD
INFORMATIONAL GENOMICS involves the integration of bioinformatics with
genomics tools to accelerate and improve the drug discovery process.
TECHNOLOGY LEADER
ROSETTA INPHARMATICS is an informational genomics company that provides an
economical, reliable and flexible technology that is designed to enable
pharmaceutical, biotechnology and agricultural companies to solve their most
critical drug discovery challenges.
OUR SOLUTION
AN INTEGRATED PLATFORM CONSISTING OF THREE KEY ELEMENTS:
- The Rosetta Resolver-TM- Expression Data Analysis System -- an enterprise
software and hardware system for analysis and storage of large quantities
of gene expression data.
- FlexJet-TM- DNA Microarrays -- customized gene expression arrays
representing thousands of genes that can be rapidly designed and
developed.
- Coherent Expression Data Sets -- libraries of high quality gene expression
data.
Rosetta, Rosetta Inpharmatics, Resolver and FlexJet are trademarks of
Rosetta Inpharmatics, Inc. All other brand names or trademarks appearing in this
prospectus are the property of their respective holders.
<PAGE>
PROSPECTUS SUMMARY
THIS SUMMARY HIGHLIGHTS INFORMATION CONTAINED ELSEWHERE IN THIS PROSPECTUS.
YOU SHOULD READ THE ENTIRE PROSPECTUS CAREFULLY, ESPECIALLY THE RISKS OF
INVESTING IN OUR COMMON STOCK DISCUSSED UNDER "RISK FACTORS."
OVERVIEW OF OUR BUSINESS
We are a leader in the emerging field of informational genomics.
Informational genomics involves acquiring and analyzing information gathered
from throughout the cell to identify a majority of the medically important drug
targets and gene functions. We combine the power of informatics and genomics to
create a proprietary platform that accelerates and enhances the drug discovery
process for pharmaceutical and biotechnology companies and improves agricultural
products.
Our informational genomics platform can accelerate the transformation of
drug discovery and healthcare research by converting the rapidly growing amount
of gene expression profiling data into organized, statistically driven,
information-based solutions. We provide a proprietary genomic expression
profiling platform, consisting of hardware and software products, that is
designed to provide seamless solutions for efficient, cost-effective and
powerful discovery programs. Our technology builds a critical mass of consistent
gene expression data, collected from DNA microarrays, and provides
comprehensive, simultaneous descriptions of a compound's effect on all relevant
targets within a cell.
Our technology platform consists of:
- our Resolver Expression Data Analysis System;
- our FlexJet DNA microarrays; and
- our coherent expression profile data sets.
We generate revenue by providing our technologies as separate components or
as an integrated informational genomics system. We have entered into a
seven-year strategic collaboration with Agilent Technologies, Inc. to co-market
our Resolver system and for Agilent to manufacture and sell FlexJet DNA
microarrays. Additionally, we offer professional consulting services to
complement and enhance our products.
The growing availability of DNA sequence information and of genome-wide
expression and proteomic measurements has created high expectations for
improvements in drug discovery, healthcare and agriculture. However, these
desired improvements are hampered by the limitations of currently available
measurement technologies, and by a shortage of powerful integrated analysis
tools that are capable of managing both large amounts and disparate types of
data. Limitations of current approaches include:
- DNA sequences and protein levels do not give direct clues to cellular
function;
- current gene expression technologies are expensive and of limited
accuracy; and
- current gene expression analysis tools and approaches do not provide
integrated solutions.
OUR SOLUTION
We provide proprietary technologies that overcome many of the limitations of
other current genomic data and analysis approaches. Our technology platform
enables superior acquisition and analysis of genetic information by providing an
integrated system of informatics tools, DNA expression arrays and expression
profile data sets that quickly and accurately determine protein function
simultaneously across the entire cell. By improving the quality of lead
compounds and providing early indications of the potential side effects of
drugs, we believe our solution is critical to solving
2
<PAGE>
fundamental inefficiencies in the drug discovery process. Our solution includes
the following components:
- integrated, enterprise level software;
- highly sensitive and cost effective genome wide sensors;
- consistent data sets that create more valuable information; and
- integrated platform for drug discovery.
OUR PRODUCTS AND SERVICES
Our products and services enable superior gene expression reporting and
analysis. They can be used as individual components or as an integrated
platform. Our platform of products and services includes:
- RESOLVER EXPRESSION DATA ANALYSIS SYSTEM. Our Resolver system is an
integrated enterprise-wide solution for storing, retrieving and analyzing
large quantities of gene expression data generated from DNA microarrays.
It allows users to securely assemble and store information concerning gene
expression in a single database and rapidly conduct sophisticated matching
of expression profile patterns on very large data sets.
- FLEXJET DNA MICROARRAYS. Our FlexJet DNA microarrays consist of different
DNA sequences built up at tens of thousands of different positions on
glass slides using a modified inkjet printer head. Our inkjet technology
is flexible, reproducible, economical, and can produce new designs
significantly faster than other array technologies. We synthesize
oligonucleotides directly on glass slides by employing solid-phase DNA
synthetic chemistry.
- COHERENT DATA SETS AND REFERENCE LIBRARIES. Through our collaborations, we
build coherent sets of data generated from microarrays that represent the
responses of cells to different genetic and disease states and to drug
treatments. These data sets provide detailed biological references against
which other expression measurements, whether generated by us, by our
collaborators or by our customers, can be compared. We have developed
experiment protocols, process controls and analysis techniques that allow
the cross-comparison of data between experiments.
- INTEGRATED PROFESSIONAL SERVICES. We combine our informational genomics
tools together with our consulting services to provide enhanced value to
selected customers. These services include customization of our Resolver
system, customized FlexJet DNA microarrays and the creation of highly
accurate consistent data sets.
OUR STRATEGY
Our goal is to be the leader in informational genomics by providing the
standard platform for gene expression data analysis. By providing this standard
platform, we hope to increase demand for each of our component technologies. The
specific elements of our strategy are to:
- become the standard informational genomics approach;
- develop multiple product revenue sources;
- establish collaborations to validate the power of our gene expression
tools;
- expand our informational genomics platform; and
- sell high-value information products.
3
<PAGE>
THIS OFFERING
UNLESS OTHERWISE INDICATED, INFORMATION IN THIS PROSPECTUS ASSUMES:
- THE AUTOMATIC CONVERSION OF ALL OUTSTANDING SHARES OF OUR PREFERRED STOCK
INTO 14,597,342 SHARES OF COMMON STOCK UPON THE CLOSING OF THIS OFFERING;
- NO EXERCISE OF THE UNDERWRITERS' OVER-ALLOTMENT OPTION; AND
- THE FILING OF OUR AMENDED AND RESTATED CERTIFICATE OF INCORPORATION
FOLLOWING THE CLOSING OF THIS OFFERING.
<TABLE>
<S> <C>
Common stock offered by us................... shares
Common stock to be outstanding after this
offering................................... shares(1)
Proposed Nasdaq National Market symbol....... RSTA
Use of proceeds.............................. We intend to use the net proceeds of this
offering for continued research and
development, including expanding our
informational genomics platform to include
other data types and analysis tools. We also
intend to increase our marketing and sales
efforts to support our products and services,
including our Resolver system. In addition,
the proceeds will be used for working capital
and other general corporate purposes and
capital expenditures.
</TABLE>
- ------------------------
(1) The number of shares of our common stock to be outstanding after this
offering is based on the number of shares outstanding at December 31, 1999
and includes 4,442,378 shares of our Series E preferred stock issued in
March 2000 and 686,928 shares of our common stock issued to Oxford Gene
Technology IP Limited in March 2000, but excludes the following:
- 2,614,157 shares of common stock issuable upon exercise of outstanding
options as of March 16, 2000 at a weighted average exercise price of $2.52
per share;
- 7,439,949 shares of common stock available for issuance as of March 16,
2000 under our stock option and stock purchase plans; and
- 1,362,712 shares of common stock issuable upon exercise of outstanding
warrants as of March 16, 2000, at a weighted average exercise price of
$2.04.
We were incorporated in Delaware in December 1996 as Rosetta Biosystems,
Inc. In September 1997, we changed our name to Rosetta Inpharmatics, Inc. Our
principal executive offices are located at 12040 115(th) Avenue N.E., Kirkland,
WA 98034. Our telephone number is (425) 820-8900 and our fax number is
(425) 821-5354. Our Web site is located at www.rii.com. We do not intend for
information found on our Web site to be incorporated into or be a part of this
prospectus.
4
<PAGE>
SUMMARY CONSOLIDATED FINANCIAL DATA
We have prepared this information using our audited financial statements for
the period from inception (December 19, 1996) to December 31, 1999 and the years
ended December 31, 1997, 1998 and 1999. The following summary historical data
should be read in conjunction with our consolidated financial statements and the
related notes and "Management's Discussion and Analysis of Financial Condition
and Results of Operations" included elsewhere in this prospectus. See Note 1 of
notes to consolidated financial statements for an explanation of the
determination of the weighted average shares used to compute pro forma net loss
per share amounts.
<TABLE>
<CAPTION>
FOR THE
PERIOD FROM
INCEPTION
YEARS ENDED DECEMBER 31, (DECEMBER 19, 1996)
-------------------------------- TO
1997 1998 1999 DECEMBER 31, 1999
---- ---- ---- -------------------
<S> <C> <C> <C> <C>
CONSOLIDATED STATEMENT OF OPERATIONS DATA: (IN THOUSANDS, EXCEPT PER SHARE DATA)
- -------------------------------------------------
Revenues......................................... $ -- $ -- $ 983 $ 983
Total operating expenses......................... 2,293 7,693 21,066 31,052
Loss from operations............................. (2,293) (7,693) (20,083) (30,069)
Net loss......................................... (1,885) (7,112) (19,820) (28,817)
Basic and diluted net loss per share............. $ (5.29) $ (5.29) $ (4.92) $ (15.09)
Pro forma basic and diluted net loss per share... $ (1.69)
Weighted average shares used in computing pro
forma basic and diluted net loss per share..... 11,740,419
</TABLE>
The unaudited pro forma consolidated balance sheet data reflects:
- the receipt of net proceeds of approximately $41.3 million from the sale
of 4,442,378 shares of our Series E preferred stock in a private placement
completed in March 2000;
- the payment of certain cash consideration and the issuance of
686,928 shares of our common stock to Oxford Gene Technology in payment of
a license fee in March 2000; and
- the automatic conversion of all preferred shares into shares of our common
stock on a one-for-one basis upon the closing of this offering.
The unaudited consolidated pro forma as adjusted balance sheet reflects the
sale of shares of our common stock in this offering at an assumed
price to the public of $
per share, after deducting the underwriting discounts and commissions and
estimated offering expenses, resulting in net proceeds of approximately
$ million.
<TABLE>
<CAPTION>
AS OF DECEMBER 31, 1999
------------------------------------
PRO FORMA
ACTUAL PRO FORMA AS ADJUSTED
------ --------- -----------
<S> <C> <C> <C>
<CAPTION>
CONSOLIDATED BALANCE SHEET DATA: (IN THOUSANDS)
- --------------------------------
Cash, cash equivalents and short-term investments. $ 19,263 $ 59,563 $
<S> <C> <C> <C>
Working capital............................................ 15,451 55,751
Total assets............................................... 34,607 50,089
Long-term obligations, less current portion................ 1,389 1,389
Additional paid-in capital................................. 56,644 107,728
Total stockholders' equity................................. 25,656 75,745
</TABLE>
5
<PAGE>
RISK FACTORS
- --------------------------------------------------------------------------------
YOU SHOULD CAREFULLY CONSIDER THE RISKS DESCRIBED BELOW TOGETHER WITH ALL OF
THE OTHER INFORMATION INCLUDED IN THIS PROSPECTUS BEFORE MAKING AN INVESTMENT
DECISION. IF ANY OF THE FOLLOWING RISKS ACTUALLY OCCURS, OUR BUSINESS, RESULTS
OF OPERATIONS AND FINANCIAL CONDITION COULD SUFFER. IN THAT CASE, THE TRADING
PRICE OF OUR COMMON STOCK COULD DECLINE, AND YOU COULD LOSE ALL OR PART OF YOUR
INVESTMENT.
RISKS RELATED TO OUR BUSINESS AND INDUSTRY
WE ARE AT AN EARLY STAGE OF DEVELOPMENT AND MAY NOT SUCCEED OR BECOME
PROFITABLE.
We commenced operations in December 1996 and are at an early stage of
development. We have a limited operating history on which you can base an
investment decision. We have just begun to incorporate our technologies into
commercialized products, and we cannot assure you that our commercialization of
them will be successful. We have not yet begun commercial sales of our Resolver
system, and Agilent, our strategic partner, has not yet begun commercial
distribution of FlexJet DNA microarrays. Our Resolver system is currently being
used by us internally and by a limited number of customers on an early-access
basis. Whether our Resolver system will be successful in analyzing gene
expression data quickly and efficiently is uncertain. As a result, our business
is subject to all of the risks inherent in the development of a new business
enterprise, such as the need:
- to obtain substantial capital to support the expenses of developing our
technology and commercializing our products and services;
- to develop a market for our products and services;
- to successfully transition from a company with a research focus to a
company capable of supporting commercial activities; and
- to attract and retain qualified management, sales, technical and
scientific staff.
IF WE CONTINUE TO INCUR LOSSES IN THE FUTURE, AS WE CURRENTLY ANTICIPATE, THE
VALUE OF OUR STOCK COULD DECREASE.
Our expenses have significantly exceeded revenue in each of the years since
our inception. It is uncertain when, if ever, we will become profitable. We have
incurred operating losses since our inception and we had no revenue in 1997 and
1998 and only limited revenue in 1999. As of December 31, 1999, we had an
accumulated deficit of $28.8 million. We expect to continue to experience
significant operating losses in the future as we continue our research and
development efforts, further develop our products and services and expand our
marketing and sales force in an effort to commercialize our products. The
expansion of our operations will require substantial expenditures on our part
for at least the next several years to support growth of the organization. In
addition, we anticipate continued spending in research and development to remain
a leader in our industry. Our ability to achieve profitability will depend, in
part, on successfully commercializing our Resolver system. To date, we have not
yet generated significant revenue from our expression profile systems or
technologies, and it is uncertain when, if ever, we will be generating
significant revenues from such systems or technologies. If we are unable to
generate significant revenue from our products and services, our business and
financial condition would be materially and adversely affected. Our operations
also may be affected by problems frequently encountered with the use of new
technologies and by the competitive environment in which we operate.
6
<PAGE>
OUR SUCCESS IS DEPENDENT ON OUR EXISTING COLLABORATION WITH AGILENT FOR THE
MANUFACTURING, MARKETING AND DISTRIBUTION OF OUR RESOLVER SYSTEM AND FLEXJET DNA
MICROARRAYS. IF AGILENT FAILS TO PERFORM UNDER OUR AGREEMENT, DOES NOT
SUCCESSFULLY COMMERCIALIZE OUR COLLABORATIVE PRODUCTS OR TERMINATES OUR
AGREEMENT, WE MAY LOSE THE DEVELOPMENT FUNDING WE CURRENTLY RECEIVE FROM
AGILENT, AND OUR REVENUE WOULD BE SIGNIFICANTLY REDUCED.
In our agreement with Agilent, we agreed to partner with Agilent to make and
sell certain products in the gene expression field including our Resolver
system, microarrays, array design services and other products. As part of our
agreement, Agilent has the co-exclusive right to sell our Resolver system and to
use our inkjet synthesizer and related chip design technology in exchange for
royalty payments. Any failure by Agilent to perform its obligations under this
agreement or to achieve significant revenues from collaboration products and
services would have a material adverse affect on our revenues.
We also rely on Agilent for significant financial and technical
contributions in connection with the development of products covered by the
agreement. Our ability to develop, manufacture and market these products
successfully depends significantly on Agilent's performance under this
agreement. If Agilent experiences manufacturing or distribution difficulties,
does not actively market the Resolver system or does not otherwise perform under
this agreement, our revenue derived from FlexJet DNA microarrays or our Resolver
system would be reduced. From time to time, patents may issue covering DNA
sequences that are used on DNA microarrays manufactured by Agilent. If this
occurs, we expect that Agilent would seek to obtain the rights to use these
sequences or would seek to use an alternative sequence. If it is unable to
obtain rights or acquire alternative sequences, Agilent's array sales may
suffer, and this would negatively affect our revenue from royalties related to
array sales by Agilent and our business would be harmed.
Our collaboration agreement with Agilent may be terminated early by Agilent
under certain circumstances, including in the event of a breach of material term
by us. If Agilent were to terminate its agreement with us or otherwise fail to
conduct its obligations under our collaboration or to complete them in a timely
manner, we could lose significant revenue and have limited means to
commercialize our products. If Agilent terminates this agreement, we may need to
obtain development funding from other sources, and we may be required to find
one or more other collaborators for the development and commercialization of our
products. The early termination of our collaboration with Agilent could harm our
business and financial condition.
IF WE DO NOT RETAIN OUR CUSTOMERS OR OBTAIN NEW CUSTOMERS, OUR BUSINESS AND
FINANCIAL CONDITION WILL BE MATERIALLY AND ADVERSELY AFFECTED.
Our strategy depends on selling our informational genomics products and
services to pharmaceutical, biotechnology and agriculture companies. To date, we
only have a limited number of customers who are using our products on an
early-access or evaluative basis. We cannot assure you that these evaluative
programs will be successful or that customers using our products and services
will purchase our products and services on a broader scale, commercial basis. If
we are unsuccessful in selling our products and services, our business and
results of operations would be materially harmed.
A SMALL NUMBER OF CUSTOMERS AND AGILENT HAVE ACCOUNTED FOR, AND ARE LIKELY TO
CONTINUE TO ACCOUNT FOR, A SUBSTANTIAL PORTION OF OUR REVENUES. OUR REVENUES
WOULD DECLINE IF WE LOST ANY ONE OF THESE CUSTOMERS OR AGILENT.
Historically we have had very few customers and one commercial partner,
Agilent, from which we have derived the majority of our revenue. If we were to
lose any one of these, our revenue would decrease substantially. Agilent and a
customer accounted for 70% of total revenues in fiscal year 1999. We had no
customers and no revenue in fiscal year 1998 and 1997. Through our agreement
with
7
<PAGE>
Agilent, we jointly introduced our Resolver system in February 2000 and have not
yet derived significant revenue from the sale of this product on a commercial
basis. We expect that we will continue to rely on a narrow base of customers and
Agilent for the majority of our revenue for the foreseeable future. Our
potential sources of revenue for the next several years are likely to be from
the sale of products and services sold by Agilent and research payments under
existing and possible future collaborative arrangements. Although we are seeking
to expand our customer base, we cannot assure you that these efforts will be
successful. Our operating results would be adversely affected if Agilent or a
significant customer were to discontinue or significantly reduce the use of
products or services.
IF OUR TECHNOLOGIES AND INITIAL COMMERCIAL PRODUCTS DO NOT ACHIEVE MARKET
ACCEPTANCE OR BECOME COMMERCIALLY VIABLE OR SUCCESSFUL, OUR BUSINESS WOULD BE
ADVERSELY AFFECTED.
Our application of innovative array and informational genomics platforms to
drug discovery is a new and unproven approach. Market acceptance of our products
and services will depend upon many factors, many of which are not within our
control, such as:
- continued growth in the bioinformatics industry;
- the availability and price of competing products, services and
technologies; and
- the success of our marketing and sales efforts.
In addition, our array and informatics technologies and gene expression
analysis approaches will require significant additional funding prior to
commencement of full-scale commercial operations. If we are unable to obtain
additional funding, commercialization of our products may be delayed, which
would adversely affect our business and financial condition.
IF WE ARE UNABLE TO COMPETE SUCCESSFULLY AGAINST EXISTING TECHNOLOGIES, OUR
BUSINESS AND RESULTS OF OPERATIONS WOULD BE MATERIALLY AND ADVERSELY AFFECTED.
Our business depends upon successfully competing in the development and
commercialization of products and services that improve the efficiency of the
drug discovery process. Development of new and efficient pharmaceutical methods
is highly uncertain and our drug discovery technology may not result in any
commercially successful product or results. We may fail to compete successfully
if:
- our products or services are found to be ineffective or unreliable;
- our products are difficult to manufacture or uneconomical to market;
- unforeseen complications in the development or delivery of our products
and services increase the costs of development of our products and
services;
- the proprietary rights of third parties preclude us or our collaborative
partners from marketing our products; or
- potential customers fail to use our technology and instead rely on
existing internal processes or technologies.
Our failure to develop or successfully commercialize our products and compete
against existing technologies would adversely affect our business, financial
condition and results of operations.
8
<PAGE>
WE INTEND TO RELY ON EXISTING AND POTENTIAL RESEARCH COLLABORATIONS AND
LICENSING AGREEMENTS TO IMPLEMENT OUR BUSINESS STRATEGY AND FURTHER
COMMERCIALIZE OUR PRODUCTS. OUR BUSINESS COULD BE SERIOUSLY HARMED IF WE ARE
UNABLE TO MAINTAIN OR TO ENTER INTO NEW COLLABORATIONS OR LICENSING
ARRANGEMENTS.
We intend to enter into collaborative arrangements with pharmaceutical,
biotechnology and agricultural companies to apply our technology, to fund
development and to commercialize our potential future products. We may not be
able to negotiate collaborative agreements on acceptable terms, if at all, and
such collaborative agreements may not be successful and may not provide us with
expected benefits. Our collaborators may pursue or develop alternative
technologies either on their own or in collaboration with others, including our
competitors, as a means for improving the efficiency of drug discovery. To the
extent we choose not to or are unable to enter into such collaborative
agreements, we will require substantially greater capital to undertake the
research, development, marketing, sales and distribution of systems and
technologies at our own expense, which would have a material adverse effect on
our results of operations and financial condition.
Additionally, our present or future collaborative partners may not perform
their obligations under our agreements with them or may not devote sufficient
resources to the development, clinical testing or marketing of our potential
products developed under collaborations. If one of our collaboration partners
were to develop technologies or components competitive with our system in
parallel with us, or if we are precluded from entering into competitive
arrangements under the terms of our collaboration agreements, our potential
products could be rendered non-competitive or obsolete, which would adversely
affect our business. In addition, any premature termination of a collaboration
agreement could have a material adverse effect on our financial condition and
results of operations.
Generally, the terms of our collaboration agreements provide for a division
of responsibility between us and our collaborators. To the extent that disputes
arise concerning our respective obligations and rights, including ownership of
intellectual property, our collaborative research, development or
commercialization of certain products or technologies could be delayed. Such
disputes could require or result in litigation or arbitration, which would be
time-consuming and expensive, and could have a material adverse effect on our
business and results of operations.
WE EXPECT THAT OUR QUARTERLY RESULTS OF OPERATIONS WILL FLUCTUATE, AND THIS
FLUCTUATION COULD CAUSE OUR STOCK PRICE TO DECLINE, CAUSING INVESTOR LOSSES.
Our quarterly operating results have fluctuated in the past and are likely
to do so in the future. These fluctuations could cause our stock price to
fluctuate significantly or decline. Some of the factors that could cause our
operating results to fluctuate include:
- the timing and amount of revenue resulting from collaborations, product
sales and royalties is not wholly predictable nor consistent from quarter
to quarter;
- changes in our percentage share of revenue generated from our
collaboration with Agilent;
- the success rate of our discovery efforts leading to milestone payments or
royalties;
- the timing and willingness of collaborators to commercialize products
discovered through the use of our products or services which would result
in milestone payments or royalties;
- the expiration of research contracts with collaborators, which may not be
renewed or replaced; and
- general and industry-specific economic conditions, which may affect our
collaborators' research and development expenditures.
9
<PAGE>
Large portions of our expenses are relatively fixed, including expenses for
facilities, equipment and personnel. Accordingly, if revenues decline or do not
grow as anticipated due to expiration of research contracts, failure to obtain
new contracts or other factors, we may not be able to correspondingly reduce our
operating expenses. In addition, we plan to significantly increase operating
expenses in 2000 in order to accelerate our sales and marketing and product
development efforts. Failure to achieve anticipated levels of revenues could
therefore significantly harm our operating results for a particular fiscal
period.
Due to the possibility of fluctuations in our revenues and expenses, we
believe that quarter-to-quarter comparisons of our operating results are not a
good indication of our future performance. Our operating results in some
quarters may not meet the expectations of stock market analysts and investors.
In that case, our stock price could decline and you could lose a significant
portion or all of your investment.
WE ARE DEPENDENT ON THE TECHNOLOGY OF THIRD PARTIES, AND THE FAILURE TO MAINTAIN
OR OBTAIN RIGHTS TO THIRD PARTY TECHNOLOGY COULD HARM OUR DEVELOPMENTAL AND
COMMERCIAL EFFORTS.
Our success is dependent on our ability to enter into licensing arrangements
with commercial or academic entities for technology that is advantageous or
necessary to the development and commercialization of our technologies. We may
not be able to negotiate additional license agreements in the future on
acceptable terms, if at all.
In our existing and potential future collaborations, disputes may arise as
to the inventorship and corresponding rights in inventions and know-how
resulting from research by us and our licensors or scientific collaborators.
Additionally, our present and future in-licensing agreements may contain
provisions requiring us to meet certain performance obligations, or milestones,
within specified time periods. If we fail to meet any significant milestones,
our licensors may be permitted to terminate such agreements.
Any of our current license agreements may be terminated under certain
circumstances by the other party, and we may not be able to maintain the
exclusivity of our exclusive licenses. In the event we are unable to obtain or
maintain licenses to technology necessary and advantageous to our business, we
may be required to expend significant time and resources to develop or
in-license alternative technology. We may not be successful in this regard. If
we cannot acquire or develop necessary technology, we may be prevented from
commercializing certain of our products or may need to limit our operations. Any
such event would have a material adverse effect on us.
In November 1998, we entered into a non-exclusive license agreement with
Affymetrix, Inc. Under this agreement, Affymetrix licensed to us rights under
its patents to mechanically fabricate arrays and to internally use those arrays
for analyzing expressed messenger RNA in cells for commercial research use. If
this agreement is terminated and we were to lose the right to make arrays for
our own use, or if we find that the arrays we make are insufficient for our
purposes, we would seek to acquire arrays from Affymetrix or another source.
Affymetrix may assert that other sources of DNA microarrays violate its patent
rights which could reduce or eliminate the willingness of any other supplier to
provide these arrays and which might subject us to potential liability for
patent infringement if we were to acquire arrays from an infringing supplier.
We, therefore, may not be able to acquire DNA microarrays on reasonable terms,
or at all. This would have a material adverse affect upon our commercialization
efforts and upon our business condition and results of operations.
In March 2000, we entered into a non-exclusive license agreement with Oxford
Gene Technology IP Limited. Under this agreement, Oxford Gene Technology has
licensed to us certain rights, under its patents, pertaining to making and using
DNA microarrays for internal purposes. If this agreement is terminated and we
were to lose the right to make arrays for our own use, or if we find that the
arrays we make are insufficient for our purposes, we would need to acquire
arrays from third parties. Oxford
10
<PAGE>
Gene Technology may assert that other third-party providers of DNA microarrays
violate its patent rights, which might reduce or eliminate the willingness of
any other supplier to provide these arrays and which could subject us to
potential liability for patent infringement if we were to acquire arrays from an
infringing supplier. If we are unable to acquire DNA microarrays or unable to
acquire them on reasonable terms, and we may be unable to operate a material
part of our business. This would have a material adverse affect upon our
commercialization efforts and upon our financial condition and results of
operations.
IF WE ARE UNABLE TO PROTECT OUR PROPRIETARY RIGHTS ADEQUATELY, OR OPERATE
WITHOUT INFRINGING OR MISAPPROPRIATING THE INTELLECTUAL RIGHTS OF OTHERS, OUR
COMPETITIVE POSITION WILL SUFFER. IN ADDITION, LITIGATION OVER SUCH MATTERS IS
OFTEN TIME-CONSUMING AND EXPENSIVE AND WOULD DIVERT MANAGEMENT AND CAPITAL
RESOURCES, WHICH WOULD ADVERSELY AFFECT OUR BUSINESS AND FINANCIAL CONDITION.
Our success will depend, in large part, on our ability to obtain patent
protection for our products and technologies, both in the United States and in
other countries, to preserve our trade secrets and to operate without infringing
the proprietary rights of third parties. Because of the substantial length of
time and expense associated with developing new proprietary products and
technologies, we place considerable importance on patent and trade secret
protection. However, the patent position of biotechnology and bioinformatics
firms generally is highly uncertain and involves complex legal and factual
questions. Our patent applications may not protect our technologies or products
for any one or more of the following reasons:
- some or all of our pending patent applications may not result in issued
patents;
- we may develop additional proprietary technologies that are not
patentable;
- any patents issued to us may not cover commercially viable products;
- any patents issued to us may not provide us with reasonable scope so as to
block others from using our or similar technology; and
- any patents issued to us may be challenged, circumvented or invalidated by
third parties.
We intend to file applications for patents as appropriate for methods and
products relating to gene expression analysis technologies and relating to
individual disease genes and targets we discover. As of March 1, 2000, we own
one issued U.S. patent and 35 pending U.S. patent applications and corresponding
international and foreign patent applications. In addition, we had exclusive
rights to two issued U.S. patents and eight U.S. patent applications and
corresponding international and foreign patent applications. Our pending patent
applications may not ever issue as patents, and thus we may be unable to keep
our competitors from commercializing our discoveries.
Should third parties file patent applications, or be issued patents,
claiming technology also claimed by us in pending applications, we may be
required to participate in interference proceedings in the United States Patent
and Trademark Office to determine priority of invention. We, or our licensors,
may also need to participate in interference proceedings involving our issued
patents and pending applications of another entity. An unfavorable outcome in an
interference proceeding could require us to cease using the technology or
license rights from prevailing third parties. There is no guarantee that any
prevailing party would offer us a license or that we could acquire any license
made available to us on commercially acceptable terms.
We may not be able to obtain new patents for our products or methods. Even
if we are able to obtain new patents, these patents may not provide us with
substantial or meaningful protection or be commercially beneficial to us. The
issuance of a patent is not conclusive as to its validity or its enforceability.
Further, a patent does not provide the patent holder with an absolute right to
practice such patented technology. Any patents issued to us or to our licensors
may be challenged and
11
<PAGE>
subsequently invalidated or circumvented. It is quite possible that third
parties may have patents of their own which could, if asserted, prevent us from
practicing our patented technologies. This inability to practice our own
patented technologies could adversely affect our business and revenue.
In order to protect or enforce our patent rights, we may initiate patent
litigation against third parties. These lawsuits could be expensive, take
significant time, and could divert management's attention from other business
concerns. These lawsuits would put our patents at risk of being invalidated or
interpreted narrowly. We may also provoke these third parties to assert claims
against us. We may also participate in patent litigation to invalidate the
patents of another or defend ourself against claims of infringement. Patent law
relating to the scope of claims in the biotechnology and bioinformatics fields
in which we operate is still evolving and, consequently, patent positions in our
industry are generally uncertain. We cannot assure you that we will prevail in
any of these suits or that the damages or other remedies awarded, if any, will
be commercially valuable. During the course of these suits, there may be public
announcements of the results of hearings, motions and other interim proceedings
or developments in the litigation. If securities analysts or investors perceive
any of these announcements to be negative, it could cause the market price of
our stock to decline.
We may be sued for infringing the intellectual property rights of others.
Intellectual property litigation is costly and, even if we prevail, the costs of
such litigation could adversely affect our business and results of operations.
In addition, litigation is time consuming and could divert management attention
and resources away from our business. We may enter into a license to the
intellectual property in question in order to settle such litigation. If we do
not prevail in any proceeding or litigation, in addition to any damages we might
have to pay, we could be required to stop the infringing activity, if we are
unable to obtain a license to the intellectual property, or negotiate such a
license on reasonable terms. Even if we were able to obtain a license to such
technology, some licenses may be non-exclusive, thereby giving our competitors
access to the same technologies licensed to us. If we fail to obtain a required
license, exceed the scope of one of our licenses, or are unable to design around
any third party patent, we may be subject to litigation due to alleged
infringement. Ultimately we may be unable to sell some of our products or may
have to cease certain business operations, which, as a result, could have a
material adverse effect on our business and results of operations.
IF WE ARE UNABLE TO RELY UPON TRADE SECRET PROTECTION FOR OUR CONFIDENTIAL AND
PROPRIETARY INFORMATION, OUR COMPETITIVE POSITION WILL SUFFER.
We have taken security measures to protect our proprietary technologies,
processes, information systems and data, and continue to explore ways to enhance
such security. Such measures may not provide adequate protection for our trade
secrets or other proprietary information. While we require employees, academic
collaborators and consultants to enter into confidentiality agreements where
appropriate, any of the following could still occur, which could adversely
affect our business:
- our proprietary information could be disclosed;
- our trade secrets could be disclosed; or
- others may independently develop substantially equivalent proprietary
information and techniques, otherwise gain access to our trade secrets or
disclose such technology.
In addition, while we require our employees to disclose their prior inventions
to us, we cannot be certain that all such inventions have been disclosed or that
employees will avoid disputes concerning prior inventions. On January 6, 2000 we
received, through our legal counsel, a request for information from the FBI. The
information requested pertains to one of our recently hired employees and is
related to his involvement in certain software development activities prior to
his employment with us. We are cooperating fully with the FBI. While we do not
believe that we, as a company, or any actions by us are the subject of the
investigation, we are unable at this time to predict the outcome of this
12
<PAGE>
investigation. The FBI investigation may result in adverse publicity that could
adversely affect our business and revenues.
INTENSE COMPETITION IN THE MARKET COULD PREVENT US FROM INCREASING REVENUE AND
ACHIEVING PROFITABILITY OR RESULT IN THE OBSOLESCENCE OF OUR TECHNOLOGY.
The genomics industry is highly competitive. We compete with companies in
the United States and abroad that are engaged in the development and production
of products that analyze genetic information. Our competitors in the United
States and abroad are numerous and include, among others:
- major pharmaceutical and diagnostic companies;
- specialized biotechnology firms;
- internal genomic and gene expression efforts at our target customers;
- universities and other research institutions and government agencies;
- software developers; and
- other genomics companies.
Many of these organizations that compete with us have greater capital
resources, more experienced research, development, sales, marketing,
distribution and service staffs and superior facilities and manufacturing
capabilities. We are aware that there are a number of companies pursuing
alternative methods for using software and computers to assist in making the
drug discovery process more efficient and less expensive which would compete
with our products or render our products obsolete. A number of companies have
announced their intention to develop and market software to assist life science
research companies and academic researchers in the collection, management and
analysis of their own genomic data, as well as the analysis of genomic data that
is publicly available.
In addition, many of our competitors have a more established customer base
and have built up previous relationships with our target audience. We are also
likely to encounter increased competition as we enter new markets. In addition,
many of our competitors have a more established customer base and have thus
previous relationships with our target audience.
The relative speed with which we can develop products or technologies is
expected to have an impact on our competitive position. Many companies have
already commenced the commercialization of novel, genomic-based products and
services for use in drug discovery and development. Competitors offer a broad
range of arrays and other gene expression products, bioinformatics software and
analysis tools and functional genomics services and data sets that compete with
ours. We believe that customers in our markets display significant loyalty to
specific technologies or products that they have used successfully in their
research and development. Therefore, we may experience difficulties in
generating sales from customers that initially purchased products or services
from competitors. We expect competition to intensify in the fields in which we
are involved as technical advances in such fields are made and become more
widely known. To the extent that other companies succeed in developing similar
products that are introduced earlier, are more effective or are produced and
marketed more effectively, the commercial success of our products or
technologies to be developed may be materially and adversely affected.
13
<PAGE>
OUR DEPENDENCE ON THIRD-PARTY PRODUCTS AND SERVICES AND SOLE OR LIMITED SOURCES
OF SUPPLY TO DEVELOP AND MANUFACTURE SOME COMPONENTS OF OUR PRODUCTS COULD
IMPAIR OUR ABILITY TO DEVELOP, MANUFACTURE AND DELIVER OUR PRODUCTS ON A TIMELY
BASIS.
We rely to a substantial extent on outside vendors to supply many of the
hardware components of our Resolver system. We also rely on outside vendors to
supply us with chemical reagents and other items necessary to manufacture
microarrays and conduct expression profiling experiments. Some of these items
and components are obtained from a single supplier or a limited group of
suppliers. Our reliance on outside vendors generally, and a sole or a limited
group of suppliers in particular, involves several risks, including:
- the inability to obtain an adequate supply of required materials due to
manufacturing capacity constraints, a discontinuance of a product by a
third-party manufacturer or other supply constraints;
- reduced control over quality and pricing of components; and
- delays and long lead times in receiving materials from vendors.
For example, we obtain computer hardware used in our Resolver system from
Sun Microsystems. If this hardware became unavailable we would need to find an
alternate supplier of such computer hardware and rewrite substantial portions of
our Resolver system software. This could adversely affect our ability to provide
our Resolver system to potential customers, which would materially and adversely
affect our revenues.
OUR RESOLVER SYSTEM INCORPORATES THIRD PARTY SOFTWARE, THE LOSS OF WHICH WOULD
HARM OUR BUSINESS.
Our Resolver system incorporates software programs developed by third
parties. If these third parties cease to provide or support their software
programs, we would need to acquire or develop replacement software. If we are
unable to acquire or develop replacement software, either alone or with others,
the quality of our products could deteriorate and our financial condition and
results of operations could be materially and adversely affected.
THE SALES CYCLES FOR OUR PRODUCTS ARE LENGTHY AND WE MAY SPEND CONSIDERABLE
RESOURCES ON UNSUCCESSFUL SALES EFFORTS OR MAY NOT BE ABLE TO COMPLETE DEALS.
Our ability to obtain new customers for our technologies depends in
significant part upon the perception that our products and services can help
accelerate their drug discovery efforts. Our sales cycle and Agilent's sales
cycle are likely to be lengthy because of the need to educate our potential
customers and sell the benefits of our technologies to a variety of
constituencies within such companies. In addition, each agreement involves the
negotiation of unique terms. We and Agilent may be required to expend
substantial funds and management effort with no assurance that an agreement will
result.
WE MAY NOT BE ABLE TO SUCCESSFULLY MANAGE OUR GROWTH, WHICH WOULD ADVERSELY
AFFECT OUR BUSINESS.
We have grown rapidly in recent years and expect to continue to grow
rapidly, which could materially and adversely affect our business and results of
operations. Our strategy for developing and commercializing our products and
services includes the formation of multiple customer partnerships and licensing
arrangements. We expect to experience significant growth in the number of our
employees and customers and the scope of our operations. This growth may
continue to place a significant strain on our management and operations. Our
ability to manage this growth will depend upon our ability to broaden our
management team and our ability to attract, hire and retain skilled employees.
Our success will also depend on the ability of our officers and key employees to
continue to implement and improve our operational and other systems, to manage
multiple, concurrent customer
14
<PAGE>
relationships and to hire, train and manage our employees. Our future success is
heavily dependent upon growth and acceptance of our products. If we cannot scale
our business appropriately or otherwise adapt to anticipated growth in this
area, a key part of our strategy may not be successful which could materially
and adversely affect our business and results of operations.
WE ARE HIGHLY DEPENDENT ON PRINCIPAL MEMBERS OF OUR MANAGEMENT AND SCIENTIFIC
STAFF, THE LOSS OF WHOM WOULD IMPAIR OUR ABILITY TO COMPETE.
We are highly dependent on the principal members of our management and
scientific staff. The loss of the services of any of these persons could delay
or reduce our product development and commercialization efforts. In addition, we
will require additional personnel in the areas of scientific research,
diagnostic testing, manufacturing and marketing.
OUR EXECUTIVE OFFICERS HAVE LIMITED EXPERIENCE AS EXECUTIVE OFFICERS OF PUBLICLY
TRADED COMPANIES.
Most of our executive officers have no prior experience as executive
officers of publicly traded companies. Our new employees include a number of key
managerial, technical and operations personnel who have not yet been fully
integrated into our operations, and we expect to add additional key personnel in
the near future. If we are unable to manage growth effectively and the addition
of these new employees, our business will be harmed.
WE MAY NOT BE ABLE TO RETAIN AND HIRE THE KEY SCIENTIFIC AND TECHNICAL STAFF AND
QUALIFIED MANAGEMENT NECESSARY TO OPERATE OUR BUSINESS, WHICH COULD THREATEN OUR
FUTURE GROWTH.
Because of the specialized scientific nature of our business, we are also
highly dependent upon our ability to attract and retain additional qualified
scientific and technical personnel. We continue to recruit qualified scientific
and technical personnel, including individuals holding doctoral degrees in the
basic sciences. Our business is located in the Seattle, Washington, metropolitan
area, where demand for personnel with these skills is extremely high and is
likely to remain high. As a result, competition for and retention of personnel,
particularly for employees with technical expertise, is intense, and the
turnover rate for these people is high. If we are not able to attract, hire,
train and retain a sufficient number of qualified personnel, our business,
financial condition and results of operations could be serious harmed. If we
expand in areas and activities requiring additional expertise, such as clinical
trials, regulatory approvals and manufacturing and marketing, we will require
additional management and scientific personnel. If we fail to attract and retain
such personnel, it could materially adversely affect prospects for our success.
WE FACE TECHNOLOGICAL CHALLENGES AND UNCERTAINTY IN A RAPIDLY CHANGING INDUSTRY
AND WE MAY NOT BE ABLE TO COMPETE SUCCESSFULLY WITH NEWLY EMERGING TECHNOLOGIES.
We are engaged in the genomic science and biotechnology fields, which are
characterized by extensive research efforts and rapid technological change. New
developments in improving the efficiency of drug discovery, utilizing genomic
approaches and other biotechnology processes are expected to continue at a rapid
pace in industry, government and academia. Our future success will depend in
large part on our ability to maintain a competitive position with respect to
these technologies. Research and discoveries by others may be more effective
than our research and discoveries and may render some or all of our programs,
products or technologies noncompetitive or obsolete. Unforeseen problems may
develop with the technologies or applications used by us, and commercially
feasible products or technologies may not ultimately be developed by us. We may
not be able to make the enhancements to our technology necessary to compete
successfully with newly emerging technologies, which would materially adversely
affect our results of operations and financial condition.
15
<PAGE>
WE HAVE LIMITED SALES AND MARKETING EXPERIENCE AND MANUFACTURING CAPACITY. IN
ADDITION, WE HAVE LIMITED EXPERIENCE IN MANUFACTURING PRODUCTS FOR COMMERCIAL
SALE. OUR LIMITED EXPERIENCE IN THESE AREAS MAY DELAY OUR COMMERCIALIZATION
EFFORTS, WHICH WOULD ADVERSELY AFFECT OUR BUSINESS AND FINANCIAL CONDITION.
We have only a small internal sales force to market and sell our products
and have only limited experience in sales and marketing. We intend to market our
products and services to pharmaceutical, biotechnology and agricultural
companies. In order to successfully market our products and services to these
parties, we are dependent on Agilent to commercialize our products. We may not
be able to establish a direct sales force or to establish collaborative or
distribution arrangements to market our products and technologies. If Agilent
fails to market our products successfully or if we fail to establish a
significant sales force of our own, our business and results of operations would
be materially and adversely affected.
We have not yet internally produced our Resolver system or FlexJet DNA
microarrays in commercial quantities. We have limited experience in
manufacturing our Resolver system for commercial sale. We may not be able to
maintain acceptable quality standards while producing commercial quantities. Our
customers also require that we comply with current good manufacturing practices
that we may not be able to meet. To achieve the production levels necessary for
successful commercialization of our products, we will need to scale-up our
manufacturing facilities, establish more automated manufacturing capabilities
and maintain adequate levels of inventory. We may not be able to manufacture
sufficient quantities to meet market demand. If we cannot achieve the required
level and quality of production, we may need to outsource production or rely on
licensing and other arrangements with third parties who possess sufficient
manufacturing facilities and capabilities. This could reduce our gross margins
and expose us to the risks inherent in relying on others. We may not be able to
successfully outsource our production or enter into licensing or other
arrangements with these third parties, which could adversely affect our
business.
WE MAY NOT BE ABLE TO SUCCESSFULLY ADAPT OUR PRODUCTS FOR COMMERCIAL
APPLICATIONS, WHICH WOULD REDUCE OUR REVENUE.
We have completed the initial development of our Resolver system technology
and FlexJet DNA microarray technology for applications in gene expression
profile analysis. We may not be able to successfully adapt our products to the
commercial requirements of drug discovery or healthcare research. A number of
potential applications of our technology in these fields will require
significant enhancements in our core technology, including adaptation of our
software. If we are unable, for technological or other reasons, to complete the
development, introduction or scale-up of the manufacturing of any product, or if
any product does not achieve a significant level of market acceptance, our
business, financial condition and results of operations could be seriously
harmed. Market acceptance will depend on many factors, including demonstrating
to customers that our technology is superior to other technologies and products
which are available now or which may become available in the future. We believe
that our revenue growth and profitability will substantially depend on our
ability to overcome significant technological challenges and successfully
introduce our products into the marketplace.
IF WE ARE SLOW TO DEVELOP AND MARKET LOWER COST VERSIONS OF OUR INFORMATICS
SOFTWARE TECHNOLOGY, WE MAY BE UNABLE TO BROADEN OUR CUSTOMER BASE IN THE
PRESENCE OF LOWER PRICED PRODUCTS OF COMPETITORS AND OUR COMPETITIVE POSITION
WILL SUFFER.
The marketplace for informatics software, specifically the gene expression
analysis market served by our Resolver system, is evolving rapidly and is highly
competitive. There are no established pricing models, and competing products and
services are being offered at a variety of price points. Our
16
<PAGE>
Resolver system is a high-end product and may not serve the needs of all
customers in this marketplace. This marketplace may evolve into one that demands
a product that is priced lower than our Resolver system. If this occurs, and we
do not have a product available to compete at this lower price point in a timely
manner, we could suffer a material adverse effect on our business, financial
condition and results of operations.
WE ARE EXPOSED TO PRODUCT LIABILITY AND RELATED RISKS WHICH COULD ADVERSELY
AFFECT OUR BUSINESS.
We may be exposed to claims of liability from the use of products that
either we or our customers provide. For example, we may be subject to product
liability if our products contain inaccurate information or if any of our
customers develops or commercializes a product discovered through the use of our
technology which results in injury or death to clinical trial participants or
patients. Although we currently maintain errors and omissions insurance for our
Resolver system, our insurance coverage may not be adequate to protect us
against future claims. Furthermore, our customers may not indemnify us against
these types of claims or they may not be adequately insured or, in the case of
smaller companies, have a net worth sufficient to satisfy any product liability
claims. A product liability claim, product recall or a medical malpractice claim
could cause our business, financial condition and results of operations to
suffer. In addition, we may be liable to customers if we are unable to maintain
the security and integrity of data generated and analyzed on their behalf.
IMPROPER HANDLING, STORAGE OR DISPOSAL OF HAZARDOUS CHEMICALS AND BIOLOGICAL
MATERIALS COULD BE TIME CONSUMING AND COSTLY.
We use controlled hazardous and biological materials in our business. The
risk of accidental contamination or injury from these materials cannot be
completely eliminated. If an accident with these substances occurs, we could be
liable for any damages that result, which could seriously harm our business.
Additionally, an accident could damage our research and manufacturing facilities
and operations, resulting in delays and increased costs.
WE FACE RISKS ASSOCIATED WITH ACQUISITIONS.
As part of our business strategy, we may from time to time acquire assets
and businesses principally relating to, or complementary to, our operations.
These acquisitions may include acquisitions for the purpose of acquiring
specific technology. If we acquire additional businesses, we may experience more
difficulty integrating and managing the acquired businesses' operations. These
and any other acquisitions by us involve risks commonly encountered in
acquisitions of companies. These risks include, among other things, the
following:
- we may be exposed to unknown liabilities of acquired companies;
- we may incur acquisition costs and expenses higher than we anticipate;
- we may experience difficulty and expense of assimilating the operations
and personnel of the acquired businesses; and
- we may experience difficulties in establishing and maintaining uniform
standards, controls, procedures and policies.
We may not overcome these risks or any other problems encountered in connection
with acquisitions. If we are unsuccessful in doing so, our business, financial
condition and results of operations could be materially and adversely affected.
17
<PAGE>
DELAWARE AND WASHINGTON LAW AND OUR CHARTER DOCUMENTS CONTAIN PROVISIONS THAT
COULD DISCOURAGE OR PREVENT A POTENTIAL TAKEOVER, EVEN IF THE TRANSACTION WOULD
BENEFIT OUR STOCKHOLDERS.
Certain provisions of our certificate of incorporation and bylaws and the
provisions of Delaware and Washington law could have the effect of delaying,
deferring or preventing our acquisition, even if an acquisition would be
beneficial to our stockholders. See "Description of Capital Stock."
IF WE ARE UNABLE TO OBTAIN ADDITIONAL FUNDS, AS NEEDED, WE WOULD HAVE TO REDUCE
OR CEASE OPERATIONS, ATTEMPT TO SELL SOME OR ALL OF OUR OPERATIONS OR MERGE WITH
ANOTHER ENTITY.
Based on our current plans, we believe that the net proceeds of this
offering together with existing cash and marketable securities, borrowings under
equipment financing arrangements and anticipated cash flow from operations will
be sufficient to support our operations at least until the end of 2001. We may
choose to raise additional capital due to market conditions or strategic
considerations even if we have sufficient funds for our operating plan. We
expect that we will require significant additional funding in the future. In
particular, we will likely need additional funds to generate additional data and
to increase our marketing efforts.
However, the actual amount of funds that we will need until December 31,
2001 and beyond will be determined by many factors, some of which are beyond our
control, and we may need funds sooner than currently anticipated. These factors
include:
- the level of our success and Agilent's success in selling our Resolver
system and associated technologies;
- our progress with research and development;
- our ability to introduce and sell new products;
- the level of our sales and marketing expenses;
- the level of our expenses associated with unforeseen litigation;
- the costs and timing of obtaining new patent rights; and
- regulatory changes and competition and technological developments in the
market.
We may seek funding through additional public or private equity offerings,
debt financings or agreements with customers. If we raise additional capital by
issuing equity or convertible debt securities, the issuances may dilute share
ownership and future investors may be granted rights superior to those of
current shareholders. Additional financing may not be available when needed, or,
if available, may not be available on favorable terms. If additional funds are
required and we are unable to obtain them on terms favorable to us, we may be
required to cease or reduce further commercialization of our products to sell
some or all of our technology or assets or to merge with another entity.
RISKS RELATED TO THE GENOMICS INDUSTRY
THERE MAY BE ETHICAL AND OTHER CONCERNS SURROUNDING THE USE OF GENETIC
INFORMATION WHICH COULD FRUSTRATE OUR ABILITY TO DEVELOP AND SELL OUR EXISTING
PRODUCTS AND NEW PRODUCTS.
The genetic screening of humans has raised ethical issues regarding the
confidentiality and appropriate uses of the resulting information. Government
authorities may regulate or prohibit the use of genetic testing to determine
genetic predispositions to certain conditions. Additionally, the public may
disfavor and reject the use of genetic testing. It is possible that the
government authorities and the public may fail to distinguish between the
genetic screening of humans and genomic and proteomic research. If this occurs,
our products and the processes for which our products are used, may be subject
18
<PAGE>
to government regulations intended to affect genetic screening. Further, if the
public fails to distinguish between the two fields, it may pressure our
customers to discontinue the research and development initiatives for which our
products are used. If this occurs, the potential market for our products could
be reduced, which could seriously harm our business, financial condition and
results of operations.
CONSOLIDATION WITHIN THE PHARMACEUTICAL AND BIOTECHNOLOGY INDUSTRIES MAY HARM
OUR EFFORTS TO MARKET AND COMMERCIALIZE OUR PRODUCTS.
Consolidation within the pharmaceutical and biotechnology industries has
heightened the competition for services of the type provided by us. If this
consolidation trend continues, it may result in fewer customers for our
services, price erosion and greater competition among us and our competitors.
Our potential partners may consolidate, which could decrease the value of our
technologies and shrink the research market we target for our products.
Consolidation in the pharmaceutical and biotechnology industries may have a
material adverse effect on our financial condition and results of operations.
THE PRODUCTS DEVELOPED USING THE INFORMATION FROM OUR DATA MAY BE SUBJECT TO
GOVERNMENT REGULATION.
Any new drug developed by the efforts of our customers as a result of their
use of our technologies must undergo an extensive regulatory review process in
the United States and other countries before it can be marketed. This regulatory
process can take many years and requires substantial expense. Changes in U.S.
Food and Drug Administration (FDA) policies and the policies of similar foreign
regulatory bodies can increase the delay for each new drug, product license and
biological license application. We expect similar delays in the regulatory
review process for any diagnostic or agricultural product, where similar review
or other approval is required. Even if marketing clearance is obtained, a
marketed product and its manufacturer are subject to continuing review.
Discovery of previously unknown problems with a product may result in withdrawal
of the product from the market.
No product resulting from the use of our data has been released for
commercialization in the United States or elsewhere. In addition, no
investigational new drug application has been submitted for any such product
candidate. We expect to rely on our customers to file such applications and
generally direct the regulatory review process. We cannot be certain if or when
our customers will submit any applications for regulatory review, or whether our
customers will be able to obtain marketing clearance for any products on a
timely basis, if at all. If our customers fail to obtain required governmental
clearances, it will prevent them from marketing drugs or diagnostic products
until such clearance can be obtained, if at all. The occurrence of any of these
events may cause our business and results of operations to suffer.
In addition, our access to and use of human or other tissue samples in the
expansion of our array and informatics and genomic platforms technologies may
become subject to government regulation, both in the United States and abroad.
United States and foreign government agencies may also impose restrictions on
the use of data derived from human or other tissue samples. If our access to or
use of human tissue samples, or our customers' use of data derived from such
samples, is restricted, our business will suffer.
RISKS RELATED TO THE OFFERING
THERE MAY NOT BE AN ACTIVE, LIQUID TRADING MARKET FOR OUR COMMON STOCK.
We cannot assure you that an active trading market for our common stock will
develop following this offering. You may not be able to sell your shares quickly
or at the market price if trading in our
19
<PAGE>
stock is not active. The initial public offering price will be determined by
negotiations between us and the representatives of the underwriters based upon a
number of factors. The initial public offering price may not be indicative of
prices that will prevail in the trading market. See "Underwriting" for more
information regarding our arrangement with the underwriters and the factors
considered in setting the initial public offering price.
OUR STOCK PRICE COULD BE EXTREMELY VOLATILE AND YOUR INVESTMENT COULD SUFFER A
DECLINE IN VALUE, WHICH IN TURN COULD AFFECT OUR ABILITY TO RAISE ADDITIONAL
CAPITAL TO FUND THE COMMERCIALIZATION OF OUR PRODUCTS.
The trading price of our common stock is likely to be highly volatile and
could be subject to wide fluctuations in price in response to various factors,
many of which are beyond our control, including:
- actual or anticipated variations in quarterly operating results;
- announcements of technological innovations by us or our competitors;
- new products or services introduced or announced by us or our competitors;
- changes in financial estimates by securities analysts;
- conditions or trends in the biotechnology, pharmaceutical and genomics
industries;
- changes in the market valuations of other similar companies;
- announcements by us of significant acquisitions, strategic partnerships,
joint ventures or capital commitments;
- additions or departures of key personnel; and
- sales of our common stock.
As a result, you could lose all or part of your investment.
In addition, the stock market in general, and the Nasdaq National Market and
the market for technology companies, in particular, has experienced extreme
price and volume fluctuations that have often been unrelated or disproportionate
to the operating performance of those companies. Further, there has been
particular volitality in the market prices of securities of biotechnology and
life sciences companies. These broad market and industry factors may seriously
harm the market price of our common stock, regardless of our operating
performance.
In the past, stockholders have often instituted securities class action
litigation after periods of volatility in the market price of a company's
securities. If a stockholder files a securities class action suit against us, we
would incur substantial legal fees and our management's attention and resources
would be diverted from operating our business in order to respond to the
litigation, which could seriously harm our business and results of operations.
YOU WILL SUFFER SUBSTANTIAL DILUTION IN THE NET TANGIBLE BOOK VALUE OF THE
COMMON STOCK YOU PURCHASE.
The initial public offering price of our common stock will be substantially
higher than the pro forma net tangible book value per share of our common stock.
Based on an assumed initial public offering price of $ per share, if you
purchase shares of common stock in this offering, you will suffer immediate and
substantial dilution of $ per share in the net tangible book value of the
common stock. To the extent outstanding options and warrants are exercised, you
will suffer further dilution.
20
<PAGE>
FUTURE SALES OF OUR COMMON STOCK MAY DEPRESS OUR STOCK PRICE.
The market price of our common stock could decline as a result of sales of
substantial amounts of our common stock in the public market after the closing
of this offering, or the perception that these sales could occur. In addition,
these factors could make it more difficult for us to raise funds through future
offerings of common stock. There will be shares of common stock
outstanding immediately after this offering, or shares if the
representatives of the underwriters exercise their over-allotment option in
full. Of the shares sold in the offering, shares will be freely
transferable without restriction or further registration under the Securities
Act, except for any shares purchased by our "affiliates," as defined in
Rule 144 of the Securities Act and shares will be subject to a
lock-up agreement providing that the stockholder will not offer, sell or
otherwise dispose of any of the shares of common stock owned by them for a
period of 180 days after the date of this prospectus. The remaining
shares of common stock outstanding will be "restricted securities"
as defined in Rule 144. These shares may be sold on the 181st day after the date
of this prospectus without registration under the Securities Act to the extent
permitted by Rule 144 or other exemptions under the Securities Act. See "Shares
Eligible for Future Sale."
SUBSTANTIAL CONCENTRATION OF OWNERSHIP OF OUR COMMON STOCK AMONG OUR EXISTING
EXECUTIVE OFFICERS, DIRECTORS AND PRINCIPAL STOCKHOLDERS MAY PREVENT NEW
INVESTORS FROM INFLUENCING SIGNIFICANT CORPORATE DECISIONS.
Upon completion of this offering, our executive officers, directors and
beneficial owners of 5% or more of our common stock and their affiliates will,
in aggregate, beneficially own approximately % of our outstanding common stock
or % if the underwriters' over-allotment option is exercised in full. As a
result, these persons, acting together, will have the ability to determine the
outcome of all matters submitted to our stockholders for approval, including the
election and removal of directors and any merger, consolidation or sale of all
or substantially all of our assets. In addition, such persons, acting together,
will have the ability to control the management and affairs of our company.
Accordingly, this concentration of ownership may harm the market price of our
common stock by:
- delaying, deferring or preventing a change in control of our company;
- impeding a merger, consolidation, takeover or other business combination
involving our company; or
- discouraging a potential acquiror from making a tender offer or otherwise
attempting to obtain control of our company.
Please see "Principal Stockholders" for additional information on
concentration of ownership of our common stock.
MANAGEMENT MAY INVEST OR SPEND THE PROCEEDS OF THIS OFFERING IN WAYS WITH WHICH
YOU MAY NOT AGREE AND IN WAYS THAT MAY NOT YIELD A RETURN.
Management will retain broad discretion over the use of proceeds from this
offering. Stockholders may not deem such uses desirable, and our use of the
proceeds may not yield a significant return or any return at all. Management
intends to use a majority of the proceeds from this offering for research and
development, working capital and other general corporate purposes and to finance
potential acquisitions or investments. Because of the number and variability of
factors that determine our use of the net proceeds from this offering, we cannot
assure you that these uses will not vary substantially from our currently
planned uses. We may not be able to invest these funds effectively, which would
adversely affect our financial condition.
21
<PAGE>
FORWARD-LOOKING STATEMENTS
- --------------------------------------------------------------------------------
This prospectus contains forward-looking statements that involve risks and
uncertainties. Discussions containing such forward-looking statements are found
in the material set forth under "Prospectus Summary," "Risk Factors,"
"Management's Discussion and Analysis of Financial Condition and Results of
Operations" and "Business," as well as in this prospectus generally. When used
in this prospectus, the words "anticipate," "believe," "expect," "estimate" and
similar expressions are generally intended to identify forward-looking
statements. Our actual results could differ materially from those anticipated in
the forward-looking statements as a result of certain factors, including the
risks described in "Risk Factors" and elsewhere in this prospectus.
USE OF PROCEEDS
- --------------------------------------------------------------------------------
The net proceeds to us from the sale of the shares of common stock being
offered by us hereby at an assumed public offering price of $ per share are
estimated to be $ ($ if the underwriters' over-allotment
option is exercised in full). The principal purpose of the offering is to obtain
additional working capital. We intend to use the net proceeds of this offering
for continued research and development, including expanding our informational
genomics platform to include other data types and analysis tools. We also intend
to increase our marketing and sales efforts to support our products and
services, including our Resolver system. In addition, the proceeds will be used
for working capital and other general corporate purposes and capital
expenditures. We may also use a portion of the proceeds for the acquisition of,
or investment in companies, technologies, or assets that complement our
business. However, we have no present understandings, commitments or agreements
to enter into any potential acquisitions and investments. As a result, our
management will have the broad discretion to allocate the net proceeds from this
offering. Pending these uses, we will invest the net proceeds in short-term
investment grade, interest-bearing instruments.
DIVIDEND POLICY
- --------------------------------------------------------------------------------
We have never declared or paid cash dividends on our capital stock. We
currently intend to retain all available funds and any future earnings for use
in the operation of our business and do not anticipate paying any cash dividends
in the foreseeable future. In the future the terms of credit agreements or
contractual provisions may impose restrictions or limitations on the payment of
dividends.
22
<PAGE>
CAPITALIZATION
- --------------------------------------------------------------------------------
The following table sets forth our capitalization as of December 31, 1999 on
an actual, pro forma and pro forma as adjusted basis:
- The "actual" column reflects our capitalization as of December 31, 1999
without any adjustments to reflect subsequent events or anticipated
events,
- The unaudited "pro forma" column reflects our capitalization as of
December 31, 1999 with adjustments to give effect to the conversion of all
shares of outstanding preferred stock, including the Series E preferred
stock issued in March 2000, into 14,597,342 shares of common stock upon
the closing of this offering and the issuance of 686,928 shares of common
stock Oxford Gene Technology in March 2000,
- The unaudited "pro forma as adjusted" column reflects our pro forma
capitalization as of December 31, 1999 with adjustments to give effect to
(1) the receipt of the estimated proceeds from the sale of our common
stock offered hereby after deducting the estimated offering expenses and
underwriting discounts and commissions and (2) the change in the
authorized number of shares upon the completion of this offering.
This table should be read in conjunction with "Management's Discussion and
Analysis of Financial Condition and Results of Operations" and the consolidated
financial statements and related notes thereto included elsewhere in this
prospectus.
<TABLE>
<CAPTION>
AS OF DECEMBER 31, 1999
----------------------------------
PRO FORMA
ACTUAL PRO FORMA AS ADJUSTED
------ --------- -----------
(IN THOUSANDS, EXCEPT SHARE DATA)
<S> <C> <C> <C>
Long-term debt, less current portion........................ $ 1,389 $ 1,389 $ 1,389
-------- -------- --------
Stockholders' equity (deficit):
Preferred Stock, $0.001 par value; authorized: 18,000,000
shares actual; outstanding: 10,154,964 shares actual; no
shares issued and outstanding pro forma and pro forma as
adjusted................................................ 10
Common Stock $0.001 par value; authorized: 36,000,000
shares actual, pro forma and pro forma as adjusted;
outstanding: 5,182,382 shares actual; shares
issued and outstanding pro forma; shares issued
and outstanding, pro forma as adjusted.................. 5 20
Additional paid-in capital................................ 56,644 107,728
Notes receivable from stockholders........................ (58) (58) (58)
Deferred stock compensation............................... (2,128) (2,128) (2,128)
Deficit accumulated in the development stage.............. (28,817) (28,817) (28,817)
-------- -------- --------
Total stockholders' equity.................................. 25,656 76,745
-------- -------- --------
Total capitalization........................................ $ 27,045 $ 78,134 $
======== ======== ========
</TABLE>
The information in the table excludes as of December 31, 1999:
- 2,089,184 shares subject to outstanding options at a weighted average
exercise price of $0.41 per share;
- 2,796,260 additional shares available for grants under our stock option
plans; and
- 1,336,004 shares subject to outstanding warrants at a weighted average
exercise price of $1.90 per share.
23
<PAGE>
DILUTION
- --------------------------------------------------------------------------------
Our pro forma net tangible book value as of December 31, 1999 was
approximately $ or $ per share, assuming the
issuance of 4,442,378 shares of our Series E preferred stock in March 2000, the
payment of certain cash consideration and the issuance of 686,928 shares of
common stock in March 2000 to Oxford Gene Technology, and after giving effect to
the automatic conversion of all outstanding shares of preferred stock into an
aggregate of shares of common stock.
After giving effect to the sale of the common stock in this offering at an
assumed initial public offering price of $ per share, assuming that the
underwriters' over-allotment option is not exercised, and after deducting the
estimated underwriting discounts and commissions and offering expenses, the
adjusted pro forma net tangible book value at December 31, 1999 would have been
$ , or $ per share.
Pro forma net tangible book value per share before this offering has been
determined by dividing pro forma net tangible book value (total tangible assets
less total liabilities) by the pro forma number of shares of common stock
outstanding at December 31, 1999. This offering will result in an increase in
pro forma net tangible book value per share of $ to existing
stockholders and dilution in pro forma net tangible book value per share of
$ to new investors who purchase shares in this offering. Dilution
is determined by subtracting pro forma net tangible book value per share after
this offering from the assumed initial public offering price of $ per
share. The following table illustrates this dilution:
<TABLE>
<S> <C> <C>
Assumed initial public offering price....................... $
Pro forma net tangible book value per share at December
31, 1999................................................ $
Increase attributable to new investors.................... $
Pro forma net tangible book value after this offering....... $
------
Dilution in net tangible book value to new investors........ $
======
</TABLE>
The following table summarizes, on a pro forma basis as of December 31, 1999
as adjusted for the March 2000 issuances of 4,442,378 shares of our Series E
preferred stock and 686,928 shares of our common stock described above, the
difference between the total consideration paid and the average price per share
paid by the existing stockholders and the new investors with respect to the
number of shares of common stock purchased from us based on an assumed public
offering price of $ per share:
<TABLE>
<CAPTION>
TOTAL
SHARES PURCHASED CONSIDERATION
------------------- ------------------- AVERAGE PRICE
NUMBER PERCENT AMOUNT PERCENT PER SHARE
------ ------- ------ ------- -------------
<S> <C> <C> <C> <C> <C>
Existing stockholders............................ % $ % $
New investors....................................
----- ------ ------ ------ -------
Totals........................................... 100.0% $ 100.0%
===== ====== ====== ======
</TABLE>
The tables and calculations above assume no exercise of the underwriters'
overallotment option and excludes the following shares:
- 2,089,184 shares of common stock underlying options outstanding at
December 31, 1999 at weighted average exercise price of $0.41 per share,
of which 925,538 were fully vested at December 31, 1999;
- 2,796,260 shares of common stock available for future grants under our
stock option plans; and
- 1,336,004 shares subject to outstanding warrants at a weighted average
price of $1.90 per share.
24
<PAGE>
SELECTED CONSOLIDATED FINANCIAL DATA
- --------------------------------------------------------------------------------
The following selected consolidated financial data should be read in
conjunction with our consolidated financial statements and the related notes and
"Management's Discussion and Analysis of Financial Condition and Results of
Operations" included elsewhere in this prospectus. The consolidated statement of
operations data presented below for the period from inception (December 19,
1996) to December 31, 1999 and for the years ended December 31, 1997, 1998, and
1999, and the balance sheet data at December 31, 1998 and 1999 are derived from
our financial statements which have been audited by PricewaterhouseCoopers LLP,
independent accountants, included elsewhere in this prospectus. The selected
consolidated balance sheet data at December 31, 1997 is derived from our
financial statements that have also been audited by PricewaterhouseCoopers LLP
and that are not included in this prospectus. The selected data in this section
is not intended to replace our financial statements. Historical results are not
necessarily indicative of the results to be expected in the future.
<TABLE>
<CAPTION>
PERIOD FROM INCEPTION
YEAR ENDED DECEMBER 31, (DECEMBER 19, 1996) TO
------------------------------ DECEMBER 31,
1997 1998 1999 1999
-------- -------- -------- ----------------------
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<S> <C> <C> <C> <C>
CONSOLIDATED STATEMENT OF OPERATIONS DATA:
- ------------------------------------------------
Revenue......................................... $ -- $ -- $ 983 $ 983
------- ------- -------- --------
Operating expenses:
Research and development...................... 1,189 4,417 10,189 15,796
General and administrative.................... 1,039 2,695 7,661 11,395
Stock-based compensation...................... 65 581 3,215 3,861
------- ------- -------- --------
Total operating expenses.................... 2,293 7,693 21,065 31,052
------- ------- -------- --------
Loss from operations............................ (2,293) (7,693) (20,082) (30,069)
Other income and (expenses)
Interest income............................... 440 707 639 1,786
Interest expense.............................. (45) (208) (293) (546)
Other, net.................................... 14 81 (82) 13
------- ------- -------- --------
Net loss........................................ $(1,884) $(7,113) $(19,818) $(28,816)
======= ======= ======== ========
Basic and diluted net loss per share............ $ (5.29) $ (5.29) $ (4.92) $ (15.09)
Weighted average shares used to compute basic
and diluted net loss per share................ 356 1,344 4,030 1,910
Pro forma basic and diluted net loss per
share......................................... $ (1.69)
Weighted average shares used in computing pro
forma basic and diluted net loss per share.... 11,740
</TABLE>
<TABLE>
<CAPTION>
AS OF DECEMBER 31,
------------------------------
1997 1998 1999
-------- -------- --------
<S> <C> <C> <C>
CONSOLIDATED BALANCE SHEET DATA: (IN THOUSANDS)
- ------------------------------------------------------------
Cash and cash equivalents................................... $ 7,827 $ 3,271 $ 8,312
Working capital............................................. 14,902 7,115 15,451
Total assets................................................ 16,933 11,393 34,607
Long term obligations, less current portion................. 1,036 1,344 1,389
Stockholders' equity........................................ 15,279 8,761 25,656
</TABLE>
25
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
- --------------------------------------------------------------------------------
YOU SHOULD READ THE FOLLOWING DISCUSSION AND ANALYSIS IN CONJUNCTION WITH
OUR "SELECTED CONSOLIDATED FINANCIAL DATA," AND OUR CONSOLIDATED FINANCIAL
STATEMENTS AND THE RELATED NOTES INCLUDED ELSEWHERE IN THIS PROSPECTUS. THIS
DISCUSSION AND ANALYSIS CONTAINS FORWARD-LOOKING STATEMENTS THAT INVOLVE RISKS,
UNCERTAINTIES AND ASSUMPTIONS. PLEASE SEE THE NOTE REGARDING "FORWARD LOOKING
STATEMENTS."
OVERVIEW
We are a leader in the emerging field of informational genomics. Our
technology platform consists of our Resolver system, our FlexJet DNA microarrays
and our coherent data sets of information generated from microarrays. We
generate revenue by providing our technologies both as separate components or as
integrated informational genomics systems to pharmaceutical, biotechnology and
agricultural customers. From our inception in December 1996 through
December 1999, our operating activities were primarily devoted to research and
development of technologies for our informational genomic platform, including
the development of our Resolver system, acquiring assets, recruiting personnel,
business development and raising capital.
In October 1999, we entered into a strategic collaboration with Agilent. We
agreed to exclusively partner with Agilent to make and sell products in the gene
expression field including microarrays, array design services, expression data
analysis systems and other products. In connection with this collaboration,
Agilent purchased 2,285,714 shares of our Series D preferred stock, and we have
the right to sell Agilent an additional $10.0 million of common stock at any
time prior to or upon the closing of this offering. Under the agreement, we
co-market our Resolver system with Agilent on an exclusive basis and share
revenues for Resolver system sales and array design services. In addition,
Agilent has the exclusive right to market and sell arrays manufactured using our
inkjet and related array design technology in exchange for royalty payments to
us.
Since our inception, we have incurred significant losses and as of
December 31, 1999, we had an accumulated deficit of $28.8 million. Our losses
have resulted principally from costs incurred in research and development, and
from general and administrative costs associated with our operations. Operating
expenses increased to $21.1 million in 1999 from $7.7 million in 1998 and
$2.3 million in 1997. We expect to incur additional operating losses over at
least the next several years as we continue to expand our research and product
development efforts and infrastructure.
To date, our revenue has been derived principally from revenue earned under
our collaboration agreements with Agilent and others. To a lesser extent, we
have derived revenue from government grants. We have generated a substantial
portion of our revenue to date from a limited number of sources. Our potential
sources of revenue for the next several years are likely to be from the sale of
products and services sold by Agilent and research payments under existing and
possible future collaborative arrangements.
In view of our limited operating history and the rapidly evolving nature of
our business, we believe that period-to-period comparisons of our operating
results, particularly for each of the years ended 1999, 1998 and 1997, are not
meaningful and should not be relied upon as an indication of future performance.
SUBSEQUENT EVENTS
In March 2000, we sold $41.6 million of Series E preferred stock in a
private equity placement to a number of financial and strategic investors
pursuant to the terms of a stock purchase agreement. We issued a total of
4,442,378 shares of Series E preferred stock at price of $9.36 per share. The
Series E preferred stock will convert to common stock at a one-to-one ratio upon
the closing of this offering.
26
<PAGE>
The Series E preferred stock contains substantially the same rights and
preferences as our previously issued series of preferred stock.
In March 2000, we entered into a license agreement with Oxford Gene
Technology whereby they granted us a nonexclusive, worldwide sublicense to
certain patents related to the fabrication and use of nucleic acid arrays. In
connection with this license agreement, we issued Oxford Gene Technology 686,928
shares of our common stock and paid a cash license fee.
RESULTS OF OPERATIONS
YEARS ENDED DECEMBER 31, 1999 AND 1998
REVENUES. Revenues increased to $983,000 in 1999 from none in 1998. The
increase was due primarily to collaboration revenue recognized in connection
with a collaboration agreement entered into with Agilent in October 1999 and
grant revenues recognized in connection with Small Business Innovation Research
Program grants from the National Institutes of Health and a grant from the
Department of Energy. We do not expect to recognize any grant revenues in 2000.
RESEARCH AND DEVELOPMENT EXPENSES. Research and development expenses
increased to $10.2 million in 1999 from $4.4 million in 1998. The increase was
primarily due to increased payroll and personnel expenses, including recruitment
and relocation expenses, increased usage of laboratory materials and supplies,
facility costs and depreciation of facilities and laboratory equipment. Research
and development expenses also included $1.4 million of license fees incurred in
1999 as compared to $225,000 of license fees incurred in 1998. The number of
research and development personnel was 70 at December 31, 1999 and 45 at
December 31, 1998. Research and development expenses to date have consisted of
costs to develop and analyze DNA microarrays, develop and use proprietary
technologies to analyze these arrays, build our data set of consistent
expression profiles and design a large set of analysis tools. We expect research
and development expenses to increase significantly in the future to support the
expansion of our research and development activities.
GENERAL AND ADMINISTRATIVE EXPENSES. General and administrative expenses
increased to $7.7 million in 1999 from $2.7 million in 1998. The increase was
primarily due to increased expenses related to payroll and personnel, including
recruitment and relocation expenses, facility costs, legal fees, business
development activities and depreciation. In addition, general and administrative
expenses in 1999 included $2.8 million of amortization expense relating to
intangible assets as a result of our acquisition of Acacia Biosciences in
February 1999. See Note 3 of the notes to our consolidated financial statements.
We expect general and administrative expenses to continue to increase in the
future to support the expansion of our business activities and to accommodate
new demands associated with operating as a public company.
STOCK-BASED COMPENSATION. Stock-based compensation expense in 1999 and 1998
resulted from stock options granted to employees at exercise prices subsequently
deemed to be less than the fair market value of the common stock on the date of
grant to employees, options granted to outside consultants for services, and for
the sale of restricted stock to founders deemed to be non-employees. We recorded
total deferred stock-based compensation of $4.8 million in 1999 and
$1.0 million in 1998. Deferred stock-based compensation is being amortized to
expense over the vesting periods of the underlying options, generally four
years, resulting in the amortization of stock-based compensation totaling
$3.2 million in 1999 and $581,000 in 1998. We recorded additional deferred
stock-based compensation of $17.0 million for stock option grants made since
December 31, 1999.
INTEREST INCOME. Interest income decreased to $640,000 in 1999 from
$707,000 in 1998. The decrease was due to lower average balances of cash and
cash equivalents and short term investments in 1999 as compared to 1998.
Compensation expense related to equity instruments issued to nonemployees is
recognized as the equity instruments vest. As a result, stock-based compensation
27
<PAGE>
expense related to equity instruments issued to nonemployees will fluctuate as
the fair value of our common stock fluctuates.
INTEREST EXPENSE. Interest expense increased to $293,000 in 1999 from
$208,000 in 1998. The increase in 1999 from 1998 resulted from increased
interest expense associated with higher levels of debt from borrowings under
equipment financing agreements.
OTHER INCOME (EXPENSE). Other income (expense) decreased to an expense of
$82,000 in 1999 from income of $81,000 in 1998. The decrease was due primarily
to the write-off of certain leasehold improvements and office and laboratory
equipment.
YEARS ENDED DECEMBER 31, 1998 AND 1997
REVENUE. We had no revenue in both 1998 and 1997.
RESEARCH AND DEVELOPMENT EXPENSES. Research and development expenses
increased to $4.4 million in 1998 from $1.2 million in 1997. The increase was
primarily due to increased payroll and personnel expenses, including recruitment
and relocation expenses. The number of research and development personnel was 45
at December 31, 1998 and 21 at December 31, 1997.
GENERAL AND ADMINISTRATIVE EXPENSES. General and administrative expenses
increased to $2.7 million in 1998 from $1.0 million in 1997. The increase was
primarily due to increased expenses related to payroll and personnel, including
recruitment and relocation expenses, facility costs, legal fees, business
development activities and depreciation.
STOCK-BASED COMPENSATION. We recorded total deferred stock-based
compensation of $1.0 million in 1998 and $157,000 in 1997. Deferred stock-based
compensation is being amortized to expense over the vesting periods of the
applicable agreements, resulting in the amortization of stock-based compensation
totaling $581,000 in 1998 and $65,000 in 1997.
INTEREST INCOME. Interest income increased to $707,000 in 1998 from
$440,000 in 1997. The increase was due to higher average balances of cash and
cash equivalents and short term investments in 1998 compared to 1997, as a
result of the investment of the proceeds from the sale of Series A preferred
stock in June through October of 1997.
INTEREST EXPENSE. Interest expense increased to $208,000 in 1998 from
$45,000 in 1997. The increase was primarily the result of increased debt from
borrowings under equipment financing agreements.
OTHER INCOME (EXPENSE). Other income (expense) increased to $81,000 in 1998
from $14,000 in 1997. The increase was due primarily to rental income received
for the subletting of approximately 3,800 square feet of our facilities.
LIQUIDITY AND CAPITAL RESOURCES
From inception through December 31, 1999, we have funded our operations with
$37.9 million of private equity financings and $3.3 million from equipment
financing arrangements. At December 31, 1999, cash and cash equivalents, and
short term investments totaled $19.3 million compared to $8.3 million at
December 31, 1998. Our cash reserves are held in a variety of interest-bearing
instruments including high-grade corporate bonds, commercial paper, and money
market accounts.
Cash used in operations in 1999 was $7.4 million compared with $5.8 million
in 1998. Our net loss of $19.8 million in 1999 was partially offset by non-cash
charges of $7.0 million related to deferred stock compensation amortization,
depreciation expense, and amortization of intangible assets, and working capital
changes of $4.7 million.
28
<PAGE>
Investing activities, other than the changes in our short term investments,
used $2.5 million due primarily to leasehold improvements and capital
expenditures. We expect capital expenditures to increase in the future as we
build additional computer hardware and software infrastructure for our
informational genomics systems and complete our facility expansion.
Cash provided by financing activities was $20.9 million in 1999 compared to
$589,000 in 1998. Financing activities included the receipt of $20.9 million for
the sale of preferred stock to investors in 1999.
In 1997, we entered into a financing arrangement for the purchase of
property and equipment, which, as amended in 1998 and 1999, provides for an
aggregate facility of $3.3 million. As of December 31, 1999, we had drawn down
$3.1 million and had $200,000 remaining available under this arrangement. These
obligations are collateralized by the equipment financed, bear interest at a
weighted-average fixed rate of approximately 12.3%, and are due in monthly
installments through December 2003. In addition, through December 31, 1999, we
had drawn down $223,000 on a bank line of credit to finance capital
expenditures. The amount available under the line of credit was $362,000 at
December 31, 1999. See Note 7 of the notes to our financial statements. At
December 31, 1999, we had $2.4 million in capitalized lease obligations and
notes payable, of which $1.0 million is due in 2000. The bank line of credit had
an interest rate of 10.5% and was paid off in its entirety in March 2000.
Our capital requirements depend on numerous factors, including market
acceptance of our products, the resources we devote to developing and supporting
our products, and other factors. We expect to devote substantial capital
resources to expand our research and development efforts, to expand marketing
and sales efforts to support our products and services, and for other general
corporate activities. We believe that our current cash balances, together with
the proceeds from the sale of the Series E preferred stock and the net proceeds
of this offering and revenue to be derived from our collaboration with Agilent
and our license revenue from the Resolver system will be sufficient to fund our
operations at least through December 31, 2001. After this period, we may need to
sell additional equity or debt securities or obtain additional credit
arrangements. Additional financing may not be available on terms acceptable to
us or at all.
RECENT ACCOUNTING PRONOUNCEMENTS
In June 1998, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards No. 133, Accounting for Derivative Financial
Instruments and for Hedging Activities, SFAS 133, which provides a comprehensive
and consistent standard for the recognition and measurement of derivatives and
hedging activities. SFAS 133 is effective for fiscal years beginning after
June 15, 2000 and is not anticipated to have an impact on our results of
operations or financial condition when adopted as we hold no derivative
financial instruments and do not currently engage in hedging activities.
In December 1999, the Securities and Exchange Commission issued Staff
Accounting Bulletin No. 101, Revenue Recognition, which provides guidance on the
recognition, presentation and disclosure of revenue in financial statements
filed with the SEC. SAB 101 outlines the basic criteria that must be met to
recognize revenue and provides guidance for disclosures related to revenue
recognition policies. Management believes that the impact of SAB 101 would have
no material effect on our financial position or results of operations.
QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
Our exposure to market risk is limited to interest income sensitivity, which
is affected by changes in the general level of U.S. interest rates, particularly
because the majority of our investments are in short-term debt securities issued
by U.S. corporations. The primary objective of our investment activities is to
preserve principal while at the same time maximizing the income we receive
without significantly increasing risk. To minimize risk, we maintain our
portfolio of cash, cash equivalents and short term investments in a variety of
high-grade securities and with a variety of issuers, including corporate notes,
commercial paper and money market funds. Due to the nature of our short-term
investments, we believe that we are not subject to any material market risk
exposure. We do not have any foreign currency or other derivative financial
instruments.
29
<PAGE>
BUSINESS
- --------------------------------------------------------------------------------
OVERVIEW OF OUR BUSINESS
We are a leader in the emerging field of informational genomics.
Informational genomics involves acquiring and analyzing information gathered
from throughout the cell to identify a majority of the medically important drug
targets and gene functions. We combine the power of informatics and genomics to
offer proprietary solutions for pharmaceutical, biotechnology and agricultural
companies that accelerate and enhance the drug discovery process for
pharmaceutical and biotechnology companies and improves agricultural products.
Our informational genomics platform can accelerate drug discovery and
healthcare research by converting the rapidly growing amount of expression
profiling data into information critical for these processes. We provide a
proprietary genomic expression profiling platform of hardware and software
products that is designed to provide seamless solutions for efficient,
cost-effective and powerful discovery programs. Our technology builds a critical
mass of consistent gene expression data and provides a comprehensive description
of a given drug compound's effect on all relevant targets within a cell
simultaneously.
Our technology platform consists of our Resolver Expression Data Analysis
System, our FlexJet DNA microarrays and our coherent data sets of information
generated from microarrays. We generate revenue by providing our technologies as
separate components or as integrated informational genomics systems to
pharmaceutical, biotechnology and agricultural customers. In October 1999, we
entered into a seven-year strategic partnership with Agilent Technologies, Inc.
to co-market our Resolver system and for Agilent to manufacture and sell FlexJet
DNA microarrays.
BACKGROUND
All living cells contain molecules of deoxyribonucleic acid, or DNA. DNA
molecules determine the inherited characteristics of all organisms. Each double
helix DNA molecule contains two complementary strands comprised of four
different types of nucleotide bases, commonly known as G, C, A and T. The order
of these bases, called the DNA sequence, is used by the cell to make proteins,
replicate itself and perform its specific role in the organism. Each G on one
DNA strand pairs with a C on the complementary strand, and similarly each A
pairs with a T. This pairing is the basis for many of the measurement
technologies discussed below. The entire DNA content of an organism is called
its genome.
Genes, which are segments of DNA, contain a set of instructions for the cell
to produce a specific protein. Each cell contains a full set of genes, but each
cell type expresses only those genes necessary for its specific function. When
genes are expressed, copies of the DNA sequence, called messenger RNA, are used
to direct the manufacture of a protein. Cells use proteins to carry out their
functions. For example, the insulin receptor protein on pancreatic cells is
essential for the proper metabolism of sugar. For an individual to be healthy,
the correct proteins must be produced at the right time in the appropriate
amounts in the correct cells. DNA variations, along with effects of environment
and infectious disease, can change the amount and function of a protein. Drugs
are effective to the extent that they modify specific protein functions.
Efforts to discover the order of the nucleotide bases in large segments of
the human genome, known as sequencing, began in the mid-1980s when high
throughput sequencing became available. The goal was to develop new medical
treatments and diagnostics based on genetic information. In the early 1990s,
governments and foundations sponsored an intensification of these efforts, which
came to be known as the Human Genome Project. According to the Human Genome
Project, the overall public sector expenditure on the Human Genome Project is
expected to total approximately $2 billion by 2001. In parallel with the public
sector effort, a large private sector effort emerged in the mid 1990s. It
30
<PAGE>
is expected that the entire human genome will be fully sequenced by the end of
2000. However, the vast amount of sequence information produced cannot be
directly used for the development of medical applications without a more
sophisticated understanding of gene function.
As sequencing of the human genome nears completion, researchers are
increasingly focusing their efforts on interpreting this broad base of sequence
information. This will result in a better understanding of the roles genes and
proteins play in biochemical pathways and the mechanisms of disease. These
advances in genomics have generated high expectations that the drug discovery
process may be transformed through rapid and efficient discovery of new drug
targets in model organisms and human cells. Drug targets are proteins within
each cell that are potentially responsive to drug therapies. When these targets
are identified, researchers test many compounds against them, and, based on the
reaction of the target to the compound, attempt to determine if a potential drug
candidate is likely to be successful.
Genomics has given rise to a variety of methodologies that are now being
used to discover new targets and therapeutic approaches. For example, the
discovery of new targets is often facilitated by comparing the DNA sequence of
the potential target with that of known targets. This approach may also be used
to identify which molecular target in humans is likely to be analogous to a
target previously identified in an animal model. Targets can also be identified
by determining which genes are responsible for a given disease.
Genomics has helped identify genetic variations which are a major component
of nearly all diseases, including cancer, diabetes and cardiovascular disease.
Disease risks can be identified by monitoring variations in responsible genes.
This can be done by analyzing the change in a single nucleotide base, called a
single nucleotide polymorphism, or SNP. Although SNPs may potentially help
select which drug will be best for a given individual, SNP analysis requires
large scale human studies to establish these useful associations. This makes it
an expensive and difficult process. Additionally, SNP analysis may be
inaccurate, non-automated, inflexible or slow and is therefore primarily
effective as a research tool.
Much of the current focus of genomic companies has been on generating large
amounts of DNA sequence data. Without knowledge of a gene's function, however,
DNA sequence data are insufficient to materially impact the drug development
process. Associations between sequence and detailed cellular function are
complex and still mostly unknown.
Detailed measurements of the actual biological functioning of the cell at a
molecular level are important to identify the best targets and illuminate
mechanisms of disease. Recently, two approaches have been developed that attempt
to address this need by monitoring changes in the levels of certain cellular
components. The first approach, expression profiling, monitors the level of
messenger RNA for each gene within a cell. The most promising expression
profiling technologies allow the monitoring of tens of thousands of genes. This
is made possible by arranging either unique DNA fragments, called cDNAs, or
shorter single-stranded DNA pieces, called oligonucleotides, in a dense grid on
a glass surface. This grid is known as a DNA microarray. Each cDNA or
oligonucleotide in a microarray binds to the messenger RNA of a specific gene,
thereby providing a report on that gene's expression level. The second approach,
proteomics, monitors the level of protein expressed by each gene within a cell.
Proteomics measurements most often are obtained by separating the mix of
proteins in the cell by dragging them through a resistive substance, often a
gel, with the result that proteins of different sizes and properties end up in
different spots on the gel. To the extent that these spots can be separated and
identified, current methods allow the monitoring of protein levels within a
cell.
Two approaches currently being used for determining the function of proteins
include the use of model organisms and the use of a standard biochemical assay.
Model organisms are those for which all or most of the genetic sequence of the
organism's genome is known. Some model organisms include yeast, flatworms and
fruit flies. The use of model organisms for determining protein function in
humans
31
<PAGE>
is based on the concept that genetic sequence and biochemical pathways and
mechanisms are conserved or maintained through genes of similar or identical
sequence across different organisms. The other approach, biochemical assays,
involves the use of an assay that uses enzymes to determine the function of a
protein.
LIMITATIONS AND DEFICIENCIES OF CURRENT APPROACHES
The availability of DNA sequence information and of genome-wide expression
and proteomic measurements has created high expectations for improvements in
drug discovery, healthcare and agriculture. However, these improvements are
hampered by current limitations of the measurement technologies, and by a
shortage of powerful integrated analysis tools that are capable of managing both
large amounts and disparate types of data.
NEITHER DNA SEQUENCES NOR PROTEIN LEVELS GIVE DIRECT CLUES TO CELLULAR
FUNCTION.
Current DNA sequencing technologies, which provide information about the
sequence of a gene, and proteomics technologies, which provide information about
protein levels, give little direct insight into protein function. Consequently,
this information is of minimal value in drug discovery and analyzing disease
response. The high cost of existing DNA microarrays and the accuracy limitations
of arrays and the measurement process generally discourage the widespread use of
them to determine protein function.
The use of model organisms to determine protein function in a target species
such as humans has some of the same limitations as relying solely on gene
sequence information. While some protein function is conserved or maintained
across species, frequently functions are only loosely conserved or maintained
across species. In addition, determining protein function by using model
organisms or a standard biochemical assay is limited because these approaches
can only analyze a single protein at a time.
CURRENT GENE EXPRESSION TECHNOLOGIES ARE EXPENSIVE AND OF LIMITED ACCURACY.
A single DNA microarray used in gene expression typically costs from $1,000
to $10,000, depending on the type of array purchased. In addition, due to
limited accuracy in the measurement process, subtle changes in gene expression
are usually not detected. Although expression profiling can be used to monitor
protein functions in the cell, large numbers of high-accuracy DNA microarray
experiments are needed to accomplish this.
CURRENT GENE EXPRESSION ANALYSIS TOOLS AND APPROACHES ARE INADEQUATE.
The increasing use of genomics and proteomics tools in the drug discovery
process has generated tremendous quantities of data from disparate array
platforms and experimental conditions. Current tools are inadequate for
effectively analyzing these large volumes of disparate data. Cross-comparisons
between experiments could be informative. However, these comparisons are
hampered by a lack of consistency in the data and by a lack of informatics
tools. Even when the data are of sufficient quality to support
cross-comparisons, current approaches for analyzing gene expression data do not
have the ability to report multiple protein functions. Thus, potentially
valuable information on drug toxicity, therapeutic targets and disease
mechanisms, as well as on individual human differences, is wasted.
OUR SOLUTION
Our proprietary technologies overcome many of the limitations of other
current technologies by providing an integrated system of informatics tools, DNA
expression arrays and expression profile data sets that rapidly and accurately
determine protein function simultaneously across the entire cell. Our platform
technologies enable pharmaceutical, biotechnology and agricultural companies to
convert large
32
<PAGE>
volumes of data from disparate sources into information that can accelerate and
enhance their discovery process. We believe our solution is critical to solving
fundamental inefficiencies in drug discovery, improving the quality of lead
compounds and providing an early indication of potential side effects. Our
solution includes the following:
INTEGRATED, ENTERPRISE-LEVEL SOFTWARE.
Our Resolver Expression Data Analysis System is the first enterprise-level
software product enabling organizations to securely assemble, store in a single
database and analyze gene expression data from multiple experiments generated
from the most commonly used expression profiling technologies. Customers use our
Resolver system as a stand-alone informatics tool to streamline their
independent drug discovery efforts. Our Resolver system can also be used by our
collaborators to take advantage of the high quality and consistent data that we
generate.
HIGHLY SENSITIVE AND COST-EFFECTIVE GENOME WIDE SENSORS.
We have developed a flexible DNA microarray platform, our FlexJet DNA
microarray, based on inkjet printing technology. Our FlexJet DNA microarrays
allow us to simultaneously monitor small changes in the expression levels of
thousands of genes. These measurements reveal changes in protein functions more
reliably than direct measurements of protein levels. We believe our FlexJet DNA
microarrays are more cost-effective than traditional oligonucleotide arrays and
can be customized for individual customer needs more quickly than competing
technologies.
CONSISTENT DATA SETS CREATE MORE VALUABLE INFORMATION.
Using our experience with tens of thousands of array experiments and several
different expression technology platforms, we have developed standardized
protocols and processes to ensure that expression profiling data reflect
departures from a known biological reference. Our approach enables meaningful
comparisons to be made among many disparate expression experiments. This allows
our collaborators to discover medically important cellular pathways, identify
useful disease subclassifications and predict unexpected drug toxicities and
interactions. Because the number of possible intercomparisons grows much faster
than the number of experiments, the value of information generated by our
platform grows more rapidly than the amount of data analyzed. This is a
fundamental strength of informational genomics.
INTEGRATED PLATFORM FOR DRUG DISCOVERY.
Components of our informational genomics system can be used individually or
as an integrated platform. The integration of our Resolver system, FlexJet DNA
microarrays and consistent data sets is designed to provide seamless solutions
for efficient, cost-effective and powerful drug discovery.
OUR PRODUCTS AND SERVICES
Our primary products are the Resolver Expression Data Analysis System,
FlexJet DNA microarrays and coherent data sets of information generated from
microarrays. We also offer professional consulting services to complement and
enhance our products. As an integrated platform or as individual components, our
products and services offer essential tools to accelerate and improve the drug
discovery process.
RESOLVER EXPRESSION DATA ANALYSIS SYSTEM.
Our Resolver system is an integrated, enterprise-wide solution for storing,
retrieving and analyzing large quantities of gene expression data generated
using cDNA microarrays, oligonucleotide arrays and other technologies. Its
architecture supports the concurrent analysis and comparison of tens of
33
<PAGE>
thousands of expression profiling experiments and is designed to accommodate the
increasing diversity of data types and analysis algorithms.
Our Resolver system enables users to securely assemble, store in a single
database and analyze gene expression data from multiple expression technology
platforms. The product's flexible interfaces allow users to add, edit and
maintain cell type, RNA and experiment annotations, and to collaborate and share
information with other users. Our Resolver system provides tools to find and
analyze expression profiling information quickly and efficiently through custom
database queries. Users of our Resolver system can instantly link to expression
profile databases and other databases on corporate intranets or the Internet.
The Resolver system's proprietary architecture and seamless integration of
software and hardware allow users to rapidly conduct sophisticated matching of
expression profile patterns, known as pattern matching on very large data sets.
The Resolver system's architecture and analysis features were initially
developed to meet the needs of our internal research and development
environment, which represented a realistic high-throughput enterprise context.
Our scientists have performed and analyzed tens of thousands of array
experiments, and interact with our molecular biologists, laboratory technicians
and applied mathematicians on product development efforts. Our experience
together with our interactive approach has resulted in design decisions and
algorithm choices that enable quick delivery of the most relevant analysis
results.
The advantages of our Resolver system include:
- data compatibility across array platforms;
- rapid access to large data sets for clustering and pattern matching
applications;
- fast visualization tools to view and draw assumptions about large data
sets;
- similarity searches based on our proprietary understanding of the most
biologically meaningful criteria; and
- administrator controlled storage and retrieval of enterprise-wide data.
We offer professional bioinformatics services to integrate the Resolver
system with our customers' unique enterprise resources, to produce state-of-art
expression profile data, and to develop special analysis software for their
research needs. Our Resolver system is jointly marketed by Agilent and us and
will be sold by Agilent pursuant to our partnership agreement.
FLEXJET DNA MICROARRAYS
FlexJet DNA microarrays consist of different DNA sequences built up at tens
of thousands of different positions on glass slides using a modified inkjet
printer head to deliver the individual DNA building blocks G, C, A or T to the
appropriate locations. This inkjet technology is fast, flexible, reproducible
and economical and it can produce new array designs in a matter of hours, which
is significantly faster than other array technologies. We synthesize
oligonucleotides directly on glass slides by employing solid-phase DNA synthetic
chemistry.
Prior to our FlexJet DNA microarray methodology, there were two standard
methods currently used for creating microarrays on slides: the deposition of
pre-synthesized cDNAs and the photolithographic synthesis of oligonucleotides.
Unlike the manufacture of cDNA arrays, our FlexJet DNA microarrays can be
directly manufactured using sequence information stored in computer files, thus
eliminating the expense and difficulties associated with manufacturing
pre-synthesized cDNAs. In contrast to photolithographic arrays, our FlexJet DNA
microarrays do not require the manufacture of an extensive series of chromium
masks for each array designed, thereby eliminating the time and expense
associated with chromium mask manufacturing.
Prior to synthesizing our FlexJet DNA microarrays, we perform extensive
calculations to determine the possible interactions between DNA sequences in the
genome to choose the oligonucleotide probes
34
<PAGE>
that will report the desired genes and no others. This process, coupled with the
high accuracy with which the oligonucleotide sequences are synthesized, allows
sensitive and specific gene expression reporting using only a single reporter
feature per gene, rather than the many reporters used in other technologies.
This, in turn, allows more than 25,000 genes to be monitored using a single
microscope slide.
The flexibility of the inkjet approach is an attractive feature for
applications in which a large number of different array designs are needed, or
where the array design needs to change quickly in response to new information.
The benefits of this flexibility include:
- the ability to update array designs in response to ongoing human
sequencing efforts;
- looking for alternative forms of genes in different tissues under
different conditions;
- arrays for newly sequenced organisms; and
- arrays for focused subsets of genes.
We use our proprietary oligonucleotide sequence design methods to generate
FlexJet DNA microarrays for use in our collaborative relationships and for use
in our own internal operations. In addition, we have exclusively licensed to
Agilent the rights to manufacture, sell and distribute FlexJet DNA microarrays
to third parties. Agilent has agreed to pay us royalties on the FlexJet DNA
microarrays that they sell. We also provide our microarray design services to
customers of Agilent-manufactured arrays. We will receive additional royalties
on arrays that are designed by us and sold by Agilent to third parties.
COHERENT DATA SETS AND REFERENCE LIBRARIES.
We build coherent sets of data generated from DNA microarrays that represent
the responses of cells to different genetic and disease states and to drug
treatments. These data sets provide detailed references against which other
expression measurements, either generated by us or by our collaborators or
customers, can be compared. Using our extensive experience, we have developed
experiment protocols, process controls and analysis techniques that allow the
sharing of data between experiments. This coherence requirement is a key aspect
of our reference library approach. Data that have not been derived using this
rigorous approach are much less valuable.
The following useful information may be derived from our coherent data sets:
- characteristics of drug candidates, including toxicity;
- compounds with novel mechanisms of action;
- functions of newly sequenced genes;
- gene reporters that can monitor pathways to enable construction of high
throughput screens; and
- interpretation of genetic traits in terms of individual biochemical
disturbances.
INTEGRATED PROFESSIONAL SERVICES.
We combine our informational genomics tools together with our consulting
services to provide enhanced value to selected customers. These services include
customization of our Resolver system, customized FlexJet DNA microarrays and
creation of highly accurate and consistent data sets. The integration of our
unique tools and expertise presents significant capabilities to customers
desiring the power of informational genomics technologies.
STRATEGY
Our goal is to be the leader in informational genomics by providing the
standard platform for gene expression data integration. By providing this
standard platform, we hope to increase demand for each of our component
technologies. The specific elements of our strategy are to:
35
<PAGE>
BECOME THE STANDARD INFORMATIONAL GENOMICS APPROACH.
We intend to establish our Resolver system as the preferred software and
database platform for gene expression data storage and analysis. Our Resolver
system can accept most major types of expression data and has superior
capabilities for analyzing and managing large data sets. In addition, our
FlexJet DNA microarrays, sold and distributed by Agilent, enable the creation of
consistent data sets, which will drive the demand for our array technology and
informatics platform in this rapidly growing array market.
DEVELOP MULTIPLE PRODUCT REVENUE SOURCES.
We seek to establish a widely installed base of our Resolver systems in
order to generate annual license fees, maintenance and support payments, and
opportunities for professional services. Our Resolver system is jointly marketed
by Agilent and us. We intend to make our FlexJet DNA microarrays available
directly to our customers for research collaborations. Outside of research
collaborations, customers needing arrays can purchase them from Agilent, and we
will receive royalty payments on these sales.
ESTABLISH COLLABORATIONS TO VALIDATE THE POWER OF OUR GENE EXPRESSION TOOLS.
We intend to continue to enter into gene expression collaborations with
pharmaceutical, biotechnology and agricultural companies. We anticipate that
these collaborations will validate the power of our gene expression tools. In
addition, we anticipate these collaborations will result in sales of our
Resolver system and royalties from FlexJet DNA microarrays. These collaborations
may also provide us with a mix of technology license fees, research funding,
milestone payments and royalties or profit-sharing income from commercialization
of products resulting from the collaborations.
EXPAND OUR INFORMATIONAL GENOMICS PLATFORM.
We intend to expand our informational genomics platform to include other
data types and analysis tools. For example, linking gene expression profiling
data with genotyping methods such as SNP analysis, and with clinical data, can
greatly enhance our ability to identify genes imparting risks for specific
diseases. We expect our current development work in this area to result in
analysis methods that will significantly reduce the number of patients required
to identify disease-causing genes, thereby providing us and our collaborators
with significant advantages in this area.
SELL HIGH-VALUE INFORMATION PRODUCTS.
We plan to gradually transition from being a provider of gene expression
tools to creating information products derived through the use of our gene
expression tools and coherent data sets. We expect that the earliest information
products will be new pairings of therapeutic targets and compounds specific for
those targets. These pairings are more valuable than the identification of new
targets alone because this provides a lead compound at the same time the target
is analyzed.
SALES AND MARKETING
Our Resolver system will be jointly marketed by Agilent and us and will be
sold by Agilent pursuant to our partnership agreement. Agilent is responsible
for selling and marketing the FlexJet DNA microarray and we will receive royalty
revenues from these sales. Agilent's direct sales force has a strong worldwide
presence among our targeted customer base. Additionally, we anticipate our
collaborations will stimulate demand for our informational genomic tools. Our
collaborations are established by our business development group and our
internal sales and marketing group. We expect to expand our sales and marketing
efforts to increase our market presence worldwide. In 1999, Agilent accounted
for 66% of our revenues.
36
<PAGE>
STRATEGIC COLLABORATION
AGILENT TECHNOLOGIES, INC.
In October 1999, we entered into a strategic collaboration with Agilent. We
agreed to exclusively partner with Agilent to make and sell products in the gene
expression field including our Resolver system, FlexJet DNA microarrays, array
design services and certain other products. Under the agreement, we agreed to
conduct certain research and development activities related to our technologies
for which Agilent is obligated to provide funding. In connection with the
collaboration, Agilent purchased 2,285,714 shares of our Series D preferred
stock. We have the right to sell Agilent an additional $10.0 million of common
stock at any time on or before the closing of this offering.
Our relationship with Agilent provides us with the scale and expertise of a
leading technology company to commercialize our inkjet array technology and to
bring our Resolver system to market more rapidly. Agilent has integrated our
inkjet technology for manufacturing DNA microarrays with their previously
developed ink jet technology. Agilent has agreed that it will further develop,
manufacture and distribute FlexJet DNA microarrays as well as provide and
further develop our Resolver Expression Data Analysis System.
Under the agreement, Agilent has the exclusive right to market and sell
FlexJet DNA microarrays manufactured using our inkjet synthesizer and related
array design technology, in exchange for certain royalty payments. Agilent also
has the right, co-exclusive with us, under the agreement to market and sell the
Resolver system. Agilent will share revenues with us for Resolver system sales
and array design services.
Our agreement with Agilent further contemplates that we will provide certain
services related to the customized design of arrays. Revenue received in
connection with these services and royalties received in connection with the
sales of arrays will be shared by Agilent and us. As part of this relationship,
Agilent has agreed to sell arrays to us at a discount and we anticipate that
Agilent will be the primary supplier of arrays that for our internal use. We
will not receive royalties on arrays that we purchase from Agilent.
In this relationship, we primarily focus on developing our Resolver system
and our array design services, including the capability to select
oligonucleotides that are used on FlexJet DNA microarrays. Agilent focuses
primarily on manufacturing and distribution of FlexJet DNA microarrays,
development of other instruments and overall system integration. Both of us are
involved in developing the business plan for the products under this agreement.
The agreement provides that a party's consent must be obtained before the other
party may introduce a product that could compete with products that are covered
by the collaboration.
The Agilent agreement has a seven-year term and expires in October 2006
unless extended by mutual agreement of the parties. At the end of this period,
we will retain the right to purchase arrays from Agilent at a discounted price
and Agilent will retain the right to sell arrays manufactured using our
technology. If the agreement was terminated by Agilent as a result of a breach
by us, Agilent would retain the right to sell, and we will receive a royalty on,
FlexJet DNA microarrays sold by Agilent that are manufactured using our
technology. In addition, Agilent will retain the right to be a value added
reseller of the Resolver system.
Either of us may terminate the agreement prior to the end of the seven-year
term upon certain material breaches of the agreement or upon bankruptcy of the
other party. In the event of an early termination of this agreement, we will
still receive royalties from FlexJet DNA microarrays sold by Agilent. However,
the royalty rate is adjusted depending upon which party terminates the
agreement. Upon an early termination of this agreement, we retain rights to our
Resolver system.
37
<PAGE>
CUSTOMER COLLABORATIONS
DUPONT PHARMACEUTICALS COMPANY
In September 1999, we entered into an early access program agreement with
DuPont Pharmaceuticals Company. Under the terms of this agreement, DuPont agreed
to purchase a pre-release version of our Resolver system at a reduced price.
DuPont also agreed to provide us feedback with respect to both feature
development and user satisfaction to assist in the development of our product.
We have granted DuPont a limited, non-exclusive license to use this version of
our Resolver software. The license reverts to us upon termination of this
agreement. DuPont has agreed to provide us feedback regarding our Resolver
software.
MONSANTO COMPANY
We entered into a pilot project collaboration agreement with the Monsanto
Company in February 2000. Under this agreement, Monsanto is evaluating the use
of our FlexJet DNA microarray technology and array design capabilities for gene
expression profiling across several species. Monsanto is also evaluating our
Resolver system for analyzing gene expression data. Upon the successful
completion of the pilot project, we have agreed with Monsanto to discuss a
follow-on agreement, but the parties are not required to enter into such a
follow-on agreement. In certain circumstances, we have agreed to non-exclusively
license to Monsanto some discoveries made by Monsanto that utilize our data.
COMPETITION
Competition is intense among companies providing drug discovery and
development tools and methods to our target markets. For certain of our products
we face competition from biotechnology and bioinformatics companies, in-house
bioinformatics efforts of pharmaceutical and agricultural companies, academic
institutions and government agencies, both in the United States and abroad. We
expect that the intensity of such competition will continue to increase.
Competition for our market can be broken down into the following categories.
- BIOINFORMATICS SOLUTIONS. Bioinformatics competitors fall into three
groups: custom integrators, providers of desktop analysis tools, and
providers of database software. Some competitors provide both desktop
analysis tools and database software which provide many of the basic
functions of our Resolver system. Custom integrators are direct
competitors for some aspects of our informatics consulting services.
- ARRAY PROVIDERS. FlexJet DNA microarrays sold by Agilent will have
competition from other commercial manufacturers of oligonucleotide arrays
and of cDNA arrays. There also are providers of systems that enable the
customer to make their own cDNA arrays.
- EXPRESSION PROFILE PROGRAMS. Many potential pharmaceutical and
biotechnology customers have in-house expression profiling efforts either
in place or planned. These internal efforts may compete with our
informational genomics products and services. External genomics
competitors with greater financial resources than we have are building
gene expression databases.
Future competition will come from expanded offerings of existing competitors
and other companies developing new technologies for drug discovery based on gene
sequences, target gene identification, bioinformatics and related technologies.
Many of our competitors have greater capital and research and development
resources. In addition, many have a more established customer base and have
pre-existing relationships with our potential customers. Our future success will
depend, in large part, on our ability to maintain a competitive position in the
genomics and bioinformatics fields.
38
<PAGE>
INTELLECTUAL PROPERTY AND PROPRIETARY TECHNOLOGY
We rely on a combination of patent, trademark, copyright and trade secret
laws to protect our proprietary technologies and products. We aggressively seek
U.S. and international patent protection to further our business strategy and
for major components of our technology platform, including elements of our array
design, data analysis software and bioinformatics technologies, as well as genes
of interest and potential drug targets. We rely upon trade secret protection for
certain of our confidential and proprietary information, and we enter into
licenses to access external technologies we view as necessary to pursue our
corporate goals.
As of March 1, 2000, we own one issued U.S. patent and 35 pending U.S.
patent applications and corresponding international and foreign patent
applications. In addition, we had exclusive rights to two issued U.S. patents
and eight U.S. patent applications and corresponding international and foreign
patent applications.
In general, we apply for patent protection for methods and products relating
to gene expression analysis technologies and relating to individual disease
genes and targets we discover. These patent applications may include claims
relating to novel uses for known genes or gene fragments identified through our
discovery programs.
With respect to proprietary know-how that is not patentable, we have chosen
to rely on trade secret protection and confidentiality agreements to protect our
interests. In addition, we have developed a proprietary data set that provides
transcript array expression data and that is updated on an ongoing basis. We
expect that some of the data contained within this data set will be the subject
of patent applications, whereas other data will be maintained as proprietary
trade secret information. We have taken security measures to protect our
proprietary know-how, technologies and confidential data and continue to explore
further methods of protection.
We also rely on trade secrets and proprietary know-how, especially in
circumstances where patent protection is not believed to be appropriate or
obtainable. We require all employees, consultants and collaborators to enter
into confidentiality agreements, and all employees and most consultants enter
into invention agreements with us. These agreements generally provide that all
confidential information developed or made known to the individual during the
course of such relationship will be kept confidential and not disclosed to third
parties, except in specified circumstances. These agreements also generally
provide that all inventions conceived by the individual in the course of
rendering services to us shall be our exclusive property. There can be no
assurance, however, that these agreements will provide meaningful protection or
adequate remedies for any breach, or that our trade secrets will not otherwise
become known or be independently discovered by our competitors. Any of these
events could have a material adverse effect on our business, financial condition
and results of operations.
In the case of a strategic partnership or other collaborative arrangement
which requires the sharing of data, our policy is to disclose to our partner
only such data as are relevant to the partnership or arrangement, under
controlled circumstances and only during the contractual term of the strategic
partnership or collaborative arrangement, subject to a duty of confidentiality
on the part of our partner or collaborator. Disputes may arise as to the
inventorship and corresponding rights in know-how and inventions resulting from
research by us and our corporate partners, licensors, scientific collaborators
and consultants. There can be no assurance that we will be able to maintain our
proprietary position, or that third parties will not circumvent any proprietary
protection we have. Our failure to maintain exclusive or other rights to such
technologies could have a material adverse effect on our business, financial
condition and results of operations.
We are a party to various license agreements which give us rights to use
certain technologies in our research, development and commercialization
activities. One of these license agreements is with Affymetrix, a company that
possesses a substantial intellectual property position in the area of
39
<PAGE>
polynucleotide array fabrication and use. This agreement permits us to make and
use arrays for our internal use. We have also sublicensed certain rights under
certain patents related to the fabrication and use of nucleic acid arrays from
Oxford Gene Technology.
To continue developing and commercializing our current and future products,
we may license intellectual property from commercial or academic entities to
obtain the rights to technology that is required for our discovery, research,
development and commercialization activities.
The biotechnology industry, including companies using DNA microarrays, has
experienced significant litigation over alleged infringement of various patents
and intellectual property rights. Agilent has agreed to indemnify us against any
claims, damages, or other liabilities that may arise from an alleged
infringement of any third party's intellectual property rights covering our use
of DNA microarrays.
In anticipation of the commercial distribution of our products and services,
we have filed a number of trademark applications.
TECHNOLOGY LICENSES
Where consistent with our strategy, we seek to obtain technologies that
complement and expand our existing technology base. We have licensed and will
continue to license product and marketing rights from selected research and
academic institutions, as well as other organizations. Under these license
agreements, we generally seek to obtain unrestricted sublicense rights. We are
generally obligated under these agreements to pursue product development, make
development milestone payments and pay royalties on any product sales. In
addition to license agreements, we seek relationships with other entities which
may benefit us and support our business goals.
AFFYMETRIX, INC.
In November 1998, we entered into a three-year internal use license
agreement with Affymetrix, which is renewable on an annual basis. Under the
license agreement, Affymetrix granted us a nonexclusive, nontransferable,
nonsublicensable, worldwide license to certain patents related to the
fabrication and use of nucleic acid arrays. We paid an up-front license fee upon
execution of the license agreement and pay an annual usage royalty.
FRED HUTCHINSON CANCER RESEARCH CENTER
In December 1997, we entered into a license agreement with the Fred
Hutchinson Cancer Research Center. Under the agreement, the Hutchinson Center
granted us an exclusive, worldwide, sublicensable license (subject to the rights
of certain U.S. governmental agencies and a grant-back to the Hutchinson Center
for non-commercial research purposes) to certain drug screening technology. Upon
execution of the license agreement we issued 352,000 shares of our common stock
to the Hutchinson Center. In addition, we are obligated under the agreement to
pay the Hutchinson Center a fixed annual payment upon issuance of the first U.S.
patent containing claims covering the licensed technology.
OXFORD GENE TECHNOLOGY IP LIMITED
In March 2000, we entered into a License Agreement with Oxford Gene
Technology IP Limited. Under the agreement, Oxford Gene Technology granted us a
nonexclusive worldwide sublicense to certain patents related to the fabrication
and use of nucleic acid arrays. We issued 686,928 shares of our common stock to
Oxford Gene Technology. We are also obligated to pay royalties to Oxford Gene
Technology on sales of products and services covered by the patents licensed to
us under the agreement. The term of the agreement continues until the last of
the licensed patents expire.
40
<PAGE>
UNIVERSITY OF CALIFORNIA, BERKELEY
As part of our merger with Acacia Biosciences in February 1999, we assumed
an agreement with the University of California. Under this agreement, we have an
exclusive license to two issued U.S. patents, 5,569,588 and 5,777,888 (the '888
patent) and patent applications related to these patents. The '888 patent covers
a fundamental analysis approach useful for gene expression analysis. Under the
agreement, we are obligated to pay the University of California an annual
minimum royalty and a percentage of revenues that we obtain from sublicensing
this technology.
UNIVERSITY OF WASHINGTON
In September 1997, we entered into a license agreement with the University
of Washington. The University of Washington granted us an exclusive, worldwide,
sublicensable license (subject to the rights of certain U.S. governmental
agencies and a grant-back to the University of Washington for non-commercial
research purposes) to certain technology pertaining to inkjet synthesis of
oligonucleotides. Upon execution of the license agreement we issued 90,000
shares of our common stock to the University of Washington. We are also
obligated to make future periodic payments on the anniversary date of the
agreement. In addition, we are obligated to make royalty payments on any product
sales, subject to an annual minimum royalty. In addition to the common stock
issued upon execution of the agreement, we issued 30,000 shares of our common
stock because of the issuance of the first U.S. patent containing claims
covering the licensed technology and the first commercial sale of a product
incorporating the licensed technology.
GOVERNMENT REGULATION
Our products are not currently subject to regulation by governmental
agencies other than the laws and regulations generally applicable to businesses
in the jurisdictions in which we operate. However, the products of many of the
pharmaceutical and biotechnology companies to which we market our products are
regulated by the FDA, and the interest of the FDA or other governmental agencies
in our products may increase as the number of pharmaceutical and other products
developed using our technology increases.
EMPLOYEES
As of March 16, 2000, Rosetta employed 104 personnel, 34 of whom hold
Ph.D.s, 3 of whom hold M.D.s. Of these employees, 81 are employed in Research,
Development and Informatics, and 23 are employed in administration. Each of our
employees has signed a confidentiality agreement. We have never experienced
employment-related work stoppages and consider our employee relations to be
good.
FACILITIES
We maintain our principal headquarters in Kirkland, Washington, where we
lease approximately 50,000 square feet of laboratory and general administration
space. The lease for this facility expires in July 2002, with an option to renew
the lease for an additional three year period. We believe that our existing
facilities are adequate to meet our immediate needs and that suitable additional
space will be available in the future on commercially reasonable terms as
needed.
LEGAL PROCEEDINGS
We may become involved in legal proceedings from time to time in the
ordinary course of business. As of the date of this prospectus, we are not
involved in any pending material legal proceedings. However, on January 6, 2000
we received, through our legal counsel, a request for information from the FBI.
The information requested pertains to one of our recently hired employees and
relates to the employee's involvement in certain software development activities
prior to his
41
<PAGE>
employment with us. Although the FBI has not disclosed to us the specific
substance of the matters being investigated, we do not believe that we, as a
company, or any actions by us are the subject of the investigation. We are
cooperating fully with the FBI. We are unable at this time to predict the
outcome of this investigation.
42
<PAGE>
MANAGEMENT
- --------------------------------------------------------------------------------
The following table provides information regarding our executive officers
and directors as of March 16, 2000:
<TABLE>
<CAPTION>
NAME AGE TITLE
- ---- --- --------------------------------------------
<S> <C> <C>
Stephen H. Friend, M.D., Ph.D. .............. 46 President, Chief Executive Officer and
Director
John J. King II.............................. 47 Senior Vice President, Chief Operating
Officer and Director
Mark Boguski, M.D., Ph.D..................... 46 Senior Vice President of Research
Roland Stoughton, Ph.D. ..................... 45 Vice President of Bioinformatics
David Borges................................. 36 Director of Finance
William I. Buffington........................ 51 Director
William W. Ericson........................... 42 Director
Steven Gillis, Ph.D.(1)...................... 46 Director
Ruth Kunath(1)(2)............................ 48 Director
Harvey S. Sadow, Ph.D(2)..................... 77 Director
Peter Svenillson............................. 38 Director
Charles P. Waite(1)(2)....................... 44 Director
</TABLE>
- ------------------------
(1) Member of Compensation Committee
(2) Member of Audit Committee
STEPHEN H. FRIEND, M.D., PH.D. Dr. Friend co-founded our company in 1996 and
has served as our President since June 1997, Chief Scientific Officer and
director since April 1997, and Chief Executive Officer since February 2000. From
April 1997 to June 1997, Dr. Friend served as our Acting President. From
December 1996 to April 1997, Dr. Friend served as our Vice President of
Functional Genomics. Dr. Friend joined the Fred Hutchinson Cancer Research
Center, a research organization, as a visiting scientist in 1994 and has been a
Full Member and Head of the Program of Molecular Pharmacology from 1995 to the
present. In 1995, he co-founded the Seattle Project, an Advanced Institute for
Drug Discovery, at the Hutchinson Center and was a co-director from 1995 through
March 2000. Dr. Friend held faculty positions at Harvard Medical School from
1987 to 1995 and at Massachusetts General Hospital from 1990 to 1995.
Dr. Friend graduated from Indiana University with a B.A. in Philosophy and
received his Ph.D. in Biochemistry and his M.D. from Indiana University.
JOHN J. KING, II. Mr. King has served as our Senior Vice President, Chief
Operating Officer and director since April 1997. From 1992 to 1996, Mr. King
served as Executive Vice President of KidStar Interactive Media, Inc., a media
company. He co-founded Biotope, Inc., a biotechnology company, and served as its
President and Chief Operating Officer from 1986 to 1988 and its Chairman from
1988 to 1992. Mr. King co-founded IMRE Corporation, a biotechnology company, and
served as its President and Chief Operating Officer from 1981 to 1986. Mr. King
graduated from the University of Pennsylvania with a B.A. in Anthropology.
MARK BOGUSKI, M.D., PH.D. Dr. Boguski has been our Senior Vice President of
Research since March 2000. From 1995 to March 1999, he was a Senior Investigator
at the U.S. National Center for Biotechnology Information, a division of the
National Library of Medicine at the National Institutes of Health in Bethesda,
Maryland and was a Senior Staff Fellow at the National Center from 1989 to 1995.
In addition, Dr. Boguski has been an Assistant Professor in the Department of
Molecular Biology and Genetics at Johns Hopkins University School of Medicine
from 1995 to present. Dr. Boguski received a B.A. from Johns Hopkins University
and a Ph.D. and M.D. from the Washington University School of Medicine.
43
<PAGE>
ROLAND STOUGHTON, PH.D. Dr. Stoughton has served as our Vice President of
Bioinformatics since November 1998 and from July 1997 through November 1998,
Dr. Stoughton served as our Informatics Team Leader. From September 1982 through
July 1997, he was the Division Manager and Senior Research Scientist at Science
Applications International Corporation, a research and engineering company.
Mr. Stoughton has a B.A. in Physics from Amherst College, an M.S. in
Astrophysics, and his Ph.D. in Physics and Astronomy from the University of
California, Santa Cruz.
DAVID BORGES, CPA. Mr. Borges has served as our Director of Finance and
Controller since May 1998. From June 1986 through May 1998 he worked for the
international public accounting firm of Coopers Lybrand LLP. Mr. Borges holds a
B.A. in accounting from Santa Clara University.
WILLIAM I. BUFFINGTON. Mr. Buffington has served as one of our Directors
since October 1999. From August 1998 to the present, Mr. Buffington has been
General Manager, Bioscience Products Business at Agilent Technologies, Inc, a
technology company formerly part of Hewlett-Packard Company. Prior to that, he
held various positions at Hewlett-Packard Company, a technology company,
including Group R&D Manager, Bioscience Products Business from January 1996 to
August 1998, General Manager and Director at Hewlett Packard and Yokogawa
Electrical JV from April 1992 to May 1995, and R&D Manager, Avondale Division,
from 1984 to April 1992. Mr. Buffington holds a B.S. in Electrical Engineering
and a M.S. in Physics from Pennsylvania State University.
WILLIAM W. ERICSON. Mr. Ericson has served as one of our directors since
March 2000. Since August 1995, Mr. Ericson has been an attorney at Venture Law
Group, a law firm specializing in the representation of technology companies.
Mr. Ericson is the managing director and founder of Venture Law Group's Pacific
Northwest office located in Kirkland, Washington. Prior to joining Venture Law
Group, Mr. Ericson was an associate at the law firm of Brobeck, Phleger and
Harrison, LLP from October 1992 through August 1995. Mr. Ericson holds a
Bachelor of Science in Foreign Service from Georgetown University and a J.D.
from Northwestern University School of Law. Mr. Ericson is on the board of
Onvia.com, Inc. and several privately-held companies.
STEVEN GILLIS, PH.D. Dr. Gillis has served as one of our Directors since
June 1997. He has served as Chairman of the Board of Corixa Corporation, a
biotechnology company, since March 1999 and either President or Chief Executive
Officer and director of Corixa since 1994. Dr. Gillis was a founder of Immunex
Corporation, a biotechnology company. From 1981 to 1994, Dr. Gillis served as
Executive Vice President and Director of Research and Development of Immunex,
and from 1993 to 1994, served as Acting Chief Executive Officer and Chairman of
the Board of Immunex. From 1990 to 1994, Dr. Gillis also served as President and
Chief Executive Officer of Immunex Research and Development Corporation, a
wholly-owned subsidiary of Immunex, and Chief Scientific Officer of Immunex. In
addition, Dr. Gillis is a director of Micrologix Biotech, Inc., a biotechnology
company, Genesis Research and Development Corporation Limited, a biotechnology
company, and Koronis Pharmaceuticals, a biotechnology company. Dr. Gillis
graduated from Williams College with a B.A. in Biology and English and received
his Ph.D. in Biological Sciences from Dartmouth College.
RUTH KUNATH. Ms. Kunath has served as one of our directors since June 1997.
Since 1992, Ms. Kunath has managed the public and private biotechnology and
emerging healthcare technology portfolios for Vulcan Ventures, Inc., a venture
capital firm founded by Paul G. Allen in 1992. From 1975 to 1992, Ms. Kunath was
the Biotechnology Analyst and then the Senior Portfolio Manager for the
healthcare sector at Bank of America Capital Management (formerly Seattle
Capital Management Equity), a financial services company. Ms. Kunath is
currently a director of VaxGen, Inc., a biotechnology company, and Dendreon
Corporation, a biotechnology company. Ms. Kunath is a Certified Financial
Analyst and holds a B.A. from DePauw University in Indiana.
HARVEY S. SADOW, PH.D. Dr. Sadow has served as one of our directors since
February 1999. Prior to that, Dr. Sadow served as Chairman of the Board of
Directors of Acacia Biosciences, Inc., a
44
<PAGE>
biotechnology company, until our acquisition of Acacia in February 1999. He was
President and Chief Executive Officer and a director of Boehringer
Ingelheim Ltd., a pharmaceuticals company, from 1971 until 1981 and as President
and Chief Executive Officer of its successor company, Boehringer Ingelheim
Pharmaceuticals, Inc. and its parent, Boehringer Ingelheim Corporation, until
1988, retiring as Chairman of the Board of both companies in 1990. He is
currently a director of Anika Therapeutics, Inc., a biomedical company,
Cholestech Corp., a medical diagnostics company, and Trega Biosciences, Inc., a
biotechnology company. Dr. Sadow received a B.S. from the Virginia Military
Institute in 1947, a M.S. from the University of Kansas in 1949 and a Ph.D. in
bioanalytical chemistry from the University of Connecticut in 1953.
PETER SVENILLSON. Mr. Svenillson has served as one of our directors since
June 1997. From 1995 to the present, he has been a Managing Director and Partner
of Hamilton Capital Ltd., an investment company, and of Broadview Ltd., an
investment company. From 1993 to 1995, Mr. Svenillson was Managing Director and
Partner of Stone Porch Ltd., an investment company in London, England. From 1987
to 1993, Mr. Svenillson was Associate Managing Director of Nomura International
PLC, a financial services company, in London, England, in charge of European
investment banking. He is a director of PTC Therapeutics, a biotechnology
company, and Somalogic, Inc., a biotechnology company. Mr. Svenillson received
his B.A. and his M.B.A. from the Stockholm School of Economics. He has also
attended M.B.A. programs at INSEAD and at the London Business School.
CHARLES P. WAITE. Mr. Waite has served as one of our directors since
June 1997. From 1987 to the present, Mr. Waite has been a General Partner with
Olympic Venture Partners, a venture capital firm. From 1983 to 1987, he was a
General Partner at Hambrecht & Quist Venture Partners. Mr. Waite currently
serves on a number of boards including: Cardima, Inc., a medical device company,
Loudeye Technologies, Inc., an Internet media company, Seattle Genetics, a
biotechnology company, SignalSoft Corporation, a wireless services company,
WatchGuard Technologies, Inc, an Internet security company, and Verity, Inc., a
software company. Mr. Waite received his A.B. from Kenyon College and received
his M.B.A. from Harvard University.
BOARD COMPOSITION
We currently have nine directors and have one vacancy. Upon the closing of
this offering, our Board of Directors will be divided into three classes. The
Class I directors are Peter Svenillson, Harvey S. Sadow, and Stephen Gillis, and
they will serve an initial term until the 2001 annual meeting of stockholders or
special meeting held in lieu thereof, the Class II directors are John J. King,
William W. Ericson, and Ruth Kunath, and they will serve an initial term until
the 2002 annual meeting of stockholders or special meeting held in lieu thereof,
and the Class III directors are Stephen H. Friend, Bill Buffington, and Charles
P. Waite, and they will serve an initial term until the 2003 annual meeting of
stockholders or special meeting held in lieu thereof.
At each annual meeting of stockholders after the initial classification (or
special meeting in lieu of a meeting), the successors to directors whose terms
will then expire will be elected to serve from the time of election and
qualification until the second annual meeting following election (or special
meeting held in lieu thereof). Any additional directorships resulting from an
increase in the number of directors will be distributed among the classes so
that, as nearly as possible, each class will consist of approximately one-third
of the directors. This classification of the board of directors may have the
effect of delaying or preventing changes in control or management of the
company, although directors of the company may be removed for cause by the
affirmative vote of the holders of a majority of the common stock.
45
<PAGE>
COMMITTEES OF THE BOARD
AUDIT COMMITTEE. In March 2000, our Board established its audit committee.
The Board's Audit Committee currently consists of Ms. Kunath, Mr. Waite and
Dr. Sadow. The Audit Committee
- makes recommendations to the board of directors regarding the selection of
independent auditors;
- reviews the results and scope of the audit and other services provided by
our independent auditors; and
- reviews and evaluates our audit and control functions.
COMPENSATION COMMITTEE. In July 1997, our Board established a Compensation
Committee. The Compensation Committee consists of Dr. Gillis, Ms. Kunath and
Mr. Waite. The Compensation Committee's functions are
- to review and approve the compensation and benefits for our executive
officers;
- to administer our stock purchase and stock option plans; and
- make recommendations to our Board regarding such matters.
COMPENSATION OF DIRECTORS
COMPENSATION COMMITTEE. We do not currently compensate our directors, with
the exception of Dr. Sadow who receives $1,500 per meeting. However, directors
are reimbursed for out-of-pocket expenses incurred in connection with attendance
at meetings of the board of directors or its committees. Directors are eligible
to receive stock options in consideration of their services pursuant to our 1997
stock plan, our 2000 directors' stock option plan and our 2000 stock option plan
and, to the extent that a director is an employee, to participate in our 2000
employee stock purchase plan. See "Stock Plans."
COMPENSATION COMMITTEE INTERLOCKS AND INSIDER PARTICIPATION
Our board of directors established its compensation committee in July 1997.
Prior to establishing the compensation committee, the board of directors as a
whole performed the functions delegated to the compensation committee. None of
the members of the compensation committee is currently, or has even been at any
time since our formation, once of our officers or employees. No member of the
compensation committee serves as a member of the board of directors or
compensation committee of any entity that has one or more officers serving as a
member of our board of directors or compensation committee.
46
<PAGE>
SCIENTIFIC ADVISORY BOARD
Our Scientific Advisory Board is composed of leading academic scientists and
clinicians with expertise in fields related to our technology and business
focus. The Scientific Advisory Board meets at least twice annually with our
scientific staff and management to discuss our research and development programs
and long-term scientific strategy.
<TABLE>
<CAPTION>
SCIENTIFIC ADVISORY BOARD MEMBER AFFILIATED INSTITUTION
- -------------------------------- ----------------------
<S> <C>
Leland H. Hartwell, Ph.D..................... President, Fred Hutchinson Cancer Research Center
Ruedi Aebersold, Ph.D........................ Professor of Biotechnology, University of Washington
William G. Kaelin, Jr., M.D.................. Associate Professor, Dana Farber Cancer Institute
Andrew W. Murray, Ph.D....................... Professor of Physiology, University of California at
San Francisco
Maynard Olson, Ph.D.......................... Professor of Medicine and Genetics, University of
Washington
Jasper D. Rine, Ph.D......................... Professor of Biology and Genetics, University of
California, Berkeley
Bruce W. Stillman, Ph.D...................... Director, Cold Spring Harbor Laboratory
Hans Wigzell, Ph.D........................... President, Karolinska Institute, Stockholm, Sweden
</TABLE>
EXECUTIVE COMPENSATION
The following table provides summary information concerning the compensation
received for services rendered to us during the fiscal year ended December 31,
1999 by the Chief Executive Officer and our only other executive officers whose
aggregate compensation during our last fiscal year exceeded $100,000. We
sometimes refer to these officers as the Named Officers.
SUMMARY COMPENSATION TABLE
<TABLE>
<CAPTION>
LONG-TERM
COMPENSATION AWARDS
ANNUAL COMPENSATION -------------------
------------------- SECURITIES ALL OTHER
NAME AND PRINCIPAL POSITION SALARY BONUS(1) UNDERLYING OPTIONS COMPENSATION(2)
- --------------------------- ------ -------- ------------------ ---------------
<S> <C> <C> <C> <C>
Stephen H. Friend, M.D., Ph.D. .......... $172,500 $16,500 -- $3,291
President, Chief Executive Officer and
Chief Scientific Officer
John J. King, II ......................... $136,500 $13,100 -- $7,424
Senior Vice President and
Chief Operating Officer
Roland Stoughton, Ph.D. .................. $138,342 $13,000 -- $ 713
Vice President of Bioinformatics
</TABLE>
- ------------------------
(1) Bonus represents the amount paid to the employee in 1999.
(2) Includes amounts paid for life insurance premiums for each of the named
officers, health insurance premiums for Mr. King, and automobile expenses
for Dr. Friend.
OPTION GRANTS
None of our Named Officers received option grants or stock appreciation
rights in fiscal year 1999.
47
<PAGE>
OPTION EXERCISES AND HOLDINGS
The following table sets forth the number of shares of common stock acquired
upon the shares exercise of stock options by the Named Officers during our last
fiscal year, and the number and value of securities underlying unexercised
options held by the Named Officers as of December 31, 1999. Options to purchase
shares of our common stock under our 1997 stock plan are exercisable in full six
months after the date of grant but are subject to a right of repurchase pursuant
to the vesting schedule of each specific grant. The repurchase option generally
lapses over a four year period with 12.5% vesting on the six month anniversary
date and 1/48(th) of the total number of shares vesting monthly thereafter.
AGGREGATED OPTION EXERCISES IN 1999
AND FISCAL YEAR-END OPTION VALUES
<TABLE>
<CAPTION>
NUMBER OF SECURITIES
UNDERLYING UNEXERCISED VALUE OF UNEXERCISED
OPTIONS AT IN-THE-MONEY OPTIONS
SHARES DECEMBER 31, 1999 AT DECEMBER 31, 1999(1)
ACQUIRED ON VALUE --------------------------- ---------------------------
NAME EXERCISE REALIZED EXERCISABLE UNEXERCISABLE EXERCISABLE UNEXERCISABLE
- ---- ----------- -------- ----------- ------------- ----------- -------------
<S> <C> <C> <C> <C> <C> <C>
Stephen H. Friend, M.D.,
Ph.D..................... -- -- -- -- -- --
John J. King, II........... -- -- -- -- -- --
Roland Stoughton, Ph.D..... -- -- 151,500 -- $18,937.50 --
</TABLE>
- ------------------------
(1) Based on the fair market value as of December 31, 1999, as determined by our
Board of Directors, minus the exercise price, multiplied by the number of
shares underlying the option.
STOCK PLANS
2000 STOCK OPTION PLAN
PURPOSES OF PLAN; SHARE RESERVE. Our 2000 stock option plan was adopted by
our Board of Directors in March 2000 and will be submitted for the approval of
our stockholders before the close of this offering. A maximum of 5,286,913
shares of our common stock may be sold under the 2000 stock option plan. The
plan provides for an automatic annual increase on the first day of each of our
fiscal years beginning in 2001 and ending in 2009 equal to the lesser of:
- 1,200,000 shares,
- 4% of our outstanding common stock on the last day of the preceding fiscal
year or
- a lesser number of shares that the board determines.
As of March 16, 2000 no shares had been granted under the 2000 stock option
plan. Options granted under the 2000 stock option plan may be "incentive stock
options" within the meaning of Section 422 of the Internal Revenue Code of 1986,
or nonstatutory stock options. The 2000 stock option plan will terminate in
March 2010 unless the board terminates it earlier.
ADMINISTRATION. The 2000 stock option plan is administered by our Board or
a committee appointed by our Board. The administrator has the authority to
determine:
- the fair market value of the common stock;
- which individuals will be granted options under the 2000 stock option
plan;
- the number of shares of common stock to be covered by each award of
options granted under the 2000 stock option plan;
48
<PAGE>
- to approve the form of agreement(s) under the 2000 stock option plan;
- to determine the terms and conditions of any award granted under the 2000
stock option plan, so long as they are not inconsistent with the plan;
- to implement an option exchange program;
- to adjust the vesting of an option;
- to construe and interpret the terms of the plan and awards granted
pursuant to the plan; and
- without amending the plan, to modify grants of options or stock purchase
rights to participants who are foreign nationals or are employed outside
of the United States in order to recognize differences in local law, tax
policies, or customs.
ELIGIBILITY. The 2000 stock option plan provides for the grant to our
employees (including officers and employee directors) of incentive stock options
and for the grant of nonstatutory stock options to our employees, officers,
directors (including non-employee directors) and consultants. To the extent an
optionee would have the right in any calendar year to exercise for the first
time one or more incentive stock options for shares having an aggregate fair
market value in excess of $100,000, any such excess options shall be treated as
nonstatutory options.
TERM. The term of each option shall be no more than ten years from the date
of grant or a shorter term as may be provided in the option agreement. In the
case of an incentive stock option granted to an optionee who, at the time the
option is granted, owns stock representing more than ten percent (10%) of the
total combined voting power of all classes of our stock or any parent or
subsidiary, the term of the option shall be five years from the date of grant or
shorter term as may be provided in the written option agreement.
VESTING AND EXERCISABILITY. Options granted under the 2000 stock option
plan generally vest at a rate of 1/4(th) of the total number of shares subject
to the options twelve months after the date of grant and 1/48(th) of the total
number of shares subject to the options each month thereafter. The administrator
may permit the immediate exercise of unvested options. However, we reserve the
right to repurchase any unvested shares at the time of the optionee's
termination of employment at the exercise price paid for such shares.
EXERCISE PRICE. The exercise price of each incentive stock option granted
under the 2000 stock option plan must be at least equal to the fair market value
of our common stock on the date of grant. The exercise price of each
nonstatutory stock option granted under the 2000 stock option plan shall be as
determined by the administrator. However, generally the exercise price of any
non-statutory stock option granted to a named officer (110% of fair market value
for a 10% stockholder) must equal at least 100% of the fair market value of the
common stock on the date of grant in order to qualify the option as
performance-based compensation under applicable tax law.
PAYMENT. The method of payment of the exercise price shall be determined by
the administrator and may consist of cash, or other consideration as determined
by the administrator to the extent permitted under applicable laws.
TRANSFERABILITY. Options are generally nontransferable. The administrator
may grant nonstatutory stock options with limited transferability rights. Each
option may generally be exercised during the lifetime of the optionee only by
the optionee or permitted transferee.
TERMINATION OF OPTIONEE. Upon the termination of an optionee's employment
or other relationship with us, such optionee will have a limited time within
which to exercise any outstanding options, which time period will vary depending
on the reason for termination. To the extent that an optionee was not entitled
to exercise the option at the date of such termination, or if the optionee does
not exercise such
49
<PAGE>
option to the extent so entitled within the time specified in the 2000 stock
option plan, the option shall terminate. No termination shall be deemed to occur
if the optionee is a consultant who becomes an employee or the optionee is an
employee who becomes a consultant.
CHANGE OF CONTROL. If we merge with or consolidate into another corporation
or sell all or substantially all of our assets, we would expect that the
successor corporation will assume the options or substitute equivalent options.
In such case, immediately before the consummation of the transaction, each
outstanding award will accelerate as to 50% of the then unvested shares. In
addition, if the successor corporation terminates the employment or consulting
relationship of any participant within twelve months of the consummation of the
transaction, his or her award will vest as to all of the remaining unvested
shares. However, if the successor corporation refuses to assume or substitute
the options, each outstanding award will accelerate and become fully vested
immediately prior to the consummation of the transaction.
AMENDMENTS. Our board has the authority to amend or terminate the 2000
stock option plan provided such action does not adversely affect the rights and
obligations of any optionee under any grant with respect to options or unvested
stock issuances then outstanding under the 2000 stock option plan without his or
her consent. In addition, to the extent necessary and desirable to comply with
applicable laws, we shall obtain stockholder approval of any 2000 plan amendment
in such a manner and to such a degree as required.
1997 STOCK PLAN
PURPOSES OF PLAN; SHARE RESERVE. Our 1997 stock plan was adopted by our
board in June 1997 and approved by our stockholders in June 1997. A maximum of
5,286,913 shares of our common stock may be sold under the 1997 stock plan. As
of March 16, 2000, a total of 2,614,157 shares has been reserved for issuance
under the 1997 stock plan, options to purchase a total of 1,469,720 shares of
our common stock had been exercised and 1,833,836 shares remained available for
grant under the 1997 stock plan. Options granted under the 1997 stock plan may
be "incentive stock options" within the meaning of Section 422 of the Internal
Revenue Code of 1986, or nonstatutory stock options. Stock purchase rights may
also be granted under the 1997 stock plan. To date, no stock purchase rights
have been granted.
The terms of the 1997 stock plan are substantially similar to those of the
2000 stock option plan except for the following:
- The exercise price of any nonstatutory stock option granted to an optionee
who is a 10% stockholder must equal at least 110% of the fair market value
of our common stock on the date of grant and all other non-statutory stock
options must have exercise prices equal to at least 85% of the fair market
value on the date of grant.
- Options and stock purchase rights granted under the 1997 stock plan are
generally nontransferable and may only be exercised during the lifetime of
the award-holder by the award-holder.
The 1997 stock plan does not impose an annual limit on the number of shares
subject to awards that may be granted under the plan.
2000 DIRECTORS' STOCK OPTION PLAN
The 2000 Directors' Stock Option Plan was adopted by the board in
March 2000. We will be submitting it for approval by the stockholders prior to
the closing of this offering. A total of 600,000 shares of common stock has been
reserved for issuance under the directors' plan, none of which have been issued.
The directors' plan will be effective as of the effective date of this offering.
50
<PAGE>
Under the directors' plan, each individual who serves as a non-employee
director as of the effective date of this offering will receive an automatic
grant of an option to purchase 25,000 shares of common stock upon the effective
date of this offering. Each individual who first becomes a non-employee director
after the effective date of the directors' plan will receive an automatic
initial grant of an option to purchase 25,000 shares of common stock upon
appointment or election to the Board. The automatic grants to purchase 25,000
shares will vest and become exercisable in installments of 1/48(th) of the total
number of shares subject to the option each month following the date of grant.
The directors' plan also provides for automatic annual grants of options to
purchase 5,000 shares of common stock on the date of each annual meeting of our
stockholders to each non-employee director who has served on the Board for at
least six months prior to the meeting and who continues to serve on the Board
following the meeting. The automatic grants to purchase 5,000 shares will vest
and become exercisable in installments of 1/12(th) of the total number of shares
subject to the option each month following the date of grant. The exercise price
of all stock options granted under the directors' plan shall be equal to the
fair market value of a share of our common stock on the date of grant of the
option. The exercise price of options granted to directors on the date of this
offering will be equal to the price to the public of shares sold in this
offering. Options granted under the directors' plan have a term of ten years.
However, unvested options will terminate when the optionee ceases to serve as a
director and vested options will terminate if they are not exercised within
twelve months after the director's death or disability or within 90 days after
the director ceases to serve as a director for any other reason. In addition,
options issued under the plan terminate in their entirety if a director commits
certain acts of misconduct against us.
In the event of a sale of all or substantially all of our assets or our
merger or consolidation of with or into another corporation in which the
ownership of more than 50% of the total combined voting power of our outstanding
securities changes hands, all outstanding options will accelerate and become
fully vested effective upon the consummation of the transaction.
The directors' plan is designed to work automatically without
administration. However, to the extent administration is necessary, it will be
performed by our board of directors, with any director who has a personal
interest at stake abstaining. Although our board of directors may amend or
terminate the directors' plan, it may not take any action that may adversely
affect any outstanding option without the optionee's consent. The directors'
plan will have a term of ten years unless terminated earlier.
2000 EMPLOYEE STOCK PURCHASE PLAN
The 2000 Employee Stock Purchase Plan was adopted by the board in
March 2000 and will be submitted for approval of the stockholders prior to the
closing of this offering. A total of 350,000 shares of common stock has been
reserved for issuance under the Purchase Plan, none of which have been issued as
of the date of this offering. The number of shares reserved for issuance under
the Purchase Plan will be increased on the first day of each of our fiscal years
from 2001 to 2010 by the lesser of:
- 350,000 shares;
- 1.4% of our outstanding common stock on the last day of the preceding
fiscal year; or
- the number of shares determined by the board of directors.
The Purchase Plan becomes effective on the effective date of this offering.
Unless terminated earlier by the Board of Directors, the Purchase Plan shall
terminate in March 2020.
The Purchase Plan, which is intended to qualify under Section 423 of the
Internal Revenue Code, will be implemented by a series of overlapping offering
periods of 24 months' duration, with new offering periods, other than the first
offering period, commencing on February 1 and August 1 of each year. Each
offering period will consist of four consecutive purchase periods of six months'
duration, and
51
<PAGE>
at the end of each six month period an automatic purchase will be made for
participants. The initial offering period is expected to commence on the date of
this offering and end on July 31, 2002; the initial purchase period is expected
to begin on the date of this offering and end on January 31, 2001.
The Purchase Plan will be administered by our board of directors or by a
committee appointed by the board. Our employees (including officers and employee
directors), or those of any majority-owned subsidiary designated by the board,
are eligible to participate in the Purchase Plan if they are employed for at
least 20 hours per week and more than five months per year. Under the Purchase
Plan, eligible employees may purchase common stock through payroll deductions,
which in any event may not exceed 20% of an employee's compensation, at a price
equal to the lower of 85% of the fair market value of the common stock at the
beginning of each offering period or on each purchase date. If the fair market
value of the common stock on a purchase date is less than the fair market value
at the beginning of the offering period, each participant in the Purchase Plan
shall automatically be withdrawn from the offering period as of the end of the
purchase date and re-enrolled in the new twenty-four month offering period
beginning on the first business day following the purchase date. Employees may
end their participation in the Purchase Plan at any time during an offering
period and participation ends automatically on termination of employment.
Under the Purchase Plan no employee shall be granted an option if
immediately after the grant the employee would own stock and/or hold outstanding
options to purchase stock equaling 5% or more of the total voting power or value
of all of our classes of stock or our subsidiaries'. In addition, no employee
shall be granted an option under the Purchase Plan if the option would permit
the employee to purchase stock under all employee stock purchase plans and our
subsidiaries' in an amount that exceeds $25,000 of fair market value for each
calendar year in which the option is outstanding at any time. In addition, no
employee may purchase more than 1,800 shares of common stock under the Purchase
Plan in any one purchase period.
The Purchase Plan provides that in the event of our merger or consolidation
with or into another corporation or a sale of all or substantially all of our
assets, each right to purchase stock under the Purchase Plan will be assumed or
an equivalent right will be substituted by the successor corporation. However,
if the successor corporation refuses to assume or substitute the options, the
board will shorten any ongoing offering period will automatically be shortened
so that employees' rights to purchase stock under the Purchase Plan are
exercised prior to consummation of the transaction. The board has the power to
amend or terminate the Purchase Plan and to change or terminate offering periods
as long as any action does not adversely affect any outstanding rights to
purchase stock under the Purchase Plan, However the Board may amend or terminate
the Purchase Plan or an offering period even if it would adversely affect
outstanding options in order to avoid our incurring adverse accounting charges.
We have not issued any shares under the Purchase Plan to date.
401(K) PLAN
Effective November 1997, we adopted the Rosetta Inpharmatics, Inc. 401(k)
plan covering our full-time employees. The 401(k) plan is intended to qualify
under Section 401(k) of the Internal Revenue Code of 1986 so that contributions
to the 401(k) plan by employees or by us, and the investment earnings thereon,
are not taxable to employees until withdrawn from the 401(k) plan, and so that
contributions by us, if any, will be deductible by us when made. Under the
401(k) plan, employees can contribute up to 25% of their compensation, subject
to the statutorily prescribed annual limit ($10,500) in 2000 and to have that
amount contributed to the 401(k) plan. The 401(k) plan permits, but does not
require, additional matching contributions to the 401(k) plan by us on behalf of
all participants in the 401(k) plan. To date, we have not made any matching
contributions to the 401(k) plan.
52
<PAGE>
EMPLOYMENT OFFER LETTERS
In connection with the hiring of Stephen H. Friend as our president, we
entered into a letter agreement with Dr. Friend. Dr. Friend's employment is for
no specified length of time, and we have the right to terminate Dr. Friend's
employment with or without cause. In the event we terminate Dr. Friend's
employment for any reason other than cause, we have agreed to pay salary and
benefits to Dr. Friend for a period of six months.
In connection with the hiring of Roland B. Stoughton, we entered into a
letter agreement with Dr. Stoughton. Dr. Stoughton's options vest in accordance
with our standard vesting schedule. Dr. Stoughton's employment is for no
specified length of time, and either party has the right to terminate
Dr. Stoughton's employment at any time with or without cause.
In connection with the hiring of John J. King II, we entered into a letter
agreement with Mr. King. Mr. King's options vest in accordance with our standard
vesting schedule. Mr. King's employment is for no specified length of time, and
either party has the right to terminate Mr. King's employment at any time with
or without cause.
In connection with the hiring of Mark Boguski as our Senior Vice President
of Research, we entered into a letter agreement with Dr. Boguski. His options
vest in accordance with our standard vesting schedule. Dr. Boguski's employment
is for no specified length of time, and either party has the right to terminate
his employment at any time with or without cause. Dr. Boguski received a signing
bonus in the amount of $135,000. In the event that Dr. Boguski is terminated for
reasons other than good cause, we have agreed to continue Dr. Boguski's salary
and benefits for a period of one year past his termination and to continue to
vest his options over one year. These severance payments will be offset by any
other salary Dr. Boguski may receive during that time from other employment.
LIMITATION OF LIABILITY OF OFFICERS AND DIRECTORS AND INDEMNIFICATION MATTERS
Our Amended and Restated Certificate of Incorporation limits the liability
of directors to the maximum extent permitted by Delaware law. Delaware law
provides that a director of a corporation will not be personally liable for
monetary damages for breach of such individual's fiduciary duties as a director,
except for liability (i) for any breach of such director's duty of loyalty to
the corporation or its stockholders; (ii) for acts or omissions not in good
faith or that involve intentional misconduct or a knowing violation of law;
(iii) for unlawful payments of dividends or unlawful stock repurchases or
redemptions as provided in Delaware law; or (iv) for any transaction from which
a director derives an improper personal benefit. Delaware law does not eliminate
a director's duty of care and this provision has no effect on the availability
of equitable remedies such as an injunction or recession based upon a director's
breach of the duty of care.
Our bylaws provide that we shall indemnify our directors and officers and
may indemnify its employees and other agents to the fullest extent permitted by
law. We believe that indemnification under our bylaws covers at least negligence
and gross negligence on the part of an indemnified party and permits us to
advance expenses incurred by an indemnified party in connection with the defense
of any action or proceeding arising out of such party's status or service as a
director, officer, employee or other agent of ours upon an undertaking by such
party to repay such advances if it is ultimately determined that such party is
not entitled to indemnification.
We have entered into separate indemnification agreements with each of our
directors and officers. These agreements require us, among other things, to
indemnify such director or officer against certain expenses (including
attorney's fees), judgments, fines and settlement amounts paid by such
individual in connection with any action, suit or proceeding arising out of such
individual's status or service as our director or officer (subject to certain
exceptions, including liabilities arising from willful misconduct or conduct
that is knowingly fraudulent or deliberately dishonest or a violation of
Section 16(b) of the
53
<PAGE>
Exchange Act) and to advance expenses incurred by such individual in connection
with any proceeding against such individual with respect to which such
individual may be entitled to indemnification by us. We believe that our Amended
and Restated Certificate of Incorporation, bylaws provisions and indemnification
agreements are necessary to attract and retain qualified persons as directors
and officers. We also maintain directors' and officers' liability insurance.
We are not aware of any pending litigation or proceeding involving any
director, officer, employee or agent of ours where indemnification will be
required or permitted. We are not aware of any threatened litigation or
proceeding that might result in a claim for such indemnification.
Insofar as indemnification for liabilities arising under the Securities Act
may be permitted to directors, executive officers, or persons controlling us, we
have been informed that in the opinion of the Securities and Exchange Commission
such indemnification is against public policy as expressed in the Securities Act
and is therefore unenforceable.
54
<PAGE>
CERTAIN TRANSACTIONS
- --------------------------------------------------------------------------------
Since January 1, 1999 there has not been any transaction or series of
similar transactions to which we were or are a party in which the amount
involved exceeded or exceeds $60,000 and in which any director or executive
officer of ours, any holder of more than 5% of any class of our voting
securities or any member of the immediate family of any of the foregoing persons
had or will have a direct or indirect material interest, other than the
transactions described below.
Certain stock option grants to our directors and executive officers are
described in this prospectus under the caption "Management--Executive
Compensation."
PRIVATE PLACEMENT TRANSACTIONS
Since our inception, we have issued, in private placement transactions,
shares of preferred stock, common stock, warrants for the purchase of shares of
preferred stock, and warrants for the purchase of common stock as follows:
- a total of 4,462,500 shares of Series A preferred stock at $4.00 per share
in June, August, September and October 1997 to 13 investors;
- warrants to purchase a total of 254,823 shares of Series A preferred stock
with a weighted average exercise price of $4.00 per share in June,
September, October and December 1997, and July 1998 to three investors;
- in connection with the acquisition of Acacia Biosciences, Inc. in February
1999, a total of 1,387,298 shares of Series B preferred stock at $4.00 per
share, a total of 2,300,071 shares of common stock, warrants to purchase
33,339 shares of common stock with a weighted average exercise price of
$4.28 per share and warrants to purchase 134,596 shares of Series B
preferred stock with a weighted average exercise price of $6.20 per share
to 232 investors.
- a total of 2,019,452 shares of Series C preferred stock at $4.50 per share
in April 1999 to seven investors;
- in connection with the sale of our Series C preferred stock, in April
1999, we issued warrants to purchase an aggregate of 608,297 shares of our
common stock with an exercise price of $0.45 per share to seven investors;
- a warrant to purchase 54,949 shares of Series C preferred stock at an
exercise price of $4.50 per share in April 1999 to one investor.
- a total of 2,285,714 shares of Series D preferred stock at $5.25 per share
in October 1999 to one investor;
- a total of 4,442,378 shares of Series E preferred stock at $9.36 per share
in March 2000 to 16 investors; and
- a warrant to purchase 26,709 shares of Series E preferred stock at an
exercise price of $9.36 per share in March 2000 to one investor.
55
<PAGE>
The following table summarizes the shares of preferred stock purchased by
named executive officers, directors and 5% stockholders and persons and entities
associated with them, in private placement transactions. Each share of preferred
stock converts into one share of common stock.
<TABLE>
<CAPTION>
SERIES A SERIES B SERIES C SERIES D SERIES E
PREFERRED PREFERRED PREFERRED PREFERRED PREFERRED
INVESTOR STOCK STOCK STOCK STOCK STOCK
- -------- --------- --------- --------- --------- ---------
<S> <C> <C> <C> <C> <C>
Vulcan Ventures, Inc.(1).................. 1,000,000 -- 740,741 -- 1,602,564
Lombard Odier & Cie....................... 750,000 -- 222,222 -- 209,036
Olympic Venture Partners, L.P.(2)......... 687,500 -- 342,359 -- 262,484
Agilent Technologies, Inc.(3)............. -- -- -- 2,285,714 459,792
</TABLE>
- ------------------------
(1) Ruth Kunath, one of our directors, is an investment advisor of Vulcan
Ventures. See the Principal Stockholders table for more information.
(2) Charles Waite, one of our directors, is a General Partner of Olympic Venture
Partners. See Principal Stockholders table for more information.
(3) Bill Buffington, one of our directors, is a general manager of Agilent.
RELATED PARTY TRANSACTIONS
Simultaneously with the closing of our Series A preferred stock financing,
entities affiliated with Olympic Venture Partners were issued a warrant to
purchase up to 250,000 shares of our common stock at an exercise price of $0.05
per share. Olympic has assigned to Tredegar Investments the right to acquire
78,125 shares of our common stock pursuant to the terms of the Olympic warrant.
Charles Waite, a general partner of Olympic, is one of our directors and Steve
Johnson, a former director of ours, is the president of Tredegar Investments.
The Olympic warrant is held as follows: OVP IV Entrepreneurs Fund, LP, holds a
warrant for 8,594 shares of our common stock and Olympic Venture Partners IV,
LP, holds a warrant for 163,281 shares of common stock. TGI Fund I, LC (formerly
Tredegar) now holds the Tredegar warrant. Each warrant has a four year term.
In connection with the original issuance of the warrants to Olympic and
Tredegar, Dr. Leroy Hood, Dr. Stephen Friend and the Fred Hutchinson Cancer
Research Center agreed to contribute up to an aggregate of 200,000 shares of
common stock to us upon the exercise of the warrants issued to Olympic and
Tredegar, pursuant to a Contribution Agreement dated June 7, 1997, and as
amended and restated November 14, 1997.
Leland Hartwell, Chairperson of our Scientific Advisory Board, is President
and a Director of the Fred Hutchinson Cancer Research Center. Dr. Hartwell is
one of our co-founders. Because of Dr. Hartwell's position at the Hutchinson
Center, he transferred his right as a co-founder of ours to purchase our common
stock to the Hutchinson Center. In May 1997, the Hutchinson Center purchased
283,200 shares of our common stock at a price of $0.034 per share. In
December 1997, we entered into a license agreement with the Hutchinson Center
whereby the Hutchinson Center granted us an exclusive, worldwide, sublicensable
license (subject to the rights of certain U.S. governmental agencies and a
grant-back to the Hutchinson Center for non-commercial research purposes) to
certain drug screening technology. We paid an up-front license fee upon
execution of the license agreement which consisted of the issuance of 352,000
shares of our common stock to the Hutchinson Center. In addition to the common
stock issued upon execution of the agreement, we are obligated to pay the
Hutchinson Center a fixed annual payment upon issuance of the first U.S. patent
containing claims covering the licensed technology. In May 1999 we waived a
right of repurchase we had as to 88,000 of the shares held by Hutchinson Center.
Dr. Leroy Hood, a former director of ours, is the William Gates III
Professor of Biomedical Sciences and chairperson of the Department of Molecular
Biotechnology at the University of
56
<PAGE>
Washington. In September 1997, we entered into a license agreement with the
University of Washington. The University of Washington granted us an exclusive,
worldwide, sub-licensable license (subject to the rights of certain U.S.
governmental agencies and a grant-back to the University of Washington for
non-commercial research purposes) to certain technology pertaining to ink jet
synthesis of oligonucleotides. We paid an up-front license fee upon execution of
the license agreement which consisted of issuance of 90,000 shares of our common
stock to the University of Washington. We are also obligated to make future
periodic payments on the anniversary date of the agreement. In addition, we are
obligated to make royalty payments on any product sales, subject to an annual
minimum royalty. In addition to our common stock issued upon execution of the
agreement, we issued an aggregate of 30,000 shares of our common stock in
connection with certain patent issuance and product sale milestones under the
agreement. There are no future commitments to issue stock under this agreement.
In April 1997, we entered into an agreement with Hamilton Capital Ltd., an
entity affiliated with Peter Svenillson, one of our directors, which provided
for certain payments to Hamilton Capital in connection with investments by
certain stockholders. Generally, the agreement provides that should we raise
money from certain listed parties, Hamilton Capital will receive a cash fee
equal to 5% of the gross proceeds of the financing, and warrants to purchase
7.5% of the amount of equity securities issued in the financing. In connection
with this Agreement, Hamilton Capital and Broadview Ltd., an affiliate of
Hamilton Capital and of which Mr. Svenillson is also a partner, have received an
aggregate of $1,127,345, warrants to purchase an aggregate of 228,751 shares of
Series A preferred stock at an exercise price of $4.00, a warrant to purchase
54,949 shares of Series C preferred stock at an exercise price of $4.50, and a
warrant to purchase 26,709 shares of Series E preferred stock at an exercise
price of $9.36.
In January and May 1997, we granted Stephen Friend, our Chief Executive
Officer, the right to purchase 147,493 and 548,707 shares of common stock,
respectively. Dr. Friend issued a promissory note dated May 15, 1997 in the
amount of $16,740 in our favor in order to purchase certain of such shares.
Dr. Friend has paid the full balance of this note and is no longer indebted to
us. As of March 16, 2000, we have the right to repurchase 175,394 shares held by
Dr. Friend should he leave our employ and not become a consultant to us.
In July 1997, we granted John J. King II, our Chief Operating Officer, an
option to purchase 145,500 shares of our common stock. Mr. King issued a
promissory note dated December 31, 1998 in the amount of $58,200 in our favor in
order to exercise his option to purchase such shares. This note is still
outstanding and is due December 31, 2000. As of March 16, 2000, we have the
right to repurchase 14,140 shares held by Mr. King should he leave our employ
and not become a consultant to us.
In April 1999, in connection with the sale of our Series C preferred stock,
we issued the following warrants, each at an exercise price of $0.45 per share.
- a warrant to purchase 223,125 shares of our common stock to Vulcan
Ventures. Ruth Kunath, one of our directors, is an investment advisor of
Vulcan Ventures.
- a warrant to purchase 66,937 shares of common stock to Lombard Odier;
- warrants to purchase 103,125 shares of common stock to entities affiliated
with Olympic Venture Partners. Charles Waite, one of our directors, is a
general partner of Olympic Venture Partners.
In February 1999, we acquired all the outstanding stock of Acacia
Biosciences, Inc., for 1,387,298 shares of our Series B preferred stock,
2,300,071 shares of our common stock, warrants to purchase 134,596 shares of
Series B preferred stock, warrants to purchase an additional 33,339 shares of
common stock and 937,169 options to purchase common stock issued to employees
and consultants of Acacia. Dr. Sadow was the Chairman of the Board of Acacia
Biosciences. After the acquisition, Dr. Sadow joined our board.
57
<PAGE>
In December 1999, we entered into an agreement with Corixa Corporation
providing for our joint collaboration for identifying potential antigen targets
for vaccine development. Dr. Gillis, one of our directors, is the Chief
Executive Officer and Chairman of the Board of Corixa.
In December 1999, we waived our right to repurchase 126,607 shares of common
stock held by Leroy Hood, one of our founders and a former director.
In October 1999, we entered into a strategic partnership with
Hewlett-Packard Company, under which we agreed to partner with Hewlett-Packard
to make and sell products in the gene expression field. In connection with this
agreement, we sold 2,285,714 shares of our Series D preferred stock to
Hewlett-Packard. Hewlett-Packard assigned its rights and transferred its shares
to Agilent in connection with Hewlett-Packard's spin-out of certain business
units to Agilent. In connection with the original transaction, Mr. Buffington
was named to our board. Mr. Buffington is a general manager at Agilent.
In October 1997, Tularik, Inc. purchased 237,500 shares of our Series A
preferred stock and entered into an agreement with us in which we were to
provide certain research. Stephen McKnight, a former director of ours, is also a
director of Tularik.
For fiscal year 1999, we paid approximately $618,000 to our corporate
counsel, Venture Law Group, for legal services. William Ericson, one of our
directors, is the managing director of Venture Law Group's Pacific Northwest
office in Kirkland, Washington.
INDEMNIFICATION AGREEMENTS. We have entered into indemnification agreements
with certain of our officers and directors containing provisions which may
require us to, among other things, indemnify our officers and directors against
certain liabilities that may arise by reason of their status or service as
officers or directors (other than liabilities arising from willful misconduct of
a culpable nature) and to advance their expenses incurred as a result of any
proceeding against them as to which they could be indemnified. For a description
of limitations of liability and certain indemnification arrangements with
respect to our directors and officers, see "Management--Limitation of Liability
and Indemnification Matters."
REGISTRATION RIGHTS AGREEMENTS. Certain holders of common stock and
preferred stock have certain registration rights with respect to their shares of
common stock (including common stock issuable upon conversion of their preferred
stock). See "Description of Capital Stock--Registration Rights of Certain
Holders."
58
<PAGE>
PRINCIPAL STOCKHOLDERS
- --------------------------------------------------------------------------------
The following table sets forth information regarding the beneficial
ownership of our common stock as of March 16, 1999 and as adjusted to reflect
the sale of the common stock offered by us under this prospectus by:
- each of our directors and named officers;
- all directors and executive officers as a group; and
- each person who is known to us to own beneficially more than 5% of our
common stock.
The table includes all shares of common stock issuable within 60 days of
March 16, 1999 upon the exercise of options and other rights beneficially owned
by the indicated stockholders on that date. Beneficial ownership is determined
in accordance with the rules of the Securities and Exchange Commission and
includes voting and investment power with respect to shares. To our knowledge,
except under applicable community property laws or as otherwise indicated, the
persons named in the table have sole voting and sole investment control with
respect to all shares beneficially owned. The applicable percentage of ownership
for each stockholder is based on 21,534,903 shares of common stock outstanding
as of March 16, 1999, together with applicable options for that stockholder.
Shares of common stock issuable upon exercise of options and other rights
beneficially owned ware deemed outstanding for the purpose of computing the
percentage ownership of the person holding these options and other rights, but
are not deemed outstanding for computing the percentage ownership of any other
person.
<TABLE>
<CAPTION>
SHARES ISSUABLE
TOTAL SHARES UNDER OPTIONS PERCENTAGE OF
NUMBER OF TO A SUBJECT AND WARRANTS SHARES
SHARES RIGHT OF EXERCISABLE WITHIN OUTSTANDING
BENEFICIALLY REPURCHASE AS 60 DAYS OF ------------------------
OWNED OF MARCH 16, MARCH 16, BEFORE THIS AFTER THIS
NUMBER 2000 2000 OFFERING OFFERING
------------ ------------- ------------------ ----------- ----------
<S> <C> <C> <C> <C> <C>
Ruth Kunath(1)...................... 3,566,430 -- 223,125 16.4%
Vulcan Ventures, Inc.
110 110(th) Avenue N.E., Suite 550
Bellevue, WA 98004
William I. Buffington(2)............ 2,745,506 -- -- 12.7%
Agilent Technologies, Inc
3500 Deer Creek Rd.
Palo Alto, CA 94304
Charles P. Waite(3)................. 1,567,343 -- 275,000 7.2%
Olympic Venture Partners
2420 Carillon Point
Kirkland, WA 90833
Lombard Odier & Cie(4).............. 1,248,195 -- -- 5.8%
11 rue de la Corraterie
1204 Geneve, Switzerland
Stephen H. Friend, M.D., Ph.D.(5)... 696,200 175,394 -- 3.2%
John J. King, II (6)................ 194,000 56,577 -- *
Roland B. Stoughton, Ph.D. ......... 151,500 102,614 -- *
Peter Svenillson(7)................. 310,409 -- 310,409 1.4%
Harvey S. Sadow, Ph.D............... 54,084 -- 20,000 *
Steven Gillis, Ph.D................. 50,000 -- 50,000 *
William W. Ericson.................. 10,534 -- -- *
All directors and officers as a
group (12 persons)................ 9,334,830 347,840 900,784 41.7%
---------- ------- ------- ------- ----
</TABLE>
59
<PAGE>
- ------------------------
* Less than 1% of outstanding shares.
(1) Includes 3,566,430 shares held by Vulcan Ventures, Inc. which includes
warrants to purchase 223,125 shares exercisable within 60 days of March 15,
2000. Ruth Kunath, one of our directors, is an Investment Advisor at Vulcan
and as such may be deemed to share voting and investment power with respect
to such shares. Ms. Kunath disclaims beneficial ownership of such shares
except to the extent of her pecuniary interest in such shares.
(2) Includes 2,745,506 shares owned by Agilent. Mr. Buffington, one of our
directors, is General Manager of Agilent, and as such may be deemed to share
voting and investment power with respect to shares owned by Agilent
Technologies, Inc. Mr. Buffington disclaims beneficial ownership of such
shares except to the extent of his pecuniary interest in such shares.
(3) Includes 971,519 shares held by Olympic Venture Partners IV, L.P., 262,484
shares held by Olympic Venture Partners V, L.P., and 58,340 shares held by
Olympic Venture Partners Entrepreneurs Fund, L.P. Also includes warrants to
purchase 259,187 shares and 15,813 shares held by Olympic Venture Partners
IV, L.P. and Olympic Venture Partners Entrepreneurs Fund, L.P.,
respectively. Charles P. Waite, one of our directors, is a general partner
of Olympic Venture Partners and as such may be deemed to share voting and
investment power with respect to such shares. Mr. Waite disclaims beneficial
ownership of such shares except to the extent of his pecuniary interest in
such shares.
(4) Includes 431,258 shares held by Lombard Odier & Cie, and 750,000 shares held
by Ryco and Co. which includes warrants to purchase 66,937 shares of common
stock exercisable within 60 days of March 15, 2000.
(5) The repurchase right lapses ratably each month through May 2001. Also
includes 92,186 shares of our Common Stock that will be contributed to the
capital of our stock upon the exercise of certain warrants by certain of our
stockholders. See "Certain Transactions."
(6) Such repurchase right lapses ratably each month through April 2001.
(7) Includes warrants to purchase 310,409 shares exercisable within 60 days of
March 15, 2000 held by Hamilton Capital Ltd. and Broadview Ltd, an affiliate
of Hamilton Capital. Peter Svenillson, one of our directors, is a general
partner of Hamilton Capital Venture Partners and as such may be deemed to
share voting and investment power with respect to such shares.
Mr. Svenillson disclaims beneficial ownership of such shares except to the
extent of his pecuniary interest in such shares.
60
<PAGE>
DESCRIPTION OF CAPITAL STOCK
- --------------------------------------------------------------------------------
Upon the completion of this offering, we will amend our articles of
incorporation to change our authorized capital stock to 75,000,000 shares of
common stock, $0.001 par value per share and 5,000,000 shares of undesignated
preferred stock, $0.001 par value per share. The following description of our
capital stock does not purport to be complete and is subject to, and qualified
in its entirety by, our certificate of incorporation and bylaws, which we have
included as exhibits to the registration statement of which this prospectus
forms a part.
COMMON STOCK
As of March 16, 2000, there were 22,697,617 shares of common stock
outstanding, as adjusted to reflect the conversion of all outstanding shares of
Series A, Series B, Series C, Series D and Series E preferred stock, and the
exercise of all outstanding warrants into common and preferred stock, held of
record by 332 stockholders. Options to purchase 2,614,157 shares of common stock
were also outstanding. There will be shares of common stock
outstanding after the completion of this offering (assuming no exercise of the
underwriter's overallotment option or exercise of outstanding options under our
stock option plans, after giving effect to the sale of the shares offered
hereby.
The holders of common stock are entitled to one vote for each share held of
record on all matters submitted to a vote of the stockholders. Subject to
preferences that may be applicable to any outstanding preferred stock, holders
of common stock are entitled to receive ratably such dividends as may be
declared by the Board of Directors out of funds legally available for that
purpose. See "Dividend Policy." In the event of our liquidation, dissolution or
winding up, the holders of common stock are entitled to share ratably in all
assets remaining after payment of liabilities, subject to the prior distribution
rights of any outstanding preferred stock. The common stock has no preemptive or
conversion rights or other subscription rights. The outstanding shares of common
stock are, and the shares of common stock to be issued upon completion of this
offering will be, fully paid and non-assessable.
PREFERRED STOCK
Upon the closing of the offering, all outstanding shares of preferred stock
will be converted into 14,597,342 shares of common stock. Thereafter, the Board
of Directors will have the authority, without further action by the
stockholders, to issue up to 5,000,000 shares of preferred stock, $0.001 par
value, in one or more series. The Board of Directors will also have the
authority to designate the rights, preferences, privileges and restrictions of
each such series, including dividend rights, dividend rates, conversion rights,
voting rights, terms of redemption, redemption prices, liquidation preferences
and the number of shares constituting any series.
The issuance of preferred stock may have the effect of delaying, deferring
or preventing a change in control of our company without further action by the
stockholders. The issuance of preferred stock with voting and conversion rights
may also adversely affect the voting power of the holders of common stock. In
certain circumstances, an issuance of preferred stock could have the effect of
decreasing the market price of the common stock. As of the closing of the
offering, no shares of preferred stock will be outstanding. We currently have no
plans to issue any shares of preferred stock.
WARRANTS
At March 16, 2000, there were warrants outstanding to purchase an aggregate
of 858,297 shares of common stock with a weighted average exercise price of
$0.36 per share that will expire upon the consummation of this offering,
warrants to purchase an aggregate of 33,339 shares of common stock with a
weighted average exercise price of $4.28 per share that will survive the
effectiveness of this offering, warrants to purchase an aggregate of 24,739
shares of Series A preferred stock with a
61
<PAGE>
weighted average exercise price of $4.14 per share which expire upon the
effectiveness of this offering, warrants to purchase an aggregate of 228,751
shares of Series A preferred stock that will expire in 2007 with an exercise
price of $4.00, warrants to purchase an aggregate of 134,595 shares of Series B
preferred stock with a weighted average exercise price of $6.20 per share that
will expire upon effectiveness of this offering, a warrant to purchase 54,949
shares of Series C preferred stock with an exercise price of $4.50 that will
expire in 2009 and a warrant to purchase 26,709 shares of Series E preferred
stock with an exercise price of $9.36 per share that will expire in 2010. The
warrants to purchase shares of preferred stock that survive the closing of this
offering will convert into warrants to purchase shares of common stock on the
closing of this offering on a one-to-one basis. Generally, each warrant contains
provisions for the adjustment of the exercise price and the aggregate number of
shares issuable upon the exercise of the warrant under certain circumstances,
including stock dividends, stock splits, reorganizations, reclassifications,
consolidations and certain dilutive issuances of securities at prices below the
then existing warrant exercise price.
REGISTRATION RIGHTS
The holders of 17,653,311 shares of common stock (assuming the conversion of
all outstanding preferred stock upon completion of this offering) and options
and warrants to purchase 497,687 shares of common or preferred stock or their
transferees are entitled to certain rights with respect to the registration of
such shares under the Securities Act. These rights are provided under the terms
of an agreement between ourselves and the holders of these securities. Subject
to limitations in the agreement, the holders of at least 50% of these securities
then outstanding may require, on two occasions beginning six months after the
date of this prospectus, that we use our best efforts to register these
securities for public resale if Form S-3 is not available. If we register any of
our common stock either for our own account or for the account of other security
holders, the holders of these securities are entitled to include their shares of
common stock in that registration, subject to the ability of the underwriters to
limit the number of shares included in the offering. The holders of at least 20%
of these securities then outstanding may also require us, not more than once in
any twelve-month period or three times total, to register all or a portion of
these securities on Form S-3 when the use of that form becomes available to us,
provided, among other limitations, that the proposed aggregate selling price,
net of any underwriters' discounts or commissions, is at least $1,000,000. We
will be responsible for paying all registration expenses, and the holders
selling their shares will be responsible for paying all selling expenses.
ANTI-TAKEOVER PROVISIONS
Provisions of Delaware and Washington law, our certificate of incorporation
and bylaws could make more difficult the acquisition of us by a third party and
the removal of incumbent officers and directors. These provisions, summarized
below, are expected to discourage certain types of coercive takeover practices
and inadequate takeover bids and to encourage persons seeking to acquire control
of us to first negotiate with us. We believe that the benefits of increased
protection of our ability to negotiate with the proponent of an unfriendly or
unsolicited proposal to acquire or restructure us outweigh the disadvantages of
discouraging such proposals because, among other things, negotiation of such
proposals could result in an improvement of their terms.
We are subject to Section 203 of the Delaware General Corporation Law, which
regulates corporate acquisitions. In general, Section 203 prohibits a publicly
held Delaware corporation from engaging in a "business combination" with an
"interested stockholder" for a period of three years following the date the
person became an interested stockholder, unless:
- the board of directors approved the transaction in which such stockholder
became an interested stockholder prior to the date the interested
stockholder attained such status;
62
<PAGE>
- upon consummation of the transaction that resulted in the stockholder's
becoming an interested stockholder, he or she owned at least 85% of the
voting stock of the corporation outstanding at the time the transaction
commenced, excluding shares owned by persons who are directors and also
officers; or
- on or subsequent to such date the business combination is approved by the
board of directors and authorized by 66 2/3% vote at an annual or special
meeting or stockholders.
A business combination generally includes a merger, asset or stock sale, or
other transaction resulting in a financial benefit to the interested
stockholder. In general, an "interested stockholder" is a person who, together
with affiliates and associates, owns, or within three years prior to the
determination of interested stockholder status, did own, 15% or more of a
corporation's voting stock.
The laws of the State of Washington, where our principal executive offices
are located, also impose restrictions on certain transactions between certain
foreign corporations and significant stockholders. Chapter 23B.19 of the
Washington Business Corporation Act, the WBCA prohibits a "target corporation,"
with certain exceptions, from engaging in certain "significant business
transactions" with a person or group of persons who beneficially own 10% or more
of the voting securities of the target corporation (an acquiring person) for a
period of five years after such acquisition unless the transaction or
acquisition of such shares is approved by a majority of the members of the
target corporation's board of directors prior to the time of acquisition.
Such prohibited transactions include, among other things:
- a merger or consolidation with, disposition of assets to, or issuance or
redemption of stock to or from, the acquiring person;
- termination of 5% or more of the employees of the target corporation as a
result of the acquiring person's acquisition of 10% or more of the shares;
or
- allowing the acquiring person to receive disproportionate benefit as a
stockholder.
After the five-year period, a significant business transaction may take
place as long as it complies with certain fair price provisions of the statute.
A target corporation includes a foreign corporation if:
- the corporation has a class of voting stock registered pursuant to
Section 12 or 15 of the Exchange Act;;
- the corporation's principal executive office is located in Washington;
- any of (a) more than 10% of the corporation's stockholders of record are
Washington residents, (b) more than 10% of its shares are owned of record
by Washington residents, or (c) 1,000 or more of its stockholders of
record are Washington residents;
- a majority of the corporation's employees are Washington residents or more
than 1,000 Washington residents are employees of the corporation; and
- a majority of the corporation's tangible assets are located in Washington
or the corporation has more than $50.0 million of tangible assets located
in Washington.
A corporation may not "opt out" of this statute and, therefore, we
anticipate this statute will apply to us. Depending upon whether we meet the
definition of a target corporation, Chapter 23B.19 of the WBCA may have the
effect of delaying, deferring or preventing a change in control.
Our certificate of incorporation and bylaws do not provide for the right of
stockholders to act by written consent without a meeting or for cumulative
voting in the election of directors. In addition, our certificate of
incorporation permits the board of directors to issue preferred stock with
voting or other
63
<PAGE>
rights without any stockholder action. The authorization of undesignated
preferred stock makes it possible for the board of directors to issue preferred
stock with voting or other rights or preferences that could impede the success
of any attempt to change control of us. These and other provisions may have the
effect of deterring hostile takeovers or delaying changes in our control or
management.
Our certificate of incorporation provides for the division of our board of
directors into three classes, as nearly as equal in size as possible, with
staggered three year terms. The classification of the board of directors has the
effect of requiring more than one annual stockholder meeting to replace a
majority of the directors. Our bylaws provide that special meetings of
stockholders can be called only by the board of directors, the chairman of the
board, if any, the president and holders of 25% of the votes entitled to be cast
at a meeting. Moreover, the business permitted to be conducted at any special
meeting of stockholders is limited to the business brought before the meeting by
the board of directors, the chairman of the board, if any, the president or any
25% holder. Our bylaws set forth an advance notice procedure with regard to the
nomination, other than by or at the direction of the board of directors, of
candidates for election as directors and with regard to business to be brought
before a meeting of stockholders. These and other provisions may have the effect
of deterring hostile takeovers or delaying changes in control or management of
us.
TRANSFER AGENT AND REGISTRAR
The Transfer Agent and Registrar for our common stock is Harris Trust
Company of California and their telephone number is (312) 360-5454.
64
<PAGE>
SHARES ELIGIBLE FOR FUTURE SALE
- --------------------------------------------------------------------------------
Prior to this offering, there has been no public market for our common
stock. Future sales of substantial amounts of our common stock in the public
market could reduce prevailing market prices. Furthermore, since no shares will
be available for sale shortly after this offering because of contractual and
legal restrictions on resale as described below, sales of substantial amounts of
our common stock in the public market after any restrictions on sale lapse could
adversely affect the prevailing market price of the common stock and impair our
ability to raise equity capital in the future.
Upon completion of the offering, we will have outstanding shares
of common stock, assuming no exercise of the over-allotment option and no
exercises of outstanding options after March 16, 2000. Of these shares, all of
the shares sold in the offering will be freely tradable without restriction or
further registration under the Securities Act, unless these shares are purchased
by affiliates. The remaining 21,534,903 shares of common stock held by existing
stockholders are restricted securities. Restricted securities may be sold in the
public market only if registered or if they qualify for an exemption from
registration described below under Rules 144, 144(k) or 701 promulgated under
the Securities Act.
As a result of contractual restrictions described below and the provisions
of Rules 144, 144(k) and 701, the restricted shares will be available for sale
in the public market as follows:
- unless held by affiliates, the shares sold in the public
offering will be freely tradable upon completion of the offering;
- shares will be eligible for sale upon the expiration of the
lock-up agreements, described below, beginning 180 days after the date of
this prospectus; and
- shares will be eligible for sale upon the exercise of vested
options 180 days after the date of this prospectus.
LOCK-UP AGREEMENTS
All of our directors, officers, employees and other stockholders, who
together hold all of our securities, have entered into lock-up agreements in
connection with this offering. These lock-up agreements provide that these
holders will not offer, sell, contract to sell or grant any option to purchase
or otherwise dispose of our common stock or any securities exercisable for or
convertible into our common stock owned by them for a period of 180 days after
the date of this prospectus without the prior written consent of Warburg Dillon
Read LLC. Notwithstanding possible earlier eligibility for sale under the
provisions of Rules 144, 144(k) and 701, shares subject to lock-up agreements
may not be sold until these agreements expire or are waived by the
representatives of the underwriters of this offering
RULE 144
In general, under Rule 144 as currently in effect, after the expiration of
the lock-up agreements, a person who has beneficially owned restricted
securities for at least one year would be entitled to sell within any
three-month period a number of shares that does not exceed the greater of:
- one percent of the number of shares of common stock then outstanding which
will equal approximately shares immediately after the
offering; and
- the average weekly trading volume of the common stock during the four
calendar weeks preceding the sale.
Sales under Rule 144 are also subject to requirements with respect to manner
of sale, notice and the availability of current public information about us.
65
<PAGE>
RULE 144(K)
Under Rule 144(k), a person who is not deemed to have been our affiliate at
any time during the three months preceding a sale, and who has beneficially
owned the shares proposed to be sold for at least two years, may sell these
shares without complying with the manner of sale, public information, volume
limitation or notice requirements of Rule 144.
RULE 701
Rule 701, as currently in effect, permits our employees, officers, directors
or consultants who purchased shares pursuant to a written compensatory plan or
contract to resell such shares in reliance upon Rule 144, but without compliance
with certain restrictions. Rule 701 provides that affiliates may sell their
Rule 701 shares under Rule 144 90 days after effectiveness without complying
with the holding period requirement and that non-affiliates may sell such shares
in reliance on Rule 144 90 days after effectiveness without complying with the
holding period, public information, volume limitation or notice provisions of
Rule 144.
REGISTRATION RIGHTS
Upon completion of this offering, the holders of 17,653,311 shares of our
common stock, or their transferees, will be entitled to rights with respect to
the registration of their shares under the Securities Act. Registration of their
shares under the Securities Act would result in these shares becoming freely
tradable without restriction under the Securities Act, except for shares
purchased by affiliates, immediately upon the effectiveness of such
registration.
STOCK OPTIONS
We intend to file a registration statement under the Securities Act after
the effective date of this offering to register shares to be issued pursuant to
our employee and director benefit plans. As a result, any options or rights
exercised under the 1997 stock plan, the 2000 stock option plan, the 2000
employee stock purchase plan and the 2000 directors' stock option plan will also
be freely tradable in the public market. However, shares held by affiliates will
still be subject to the volume limitation, manner of sale, notice and public
information requirements of Rule 144 unless otherwise resalable under Rule 701.
As of March 16, 2000, we had granted options to purchase 2,614,157 shares of
common stock that had not been exercised, of which options to purchase 1,342,435
shares of common stock were both exercisable and not subject to a right of
repurchase in our favor.
66
<PAGE>
UNDERWRITING
- --------------------------------------------------------------------------------
We have entered into an underwriting agreement with the underwriters named
below. Warburg Dillon Read LLC, Lehman Brothers Inc., and Prudential Securities
Incorporated are acting as representatives of the underwriters.
The underwriting agreement will provide for the purchase of a specific
number of shares of common stock by each of the underwriters. The underwriters'
obligations are several, which means that each underwriter is required to
purchase a specific number of shares, but is not responsible for the commitment
of any other underwriter to purchase shares. Subject to the terms and conditions
of the underwriting agreement, each underwriter will severally agree to purchase
the number of shares of common stock set forth opposite its name below.
<TABLE>
<CAPTION>
NAME NUMBER OF SHARES
- ---- ----------------
<S> <C>
Warburg Dillon Read LLC.....................................
Lehman Brothers Inc. .......................................
Prudential Securities Incorporated..........................
------
Total...................................................
======
</TABLE>
This is a firm commitment underwriting. This means that the underwriters
have agreed to purchase all of the shares offered by this prospectus, other than
those covered by the over-allotment option described below, if any are
purchased. Under the underwriting agreement, if an underwriter defaults in its
commitment to purchase shares, the commitments of non-defaulting underwriters
may be increased or the underwriting agreement may be terminated, depending on
the circumstances.
The representatives have advised us that the underwriters propose to offer
the shares directly to the public at the public offering price that appears on
the cover page of this prospectus. In addition, the representatives may offer
some of the shares to certain securities dealers at such price less a concession
of $ per share. The underwriters may also allow to dealers, and such
dealers may reallow, a concession not in excess of $ per share to certain
other dealers. After the shares are released for sale to the public, the
representatives may change the offering price and other selling terms at various
times.
We have granted the underwriters an over-allotment option. This option,
which is exercisable for up to thirty days after the date of this prospectus,
permits the underwriters to purchase a maximum of additional shares of our
common stock to cover over-allotments. If the underwriters exercise all or part
of this option, they will purchase shares covered by the option at the public
offering price that appears on the cover page of this prospectus, less the
underwriting discount. If this option is exercised in full, the underwriters
will purchase shares from us, the total price to the public will be, and the
total proceeds to us will be. The underwriters have severally agreed that, to
the extent the over-allotment option is exercised, each of the underwriters will
purchase a number of additional shares proportionate to its initial amount
reflected in the above table.
The following table provides information regarding the amount of the
discount to be paid to the underwriters by us:
<TABLE>
<CAPTION>
PAID BY US
---------------------------------
NO EXERCISE OF FULL EXERCISE OF
OVER-ALLOTMENT OVER-ALLOTMENT
OPTION OPTION
-------------- ----------------
<S> <C> <C>
Per Share........................................ $ $
Total............................................ $ $
</TABLE>
67
<PAGE>
We estimate that the total expenses of this offering, excluding the
underwriter discount, will be approximately $ .
We have agreed to indemnify the underwriters against specified liabilities,
including liabilities under the Securities Act.
We and our directors, executive officers, and all of the holders of our
common stock and securities convertible into or exercisable or exchangeable for
common stock issued prior to this offering, have agreed pursuant to certain
"lock-up" agreements with the underwriters that we and they will not offer,
sell, contract to sell, pledge, grant any option to sell, or otherwise dispose
of, directly or indirectly, any shares of common stock or securities convertible
into or exercisable or exchangeable for common stock for a period of 180 days
after the date of this prospectus without the prior written consent of Warburg
Dillon Read LLC. Warburg Dillon Read LLC, in its sole discretion, may release
the shares subject to the lock-up agreements in whole or in part at any time
with or without notice. However, Warburg Dillon Read LLC has no current plan to
do so.
At our request, the underwriters have reserved for sale at the initial
public offering price up to shares of our common stock for our
officers, directors, employees, clients, friends and related persons who express
an interest in purchasing these shares. The number of shares of our common stock
available for sale to the general public will be reduced to the extent these
persons purchase these reserved shares. The underwriters will offer any shares
not so purchased by these persons to the general public on the same basis as the
other shares in this initial public offering.
Warburg Dillon Read LLC and Lehman Brothers intend to distribute and deliver
this Prospectus only by hand or by mail and intend to use only printed
prospectuses. One of the representatives, Prudential Securities Incorporated,
also markets securities online through its PrudentialSecurities.com division.
Clients of Prudential Advisor may view offering terms and a prospectus online.
Prior to this offering, there has been no public market for our common
stock. Consequently, the offering price for our common stock will be determined
by negotiations between us and the underwriters and will not necessarily be
related to our asset value, net worth or other established criteria of value.
The factors to be considered in these negotiations, in addition to prevailing
market conditions, will include the history of and prospects for the industry in
which we compete, an assessment of our management, our prospects, our capital
structure and certain other factors as are deemed relevant.
Rules of the Securities and Exchange Commission may limit the ability of the
underwriters to bid for or purchase shares before the distribution of shares is
completed. However, the underwriters may engage in the following activities in
accordance with the rules:
- STABILIZING TRANSACTIONS. The representatives may make bids for or
purchases of the shares for the purpose of pegging, fixing or maintaining
the price of the shares, so long as stabilizing bids do not exceed a
specified maximum.
- OVER-ALLOTMENTS AND SYNDICATE COVERING TRANSACTIONS. The underwriters may
create a short position in the shares by selling more shares than are set
forth on the cover page of this prospectus. If a short position is created
in connection with this offering, the representatives may engage in
syndicate covering transactions by purchasing shares in the open market.
The representatives may also elect to reduce any short position by
exercising all or part of the over-allotment option.
- PENALTY BIDS. If the representatives purchase shares in the open market in
a stabilizing transaction or syndicate covering transaction, they may
reclaim a selling concession from the underwriters and selling group
members who sold those shares as part of this offering.
68
<PAGE>
Stabilization and syndicate covering transactions may cause the price of the
shares to be higher than it would be in the absence of these transactions. The
imposition of a penalty bid might also have an effect on the price of the shares
if it discourages resales of the shares.
Neither we nor the underwriters make any representation or prediction as to
the effect that the transactions described above may have on the price of the
shares. These transactions may occur on the Nasdaq National Market or otherwise.
If these transactions are commenced, they may be discontinued without notice at
any time.
The underwriters do not expect sales to discretionary accounts to exceed
five percent of the total number of shares offered.
69
<PAGE>
LEGAL MATTERS
- --------------------------------------------------------------------------------
The validity of the common stock offered hereby will be passed upon by
Venture Law Group, Professional Corporation, Kirkland, Washington. Certain legal
matters will be passed upon for the underwriters by Mintz Levin Cohn Ferris
Glovsky and Popeo PC, Boston, Massachusetts. Investment partnerships associated
with Venture Law Group and individual attorneys of Venture Law Group
beneficially own an aggregate of 79,807 shares of our common stock.
The statements in this prospectus under the captions "Risk Factors--We are
dependent on the technology of third parties and the failure to obtain rights to
third party technology could harm our developmental and commercial efforts,"
"Risk Factors--If we are unable to protect our proprietary rights adequately, or
operate without infringing or misappropriating the intellectual rights of
others, our competitive position will suffer," and "Business--Intellectual
Property and Proprietary Technology" relating to United States patent matters
are included in reliance on the review of Pennie & Edmonds LLP of New York, New
York, as experts in United States patent law.
EXPERTS
- --------------------------------------------------------------------------------
The financial statements of Rosetta Inpharmatics, Inc. as of December 31,
1998 and 1999 and for each of the three years in the period ended December 31,
1999, and for the period from inception (December 19, 1996) to December 31, 1999
included in this prospectus, have been so included in reliance on the report of
PricewaterhouseCoopers LLP, independent accountants, given on the authority of
said firm as experts in auditing and accounting.
The financial statements of Acacia Biosciences, Inc. as of December 31, 1998
and 1997 and for the years then ended, and for the period from inception
(February 7, 1995) to December 31, 1998 included in this prospectus, have been
so included in reliance on the report of PricewaterhouseCoopers LLP, independent
accountants, given on the authority of said firm as experts in auditing and
accounting.
WHERE YOU CAN FIND MORE INFORMATION
- --------------------------------------------------------------------------------
We have filed with the Securities and Exchange Commission a registration
statement (of which this prospectus forms a part) on Form S-1 with respect to
the common stock being offered by this prospectus. This prospectus does not
contain all of the information set forth in the registration statement and the
exhibits and schedules thereto. For further information with respect to us and
the shares of common stock offered hereby, reference is made to the registration
statement, including any exhibits and schedules thereto. Statements contained in
this prospectus as to the contents of any contract or other document referred to
herein are not necessarily complete and, where any contract is an exhibit to the
registration statement, each statement with respect to the contract is qualified
in all respects by the provisions of the relevant exhibit, to which reference is
hereby made. You may read and copy any document we file at the Public Reference
Section of the Securities and Exchange Commission, 450 Fifth Street, N.W., Room
1024, Washington, D.C. 20549, and the Securities and Exchange Commision's
Regional Offices located at the Northwest Atrium Center, 500 West Madison
Street, Suite 1400, Chicago, Illinois 60661 and Seven World Trade Center, 13th
Floor, New York, NY 10048. You may call the Securities and Exchange Commission
at 1-800-SEC-0330 for further information about the operation of the public
reference rooms.
As a result of this offering, we will become subject to the information and
reporting requirements of the Securities Exchange Act of 1934 and, in accordance
therewith, will file periodic reports, proxy statements and other information
with the Securities and Exchange Commission. Upon approval of the common stock
for quotation on the Nasdaq National Market, such reports, proxy and information
statements and other information may also be inspected at the National
Association of Securities Dealers, Inc., 1735 K Street, N.W., Washington D.C.
20006.
70
<PAGE>
The Securities and Exchange Commission maintains a Web site at www.sec.gov
that contains reports, proxy and information statements and other information
regarding registrants that file electronically with the Securities and Exchange
Commission.
71
<PAGE>
ROSETTA INPHARMATICS, INC.
INDEX TO FINANCIAL STATEMENTS
<TABLE>
<CAPTION>
PAGE
--------
<S> <C>
<CAPTION>
ROSETTA INPHARMATICS, INC.
FINANCIAL STATEMENTS
Report of Independent Accountants. F-2
<S> <C>
Consolidated Balance Sheets as of December 31, 1998 and
1999...................................................... F-3
Consolidated Statements of Operations for the years ended
December 31, 1997, 1998 and 1999 and for the period from
inception (December 19, 1996) to December 31, 1999........ F-4
Consolidated Statements of Stockholders' Equity for the
period from inception (December 19, 1996) to December 31,
1999...................................................... F-5
Consolidated Statements of Cash Flows for the years ended
December 31, 1997, 1998 and 1999 and for the period from
inception (December 19, 1996) to December 31, 1999........ F-7
Notes to Consolidated Financial Statements.................. F-8
<CAPTION>
ACACIA BIOSCIENCES, INC.
FINANCIAL STATEMENTS
Report of Independent Accountants. F-29
<S> <C>
Balance Sheets as of December 31, 1998 and 1997............. F-30
Statements of Operations for the years ended December 31,
1998 and 1997 and for the period from inception (February
7, 1995) to December 31, 1998............................. F-31
Statements of Stockholders' Equity for the period from
inception (February 7, 1995) to December 31, 1998......... F-32
Statements of Cash Flows for the years ended December 31,
1998 and 1997 and for the period from inception (February
7, 1995) to December 31, 1998............................. F-34
Notes to Financial Statements............................... F-35
<CAPTION>
ROSETTA INPHARMATICS, INC.
UNAUDITED PRO FORMA COMBINED STATEMENT OF OPERATIONS
Unaudited Pro Forma Combined Statement of Operations for the year ended December 31,
<S> <C>
1999.................................................................. F-43
Notes to Unaudited Pro Forma Combined Statement of Operations........... F-44
</TABLE>
<PAGE>
REPORT OF INDEPENDENT ACCOUNTANTS
To the Board of Directors and Stockholders
Rosetta Inpharmatics, Inc.
In our opinion, the accompanying consolidated balance sheets and the related
consolidated statements of operations, of stockholders' equity and of cash flows
present fairly, in all material respects, the financial position of Rosetta
Inpharmatics, Inc. and subsidiary (a development stage company) at December 31,
1998 and 1999, and the results of their operations and their cash flows for each
of the three years in the period ended December 31, 1999 and the period from
inception (December 19, 1996), to December 31, 1999, in conformity with
accounting principles generally accepted in the United States. These financial
statements are the responsibility of the Company's management; our
responsibility is to express an opinion on these financial statements based on
our audits. We conducted our audits of these statements in accordance with
auditing standards generally accepted in the United States which require that we
plan and perform the audit to obtain reasonable assurance about whether the
financial statements are free of material misstatement. An audit includes
examining, on a test basis, evidence supporting the amounts and disclosures in
the financial statements, assessing the accounting principles used and
significant estimates made by management, and evaluating the overall financial
statement presentation. We believe that our audits provide a reasonable basis
for the opinion expressed above.
PricewaterhouseCoopers LLP
Seattle, Washington
February 18, 2000
F-2
<PAGE>
ROSETTA INPHARMATICS, INC.
(A DEVELOPMENT STAGE COMPANY)
CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
PRO FORMA
STOCKHOLDERS'
DECEMBER 31, EQUITY AT
-------------------------- DECEMBER 31,
1998 1999 1999
----------- ------------ -------------
(UNAUDITED)
<S> <C> <C> <C>
ASSETS
Current assets
Cash and cash equivalents................................. $3,270,944 $ 8,311,852
Short-term investments.................................... 4,980,632 10,951,496
Accounts receivable....................................... 1,906 155,729
Interest receivable....................................... 27,424 32,045
Prepaid expenses and other current assets................. 122,240 254,898
----------- ------------
Total current assets.................................... 8,403,146 19,706,020
Property and equipment, net................................. 2,163,497 4,109,159
Business acquisition expenses............................... 787,048
Intangible assets, net...................................... 10,316,917
Deposits and other assets................................... 39,517 475,326
----------- ------------
Total assets............................................ $11,393,208 $ 34,607,422
=========== ============
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities
Accounts payable.......................................... $ 529,360 $ 1,112,680
Accrued expenses.......................................... 132,627 219,148
License fees payable...................................... 666,667
Deferred revenue.......................................... 1,259,761
Current portion of capital lease obligation............... 209,333
Current portion of notes payable.......................... 626,650 787,388
----------- ------------
Total current liabilities............................... 1,288,637 4,254,977
Capital lease obligation, net of current portion............ 145,754
Notes payable, net of current portion....................... 1,343,552 1,242,926
Deferred revenue............................................ 3,307,974
----------- ------------
Total liabilities....................................... 2,632,189 8,951,631
----------- ------------
Contingencies and commitments
Stockholders' equity
Convertible preferred stock, par value $0.001; 18,000,000
shares authorized; 4,462,500, 10,154,964 and no shares
pro forma issued and outstanding (aggregate liquidation
preference of $17,850,000 and $44,486,725).............. 4,463 10,155
Common stock, par value $0.001; 36,000,000 shares
authorized; 2,630,555, 5,182,382 and 15,337,346 shares
pro forma issued and outstanding........................ 2,631 5,183 $ 15,338
Additional paid-in capital................................ 18,347,569 56,643,529 56,643,529
Notes receivable from stockholders........................ (74,940) (58,200) (58,200)
Deferred stock compensation............................... (521,673) (2,128,331) (2,128,331)
Deficit accumulated during the development stage.......... (8,997,031) (28,816,545) (28,816,545)
----------- ------------ -------------
Total stockholders' equity.................................. 8,761,019 25,655,791 $ 25,655,791
=========== ============ =============
Total liabilities and stockholders' equity.................. $11,393,208 $ 34,607,422
=========== ============
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
F-3
<PAGE>
ROSETTA INPHARMATICS, INC.
(A DEVELOPMENT STAGE COMPANY)
CONSOLIDATED STATEMENTS OF OPERATIONS
<TABLE>
<CAPTION>
INCEPTION
(DECEMBER 19,
YEARS ENDED DECEMBER 31, 1996) TO
---------------------------------------- DECEMBER 31,
1997 1998 1999 1999
----------- ----------- ------------ -------------
<S> <C> <C> <C> <C>
Revenues
Collaboration agreements............... $ -- $ -- $ 835,892 $ 835,892
Government grants...................... -- -- 146,863 146,863
----------- ----------- ------------ ------------
Total revenues....................... -- -- 982,755 982,755
----------- ----------- ------------ ------------
Operating expenses
Research and development............... 1,189,244 4,417,428 10,189,406 15,796,078
General and administrative............. 1,039,074 2,694,654 7,661,427 11,395,155
Stock-based compensation............... 64,744 580,564 3,215,411 3,860,719
----------- ----------- ------------ ------------
Total operating expenses............. 2,293,062 7,692,646 21,066,244 31,051,952
----------- ----------- ------------ ------------
Loss from operations..................... (2,293,062) (7,692,646) (20,083,489) (30,069,197)
Other income (expense)
Interest income........................ 439,744 706,796 639,474 1,786,014
Interest expense....................... (45,272) (207,737) (293,196) (546,205)
Other, net............................. 13,777 81,369 (82,303) 12,843
----------- ----------- ------------ ------------
Net loss................................. $(1,884,813) $(7,112,218) $(19,819,514) $(28,816,545)
=========== =========== ============ ============
Basic and diluted net loss per share..... $ (5.29) $ (5.29) $ (4.92) $ (15.09)
=========== =========== ============ ============
Shares used in computing basic and
diluted net loss per share............. 356,451 1,344,007 4,030,103 1,910,187
=========== =========== ============ ============
Pro forma basic and diluted net loss
per share (unaudited).................. $ (1.69)
============
Shares used in computing pro forma
basic and diluted net loss per share
(unaudited)............................ 11,740,419
============
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
F-4
<PAGE>
ROSETTA INPHARMATICS, INC.
(A DEVELOPMENT STAGE COMPANY)
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
INCEPTION (DECEMBER 19, 1996) TO DECEMBER 31, 1999
<TABLE>
<CAPTION>
CONVERTIBLE NOTES
PREFERRED STOCK COMMON STOCK ADDITIONAL RECEIVABLE DEFERRED
-------------------- -------------------- PAID-IN FROM STOCK
SHARES AMOUNT SHARES AMOUNT CAPITAL STOCKHOLDERS COMPENSATION
--------- -------- --------- -------- ----------- ------------ ------------
<S> <C> <C> <C> <C> <C> <C> <C>
Common stock issued in January and May
1997 to founders at $0.034 per
share................................ 1,315,037 $1,315 $ 43,265
Common stock issued in May 1997 at
$0.034 per share in exchange for
services............................. 75,000 75 2,467
Common stock issued in May, 1997 for
notes receivable at $0.034 per
share................................ 493,805 494 16,246 $(16,740)
Series A preferred stock issued in June
through October 1997 at $4.00 per
share, net of issuance costs of
$848,509............................. 4,462,500 $4,463 16,997,028
Common stock issued in September and
December 1997 in exchange for
transfer of technology at time of
inception............................ 442,000 442
Common stock issued in October 1997 at
$0.40 per share...................... 125,000 125 49,875
Deferred stock compensation related to
grants of stock options.............. 157,347 $ (157,347)
Amortization of deferred stock
compensation......................... 64,744
Net loss...............................
--------- ------ --------- ------ ----------- -------- -----------
BALANCES, DECEMBER 31, 1997.............. 4,462,500 4,463 2,450,842 2,451 17,266,228 (16,740) (92,603)
Common stock issued in October and
November 1998 in connection with
stock option exercises............... 34,213 34 13,653
Common stock issued in December 1998 in
connection with stock option
exercises for notes receivable....... 145,500 146 58,054 (58,200)
Deferred stock compensation related to
grants of stock options.............. 1,009,634 (1,009,634)
Amortization of deferred stock
compensation......................... 580,564
Net loss...............................
--------- ------ --------- ------ ----------- -------- -----------
BALANCES, DECEMBER 31, 1998.............. 4,462,500 4,463 2,630,555 2,631 18,347,569 (74,940) (521,673)
<CAPTION>
DEFICIT
ACCUMULATED
DURING THE
DEVELOPMENT
STAGE TOTAL
------------- ------------
<S> <C> <C>
Common stock issued in January and May
1997 to founders at $0.034 per
share................................ $ 44,580
Common stock issued in May 1997 at
$0.034 per share in exchange for
services............................. 2,542
Common stock issued in May, 1997 for
notes receivable at $0.034 per
share................................ --
Series A preferred stock issued in June
through October 1997 at $4.00 per
share, net of issuance costs of
$848,509............................. 17,001,491
Common stock issued in September and
December 1997 in exchange for
transfer of technology at time of
inception............................ 442
Common stock issued in October 1997 at
$0.40 per share...................... 50,000
Deferred stock compensation related to
grants of stock options.............. --
Amortization of deferred stock
compensation......................... 64,744
Net loss............................... $ (1,884,813) (1,884,813)
------------- ------------
BALANCES, DECEMBER 31, 1997.............. (1,884,813) 15,278,986
Common stock issued in October and
November 1998 in connection with
stock option exercises............... 13,687
Common stock issued in December 1998 in
connection with stock option
exercises for notes receivable....... --
Deferred stock compensation related to
grants of stock options.............. --
Amortization of deferred stock
compensation......................... 580,564
Net loss............................... (7,112,218) (7,112,218)
------------- ------------
BALANCES, DECEMBER 31, 1998.............. (8,997,031) 8,761,019
</TABLE>
(TABLE CONTINUED ON FOLLOWING PAGE)
F-5
<PAGE>
ROSETTA INPHARMATICS, INC.
(A DEVELOPMENT STAGE COMPANY)
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY (CONTINUED)
INCEPTION (DECEMBER 19, 1996) TO DECEMBER 31, 1999
<TABLE>
<CAPTION>
CONVERTIBLE NOTES
PREFERRED STOCK COMMON STOCK ADDITIONAL RECEIVABLE DEFERRED
--------------------- -------------------- PAID-IN FROM STOCK
SHARES AMOUNT SHARES AMOUNT CAPITAL STOCKHOLDERS COMPENSATION
---------- -------- --------- -------- ----------- ------------ ------------
<S> <C> <C> <C> <C> <C> <C> <C>
Series B preferred stock
issued in February 1999 at
$4.00 per share as part of
the purchase of Acacia...... 1,387,298 1,387 5,547,805
Common stock issued in
February 1999 at $2.50 per
share as part of the
purchase of Acacia.......... 2,300,071 2,300 5,747,877
Options and warrants granted
as part of purchase of
Acacia...................... 821,693
Series C preferred stock
issued in April 1999 at
$4.50 per share, net of
issuance costs of
$196,896.................... 2,019,452 2,019 8,888,619
Common stock issued in
September 1999 in exchange
for transfer of
technology.................. 30,000 30 125,033
Series D preferred stock
issued in October 1999 at
$5.25 per share, net of
issuance costs of $36,756... 2,285,714 2,286 11,960,957
Common stock issued in
connection with stock option
exercises................... 221,756 222 88,481
Acceleration of restricted
stock....................... 293,426
Payments received on notes
receivable from
stockholders................ 16,740
Deferred stock compensation
related to grants of stock
options..................... 4,822,069 (4,822,069)
Amortization of deferred stock
compensation................ 3,215,411
Net loss......................
---------- ------- --------- ------ ----------- -------- -----------
BALANCES, DECEMBER 31, 1999... 10,154,964 $10,155 5,182,382 $5,183 $56,643,529 $(58,200) $(2,128,331)
========== ======= ========= ====== =========== ======== ===========
<CAPTION>
DEFICIT
ACCUMULATED
DURING THE
DEVELOPMENT
STAGE TOTAL
------------- ------------
<S> <C> <C>
Series B preferred stock
issued in February 1999 at
$4.00 per share as part of
the purchase of Acacia...... 5,549,192
Common stock issued in
February 1999 at $2.50 per
share as part of the
purchase of Acacia.......... 5,750,177
Options and warrants granted
as part of purchase of
Acacia...................... 821,693
Series C preferred stock
issued in April 1999 at
$4.50 per share, net of
issuance costs of
$196,896.................... 8,890,638
Common stock issued in
September 1999 in exchange
for transfer of
technology.................. 125,063
Series D preferred stock
issued in October 1999 at
$5.25 per share, net of
issuance costs of $36,756... 11,963,243
Common stock issued in
connection with stock option
exercises................... 88,703
Acceleration of restricted
stock....................... 293,426
Payments received on notes
receivable from
stockholders................ 16,740
Deferred stock compensation
related to grants of stock
options.....................
Amortization of deferred stock
compensation................ 3,215,411
Net loss...................... (19,819,514) (19,819,514)
------------- ------------
$ (28,816,545)
BALANCES, DECEMBER 31, 1999...
============= ============
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
F-6
<PAGE>
ROSETTA INPHARMATICS, INC.
(A DEVELOPMENT STAGE COMPANY)
CONSOLIDATED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
INCEPTION
(DECEMBER
19,
YEARS ENDED DECEMBER 31, 1996) TO
--------------------------------------- DECEMBER 31,
1997 1998 1999 1999
----------- ----------- ----------- ------------
<S> <C> <C> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES
Net loss.................................................. $(1,884,813) $(7,112,218) $(19,819,514) $(28,816,545)
Adjustments to reconcile net loss to net cash used in
operating activities
Depreciation and amortization........................... 118,135 445,068 1,059,885 1,623,088
Stock compensation...................................... 64,744 580,564 3,215,411 3,860,719
Loss on sale and write-off of property and equipment.... 298,232 298,232
Amortization of intangible assets....................... 2,754,377 2,754,377
Investment amortization................................. (160,277) (57,486) (217,763)
Stock issued for licensed technology.................... 418,489 418,489
Changes in operating assets and liabilities, net of
effects
of purchase of Acacia.................................
Accounts receivable................................... (102,557) (102,557)
Interest receivable................................... (170,336) 142,912 (4,621) (32,045)
Prepaid expenses and other assets..................... (38,171) (125,492) (509,315) (672,978)
Accounts payable...................................... 239,175 290,185 394,278 923,638
Accrued expenses...................................... 20,608 112,019 673,793 806,420
Deferred revenue...................................... 4,267,735 4,267,735
----------- ----------- ----------- ------------
Net cash used in operating activities............... (1,650,658) (5,827,239) (7,411,293) (14,889,190)
----------- ----------- ----------- ------------
CASH FLOWS FROM INVESTING ACTIVITIES
Purchases of property and equipment......................... (1,495,867) (1,230,833) (2,253,111) (4,979,811)
Purchase of trademark and trade name........................ (40,000) (40,000)
Purchases of short-term investments (11,220,283) (15,820,220) (15,738,379) (42,778,882)
Proceeds from sale and maturity of short-term investments... 3,700,000 18,520,148 9,825,000 32,045,148
Proceeds from sale of property and equipment................ 27,500 27,500
Business acquisition expenses, net of cash acquired......... (787,048) (231,468) (1,018,516)
----------- ----------- ----------- ------------
Net cash provided by (used in) investing
activities........................................ (9,016,150) 682,047 (8,410,458) (16,744,561)
----------- ----------- ----------- ------------
CASH FLOWS FROM FINANCING ACTIVITIES
Proceeds from notes payable................................. 1,507,410 1,054,148 766,687 3,328,245
Payments on capital lease obligation........................ (156,776) (156,776)
Payments on notes payable................................... (112,725) (478,631) (706,575) (1,297,931)
Proceeds from issuance of preferred stock................... 17,001,933 20,853,881 37,855,814
Proceeds from issuance of common stock...................... 97,122 13,687 88,702 199,511
Payments received on notes receivable from stockholders..... 16,740 16,740
----------- ----------- ----------- ------------
Net cash provided by financing activities........... 18,493,740 589,204 20,862,659 39,945,603
----------- ----------- ----------- ------------
Net increase (decrease) in cash and cash equivalents........ 7,826,932 (4,555,988) 5,040,908 8,311,852
Cash and cash equivalents, beginning of period.............. -- 7,826,932 3,270,944 --
----------- ----------- ----------- ------------
Cash and cash equivalents, end of period.................... $ 7,826,932 $ 3,270,944 $ 8,311,852 $ 8,311,852
=========== =========== =========== ============
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION
Cash paid for interest.................................... $ 45,272 $ 207,737 $ 293,196 $ 546,205
=========== =========== =========== ============
Common stock issued for notes receivable.................. $ 16,740 $ 58,200 $ -- $ 74,940
=========== =========== =========== ============
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
F-7
<PAGE>
ROSETTA INPHARMATICS, INC. (A DEVELOPMENT STAGE COMPANY)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. NATURE OF OPERATIONS
Rosetta Inpharmatics, Inc. ("Rosetta") was incorporated on December 19, 1996
in the state of Delaware. Rosetta is a developer of DNA microarray expression
technologies and information systems for obtaining comprehensive knowledge of
compound and drug target activities within any cell type, including human,
animal, and plant cells. Rosetta's integrated tools and consulting services
consist of the analysis of proprietary DNA microarrays, a powerful, flexible
informatics platform, and advanced molecular biology techniques to support the
needs of pharmaceutical, biotechnology, and agriculture companies. Rosetta
believes that its planned integrated approach to analysis of targets,
toxicities, and compound activities will greatly reduce the time, cost and risk
inherent in the current drug discovery process by eliminating or greatly
reducing its sequential nature.
Since inception, Rosetta has been in the development stage and its
activities have principally consisted of obtaining financing, recruiting
personnel, and conducting research and development. Rosetta is working on
several long-term development projects that involve experimental technology and
may require several years and substantial expenditures to complete. Revenues to
date have not resulted from Rosetta's planned principal operations. Rosetta's
ability to meet its business plan objectives is dependent upon its ability to
raise additional financing, substantiate its technology and, ultimately, to fund
its operations from revenues.
The statements of operations, stockholders' equity, and cash flows reflect
Rosetta's activities from inception (December 19, 1996) to December 31, 1999.
Rosetta had no activity for the period from December 19, 1996 through
December 31, 1996.
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
BASIS OF CONSOLIDATION
The accompanying consolidated financial statements include the accounts of
Rosetta and its wholly owned subsidiary, Acacia Biosciences, Inc. ("Acacia").
All significant intercompany transactions have been eliminated in consolidation.
CASH AND CASH EQUIVALENTS
Rosetta generally considers all highly liquid investments with insignificant
interest rate risk and with original or remaining maturities of three months or
less at the date of purchase to be cash and cash equivalents.
Cash and cash equivalents are recorded at cost, which approximates market
value, and consisted of the following amounts at December 31:
<TABLE>
<CAPTION>
1998 1999
---------- ----------
<S> <C> <C>
Bank deposits........................................ $ 229,542 $ 534,262
Money market account................................. 157,694 1,001,725
Commercial paper..................................... 1,984,990 6,775,865
Corporate bonds...................................... 898,718
---------- ----------
$3,270,944 $8,311,852
========== ==========
</TABLE>
F-8
<PAGE>
ROSETTA INPHARMATICS, INC. (A DEVELOPMENT STAGE COMPANY)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
Rosetta invests its cash in deposits with one financial institution that
may, at times, exceed federally insured limits. Management believes that the
risk of loss is minimal. To date, Rosetta has not experienced any losses related
to temporary cash investments.
SHORT-TERM INVESTMENTS
Investments in securities with maturities of less than one year or where
management's intent is to use the investments to fund current operations are
classified as short-term investments. Management classifies, at the date of
acquisition, its marketable securities into categories in accordance with the
provisions of Statement of Financial Accounting Standards No. 115, "Accounting
for Certain Investments in Debt and Equity Securities." Currently, Rosetta
classifies its securities as available-for-sale which are reported at fair
market value with the related unrealized gains and losses included as a separate
component in stockholders' equity. Realized gains and losses and declines in
value of securities judged to be other than temporary are included in other
income (expense). The fair value of Rosetta's investments is based on quoted
market prices. The carrying value of those investments approximates their fair
value. Realized and unrealized gains and loss are based on the specific
identification method.
The amortized cost of debt securities is adjusted for amortization of
premiums and accretion of discounts to maturity. Such amortization is included
in interest income. Interest and dividends on all securities are included in
interest income.
Rosetta's short-term investments are diversified among high-credit quality
securities in accordance with Rosetta's investment policy.
PROPERTY AND EQUIPMENT
Property and equipment is recorded at cost. Disposals are removed at cost
less accumulated depreciation or amortization and any gain or loss from
disposition is reflected in the statement of operations in the year of
disposition. Depreciation is provided over the estimated useful lives of the
depreciable assets, generally five years, using the straight-line method.
Equipment under capital leases is recorded at the present value of minimum lease
payments and is amortized using the straight-line method over the shorter of the
estimated useful lives of the related asset or the term of the lease. Leasehold
improvements are amortized using the straight-line method over the shorter of
the life of the lease or the estimated useful lives of the improvements.
Additions and improvements that increase the value or extend the life of an
asset are capitalized. Maintenance and repairs are expensed as incurred.
IMPAIRMENT OF LONG-LIVED ASSETS
In accordance with the provisions of Statement of Financial Accounting
Standards No. 121, "Accounting for the Impairment of Long-Lived Assets and for
Long-Lived Assets to be Disposed Of" ("SFAS 121"), Rosetta reviews long-lived
assets, including intangible assets and property and equipment for impairment
whenever events or changes in business circumstances indicate that the carrying
amount of the assets may not be fully recoverable. Under SFAS 121, an impairment
loss would be recognized when estimated undiscounted future cash flows expected
to result from the use of the asset and its eventual disposition is less than
its carrying amount. While Rosetta's current and historical operating
F-9
<PAGE>
ROSETTA INPHARMATICS, INC. (A DEVELOPMENT STAGE COMPANY)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
and cash flow losses are indicators of impairment, Rosetta believes the future
cash flows to be received from the long-lived assets will exceed the assets'
carrying value, and accordingly Rosetta has not recognized any impairment losses
through December 31, 1999.
REVENUE RECOGNITION
Revenue from grants and development activities under collaboration
agreements are recorded in the period in which the services are performed.
Direct costs associated with these contracts and grants are reported as research
and development expenses. Deferred revenue is recognized when funds are received
in advance of the services to be performed. Revenue from license and maintenance
fees under collaboration agreements is recognized over the term of the
agreements. Product revenue is recognized upon the transfer of title to
customers and is recorded net of discounts, rebates and allowances.
Revenue from the license of software products under software license
agreements and from the delivery of maintenance services on Rosetta's products,
are accounted for under Statement of Position 97-2, "Software Revenue
Recognition." When contracts contain multiple elements, and vendor specific
objective evidence exists for all undelivered elements, Rosetta accounts for the
delivered elements in accordance with the "Residual Method" prescribed by
Statement of Position 98-9, "Modification of SOP 97-2, Software Revenue
Recognition, with Respect to Certain Transactions." License revenues are
recognized when persuasive evidence of an arrangement exists, the fee is fixed
and determinable, collectibility is probable, and delivery and customer
acceptance, if required under the terms of the license agreement, of the
software products have occurred. Maintenance services consist of technical
support, including telephone consultation, problem resolution, and software
updates. Customers are typically billed for maintenance services in advance for
the term of the maintenance agreement, and revenue is recognized on a
straight-line basis over the term of the agreement, generally one year. Unearned
maintenance revenue is classified as deferred revenue.
SOFTWARE COSTS
Software developed for use in Rosetta's products is expensed as incurred
until both (i) technological feasibility for the software has been established,
and (ii) all research and development activities for the other components of the
system have been completed. Rosetta believes this will occur after it has
received evaluations from the beta sites and has completed any resulting
modifications to the products. Expenditures to date have been classified as
research and development expense.
RESEARCH AND DEVELOPMENT EXPENDITURES
Research and development expenses consist of costs incurred for
Rosetta-sponsored as well as collaborative research and development activities.
These costs include direct and research-related overhead expenses, and are
expensed as incurred. Costs to acquire technologies which are utilized in
research and development and which have no alternative future use are expensed
when incurred. Research and development expenses under government grants
approximate the revenue recognized under such agreements.
F-10
<PAGE>
ROSETTA INPHARMATICS, INC. (A DEVELOPMENT STAGE COMPANY)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
BUSINESS ACQUISITION EXPENSES
Direct costs incurred by Rosetta for acquisitions accounted for under the
purchase method of accounting are included as part of the purchase price. As of
December 31, 1998, Rosetta deferred $787,048 of costs related to the acquisition
of Acacia, which closed in February 1999.
INCOME TAXES
Deferred tax assets and liabilities are recorded under the liability method
of accounting. Under the liability method, deferred taxes are determined based
on the differences between the financial statement and tax bases of the assets
and liabilities that will result in taxable or deductible amounts in the future
based on enacted tax laws and rates applicable to the periods in which the
differences are expected to affect taxable income. A valuation allowance is
established when necessary to reduce deferred tax assets to the amount expected
to be realized. Income tax expense is recorded for the amount of income tax
payable or refundable for the period, increased or decreased by the change in
deferred tax assets and liabilities during the period.
PATENT COSTS
Costs related to filing and pursuing patent applications are expensed as
incurred, as recoverability of such expenditures is uncertain.
STOCK PURCHASE WARRANTS
The fair value of stock purchase warrants is determined using the
Black-Scholes option pricing model. The fair value of warrants issued in
connection with preferred stock financings has been recorded by offsetting
charges and credits to additional paid-in capital. The fair value of warrants
issued in connection with equipment and line of credit financings are
capitalized and amortized over the period of the financing agreement.
STOCK-BASED COMPENSATION
Rosetta accounts for stock-based employee compensation arrangements in
accordance with the provisions of Accounting Principles Board Opinion No. 25
("APB No. 25"), "Accounting for Stock Issued to Employees" and complies with the
disclosure provisions of Statement of Financial Accounting Standards No. 123
("SFAS No. 123"), "Accounting for Stock-Based Compensation." Under APB No. 25,
compensation expense is based on the difference, if any, on the date of the
grant, between the deemed fair value of the Company's stock and the exercise
price of the option. Unearned compensation is being amortized on an accelerated
basis using the method prescribed in Financial Accounting Standards Board
Interpretation No. 28 over the vesting period of the individual options.
The Company accounts for equity instruments issued to nonemployees in
accordance with the provisions of SFAS No. 123. Compensation expense related to
equity instruments issued to nonemployees is recognized as the equity
instruments vest. At each reporting date, Rosetta revalues the compensation. As
a result, stock-based compensation expense related to equity instruments issued
to nonemployees will fluctuate as the fair value of Rosetta's common stock
fluctuates.
F-11
<PAGE>
ROSETTA INPHARMATICS, INC. (A DEVELOPMENT STAGE COMPANY)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
COMPREHENSIVE INCOME
Rosetta has adopted the provisions of Statement of Financial Accounting
Standards No. 130, "Reporting Comprehensive Income" ("SFAS No. 130") effective
January 1, 1998. SFAS No. 130 requires the disclosure of comprehensive income
and its components in a full set of general-purpose financial statements.
Comprehensive income is the change in equity from transactions and other events
and circumstances other than those resulting from investments by owners and
distributions to owners. SFAS No. 130 had no impact on Rosetta and, accordingly,
a separate statement of comprehensive income has not been presented.
SEGMENT REPORTING
Effective in January 1998, Rosetta adopted Statement of Financial Accounting
Standards No. 131, "Disclosure about Segments of an Enterprise and Related
Information" ("SFAS No. 131"). SFAS No. 131 establishes annual and interim
reporting standards for an enterprise's operating segments and related
disclosures about its products, services, geographic areas, and major customers.
Rosetta has determined that it operates in only one segment. Accordingly, the
adoption of SFAS No. 131 had no impact on Rosetta's financial statements.
NET LOSS PER SHARE
Basic and diluted net loss per share has been computed using the
weighted-average number of shares of common stock outstanding during the period,
less the weighted-average number of unvested shares of common stock issued that
are subject to repurchase. Basic and diluted pro forma net loss per share, as
presented in the statements of operations, has been computed as described above
and also gives effect to the conversion of the convertible preferred stock
(using the if-converted method) from the original date of issuance. Rosetta has
excluded all convertible preferred stock, warrants to purchase convertible
preferred stock, outstanding options and warrants to purchase common stock and
common stock subject to repurchase from the calculation of diluted net loss per
share, as such securities are antidilutive for all periods presented.
F-12
<PAGE>
ROSETTA INPHARMATICS, INC. (A DEVELOPMENT STAGE COMPANY)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
The following table presents the calculation of basic and diluted and pro
forma basic and diluted (unaudited) net loss per share:
<TABLE>
<CAPTION>
INCEPTION
(DECEMBER 19,
YEARS ENDED DECEMBER 31, 1996) TO
---------------------------------------- DECEMBER 31,
1997 1998 1999 1999
----------- ----------- ------------ -------------
<S> <C> <C> <C> <C>
Net loss................................ $(1,884,813) $(7,112,218) $(19,819,514) $ (28,816,545)
=========== =========== ============ =============
Basic and diluted
Weighted-average shares used in
computing basic and diluted net loss
per share........................... 356,451 1,344,007 4,030,103 1,910,187
=========== =========== ============ =============
Basic and diluted net loss per
share............................... $ (5.29) $ (5.29) $ (4.92) $ (15.09)
=========== =========== ============ =============
Pro forma (unaudited)...................
Net loss.............................. $(19,819,514)
============
Shares used above..................... 4,030,103
Pro forma adjustment to reflect
weighted effect of assumed
conversion of convertible preferred
stock............................... 7,710,316
------------
Weighted-average shares used in
computing pro forma basic and
diluted net loss per common share... 11,740,419
============
Pro forma basic and diluted net loss
per common share.................... $ (1.69)
============
Antidilutive securities not included in
diluted net loss per share calculation
Convertible preferred stock........... 4,462,500 4,462,500 10,154,964
Options to purchase common stock...... 868,000 1,092,500 2,089,184
Warrants to purchase common stock..... 250,000 250,000 891,636
Warrants to purchase Series A
preferred stock..................... 246,490 254,823 254,823
Warrants to purchase Series B
preferred stock..................... 134,596
Warrants to purchase Series C
preferred stock..................... 54,949
Unvested shares of common stock
subject to repurchase............... 1,493,048 1,075,186 350,483
----------- ----------- ------------
7,320,038 7,135,009 13,930,635
=========== =========== ============
</TABLE>
F-13
<PAGE>
ROSETTA INPHARMATICS, INC. (A DEVELOPMENT STAGE COMPANY)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
USE OF ESTIMATES
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the financial
statements and that effect the reported amounts of revenues and expenses during
the reporting period. Actual results could differ from those estimates.
RECENT ACCOUNTING PRONOUNCEMENTS
In June 1998, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards No. 133, "Accounting for Derivative Financial
Instruments and for Hedging Activities" ("SFAS 133") which provides a
comprehensive and consistent standard for the recognition and measurement of
derivatives and hedging activities. SFAS 133 is effective for fiscal years
beginning after June 15, 2000 and is not anticipated to have an impact on
Rosetta's results of operations or financial condition when adopted as Rosetta
holds no derivative financial instruments and does not currently engage in
hedging activities.
In December 1999, the Securities and Exchange Commission ("SEC") issued
Staff Accounting Bulletin No. 101 ("SAB 101"), "Revenue Recognition," which
provides guidance on the recognition, presentation and disclosure of revenue in
financial statements filed with the SEC. SAB 101 outlines the basic criteria
that must be met to recognize revenue and provides guidance for disclosures
related to revenue recognition policies. Management believes that the impact of
SAB 101 would have no material effect on the financial position or results of
operations of Rosetta.
UNAUDITED PRO FORMA STOCKHOLDERS' EQUITY
Upon the closing of Rosetta's initial public offering, all of the
convertible preferred stock outstanding will automatically be converted into
common stock. The unaudited pro forma stockholders' equity presented on the
balance sheet reflects the effect of the conversion of the preferred stock into
common stock on a one-for-one basis.
3. BUSINESS ACQUISITION
On February 22, 1999, Rosetta acquired Acacia Biosciences, Inc. ("Acacia"),
a company conducting drug discovery utilizing recent advances in genome science
and combinatorial chemistry. Under the Agreement and Plan of Reorganization,
Rosetta issued a total of 1,387,298 shares of Series B preferred stock, warrants
to acquire an additional 134,596 shares of Series B preferred stock, 2,300,071
shares of common stock and warrants to purchase an additional 33,339 shares of
common stock in exchange for all of Acacia's outstanding capital stock. In
addition, all outstanding stock options to purchase Acacia common stock were
replaced with options to purchase 937,169 shares of common stock.
The acquisition was accounted for under the purchase method. The purchase
price of $13,184,439 has been allocated to the assets acquired and liabilities
assumed by Rosetta based on their fair values at the date of acquisition.
F-14
<PAGE>
ROSETTA INPHARMATICS, INC. (A DEVELOPMENT STAGE COMPANY)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
3. BUSINESS ACQUISITION (CONTINUED)
The allocation of the purchase price is summarized as follows:
<TABLE>
<S> <C>
Book value of net assets acquired at cost................... $ 153,145
Fair value adjustments
Fair value of purchased technology........................ 9,443,000
Fair value of licensing agreements........................ 500,000
Fair value of assembled workforce......................... 1,298,571
-----------
Fair value of net assets acquired........................... 11,394,716
-----------
Purchase price
Fair value of shares, warrants and options issued......... 12,121,063
Acquisition costs......................................... 1,063,376
-----------
13,184,439
-----------
Excess of purchase price over net assets acquired, allocated
to goodwill............................................... $ 1,789,723
===========
</TABLE>
The purchased technology, goodwill and licensing agreements are being
amortized over their estimated useful lives of five years and the assembled
workforce is being amortized over its estimated useful life of one to three
years.
The following unaudited pro forma information shows the results of Rosetta
for the years ended December 31, 1998 and 1999, as if the acquisition of Acacia
had occurred on January 1, 1998. The pro forma information includes adjustments
relating to the effect of amortizing goodwill and other intangible assets
acquired, and assumes that Rosetta preferred and common shares issued in
conjunction with the acquisition were outstanding as of January 1, 1998. The pro
forma results of operations are unaudited, have been prepared for comparative
purposes only, and do not purport to indicate the results of operations which
would actually have occurred had the acquisition been in effect on the date
indicated, or which may occur in the future:
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31,
---------------------------
1998 1999
------------ ------------
(UNAUDITED)
<S> <C> <C>
Revenue.......................................... $ 1,258,158 $ 1,233,447
Net loss......................................... $(14,318,883) $(20,360,770)
Basic and diluted net loss per share............. $ (3.93) $ (4.67)
</TABLE>
4. SHORT-TERM INVESTMENTS
The following is a summary of short-term investments at December 31:
<TABLE>
<CAPTION>
1998 1999
---------- -----------
<S> <C> <C>
Available-for-sale securities
Corporate notes................................... $1,980,632 $ 7,451,496
Market auction preferreds......................... 3,000,000 3,500,000
---------- -----------
$4,980,632 $10,951,496
========== ===========
</TABLE>
F-15
<PAGE>
ROSETTA INPHARMATICS, INC. (A DEVELOPMENT STAGE COMPANY)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
4. SHORT-TERM INVESTMENTS (CONTINUED)
The amortized cost of available-for-sale securities approximated their fair
values at both December 31, 1998 and 1999. For the years ended 1997, 1998 and
1999 there were no realized gains or losses on sales of securities.
5. PROPERTY AND EQUIPMENT
Property and equipment consisted of the following at December 31:
<TABLE>
<CAPTION>
1998 1999
---------- ----------
<S> <C> <C>
Computer equipment................................... $ 953,093 $1,877,724
Lab equipment........................................ 838,870 1,833,498
Technology development equipment..................... 513,017 592,594
Manufacturing equipment.............................. 39,770
Office equipment..................................... 56,848 81,313
Office furniture and fixtures........................ 110,847 212,482
Leasehold improvements............................... 254,025 833,266
---------- ----------
2,726,700 5,470,647
Less: Accumulated depreciation and amortization...... (563,203) (1,361,488)
---------- ----------
$2,163,497 $4,109,159
========== ==========
</TABLE>
Property and equipment at December 31, 1999 includes assets acquired from
Acacia under a capital lease in the net amount of $364,729. Accumulated
amortization related to these leased assets was $112,567 at December 31, 1999.
6. INTANGIBLE ASSETS
Intangible assets consisted of the following at December 31, 1999 (there
were no intangible assets at December 31, 1998):
<TABLE>
<S> <C>
Purchased technology........................................ $ 9,443,000
Goodwill.................................................... 1,789,723
Licensing agreements........................................ 500,000
Assembled workforce......................................... 1,298,571
Trademarks and trade names.................................. 40,000
-----------
13,071,294
Less: Accumulated amortization.............................. (2,754,377)
-----------
$10,316,917
===========
</TABLE>
7. NOTES PAYABLE
In 1997 and as amended in 1998 and 1999, Rosetta entered into an equipment
financing arrangement with a finance company to provide equipment financing up
to an aggregate amount of $3,300,000. Each separate financing agreement under
this arrangement has a term of forty-eight months with interest rates ranging
from 12.2% to 12.8%, and is collateralized by the related equipment. The
F-16
<PAGE>
ROSETTA INPHARMATICS, INC. (A DEVELOPMENT STAGE COMPANY)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
7. NOTES PAYABLE (CONTINUED)
financing arrangement includes a provision that in the event that the
unrestricted cash balance of Rosetta falls below certain levels (as defined in
the arrangement), Rosetta may be required to set aside restricted cash as
additional collateral. No cash was restricted under this provision as of
December 31, 1998 or 1999.
At December 31, 1998 and 1999, $1,867,674 and $2,017,102, respectively, was
payable under these equipment financing agreements, and $194,794 was unused and
available for additional financing at December 31, 1999. In connection with the
equipment financing agreements, Rosetta issued two six year warrants to purchase
9,375 and 8,333 shares of Series A Preferred Stock at exercise prices of $4.00
and $4.50 per share in 1997 and 1998, respectively.
At December 31, 1999, Rosetta has a $750,000 line of credit with a bank
which bears interest at prime plus 2% (10.5% at December 31, 1999) and will
expire in June 2000. The amount available under the line of credit is reduced by
any outstanding letters of credit. As of December 31, 1999, Rosetta had one
outstanding letter of credit in the amount of $375,000 related to its office
facility lease. At December 31, 1998 and 1999, $102,528 and $13,212,
respectively, was payable under the line of credit agreement with the bank.
The aggregate amount of required principal payments under the equipment
financing arrangement and the line of credit as of December 31, 1999, are as
follows:
<TABLE>
<CAPTION>
YEARS ENDING DECEMBER 31,
- -------------------------
<S> <C>
2000........................................................ $ 787,388
2001........................................................ 754,571
2002........................................................ 366,998
2003........................................................ 121,357
----------
2,030,314
Less: Current portion....................................... (787,388)
----------
$1,242,926
==========
</TABLE>
8. CAPITAL LEASE
In connection with the acquisition of Acacia in February 1999, Rosetta
assumed a capital lease obligation of Acacia. The remainder of the capital lease
obligation is to be repaid over 26 months through April 2001 and is
collateralized by the related equipment. Upon completing the lease term, the
Company has the option to purchase the equipment for 12% of the original
purchase price or extend the lease term for 12 months, after which the Company
will have title to the equipment.
F-17
<PAGE>
ROSETTA INPHARMATICS, INC. (A DEVELOPMENT STAGE COMPANY)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
8. CAPITAL LEASE (CONTINUED)
The following is a schedule of future minimum lease payments under the
capital lease obligation at December 31, 1999:
<TABLE>
<CAPTION>
YEARS ENDING DECEMBER 31,
- -------------------------
<S> <C>
2000........................................................ $239,856
2001........................................................ 150,340
--------
390,196
Less: Amounts representing interest......................... (35,109)
--------
Present value of minimum lease payments..................... 355,087
Less: Current portion....................................... (209,333)
--------
Long-term portion........................................... $145,754
========
</TABLE>
9. INCOME TAXES
At December 31, 1999, Rosetta had net operating loss carryforwards of
approximately $21 million, which begin to expire in 2013. Utilization of net
operating loss carryforwards is subject to the "change of ownership" provisions
under Section 382 of the Internal Revenue Code. During 1997, Rosetta experienced
ownership changes as defined by the Internal Revenue Code. Accordingly,
Rosetta's use of losses incurred through the date of any ownership changes will
be limited during the carryforward period, which may result in the expiration of
a portion of the net operating losses before utilization. In connection with
Rosetta's acquisition of Acacia, Rosetta acquired Acacia's net operating losses
of approximately $7.5 million which begin to expire in 2010. Utilization of the
Acacia net operating losses will be subject to the limitations imposed by
Section 382 of the Internal Revenue Code.
The difference between the income tax benefit per the statements of
operations and the amount calculated based on the statutory federal tax rate of
34% and the state apportioned rate, net of the federal tax benefit, is primarily
due to the increase in the deferred tax valuation allowance.
Deferred income taxes reflect the net tax effects of temporary differences
between the carrying amounts of assets and liabilities for financial reporting
purposes and the amounts used for income tax purposes. Rosetta has placed a
valuation allowance against its deferred tax assets due to the uncertainty
surrounding the ultimate realization of such assets. Management evaluates, on a
quarterly basis, the recoverability of the deferred tax asset and the amount of
the valuation allowance. At such time as it is determined that it is more likely
than not that the deferred tax assets are realizable, the valuation allowance
will be reduced.
F-18
<PAGE>
ROSETTA INPHARMATICS, INC. (A DEVELOPMENT STAGE COMPANY)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
9. INCOME TAXES (CONTINUED)
The effects of temporary differences and carryforwards that give rise to
deferred tax assets and liabilities are as follows at December 31:
<TABLE>
<CAPTION>
1998 1999
----------- ------------
<S> <C> <C>
Deferred tax assets
Net operating loss carryforwards................ $ 2,882,128 $ 9,945,763
Amortization of intangibles..................... 927,758
Other........................................... 30,155 30,630
----------- ------------
2,912,283 10,904,151
----------- ------------
Deferred tax liabilities
Depreciation.................................... (77,204) (240,497)
Stock-based compensation........................ (146,080)
----------- ------------
(77,204) (386,577)
----------- ------------
2,835,079 10,517,574
Less: Valuation allowance......................... (2,835,079) (10,517,574)
----------- ------------
Net deferred tax asset............................ $ -- $ --
=========== ============
</TABLE>
10. 401(K) PLAN
Rosetta maintains a 401(k) plan ("the Plan") that covers all employees who
satisfy certain eligibility requirements relating to minimum age, length of
service and hours worked. Under the Plan, eligible employees may make pretax
elective contributions of up to 25% of their compensation, subject to maximum
limits on contributions prescribed by law. Under the profit-sharing portion of
the Plan, Rosetta may make an annual contribution for the benefit of eligible
employees in an amount determined by the Board of Directors. Rosetta has not
made any such contribution through December 31, 1999.
F-19
<PAGE>
ROSETTA INPHARMATICS, INC. (A DEVELOPMENT STAGE COMPANY)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
11. STOCKHOLDERS' EQUITY
The authorized capital stock of Rosetta consists of 36,000,000 shares of
common stock, $0.001 par value per share and 18,000,000 shares of preferred
stock, $0.001 par value per share.
COMMON STOCK
Common stock issued to founders of Rosetta generally vest over four years,
with 12.50% of the shares vesting six months from the date of grant, and on a
monthly, pro rata basis thereafter. From inception through December 31, 1999,
the founders of Rosetta have purchased 2,031,335 shares of common stock, of
which 265,300 shares are unvested and remain subject to repurchase at the
original issuance price ($0.034 per share) in the event of termination of
employment or services to Rosetta. Rosetta has repurchased 147,494 shares in
accordance with these rights. Options for 85,183 shares of common stock have
been exercised as of December 31, 1999 which are subject to repurchase by
Rosetta at the weighted-average exercise price of $0.40 per share. Pursuant to
FAS 123, Rosetta recognizes stock compensation expense for founder shares that
have been issued to nonemployees and that are subject to performance criteria.
For the years ended December 31, 1997, 1998 and 1999 and for the period from
inception (December 19, 1996) to December 31, 1999, Rosetta recognized stock
compensation for restricted founder shares held by nonemployees in the amounts
of $56,255, $394,940, $1,240,910 and $1,692,105, respectively.
In connection with certain license agreements entered into by Rosetta in
1997, Rosetta issued 442,000 and 30,000 shares of common stock in 1997 and 1999,
respectively. In connection with the issuance of Series A convertible preferred
stock (see below) and for consideration of services to be performed by certain
Series A convertible preferred stockholders, Rosetta issued warrants to purchase
250,000 shares of common stock for $0.05 per share, subject to adjustment (as
defined in the warrant agreement). Under the terms of the warrant agreement,
Rosetta has the right to repurchase the warrants based on a five-year vesting
schedule. These warrants shall expire upon the earlier of (i) October 1, 2002,
(ii) the closing of an initial public offering of Rosetta's common stock, or
(iii) ninety days following disengagement. Pursuant to an agreement reached by
Rosetta with certain of its stockholders, when the warrants to purchase the
common stock are exercised, certain of Rosetta's stockholders have agreed to
sell back 200,000 shares of common stock to Rosetta at the original issuance
price.
CONVERTIBLE PREFERRED STOCK
At December 31, 1999, convertible preferred stock consists of the following:
<TABLE>
<CAPTION>
ADDITIONAL COMMON STOCK
SHARES ISSUED AND PAID-IN RESERVED FOR LIQUIDATION
SERIES DESIGNATED OUTSTANDING PAR VALUE CAPITAL (NET) CONVERSION PREFERENCE
- ------ ---------- ----------- --------- ------------- ------------ -----------
<S> <C> <C> <C> <C> <C> <C>
A 6,225,000 4,462,500 $ 4,463 $16,997,028 4,462,500 $17,850,000
B 1,600,000 1,387,298 1,387 5,547,805 1,387,298 5,549,192
C 2,750,000 2,019,452 2,019 8,888,619 2,019,452 9,087,534
D 2,285,714 2,285,714 2,286 11,960,957 2,285,714 11,999,999
---------- ---------- ------- ----------- ---------- -----------
12,860,714 10,154,964 $10,155 $43,394,409 10,154,964 $44,486,725
========== ========== ======= =========== ========== ===========
</TABLE>
Subject to the rights of future series of preferred stock, holders of
Series A, B, C and D convertible preferred stock, in preference to the holders
of any other stock of Rosetta, shall be entitled
F-20
<PAGE>
ROSETTA INPHARMATICS, INC. (A DEVELOPMENT STAGE COMPANY)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
11. STOCKHOLDERS' EQUITY (CONTINUED)
to receive dividends at a rate of $0.32, $0.32, $0.36, and $0.42, respectively,
per share per annum, when and as declared by Rosetta's Board of Directors, but
only out of funds that are legally available therefor. Such dividends shall not
be cumulative and no right shall accrue to holders of such shares of preferred
stock by reason of the fact that dividends on such shares are not declared in
any prior year, nor shall any undeclared or unpaid dividend bear or accrue
interest.
All holders of Series A, B, C and D convertible preferred stock are entitled
to voting rights equal to the number of shares of common stock into which each
share of preferred stock could be converted, and have voting rights and powers
equal to the voting rights and powers of the shares of common stock. In
addition, the holders of Series A, B, C and D preferred stock have certain
registration rights.
In the event of any liquidation, dissolution, or winding up of Rosetta,
either voluntary or involuntary, including a merger, acquisition or sale of
assets where the beneficial owners of Rosetta's common and preferred stock own
less than 50% of the resulting voting power of the surviving entity, the holders
of Series A, B, C, and D convertible preferred stock are entitled to receive,
prior to and in preference to any distribution of any of the assets of Rosetta
to the holders of common stock by reason of their ownership, an amount equal to
the sum of $4.00, $4.00, $4.50, and $5.25, respectively, for each outstanding
share of Series A, B, C, and D preferred stock (as adjusted for any stock
dividends, combinations, or splits), plus any declared, but unpaid dividends, if
any, on such shares (collectively, the "Series A, B, C, and D Liquidation
Preference"). After payment in full of the Series A, B, C, and D Liquidation
Preference and any other distribution that may be required with respect to any
future Series of preferred stock, if assets remain in Rosetta, the holders of
the common stock shall receive all of the remaining assets of Rosetta.
The Series A, B, C and D convertible preferred stock are convertible at the
option of the holder or automatically upon sale of common stock in a qualified
public offering as defined in the Articles of Incorporation. In addition, each
share of Series A, B, C and D preferred stock shall be automatically converted
in the event the majority of the Series A, B, C, and D preferred stock so elect.
Each share of Series A, B, C and D preferred stock is convertible into that
number of shares as is determined by dividing the original per share purchase
price by a conversion price. The initial conversion price for the Series A, B,
C, and D preferred stock is $4.00, $4.00, $4.50, and $5.25 per share,
respectively. The conversion price is subject to adjustment upon the occurrence
of certain events, including a stock split, stock dividend, subdivision, or
similar distribution with respect to the common stock.
WARRANTS
In connection with the 1997 Series A preferred stock financing, Rosetta
issued warrants to purchase 228,751 shares of Series A convertible preferred
stock for $4.00 per share. Of these warrants, 17,813 expire on December 16, 2007
and 210,938 expire on October 30, 2007.
In connection with the 1999 Series C preferred stock financing, Rosetta
issued warrants to purchase 54,949 shares of Series C convertible preferred
stock for $4.50 per share. These warrants expire on April 1, 2009. Also in
connection with the Series C financing, Rosetta issued warrants to purchase
608,297 shares of common stock for $0.45 per share. These common stock warrants
expire upon the earliest of (i) March 31, 2004 or (ii) the closing of an initial
public offering.
F-21
<PAGE>
ROSETTA INPHARMATICS, INC. (A DEVELOPMENT STAGE COMPANY)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
11. STOCKHOLDERS' EQUITY (CONTINUED)
The following table summarizes warrants outstanding at December 31, 1999:
<TABLE>
<CAPTION>
NUMBER OF SHARES EXERCISE
----------------------------------------- PRICE EXPIRATION
COMMON SERIES A SERIES B SERIES C PER SHARE DATE
-------- -------- -------- -------- ----------- ----------
<S> <C> <C> <C> <C> <C> <C>
Series A preferred stock financing
warrants................................ 250,000 $0.05 10/01/02
Series A preferred stock financing
warrants................................ 210,938 $4.00 10/30/07
Series A preferred stock financing
warrants................................ 17,813 $4.00 12/16/07
Line of credit warrants................... 8,364 $4.00 10/01/01
Equipment financing warrants.............. 9,375 $4.00 09/01/03
Equipment financing warrants.............. 8,333 $4.50 07/01/04
Warrants issued to former Acacia
shareholders............................ 33,339 $3.92-$4.56 01/31/01
Warrants issued to former Acacia
shareholders............................ 127,513 $6.21 01/06/02
Warrants issued to former Acacia
shareholders............................ 7,083 $5.93 08/28/03
Series C preferred stock financing
warrants................................ 608,297 $0.45 03/31/04
Series C preferred stock financing
warrants................................ 54,949 $4.50 04/01/09
------- ------- ------- ------
891,636 254,823 134,596 54,949
======= ======= ======= ======
</TABLE>
12. STOCK OPTIONS
In 1997, Rosetta approved the 1997 Stock Plan (the "Plan") for employees,
directors, consultants and independent contractors under which 3,107,825 shares
of common stock were reserved. In November 1999, the number of shares reserved
under the plan was increased to 5,286,913. Pursuant to the Plan, the Board of
Directors has the ability to grant nonqualified and incentive stock options and
to establish the vesting period, exercise price and expiration period of all
options. Options generally vest over a four-year period and expire ten years
from the date of grant. Certain options have been granted that are immediately
exercisable, subject to Rosetta's right of repurchase, which expires over a four
year vesting period.
F-22
<PAGE>
ROSETTA INPHARMATICS, INC. (A DEVELOPMENT STAGE COMPANY)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
12. STOCK OPTIONS (CONTINUED)
Option activity for the period from inception (December 19, 1996) to
December 31, 1999 is as follows:
<TABLE>
<CAPTION>
OPTIONS OUTSTANDING
---------------------
WEIGHTED-
AVERAGE
SHARES EXERCISE
AVAILABLE SHARES PRICE
---------- --------- ---------
<S> <C> <C> <C>
Shares reserved.............................. 3,107,825 --
Options granted in 1997...................... (868,000) 868,000 $0.40
---------- ---------
Balances, December 31, 1997.................. 2,239,825 868,000 $0.40
Options granted.............................. (449,500) 449,500 $0.40
Options exercised............................ (179,713) $0.40
Options cancelled............................ 45,287 (45,287) $0.40
---------- ---------
Balances, December 31, 1998.................. 1,835,612 1,092,500 $0.40
Additional shares reserved................... 2,179,088
Options granted.............................. (1,499,098) 1,499,098 $0.42
Options exercised............................ (221,756) $0.40
Options cancelled............................ 280,658 (280,658) $0.40
---------- ---------
Balances, December 31, 1999.................. 2,796,260 2,089,184 $0.41
========== =========
</TABLE>
The following table summarizes information about options outstanding at
December 31, 1999 as follows:
<TABLE>
<CAPTION>
OPTIONS OUTSTANDING
- ----------------------------------------------------------------- OPTIONS EXERCISABLE
WEIGHTED- ---------------------
AVERAGE WEIGHTED- WEIGHTED-
REMAINING AVERAGE AVERAGE
RANGE OF NUMBER CONTRACTUAL EXERCISE NUMBER EXERCISE
EXERCISE PRICES OUTSTANDING LIFE (IN YEARS) PRICE OF SHARES PRICE
- --------------------- ----------- --------------- --------- --------- ---------
<S> <C> <C> <C> <C> <C>
$0.40 - $0.53 2,089,184 8.28 $0.41 1,792,334 $0.40
</TABLE>
At December 31, 1997 no shares were exercisable and at December 31, 1998,
options for 847,000 shares were exercisable with a weighted-average exercise
price of $0.40 per share.
Had compensation expense for employee-related options been determined at the
date of grant consistent with the fair value method prescribed in SFAS 123,
Rosetta's net loss and net loss per share would have changed to the following
pro forma amounts:
<TABLE>
<CAPTION>
INCEPTION
YEARS ENDED DECEMBER 31, (DECEMBER 19, 1996)
---------------------------------------- TO DECEMBER 31,
1997 1998 1999 1999
----------- ----------- ------------ -------------------
<S> <C> <C> <C> <C>
As reported
Net loss........................... $(1,884,813) $(7,112,218) $(19,819,514) $(28,816,545)
Net loss per share, basic and
diluted.......................... $ (5.29) $ (5.29) $ (4.92) $ (15.09)
Pro forma
Net loss........................... $(1,909,015) $(7,153,231) $(19,883,125) $(28,945,371)
Net loss per share, basic and
diluted.......................... $ (5.36) $ (5.32) $ (4.93) $ (15.15)
</TABLE>
F-23
<PAGE>
ROSETTA INPHARMATICS, INC. (A DEVELOPMENT STAGE COMPANY)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
12. STOCK OPTIONS (CONTINUED)
For the SFAS No. 123 pro forma disclosure, the fair value of each option
grant is estimated on the date of grant using the minimum value method allowable
for nonpublic companies with the following weighted-average assumptions:
<TABLE>
<CAPTION>
INCEPTION
YEARS ENDED DECEMBER 31, (DECEMBER 16, 1996)
------------------------------ TO DECEMBER 31,
1997 1998 1999 1999
-------- -------- -------- -------------------
<S> <C> <C> <C> <C>
Risk free interest rates......... 6.1% 5.0% 5.2% 5.4%
Expected lives................... 5 years 5 years 5 years 5 years
Expected dividends............... None None None None
Volatility....................... 0% 0% 0% 0%
</TABLE>
For the year ended December 31, 1997, all options granted had exercise
prices that equaled the estimated market value of Rosetta's common stock at the
date of grant, and had a weighted-average fair value of $0.12 per share. For the
years ended December 31, 1998 and 1999, all options granted had exercise prices
below the estimated market value of Rosetta's common stock at the date of grant,
and had weighted-average fair values of $1.20 and $2.74, respectively.
DEFERRED STOCK COMPENSATION
During 1998 and 1999, Rosetta granted stock options to certain employees
under the 1997 Stock Plan with exercise prices below the deemed fair value of
Rosetta's common stock at the date of grant. In accordance with the requirements
of APB 25, Rosetta has recorded deferred stock compensation for the difference
between the exercise price of the stock options and the deemed fair value of
Rosetta's common stock at the date of grant. This deferred stock compensation is
amortized to expense over the period during which the options or common stock
subject to repurchase vest, generally four years, using an accelerated method as
described in Financial Accounting Standards Board Interpretation No. 28. Rosetta
recorded deferred stock compensation related to these options in the amounts of
$365,669 and $2,596,896 for the years ended December 31, 1998 and 1999,
respectively. Amortization of this deferred stock compensation amounted to
$104,955 and $1,321,245 for the years ended December 31, 1998 and 1999,
respectively.
During 1997, 1998 and 1999, Rosetta granted stock options and issued
restricted stock to certain consultants and other third parties. Rosetta has
recorded deferred stock compensation using the fair value method calculated
using the Black-Scholes option pricing model and is amortizing the deferred
stock compensation over the vesting or performance period using the accelerated
method discussed above. Rosetta recorded deferred stock compensation related to
these options and restricted stock in the amounts of $37,394, $185,623 and
$1,108,862 for the years ended December 31, 1997, 1998 and 1999, respectively.
Amortization of this deferred stock compensation amounted to $8,489, $80,669,
$653,256 and $742,414 for the years ended December 31, 1997, 1998 and 1999 and
for the period from inception (December 19, 1996) to December 31, 1999,
respectively.
13. LICENSE AGREEMENTS
In September 1997, Rosetta entered into a license agreement with the
University of Washington. The University of Washington granted Rosetta an
exclusive, worldwide, sublicensable license (subject to the rights of certain
U.S. governmental agencies and a grant-back to the University of Washington for
F-24
<PAGE>
ROSETTA INPHARMATICS, INC. (A DEVELOPMENT STAGE COMPANY)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
13. LICENSE AGREEMENTS (CONTINUED)
non-commercial research purposes) to certain technology pertaining to ink jet
synthesis of oligonucleotides. Rosetta paid an up-front license fee upon
execution of the license agreement that consisted of the issuance of 90,000
shares of common stock to the University of Washington. Rosetta is also
obligated to make future periodic payments on the anniversary date of the
agreement. In addition, Rosetta is obligated to make royalty payments on any
product sales. Rosetta was also obligated to issue 30,000 additional shares of
common stock upon the occurrence of certain events. In 1999, Rosetta issued the
additional 30,000 shares of common stock.
In December 1997, Rosetta entered into a license agreement with the Fred
Hutchinson Cancer Research Center (the "FHCRC"). Under the agreement, the FHCRC
granted Rosetta an exclusive, worldwide, sublicensable license (subject to the
rights of certain U.S. governmental agencies and a grant-back to the FHCRC for
non-commercial research purposes) to certain drug screening technology. Rosetta
paid an up-front license fee upon execution of the license agreement that
consisted of the issuance of 352,000 shares of common stock to the FHCRC. Of
these shares issued, 88,000 shares were subject to repurchase by Rosetta if
certain milestones were not met by December 2002. In May 1999, Rosetta waived
the repurchase option and in conjunction with the waiver, recognized $293,426 of
stock-based compensation expense for the estimated fair market value of the
stock on the date of the waiver. Rosetta is also obligated to pay the FHCRC a
fixed annual payment of $50,000 upon issuance of the first U.S. patent
containing claims covering the licensed technology.
In November 1998, Rosetta entered into a three-year internal-use license
agreement with Affymetrix, Inc. ("Affymetrix"), which is renewable on an annual
basis. Under the license agreement, Affymetrix granted Rosetta a nonexclusive,
nontransferable, nonsublicensable, worldwide license to certain patents related
to the fabrication and use of nucleic acid arrays. Rosetta has entered into
license agreements with two academic institutions which grant Rosetta exclusive
license agreements to certain technologies, patents, and patent applications
that Rosetta believes will be useful in the development of therapeutic products.
Under the exclusive license agreements, Rosetta will be required to make royalty
payments based on net sales, if any, of products or services upon the
commencement of sales and is obligated for all future patent costs on the
agreements.
In October 1999 Rosetta entered into an agreement with Agilent Technologies.
This seven year agreement provides the following:
- Agilent and Rosetta to make and sell products in the gene expansion field.
- Agilent has the exclusive right to market and sell FlexJet DNA microarrays
manufactured using Rosetta's inkjet synthesizer and related design
technology, in exchange for certain royalty payments.
- Agilent purchased 2,285,714 shares of Rosetta's Series D preferred stock.
- Rosetta has the right to sell Agilent an additional $10,000,000 of common
stock at any time prior to or upon closing of Rosetta's initial public
offering.
- Rosetta received payments of $4,468,323 for research and development and
for certain licensing rights
- The agreement expires in 2006.
F-25
<PAGE>
ROSETTA INPHARMATICS, INC. (A DEVELOPMENT STAGE COMPANY)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
13. LICENSE AGREEMENTS (CONTINUED)
Revenues from the research and development and licensing rights payments
have been deferred and are being recognized ratably over the seven year term of
the agreement.
14. RELATED PARTY TRANSACTIONS
In 1997, a stockholder of Rosetta guaranteed the bank line of credit. In
connection with the guarantee, the stockholder received warrants to purchase
8,364 shares of Series A preferred stock for $4.00 per share. In connection with
the renewal of the bank line of credit in 1999, the line of credit is no longer
guaranteed by the stockholder.
In connection with the issuance of Series A preferred stock in 1997 and in
accordance with a commission agreement, Rosetta paid $712,500 and issued
warrants to purchase 228,751 shares of Series A preferred stock at $4.00 per
share, to a member of its Board of Directors for providing sources of equity
financing.
In connection with a collaboration agreement Rosetta entered into with one
of its preferred stock holders in 1999, Rosetta received payments of $4,468,323
for research and development and for certain licensing rights, of which $645,892
was recorded as revenue and $4,122,431 was recorded as deferred revenue at
December 31, 1999. In addition, Rosetta has a receivable in the amount of
$150,000 from this stockholder at December 31, 1999.
In connection with the issuance of Series C preferred stock in April 1999
and in accordance with a commission agreement, Rosetta paid $165,000 and issued
warrants to purchase 54,949 shares of Series C preferred stock at $4.50 per
share to a member of its Board of Directors for providing sources of equity
financing.
15. OPERATING LEASES
Rosetta leases its facilities under noncancelable operating leases expiring
through July 2002. Rosetta pays taxes, insurance, normal maintenance and certain
other operating expenses. As a condition for one of the leases, Rosetta was
required to issue a stand-by letter of credit in the amount of $375,000. To
date, no portion of the letter of credit has been utilized. At December 31,
1999, future rental payments due under the leases for the remainder of the lease
terms are as follows:
<TABLE>
<CAPTION>
YEARS ENDING DECEMBER 31,
- -------------------------
<S> <C>
2000........................................................ $ 686,543
2001........................................................ 637,916
2002........................................................ 299,074
----------
$1,623,533
==========
</TABLE>
Rent expense incurred under operating leases for the years ended
December 31, 1997, 1998 and 1999 was approximately $189,000, $410,000 and $677,
000, respectively, and for the period from inception (December 19, 1996) to
December 31, 1999 was approximately $1,276,000.
In March 2000, Rosetta entered into an additional three year facility lease,
which will increase the minimum operating lease payments by approximately
$270,000 per year over the term of the lease.
F-26
<PAGE>
ROSETTA INPHARMATICS, INC. (A DEVELOPMENT STAGE COMPANY)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
16. SUBSEQUENT EVENTS (UNAUDITED)
Effective March 16, 2000, Rosetta issued 4,442,378 shares of its Series E
preferred stock at a price of $9.36 for total proceeds to Rosetta of
$41,580,667. Of the shares issued, 1,602,564 shares purchased by one investor
are subject to regulatory approval. If regulatory approval for the issuance of
these shares is not obtained, Rosetta would be required to repay $15,000,000 to
this investor. The rights and preferences of Series E preferred stock are
substantially the same as the rights and preferences of Series A through D
preferred stock. In connection with the issuance of the Series E preferred stock
and in accordance with a commission agreement, Rosetta paid $250,000 and issued
warrants to purchase 26,709 shares of Series E preferred stock at $9.36 per
share to a member of its Board of Directors for providing sources of equity
financing. The Series E preferred stock is convertible into common stock at a
conversion price of $9.36 per share. Rosetta will record the beneficial
conversion feature of these preferred shares which represents the difference
between the conversion price and the estimated fair market value of the common
stock upon issuance. The accretion resulting from this beneficial conversion
feature may have a material effect on net loss applicable to common stockholders
in calendar 2000. The accretion will not affect Rosetta's net loss, financial
position or cash flows.
On March 16, 2000, Rosetta entered into a licensing agreement with Oxford
Gene Technology IP Limited ("OGT"). Under the terms of this agreement OGT
granted Rosetta a non-exclusive, worldwide sub-license to manufacture, have
manufactured and use nucleic acid arrays. Rosetta paid OGT an up-front license
fee upon execution of this license agreement, which consisted of $1,000,000 in
cash and 686,928 shares of common stock. Rosetta recorded a prepaid license fee
based on the cash paid and the estimated fair market value of the common stock
on the date of the agreement, which will be amortized on a straight-line basis
over the term of the agreement. Rosetta agreed during the term of the agreement
to license to OGT all patents or other intellectual property which it owns or
controls related to instrumentation and methods for making nucleic acid arrays.
Rosetta additionally consented to allow Agilent to sublicense certain of
Rosetta's Inkjet patents to OGT. Both Rosetta and OGT are required to pay each
other quarterly royalty payments based upon the supply of royalty bearing
services.
Effective March 13, 2000, Rosetta's Articles of Incorporation were amended
to increase the total number of authorized shares to 40,000,000 shares of common
stock and 18,000,000 shares of preferred stock.
Effective March 15, 2000, Rosetta's Board of directors adopted the 2000
Stock Option Plan. The 2000 Stock Option Plan provides for the grant of
incentive stock options to employees (including officers and employee directors)
and for the grant of nonstatutory stock options to employees, officers,
directors (including nonemployee directors) and consultants. A total of
5,286,913 shares of Rosetta's common stock have been reserved for issuance under
the 2000 Stock Option Plan. Options have a maximum term of 10 years and vest
according to schedules as determined by the Board of Directors. The exercise
price of options issued as incentive stock options must be at least equal to the
fair market value of Rosetta's common stock on the issuance date. The exercise
price of each nonstatutory stock option granted under this plan must equal at
least 85% of the fair market value of Rosetta common stock on the date of grant.
Effective March 15, 2000, Rosetta adopted the 2000 Director's Stock Option
Plan ("Director's Plan"). Under the terms of the Director's Plan, each
nonemployee director who first becomes a nonemployee director after the
effective date of this plan will be entitled to receive an option to purchase
25,000 shares of common stock subject to monthly vesting over 48 months. The
Director's
F-27
<PAGE>
ROSETTA INPHARMATICS, INC. (A DEVELOPMENT STAGE COMPANY)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
16. SUBSEQUENT EVENTS (UNAUDITED) (CONTINUED)
Plan also provides for annual grants of options to purchase 5,000 shares of
common stock to each nonemployee director who has served on Rosetta's Board of
Directors for at least six months. These annual grants become exerciseable in
full on the fourth anniversary date of the grant. Options issued under the
Director's Plan will have a maximum term of 10 years. A total of 600,000 shares
of Rosetta's common stock has been reserved for issuance under the Director's
Plan.
Effective March 15, 2000, Rosetta adopted the 2000 Employee Stock Purchase
Plan ("the Purchase Plan"). The Purchase Plan allows all eligible employees to
participate by purchasing the Company's common stock using a uniform percentage
of compensation at a discount allowed under guidelines issued by the Internal
Revenue Service. The Purchase Plan is intended to qualify under Section 423 of
the Internal Revenue Code. A total of 350,000 shares of Rosetta's common stock
has been reserved for issuance under the Purchase Plan. Each year, the number of
shares reserved under the Purchase Plan will be increased by the lesser of
(1) 350,000 shares; (2) 14% of the Company's outstanding common stock on the
last day of the immediately preceding fiscal year; (3) or an amount as
determined by the Board of Directors.
Subsequent to December 31, 1999, Rosetta granted options to purchase
1,626,190 shares of common stock with a weighted-average exercise price of $3.80
per share and recorded deferred compensation of approximately $17.0 million.
F-28
<PAGE>
REPORT OF INDEPENDENT ACCOUNTANTS
March 19, 1999
To the Board of Directors and Stockholders
Acacia Biosciences, Inc.
In our opinion, the accompanying balance sheets and the related statements of
operations, of stockholders' equity (deficit) and of cash flows present fairly,
in all material respects, the financial position of Acacia Biosciences, Inc. (a
development stage company) at December 31, 1998 and 1997, and the results of its
operations and its cash flows for the years then ended and for the period from
inception (February 7, 1995) to December 31, 1998, in conformity with generally
accepted accounting principles. These financial statements are the
responsibility of the Company's management; our responsibility is to express an
opinion on these financial statements based on our audits. We conducted our
audits of these statements in accordance with generally accepted auditing
standards, which require that we plan and perform the audit to obtain reasonable
assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements, assessing the
accounting principles used and significant estimates made by management, and
evaluating the overall financial statement presentation. We believe that our
audits provide a reasonable basis for the opinion expressed above.
PricewaterhouseCoopers LLP
F-29
<PAGE>
ACACIA BIOSCIENCES, INC.
(A DEVELOPMENT STAGE COMPANY)
BALANCE SHEETS
DECEMBER 31, 1998 AND 1997
<TABLE>
<CAPTION>
1998 1997
----------- -----------
<S> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents................................. $ 705,524 $ 2,957,122
Accounts receivable....................................... 152,189 134,008
Prepaid expenses and other current assets................. 21,232 5,376
----------- -----------
Total current assets.................................... 878,945 3,096,506
Property and equipment, net................................. 1,123,755 956,219
Deposits and other assets................................... 8,670 8,670
----------- -----------
$ 2,011,370 $ 4,061,395
=========== ===========
LIABILITIES AND STOCKHOLDERS' EQUITY (DEFICIT)
Current liabilities:
Accounts payable.......................................... $ 321,211 $ 197,304
Accrued sponsored research................................ 6,000 6,750
Other accrued liabilities................................. 52,954 14,402
Deferred revenue.......................................... 162,500 75,000
Current portion of capital lease obligations.............. 186,348 165,887
Notes payable............................................. 1,500,000 --
----------- -----------
Total current liabilities............................... 2,229,013 459,343
Capital lease obligations, non-current...................... 355,087 541,436
----------- -----------
Total liabilities....................................... 2,584,100 1,000,779
----------- -----------
Commitments and contingencies
Stockholders' equity (deficit):
Preferred stock, $0.001 par value; 25,000,000 shares
authorized:
Series A convertible preferred stock; 8,000,000 shares
authorized; 6,423,722 shares issued and
outstanding at December 31, 1998 and 1997
aggregate liquidation preference of $6,423,722
at December 31, 1998 and 1997........................... 6,424 6,424
Common stock, $0.001 par value, 50,000,000 shares
authorized;
12,759,616 and 12,747,276 shares issued and outstanding
at
December 31, 1998 and 1997, respectively................ 12,760 12,747
Additional paid-in capital................................ 7,202,897 7,200,442
Deferred stock compensation............................... (7,533) (24,733)
Deficit accumulated during the development stage.......... (7,787,278) (4,134,264)
----------- -----------
Total stockholders' equity (deficit)........................ (572,730) 3,060,616
----------- -----------
$ 2,011,370 $ 4,061,395
=========== ===========
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-30
<PAGE>
ACACIA BIOSCIENCES, INC.
(A DEVELOPMENT STAGE COMPANY)
STATEMENTS OF OPERATIONS
<TABLE>
<CAPTION>
INCEPTION
(FEBRUARY 7,
YEARS ENDED DECEMBER 31, 1995) TO
------------------------- DECEMBER 31,
1998 1997 1998
----------- ----------- ------------
<S> <C> <C> <C>
Revenues:
Contract revenues.................................... $662,500 $50,000 $712,500
Grant revenues....................................... 595,658 15,000 610,658
----------- ----------- -----------
Total revenues..................................... 1,258,158 65,000 1,323,158
----------- ----------- -----------
Operating expenses:
Research and development............................. 4,018,214 2,457,779 7,097,181
General and administrative........................... 1,132,639 871,903 2,521,217
----------- ----------- -----------
Total operating expenses........................... 5,150,853 3,329,682 9,618,398
----------- ----------- -----------
Loss from operations................................... (3,892,695) (3,264,682) (8,295,240)
Interest income........................................ 72,142 226,640 354,579
Interest expense....................................... (82,461) (14,156) (96,617)
Other income........................................... 250,000 -- 250,000
----------- ----------- -----------
Net loss........................................... $(3,653,014) $(3,052,198) $(7,787,278)
=========== =========== ===========
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-31
<PAGE>
ACACIA BIOSCIENCES, INC.
(A DEVELOPMENT STAGE COMPANY)
STATEMENT OF STOCKHOLDERS' EQUITY (DEFICIT)
FOR THE PERIOD FROM INCEPTION (FEBRUARY 7, 1995) TO DECEMBER 31, 1998
<TABLE>
<CAPTION>
SERIES A
CONVERTIBLE DEFICIT
PREFERRED ACCUMULATED
STOCK COMMON STOCK ADDITIONAL DEFERRED DURING THE
-------------------- --------------------- PAID-IN STOCK DEVELOPMENT
SHARES AMOUNT SHARES AMOUNT CAPITAL COMPENSATION STAGE
--------- -------- ---------- -------- ---------- ------------ -----------
<S> <C> <C> <C> <C> <C> <C> <C>
Issuance of common stock at
$0.00025 per share for cash in
March 1995..................... -- $ -- 4,000,000 $ 4,000 $ (3,000) $ -- $ --
Issuance of common stock at
$0.00025 per share for license
agreement in September 1995.... -- -- 100,000 100 (75) -- --
Issuance of common stock at
$0.00025 for cash in October
and November 1995.............. -- -- 5,000,000 5,000 (3,750) -- --
Issuance of common stock at
$0.0070 per share for cash in
December 1995.................. -- -- 1,426,400 1,426 8,574 -- --
Issuance of common stock at
$0.625 per share in December
1995, net of expenses of
$50,000........................ -- -- 800,000 800 449,200 -- --
Net loss......................... -- -- -- -- -- -- (55,253)
--------- ------ ---------- ------- ---------- -------- -----------
Balances at December 31, 1995.... -- -- 11,326,400 11,326 450,949 -- (55,253)
Issuance of common stock at
$0.725 per share for cash in
February 1996, net of expenses
of $83,070..................... -- -- 1,145,792 1,146 746,483 -- --
Issuance of common stock at
$0.725 per share for consulting
services in May 1996........... -- -- 19,600 20 14,190 -- --
Issuance of common stock at
$0.725 per share for cash in
May 1996, net of expenses of
$8,701......................... -- -- 154,484 154 103,146 -- --
Issuance of common stock at
$0.725 per share for license
agreeent in June 1996.......... -- -- 100,000 100 72,400 -- --
Issuance of Series A convertible
preferred stock at $1.00 per
share for cash in October
through December 1996, net of
expenses of $646,164........... 5,401,500 5,402 -- -- 4,749,934 -- --
Issuance of Series A convertible
preferred stock at $1.00 per
share for consulting services
in November 1996............... 22,222 22 -- -- 22,200 -- --
Deferred compensation related to
the grant of stock options to
non-employees.................. -- -- -- -- 51,600 (51,600) --
Amortization of deferred stock
compensation................... -- -- -- -- -- 9,667 --
Net loss......................... -- -- -- -- -- -- (1,026,813)
--------- ------ ---------- ------- ---------- -------- -----------
Balances at December 31, 1996
(carried forward).............. 5,423,722 5,424 12,746,276 12,746 6,210,902 (41,933) (1,082,066)
<CAPTION>
TOTAL
STOCKHOLDERS'
EQUITY
-------------
<S> <C>
Issuance of common stock at
$0.00025 per share for cash in
March 1995..................... $ 1,000
Issuance of common stock at
$0.00025 per share for license
agreement in September 1995.... 25
Issuance of common stock at
$0.00025 for cash in October
and November 1995.............. 1,250
Issuance of common stock at
$0.0070 per share for cash in
December 1995.................. 10,000
Issuance of common stock at
$0.625 per share in December
1995, net of expenses of
$50,000........................ 450,000
Net loss......................... (55,253)
-----------
Balances at December 31, 1995.... 407,022
Issuance of common stock at
$0.725 per share for cash in
February 1996, net of expenses
of $83,070..................... 747,629
Issuance of common stock at
$0.725 per share for consulting
services in May 1996........... 14,210
Issuance of common stock at
$0.725 per share for cash in
May 1996, net of expenses of
$8,701......................... 103,300
Issuance of common stock at
$0.725 per share for license
agreeent in June 1996.......... 72,500
Issuance of Series A convertible
preferred stock at $1.00 per
share for cash in October
through December 1996, net of
expenses of $646,164........... 4,755,336
Issuance of Series A convertible
preferred stock at $1.00 per
share for consulting services
in November 1996............... 22,222
Deferred compensation related to
the grant of stock options to
non-employees.................. --
Amortization of deferred stock
compensation................... 9,667
Net loss......................... (1,026,813)
-----------
Balances at December 31, 1996
(carried forward).............. 5,105,073
</TABLE>
(TABLE CONTINUED ON FOLLOWING PAGE)
F-32
<PAGE>
ACACIA BIOSCIENCES, INC.
(A DEVELOPMENT STAGE COMPANY)
STATEMENT OF STOCKHOLDERS' EQUITY (DEFICIT)
FOR THE PERIOD FROM INCEPTION (FEBRUARY 7, 1995) TO DECEMBER 31 ,1998
<TABLE>
<CAPTION>
SERIES A DEFICIT
CONVERTIBLE ACCUMULATED
PREFERRED STOCK COMMON STOCK ADDITIONAL DEFERRED DURING THE TOTAL
-------------------- --------------------- PAID-IN STOCK DEVELOPMENT STOCKHOLDERS'
SHARES AMOUNT SHARES AMOUNT CAPITAL COMPENSATION STAGE EQUITY
--------- -------- ---------- -------- ---------- ------------- ------------ -------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Balances at
December 31, 1996.. 5,423,722 $5,424 12,746,276 $12,746 $6,210,902 $(41,933) $(1,082,066) $ 5,105,073
(brought forward)
Issuance of Series
A convertible
preferred stock
at $1.00 per
share for cash in
February 1997,
net of expenses
of $9,659........ 1,000,000 1,000 -- -- 989,341 -- -- 990,341
Exercise of stock
options.......... -- -- 1,000 1 199 -- -- 200
Amortization of
deferred stock
compensation..... -- -- -- -- -- 17,200 -- 17,200
Net loss........... -- -- -- -- -- -- (3,052,198) (3,052,198)
--------- ------ ---------- ------- ---------- -------- ----------- -----------
Balances at
December 31, 1997.. 6,423,722 6,424 12,747,276 12,747 7,200,442 (24,733) (4,134,264) 3,060,616
Exercise of stock
options.......... -- -- 12,340 13 2,455 -- -- 2,468
Amortization of
deferred stock
compensation..... -- -- -- -- -- 17,200 -- 17,200
Net loss........... -- -- -- -- -- -- (3,653,014) (3,653,014)
--------- ------ ---------- ------- ---------- -------- ----------- -----------
Balances at
December 31, 1998.. 6,423,722 $6,424 12,759,616 $12,760 $7,202,897 $ (7,533) $(7,787,278) $ (572,730)
========= ====== ========== ======= ========== ======== =========== ===========
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-33
<PAGE>
ACACIA BIOSCIENCES, INC.
(A DEVELOPMENT STAGE COMPANY)
STATEMENTS OF CASH FLOW
<TABLE>
<CAPTION>
INCEPTION
(FEBRUARY 7,
YEARS ENDED DECEMBER 31, 1995) TO
------------------------- DECEMBER 31,
1998 1997 1998
----------- ----------- ------------
<S> <C> <C> <C>
CASH FLOWS FROM OPERATION ACTIVITIES
Net loss.................................................. $(3,653,014) $(3,052,198) $(7,787,278)
Adjustments to reconcile net loss to net cash used in
operating activities:
Depreciation and amortization........................... 378,249 199,160 603,311
Issuance of common stock for license agreements......... -- -- 72,525
Issuance of common stock for consulting services........ -- -- 14,210
Issuance of convertible preferred stock for consulting
services.............................................. -- -- 22,222
Changes in operating assets and liabilities:
Receivables........................................... (18,181) 38,516 (152,189)
Prepaid expenses and other current assets............. (15,856) 66,813 (21,232)
Accounts payable...................................... 123,907 164,890 321,211
Accrued sponsored research............................ (750) 6,750 6,000
Other accrued liabilities............................. 38,552 (69,416) 52,954
Deferred revenue...................................... 87,500 75,000 162,500
----------- ----------- -----------
Net cash used in operating activities............... (3,059,593) (2,570,485) (6,705,766)
----------- ----------- -----------
CASH FLOWS FROM INVESTING ACTIVITIES
Purchase of property and equipment........................ (528,585) (290,164) (941,470)
Proceeds from sale of equipment........................... -- -- 11,602
Deposits and other assets................................. -- (8,670) (8,670)
----------- ----------- -----------
Net cash used in investing activities............... (528,585) (298,834) (938,538)
----------- ----------- -----------
CASH FLOWS FROM FINANCING ACTIVITIES
Proceeds from notes payable................................. 1,500,000 -- 1,500,000
Principal payments on capital lease obligations............. (165,888) (45,808) (211,696)
Proceeds from issuance of common stock...................... 2,468 200 1,315,847
Proceeds from issuance of convertible preferred stock....... -- 990,341 5,745,677
----------- ----------- -----------
Net cash provided by financing activities........... 1,336,580 944,733 8,349,828
----------- ----------- -----------
Net (decrease) increase in cash and cash equivalents........ (2,251,598) (1,924,586) 705,524
Cash and cash equivalents at beginning of period............ 2,957,122 4,881,708 --
----------- ----------- -----------
Cash and cash equivalents at end of period.......... $ 705,524 $ 2,957,122 $ 705,524
=========== =========== ===========
SUPPLEMENTAL DISCLOSURE:
Interest paid............................................. $ 73,968 $ 14,156 $ 88,124
=========== =========== ===========
NON-CASH INVESTING ACTIVITIES:
Capital lease obligation from purchase of furniture and
equipment............................................... $ -- $ 753,131 $ 753,131
=========== =========== ===========
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-34
<PAGE>
ACACIA BIOSCIENCES, INC. (A DEVELOPMENT STAGE COMPANY)
NOTES TO FINANCIAL STATEMENTS
1. ORGANIZATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES:
ORGANIZATION AND BASIS OF PRESENTATION
Acacia Biosciences, Inc. ("the Company") is a development stage enterprise.
The Company was originally incorporated on February 7, 1995 as Aurora
Biosciences, Inc. under the laws of the State of Utah, and was reincorporated
under the laws of the State of Delaware on July 16, 1996. The Company is a drug
discovery company utilizing recent advances in genome science and combinatorial
chemistry to develop a genetic assay for screening molecules against entire
disease pathways, at the same time providing an early indication of toxicity and
side effects. The Company's near-term strategy is to use its technology to
discover and develop therapeutic compounds through strategic alliances with
major pharmaceutical companies. The Company's longer range objective is to
develop therapeutic compounds that are highly selective for the treatment of
common forms of cancer and heart disease, or that have potential anti-fungal
therapeutic value.
The Company's activities since inception have principally consisted of
obtaining financing, recruiting personnel and conducting research and
development. The Company is working on several long-term development projects
that involve experimental technology and may require several years and
substantial expenditures to complete. The Company's ability to meet its business
plan objectives is dependent upon its ability to raise additional financing,
substantiate its technology and, ultimately, to fund its operations from
revenues.
USE OF ESTIMATES
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the financial
statements and the reported amounts of revenues and expenses during the
reporting period. Actual results could differ from those estimates.
CASH AND CASH EQUIVALENTS
Cash equivalents generally consist of highly liquid investments with
original or remaining maturities of 90 days or less at the date of purchase.
PROPERTY AND EQUIPMENT
Property and equipment are stated at cost, less accumulated depreciation.
Depreciation is provided using the straight-line method over the estimated
useful lives of the respective assets, which range from three to five years.
Leasehold improvements are amortized over the shorter of the lease term or the
estimated useful lives of the assets. Capital lease equipment is depreciated
over the life of the equipment as the ownership of the equipment transfers to
the Company at the end of the lease.
REVENUE RECOGNITION
Contract revenues related to collaborative research and development
agreements and government grants are recognized based on the performance of
services. Deferred revenue is recognized when funds are received in advance of
services to be performed.
F-35
<PAGE>
ACACIA BIOSCIENCES, INC. (A DEVELOPMENT STAGE COMPANY)
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
1. ORGANIZATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES: (CONTINUED)
RESEARCH AND DEVELOPMENT EXPENSES
Research and development expenses are charged to operations as incurred and
consist of costs for Company-sponsored and collaborative research and
development activities. These costs include direct and research-related overhead
expenses. Research and development expenses under the government grants
approximate the revenue recognized under such agreements.
STOCK-BASED COMPENSATION
In accordance with the provisions of Statement of Financial Accounting
Standards No. 123, ACCOUNTING FOR STOCK-BASED COMPENSATION, ("SFAS 123"), the
Company has elected to continue to apply Accounting Principles Board Opinion
No. 25, ACCOUNTING FOR STOCK ISSUED TO EMPLOYEES ("APB 23"), and related
interpretations and to adopt the pro forma disclosure alternative as described
in SFAS 123 in accounting for its employee stock option plan. Option grants to
all others are accounted for using the fair value method prescribed by
SFAS 123.
2. COLLABORATIVE AGREEMENTS:
The Company has entered into several collaborative agreements to provide the
use of the Company's Genome Reporter Matrix-TM- to assess a limited number of
developmental compounds, and limited rights to the Company's databases. For the
years ended December 31, 1998 and 1997, and for the period from inception
(February 7, 1995) to December 31, 1998, revenues of $662,500, $50,000 and
$712,500 had been recognized under these agreements, respectively. A $75,000
receivable from a partner was recorded as deferred revenue at December 31, 1997.
3. LICENSE AND RESEARCH AGREEMENTS:
The Company has entered into several license agreements. Two of these
agreements, with academic institutions, grant the Company exclusive licenses to
certain technologies, patents and patent applications that the Company believes
will be useful in the development of therapeutic products. Under the exclusive
licenses, the Company will be required to make royalty payments based on net
sales, if any, of products or services upon commencement of sales and is
obligated for all future patent costs on two of the agreements. In consideration
for the exclusive and other licenses, the Company has paid $299,000 and issued
200,000 shares of common stock. In January 1999, the Company made an additional
payment of $20,000 under the above agreements and is required to make future
payments of up to $40,000.
The Company has also entered into three research agreements with academic
institutions. Under the terms of the agreements, the Company has paid
approximately $585,000 and accrued an additional $6,000 for expenses to be
reimbursed to the academic institutions. There are no future payments required
under these agreements.
During 1996, the Company entered into two Option and Bailment agreements
that grant the Company the option to negotiate exclusive licenses with an
academic institution that has patent rights to the technologies under the
agreements. In consideration for the option rights, the Company has paid
$75,000, and has options to renew the agreements. The Company is also obligated
to pay present and future patent costs under the agreements, if renewed.
F-36
<PAGE>
ACACIA BIOSCIENCES, INC. (A DEVELOPMENT STAGE COMPANY)
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
4. PROPERTY AND EQUIPMENT:
Property and equipment consist of the following at December 31,
<TABLE>
<CAPTION>
1998 1997
---------- ----------
<S> <C> <C>
Laboratory equipment................................. $1,226,933 $ 770,520
Computer equipment................................... 232,747 182,975
Furniture and fixtures............................... 100,187 97,437
Leasehold improvements............................... 120,409 100,757
---------- ----------
1,680,276 1,151,689
Less accumulated depreciation and amortization....... (556,521) (195,470)
---------- ----------
Property and equipment, net.......................... $1,123,755 $ 956,219
========== ==========
</TABLE>
The Company has approximately $753,000 of assets under capital leases that
are included in laboratory equipment. Accumulated amortization for these assets
was approximately $282,000 and $112,000 at December 31, 1998 and 1997,
respectively.
5. NOTES PAYABLE:
At December 31, 1998 the Company had a $1 million note payable to Penny Lane
Advisors, Inc. with interest at 10%. Subsequent to December 31, 1998, the note
was paid in full by the issuance of the Company's Series B Preferred Stock.
In connection with a proposed merger (see Note 11) and pursuant to an
exclusivity agreement executed in November 1998, the Company received $500,000
from Rosetta Inpharmatics, Inc. for which the Company issued a $250,000 note
payable and recorded $250,000 in other income. In December 1998 an additional
$250,000 was received for which the Company issued a note payable. Under the
terms of the exclusivity agreement and related notes, the notes bear interest at
7.5% and become immediately due if the merger is not consummated.
6. CAPITAL LEASE OBLIGATIONS:
In April 1997, the Company entered into a capital lease line agreement for
up to $1,500,000 expiring July 31, 1998. As of December 31, 1998, the Company
had utilized approximately $753,000 for equipment purchases under this
agreement. The capital lease obligation is to be repaid over 42 months at an
interest rate of 6.71% and is collateralized by the related equipment. Upon
completing the lease term, the Company has the option to purchase the equipment
for 12% of the original purchase price or extend the lease term for 12 months,
after which the Company will have title to the equipment. The Company issued the
lessor a warrant to purchase shares of Series A convertible preferred stock. The
warrant shares will be for 4% of the equipment cost at the price of $1.00 per
share. At December 31, 1998 and 1997, 30,000 shares are issuable under the
warrant. The warrant expires April 2003. The assigned value of the warrant was
immaterial for financial statement purposes.
F-37
<PAGE>
ACACIA BIOSCIENCES, INC. (A DEVELOPMENT STAGE COMPANY)
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
6. CAPITAL LEASE OBLIGATIONS: (CONTINUED)
Following is a schedule of future minimum lease payments under the capital
lease line agreement at December 31, 1998:
<TABLE>
<CAPTION>
YEARS ENDING DECEMBER 31,
- -------------------------
<S> <C>
1999........................................................ $ 239,856
2000........................................................ 239,856
2001........................................................ 150,340
---------
630,052
Less amounts representing interest.......................... (88,617)
---------
Present value of net minimum lease payments................. 541,435
Less current portion........................................ (186,348)
---------
Long-term portion........................................... $ 355,087
=========
</TABLE>
7. FACILITY LEASE:
The Company leases its facility under non-cancelable operating leases. These
leases expire in February 2000 and include renewal options at the end of the
leases for three additional one-year terms. Minimum annual rental commitments
under the operating leases at December 31, 1998 are as follows:
<TABLE>
<CAPTION>
YEARS ENDING DECEMBER 31,
- -------------------------
<S> <C>
1999........................................................ $113,156
2000........................................................ 14,226
--------
$127,382
========
</TABLE>
Rent expense for operating leases was $105,978, $77,368 and $187,670 for the
years ended December 31, 1998 and 1997 and for the period from inception
(February 7, 1995) to December 31, 1998, respectively.
8. RELATED PARTY TRANSACTIONS:
In January 1996, the Company appointed a member of Trautman Kramer & Company
("TKC") to its board of directors. The Company also engaged TKC as investment
consultants. Under the terms of this agreement, the Company is obligated to pay
a monthly fee to TKC of $3,000 after the February 1997 final closing of the
Series A convertible preferred stock over a 24-month period (see Note 9). In
May 1996, certain employees of TKC, including the aforementioned board member
and other related parties, purchased 120,000 shares of common stock at $0.725
per share. For the years ended December 31, 1998 and 1997 and for the period
from inception (February 7, 1995) to December 31, 1998, the Company paid fees
and commissions in connection with equity transactions of approximately $36,000,
$25,000 and $846,000 to TKC, respectively. In conjunction with TKC's efforts in
completing common stock and Series A convertible preferred stock financings
prior to 1998, the Company granted warrants to purchase 720,150 shares of
Series A convertible preferred stock at an exercise price of $1.10 per share,
and warrants to purchase 110,000 and 80,000 shares of common stock at exercise
prices of $0.7975 and $0.6875 per share, respectively. Such warrants expire in
January 2002, January 2001 and December 2000, respectively.
F-38
<PAGE>
ACACIA BIOSCIENCES, INC. (A DEVELOPMENT STAGE COMPANY)
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
9. STOCKHOLDERS' EQUITY (DEFICIT):
PREFERRED STOCK
The Company has authorized 25,000,000 shares of preferred stock of which
8,000,000 shares have been designated as Series A convertible preferred stock.
The Series A stockholders are entitled to vote together with the common
stockholders as a single class on all matters, except as otherwise required by
law. Each Series A preferred stockholder will be entitled to one vote for each
share of common stock into which his Series A preferred stock is convertible.
The Series A preferred stock may be converted into common stock at any time at
the option of the holder, on a one-for-one basis, subject to adjustment for
stock splits, stock dividends and recapitalizations. Additionally, the Series A
preferred stock shall be automatically converted in common stock on a
one-for-one basis upon the closing of an initial public offering. In the event
of any liquidation, dissolution or winding up of the Company, funds available
for distribution to stockholders shall be paid to the holders of Series A
preferred stock in an amount per share equal to $1.00 (subject to adjustment)
plus all declared and unpaid dividends prior to any distribution to holders of
common stock. Non-cumulative annual dividends shall be paid on the Series A
convertible preferred stock when and as declared by the board of directors.
COMMON STOCK REPURCHASE RIGHTS
Pursuant to the agreements with certain stockholders, the Company has the
right to repurchase 71,111 common stock at $0.00025 per share should the
stockholders cease their association with the Company or not perform certain
tasks prior to a specified date. Such repurchase rights lapse monthly over the
respective three-to five-year terms.
STOCK OPTION PLAN
In fiscal years 1995 and 1996, the Company granted 635,000 non-qualified
stock options to directors, employees and other key individuals providing
services to the Company. In June 1996, the board of directors approved an equity
incentive plan (the "1996 Plan"). The 1996 Plan allows the Company to grant
incentive stock options, non-statutory stock options, stock bonuses, rights to
purchase restricted stock and stock appreciation rights to employees,
consultants and affiliates of the Company. The exercise price of all stock
options granted must be at least equal to the estimated fair value of the stock
as determined by the board of directors at the date of grant, with the exception
of non-statutory stock options granted under the 1996 Plan wherein the exercise
price shall not be less than 85% of the fair value of the stock at the date of
grant. Options expire no later than ten years from the date of grant. The number
of shares, terms and exercise period are determined by the board of directors on
an option-by-option basis. Options generally vest 24% one year after the date of
grant and on a pro rata basis over the remaining 38-month vesting period. A
total of 4,400,000 shares of the
F-39
<PAGE>
ACACIA BIOSCIENCES, INC. (A DEVELOPMENT STAGE COMPANY)
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
9. STOCKHOLDERS' EQUITY (DEFICIT): (CONTINUED)
Company's authorized but unissued common stock have been reserved for issuance
under the 1996 plan. A summary of the activity of grants follows:
<TABLE>
<CAPTION>
OUTSTANDING STOCK OPTIONS
--------------------------------------------
SHARES WEIGHTED
AVAILABLE NUMBER OF AVERAGE
FOR GRANT SHARES PRICE PER SHARE EXERCISE PRICE
--------- --------- --------------- --------------
<S> <C> <C> <C> <C>
Balance at December 31, 1996................ 3,000,000 635,000 $0.0025-$0.20 $0.1371
Options granted........................... (966,154) 966,154 $0.20 $ 0.20
Options exercised......................... -- (1,000) $0.20 $ 0.20
Options canceled.......................... 15,000 (15,000) $0.20 $ 0.20
--------- ---------
Balance at December 31, 1997................ 2,048,846 1,585,154 $0.0025-$0.20 $0.1748
Additional authorization.................. 1,400,000
Options granted........................... (721,500) 721,500 $0.20 $ 0.20
Options exercised......................... -- (12,340) $0.20 $ 0.20
Options canceled.......................... 124,800 (124,800) $0.20 $ 0.20
--------- ---------
Balance at December 31, 1998................ 2,852,146 2,169,514 $0.0025-$0.20 $0.1816
========= =========
</TABLE>
The weighted average fair value of stock options granted in 1998 and 1997
were $0.05 and $0.06, respectively. Options were exercisable to purchase 816,704
shares (at a weighted-average exercise price of $0.15 per share) and 295,336
shares (at a weighted-average exercise price of $0.11 per share) at
December 31, 1998 and 1997, respectively.
The following table summarizes information about the stock options
outstanding at December 31, 1998:
<TABLE>
<CAPTION>
OPTIONS OUTSTANDING
----------------------------------------
WEIGHTED- OPTIONS EXERCISABLE
AVERAGE --------------------------
NUMBER WEIGHTED- REMAINING NUMBER
OUTSTANDING AT AVERAGE CONTRACTUAL EXERCISABLE AT
DECEMBER 31, EXERCISE LIFE (IN DECEMBER 31, WEIGHTED-
EXERCISE PRICE RANGE 1998 PRICE YEARS) 1998 AVERAGE
- -------------------- -------------- --------- ----------- -------------- ---------
<S> <C> <C> <C> <C> <C>
$0.00025 200,000 $ 0.00025 6.7 200,000 $0.00025
$0.20 1,969,514 $ 0.20 8.5 616,704 $ 0.20
--------- -------
$0.00025-$0.20 2,169,514 $ 0.18 8.3 816,704 $ 0.15
========= =======
</TABLE>
During 1996, the Company granted 240,000 options to non-employees. These
options have been recorded as deferred compensation at their estimated fair
value, which was estimated to be $51,600 using the Black-Scholes option
valuation model. Deferred compensation is amortized as general and
administrative expense over a three-year vesting period.
PRO FORMA INFORMATION
Pro forma information regarding net loss is required by SFAS 123, and has
been determined as if the Company accounted for its employee stock options under
the fair value method of SFAS 123. The fair value for these options was
estimated at the date of grant using the minimum value method
F-40
<PAGE>
ACACIA BIOSCIENCES, INC. (A DEVELOPMENT STAGE COMPANY)
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
9. STOCKHOLDERS' EQUITY (DEFICIT): (CONTINUED)
allowable for non-public companies with the following assumptions: risk-free
interest rate of between 4.49% and 5.84% for grants in fiscal 1998 and between
5.64% and 6.68% for grants in fiscal 1997; a weighted-average expected life of
the option from grant date of three years; volatility of 0% and a dividend yield
of zero.
The Black-Scholes option valuation model was developed for use in estimating
the fair value of traded options that have no vesting restrictions and are fully
transferable. In addition, option valuation models require the input of highly
subjective assumptions including the expected stock price volatility. Because
the Company's employee stock options have characteristics significantly
different from those of traded options, and because changes in the subjective
input assumptions can materially affect the fair value estimate, in management's
opinion, the existing models do not necessarily provide a reliable single
measure of the fair value of its employee stock options.
For pro forma purposes, the estimated fair value of the Company's
stock-based awards to its employees is amortized over the option's vesting
period. The Company's pro forma information is as follows:
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31,
---------------------------
1998 1997
------------ ------------
<S> <C> <C>
Net loss as reported.............................. $(3,653,014) $(3,052,198)
Pro forma net loss................................ (3,679,260) (3,078,807)
</TABLE>
10. INCOME TAXES
As of December 31, 1998, the Company had net operating loss carryforwards
for federal income tax purposes of approximately $6,700,000. The net operating
loss carryforwards will expire at various dates from 2010 through 2019, if not
utilized.
Utilization of the net operating losses and credits may be subject to a
substantial annual limitation due to the "change in ownership" provisions of
Section 382 of the Internal Revenue Code. The annual limitation may result in
the expiration of net operating losses and credits before utilization.
As of December 31, 1998 and 1997, the Company had deferred tax assets of
approximately $3,195,000 and $1,700,000, respectively. Deferred tax assets
relate primarily to net operating loss carryforwards and research and
development costs capitalized for tax purposes. The net deferred tax asset has
been fully offset by a valuation allowance. The net valuation allowance
increased by $1,495,000 during the year ended December 31, 1998.
11. SUBSEQUENT EVENT:
In February 1999, the board of directors of the Company approved an
agreement to combine with Rosetta Inpharmatics, Inc. ("Rosetta"), in a strategic
business combination (the "Merger"). Also in February 1999, the stockholders of
both the Company and Rosetta approved the Merger. The effective date of the
Merger is February 23, 1999. Pursuant to the Merger (and subject to certain
escrow provisions), Rosetta will issue to the Company's stockholders (i) 0.1754
of a share of Rosetta Common Stock for each share of the Company's Common Stock,
(ii) 0.1771 of a share of Rosetta Series B Preferred Stock for each share of the
Company's Series A Preferred Stock and (iii) 0.1771 of a share of Rosetta
Series B Preferred Stock for each share of the Company's Series B Preferred
Stock.
F-41
<PAGE>
ACACIA BIOSCIENCES, INC. (A DEVELOPMENT STAGE COMPANY)
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
11. SUBSEQUENT EVENT: (CONTINUED)
Additionally, Rosetta issued 134,596 warrants for the purchase of Rosetta
Series B Preferred Stock to replace all of the Company's outstanding Series A
and B Preferred Stock warrants, except for 30,000 warrants issued in conjunction
with capital leases which expired upon the Merger and were not exercised.
Further, Rosetta issued 33,339 warrants for the purchase of Rosetta Common Stock
to replace the Company's outstanding common stock warrants.
Also pursuant to the Merger (and subject to certain escrow provisions), the
Company's optionholders will receive (1) fully-vested options to purchase an
aggregate of 383,969 shares of Rosetta Common Stock in exchange for cancellation
of all the vested options to purchase shares of the Company's Common Stock held
by such Company optionholders and (2) options (subject to vesting) to purchase
an aggregate of 553,200 shares of Rosetta Common Stock in exchange for
cancellation of all the unvested options to purchase shares of the Company's
Common Stock held by such Company optionholders.
F-42
<PAGE>
ROSETTA INPHARMATICS, INC.
UNAUDITED PRO FORMA COMBINED STATEMENT OF OPERATIONS
In February 1999, Rosetta acquired Acacia Biosciences, Inc. (Acacia) in a
transaction accounted for under the purchase method of accounting. Total
consideration for Acacia was $13,184,439, which consisted of the issuance of
1,387,298 shares of Series B preferred stock, warrants to acquire an additional
134,596 shares of Series B preferred stock, 2,300,071 shares of common stock,
warrants to purchase an additional 33,339 shares of common stock and
miscellaneous cash expenses. In addition, all outstanding stock options to
purchase Acacia common stock were replaced with options to purchase 937,169
shares of Rosetta's common stock.
The following unaudited pro forma combined statement of operations for the
year ended December 31, 1999 gives effect to the acquisition as if it had
occurred on January 1, 1999.
The unaudited pro forma combined statement of operations should be read in
conjunction with the historical financial statements and notes thereto of
Rosetta and Acacia, included elsewhere in this prospectus. The unaudited pro
forma combined statement of operations is presented for illustrative purposes
only and is not necessarily indicative of results of operations that would have
actually occurred had the acquisition of Acacia been effected on the date
assumed.
ROSETTA INPHARMATICS, INC.
UNAUDITED PRO FORMA COMBINED STATEMENT OF OPERATIONS
FOR THE YEAR ENDED DECEMBER 31, 1999
<TABLE>
<CAPTION>
PRO FORMA
ROSETTA ACACIA COMBINED ADJUSTMENTS PRO FORMA
------- ------ -------- ----------- ---------
<S> <C> <C> <C> <C> <C>
Net revenues................................. $ 535,892 $ 697,555 $ 1,233,447 $ -- $ 1,233,447
------------ ------------ ------------ ------------ ------------
Operating expenses...........................
Research and development................... 8,128,385 3,037,303 11,165,688 11,165,688
General and administrative................. 8,613,759 964,791 9,578,550 550,608 (1) 10,129,158
Stock-based compensation................... 1,973,719 1,973,719 1,973,719
------------ ------------ ------------ ------------ ------------
Total operating expenses................. 18,715,863 4,002,094 22,717,957 550,608 23,268,565
------------ ------------ ------------ ------------ ------------
Loss from operations......................... (18,179,971) (3,304,539) (21,484,510) (550,608) (22,035,118)
Other income (expense)
Interest income............................ 632,156 4,909 637,065 637,065
Interest expense........................... (243,791) (68,302) (312,093) (312,093)
Other, net................................. 19,663 398,034 417,697 (500,000)(2) (82,303)
------------ ------------ ------------ ------------ ------------
Net loss..................................... $(17,771,943) $ (2,969,898) $(20,741,841) $ (1,050,608) $(21,792,449)
============ ============ ============ ============ ============
Basic and diluted net loss per share......... $ (8.61) $ (5.41)
============ ============
Weighted average shares used in computing net
loss per share............................. 2,064,015 4,030,103 (3)
============ ============
</TABLE>
F-43
<PAGE>
ROSETTA INPHARMATICS, INC.
NOTES TO UNAUDITED PRO FORMA COMBINED STATEMENT OF OPERATIONS
(1) Reflects the amortization of trained and assembled workforce, licensing
agreements, patents and goodwill acquired in the business combination, which
is being amortized over 1-3 years for trained and assembled workforce and
5 years for licensing agreements, patents and goodwill.
(2) Reflects the issuance of a note payable from Rosetta to Acacia for $500,000
which Acacia recognized as other revenue at the time Rosetta purchased
Acacia.
(3) Basic and diluted net loss per share is computed using the weighted-average
number of shares of common stock outstanding after the issuance of Rosetta
common stock in connection with the Acacia acquisition.
F-44
<PAGE>
YOU SHOULD RELY ONLY ON THE INFORMATION CONTAINED IN THIS PROSPECTUS. WE HAVE
NOT AUTHORIZED ANYONE TO PROVIDE YOU WITH INFORMATION DIFFERENT FROM THAT
CONTAINED IN THIS PROSPECTUS. WE ARE OFFERING TO SELL, AND SEEKING OFFERS TO BUY
SHARES OF ROSETTA INPHARMATICS, INC. COMMON STOCK ONLY IN JURISDICTIONS WHERE
OFFERS AND SALES ARE PERMITTED. THE INFORMATION CONTAINED IN THIS PROSPECTUS IS
ACCURATE ONLY AS OF THE DATE OF THIS PROSPECTUS, REGARDLESS OF THE TIME OF
DELIVERY OF THIS PROSPECTUS OR OF ANY SALE OF THE ROSETTA INPHARMATICS, INC.
COMMON STOCK.
TABLE OF CONTENTS
<TABLE>
<CAPTION>
<S> <C>
Prospectus Summary................... 2
Risk Factors......................... 6
Forward-Looking Statements........... 22
Use of Proceeds...................... 22
Dividend Policy...................... 22
Capitalization....................... 23
Dilution............................. 24
Selected Consolidated Financial
Data............................... 25
Management's Discussion and Analysis
of Financial Condition and Results
of Operations...................... 26
Business............................. 30
Management........................... 43
Certain Transactions................. 55
Principal Stockholders............... 59
Description of Capital Stock......... 61
Shares Eligible for Future Sale...... 65
Underwriting......................... 67
Legal Matters........................ 70
Experts.............................. 70
Where can you find more
Information........................ 70
Index to Consolidated Financial
Statements......................... F-1
</TABLE>
PRELIMINARY PROSPECTUS
Shares
[LOGO]
Common Stock
Warburg Dillon Read LLC
Lehman Brothers
Prudential Vector Healthcare
a unit of Prudential Securities
<PAGE>
PART II
INFORMATION NOT REQUIRED IN PROSPECTUS
ITEM 13. OTHER EXPENSES OF ISSUANCE AND DISTRIBUTION
The following table sets forth the costs and expenses, other than
underwriting discounts and commissions, payable by us in connection with the
sale of common stock being registered. All amounts are estimates except the SEC
registration fee, the NASD filing fee and the Nasdaq National Market listing
fee.
<TABLE>
<CAPTION>
AMOUNT
TO BE PAID
----------
<S> <C>
SEC registration fee........................................ $ 30,360
NASD filing fee............................................. *
Nasdaq National Market listing fee.......................... 1,000
Printing and engraving expenses............................. 200,000
Legal fees and expenses..................................... 250,000
Accounting fees and expenses................................ 250,000
Blue Sky qualification fees and expenses.................... 5,000
Transfer Agent and Registrar fees........................... 10,000
Miscellaneous fees and expenses............................. 103,640
--------
Total................................................... $850,000
========
</TABLE>
- ------------------------
* to be filed by amendment
ITEM 14. INDEMNIFICATION OF DIRECTORS AND OFFICERS
Section 145 of the Delaware General Corporation Law authorizes a court to
award, or a corporation's Board of Directors to grant, indemnity to directors
and officers in terms sufficiently broad to permit such indemnification under
certain circumstances for liabilities (including reimbursement for expenses
incurred) arising under the Securities Act of 1933, as amended (the "Securities
Act"). Article of our Certificate of Incorporation (Exhibit 3.2 hereto)
and Article of our bylaws (Exhibit 3.3 hereto) provide for indemnification
of our directors, officers, employees and other agents to the maximum extent
permitted by Delaware Law. In addition, Rosetta has entered into Indemnification
Agreements (Exhibit 10.1 hereto) with its officers and directors. The
Underwriting Agreement (Exhibit 1.1) also provides for cross-indemnification
among us and the Underwriters with respect to certain matters, including matters
arising under the Securities Act.
ITEM 15. RECENT SALES OF UNREGISTERED SECURITIES
(a) Since inception in December 1996, Rosetta has issued and sold (without
payment of any selling commission to any person except as indicated below) the
following registered securities:
1. In May and June 1997, Rosetta issued 1,883,842 shares of common
stock to eleven founders;
2. In June, August, September and October 1997, Rosetta sold a total of
254,823 shares of Series A preferred stock to a total of three investors,
including entities affiliated with two of our directors for an aggregate
purchase price of $1,019,292. In connection with this financing, we paid an
entity affiliated with one of our directors $712,500 in cash and issued
warrants to purchase a total of 228,751 shares of Series A preferred stock
(included in the warrant total below in (a)(3));
II-1
<PAGE>
3. In June, September, October, and December 1997 and July 1998,
Rosetta issued warrants to purchase a total of 253,823 shares of Series A
preferred stock with a weighted average exercise price of $4.00 per share to
three investors;
4. In June 1997 and September of 1999, Rosetta issued a total of
120,000 shares of common stock to a corporate partner in connection with a
license agreement.
5. In December 1997, Rosetta issued a total of 352,000 shares of common
stock to a strategic partner in connection with a license agreement.
6. In connection with the acquisition of Acacia Biosciences, Inc., in
February 1999 Rosetta issued a total of 1,387,298 shares of Series B
preferred stock, 2,300,071 shares of common stock, warrants to purchase
33,339 shares of common stock with a weighted average exercise price of
$4.28 per share and warrants to purchase 134,595 shares of Series B
preferred stock with a weighted average exercise price of $6.20 per share to
a total of 232 investors;
7. In April 1999, Rosetta sold and issued a total of 2,019,452 shares
of Series C preferred stock to a total of 7 investors, including entities
affiliated with two of our directors with an aggregate purchase price of
$9,087,534. In connection with the Series C financing, we paid an entity
affiliated with one of our directors $712,500 in cash and issued a warrant
to purchase a total of 54,949 shares of Series C preferred with an exercise
price of $4.50 per share;
8. In April 1999, Rosetta issued warrants to purchase a total of
608,297 shares of our common stock with an exercise price of $4.50 per share
to seven investors, including entities affiliated with two of our directors;
9. In October 1999, Rosetta sold and issued a total of 2,285,714 shares
of Series D preferred stock for an aggregate purchase price of $11,999,998
to one investor, an entity affiliated with one of our directors;
10. In March 2000, Rosetta sold and issued a total of 4,442,378 shares
of Series E preferred stock for an aggregate purchase price of $41,580,658
to a total of 16 investors, including entities affiliated with three of our
directors. In connection with the Series E financing, we paid an entity
affiliated with one of our directors a commission of $250,000 in cash and
issued warrants to purchase a total of 26,709 shares of Series E preferred;
11. In March 2000, Rosetta issued a total of 686,928 shares of common
stock to a strategic partner in connection with a license agreement; and
12. As of March 16, 1999, 1,469,720 shares of common stock had been
issued to employees, directors and consultants of Rosetta upon exercise of
options and 2,614,157 shares of common stock were issuable upon exercise of
outstanding options under Rosetta's 1997 stock option plan.
(b) There were no underwritten offerings employed in connection with any of
the transactions set forth in Item 15(a).
The issuances described in Items 15(a)(1)-(8) were deemed to be exempt from
registration under the Securities Act in reliance upon Section 4(2) thereof as
transactions by an issuer not involving any public offering. The issuances
described in Items 15(a)(9) were deemed to be exempt from registration under the
Securities Act in reliance upon Rule 701 promulgated thereunder in that they
were offered and sold either pursuant to written compensatory benefit plans or
pursuant to a written contract relating to compensation, as provided by
Rule 701. In addition, such issuances were deemed to be exempt from registration
under Section 4(2) of the Securities Act as transactions by an issuer not
involving any public offering. The recipients of securities in each such
transaction represented their intentions to acquire the securities for
investment only and not with a view to or for sale in connection with any
distribution thereof and appropriate legends where affixed to the securities
issued in such
II-2
<PAGE>
transactions. All recipients had adequate access, through their relationships
with us, to information about Loudeye.
ITEM 16. EXHIBITS AND FINANCIAL STATEMENT SCHEDULES
(a) Exhibits
<TABLE>
<CAPTION>
NUMBER DESCRIPTION
- ------ -----------
<C> <S>
1.1* Form of Underwriting Agreement.
2.2* Agreement and Plan of Reorganization by and among Registrant
and Acacia Biosciences, Inc. dated January 29, 1999.
3.1* Sixth Amended and Restated Certificate of Incorporation of
Registrant.
3.2 Amended and Restated Certificate of Incorporation of
Registrant (proposed, post-offering).
3.3 Amended and Restated Bylaws of Registrant.
3.4 Amended and Restated Bylaws of Registrant (proposed,
post-offering).
4.1* Specimen Stock Certificate.
4.2* Amended and Restated Investors' Rights Agreement, dated
March 15, 2000 between Registrant and holders of
Registrant's Series A, Series B, Series C, Series D, and
Series E preferred stock.
5.1* Opinion of Venture Law Group regarding the legality of the
common stock being registered.
5.2* Opinion of Pennie Edmonds regarding intellectual property.
10.1 Form of Indemnification Agreement between Registrant and
each of its Officers and Directors.
10.2 1997 Stock Plan.
10.3* 2000 Stock Incentive Plan.
10.4* 2000 Employee Stock Purchase Plan.
10.5* 2000 Directors' Stock Option Plan.
10.6* Amended and Restated Contribution Agreement dated November
1997 by and among Stephen Friend, Larry Hood and the Fred
Hutchinson Cancer Research Center and Rosetta Inpharmatics,
Inc.
10.7 Series C Preferred Stock Purchase Agreement between
Registrant and certain stockholders, dated April 1, 1999.
10.8 Series D Preferred Stock Purchase Agreement between
Registrant and Hewlett-Packard Company, dated October 1,
1999.
10.9 Series E Preferred Stock Purchase Agreement between
Registrant and certain stockholders, dated March 15, 2000.
10.10 Common Stock Purchase Agreement between Registrant and
Stephen Friend, dated January 31, 1997.
10.11* Common Stock Purchase Agreement between Registrant and
Stephen Friend dated May 15, 1997.
10.12 Common Stock Purchase Agreement between Registrant and John
King, dated May 15, 1997.
10.13* Amended and Restated Exclusive License by and between
Registrant and The Regents of The University of California
for Gene Reporter Matrix with an original effective date of
September 1, 1995 and amended and restated as of December 1,
1998.
10.14 Lease Agreement dated December 17, 1996, between Registrant
and Rosenberg, et. al d/b/a C & R Investments for property
located at 4136 Lakeside Drive, Richmond, CA 94806 and
amendments thereto.
10.15 Lease Agreement dated January 21, 1997 between Registrant
and Overaa Properties for property located at 4138 Lakeside
Drive, Richmond, CA 94806 and all amendments thereto.
</TABLE>
II-3
<PAGE>
<TABLE>
<CAPTION>
NUMBER DESCRIPTION
- ------ -----------
<C> <S>
10.16 Lease Agreement dated February 19, 1997 between Registrant
and Riggs Bank N.A., as trustee for Multi-Employer Property
Trust for space at Building G at Suite 210, 12040 115(th)
Avenue NE, Kirkland, WA 98034, and amendments thereto.
10.17* Amended and Restated Loan Security Agreement dated November
10, 1998 between Registrant and Silicon Valley Bank.
10.18* Promissory Note dated February 1997 by Registrant to Silicon
Valley Bank
10.19* License Agreement dated September 1, 1997 between Registrant
and the University of Washington.
10.20* Equipment Financing Agreement dated September 1997, between
Registrant and Lease Management Services, Inc.
10.21* Equipment Financing Agreement dated April 1997 between
Registrant and Lease Management Services.
10.22* Equipment Financing Agreement dated May 1998 between
Registrant and Lease Management Services.
10.23* License Agreement between Registrant and Fred Hutchinson
Cancer Research Center dated December 23, 1997.
10.24* Sublease Agreement dated August 1998 between Registrant and
Siemens Real Estate, Inc.
10.25* Internal Use License Agreement between Registrant and
Affymetrix, Inc. dated November 30, 1998.
10.26* License Agreement between Registrant and Xenometrix, Inc.
dated November 12, 1998.
10.27* Indirect Proprietary Value Added Reseller Agreement between
Registrant and Sun Microsystems dated January 11, 1999.
10.28* Consulting Agreement between Registrant and Dr. Jasper Rine,
Ph.D.
10.29* Resolver Early Access Program Agreement between Registrant
and Dupont Pharmaceuticals Company dated September 30, 1999.
10.30* Agilent Agreement Gene Expression Collaboration Agreement
between Rosetta Inpharmetics, Inc and Hewlett Packard
Company dated October 1, 1999.
10.31* License Agreement between Registrant and Oxford Gene
Technology LP Limited dated March 16, 2000.
10.32* Common Stock Issuance Agreement between Registrant and
Oxford Gene LP Limited dated March 16, 2000.
10.33* Collaboration Agreement between Registrant and Corixa
Corporation dated December 20, 1999.
10.34* Offer letter dated June 21, 1997 with Stephen Friend.
10.35* Offer letter dated June 6, 1997 with Roland Stoughton.
10.36* Offer letter dated with John King.
10.37* Offer letter dated March 13, 1999 with Mark Boguski.
23.1 Consent of PricewaterhouseCoopers LLP, Independent
Accountants.
23.2* Consent of Venture Law Group, a Professional Corporation.
(See Exhibit 5.1)
24.1 Power of Attorney. Reference is made to the signature page.
27.1 Financial Data Schedule.
</TABLE>
- ------------------------
* To be supplied by amendment.
+ Confidential treatment requested as to certain portions of this Exhibit.
(b) Financial Statement Schedules
Schedules not listed above have been omitted because the information
required to be set forth therein is not applicable or is shown in the financial
statements or notes thereto.
II-4
<PAGE>
ITEM 17. UNDERTAKINGS
The undersigned registrant hereby undertakes to provide to the underwriters
at the closing specified in the underwriting agreements certificates in such
denominations and registered in such names as required by the underwriters to
permit prompt delivery to each purchaser.
Insofar as indemnification for liabilities arising under the Securities Act
of 1933 may be permitted to directors, officers and controlling persons of the
registrant pursuant to the foregoing provisions, or otherwise, the registrant
has been advised that in the opinion of the Securities and Exchange Commission
such indemnification is against public policy as expressed in the Act, and is,
therefore, unenforceable. In the event that a claim for indemnification against
such liabilities (other than the payment by the registrant of expenses incurred
or paid by a director, officer, or controlling person of the registrant in the
successful defense of any action, suit or proceeding) is asserted by such
director, officer or controlling person in connection with the securities being
registered, the registrant will, unless in the opinion of its counsel the matter
has been settled by controlling precedent, submit to a court of appropriate
jurisdiction the question whether such indemnification by it is against public
policy as expressed in the Act and will be governed by the final adjudication of
such issue.
The undersigned registrant hereby undertakes that:
(1) For purposes of determining any liability under the Securities Act of 1933,
the information omitted from the form of prospectus filed as part of this
registration statement in reliance upon Rule 430A and contained in a form of
prospectus filed by the registrant pursuant to Rule 424(b)(1) or (4) or
497(h) under the Securities Act shall be deemed to be part of this
registration statement as of the time it was declared effective.
(2) For the purpose of determining any liability under the Securities Act of
1933, each post-effective amendment that contains a form of prospectus shall
be deemed to be a new registration statement relating to the securities
offered therein, and the offering of such securities at that time shall be
deemed to be the initial BONA FIDE offering thereof.
II-5
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933, the registrant
has duly caused this registration statement to be signed on its behalf by the
undersigned, thereunto duly authorized, in the city of Bellevue, State of
Washington on March 17, 2000.
<TABLE>
<S> <C>
ROSETTA INPHARMATICS, INC.
By: /s/ STEPHEN H. FRIEND
--------------------------------------------
Stephen H. Friend, M.D., Ph.D.
PRESIDENT AND CHIEF EXECUTIVE OFFICER
</TABLE>
POWER OF ATTORNEY
KNOW ALL PERSONS BY THESE PRESENTS, that each person whose signature appears
below hereby constitutes and appoints, jointly and severally, Stephen H. Friend
and John J. King, and each of them, as his attorney-in-fact, with full power of
substitution, for him in any and all capacities, to sign any and all amendments
to this Registration Statement (including post-effective amendments), and any
and all Registration Statements filed pursuant to Rule 462 under the Securities
Act of 1933, as amended, in connection with or related to the offering
contemplated by this Registration Statement and its amendments, if any, and to
file the same, with exhibits thereto and other documents in connection
therewith, with the Securities and Exchange Commission, hereby ratifying and
confirming our signatures as they may be signed by our said attorney to any and
all amendments to said Registration Statement.
Pursuant to the requirements of the Securities Act of 1933, this
Registration Statement has been signed by the following persons in the
capacities and on the dates indicated:
<TABLE>
<CAPTION>
SIGNATURE TITLE DATE
- --------- ----- ----
<S> <C> <C>
/s/ STEPHEN H. FRIEND
- --------------------------------- President, Chief Executive Officer, March 17, 2000
Stephen H. Friend, M.D., Ph.D. and Director
/s/ JOHN J. KING, II
- --------------------------------- Senior Vice President, Chief Operating March 17, 2000
John J. King, II Officer and Director
/s/ DAVID BORGES
- --------------------------------- Director of Finance March 17, 2000
David Borges
/s/ STEVEN GILLIS
- --------------------------------- Director March 17, 2000
Steven Gillis, Ph.D.
/s/ BILL BUFFINGTON
- --------------------------------- Director March 17, 2000
Bill Buffington
/s/ RUTH KUNATH
- --------------------------------- Director March 17, 2000
Ruth Kunath
</TABLE>
II-6
<PAGE>
<TABLE>
<CAPTION>
SIGNATURE TITLE DATE
- --------- ----- ----
<S> <C> <C>
/s/ PETER SVENILLSON
- --------------------------------- Director March 17, 2000
Peter Svenillson
/s/ CHARLES P. WAITE
- --------------------------------- Director March 17, 2000
Charles P. Waite
/s/ HARVEY S. SADOW
- --------------------------------- Director March 17, 2000
Harvey S. Sadow, Ph.D.
/s/ WILLIAM W. ERICSON
- --------------------------------- Director March 17, 2000
William W. Ericson
</TABLE>
II-7
<PAGE>
Exhibit 3.2
SEVENTH AMENDED AND RESTATED
CERTIFICATE OF INCORPORATION
OF
ROSETTA INPHARMATICS, INC.
The undersigned, Stephen H. Friend, M.D., Ph.D. and John J. King II,
hereby certify that:
1. They are the duly elected and acting President and Secretary,
respectively, of Rosetta Inpharmatics, Inc., a Delaware corporation.
2. The Certificate of Incorporation of this corporation was originally
filed with the Secretary of State of Delaware December 19, 1996 under the name
VLG NW, Inc.
3. The Certificate of Incorporation of this corporation shall be
amended and restated to read in full as follows:
"ARTICLE I
The name of this corporation is Rosetta Inpharmatics, Inc. (the
"Corporation").
ARTICLE II
The address of the Corporation's registered office in the State of
Delaware is 9 East Loockerman Street, Dover, Delaware 19901, County of Kent. The
name of its registered agent at such address is National Corporate Research,
Ltd.
ARTICLE III
The purpose of the Corporation is to engage in any lawful act or
activity for which corporations may be organized under the General Corporation
Law of Delaware.
ARTICLE IV
(A) The Corporation is authorized to issue two classes of stock to be
designated, respectively, "Common Stock" and "Preferred Stock." The total number
of shares which the Corporation is authorized to issue is Eighty Million
(80,000,000) shares, each with a par value of $0.001 per share. Seventy-Five
Million (75,000,000) shares shall be Common Stock and Five Million (5,000,000)
shares shall be Preferred Stock.
(B) The Preferred Stock may be issued from time to time in one or more
series. The Board of Directors is hereby authorized, by filing a certificate
pursuant to the applicable law of the state of Delaware and within the
limitations and restrictions stated in this Certificate of Incorporation, to
determine or alter the rights, preferences, privileges and restrictions granted
to or imposed upon any wholly unissued series of Preferred Stock and the number
of shares constituting any such series and the designation thereof, or any of
them; and to increase or decrease the number of shares of any series subsequent
to the issuance of shares of that series, but not below the number of shares of
such series then outstanding. In case the number of shares
<PAGE>
of any series shall be so decreased, the shares constituting such decrease shall
resume the status which they had prior to the adoption of the resolution
originally fixing the number of shares of such series.
ARTICLE V
The number of directors of the Corporation shall be fixed from time to
time by a bylaw or amendment thereof duly adopted by the Board of Directors.
ARTICLE VI
(A) The Board of Directors of the Corporation shall divide the
directors into three classes, as nearly equal in number as reasonably possible,
with the term of office of the first class to expire at the first annual meeting
of shareholders following the date this Article VI becomes effective (the
"EFFECTIVE DATE") or any special meeting in lieu thereof, the term of office of
the second class to expire at the second annual meeting of shareholders after
the Effective Date or any special meeting in lieu thereof and the term of office
of the third class to expire at the third annual meeting of shareholders or any
special meeting in lieu thereof. At each annual meeting of shareholders or
special meeting in lieu thereof following such initial classification, directors
elected to succeed those directors whose terms expire shall be elected for a
term of office to expire at the third succeeding annual meeting of shareholders
or special meeting in lieu thereof after their election and until their
successors are duly elected and qualified.
(B) Subject to the rights of the holders of any series of Preferred
Stock then outstanding, newly created directorships resulting from any increase
in the authorized number of directors or any vacancies in the Board of Directors
resulting from death, resignation, retirement, disqualification, removal from
office or other cause may be filled only by a majority vote of the directors
then in office even though less than a quorum, or by a sole remaining director.
In the event of any increase or decrease in the authorized number of directors,
(i) each director then serving as such shall nevertheless continue as a director
of the class of which he or she is a member until the expiration of his or her
current term or his or her prior death, retirement, removal or resignation, and
(ii) the newly created or eliminated directorships resulting from such increase
or decrease shall, if reasonably possible, be apportioned by the Board of
Directors between the three classes of directors so as to ensure that no one
class has more than one director more than any other class. To the extent
reasonably possible, consistent with the foregoing rule, any newly created
directorships shall be added to those classes whose terms of office are to
expire at the latest dates following such allocation and newly eliminated
directorships shall be subtracted from those classes whose terms of office are
to expire at the earliest dates following such allocation, unless otherwise
provided for from time to time by resolution adopted by a majority of the
directors then in office, although less than a quorum. In the event of a vacancy
in the Board of Directors, the remaining directors, except as otherwise provided
by law, may exercise the powers of the full Board of Directors until the vacancy
is filled.
-2-
<PAGE>
(C) Holders of stock of any class or series of the Corporation shall
not be entitled to cumulate their votes for the election of directors or any
other matter submitted to a vote of the stockholders.
ARTICLE VII
No action shall be taken by the stockholders of the Corporation other
than at an annual or special meeting of the stockholders, upon due notice and in
accordance with the provisions of the Corporation's bylaws.
ARTICLE VIII
The Corporation reserves the right to amend, alter, change or repeal
any provision contained in this Certificate of Incorporation, in the manner now
or hereafter prescribed by statute, and all rights conferred upon stockholders
herein are granted subject to this reservation.
ARTICLE IX
(A) Except as otherwise provided in the Bylaws, the Bylaws may be
altered or amended or new Bylaws adopted by the affirmative vote of at least
sixty-six and two-thirds percent (66 2/3%) of the voting power of all of the
then-outstanding shares of the voting stock of the Corporation entitled to vote.
The Board of Directors of the Corporation is expressly authorized to adopt,
amend or repeal Bylaws.
(B) The directors of the Corporation need not be elected by written
ballot unless the Bylaws so provide.
(C) Advance notice of stockholder nominations for the election of
directors or of business to be brought by the stockholders before any meeting of
the stockholders of the corporation shall be given in the manner provided in the
Bylaws.
ARTICLE X
Meetings of stockholders may be held within or without the State of
Delaware, as the Bylaws may provide. The books of the Corporation may be kept
(subject to any provision contained in the statutes) outside the State of
Delaware at such place or places as may be designated from time to time by the
Board of Directors or in the bylaws of the Corporation.
ARTICLE XI
The Corporation shall have perpetual existence.
ARTICLE XII
(A) To the fullest extent permitted by the General Corporation Law of
Delaware, as the same may be amended from time to time, a director of the
Corporation shall not be personally liable to the Corporation or its
stockholders for monetary damages for breach of fiduciary duty as a director. If
the General Corporation Law of Delaware is hereafter amended to authorize, with
-3-
<PAGE>
the approval of a corporation's stockholders, further reductions in the
liability of a corporation's directors for breach of fiduciary duty, then a
director of the Corporation shall not be liable for any such breach to the
fullest extent permitted by the General Corporation Law of Delaware, as so
amended.
(B) Any repeal or modification of the foregoing provisions of this
Article XII shall not adversely affect any right or protection of a director of
the Corporation with respect to any acts or omissions of such director occurring
prior to such repeal or modification.
ARTICLE XIII
(A) To the fullest extent permitted by applicable law, the Corporation
is also authorized to provide indemnification of (and advancement of expenses
to) such agents (and any other persons to which Delaware law permits the
Corporation to provide indemnification) through Bylaw provisions, agreements
with such agents or other persons, vote of stockholders or disinterested
directors or otherwise, in excess of the indemnification and advancement
otherwise permitted by Section 145 of the General Corporation Law of Delaware,
subject only to limits created by applicable Delaware law (statutory or
non-statutory), with respect to actions for breach of duty to a corporation, its
stockholders, and others.
(B) Any repeal or modification of any of the foregoing provisions of
this Article XIII shall not adversely affect any right or protection of a
director, officer, agent or other person existing at the time of, or increase
the liability of any director of the Corporation with respect to any acts or
omissions of such director, officer or agent occurring prior to such repeal or
modification."
* * *
-4-
<PAGE>
The foregoing Amended and Restated Certificate of Incorporation has
been duly adopted by this Corporation's Board of Directors and stockholders in
accordance with the applicable provisions of Section 228, 242 and 245 of the
General Corporation Law of the State of Delaware.
Executed at Seattle, Washington, on the ____ day of ___________, 2000.
----------------------------
Stephen H. Friend, President
---------------------------
John J. King II, Secretary
-5-
<PAGE>
THIRD AMENDED AND RESTATED BYLAWS
OF
ROSETTA INPHARMATICS, INC.
ARTICLE I
CORPORATE OFFICES
1.1 REGISTERED OFFICE.
The registered office of the corporation shall be in the City
of Dover, County of Kent, State of Delaware. The name of the registered agent of
the corporation at such location is National Corporate Research, Ltd.
1.2 OTHER OFFICES.
The Board of Directors may at any time establish other offices
at any place or places where the corporation is qualified to do business.
ARTICLE II
MEETINGS OF STOCKHOLDERS
2.1 PLACE OF MEETINGS.
Meetings of stockholders shall be held at any place, within or
outside the State of Delaware, designated by the Board of Directors. In the
absence of any such designation, stockholders' meetings shall be held at the
registered office of the corporation.
2.2 ANNUAL MEETING.
The annual meeting of stockholders shall be held on such date,
time and place, either within or without the State of Delaware, as may be
designated by resolution of the Board of Directors each year. At the meeting,
directors shall be elected and any other proper business may be transacted.
2.3 SPECIAL MEETING.
A special meeting of the stockholders may be called at any
time by the Board of Directors, the chairman of the board, the president or by
one or more stockholders holding shares in the aggregate entitled to cast not
less than ten percent of the votes at that meeting.
If a special meeting is called by any person or persons other
than the Board of Directors, the president or the chairman of the board, the
request shall be in writing, specifying the time of such meeting and the general
nature of the business proposed to be transacted, and
<PAGE>
shall be delivered personally or sent by registered mail or by telegraphic or
other facsimile transmission to the chairman of the board, the president, any
vice president, or the secretary of the corporation. No business may be
transacted at such special meeting otherwise than specified in such notice. The
officer receiving the request shall cause notice to be promptly given to the
stockholders entitled to vote, in accordance with the provisions of Sections 2.4
and 2.5 of this Article II, that a meeting will be held at the time requested by
the person or persons calling the meeting, not less than thirty-five (35) nor
more than sixty (60) days after the receipt of the request. If the notice is not
given within twenty (20) days after the receipt of the request, the person or
persons requesting the meeting may give the notice. Nothing contained in this
paragraph of this Section 2.3 shall be construed as limiting, fixing, or
affecting the time when a meeting of stockholders called by action of the Board
of Directors may be held.
2.4 NOTICE OF STOCKHOLDERS' MEETINGS.
All notices of meetings with stockholders shall be in writing
and shall be sent or otherwise given in accordance with Section 2.5 of these
Bylaws not less than ten (10) nor more than sixty (60) days before the date of
the meeting to each stockholder entitled to vote at such meeting. The notice
shall specify the place, date, and hour of the meeting, and, in the case of a
special meeting, the purpose or purposes for which the meeting is called.
2.5 MANNER OF GIVING NOTICE; AFFIDAVIT OF NOTICE.
Written notice of any meeting of stockholders, if mailed, is
given when deposited in the United States mail, postage prepaid, directed to the
stockholder at his address as it appears on the records of the corporation. An
affidavit of the secretary or an assistant secretary or of the transfer agent of
the corporation that the notice has been given shall, in the absence of fraud,
be prima facie evidence of the facts stated therein.
2.6 QUORUM.
The holders of a majority of the stock issued and outstanding
and entitled to vote thereat, present in person or represented by proxy, shall
constitute a quorum at all meetings of the stockholders for the transaction of
business except as otherwise provided by statute or by the certificate of
incorporation. If, however, such quorum is not present or represented at any
meeting of the stockholders, then either (i) the chairman of the meeting or (ii)
the stockholders entitled to vote thereat, present in person or represented by
proxy, shall have power to adjourn the meeting from time to time, without notice
other than announcement at the meeting, until a quorum is present or
represented. At such adjourned meeting at which a quorum is present or
represented, any business may be transacted that might have been transacted at
the meeting as originally noticed.
2.7 ADJOURNED MEETING; NOTICE.
When a meeting is adjourned to another time or place, unless
these Bylaws otherwise require, notice need not be given of the adjourned
meeting if the time and place thereof are announced at the meeting at which the
adjournment is taken. At the adjourned meeting the
-2-
<PAGE>
corporation may transact any business that might have been transacted at the
original meeting. If the adjournment is for more than thirty (30) days, or if
after the adjournment a new record date is fixed for the adjourned meeting, a
notice of the adjourned meeting shall be given to each stockholder of record
entitled to vote at the meeting.
2.8 CONDUCT OF BUSINESS.
The chairman of any meeting of stockholders shall determine
the order of business and the procedure at the meeting, including the manner of
voting and the conduct of business.
2.9 VOTING.
The stockholders entitled to vote at any meeting of
stockholders shall be determined in accordance with the provisions of Section
2.12 of these Bylaws, subject to the provisions of Sections 217 and 218 of the
General Corporation Law of Delaware (relating to voting rights of fiduciaries,
pledgors and joint owners of stock and to voting trusts and other voting
agreements).
Except as may be otherwise provided in the certificate of
incorporation, each stockholder shall be entitled to one vote for each share of
capital stock held by such stockholder.
2.10 WAIVER OF NOTICE.
Whenever notice is required to be given under any provision of
the General Corporation Law of Delaware or of the certificate of incorporation
or these Bylaws, a written waiver thereof, signed by the person entitled to
notice, whether before or after the time stated therein, shall be deemed
equivalent to notice. Attendance of a person at a meeting shall constitute a
waiver of notice of such meeting, except when the person attends a meeting for
the express purpose of objecting, at the beginning of the meeting, to the
transaction of any business because the meeting is not lawfully called or
convened. Neither the business to be transacted at, nor the purpose of, any
regular or special meeting of the stockholders need be specified in any written
waiver of notice unless so required by the certificate of incorporation or these
Bylaws.
2.11 STOCKHOLDER ACTION BY WRITTEN CONSENT WITHOUT A MEETING.
Unless otherwise provided in the certificate of incorporation,
any action required to be taken at any annual or special meeting of stockholders
of the corporation, or any action that may be taken at any annual or special
meeting of such stockholders, may be taken without a meeting, without prior
notice, and without a vote if a consent in writing, setting forth the action so
taken, is signed by the holders of outstanding stock having not less than the
minimum number of votes that would be necessary to authorize or take such action
at a meeting at which all shares entitled to vote thereon were present and
voted.
Prompt notice of the taking of the corporate action without a
meeting by less than unanimous written consent shall be given to those
stockholders who have not consented in
-3-
<PAGE>
writing. If the action which is consented to is such as would have required the
filing of a certificate under any section of the General Corporation Law of
Delaware if such action had been voted on by stockholders at a meeting thereof,
then the certificate filed under such section shall state, in lieu of any
statement required by such section concerning any vote of stockholders, that
written notice and written consent have been given as provided in Section 228 of
the General Corporation Law of Delaware.
2.12 RECORD DATE FOR STOCKHOLDER NOTICE; VOTING; GIVING CONSENTS.
In order that the corporation may determine the stockholders
entitled to notice of or to vote at any meeting of stockholders or any
adjournment thereof, or entitled to express consent to corporate action in
writing without a meeting, or entitled to receive payment of any dividend or
other distribution or allotment of any rights, or entitled to exercise any
rights in respect of any change, conversion or exchange of stock or for the
purpose of any other lawful action, the Board of Directors may fix, in advance,
a record date, which shall not be more than sixty (60) nor less than ten (10)
days before the date of such meeting, nor more than sixty (60) days prior to any
other action.
If the Board of Directors does not so fix a record date:
(i) The record date for determining stockholders entitled to
notice of or to vote at a meeting of stockholders shall be at the close of
business on the day next preceding the day on which notice is given, or, if
notice is waived, at the close of business on the day next preceding the day on
which the meeting is held.
(ii) The record date for determining stockholders entitled to
consent to corporate action in writing without a meeting, when no prior action
by the Board of Directors is necessary, shall be the day on which the first
written consent is delivered to the corporation.
(iii) The record date for determining stockholders for any
other purpose shall be at the close of business on the day on which the Board of
Directors adopts the resolution relating thereto.
A determination of stockholders of record entitled to notice
of or to vote at a meeting of stockholders shall apply to any adjournment of the
meeting; PROVIDED, HOWEVER, that the Board of Directors may fix a new record
date for the adjourned meeting.
2.13 PROXIES.
Each stockholder entitled to vote at a meeting of stockholders
or to express consent or dissent to corporate action in writing without a
meeting may authorize another person or persons to act for such stockholder by a
written proxy, signed by the stockholder and filed with the secretary of the
corporation, but no such proxy shall be voted or acted upon after three (3)
years from its date, unless the proxy provides for a longer period. A proxy
shall be deemed signed if the stockholder's name is placed on the proxy (whether
by manual signature, typewriting, telegraphic transmission or otherwise) by the
stockholder or the stockholder's
-4-
<PAGE>
attorney-in-fact. The revocability of a proxy that states on its face that it is
irrevocable shall be governed by the provisions of Section 212(e) of the General
Corporation Law of Delaware.
ARTICLE III
DIRECTORS
3.1 POWERS.
Subject to the provisions of the General Corporation Law of
Delaware and any limitations in the certificate of incorporation or these Bylaws
relating to action required to be approved by the stockholders or by the
outstanding shares, the business and affairs of the corporation shall be managed
and all corporate powers shall be exercised by or under the direction of the
Board of Directors.
3.2 NUMBER OF DIRECTORS.
Upon the adoption of these bylaws, the number of directors
constituting the entire Board of Directors shall be twelve (12) persons until
changed by a proper amendment of this Section 3.2. No reduction of the
authorized number of directors shall have the effect of removing any director
before such director's term of office expires.
3.3 ELECTION, QUALIFICATION AND TERM OF OFFICE OF DIRECTORS.
Except as provided in Section 3.4 of these Bylaws, directors
shall be elected at each annual meeting of stockholders to hold office until the
next annual meeting. Directors need not be stockholders unless so required by
the certificate of incorporation or these Bylaws, wherein other qualifications
for directors may be prescribed. Each director, including a director elected to
fill a vacancy, shall hold office until his or her successor is elected and
qualified or until his or her earlier resignation or removal.
Elections of directors need not be by written ballot.
3.4 RESIGNATION AND VACANCIES.
Any director may resign at any time upon written notice to the
attention of the Secretary of the corporation. When one or more directors so
resigns and the resignation is effective at a future date, a majority of the
directors then in office, including those who have so resigned, shall have power
to fill such vacancy or vacancies, the vote thereon to take effect when such
resignation or resignations shall become effective, and each director so chosen
shall hold office as provided in this section in the filling of other vacancies.
Unless otherwise provided in the certificate of incorporation
or these Bylaws:
(i) Vacancies and newly created directorships resulting from
any increase in the authorized number of directors elected by all of the
stockholders having the right to vote as a
-5-
<PAGE>
single class may be filled by a majority of the directors then in office,
although less than a quorum, or by a sole remaining director.
(ii) Whenever the holders of any class or classes of stock or
series thereof are entitled to elect one or more directors by the provisions of
the certificate of incorporation, vacancies and newly created directorships of
such class or classes or series may be filled by a majority of the directors
elected by such class or classes or series thereof then in office, or by a sole
remaining director so elected.
If at any time, by reason of death or resignation or other
cause, the corporation should have no directors in office, then any officer or
any stockholder or an executor, administrator, trustee or guardian of a
stockholder, or other fiduciary entrusted with like responsibility for the
person or estate of a stockholder, may call a special meeting of stockholders in
accordance with the provisions of the certificate of incorporation or these
Bylaws, or may apply to the Court of Chancery for a decree summarily ordering an
election as provided in Section 211 of the General Corporation Law of Delaware.
If, at the time of filling any vacancy or any newly created
directorship, the directors then in office constitute less than a majority of
the whole board (as constituted immediately prior to any such increase), then
the Court of Chancery may, upon application of any stockholder or stockholders
holding at least ten (10) percent of the total number of the shares at the time
outstanding having the right to vote for such directors, summarily order an
election to be held to fill any such vacancies or newly created directorships,
or to replace the directors chosen by the directors then in office as aforesaid,
which election shall be governed by the provisions of Section 211 of the General
Corporation Law of Delaware as far as applicable.
3.5 PLACE OF MEETINGS; MEETINGS BY TELEPHONE.
The Board of Directors of the corporation may hold meetings,
both regular and special, either within or outside the State of Delaware.
Unless otherwise restricted by the certificate of
incorporation or these Bylaws, members of the Board of Directors, or any
committee designated by the Board of Directors, may participate in a meeting of
the Board of Directors, or any committee, by means of conference telephone or
similar communications equipment by means of which all persons participating in
the meeting can hear each other, and such participation in a meeting shall
constitute presence in person at the meeting.
3.6 REGULAR MEETINGS.
Regular meetings of the Board of Directors may be held without
notice at such time and at such place as shall from time to time be determined
by the board.
-6-
<PAGE>
3.7 SPECIAL MEETINGS; NOTICE.
Special meetings of the Board of Directors for any purpose or
purposes may be called at any time by the chairman of the board, the president,
any vice president, the secretary or any two directors.
Notice of the time and place of special meetings shall be
delivered personally or by telephone to each director or sent by first-class
mail or telegram, charges prepaid, addressed to each director at that director's
address as it is shown on the records of the corporation. If the notice is
mailed, it shall be deposited in the United States mail at least four (4) days
before the time of the holding of the meeting. If the notice is delivered
personally or by telephone or by telegram, it shall be delivered personally or
by telephone or to the telegraph company at least forty-eight (48) hours before
the time of the holding of the meeting. Any oral notice given personally or by
telephone may be communicated either to the director or to a person at the
office of the director who the person giving the notice has reason to believe
will promptly communicate it to the director. The notice need not specify the
purpose or the place of the meeting, if the meeting is to be held at the
principal executive office of the corporation.
3.8 QUORUM.
At all meetings of the Board of Directors, a majority of the
authorized number of directors shall constitute a quorum for the transaction of
business and the act of a majority of the directors present at any meeting at
which there is a quorum shall be the act of the Board of Directors, except as
may be otherwise specifically provided by statute or by the certificate of
incorporation. If a quorum is not present at any meeting of the Board of
Directors, then the directors present thereat may adjourn the meeting from time
to time, without notice other than announcement at the meeting, until a quorum
is present.
A meeting at which a quorum is initially present may continue
to transact business notwithstanding the withdrawal of directors, if any action
taken is approved by at least a majority of the required quorum for that
meeting.
3.9 WAIVER OF NOTICE.
Whenever notice is required to be given under any provision of
the General Corporation Law of Delaware or of the certificate of incorporation
or these Bylaws, a written waiver thereof, signed by the person entitled to
notice, whether before or after the time stated therein, shall be deemed
equivalent to notice. Attendance of a person at a meeting shall constitute a
waiver of notice of such meeting, except when the person attends a meeting for
the express purpose of objecting, at the beginning of the meeting, to the
transaction of any business because the meeting is not lawfully called or
convened. Neither the business to be transacted at, nor the purpose of, any
regular or special meeting of the directors, or members of a committee of
directors, need be specified in any written waiver of notice unless so required
by the certificate of incorporation or these Bylaws.
-7-
<PAGE>
3.10 BOARD ACTION BY WRITTEN CONSENT WITHOUT A MEETING.
Unless otherwise restricted by the certificate of
incorporation or these Bylaws, any action required or permitted to be taken at
any meeting of the Board of Directors, or of any committee thereof, may be taken
without a meeting if all members of the board or committee, as the case may be,
consent thereto in writing and the writing or writings are filed with the
minutes of proceedings of the board or committee. Written consents representing
actions taken by the board or committee may be executed by telex, telecopy or
other facsimile transmission, and such facsimile shall be valid and binding to
the same extent as if it were an original.
3.11 FEES AND COMPENSATION OF DIRECTORS.
Unless otherwise restricted by the certificate of
incorporation or these Bylaws, the Board of Directors shall have the authority
to fix the compensation of directors. No such compensation shall preclude any
director from serving the corporation in any other capacity and receiving
compensation therefor.
3.12 APPROVAL OF LOANS TO OFFICERS.
The corporation may lend money to, or guarantee any obligation
of, or otherwise assist any officer or other employee of the corporation or of
its subsidiary, including any officer or employee who is a director of the
corporation or its subsidiary, whenever, in the judgment of the directors, such
loan, guaranty or assistance may reasonably be expected to benefit the
corporation. The loan, guaranty or other assistance may be with or without
interest and may be unsecured, or secured in such manner as the Board of
Directors shall approve, including, without limitation, a pledge of shares of
stock of the corporation. Nothing in this section contained shall be deemed to
deny, limit or restrict the powers of guaranty or warranty of the corporation at
common law or under any statute.
3.13 REMOVAL OF DIRECTORS.
Unless otherwise restricted by statute, by the certificate of
incorporation or by these Bylaws, any director or the entire Board of Directors
may be removed, with or without cause, by the holders of a majority of the
shares then entitled to vote at an election of directors; PROVIDED, HOWEVER,
that if the stockholders of the corporation are entitled to cumulative voting,
if less than the entire Board of Directors is to be removed, no director may be
removed without cause if the votes cast against his removal would be sufficient
to elect him if then cumulatively voted at an election of the entire Board of
Directors.
No reduction of the authorized number of directors shall have
the effect of removing any director prior to the expiration of such director's
term of office.
3.14 CHAIRMAN OF THE BOARD OF DIRECTORS.
The corporation may also have, at the discretion of the Board
of Directors, a chairman of the Board of Directors who shall not be considered
an officer of the corporation.
-8-
<PAGE>
ARTICLE IV
COMMITTEES
4.1 COMMITTEES OF DIRECTORS.
The Board of Directors may, by resolution passed by a majority
of the whole board, designate one or more committees, with each committee to
consist of one or more of the directors of the corporation. The board may
designate one or more directors as alternate members of any committee, who may
replace any absent or disqualified member at any meeting of the committee. In
the absence or disqualification of a member of a committee, the member or
members thereof present at any meeting and not disqualified from voting, whether
or not such member or members constitute a quorum, may unanimously appoint
another member of the Board of Directors to act at the meeting in the place of
any such absent or disqualified member. Any such committee, to the extent
provided in the resolution of the Board of Directors or in the Bylaws of the
corporation, shall have and may exercise all the powers and authority of the
Board of Directors in the management of the business and affairs of the
corporation, and may authorize the seal of the corporation to be affixed to all
papers that may require it; but no such committee shall have the power or
authority to (i) amend the certificate of incorporation (except that a committee
may, to the extent authorized in the resolution or resolutions providing for the
issuance of shares of stock adopted by the Board of Directors as provided in
Section 151(a) of the General Corporation Law of Delaware, fix the designations
and any of the preferences or rights of such shares relating to dividends,
redemption, dissolution, any distribution of assets of the corporation or the
conversion into, or the exchange of such shares for, shares of any other class
or classes or any other series of the same or any other class or classes of
stock of the corporation or fix the number of shares of any series of stock or
authorize the increase or decrease of the shares of any series), (ii) adopt an
agreement of merger or consolidation under Sections 251 or 252 of the General
Corporation Law of Delaware, (iii) recommend to the stockholders the sale, lease
or exchange of all or substantially all of the corporation's property and
assets, (iv) recommend to the stockholders a dissolution of the corporation or a
revocation of a dissolution, or (v) amend the Bylaws of the corporation; and,
unless the board resolution establishing the committee, the Bylaws or the
certificate of incorporation expressly so provide, no such committee shall have
the power or authority to declare a dividend, to authorize the issuance of
stock, or to adopt a certificate of ownership and merger pursuant to Section 253
of the General Corporation Law of Delaware.
4.2 COMMITTEE MINUTES.
Each committee shall keep regular minutes of its meetings and
report the same to the Board of Directors when required.
4.3 MEETINGS AND ACTION OF COMMITTEES.
Meetings and actions of committees shall be governed by, and
held and taken in accordance with, the provisions of Section 3.5 (place of
meetings and meetings by telephone), Section 3.6 (regular meetings), Section 3.7
(special meetings and notice), Section 3.8 (quorum),
-9-
<PAGE>
Section 3.9 (waiver of notice), and Section 3.10 (action without a meeting) of
these Bylaws, with such changes in the context of such provisions as are
necessary to substitute the committee and its members for the Board of Directors
and its members; PROVIDED, HOWEVER, that the time of regular meetings of
committees may be determined either by resolution of the Board of Directors or
by resolution of the committee, that special meetings of committees may also be
called by resolution of the Board of Directors and that notice of special
meetings of committees shall also be given to all alternate members, who shall
have the right to attend all meetings of the committee. The Board of Directors
may adopt rules for the government of any committee not inconsistent with the
provisions of these Bylaws.
ARTICLE V
OFFICERS
5.1 OFFICERS.
The officers of the corporation shall be a chief executive
officer, a president, a secretary, and a chief financial officer. The
corporation may also have, at the discretion of the Board of Directors, one or
more vice presidents, one or more assistant secretaries, one or more assistant
treasurers, and any such other officers as may be appointed in accordance with
the provisions of Section 5.3 of these Bylaws. Any number of offices may be held
by the same person.
5.2 APPOINTMENT OF OFFICERS.
The officers of the corporation, except such officers as may
be appointed in accordance with the provisions of Sections 5.3 or 5.5 of these
Bylaws, shall be appointed by the Board of Directors, subject to the rights, if
any, of an officer under any contract of employment.
5.3 SUBORDINATE OFFICERS.
The Board of Directors may appoint, or empower the chief
executive officer or the president to appoint, such other officers and agents as
the business of the corporation may require, each of whom shall hold office for
such period, have such authority, and perform such duties as are provided in
these Bylaws or as the Board of Directors may from time to time determine.
5.4 REMOVAL AND RESIGNATION OF OFFICERS.
Subject to the rights, if any, of an officer under any
contract of employment, any officer may be removed, either with or without
cause, by an affirmative vote of the majority of the Board of Directors at any
regular or special meeting of the board or, except in the case of an officer
chosen by the Board of Directors, by any officer upon whom such power of removal
may be conferred by the Board of Directors.
-10-
<PAGE>
Any officer may resign at any time by giving written notice to
the attention of the Secretary of the corporation. Any resignation shall take
effect at the date of the receipt of that notice or at any later time specified
in that notice; and, unless otherwise specified in that notice, the acceptance
of the resignation shall not be necessary to make it effective. Any resignation
is without prejudice to the rights, if any, of the corporation under any
contract to which the officer is a party.
5.5 VACANCIES IN OFFICES.
Any vacancy occurring in any office of the corporation shall
be filled by the Board of Directors.
5.6 CHIEF EXECUTIVE OFFICER.
Subject to such supervisory powers, if any, as may be given by
the Board of Directors to the chairman of the board, if any, the chief executive
officer of the corporation shall, subject to the control of the Board of
Directors, have general supervision, direction, and control of the business and
the officers of the corporation. He or she shall preside at all meetings of the
stockholders and, in the absence or nonexistence of a chairman of the board, at
all meetings of the Board of Directors and shall have the general powers and
duties of management usually vested in the office of chief executive officer of
a corporation and shall have such other powers and duties as may be prescribed
by the Board of Directors or these bylaws.
5.7 PRESIDENT.
Subject to such supervisory powers, if any, as may be given by
the Board of Directors to the chairman of the board (if any) or the chief
executive officer, the president shall have general supervision, direction, and
control of the business and other officers of the corporation. He or she shall
have the general powers and duties of management usually vested in the office of
president of a corporation and such other powers and duties as may be prescribed
by the Board of Directors or these Bylaws.
5.8 VICE PRESIDENTS.
In the absence or disability of the chief executive officer
and president, the vice presidents, if any, in order of their rank as fixed by
the Board of Directors or, if not ranked, a vice president designated by the
Board of Directors, shall perform all the duties of the president and when so
acting shall have all the powers of, and be subject to all the restrictions
upon, the president. The vice presidents shall have such other powers and
perform such other duties as from time to time may be prescribed for them
respectively by the Board of Directors, these Bylaws, the president or the
chairman of the board.
5.9 SECRETARY.
The secretary shall keep or cause to be kept, at the principal
executive office of the corporation or such other place as the Board of
Directors may direct, a book of minutes of all
-11-
<PAGE>
meetings and actions of directors, committees of directors, and stockholders.
The minutes shall show the time and place of each meeting, the names of those
present at directors' meetings or committee meetings, the number of shares
present or represented at stockholders' meetings, and the proceedings thereof.
The secretary shall keep, or cause to be kept, at the
principal executive office of the corporation or at the office of the
corporation's transfer agent or registrar, as determined by resolution of the
Board of Directors, a share register, or a duplicate share register, showing the
names of all stockholders and their addresses, the number and classes of shares
held by each, the number and date of certificates evidencing such shares, and
the number and date of cancellation of every certificate surrendered for
cancellation.
The secretary shall give, or cause to be given, notice of all
meetings of the stockholders and of the Board of Directors required to be given
by law or by these Bylaws. He or she shall keep the seal of the corporation, if
one be adopted, in safe custody and shall have such other powers and perform
such other duties as may be prescribed by the Board of Directors or by these
Bylaws.
5.10 CHIEF FINANCIAL OFFICER.
The chief financial officer shall keep and maintain, or cause
to be kept and maintained, adequate and correct books and records of accounts of
the properties and business transactions of the corporation, including accounts
of its assets, liabilities, receipts, disbursements, gains, losses, capital
retained earnings, and shares. The books of account shall at all reasonable
times be open to inspection by any director.
The chief financial officer shall deposit all moneys and other
valuables in the name and to the credit of the corporation with such
depositories as may be designated by the Board of Directors. He or she shall
disburse the funds of the corporation as may be ordered by the Board of
Directors, shall render to the president, the chief executive officer, or the
directors, upon request, an account of all his or her transactions as chief
financial officer and of the financial condition of the corporation, and shall
have other powers and perform such other duties as may be prescribed by the
Board of Directors or the bylaws.
5.11 REPRESENTATION OF SHARES OF OTHER CORPORATIONS.
The chairman of the board, the chief executive officer, the
president, any vice president, the chief financial officer, the secretary or
assistant secretary of this corporation, or any other person authorized by the
Board of Directors or the chief executive officer or the president or a vice
president, is authorized to vote, represent, and exercise on behalf of this
corporation all rights incident to any and all shares of any other corporation
or corporations standing in the name of this corporation. The authority granted
herein may be exercised either by such person directly or by any other person
authorized to do so by proxy or power of attorney duly executed by the person
having such authority.
5.12 AUTHORITY AND DUTIES OF OFFICERS.
-12-
<PAGE>
In addition to the foregoing authority and duties, all
officers of the corporation shall respectively have such authority and perform
such duties in the management of the business of the corporation as may be
designated from time to time by the Board of Directors or the stockholders.
ARTICLE VI
INDEMNIFICATION OF DIRECTORS, OFFICERS, EMPLOYEES, AND OTHER
AGENTS
6.1 INDEMNIFICATION OF DIRECTORS AND OFFICERS.
The corporation shall, to the maximum extent and in the manner
permitted by the General Corporation Law of Delaware, indemnify each of its
directors and officers against expenses (including attorneys' fees), judgments,
fines, settlements and other amounts actually and reasonably incurred in
connection with any proceeding, arising by reason of the fact that such person
is or was an agent of the corporation. For purposes of this Section 6.1, a
"director" or "officer" of the corporation includes any person (i) who is or was
a director or officer of the corporation, (ii) who is or was serving at the
request of the corporation as a director or officer of another corporation,
partnership, joint venture, trust or other enterprise, or (iii) who was a
director or officer of a corporation which was a predecessor corporation of the
corporation or of another enterprise at the request of such predecessor
corporation.
6.2 INDEMNIFICATION OF OTHERS.
The corporation shall have the power, to the maximum extent
and in the manner permitted by the General Corporation Law of Delaware, to
indemnify each of its employees and agents (other than directors and officers)
against expenses (including attorneys' fees), judgments, fines, settlements and
other amounts actually and reasonably incurred in connection with any
proceeding, arising by reason of the fact that such person is or was an agent of
the corporation. For purposes of this Section 6.2, an "employee" or "agent" of
the corporation (other than a director or officer) includes any person (i) who
is or was an employee or agent of the corporation, (ii) who is or was serving at
the request of the corporation as an employee or agent of another corporation,
partnership, joint venture, trust or other enterprise, or (iii) who was an
employee or agent of a corporation which was a predecessor corporation of the
corporation or of another enterprise at the request of such predecessor
corporation.
6.3 PAYMENT OF EXPENSES IN ADVANCE.
Expenses incurred in defending any action or proceeding for
which indemnification is required pursuant to Section 6.1 or for which
indemnification is permitted pursuant to Section 6.2 following authorization
thereof by the Board of Directors shall be paid by the corporation in advance of
the final disposition of such action or proceeding upon receipt of an
undertaking by or on behalf of the indemnified party to repay such amount if it
shall ultimately be determined that the indemnified party is not entitled to be
indemnified as authorized in this Article VI.
-13-
<PAGE>
6.4 INDEMNITY NOT EXCLUSIVE.
The indemnification provided by this Article VI shall not be
deemed exclusive of any other rights to which those seeking indemnification may
be entitled under any bylaw, agreement, vote of shareholders or disinterested
directors or otherwise, both as to action in an official capacity and as to
action in another capacity while holding such office, to the extent that such
additional rights to indemnification are authorized in the certificate of
incorporation
6.5 INSURANCE.
The corporation may purchase and maintain insurance on behalf
of any person who is or was a director, officer, employee or agent of the
corporation, or is or was serving at the request of the corporation as a
director, officer, employee or agent of another corporation, partnership, joint
venture, trust or other enterprise against any liability asserted against him or
her and incurred by him or her in any such capacity, or arising out of his or
her status as such, whether or not the corporation would have the power to
indemnify him or her against such liability under the provisions of the General
Corporation Law of Delaware.
6.6 CONFLICTS.
No indemnification or advance shall be made under this Article
VI, except where such indemnification or advance is mandated by law or the
order, judgment or decree of any court of competent jurisdiction, in any
circumstance where it appears:
(a) That it would be inconsistent with a provision of the
certificate of incorporation, these Bylaws, a resolution of the stockholders or
an agreement in effect at the time of the accrual of the alleged cause of the
action asserted in the proceeding in which the expenses were incurred or other
amounts were paid, which prohibits or otherwise limits indemnification; or
(b) That it would be inconsistent with any condition expressly
imposed by a court in approving a settlement.
ARTICLE VII
RECORDS AND REPORTS
7.1 MAINTENANCE AND INSPECTION OF RECORDS.
The corporation shall, either at its principal executive
offices or at such place or places as designated by the Board of Directors, keep
a record of its stockholders listing their names and addresses and the number
and class of shares held by each stockholder, a copy of these Bylaws as amended
to date, accounting books, and other records.
Any stockholder of record, in person or by attorney or other
agent, shall, upon written demand under oath stating the purpose thereof, have
the right during the usual hours for business to inspect for any proper purpose
the corporation's stock ledger, a list of its
-14-
<PAGE>
stockholders, and its other books and records and to make copies or extracts
therefrom. A proper purpose shall mean a purpose reasonably related to such
person's interest as a stockholder. In every instance where an attorney or other
agent is the person who seeks the right to inspection, the demand under oath
shall be accompanied by a power of attorney or such other writing that
authorizes the attorney or other agent to so act on behalf of the stockholder.
The demand under oath shall be directed to the corporation at its registered
office in Delaware or at its principal place of business.
7.2 INSPECTION BY DIRECTORS.
Any director shall have the right to examine the corporation's
stock ledger, a list of its stockholders, and its other books and records for a
purpose reasonably related to his or her position as a director. The Court of
Chancery is hereby vested with the exclusive jurisdiction to determine whether a
director is entitled to the inspection sought. The Court may summarily order the
corporation to permit the director to inspect any and all books and records, the
stock ledger, and the stock list and to make copies or extracts therefrom. The
Court may, in its discretion, prescribe any limitations or conditions with
reference to the inspection, or award such other and further relief as the Court
may deem just and proper.
7.3 ANNUAL STATEMENT TO STOCKHOLDERS.
The Board of Directors shall present at each annual meeting,
and at any special meeting of the stockholders when called for by vote of the
stockholders, a full and clear statement of the business and condition of the
corporation.
ARTICLE VIII
GENERAL MATTERS
8.1 CHECKS.
From time to time, the Board of Directors shall determine by
resolution which person or persons may sign or endorse all checks, drafts, other
orders for payment of money, notes or other evidences of indebtedness that are
issued in the name of or payable to the corporation, and only the persons so
authorized shall sign or endorse those instruments.
8.2 EXECUTION OF CORPORATE CONTRACTS AND INSTRUMENTS.
The Board of Directors, except as otherwise provided in these
Bylaws, may authorize any officer or officers, or agent or agents, to enter into
any contract or execute any instrument in the name of and on behalf of the
corporation; such authority may be general or confined to specific instances.
Unless so authorized or ratified by the Board of Directors or within the agency
power of an officer, no officer, agent or employee shall have any power or
authority to bind the corporation by any contract or engagement or to pledge its
credit or to render it liable for any purpose or for any amount.
-15-
<PAGE>
8.3 STOCK CERTIFICATES; PARTLY PAID SHARES.
The shares of a corporation shall be represented by
certificates, provided that the Board of Directors of the corporation may
provide by resolution or resolutions that some or all of any or all classes or
series of its stock shall be uncertificated shares. Any such resolution shall
not apply to shares represented by a certificate until such certificate is
surrendered to the corporation. Notwithstanding the adoption of such a
resolution by the Board of Directors, every holder of stock represented by
certificates and upon request every holder of uncertificated shares shall be
entitled to have a certificate signed by, or in the name of the corporation by
the chairman or vice-chairman of the Board of Directors, or the chief executive
officer or the president or vice-president, and by the chief financial officer
or an assistant treasurer, or the secretary or an assistant secretary of such
corporation representing the number of shares registered in certificate form.
Any or all of the signatures on the certificate may be a facsimile. In case any
officer, transfer agent or registrar who has signed or whose facsimile signature
has been placed upon a certificate has ceased to be such officer, transfer agent
or registrar before such certificate is issued, it may be issued by the
corporation with the same effect as if he or she were such officer, transfer
agent or registrar at the date of issue.
The corporation may issue the whole or any part of its shares
as partly paid and subject to call for the remainder of the consideration to be
paid therefor. Upon the face or back of each stock certificate issued to
represent any such partly paid shares, upon the books and records of the
corporation in the case of uncertificated partly paid shares, the total amount
of the consideration to be paid therefor and the amount paid thereon shall be
stated. Upon the declaration of any dividend on fully paid shares, the
corporation shall declare a dividend upon partly paid shares of the same class,
but only upon the basis of the percentage of the consideration actually paid
thereon.
8.4 SPECIAL DESIGNATION ON CERTIFICATES.
If the corporation is authorized to issue more than one class
of stock or more than one series of any class, then the powers, the
designations, the preferences, and the relative, participating, optional or
other special rights of each class of stock or series thereof and the
qualifications, limitations or restrictions of such preferences and/or rights
shall be set forth in full or summarized on the face or back of the certificate
that the corporation shall issue to represent such class or series of stock;
PROVIDED, HOWEVER, that, except as otherwise provided in Section 202 of the
General Corporation Law of Delaware, in lieu of the foregoing requirements there
may be set forth on the face or back of the certificate that the corporation
shall issue to represent such class or series of stock a statement that the
corporation will furnish without charge to each stockholder who so requests the
powers, the designations, the preferences, and the relative, participating,
optional or other special rights of each class of stock or series thereof and
the qualifications, limitations or restrictions of such preferences and/or
rights.
8.5 LOST CERTIFICATES.
Except as provided in this Section 8.5, no new certificates
for shares shall be issued to replace a previously issued certificate unless the
latter is surrendered to the corporation
-16-
<PAGE>
and cancelled at the same time. The corporation may issue a new certificate of
stock or uncertificated shares in the place of any certificate previously issued
by it, alleged to have been lost, stolen or destroyed, and the corporation may
require the owner of the lost, stolen or destroyed certificate, or the owner's
legal representative, to give the corporation a bond sufficient to indemnify it
against any claim that may be made against it on account of the alleged loss,
theft or destruction of any such certificate or the issuance of such new
certificate or uncertificated shares.
8.6 CONSTRUCTION; DEFINITIONS.
Unless the context requires otherwise, the general provisions,
rules of construction, and definitions in the Delaware General Corporation Law
shall govern the construction of these Bylaws. Without limiting the generality
of this provision, the singular number includes the plural, the plural number
includes the singular, and the term "person" includes both a corporation and a
natural person.
8.7 DIVIDENDS.
The directors of the corporation, subject to any restrictions
contained in (i) the General Corporation Law of Delaware or (ii) the certificate
of incorporation, may declare and pay dividends upon the shares of its capital
stock. Dividends may be paid in cash, in property, or in shares of the
corporation's capital stock.
The directors of the corporation may set apart out of any of
the funds of the corporation available for dividends a reserve or reserves for
any proper purpose and may abolish any such reserve. Such purposes shall include
but not be limited to equalizing dividends, repairing or maintaining any
property of the corporation, and meeting contingencies.
8.8 FISCAL YEAR.
The fiscal year of the corporation shall be fixed by
resolution of the Board of Directors and may be changed by the Board of
Directors.
8.9 SEAL.
The corporation may adopt a corporate seal, which may be
altered at pleasure, and may use the same by causing it or a facsimile thereof,
to be impressed or affixed or in any other manner reproduced.
8.10 TRANSFER OF STOCK.
Subject to Section 8.13, upon surrender to the corporation or
the transfer agent of the corporation of a certificate for shares duly endorsed
or accompanied by proper evidence of succession, assignation or authority to
transfer, it shall be the duty of the corporation to issue a new certificate to
the person entitled thereto, cancel the old certificate, and record the
transaction in its books.
-17-
<PAGE>
8.11 STOCK TRANSFER AGREEMENTS.
The corporation shall have power to enter into and perform any
agreement with any number of stockholders of any one or more classes of stock of
the corporation to restrict the transfer of shares of stock of the corporation
of any one or more classes owned by such stockholders in any manner not
prohibited by the General Corporation Law of Delaware.
8.12 REGISTERED STOCKHOLDERS.
The corporation shall be entitled to recognize the exclusive
right of a person registered on its books as the owner of shares to receive
dividends and to vote as such owner, shall be entitled to hold liable for calls
and assessments the person registered on its books as the owner of shares, and
shall not be bound to recognize any equitable or other claim to or interest in
such share or shares on the part of another person, whether or not it shall have
express or other notice thereof, except as otherwise provided by the laws of
Delaware.
8.13 RIGHT OF FIRST REFUSAL.
(a) RIGHT OF FIRST REFUSAL. Before any shares of capital stock
of the corporation or securities convertible into or exchangeable or exercisable
for any shares of capital stock of the corporation (collectively, the "SHARES")
held by a stockholder of the corporation (the "HOLDER") may be sold or otherwise
transferred (including transfer by gift or operation of law), the corporation or
its assignee(s) shall have a right of first refusal to purchase the Shares on
the terms and conditions set forth in this Section 8.13(a) (the "RIGHT OF FIRST
REFUSAL"); PROVIDED, HOWEVER, any Shares which are repurchased by the
corporation pursuant to the corporation's right under any stock option plan,
stock purchase agreement or otherwise shall not be subject to the Right of First
Refusal.
(i) NOTICE OF PROPOSED TRANSFER. Subject to
subparagraph (vi) below, before any Shares held by a Holder may be sold or
otherwise transferred, the Holder of the Shares shall deliver to the Company a
written notice (the "NOTICE") stating: (A) the Holder's bona fide intention to
sell or otherwise transfer such Shares; (B) the name of each proposed purchaser
or other transferee ("PROPOSED TRANSFEREE"); (C) the number of Shares to be
transferred to each Proposed Transferee; and (D) the terms and conditions of
each proposed sale or transfer. The Holder shall offer the Shares at the same
price (the "OFFERED PRICE") and upon the same terms (or terms as similar as
reasonably possible) to the corporation or its assignee(s).
(ii) EXERCISE OF RIGHT OF FIRST REFUSAL. At any
time within thirty (30) days after receipt of the Notice, the corporation and/or
its assignee(s) may, by giving written notice to the Holder, elect to purchase
all, but not less than all, of the Shares proposed to be transferred to any one
or more of the Proposed Transferees, at the purchase price determined in
accordance with subsection (iii) below.
(iii) PURCHASE PRICE. The purchase price
("PURCHASE PRICE") for the Shares purchased by the corporation or its
assignee(s) under this Section 8.13(a) shall be the Offered Price. If the
Offered Price includes consideration other than cash, the cash equivalent
-18-
<PAGE>
value of the non-cash consideration shall be determined by the Board of
Directors of the corporation in good faith. In the event the transfer occurs by
gift or operation of law, the Offered Price shall be equal to the fair market
value as determined by the Board of Directors of the corporation in its
reasonable judgment.
(iv) PAYMENT. Payment of the Purchase Price
shall be made, at the option of the corporation or its assignee(s), in cash (by
check), by cancellation of all or a portion of any outstanding indebtedness of
the Holder to the corporation (or, in the case of repurchase by an assignee, to
the assignee), or by any combination thereof within thirty (30) days after
receipt of the Notice or in the manner and at the times set forth in the Notice.
(v) HOLDER'S RIGHT TO TRANSFER. If all of the
Shares proposed in the Notice to be transferred to a given Proposed Transferee
are not purchased by the corporation and/or its assignee(s) as provided in this
Section 8.13(a), then the Holder may sell or otherwise transfer such Shares to
that Proposed Transferee at the Offered Price or at a higher price; PROVIDED,
HOWEVER, that such sale or other transfer is consummated within sixty (60) days
after the date of the Notice and PROVIDED FURTHER, HOWEVER, that any such sale
or other transfer is effected in accordance with any applicable securities laws
and the Proposed Transferee agrees in writing that the provisions of this
Section 8.13 shall continue to apply to the Shares in the hands of such Proposed
Transferee. If the Shares described in the Notice are not transferred to the
Proposed Transferee within such period, or if the Holder proposes to change the
price or other terms to make them more favorable to the Proposed Transferee, a
new Notice shall be given to the corporation, and the corporation and/or its
assignees shall again be offered the Right of First Refusal before any Shares
held by the Holder may be sold or otherwise transferred.
(vi) EXCEPTION FOR CERTAIN TRANSFERS. Anything
to the contrary contained herein notwithstanding, the following transactions
shall be exempt from the provisions of this Section 8.13:
(A) A stockholder's transfer of any or
all shares held either during such stockholder's lifetime or on death by will or
intestacy to such stockholder's immediate family. "Immediate family" as used
herein shall mean spouse, lineal descendant, father, mother, brother, or sister
of the stockholder making such transfer and shall include any trust established
primarily for the benefit of the stockholder or his immediate family.
(B) A stockholder's bona fide pledge or
mortgage of any shares with a commercial lending institution, provided that any
subsequent transfer of said shares by said institution shall be conducted in the
manner set forth in this Section 8.13.
(C) A stockholder's transfer of any or all
of such stockholder's shares to the corporation.
(D) A corporate stockholder's transfer of
any or all of its shares to an affiliate thereof or pursuant to and in
accordance with the terms of any merger, consolidation, or reclassification of
shares or capital reorganization of the corporate stockholder.
-19-
<PAGE>
(E) A corporate stockholder's transfer of
any or all of its shares to any or all of its stockholders or a limited
liability company stockholder's transfer of any or all of its shares to any or
all of its members.
(F) A transfer by a stockholder which is
limited or general partnership to any or all of its partners or retired
partners, or to any such partner's or retired partner's estate.
In any such case, the transferee, assignee or other recipient
shall receive and hold such stock subject to the provisions of this Section
8.13, and there shall be no further transfer of such stock except in accordance
with this Section 8.13.
(vi) The provisions of this Section 8.13(a) may be
waived with respect to any transfer by the corporation, upon duly authorized
action of the Board of Directors of the Corporation.
(b) ASSIGNMENT. The right of the corporation to purchase any
part of the Shares may be assigned in whole or in part to any stockholder or
stockholders of the corporation or other persons or organizations; PROVIDED,
HOWEVER, that an assignee, other than a corporation that is the parent or a one
hundred percent (100%) owned subsidiary of the corporation, must pay the
corporation, upon assignment of such right, cash equal to the difference between
the original purchase price and fair market value, if the original purchase
price is less than the fair market value of the Shares subject to the
assignment.
(c) RESTRICTIONS BINDING ON TRANSFEREES. All transferees of
Shares or any interest therein will receive and hold such Shares or interest
subject to the provisions of this Section 8.13. Any sale or transfer of the
corporation's Shares shall be void unless the provisions of this Section 8.13
are met.
(d) TERMINATION OF RIGHTS. The right of first refusal granted
the corporation by Section 8.13(a) above shall terminate upon the earlier to
occur of (i) the first sale of Common Stock of the corporation to the general
public pursuant to a registration statement filed with and declared effective by
the Securities and Exchange Commission under the Securities Act and (ii) either
(A) the acquisition of the corporation by another entity by means of any
transaction or series of related transactions (including, without limitation,
any reorganization, merger or consolidation, but excluding any merger effected
exclusively for the purpose of changing the domicile of the corporation); or (B)
a sale of all or substantially all of the assets of the corporation, UNLESS the
corporation's stockholders of record as constituted immediately prior to such
acquisition or sale will, immediately after such acquisition or sale (by virtue
of securities issued as consideration for the corporation's acquisition or sale
or otherwise) hold at least 50% of the voting power of the surviving or
acquiring entity in approximately the same relative percentages after such
acquisition or sale as before such acquisition or sale. Upon termination of the
right of first refusal described in Section 8.13(a), a new certificate or
certificates shall be issued, on request, without the legend referred to in
Section 8.13(e) below and delivered to Holder.
-20-
<PAGE>
(e) LEGENDS. The corporation shall place an appropriate legend
on all certificates for its shares referring to the provisions of this Section
8.13 restricting the transfer of shares.
(f) TRANSFER IN VIOLATION VOID. Any sale or transfer, or
purported sale or transfer, of securities of the corporation shall be null and
void unless the terms, conditions, and provisions of this Section 8.13 are
strictly observed and followed.
(g) CONFLICTING AGREEMENTS. Notwithstanding any other
agreement between the corporation and the stockholders of the corporation or any
other agreement among the stockholders of the corporation or otherwise
(collectively, a "CONFLICTING AGREEMENT"), to the extent such Conflicting
Agreement directly or indirectly conflicts with the terms of this Section 8.13,
this Section 8.13 shall govern any proposed transfer.
ARTICLE IX
AMENDMENTS
The Bylaws of the corporation may be adopted, amended or
repealed by the stockholders entitled to vote; PROVIDED, HOWEVER, that the
corporation may, in its certificate of incorporation, confer the power to adopt,
amend or repeal Bylaws upon the directors. The fact that such power has been so
conferred upon the directors shall not divest the stockholders of the power, nor
limit their power to adopt, amend or repeal Bylaws.
-21-
<PAGE>
CERTIFICATE OF ADOPTION OF BYLAWS
OF
ROSETTA INPHARMATICS, INC.
The undersigned hereby certifies that the undersigned is the duly
elected, qualified, and acting Secretary of ROSETTA INPHARMATICS, INC., and that
the foregoing Bylaws were adopted as the Bylaws of the corporation on October 1,
1999, by the stockholders of the Company.
Executed this 1st day of October, 1999.
-----------------------------
William E. Ericson, Secretary
<PAGE>
THIRD AMENDED AND RESTATED BYLAWS
OF
ROSETTA INPHARMATICS, INC.
(ADOPTED OCTOBER 1, 1999)
<PAGE>
TABLE OF CONTENTS
<TABLE>
<CAPTION>
PAGE
<S> <C>
ARTICLE I - CORPORATE OFFICES............................................................................1
1.1 Registered Office....................................................................................1
1.2 Other Offices........................................................................................1
ARTICLE II - MEETINGS OF STOCKHOLDERS....................................................................1
2.1 Place Of Meetings....................................................................................1
2.2 Annual Meeting.......................................................................................1
2.3 Special Meeting......................................................................................1
2.4 Notice Of Stockholders' Meetings.....................................................................2
2.5 Manner Of Giving Notice; Affidavit Of Notice.........................................................2
2.6 Quorum...............................................................................................2
2.7 Adjourned Meeting; Notice............................................................................2
2.8 Conduct Of Business..................................................................................3
2.9 Voting...............................................................................................3
2.10 Waiver Of Notice....................................................................................3
2.11 Stockholder Action By Written Consent Without A Meeting.............................................3
2.12 Record Date For Stockholder Notice; Voting; Giving Consents.........................................4
2.13 Proxies.............................................................................................4
ARTICLE III - DIRECTOR...................................................................................5
3.1 Powers...............................................................................................5
3.2 Number Of Directors..................................................................................5
3.3 Election, Qualification And Term Of Office Of Directors..............................................5
3.4 Resignation And Vacancies............................................................................5
3.5 Place Of Meetings; Meetings By Telephone.............................................................6
3.6 Regular Meetings.....................................................................................6
3.7 Special Meetings; Notice.............................................................................7
3.8 Quorum...............................................................................................7
3.9 Waiver Of Notice.....................................................................................7
3.10 Board Action By Written Consent Without A Meeting...................................................8
3.11 Fees And Compensation Of Directors..................................................................8
3.12 Approval Of Loans To Officers.......................................................................8
3.13 Removal Of Directors................................................................................8
3.14 Chairman Of The Board Of Directors..................................................................8
ARTICLE IV - COMMITTEES..................................................................................9
4.1 Committees Of Directors..............................................................................9
4.2 Committee Minutes....................................................................................9
4.3 Meetings And Action Of Committees....................................................................9
ARTICLE V - OFFICERS....................................................................................10
5.1 Officers............................................................................................10
5.2 Appointment Of Officers.............................................................................10
5.3 Subordinate Officers................................................................................10
5.4 Removal And Resignation Of Officers.................................................................10
5.5 Vacancies In Offices................................................................................11
</TABLE>
<PAGE>
<TABLE>
<S> <C>
5.6 Chief Executive Officer.............................................................................11
5.7 President...........................................................................................11
5.8 Vice Presidents.....................................................................................11
5.9 Secretary...........................................................................................11
5.10 Chief Financial Officer............................................................................12
5.11 Representation Of Shares Of Other Corporations.....................................................12
5.12 Authority And Duties Of Officers...................................................................12
ARTICLE VI - INDEMNIFICATION OF DIRECTORS, OFFICERS, EMPLOYEES, AND OTHER AGENTS........................13
6.1 Indemnification Of Directors And Officers...........................................................13
6.2 Indemnification Of Others...........................................................................13
6.3 Payment Of Expenses In Advance......................................................................13
6.4 Indemnity Not Exclusive.............................................................................14
6.5 Insurance...........................................................................................14
6.6 Conflicts...........................................................................................14
ARTICLE VII - RECORDS AND REPORTS.......................................................................14
7.1 Maintenance And Inspection Of Records...............................................................14
7.2 Inspection By Directors.............................................................................15
7.3 Annual Statement To Stockholders....................................................................15
ARTICLE VIII - GENERAL MATTERS..........................................................................15
8.1 Checks..............................................................................................15
8.2 Execution Of Corporate Contracts And Instruments....................................................15
8.3 Stock Certificates; Partly Paid Shares..............................................................16
8.4 Special Designation On Certificates.................................................................16
8.5 Lost Certificates...................................................................................16
8.6 Construction; Definitions...........................................................................17
8.7 Dividends...........................................................................................17
8.8 Fiscal Year.........................................................................................17
8.9 Seal................................................................................................17
8.10 Transfer Of Stock..................................................................................17
8.11 Stock Transfer Agreements..........................................................................18
8.12 Registered Stockholders............................................................................18
8.13 Right of First Refusal.............................................................................18
ARTICLE IX - AMENDMENTS.................................................................................21
</TABLE>
<PAGE>
Exhibit 3.4
AMENDED AND RESTATED
BYLAWS
OF
ROSETTA INPHARMATICS, INC.
<PAGE>
TABLE OF CONTENTS
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
ARTICLE I - CORPORATE OFFICES.....................................................................1
1.1 Registered Office...........................................................1
1.2 Other Offices...............................................................1
ARTICLE II - MEETINGS OF STOCKHOLDERS.............................................................1
2.1 Place Of Meetings...........................................................1
2.2 Annual Meeting..............................................................1
2.3 Special Meeting.............................................................2
2.4 Notice Of Stockholders'Meetings.............................................2
2.5 Advance Notice of Stockholder Nominees and Other Stockholder................3
2.6 Quorum......................................................................4
2.7 Adjourned Meeting; Notice...................................................4
2.8 Conduct Of Business.........................................................4
2.9 Voting......................................................................5
2.10 Waiver Of Notice ...........................................................5
2.11 Record Date For Stockholder Notice; Voting .................................5
2.12 Proxies.....................................................................6
ARTICLE III - DIRECTORS...........................................................................6
3.1 Powers......................................................................6
3.2 Number Of Directors.........................................................6
3.3 Election, Qualification And Term Of Office Of Directors.....................6
3.4 Resignation And Vacancies...................................................7
3.5 Place Of Meetings; Meetings By Telephone....................................8
3.6 Regular Meetings............................................................8
3.7 Special Meetings; Notice....................................................8
3.8 Quorum......................................................................8
3.9 Waiver Of Notice............................................................9
3.10 Board Action By Written Consent Without A Meeting...........................9
3.11 Fees And Compensation Of Directors..........................................9
3.12 Approval Of Loans To Officers...............................................9
3.13 Removal Of Directors.......................................................10
3.14 Chairman Of The Board Of Directors.........................................10
ARTICLE IV - COMMITTEES..........................................................................10
4.1 Committees Of Directors....................................................10
4.2 Committee Minutes..........................................................11
4.3 Meetings And Action Of Committees..........................................11
ARTICLE V - OFFICERS ...........................................................................12
5.1 Officers...................................................................12
</TABLE>
<PAGE>
TABLE OF CONTENTS
(CONTINUED)
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
5.2 Appointment Of Officers....................................................12
5.3 Subordinate Officers.......................................................12
5.4 Removal And Resignation Of Officers........................................12
5.5 Vacancies In Offices.......................................................12
5.6 Chief Executive Officer....................................................13
5.7 President..................................................................13
5.8 Vice Presidents............................................................13
5.9 Secretary..................................................................13
5.10 Chief Financial Officer....................................................14
5.11 Representation Of Shares Of Other Corporations.............................14
5.12 Authority And Duties Of Officers...........................................14
ARTICLE VI - INDEMNIFICATION OF DIRECTORS, OFFICERS, EMPLOYEES, AND OTHER AGENTS.................15
6.1 Indemnification Of Directors And Officers..................................15
6.2 Indemnification Of Others..................................................15
6.3 Payment Of Expenses In Advance.............................................15
6.4 Indemnity Not Exclusive....................................................16
6.5 Insurance..................................................................16
6.6 Conflicts..................................................................16
ARTICLE VII - RECORDS AND REPORTS................................................................16
7.1 Maintenance And Inspection Of Records......................................16
7.2 Inspection By Directors....................................................17
7.3 Annual Statement To Stockholders...........................................17
ARTICLE VIII - GENERAL MATTERS...................................................................17
8.1 Checks.....................................................................17
8.2 Execution Of Corporate Contracts And Instruments...........................17
8.3 Stock Certificates; Partly Paid Shares.....................................18
8.4 Special Designation On Certificates........................................18
8.5 Lost Certificates..........................................................19
8.6 Construction; Definitions..................................................19
8.7 Dividends..................................................................19
8.8 Fiscal Year................................................................19
8.9 Seal.......................................................................19
8.10 Transfer Of Stock..........................................................20
8.11 Stock Transfer Agreements..................................................20
8.12 Registered Stockholders....................................................20
</TABLE>
-3-
<PAGE>
TABLE OF CONTENTS
(CONTINUED)
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
ARTICLE IX - AMENDMENTS..........................................................................20
</TABLE>
-4-
<PAGE>
AMENDED AND RESTATED
BYLAWS
OF
ROSETTA INPHARMATICS, INC.
ARTICLE I
CORPORATE OFFICES
1.1 REGISTERED OFFICE.
The registered office of the corporation shall be in the City
of Dover, County of Kent, State of Delaware. The name of the registered agent of
the corporation at such location is National Corporate Research, Ltd.
1.2 OTHER OFFICES.
The Board of Directors may at any time establish other offices
at any place or places where the corporation is qualified to do business.
ARTICLE II
MEETINGS OF STOCKHOLDERS
2.1 PLACE OF MEETINGS.
Meetings of stockholders shall be held at any place, within or
outside the State of Delaware, designated by the Board of Directors. In the
absence of any such designation, stockholders' meetings shall be held at the
registered office of the corporation.
2.2 ANNUAL MEETING.
(a) The annual meeting of stockholders shall be held on
such date, time and place, either within or without the State of Delaware, as
may be designated by resolution of the Board of Directors each year. At the
meeting, directors shall be elected and any other proper business may be
transacted.
(b) Nominations of persons for election to the Board of
Directors of the Corporation and the proposal of business to be transacted by
the stockholders may be made at an annual meeting of stockholders (i) pursuant
to the Corporation's notice with respect to such meeting, (ii) by or at the
direction of the Board of Directors or (iii) by any stockholder of the
Corporation who was a stockholder of record at the time of giving of the notice
provided for in this Section 2.2, who is entitled to vote at the meeting and who
has complied with the notice procedures set forth in this Section 2.2.
<PAGE>
(c) For nominations or other business to be properly
brought before an annual meeting by a stockholder pursuant to clause (iii) of
paragraph (b) of this Section 2.2, the stockholder must have given timely notice
thereof in writing to the secretary of the Corporation, as provided in Section
2.5, and such business must be a proper matter for stockholder action under the
General Corporation Law of Delaware.
(d) Only such business shall be conducted at an annual
meeting of stockholders as shall have been brought before the meeting in
accordance with the procedures set forth in these Bylaws. The chairman of the
meeting shall determine whether a nomination or any business proposed to be
transacted by the stockholders has been properly brought before the meeting and,
if any proposed nomination or business has not been properly brought before the
meeting, the chairman shall declare that such proposed business or nomination
shall not be presented for stockholder action at the meeting.
(e) Nothing in this Section 2.2 shall be deemed to affect
any rights of stockholders to request inclusion of proposals in the
Corporation's proxy statement pursuant to Rule 14a-8 under the Exchange Act.
2.3 SPECIAL MEETING.
A special meeting of the stockholders may be called at any
time by the Board of Directors, the chairman of the board, the president or by
one or more stockholders holding shares in the aggregate entitled to cast not
less than twenty-five (25) percent of the votes at that meeting.
2.4 NOTICE OF STOCKHOLDERS' MEETINGS; AFFIDAVIT OF NOTICE.
All notices of meetings of stockholders shall be in writing
and shall be sent or otherwise given in accordance with this Section 2.4 of
these Bylaws not less than 10 nor more than 60 days before the date of the
meeting to each stockholder entitled to vote at such meeting (or such longer or
shorter time as is required by Section 2.5 of these Bylaws, if applicable). The
notice shall specify the place, date, and hour of the meeting, and, in the case
of a special meeting, the purpose or purposes for which the meeting is called.
Written notice of any meeting of stockholders, if mailed, is
given when deposited in the United States mail, postage prepaid, directed to the
stockholder at his address as it appears on the records of the Corporation. An
affidavit of the secretary or an assistant secretary or of the transfer agent of
the Corporation that the notice has been given shall, in the absence of fraud,
be prima facie evidence of the facts stated therein.
2.5 ADVANCE NOTICE OF STOCKHOLDER NOMINEES AND OTHER STOCKHOLDER
PROPOSALS.
(a) Only persons who are nominated in accordance with the
procedures set forth in this Section 2.5 shall be eligible for election as
directors. Nominations of persons for election to the Board of Directors of the
Corporation may be made at a meeting of stockholders by or at the direction of
the Board of Directors or by any stockholder of the Corporation entitled to vote
for the election of directors at the meeting who complies with the notice
procedures set
-2-
<PAGE>
forth in this Section 2.5. Such nominations, other than those made by or at
the direction of the Board of Directors, shall be made pursuant to timely
notice in writing to the secretary of the Corporation. Stockholders may bring
other business before the annual meeting, provided that timely notice is
provided to the secretary of the Corporation in accordance with this section,
and provided further that such business is a proper matter for stockholder
action under the General Corporation Law of Delaware. To be timely, a
stockholder's notice shall be delivered to or mailed and received at the
principal executive offices of the Corporation not less than 90 days nor more
than 120 days prior to the anniversary date of the prior year's meeting;
provided, however, that in the event that (i) the date of the annual meeting
is more than 30 days prior to or more than 60 days after such anniversary
date, and (ii) less than 60 days notice or prior public disclosure of the
date of the meeting is given or made to stockholders, notice by the
stockholder to be timely must be so received not later than the close of
business on the 10th day following the day on which such notice of the date
of the meeting was mailed or such public disclosure was made. Such
stockholder's notice shall set forth (a) as to each person whom the
stockholder proposes to nominate for election or re-election as a directors,
(i) the name, age, business address and residence address of such person,
(ii) the principal occuption or employment of such person, (iii) the class
and number of shares of the Corporation which are beneficially owned by such
person and (iv) any other information relating to such person that is
required to be disclosed in solicitations of proxies for election of
directors, or is otherwise required, in each case pursuant to Regulation 14A
under the Securities Exchange Act of 1934 (including, without limitation,
such person's written consent to being name in the proxy statement as a
nominee and to serving as a director if elected); (b) as to any other
business that the stockholder proposes to bring before the meeting, a brief
description of such business, the reasons for conducting such business at the
meeting and any material interest in such business of such stockholder and
the beneficial owner, if any, on whose behalf the proposal is made; and (c)
as to the stockholder giving the notice and the beneficial owner, if any, on
whose behalf the proposal is made (i) the name and address of the
stockholder, as they appear on the Corporation's books, and of such
beneficial owner and (ii) the class and number of shares of the Corporation
which are owned of record by such stockholder and beneficially by such
beneficial owner. At the request of the Board of Directors any person
nominated by the Board of Directors for election as a director shall furnish
to the secretary of the Corporation that information required to be set forth
in a stockholder's notice of nomination which pertains to the nominee. The
chairman of the meeting shall, if the facts warrant, determine and declare to
the meeting that a nomination was not made in accordance with the procedures
prescribed by the Bylaws, and if he or she should so determine, he or she
shall so declare to the meeting and the defective nomination shall be
disregarded.
(b) If a special meeting is called by any person or
persons other than the Board of Directors, the president or the chairman of the
board, the request shall be in writing, specifying the time of such meeting and
the general nature of the business proposed to be transacted, and shall be
delivered personally or sent by registered mail or by telegraphic or other
facsimile transmission to the chairman of the board, the president, any vice
president, or the secretary of the corporation. No business may be transacted at
such special meeting otherwise than specified in such notice. The officer
receiving the request shall cause notice to be promptly given to the
stockholders entitled to vote, in accordance with the provisions of Sections 2.4
and 2.5 of this Article II, that a meeting will be held at the time requested by
the person or persons
-3-
<PAGE>
calling the meeting, not less than thirty-five (35) nor more than sixty (60)
days after the receipt of the request. If the notice is not given within twenty
(20) days after the receipt of the request, the person or persons requesting the
meeting may give the notice. Nothing contained in this paragraph of this Section
2.3 shall be construed as limiting, fixing, or affecting the time when a meeting
of stockholders called by action of the Board of Directors may be held.
2.6 QUORUM.
The holders of a majority of the stock issued and outstanding
and entitled to vote thereat, present in person or represented by proxy, shall
constitute a quorum at all meetings of the stockholders for the transaction of
business except as otherwise provided by statute or by the certificate of
incorporation. If, however, such quorum is not present or represented at any
meeting of the stockholders, then either (a) the chairman of the meeting or (b)
the stockholders entitled to vote thereat, present in person or represented by
proxy, shall have power to adjourn the meeting from time to time, without notice
other than announcement at the meeting, until a quorum is present or
represented. At such adjourned meeting at which a quorum is present or
represented, any business may be transacted that might have been transacted at
the meeting as originally noticed.
2.7 ADJOURNED MEETING; NOTICE.
When a meeting is adjourned to another time or place, unless
these Bylaws otherwise require, notice need not be given of the adjourned
meeting if the time and place thereof are announced at the meeting at which the
adjournment is taken. At the adjourned meeting the corporation may transact any
business that might have been transacted at the original meeting. If the
adjournment is for more than thirty (30) days, or if after the adjournment a new
record date is fixed for the adjourned meeting, a notice of the adjourned
meeting shall be given to each stockholder of record entitled to vote at the
meeting.
2.8 CONDUCT OF BUSINESS.
The chairman of any meeting of stockholders shall determine
the order of business and the procedure at the meeting, including the manner of
voting and the conduct of business.
2.9 VOTING.
The stockholders entitled to vote at any meeting of
stockholders shall be determined in accordance with the provisions of Section
2.11 of these Bylaws, subject to the provisions of Sections 217 and 218 of the
General Corporation Law of Delaware (relating to voting rights of fiduciaries,
pledgors and joint owners of stock and to voting trusts and other voting
agreements).
Except as may be otherwise provided in the certificate of
incorporation, each stockholder shall be entitled to one vote for each share of
capital stock held by such stockholder.
-4-
<PAGE>
2.10 WAIVER OF NOTICE.
Whenever notice is required to be given under any provision of
the General Corporation Law of Delaware or of the certificate of incorporation
or these Bylaws, a written waiver thereof, signed by the person entitled to
notice, whether before or after the time stated therein, shall be deemed
equivalent to notice. Attendance of a person at a meeting shall constitute a
waiver of notice of such meeting, except when the person attends a meeting for
the express purpose of objecting, at the beginning of the meeting, to the
transaction of any business because the meeting is not lawfully called or
convened. Neither the business to be transacted at, nor the purpose of, any
regular or special meeting of the stockholders need be specified in any written
waiver of notice unless so required by the certificate of incorporation or these
Bylaws.
2.11 RECORD DATE FOR STOCKHOLDER NOTICE; VOTING.
In order that the corporation may determine the stockholders
entitled to notice of or to vote at any meeting of stockholders or any
adjournment thereof, or entitled to receive payment of any dividend or other
distribution or allotment of any rights, or entitled to exercise any rights in
respect of any change, conversion or exchange of stock or for the purpose of any
other lawful action, the Board of Directors may fix, in advance, a record date,
which shall not be more than sixty (60) nor less than ten (10) days before the
date of such meeting, nor more than sixty (60) days prior to any other action.
If the Board of Directors does not so fix a record date:
(a) The record date for determining stockholders entitled
to notice of or to vote at a meeting of stockholders shall be at the close of
business on the day next preceding the day on which notice is given, or, if
notice is waived, at the close of business on the day next preceding the day on
which the meeting is held.
(b) The record date for determining stockholders for any
other purpose shall be at the close of business on the day on which the Board of
Directors adopts the resolution relating thereto.
A determination of stockholders of record entitled to notice
of or to vote at a meeting of stockholders shall apply to any adjournment of the
meeting; provided, however, that the Board of Directors may fix a new record
date for the adjourned meeting.
2.12 PROXIES.
Each stockholder entitled to vote at a meeting of stockholders
may authorize another person or persons to act for such stockholder by a written
proxy, signed by the stockholder and filed with the secretary of the
corporation, but no such proxy shall be voted or acted upon after three (3)
years from its date, unless the proxy provides for a longer period. A proxy
shall be deemed signed if the stockholder's name is placed on the proxy (whether
by manual signature, typewriting, electronic transmission or otherwise) by the
stockholder or the stockholder's attorney-in-fact. The revocability of a proxy
that states on its face that it is
-5-
<PAGE>
irrevocable shall be governed by the provisions of Section 212(e) of the General
Corporation Law of Delaware.
ARTICLE III
DIRECTORS
3.1 POWERS.
Subject to the provisions of the General Corporation Law of
Delaware and any limitations in the certificate of incorporation or these Bylaws
relating to action required to be approved by the stockholders or by the
outstanding shares, the business and affairs of the corporation shall be managed
and all corporate powers shall be exercised by or under the direction of the
Board of Directors.
3.2 NUMBER OF DIRECTORS.
Upon the adoption of these bylaws, the number of directors
constituting the entire Board of Directors shall be [SIX]. Thereafter, this
number may be changed by a resolution of the Board of Directors or of the
stockholders, subject to Section 3.4 of these Bylaws. No reduction of the
authorized number of directors shall have the effect of removing any director
before such director's term of office expires.
3.3 ELECTION, QUALIFICATION AND TERM OF OFFICE OF DIRECTORS.
Except as provided in Section 3.4 of these Bylaws and unless
otherwise provided in the certificate of incorporation, directors shall be
elected at each annual meeting of stockholders to hold office until the next
annual meeting.
Directors need not be stockholders unless so required by the
certificate of incorporation or these Bylaws, wherein other qualifications for
directors may be prescribed. Each director, including a director elected to fill
a vacancy, shall hold office until his or her successor is elected and qualified
or until his or her earlier resignation or removal.
Elections of directors need not be by written ballot.
3.4 RESIGNATION AND VACANCIES.
Any director may resign at any time upon written notice to the
attention of the Secretary of the corporation. When one or more directors so
resigns and the resignation is effective at a future date, a majority of the
directors then in office, including those who have so resigned, shall have power
to fill such vacancy or vacancies, the vote thereon to take effect when such
resignation or resignations shall become effective, and each director so chosen
shall hold office as provided in this section in the filling of other vacancies,
unless otherwise provided in the certificate of incorporation and subject to the
rights of any holders of preferred stock then outstanding.
-6-
<PAGE>
Unless otherwise provided in the certificate of incorporation
or these Bylaws:
(a) Vacancies and newly created directorships resulting
from any increase in the authorized number of directors elected by all of the
stockholders having the right to vote as a single class may be filled by a
majority of the directors then in office, although less than a quorum, or by a
sole remaining director.
(b) Whenever the holders of any class or classes of stock
or series thereof are entitled to elect one or more directors by the provisions
of the certificate of incorporation, vacancies and newly created directorships
of such class or classes or series may be filled by a majority of the directors
elected by such class or classes or series thereof then in office, or by a sole
remaining director so elected.
If at any time, by reason of death or resignation or other
cause, the corporation should have no directors in office, then any officer or
any stockholder or an executor, administrator, trustee or guardian of a
stockholder, or other fiduciary entrusted with like responsibility for the
person or estate of a stockholder, may call a special meeting of stockholders in
accordance with the provisions of the certificate of incorporation or these
Bylaws, or may apply to the Court of Chancery for a decree summarily ordering an
election as provided in Section 211 of the General Corporation Law of Delaware.
If, at the time of filling any vacancy or any newly created
directorship, the directors then in office constitute less than a majority of
the whole board (as constituted immediately prior to any such increase), then
the Court of Chancery may, upon application of any stockholder or stockholders
holding at least ten (10) percent of the total number of the shares at the time
outstanding having the right to vote for such directors, summarily order an
election to be held to fill any such vacancies or newly created directorships,
or to replace the directors chosen by the directors then in office as aforesaid,
which election shall be governed by the provisions of Section 211 of the General
Corporation Law of Delaware as far as applicable.
3.5 PLACE OF MEETINGS; MEETINGS BY TELEPHONE.
The Board of Directors of the corporation may hold meetings,
both regular and special, either within or outside the State of Delaware.
Unless otherwise restricted by the certificate of
incorporation or these Bylaws, members of the Board of Directors, or any
committee designated by the Board of Directors, may participate in a meeting of
the Board of Directors, or any committee, by means of conference telephone or
similar communications equipment by means of which all persons participating in
the meeting can hear each other, and such participation in a meeting shall
constitute presence in person at the meeting.
3.6 REGULAR MEETINGS.
Regular meetings of the Board of Directors may be held without
notice at such time and at such place as shall from time to time be determined
by the board.
-7-
<PAGE>
3.7 SPECIAL MEETINGS; NOTICE.
Special meetings of the Board of Directors for any purpose or
purposes may be called at any time by the chairman of the board, the president,
any vice president, the secretary or any two directors.
Notice of the time and place of special meetings shall be
delivered personally or by telephone to each director or sent by first-class
mail or telegram, charges prepaid, addressed to each director at that director's
address as it is shown on the records of the corporation. If the notice is
mailed, it shall be deposited in the United States mail at least four (4) days
before the time of the holding of the meeting. If the notice is delivered
personally or by telephone or by telegram, it shall be delivered personally or
by telephone or to the telegraph company at least forty-eight (48) hours before
the time of the holding of the meeting. Any oral notice given personally or by
telephone may be communicated either to the director or to a person at the
office of the director who the person giving the notice has reason to believe
will promptly communicate it to the director. The notice need not specify the
purpose or the place of the meeting, if the meeting is to be held at the
principal executive office of the corporation.
3.8 QUORUM.
At all meetings of the Board of Directors, a majority of the
authorized number of directors shall constitute a quorum for the transaction of
business and the act of a majority of the directors present at any meeting at
which there is a quorum shall be the act of the Board of Directors, except as
may be otherwise specifically provided by statute or by the certificate of
incorporation. If a quorum is not present at any meeting of the Board of
Directors, then the directors present thereat may adjourn the meeting from time
to time, without notice other than announcement at the meeting, until a quorum
is present.
A meeting at which a quorum is initially present may continue
to transact business notwithstanding the withdrawal of directors, if any action
taken is approved by at least a majority of the required quorum for that
meeting.
3.9 WAIVER OF NOTICE.
Whenever notice is required to be given under any provision of
the General Corporation Law of Delaware or of the certificate of incorporation
or these Bylaws, a written waiver thereof, signed by the person entitled to
notice, whether before or after the time stated therein, shall be deemed
equivalent to notice. Attendance of a person at a meeting shall constitute a
waiver of notice of such meeting, except when the person attends a meeting for
the express purpose of objecting, at the beginning of the meeting, to the
transaction of any business because the meeting is not lawfully called or
convened. Neither the business to be transacted at, nor the purpose of, any
regular or special meeting of the directors, or members of a committee of
directors, need be specified in any written waiver of notice unless so required
by the certificate of incorporation or these Bylaws.
-8-
<PAGE>
3.10 BOARD ACTION BY WRITTEN CONSENT WITHOUT A MEETING.
Unless otherwise restricted by the certificate of
incorporation or these Bylaws, any action required or permitted to be taken at
any meeting of the Board of Directors, or of any committee thereof, may be taken
without a meeting if all members of the board or committee, as the case may be,
consent thereto in writing and the writing or writings are filed with the
minutes of proceedings of the board or committee. Written consents representing
actions taken by the board or committee may be executed by telex, telecopy or
other facsimile transmission, and such facsimile shall be valid and binding to
the same extent as if it were an original.
3.11 FEES AND COMPENSATION OF DIRECTORS.
Unless otherwise restricted by the certificate of
incorporation or these Bylaws, the Board of Directors shall have the authority
to fix the compensation of directors. No such compensation shall preclude any
director from serving the corporation in any other capacity and receiving
compensation therefor.
3.12 APPROVAL OF LOANS TO OFFICERS.
The corporation may lend money to, or guarantee any obligation
of, or otherwise assist any officer or other employee of the corporation or of
its subsidiary, including any officer or employee who is a director of the
corporation or its subsidiary, whenever, in the judgment of the directors, such
loan, guaranty or assistance may reasonably be expected to benefit the
corporation. The loan, guaranty or other assistance may be with or without
interest and may be unsecured, or secured in such manner as the Board of
Directors shall approve, including, without limitation, a pledge of shares of
stock of the corporation. Nothing in this section contained shall be deemed to
deny, limit or restrict the powers of guaranty or warranty of the corporation at
common law or under any statute.
3.13 REMOVAL OF DIRECTORS.
Unless otherwise restricted by statute, by the certificate of
incorporation or by these Bylaws, any director or the entire Board of Directors
may be removed, with or without cause, by the holders of a majority of the
shares then entitled to vote at an election of directors; provided, however,
that if the stockholders of the corporation are entitled to cumulative voting,
if less than the entire Board of Directors is to be removed, no director may be
removed without cause if the votes cast against his removal would be sufficient
to elect him if then cumulatively voted at an election of the entire Board of
Directors.
No reduction of the authorized number of directors shall have
the effect of removing any director prior to the expiration of such director's
term of office.
3.14 CHAIRMAN OF THE BOARD OF DIRECTORS.
The corporation may also have, at the discretion of the Board
of Directors, a chairman of the Board of Directors who shall not be considered
an officer of the corporation.
-9-
<PAGE>
ARTICLE IV
COMMITTEES
4.1 COMMITTEES OF DIRECTORS.
The Board of Directors may designate one or more committees, each
committee to consist of one or more of the directors of the corporation. The
Board may designate 1 or more directors as alternate members of any committee,
who may replace any absent or disqualified member at any meeting of the
committee. In the absence or disqualification of a member of a committee, the
member or members present at any meeting and not disqualified from voting,
whether or not such member or members constitute a quorum, may unanimously
appoint another member of the Board of Directors to act at the meeting in the
place of any such absent or disqualified member. Any such committee, to the
extent provided in the resolution of the Board of Directors, or in these Bylaws,
shall have and may exercise all the powers and authority of the Board of
Directors in the management of the business and affairs of the corporation, and
may authorize the seal of the corporation to be affixed to all papers which may
require it; but no such committee shall have the power or authority to (a) amend
the Certificate of Incorporation (except that a committee may, to the extent
authorized in the resolution or resolutions providing for the issuance of shares
of stock adopted by the Board of Directors as provided in Section 151(a) of the
General Corporation Law of Delaware, fix the designations and any of the
preferences or rights of such shares relating to dividends, redemption,
dissolution, any distribution of assets of the Corporation or the conversion
into, or the exchange of such shares for, shares of any other class or classes
or any other series of the same or any other class or classes of stock of the
Corporation or fix the number of shares of any series of stock or authorize the
increase or decrease of the shares of any series), (b) adopt an agreement of
merger or consolidation under Sections 251 or 252 of the General Corporation Law
of Delaware, (c) recommend to the stockholders the sale, lease or exchange of
all or substantially all of the Corporation's property and assets, (d) recommend
to the stockholders a dissolution of the Corporation or a revocation of a
dissolution, or (e) amend the Bylaws of the Corporation; and, unless the board
resolution establishing the committee, the Bylaws or the Certificate of
Incorporation expressly so provide, no such committee shall have the power or
authority to declare a dividend, to authorize the issuance of stock, or to adopt
a certificate of ownership and merger pursuant to Section 253 of the General
Corporation Law of Delaware.
4.2 COMMITTEE MINUTES.
Each committee shall keep regular minutes of its meetings and
report the same to the Board of Directors when required.
4.3 MEETINGS AND ACTION OF COMMITTEES.
Meetings and actions of committees shall be governed by, and
held and taken in accordance with, the provisions of Section 3.5 (place of
meetings and meetings by telephone), Section 3.6 (regular meetings), Section 3.7
(special meetings and notice), Section 3.8 (quorum), Section 3.9 (waiver of
notice), and Section 3.10 (action without a meeting) of these Bylaws, with
-10-
<PAGE>
such changes in the context of such provisions as are necessary to substitute
the committee and its members for the Board of Directors and its members;
provided, however, that the time of regular meetings of committees may be
determined either by resolution of the Board of Directors or by resolution of
the committee, that special meetings of committees may also be called by
resolution of the Board of Directors and that notice of special meetings of
committees shall also be given to all alternate members, who shall have the
right to attend all meetings of the committee. The Board of Directors may adopt
rules for the government of any committee not inconsistent with the provisions
of these Bylaws.
ARTICLE V
OFFICERS
5.1 OFFICERS.
The officers of the corporation shall be a chief executive
officer, a president, a secretary, and a chief financial officer. The
corporation may also have, at the discretion of the Board of Directors, one or
more vice presidents, one or more assistant secretaries, one or more assistant
treasurers, and any such other officers as may be appointed in accordance with
the provisions of Section 5.3 of these Bylaws. Any number of offices may be held
by the same person.
5.2 APPOINTMENT OF OFFICERS.
The officers of the corporation, except such officers as may
be appointed in accordance with the provisions of Sections 5.3 or 5.5 of these
Bylaws, shall be appointed by the Board of Directors, subject to the rights, if
any, of an officer under any contract of employment.
5.3 SUBORDINATE OFFICERS.
The Board of Directors may appoint, or empower the chief
executive officer or the president to appoint, such other officers and agents as
the business of the corporation may require, each of whom shall hold office for
such period, have such authority, and perform such duties as are provided in
these Bylaws or as the Board of Directors may from time to time determine.
5.4 REMOVAL AND RESIGNATION OF OFFICERS.
Subject to the rights, if any, of an officer under any
contract of employment, any officer may be removed, either with or without
cause, by an affirmative vote of the majority of the Board of Directors at any
regular or special meeting of the board or, except in the case of an officer
chosen by the Board of Directors, by any officer upon whom such power of removal
may be conferred by the Board of Directors.
Any officer may resign at any time by giving written notice to
the attention of the Secretary of the corporation. Any resignation shall take
effect at the date of the receipt of that
-11-
<PAGE>
notice or at any later time specified in that notice; and, unless otherwise
specified in that notice, the acceptance of the resignation shall not be
necessary to make it effective. Any resignation is without prejudice to the
rights, if any, of the corporation under any contract to which the officer is a
party.
5.5 VACANCIES IN OFFICES.
Any vacancy occurring in any office of the corporation shall
be filled by the Board of Directors.
5.6 CHIEF EXECUTIVE OFFICER.
Subject to such supervisory powers, if any, as may be given by
the Board of Directors to the chairman of the board, if any, the chief executive
officer of the corporation shall, subject to the control of the Board of
Directors, have general supervision, direction, and control of the business and
the officers of the corporation. He or she shall preside at all meetings of the
stockholders and, in the absence or nonexistence of a chairman of the board, at
all meetings of the Board of Directors and shall have the general powers and
duties of management usually vested in the office of chief executive officer of
a corporation and shall have such other powers and duties as may be prescribed
by the Board of Directors or these bylaws.
5.7 PRESIDENT.
Subject to such supervisory powers, if any, as may be given by
the Board of Directors to the chairman of the board (if any) or the chief
executive officer, the president shall have general supervision, direction, and
control of the business and other officers of the corporation. He or she shall
have the general powers and duties of management usually vested in the office of
president of a corporation and such other powers and duties as may be prescribed
by the Board of Directors or these Bylaws.
5.8 VICE PRESIDENTS.
In the absence or disability of the chief executive officer
and president, the vice presidents, if any, in order of their rank as fixed by
the Board of Directors or, if not ranked, a vice president designated by the
Board of Directors, shall perform all the duties of the president and when so
acting shall have all the powers of, and be subject to all the restrictions
upon, the president. The vice presidents shall have such other powers and
perform such other duties as from time to time may be prescribed for them
respectively by the Board of Directors, these Bylaws, the president or the
chairman of the board.
5.9 SECRETARY.
The secretary shall keep or cause to be kept, at the principal
executive office of the corporation or such other place as the Board of
Directors may direct, a book of minutes of all meetings and actions of
directors, committees of directors, and stockholders. The minutes shall show the
time and place of each meeting, the names of those present at directors'
meetings or
-12-
<PAGE>
committee meetings, the number of shares present or represented at stockholders'
meetings, and the proceedings thereof.
The secretary shall keep, or cause to be kept, at the
principal executive office of the corporation or at the office of the
corporation's transfer agent or registrar, as determined by resolution of the
Board of Directors, a share register, or a duplicate share register, showing the
names of all stockholders and their addresses, the number and classes of shares
held by each, the number and date of certificates evidencing such shares, and
the number and date of cancellation of every certificate surrendered for
cancellation.
The secretary shall give, or cause to be given, notice of all
meetings of the stockholders and of the Board of Directors required to be given
by law or by these Bylaws. He or she shall keep the seal of the corporation, if
one be adopted, in safe custody and shall have such other powers and perform
such other duties as may be prescribed by the Board of Directors or by these
Bylaws.
5.10 CHIEF FINANCIAL OFFICER.
The chief financial officer shall keep and maintain, or cause
to be kept and maintained, adequate and correct books and records of accounts of
the properties and business transactions of the corporation, including accounts
of its assets, liabilities, receipts, disbursements, gains, losses, capital
retained earnings, and shares. The books of account shall at all reasonable
times be open to inspection by any director.
The chief financial officer shall deposit all moneys and other
valuables in the name and to the credit of the corporation with such
depositories as may be designated by the Board of Directors. He or she shall
disburse the funds of the corporation as may be ordered by the Board of
Directors, shall render to the president, the chief executive officer, or the
directors, upon request, an account of all his or her transactions as chief
financial officer and of the financial condition of the corporation, and shall
have other powers and perform such other duties as may be prescribed by the
Board of Directors or the bylaws.
5.11 REPRESENTATION OF SHARES OF OTHER CORPORATIONS.
The chairman of the board, the chief executive officer, the
president, any vice president, the chief financial officer, the secretary or
assistant secretary of this corporation, or any other person authorized by the
Board of Directors or the chief executive officer or the president or a vice
president, is authorized to vote, represent, and exercise on behalf of this
corporation all rights incident to any and all shares of any other corporation
or corporations standing in the name of this corporation. The authority granted
herein may be exercised either by such person directly or by any other person
authorized to do so by proxy or power of attorney duly executed by the person
having such authority.
-13-
<PAGE>
5.12 AUTHORITY AND DUTIES OF OFFICERS.
In addition to the foregoing authority and duties, all
officers of the corporation shall respectively have such authority and perform
such duties in the management of the business of the corporation as may be
designated from time to time by the Board of Directors or the stockholders.
ARTICLE VI
INDEMNIFICATION OF DIRECTORS, OFFICERS, EMPLOYEES, AND OTHER
AGENTS
6.1 INDEMNIFICATION OF DIRECTORS AND OFFICERS.
The corporation shall, to the maximum extent and in the manner
permitted by the General Corporation Law of Delaware, indemnify each of its
directors and officers against expenses (including attorneys' fees), judgments,
fines, settlements and other amounts actually and reasonably incurred in
connection with any proceeding, arising by reason of the fact that such person
is or was an agent of the corporation. For purposes of this Section 6.1, a
"director" or "officer" of the corporation includes any person (a) who is or was
a director or officer of the corporation, (b) who is or was serving at the
request of the corporation as a director or officer of another corporation,
partnership, joint venture, trust or other enterprise, or (c) who was a director
or officer of a corporation which was a predecessor corporation of the
corporation or of another enterprise at the request of such predecessor
corporation.
6.2 INDEMNIFICATION OF OTHERS.
The corporation shall have the power, to the maximum extent
and in the manner permitted by the General Corporation Law of Delaware, to
indemnify each of its employees and agents (other than directors and officers)
against expenses (including attorneys' fees), judgments, fines, settlements and
other amounts actually and reasonably incurred in connection with any
proceeding, arising by reason of the fact that such person is or was an agent of
the corporation. For purposes of this Section 6.2, an "employee" or "agent" of
the corporation (other than a director or officer) includes any person (a) who
is or was an employee or agent of the corporation, (b) who is or was serving at
the request of the corporation as an employee or agent of another corporation,
partnership, joint venture, trust or other enterprise, or (c) who was an
employee or agent of a corporation which was a predecessor corporation of the
corporation or of another enterprise at the request of such predecessor
corporation.
6.3 PAYMENT OF EXPENSES IN ADVANCE.
Expenses incurred in defending any action or proceeding for
which indemnification is required pursuant to Section 6.1 or for which
indemnification is permitted pursuant to Section 6.2 following authorization
thereof by the Board of Directors shall be paid by the corporation in advance of
the final disposition of such action or proceeding upon receipt of an
undertaking by or on behalf of the indemnified party to repay such amount if it
shall ultimately
-14-
<PAGE>
be determined that the indemnified party is not entitled to be indemnified as
authorized in this Article VI.
6.4 INDEMNITY NOT EXCLUSIVE.
The indemnification provided by this Article VI shall not be
deemed exclusive of any other rights to which those seeking indemnification may
be entitled under any bylaw, agreement, vote of shareholders or disinterested
directors or otherwise, both as to action in an official capacity and as to
action in another capacity while holding such office, to the extent that such
additional rights to indemnification are authorized in the certificate of
incorporation
6.5 INSURANCE.
The corporation may purchase and maintain insurance on behalf
of any person who is or was a director, officer, employee or agent of the
corporation, or is or was serving at the request of the corporation as a
director, officer, employee or agent of another corporation, partnership, joint
venture, trust or other enterprise against any liability asserted against him or
her and incurred by him or her in any such capacity, or arising out of his or
her status as such, whether or not the corporation would have the power to
indemnify him or her against such liability under the provisions of the General
Corporation Law of Delaware.
6.6 CONFLICTS.
No indemnification or advance shall be made under this Article
VI, except where such indemnification or advance is mandated by law or the
order, judgment or decree of any court of competent jurisdiction, in any
circumstance where it appears:
(a) That it would be inconsistent with a provision of the
certificate of incorporation, these Bylaws, a resolution of the stockholders or
an agreement in effect at the time of the accrual of the alleged cause of the
action asserted in the proceeding in which the expenses were incurred or other
amounts were paid, which prohibits or otherwise limits indemnification; or
(b) That it would be inconsistent with any condition
expressly imposed by a court in approving a settlement.
ARTICLE VII
RECORDS AND REPORTS
7.1 MAINTENANCE AND INSPECTION OF RECORDS.
The corporation shall, either at its principal executive
offices or at such place or places as designated by the Board of Directors, keep
a record of its stockholders listing their names and addresses and the number
and class of shares held by each stockholder, a copy of these Bylaws as amended
to date, accounting books, and other records.
-15-
<PAGE>
Any stockholder of record, in person or by attorney or other
agent, shall, upon written demand under oath stating the purpose thereof, have
the right during the usual hours for business to inspect for any proper purpose
the corporation's stock ledger, a list of its stockholders, and its other books
and records and to make copies or extracts therefrom. A proper purpose shall
mean a purpose reasonably related to such person's interest as a stockholder. In
every instance where an attorney or other agent is the person who seeks the
right to inspection, the demand under oath shall be accompanied by a power of
attorney or such other writing that authorizes the attorney or other agent to so
act on behalf of the stockholder. The demand under oath shall be directed to the
corporation at its registered office in Delaware or at its principal place of
business.
7.2 INSPECTION BY DIRECTORS.
Any director shall have the right to examine the corporation's
stock ledger, a list of its stockholders, and its other books and records for a
purpose reasonably related to his or her position as a director. The Court of
Chancery is hereby vested with the exclusive jurisdiction to determine whether a
director is entitled to the inspection sought. The Court may summarily order the
corporation to permit the director to inspect any and all books and records, the
stock ledger, and the stock list and to make copies or extracts therefrom. The
Court may, in its discretion, prescribe any limitations or conditions with
reference to the inspection, or award such other and further relief as the Court
may deem just and proper.
7.3 ANNUAL STATEMENT TO STOCKHOLDERS.
The Board of Directors shall present at each annual meeting,
and at any special meeting of the stockholders when called for by vote of the
stockholders, a full and clear statement of the business and condition of the
corporation.
ARTICLE VIII
GENERAL MATTERS
8.1 CHECKS.
From time to time, the Board of Directors shall determine by
resolution which person or persons may sign or endorse all checks, drafts, other
orders for payment of money, notes or other evidences of indebtedness that are
issued in the name of or payable to the corporation, and only the persons so
authorized shall sign or endorse those instruments.
8.2 EXECUTION OF CORPORATE CONTRACTS AND INSTRUMENTS.
The Board of Directors, except as otherwise provided in these
Bylaws, may authorize any officer or officers, or agent or agents, to enter into
any contract or execute any instrument in the name of and on behalf of the
corporation; such authority may be general or confined to specific instances.
Unless so authorized or ratified by the Board of Directors or within the agency
power of an officer, no officer, agent or employee shall have any power or
-16-
<PAGE>
authority to bind the corporation by any contract or engagement or to pledge its
credit or to render it liable for any purpose or for any amount.
8.3 STOCK CERTIFICATES; PARTLY PAID SHARES.
The shares of a corporation shall be represented by
certificates, provided that the Board of Directors of the corporation may
provide by resolution or resolutions that some or all of any or all classes or
series of its stock shall be uncertificated shares. Any such resolution shall
not apply to shares represented by a certificate until such certificate is
surrendered to the corporation. Notwithstanding the adoption of such a
resolution by the Board of Directors, every holder of stock represented by
certificates and upon request every holder of uncertificated shares shall be
entitled to have a certificate signed by, or in the name of the corporation by
the chairman or vice-chairman of the Board of Directors, or the president or
vice-president, and by the chief financial officer or an assistant treasurer, or
the secretary or an assistant secretary of such corporation representing the
number of shares registered in certificate form. Any or all of the signatures on
the certificate may be a facsimile. In case any officer, transfer agent or
registrar who has signed or whose facsimile signature has been placed upon a
certificate has ceased to be such officer, transfer agent or registrar before
such certificate is issued, it may be issued by the corporation with the same
effect as if he or she were such officer, transfer agent or registrar at the
date of issue.
The corporation may issue the whole or any part of its shares
as partly paid and subject to call for the remainder of the consideration to be
paid therefor. Upon the face or back of each stock certificate issued to
represent any such partly paid shares, upon the books and records of the
corporation in the case of uncertificated partly paid shares, the total amount
of the consideration to be paid therefor and the amount paid thereon shall be
stated. Upon the declaration of any dividend on fully paid shares, the
corporation shall declare a dividend upon partly paid shares of the same class,
but only upon the basis of the percentage of the consideration actually paid
thereon.
8.4 SPECIAL DESIGNATION ON CERTIFICATES.
If the corporation is authorized to issue more than one class
of stock or more than one series of any class, then the powers, the
designations, the preferences, and the relative, participating, optional or
other special rights of each class of stock or series thereof and the
qualifications, limitations or restrictions of such preferences and/or rights
shall be set forth in full or summarized on the face or back of the certificate
that the corporation shall issue to represent such class or series of stock;
provided, however, that, except as otherwise provided in Section 202 of the
General Corporation Law of Delaware, in lieu of the foregoing requirements there
may be set forth on the face or back of the certificate that the corporation
shall issue to represent such class or series of stock a statement that the
corporation will furnish without charge to each stockholder who so requests the
powers, the designations, the preferences, and the relative, participating,
optional or other special rights of each class of stock or series thereof and
the qualifications, limitations or restrictions of such preferences and/or
rights.
-17-
<PAGE>
8.5 LOST CERTIFICATES.
Except as provided in this Section 8.5, no new certificates
for shares shall be issued to replace a previously issued certificate unless the
latter is surrendered to the corporation and cancelled at the same time. The
corporation may issue a new certificate of stock or uncertificated shares in the
place of any certificate previously issued by it, alleged to have been lost,
stolen or destroyed, and the corporation may require the owner of the lost,
stolen or destroyed certificate, or the owner's legal representative, to give
the corporation a bond sufficient to indemnify it against any claim that may be
made against it on account of the alleged loss, theft or destruction of any such
certificate or the issuance of such new certificate or uncertificated shares.
8.6 CONSTRUCTION; DEFINITIONS.
Unless the context requires otherwise, the general provisions,
rules of construction, and definitions in the Delaware General Corporation Law
shall govern the construction of these Bylaws. Without limiting the generality
of this provision, the singular number includes the plural, the plural number
includes the singular, and the term "person" includes both a corporation and a
natural person.
8.7 DIVIDENDS.
The directors of the corporation, subject to any restrictions
contained in (a) the General Corporation Law of Delaware or (b) the certificate
of incorporation, may declare and pay dividends upon the shares of its capital
stock. Dividends may be paid in cash, in property, or in shares of the
corporation's capital stock.
The directors of the corporation may set apart out of any of
the funds of the corporation available for dividends a reserve or reserves for
any proper purpose and may abolish any such reserve. Such purposes shall include
but not be limited to equalizing dividends, repairing or maintaining any
property of the corporation, and meeting contingencies.
8.8 FISCAL YEAR.
The fiscal year of the corporation shall be fixed by
resolution of the Board of Directors and may be changed by the Board of
Directors.
8.9 SEAL.
The corporation may adopt a corporate seal, which may be
altered at pleasure, and may use the same by causing it or a facsimile thereof,
to be impressed or affixed or in any other manner reproduced.
8.10 TRANSFER OF STOCK.
Upon surrender to the corporation or the transfer agent of the
corporation of a certificate for shares duly endorsed or accompanied by proper
evidence of succession,
-18-
<PAGE>
assignation or authority to transfer, it shall be the duty of the corporation to
issue a new certificate to the person entitled thereto, cancel the old
certificate, and record the transaction in its books.
8.11 STOCK TRANSFER AGREEMENTS.
The corporation shall have power to enter into and perform any
agreement with any number of stockholders of any one or more classes of stock of
the corporation to restrict the transfer of shares of stock of the corporation
of any one or more classes owned by such stockholders in any manner not
prohibited by the General Corporation Law of Delaware.
8.12 REGISTERED STOCKHOLDERS.
The corporation shall be entitled to recognize the exclusive
right of a person registered on its books as the owner of shares to receive
dividends and to vote as such owner, shall be entitled to hold liable for calls
and assessments the person registered on its books as the owner of shares, and
shall not be bound to recognize any equitable or other claim to or interest in
such share or shares on the part of another person, whether or not it shall have
express or other notice thereof, except as otherwise provided by the laws of
Delaware.
ARTICLE IX
AMENDMENTS
The Bylaws of the corporation may be adopted, amended or
repealed by the stockholders entitled to vote; provided, however, that the
corporation may, in its certificate of incorporation, confer the power to adopt,
amend or repeal Bylaws upon the directors. The fact that such power has been so
conferred upon the directors shall not divest the stockholders of the power, nor
limit their power to adopt, amend or repeal Bylaws.
-19-
<PAGE>
CERTIFICATE OF ADOPTION OF
AMENDED AND RESTATED BYLAWS
OF
ROSETTA INPHARMATICS, INC.
The undersigned hereby certifies that she is the duly elected,
qualified, and acting Secretary of Rosetta Inpharmatics, Inc. (the
"CORPORATION") and that the foregoing Bylaws, comprising ___ pages, were adopted
as the Bylaws of the Corporation on _______, 2000, by the Board of Directors of
the Corporation.
IN WITNESS WHEREOF, the undersigned has executed this Certificate of
Adoption on __________ 2000.
- ----------------------------------
John J. King, II
Secretary
<PAGE>
INDEMNIFICATION AGREEMENT
This Indemnification Agreement (the "AGREEMENT") is made as of March ___,
2000, by and between Rosetta Inpharmatics, Inc., a Delaware corporation (the
"COMPANY"), and _________________ (the "Indemnitee").
RECITALS
The Company and Indemnitee recognize the increasing difficulty in obtaining
liability insurance for directors, officers and key employees, the significant
increases in the cost of such insurance and the general reductions in the
coverage of such insurance. The Company and Indemnitee further recognize the
substantial increase in corporate litigation in general, subjecting directors,
officers and key employees to expensive litigation risks at the same time as the
availability and coverage of liability insurance has been severely limited.
Indemnitee does not regard the current protection available as adequate under
the present circumstances, and Indemnitee and agents of the Company may not be
willing to continue to serve as agents of the Company without additional
protection. The Company desires to attract and retain the services of highly
qualified individuals, such as Indemnitee, and to indemnify its directors,
officers and key employees so as to provide them with the maximum protection
permitted by law.
AGREEMENT
In consideration of the mutual promises made in this Agreement, and for
other good and valuable consideration, receipt of which is hereby acknowledged,
the Company and Indemnitee hereby agree as follows:
1. INDEMNIFICATION
(a) Third Party Proceedings. The Company shall indemnify Indemnitee if
Indemnitee is or was a party or is threatened to be made a party to any
threatened, pending or completed action, suit or proceeding, whether civil,
criminal, administrative or investigative (other than an action by or in the
right of the Company) by reason of the fact that Indemnitee is or was a
director, officer, employee or agent of the Company, or any subsidiary of the
Company, by reason of any action or inaction on the part of Indemnitee while an
officer or director or by reason of the fact that Indemnitee is or was serving
at the request of the Company as a director, officer, employee or agent of
another corporation, partnership, joint venture, trust or other enterprise,
against expenses (including attorneys' fees), judgments, fines and amounts paid
in settlement (if such settlement is approved in advance by the Company, which
approval shall not be unreasonably withheld) actually and reasonably incurred by
Indemnitee in connection with such action, suit or proceeding if Indemnitee
acted in good faith and in a manner Indemnitee reasonably believed to be in or
not opposed to the best interests of the Company, and, with respect to any
criminal action or proceeding, had no reasonable cause to believe Indemnitee's
conduct was unlawful. The termination of any action, suit or proceeding by
judgment, order,
<PAGE>
settlement, conviction, or upon a plea of nolo contendere or its equivalent,
shall not, of itself, create a presumption that Indemnitee did not act in good
faith and in a manner which Indemnitee reasonably believed to be in or not
opposed to the best interests of the Company, or, with respect to any criminal
action or proceeding, that Indemnitee had reasonable cause to believe that
Indemnitee's conduct was unlawful.
(b) Proceedings By or in the Right of the Company. The Company shall
indemnify Indemnitee if Indemnitee was or is a party or is threatened to be made
a party to any threatened, pending or completed action or proceeding by or in
the right of the Company or any subsidiary of the Company to procure a judgment
in its favor by reason of the fact that Indemnitee is or was a director,
officer, employee or agent of the Company, or any subsidiary of the Company, by
reason of any action or inaction on the part of Indemnitee while an officer or
director or by reason of the fact that Indemnitee is or was serving at the
request of the Company as a director, officer, employee or agent of another
corporation, partnership, joint venture, trust or other enterprise, against
expenses (including attorneys' fees) and, to the fullest extent permitted by
law, amounts paid in settlement (if such settlement is approved in advance by
the Company, which approval shall not be unreasonably withheld), in each case to
the extent actually and reasonably incurred by Indemnitee in connection with the
defense or settlement of such action or suit if Indemnitee acted in good faith
and in a manner Indemnitee reasonably believed to be in or not opposed to the
best interests of the Company and its stockholders, except that no
indemnification shall be made in respect of any claim, issue or matter as to
which Indemnitee shall have been finally adjudicated by court order or judgment
to be liable to the Company in the performance of Indemnitee's duty to the
Company and its stockholders unless and only to the extent that the court in
which such action or proceeding is or was pending shall determine upon
application that, in view of all the circumstances of the case, Indemnitee is
fairly and reasonably entitled to indemnity for such expenses which such court
shall deem proper.
(c) Mandatory Payment of Expenses. To the extent that Indemnitee has
been successful on the merits or otherwise in defense of any action, suit or
proceeding referred to in Section 1(a) or Section 1(b) or the defense of any
claim, issue or matter therein, Indemnitee shall be indemnified against expenses
(including attorneys' fees) actually and reasonably incurred by Indemnitee in
connection therewith.
2. NO EMPLOYMENT RIGHTS. Nothing contained in this Agreement is intended
to create in Indemnitee any right to continued employment.
3. EXPENSES; INDEMNIFICATION PROCEDURE
(a) ADVANCEMENT OF EXPENSES. The Company shall advance all expenses
incurred by Indemnitee in connection with the investigation, defense, settlement
or appeal of any civil or criminal action, suit or proceeding referred to in
Section l(a) or Section 1(b) hereof (including amounts actually paid in
settlement of any such action, suit or proceeding). Indemnitee hereby undertakes
to repay such amounts advanced only if, and to the extent that, it shall
-2-
<PAGE>
ultimately be determined that Indemnitee is not entitled to be indemnified by
the Company as authorized hereby. Any advances to be made under this Agreement
shall be paid by the Company to Indemnitee within twenty (20) days following
delivery of a written request therefor by Indemnitee to the Company.
(b) NOTICE/COOPERATION BY INDEMNITEE. Indemnitee shall, as a condition
precedent to his or her right to be indemnified under this Agreement, give the
Company notice in writing as soon as practicable of any claim made against
Indemnitee for which indemnification will or could be sought under this
Agreement. Notice to the Company shall be directed to the Chief Executive
Officer of the Company and shall be given in accordance with the provisions of
Section 12(d) below. In addition, Indemnitee shall give the Company such
information and cooperation as it may reasonably require and as shall be within
Indemnitee's power.
(c) PROCEDURE. Any indemnification and advances provided for in
Section 1 and this Section 3 shall be made no later than forty-five (45) days
after receipt of the written request of Indemnitee. If a claim under this
Agreement, under any statute, or under any provision of the Company's
Certificate of Incorporation or Bylaws providing for indemnification, is not
paid in full by the Company within forty-five (45) days after a written request
for payment thereof has first been received by the Company, Indemnitee may, but
need not, at any time thereafter bring an action against the Company to recover
the unpaid amount of the claim and, subject to Section 11 of this Agreement,
Indemnitee shall also be entitled to be paid for the expenses (including
attorneys' fees) of bringing such action. It shall be a defense to any such
action (other than an action brought to enforce a claim for expenses incurred in
connection with any action, suit or proceeding in advance of its final
disposition) that Indemnitee has not met the standards of conduct which make it
permissible under applicable law for the Company to indemnify Indemnitee for the
amount claimed, but the burden of proving such defense shall be on the Company
and Indemnitee shall be entitled to receive interim payments of expenses
pursuant to Section 3(a) unless and until such defense may be finally
adjudicated by court order or judgment from which no further right of appeal
exists. It is the parties' intention that if the Company contests Indemnitee's
right to indemnification, the question of Indemnitee's right to indemnification
shall be for the court to decide, and neither the failure of the Company
(including its Board of Directors, any committee or subgroup of the Board of
Directors, independent legal counsel, or its stockholders) to have made a
determination that indemnification of Indemnitee is proper in the circumstances
because Indemnitee has met the applicable standard of conduct required by
applicable law, nor an actual determination by the Company (including its Board
of Directors, any committee or subgroup of the Board of Directors, independent
legal counsel, or its stockholders) that Indemnitee has not met such applicable
standard of conduct, shall create a presumption that Indemnitee has or has not
met the applicable standard of conduct.
(d) NOTICE TO INSURERS. If, at the time of the receipt of a notice of
a claim pursuant to Section 3(b) hereof, the Company has director and officer
liability insurance in effect, the Company shall give prompt notice of the
commencement of such proceeding to the insurers in accordance with the
procedures set forth in the respective policies. The Company
-3-
<PAGE>
shall thereafter take all necessary or desirable action to cause such insurers
to pay, on behalf of the Indemnitee, all amounts payable as a result of such
proceeding in accordance with the terms of such policies.
(e) SELECTION OF COUNSEL. In the event the Company shall be obligated
under Section 3(a) hereof to pay the expenses of any proceeding against
Indemnitee, the Company, if appropriate, shall be entitled to assume the defense
of such proceeding, with counsel approved by Indemnitee, upon the delivery to
Indemnitee of written notice of its election so to do. After delivery of such
notice, approval of such counsel by Indemnitee and the retention of such counsel
by the Company, the Company will not be liable to Indemnitee under this
Agreement for any fees of counsel subsequently incurred by Indemnitee with
respect to the same proceeding, provided that (i) Indemnitee shall have the
right to employ counsel in any such proceeding at Indemnitee's expense; and (ii)
if (A) the employment of counsel by Indemnitee has been previously authorized by
the Company, (B) Indemnitee shall have reasonably concluded that there may be a
conflict of interest between the Company and Indemnitee in the conduct of any
such defense or (C) the Company shall not, in fact, have employed counsel to
assume the defense of such proceeding, then the fees and expenses of
Indemnitee's counsel shall be at the expense of the Company.
4. ADDITIONAL INDEMNIFICATION RIGHTS; NONEXCLUSIVITY
(a) SCOPE. Notwithstanding any other provision of this Agreement, the
Company hereby agrees to indemnify the Indemnitee to the fullest extent
permitted by law, notwithstanding that such indemnification is not specifically
authorized by the other provisions of this Agreement, the Company's Certificate
of Incorporation, the Company's Bylaws or by statute. In the event of any
change, after the date of this Agreement, in any applicable law, statute, or
rule which expands the right of a Delaware corporation to indemnify a member of
its board of directors or an officer, such changes shall be deemed to be within
the purview of Indemnitee's rights and the Company's obligations under this
Agreement. In the event of any change in any applicable law, statute or rule
which narrows the right of a Delaware corporation to indemnify a member of its
board of directors or an officer, such changes, to the extent not otherwise
required by such law, statute or rule to be applied to this Agreement shall have
no effect on this Agreement or the parties' rights and obligations hereunder.
(b) NONEXCLUSIVITY. The indemnification provided by this Agreement
shall not be deemed exclusive of any rights to which Indemnitee may be entitled
under the Company's Certificate of Incorporation, its Bylaws, any agreement, any
vote of stockholders or disinterested members of the Company's Board of
Directors, the General Corporation Law of the State of Delaware, or otherwise,
both as to action in Indemnitee's official capacity and as to action in another
capacity while holding such office. The indemnification provided under this
Agreement shall continue as to Indemnitee for any action taken or not taken
while serving in an indemnified capacity even though he or she may have ceased
to serve in any such capacity at the time of any action, suit or other covered
proceeding.
-4-
<PAGE>
5. PARTIAL INDEMNIFICATION. If Indemnitee is entitled under any provision
of this Agreement to indemnification by the Company for some or a portion of the
expenses, judgments, fines or penalties actually or reasonably incurred in the
investigation, defense, appeal or settlement of any civil or criminal action,
suit or proceeding, but not, however, for the total amount thereof, the Company
shall nevertheless indemnify Indemnitee for the portion of such expenses,
judgments, fines or penalties to which Indemnitee is entitled.
6. MUTUAL ACKNOWLEDGMENT. Both the Company and Indemnitee acknowledge
that in certain instances, Federal law or public policy may override applicable
state law and prohibit the Company from indemnifying its directors and officers
under this Agreement or otherwise. For example, the Company and Indemnitee
acknowledge that the Securities and Exchange Commission (the "SEC") has taken
the position that indemnification is not permissible for liabilities arising
under certain federal securities laws, and federal legislation prohibits
indemnification for certain ERISA violations. Indemnitee understands and
acknowledges that the Company has undertaken or may be required in the future to
undertake with the SEC to submit the question of indemnification to a court in
certain circumstances for a determination of the Company's right under public
policy to indemnify Indemnitee.
7. OFFICER AND DIRECTOR LIABILITY INSURANCE. The Company shall, from time
to time, make the good faith determination whether or not it is practicable for
the Company to obtain and maintain a policy or policies of insurance with
reputable insurance companies providing the officers and directors of the
Company with coverage for losses from wrongful acts, or to ensure the Company's
performance of its indemnification obligations under this Agreement. Among other
considerations, the Company will weigh the costs of obtaining such insurance
coverage against the protection afforded by such coverage. In all policies of
director and officer liability insurance, Indemnitee shall be named as an
insured in such a manner as to provide Indemnitee the same rights and benefits
as are accorded to the most favorably insured of the Company's directors, if
Indemnitee is a director; or of the Company's officers, if Indemnitee is not a
director of the Company but is an officer; or of the Company's key employees, if
Indemnitee is not an officer or director but is a key employee. Notwithstanding
the foregoing, the Company shall have no obligation to obtain or maintain such
insurance if the Company determines in good faith that such insurance is not
reasonably available, if the premium costs for such insurance are
disproportionate to the amount of coverage provided, if the coverage provided by
such insurance is limited by exclusions so as to provide an insufficient
benefit, or if Indemnitee is covered by similar insurance maintained by a parent
or subsidiary of the Company.
8. SEVERABILITY. Nothing in this Agreement is intended to require or
shall be construed as requiring the Company to do or fail to do any act in
violation of applicable law. The Company's inability, pursuant to court order,
to perform its obligations under this Agreement shall not constitute a breach of
this Agreement. The provisions of this Agreement shall be severable as provided
in this Section 8. If this Agreement or any portion hereof shall be invalidated
on any ground by any court of competent jurisdiction, then the Company shall
nevertheless indemnify Indemnitee to the full extent permitted by any applicable
portion of this
-5-
<PAGE>
Agreement that shall not have been invalidated, and the balance of this
Agreement not so invalidated shall be enforceable in accordance with its terms.
9. EXCEPTIONS. Any other provision herein to the contrary
notwithstanding, the Company shall not be obligated pursuant to the terms of
this Agreement:
(a) CLAIMS INITIATED BY INDEMNITEE. To indemnify or advance expenses
to Indemnitee with respect to proceedings or claims initiated or brought
voluntarily by Indemnitee and not by way of defense, except with respect to
proceedings brought to establish or enforce a right to indemnification under
this Agreement or any other statute or law or otherwise as required under
Section 145 of the Delaware General Corporation Law, but such indemnification or
advancement of expenses may be provided by the Company in specific cases if the
Board of Directors finds it to be appropriate;
(b) LACK OF GOOD FAITH. To indemnify Indemnitee for any expenses
incurred by Indemnitee with respect to any proceeding instituted by Indemnitee
to enforce or interpret this Agreement, if a court of competent jurisdiction
determines that each of the material assertions made by Indemnitee in such
proceeding was not made in good faith or was frivolous;
(c) INSURED CLAIMS. To indemnify Indemnitee for expenses or
liabilities of any type whatsoever (including, but not limited to, judgments,
fines, ERISA excise taxes or penalties, and amounts paid in settlement) to the
extent such expenses or liabilities have been paid directly to Indemnitee by an
insurance carrier under a policy of officers' and directors' liability insurance
maintained by the Company; or
(d) CLAIMS UNDER SECTION 16(b). To indemnify Indemnitee for expenses
or the payment of profits arising from the purchase and sale by Indemnitee of
securities in violation of Section 16(b) of the Securities Exchange Act of 1934,
as amended, or any similar successor statute.
10. CONSTRUCTION OF CERTAIN PHRASES
(a) For purposes of this Agreement, references to the "COMPANY" shall
include, in addition to the resulting corporation, any constituent corporation
(including any constituent of a constituent) absorbed in a consolidation or
merger which, if its separate existence had continued, would have had power and
authority to indemnify its directors, officers, and employees or agents, so that
if Indemnitee is or was a director, officer, employee or agent of such
constituent corporation, or is or was serving at the request of such constituent
corporation as a director, officer, employee or agent of another corporation,
partnership, joint venture, trust or other enterprise, Indemnitee shall stand in
the same position under the provisions of this Agreement with respect to the
resulting or surviving corporation as Indemnitee would have with respect to such
constituent corporation if its separate existence had continued.
-6-
<PAGE>
(b) For purposes of this Agreement, references to "OTHER ENTERPRISES"
shall include employee benefit plans; references to "FINES" shall include any
excise taxes assessed on Indemnitee with respect to an employee benefit plan;
and references to "SERVING AT THE REQUEST OF THE COMPANY" shall include any
service as a director, officer, employee or agent of the Company which imposes
duties on, or involves services by, such director, officer, employee or agent
with respect to an employee benefit plan, its participants, or beneficiaries;
and if Indemnitee acted in good faith and in a manner Indemnitee reasonably
believed to be in the interest of the participants and beneficiaries of an
employee benefit plan, Indemnitee shall be deemed to have acted in a manner "NOT
OPPOSED TO THE BEST INTERESTS OF THE COMPANY" as referred to in this Agreement.
11. ATTORNEYS' FEES. In the event that any action is instituted by
Indemnitee under this Agreement to enforce or interpret any of the terms hereof,
Indemnitee shall be entitled to be paid all court costs and expenses, including
reasonable attorneys' fees, incurred by Indemnitee with respect to such action,
unless as a part of such action, the court of competent jurisdiction determines
that each of the material assertions made by Indemnitee as a basis for such
action were not made in good faith or were frivolous. In the event of an action
instituted by or in the name of the Company under this Agreement or to enforce
or interpret any of the terms of this Agreement, Indemnitee shall be entitled to
be paid all court costs and expenses, including attorneys' fees, incurred by
Indemnitee in defense of such action (including with respect to Indemnitee's
counterclaims and cross-claims made in such action), unless as a part of such
action the court determines that each of Indemnitee's material defenses to such
action were made in bad faith or were frivolous.
12. MISCELLANEOUS
(a) GOVERNING LAW. This Agreement and all acts and transactions
pursuant hereto and the rights and obligations of the parties hereto shall be
governed, construed and interpreted in accordance with the laws of the State of
Delaware, without giving effect to principles of conflict of law.
(b) ENTIRE AGREEMENT; ENFORCEMENT OF RIGHTS. This Agreement sets forth
the entire agreement and understanding of the parties relating to the subject
matter herein and merges all prior discussions between them. No modification of
or amendment to this Agreement, nor any waiver of any rights under this
Agreement, shall be effective unless in writing signed by the parties to this
Agreement. The failure by either party to enforce any rights under this
Agreement shall not be construed as a waiver of any rights of such party.
(c) CONSTRUCTION. This Agreement is the result of negotiations between
and has been reviewed by each of the parties hereto and their respective
counsel, if any; accordingly, this Agreement shall be deemed to be the product
of all of the parties hereto, and no ambiguity shall be construed in favor of or
against any one of the parties hereto.
-7-
<PAGE>
(d) NOTICES. Any notice, demand or request required or permitted to be
given under this Agreement shall be in writing and shall be deemed sufficient
when delivered personally or sent by telegram or forty-eight (48) hours after
being deposited in the U.S. mail, as certified or registered mail, with postage
prepaid, and addressed to the party to be notified at such party's address as
set forth below or as subsequently modified by written notice.
(e) COUNTERPARTS. This Agreement may be executed in two or more
counterparts, each of which shall be deemed an original and all of which
together shall constitute one instrument.
(f) SUCCESSORS AND ASSIGNS. This Agreement shall be binding upon the
Company and its successors and assigns, and inure to the benefit of Indemnitee
and Indemnitee's heirs, legal representatives and assigns.
(g) SUBROGATION. In the event of payment under this Agreement, the
Company shall be subrogated to the extent of such payment to all of the rights
of recovery of Indemnitee, who shall execute all documents required and shall do
all acts that may be necessary to secure such rights and to enable the Company
to effectively bring suit to enforce such rights.
[Signature Page Follows]
-8-
<PAGE>
The parties hereto have executed this Agreement as of the day and year set
forth on the first page of this Agreement.
ROSETTA INPHARMATICS, INC.
By:_________________________________
Title:______________________________
Address:____________________________
AGREED TO AND ACCEPTED:
________________________________
________________________________
(Signature)
Address: _____________________
_____________________
<PAGE>
ROSETTA INPHARMATICS, INC.
1997 STOCK PLAN
1. PURPOSES OF THE PLAN. The purposes of this 1997 Stock Plan are to
attract and retain the best available personnel for positions of substantial
responsibility, to provide additional incentive to Employees and Consultants of
the Company and its Subsidiaries and to promote the success of the Company's
business. Options granted under the Plan may be incentive stock options (as
defined under Section 422 of the Code) or nonstatutory stock options, as
determined by the Administrator at the time of grant of an option and subject to
the applicable provisions of Section 422 of the Code, as amended, and the
regulations promulgated thereunder. Stock purchase rights may also be granted
under the Plan.
2. DEFINITIONS. As used herein, the following definitions shall apply:
(a) "ADMINISTRATOR" means the Board or any of its Committees
appointed pursuant to Section 4 of the Plan.
(b) "BOARD" means the Board of Directors of the Company.
(c) "CODE" means the Internal Revenue Code of 1986, as amended.
(d) "COMMITTEE" means the Committee appointed by the Board of
Directors in accordance with Section 4(a) of the Plan.
(e) "COMMON STOCK" means the Common Stock of the Company.
(f) "COMPANY" means Rosetta Inpharmatics, Inc., a Delaware
corporation.
(g) "CONSULTANT" means any person, including an advisor, who is
engaged by the Company or any Parent or Subsidiary to render services and is
compensated for such services, and any director of the Company whether
compensated for such services or not.
(h) "CONTINUOUS STATUS AS AN EMPLOYEE OR CONSULTANT" means the
absence of any interruption or termination of service as an Employee or
Consultant. Continuous Status as an Employee or Consultant shall not be
considered interrupted in the case of: (i) sick leave; (ii) military leave;
(iii) any other leave of absence approved by the Administrator, provided that
such leave is for a period of not more than ninety (90) days, unless
reemployment upon the expiration of such leave is guaranteed by contract or
statute, or unless provided otherwise pursuant to Company policy adopted from
time to time; or (iv) in the case of transfers between locations of the Company
or between the Company, its Subsidiaries or their respective successors. For
purposes of this Plan, a change in status from an Employee to a Consultant or
from a Consultant to an Employee will not constitute an interruption of
Continuous Status as an Employee or Consultant.
<PAGE>
(i) "EMPLOYEE" means any person, including officers and directors,
employed by the Company or any Parent or Subsidiary of the Company, with the
status of employment determined based upon such minimum number of hours or
periods worked as shall be determined by the Administrator in its discretion,
subject to any requirements of the Code. The payment by the Company of a
director's fee to a Director shall not be sufficient to constitute "employment"
of such Director by the Company.
(j) "EXCHANGE ACT" means the Securities Exchange Act of 1934, as
amended.
(k) "FAIR MARKET VALUE" means, as of any date, the fair market value
of Common Stock determined as follows:
(i) If the Common Stock is listed on any established stock
exchange or a national market system including without limitation the National
Market of the National Association of Securities Dealers, Inc. Automated
Quotation ("NASDAQ") System, its Fair Market Value shall be the closing sales
price for such stock (or the closing bid, if no sales were reported), as quoted
on such system or exchange, or the exchange with the greatest volume of trading
in Common Stock for the last market trading day prior to the time of
determination, as reported in The Wall Street Journal or such other source as
the Administrator deems reliable;
(ii) If the Common Stock is quoted on the Nasdaq System (but
not on the National Market thereof) or regularly quoted by a recognized
securities dealer but selling prices are not reported, its Fair Market Value
shall be the mean between the high bid and low asked prices for the Common Stock
for the last market trading day prior to the time of determination, as reported
in The Wall Street Journal or such other source as the Administrator deems
reliable; or
(iii) In the absence of an established market for the Common
Stock, the Fair Market Value thereof shall be determined in good faith by the
Administrator.
(l) "INCENTIVE STOCK OPTION" means an Option intended to qualify as
an incentive stock option within the meaning of Section 422 of the Code, as
designated in the applicable written option agreement.
(m) "NONSTATUTORY STOCK OPTION" means an Option not intended to
qualify as an Incentive Stock Option, as designated in the applicable written
option agreement.
(n) "OPTION" means a stock option granted pursuant to the Plan.
(o) "OPTIONED STOCK" means the Common Stock subject to an Option or
a Stock Purchase Right.
(p) "OPTIONEE" means an Employee or Consultant who receives an
Option or a Stock Purchase Right.
-2-
<PAGE>
(q) "PARENT" means a "parent corporation", whether now or hereafter
existing, as defined in Section 424(e) of the Code, or any successor provision.
(r) "PLAN" means this 1997 Stock Plan.
(s) "REPORTING PERSON" means an officer, director, or greater than
ten percent stockholder of the Company within the meaning of Rule 16a-2 under
the Exchange Act, who is required to file reports pursuant to Rule 16a-3 under
the Exchange Act.
(t) "RESTRICTED STOCK" means shares of Common Stock acquired
pursuant to a grant of a Stock Purchase Right under Section 10 below.
(u) "RULE 16b-3" means Rule 16b-3 promulgated under the Exchange
Act, as the same may be amended from time to time, or any successor provision.
(v) "SHARE" means a share of the Common Stock, as adjusted in
accordance with Section 12 of the Plan.
(w) "STOCK EXCHANGE" means any stock exchange or consolidated stock
price reporting system on which prices for the Common Stock are quoted at any
given time.
(x) "STOCK PURCHASE RIGHT" means the right to purchase Common Stock
pursuant to Section 10 below.
(y) "SUBSIDIARY" means a "subsidiary corporation," whether now or
hereafter existing, as defined in Section 424(f) of the Code, or any successor
provision.
3. STOCK SUBJECT TO THE PLAN. Subject to the provisions of Section 12
of the Plan, the maximum aggregate number of Shares that may be optioned and
sold under the Plan is 5,286,913 shares of Common Stock. The Shares may be
authorized, but unissued, or reacquired Common Stock. If an Option should expire
or become unexercisable for any reason without having been exercised in full,
the unpurchased Shares that were subject thereto shall, unless the Plan shall
have been terminated, become available for future grant under the Plan. In
addition, any Shares of Common Stock which are retained by the Company upon
exercise of an Option or Stock Purchase Right in order to satisfy the exercise
or purchase price for such Option or Stock Purchase Right or any withholding
taxes due with respect to such exercise shall be treated as not issued and shall
continue to be available under the Plan. Shares repurchased by the Company
pursuant to any repurchase right which the Company may have shall not be
available for future grant under the Plan.
4. ADMINISTRATION OF THE PLAN.
(a) INITIAL PLAN PROCEDURE. Prior to the date, if any, upon
which the Company becomes subject to the Exchange Act, the Plan shall be
administered by the Board or a committee appointed by the Board.
-3-
<PAGE>
(b) PLAN PROCEDURE AFTER THE DATE, IF ANY, UPON WHICH THE COMPANY
BECOMES SUBJECT TO THE EXCHANGE ACT.
(i) MULTIPLE ADMINISTRATIVE BODIES. If permitted by Rule 16b-3,
grants under the Plan may be made by different bodies with respect to directors,
non-director officers and Employees or Consultants who are not Reporting
Persons.
(ii) ADMINISTRATION WITH RESPECT TO REPORTING PERSONS. With
respect to grants of Options or Stock Purchase Rights to Employees who are
Reporting Persons, such grants shall be made by (A) the Board if the Board may
make grants to Reporting Persons under the Plan in compliance with Rule 16b-3,
or (B) a committee designated by the Board to make such grants under the Plan,
which committee shall be constituted in such a manner as to permit grants under
the Plan to comply with Rule 16b-3. Once appointed, such committee shall
continue to serve in its designated capacity until otherwise directed by the
Board. From time to time the Board may increase the size of the committee and
appoint additional members thereof, remove members (with or without cause) and
appoint new members in substitution therefor, fill vacancies, however caused,
and remove all members of the committee and thereafter directly make grants to
Reporting Persons under the Plan, all to the extent permitted by Rule 16b-3.
(iii) ADMINISTRATION WITH RESPECT TO CONSULTANTS AND OTHER
EMPLOYEES. With respect to grants of Options or Stock Purchase Rights to
Employees or Consultants who are not Reporting Persons, the Plan shall be
administered by (A) the Board or (B) a committee designated by the Board, which
committee shall be constituted in such a manner as to satisfy the legal
requirements relating to the administration of incentive stock option plans, if
any, of Washington corporate and securities laws, of the Code and of any
applicable Stock Exchange (the "APPLICABLE LAWS"). Once appointed, such
Committee shall continue to serve in its designated capacity until otherwise
directed by the Board. From time to time the Board may increase the size of the
Committee and appoint additional members thereof, remove members (with or
without cause) and appoint new members in substitution therefor, fill vacancies,
however caused, and remove all members of the Committee and thereafter directly
administer the Plan, all to the extent permitted by the Applicable Laws.
(c) POWERS OF THE ADMINISTRATOR. Subject to the provisions of the
Plan and in the case of a Committee, the specific duties delegated by the Board
to such Committee, and subject to the approval of any relevant authorities,
including the approval, if required, of any Stock Exchange, the Administrator
shall have the authority, in its discretion:
(i) to determine the Fair Market Value of the Common Stock, in
accordance with Section 2(k) of the Plan;
(ii) to select the Consultants and Employees to whom Options
and Stock Purchase Rights may from time to time be granted hereunder;
(iii) to determine whether and to what extent Options
and Stock Purchase Rights or any combination thereof are granted hereunder;
-4-
<PAGE>
(iv) to determine the number of shares of Common Stock to be
covered by each such award granted hereunder;
(v) to approve forms of agreement for use under the Plan;
(vi) to determine the terms and conditions, not inconsistent
with the terms of the Plan, of any award granted hereunder;
(vii) to determine whether and under what circumstances an
Option may be settled in cash under Section 9(f) instead of Common Stock;
(viii) to reduce the exercise price of any Option to the then
current Fair Market Value if the Fair Market Value of the Common Stock covered
by such Option shall have declined since the date the Option was granted;
(ix) to determine the terms and restrictions applicable to Stock
Purchase Rights and the Restricted Stock purchased by exercising such Stock
Purchase Rights; and
(x) to construe and interpret the terms of the Plan and awards
granted pursuant to the Plan; and
(xi) in order to fulfill the purposes of the Plan and without
amending the Plan, to modify grants of Options or Stock Purchase Rights to
participants who are foreign nationals or employed outside of the United States
in order to recognize differences in local law, tax policies or customs.
(d) EFFECT OF ADMINISTRATOR'S DECISION. All decisions,
determinations and interpretations of the Administrator shall be final and
binding on all holders of Options or Stock Purchase Rights.
5. ELIGIBILITY.
(a) RECIPIENTS OF GRANTS. Nonstatutory Stock Options and Stock
Purchase Rights may be granted to Employees and Consultants. Incentive Stock
Options may be granted only to Employees. An Employee or Consultant who has been
granted an Option or Stock Purchase Right may, if he or she is otherwise
eligible, be granted additional Options or Stock Purchase Rights.
(b) TYPE OF OPTION. Each Option shall be designated in the written
option agreement as either an Incentive Stock Option or a Nonstatutory Stock
Option. However, notwithstanding such designations, to the extent that the
aggregate Fair Market Value of Shares with respect to which Options designated
as Incentive Stock Options are exercisable for the first time by any Optionee
during any calendar year (under all plans of the Company or any Parent or
Subsidiary) exceeds $100,000, such excess Options shall be treated as
Nonstatutory Stock Options. For purposes of this Section 5(b), Incentive Stock
Options shall be taken into account
-5-
<PAGE>
in the order in which they were granted, and the Fair Market Value of the Shares
subject to an Incentive Stock Option shall be determined as of the date of the
grant of such Option.
(c) The Plan shall not confer upon any Optionee any right with
respect to continuation of employment or consulting relationship with the
Company, nor shall it interfere in any way with such Optionee's right or the
Company's right to terminate his or her employment or consulting relationship at
any time, with or without cause.
6. TERM OF PLAN. The Plan shall become effective upon the earlier to
occur of its adoption by the Board of Directors or its approval by the
stockholders of the Company as described in Section 19 of the Plan. It shall
continue in effect for a term of ten (10) years unless sooner terminated under
Section 15 of the Plan.
7. TERM OF OPTION. The term of each Option shall be the term stated in
the Option Agreement; provided, however, that the term shall be no more than ten
(10) years from the date of grant thereof or such shorter term as may be
provided in the Option Agreement and provided further that, in the case of an
Incentive Stock Option granted to an Optionee who, at the time the Option is
granted, owns stock representing more than ten percent (10%) of the total
combined voting power of all classes of stock of the Company or any Parent or
Subsidiary, the term of the Option shall be five (5) years from the date of
grant thereof or such shorter term as may be provided in the written option
agreement.
8. OPTION EXERCISE PRICE AND CONSIDERATION.
(a) The per share exercise price for the Shares to be issued
pursuant to exercise of an Option shall be such price as is determined by the
Board and set forth in the applicable agreement, but shall be subject to the
following:
(i) In the case of an Incentive Stock Option that is:
(A) granted to an Employee who, at the time of the grant of
such Incentive Stock Option, owns stock representing more than ten percent (10%)
of the total combined voting power of all classes of stock of the Company or any
Parent or Subsidiary, the per Share exercise price shall be no less than 110% of
the Fair Market Value per Share on the date of grant.
(B) granted to any other Employee, the per Share exercise
price shall be no less than 100% of the Fair Market Value per Share on the date
of grant.
(ii) In the case of a Nonstatutory Stock Option that is:
(A) granted to a person who, at the time of the grant of
such Option, owns stock representing more than ten percent (10%) of the total
combined voting power of all classes of stock of the Company or any Parent or
Subsidiary, the per Share exercise price shall be no less than 110% of the Fair
Market Value per Share on the date of the grant.
-6-
<PAGE>
(B) granted to any person, the per Share exercise price
shall be no less than 85% of the Fair Market Value per Share on the date of
grant.
(b) The consideration to be paid for the Shares to be issued upon
exercise of an Option, including the method of payment, shall be determined by
the Administrator (and, in the case of an Incentive Stock Option, shall be
determined at the time of grant) and may consist entirely of (1) cash, (2)
check, (3) promissory note (subject to the provisions of Section 153 of the
Delaware General Corporation Law), (4) other Shares that (x) in the case of
Shares acquired upon exercise of an Option, have been owned by the Optionee for
more than six months on the date of surrender or such other period as may be
required to avoid a charge to the Company's earnings, and (y) have a Fair Market
Value on the date of surrender equal to the aggregate exercise price of the
Shares as to which such Option shall be exercised, (5) authorization for the
Company to retain from the total number of Shares as to which the Option is
exercised that number of Shares having a Fair Market Value on the date of
exercise equal to the exercise price for the total number of Shares as to which
the Option is exercised, (6) delivery of a properly executed exercise notice
together with such other documentation as the Administrator and the broker, if
applicable, shall require to effect an exercise of the Option and delivery to
the Company of the sale or loan proceeds required to pay the exercise price and
any applicable income or employment taxes, (7) delivery of an irrevocable
subscription agreement for the Shares that irrevocably obligates the option
holder to take and pay for the Shares not more than twelve months after the date
of delivery of the subscription agreement, (8) any combination of the foregoing
methods of payment, or (9) such other consideration and method of payment for
the issuance of Shares to the extent permitted under Applicable Laws. In making
its determination as to the type of consideration to accept, the Administrator
shall consider if acceptance of such consideration may be reasonably expected to
benefit the Company.
9. EXERCISE OF OPTION.
(a) PROCEDURE FOR EXERCISE; RIGHTS AS A STOCKHOLDER. Any Option
granted hereunder shall be exercisable at such times and under such conditions
as determined by the Administrator, and reflected in the written option
agreement, which may include vesting requirements and/or performance criteria
with respect to the Company and/or the Optionee; provided that such Option shall
become exercisable at the rate of at least twenty percent (20%) per year over
five (5) years from the date the Option is granted. In the event that any of the
Shares issued upon exercise of an Option should be subject to a right of
repurchase in the Company's favor, such repurchase right shall lapse at the rate
of at least twenty percent (20%) per year over five (5) years from the date the
Option is granted.
An Option may not be exercised for a fraction of a Share.
An Option shall be deemed to be exercised when written notice of
such exercise has been given to the Company in accordance with the terms of the
Option by the person entitled to exercise the Option and the Company has
received full payment for the Shares with respect to which the Option is
exercised. Full payment may, as authorized by the Board, consist of any
consideration and method of payment allowable under Section 8(b) of the Plan.
-7-
<PAGE>
Until the issuance (as evidenced by the appropriate entry on the books of the
Company or of a duly authorized transfer agent of the Company) of the stock
certificate evidencing such Shares, no right to vote or receive dividends or any
other rights as a stockholder shall exist with respect to the Optioned Stock,
not withstanding the exercise of the Option. The Company shall issue (or cause
to be issued) such stock certificate promptly upon exercise of the Option. No
adjustment will be made for a dividend or other right for which the record date
is prior to the date the stock certificate is issued, except as provided in
Section 12 of the Plan.
Exercise of an Option in any manner shall result in a decrease in
the number of Shares that thereafter may be available, both for purposes of the
Plan and for sale under the Option, by the number of Shares as to which the
Option is exercised.
(b) TERMINATION OF EMPLOYMENT OR CONSULTING RELATIONSHIP. Subject to
Section 9(c), in the event of termination of an Optionee's Continuous Status as
an Employee or Consultant with the Company, such Optionee may, but only within
three (3) months (or such other period of time not less than thirty (30) days as
is determined by the Administrator, with such determination in the case of an
Incentive Stock Option being made at the time of grant of the Option and not
exceeding three (3) months) after the date of such termination (but in no event
later than the expiration date of the term of such Option as set forth in the
Option Agreement), exercise his or her Option to the extent that the Optionee
was entitled to exercise it at the date of such termination. To the extent that
Optionee was not entitled to exercise the Option at the date of such
termination, or if Optionee does not exercise such Option to the extent so
entitled within the time specified herein, the Option shall terminate. No
termination shall be deemed to occur and this Section 9(b) shall not apply if
(i) the Optionee is a Consultant who becomes an Employee; or (ii) the Optionee
is an Employee who becomes a Consultant.
(c) DISABILITY OF OPTIONEE.
(i) Notwithstanding Section 9(b) above, in the event of
termination of an Optionee's Continuous Status as an Employee or Consultant as
a result of his or her total and permanent disability (within the meaning of
Section 22(e)(3) of the Code), Optionee may, but only within twelve (12) months
from the date of such termination (but in no event later than the expiration
date of the term of such Option as set forth in the Option Agreement), exercise
the Option to the extent otherwise entitled to exercise it at the date of such
termination. To the extent that Optionee was not entitled to exercise the Option
at the date of termination, or if Optionee does not exercise such Option to the
extent so entitled within the time specified herein, the Option shall terminate.
(ii) In the event of termination of an Optionee's Continuous
Status as an Employee or Consultant as a result of a disability which does not
fall within the meaning of total and permanent disability (as set forth in
Section 22(e)(3) of the Code), Optionee may, but only within six (6) months from
the date of such termination (but in no event later than the expiration date of
the term of such Option as set forth in the Option Agreement), exercise the
Option to the extent otherwise entitled to exercise it at the date of such
termination. However, to the extent that such Optionee fails to exercise an
Option which is an Incentive Stock Option
-8-
<PAGE>
("ISO") (within the meaning of Section 422 of the Code) within three (3) months
of the date of such termination, the Option will not qualify for ISO treatment
under the Code. To the extent that Optionee was not entitled to exercise the
Option at the date of termination, or if Optionee does not exercise such Option
to the extent so entitled within six months (6) from the date of termination,
the Option shall terminate.
(d) DEATH OF OPTIONEE. In the event of the death of an Optionee
during the period of Continuous Status as an Employee or Consultant since the
date of grant of the Option, or within thirty (30) days following termination of
Optionee's Continuous Status as an Employee or Consultant, the Option may be
exercised, at any time within six (6) months following the date of death (but in
no event later than the expiration date of the term of such Option as set forth
in the Option Agreement), by Optionee's estate or by a person who acquired the
right to exercise the Option by bequest or inheritance, but only to the extent
of the right to exercise that had accrued at the date of death or, if earlier,
the date of termination of Optionee's Continuous Status as an Employee or
Consultant. To the extent that Optionee was not entitled to exercise the Option
at the date of death or termination, as the case may be, or if Optionee does not
exercise such Option to the extent so entitled within the time specified herein,
the Option shall terminate.
(e) RULE 16b-3. Options granted to Reporting Persons shall comply
with Rule 16b-3 and shall contain such additional conditions or restrictions as
may be required thereunder to qualify for the maximum exemption for Plan
transactions.
(f) BUYOUT PROVISIONS. The Administrator may at any time offer to
buy out for a payment in cash or Shares, an Option previously granted, based on
such terms and conditions as the Administrator shall establish and communicate
to the Optionee at the time that such offer is made.
10. STOCK PURCHASE RIGHTS.
(a) RIGHTS TO PURCHASE. Stock Purchase Rights may be issued either
alone, in addition to, or in tandem with other awards granted under the Plan
and/or cash awards made outside of the Plan. After the Administrator determines
that it will offer Stock Purchase Rights under the Plan, it shall advise the
offeree in writing of the terms, conditions and restrictions related to the
offer, including the number of Shares that such person shall be entitled to
purchase, the price to be paid (which price shall not be less than 85% of the
Fair Market Value of the Shares as of the date of the offer, or, in the case of
a person owning stock representing more than ten percent (10%) of the total
combined voting power of all classes of stock of the Company or any Parent or
Subsidiary, the price shall not be less than one hundred percent (100%) of the
Fair Market Value of the Shares as of the date of the offer), and the time
within which such person must accept such offer, which shall in no event exceed
thirty (30) days from the date upon which the Administrator made the
determination to grant the Stock Purchase Right. The offer shall be accepted by
execution of a Restricted Stock purchase agreement in the form determined by the
Administrator. Shares purchased pursuant to the grant of a Stock Purchase Right
shall be referred to herein as "Restricted Stock."
-9-
<PAGE>
(b) REPURCHASE OPTION. Unless the Administrator determines
otherwise, the Restricted Stock purchase agreement shall grant the Company a
repurchase option exercisable upon the voluntary or involuntary termination of
the purchaser's employment with the Company for any reason (including death or
disability). The purchase price for Shares repurchased pursuant to the
Restricted Stock purchase agreement shall be the original purchase price paid by
the purchaser and may be paid by cancellation of any indebtedness of the
purchaser to the Company. The repurchase option shall lapse at such rate as the
Administrator may determine, but at a minimum rate of 20% per year.
(c) OTHER PROVISIONS. The Restricted Stock purchase agreement shall
contain such other terms, provisions and conditions not inconsistent with the
Plan as may be determined by the Administrator in its sole discretion. In
addition, the provisions of Restricted Stock purchase agreements need not be the
same with respect to each purchaser.
(d) RIGHTS AS A STOCKHOLDER. Once the Stock Purchase Right is
exercised, the purchaser shall have the rights equivalent to those of a
stockholder, and shall be a stockholder when his or her purchase is entered upon
the records of the duly authorized transfer agent of the Company. No adjustment
will be made for a dividend or other right for which the record date is prior to
the date the Stock Purchase Right is exercised, except as provided in Section 12
of the Plan.
11. STOCK WITHHOLDING TO SATISFY WITHHOLDING TAX OBLIGATIONS. At the
discretion of the Administrator, Optionees may satisfy withholding obligations
as provided in this paragraph. When an Optionee incurs tax liability in
connection with an Option or Stock Purchase Right, which tax liability is
subject to tax withholding under applicable tax laws, and the Optionee is
obligated to pay the Company an amount required to be withheld under applicable
tax laws, the Optionee may satisfy the withholding tax obligation by one or some
combination of the following methods: (a) by cash payment, or (b) out of
Optionee's current compensation, (c) if permitted by the Administrator, in its
discretion, by surrendering to the Company Shares that (i) in the case of Shares
previously acquired from the Company, have been owned by the Optionee for more
than six months on the date of surrender, and (ii) have a fair market value on
the date of surrender equal to or less than Optionee's marginal tax rate times
the ordinary income recognized, or (d) by electing to have the Company withhold
from the Shares to be issued upon exercise of the Option, or the Shares to be
issued in connection with the Stock Purchase Right, if any, that number of
Shares having a fair market value equal to the amount required to be withheld.
For this purpose, the fair market value of the Shares to be withheld shall be
determined on the date that the amount of tax to be withheld is to be determined
(the "TAX DATE").
Any surrender by a Reporting Person of previously owned Shares to
satisfy tax withholding obligations arising upon exercise of this Option must
comply with the applicable provisions of Rule 16b-3.
-10-
<PAGE>
All elections by an Optionee to have Shares withheld to satisfy tax
withholding obligations shall be made in writing in a form acceptable to the
Administrator and shall be subject to the following restrictions:
(a) the election must be made on or prior to the applicable Tax
Date;
(b) once made, the election shall be irrevocable as to the
particular Shares of the Option or Stock Purchase Right as to which the election
is made; and
(c) all elections shall be subject to the consent or disapproval of
the Administrator.
In the event the election to have Shares withheld is made by an
Optionee and the Tax Date is deferred under Section 83 of the Code because no
election is filed under Section 83(b) of the Code, the Optionee shall receive
the full number of Shares with respect to which the Option or Stock Purchase
Right is exercised but such Optionee shall be unconditionally obligated to
tender back to the Company the proper number of Shares on the Tax Date.
12. ADJUSTMENTS UPON CHANGES IN CAPITALIZATION, MERGER OR CERTAIN OTHER
TRANSACTIONS.
(a) CHANGES IN CAPITALIZATION. Subject to any required action by the
stockholders of the Company, the number of shares of Common Stock covered by
each outstanding Option or Stock Purchase Right, and the number of shares of
Common Stock that have been authorized for issuance under the Plan but as to
which no Options or Stock Purchase Rights have yet been granted or that have
been returned to the Plan upon cancellation or expiration of an Option or Stock
Purchase Right, as well as the price per share of Common Stock covered by each
such outstanding Option or Stock Purchase Right, shall be proportionately
adjusted for any increase or decrease in the number of issued shares of Common
Stock resulting from a stock split, reverse stock split, stock dividend,
combination, recapitalization or reclassification of the Common Stock, or any
other increase or decrease in the number of issued shares of Common Stock
effected without receipt of consideration by the Company; provided, however,
that conversion of any convertible securities of the Company shall not be deemed
to have been "effected without receipt of consideration." Such adjustment shall
be made by the Board, whose determination in that respect shall be final,
binding and conclusive. Except as expressly provided herein, no issuance by the
Company of shares of stock of any class, or securities convertible into shares
of stock of any class, shall affect, and no adjustment by reason thereof shall
be made with respect to, the number or price of shares of Common Stock subject
to an Option or Stock Purchase Right.
(b) DISSOLUTION OR LIQUIDATION. In the event of the proposed
dissolution or liquidation of the Company, the Board shall notify the Optionee
at least fifteen (15) days prior to such proposed action. To the extent it has
not been previously exercised, the Option or Stock Purchase Right will terminate
immediately prior to the consummation of such proposed action.
-11-
<PAGE>
(c) MERGER OR SALE OF ASSETS. In the event of a proposed sale of all
or substantially all of the Company's assets or a merger of the Company with or
into another corporation where the successor corporation issues its securities
to the Company's stockholders, each outstanding Option or Stock Purchase Right
shall be assumed or an equivalent option or right shall be substituted by such
successor corporation or a parent or subsidiary of such successor corporation,
unless the successor corporation does not agree to assume the Option or Stock
Purchase Right or to substitute an equivalent option or right, in which case
such Option or Stock Purchase Right shall terminate upon the consummation of the
merger or sale of assets.
(d) CERTAIN DISTRIBUTIONS. In the event of any distribution to the
Company's stockholders of securities of any other entity or other assets (other
than dividends payable in cash or stock of the Company) without receipt of
consideration by the Company, the Administrator may, in its discretion,
appropriately adjust the price per share of Common Stock covered by each
outstanding Option or Stock Purchase Right to reflect the effect of such
distribution.
13. NON-TRANSFERABILITY OF OPTIONS AND STOCK PURCHASE RIGHTS.
Options and Stock Purchase Rights may not be sold, pledged, assigned,
hypothecated, transferred, or disposed of in any manner other than by will or by
the laws of descent or distribution and may be exercised or purchased during the
lifetime of the Optionee or Stock Purchase Rights Holder only by the Optionee or
Stock Purchase Rights Holder.
14. TIME OF GRANTING OPTIONS AND STOCK PURCHASE RIGHTS. The date of
grant of an Option or Stock Purchase Right shall, for all purposes, be the date
on which the Administrator makes the determination granting such Option or Stock
Purchase Right, or such other date as is determined by the Board; provided
however that in the case of any Incentive Stock Option, the grant date shall be
the later of the date on which the Administrator makes the determination
granting such Incentive Stock Option or the date of commencement of the
Optionee's employment relationship with the Company. Notice of the determination
shall be given to each Employee or Consultant to whom an Option or Stock
Purchase Right is so granted within a reasonable time after the date of such
grant.
15. AMENDMENT AND TERMINATION OF THE PLAN.
(a) AUTHORITY TO AMEND OR TERMINATE. The Board may at any time
amend, alter, suspend or discontinue the Plan, but no amendment, alteration,
suspension or discontinuation shall be made that would impair the rights of any
Optionee under any grant theretofore made, without his or her consent. In
addition, to the extent necessary and desirable to comply with Rule 16b-3 or
with Section 422 of the Code (or any other applicable law or regulation,
including the requirements of any Stock Exchange), the Company shall obtain
stockholder approval of any Plan amendment in such a manner and to such a degree
as required.
(b) EFFECT OF AMENDMENT OR TERMINATION. No amendment or termination
of the Plan shall adversely affect Options already granted, unless mutually
agreed otherwise between the Optionee and the Board, which agreement must be in
writing and signed by the Optionee and the Company.
-12-
<PAGE>
16. CONDITIONS UPON ISSUANCE OF SHARES. Shares shall not be issued
pursuant to the exercise of an Option or Stock Purchase Right unless the
exercise of such Option or Stock Purchase Right and the issuance and delivery of
such Shares pursuant thereto shall comply with all relevant provisions of law,
including, without limitation, the Securities Act of 1933, as amended, the
Exchange Act, the rules and regulations promulgated thereunder, and the
requirements of any Stock Exchange. As a condition to the exercise of an Option,
the Company may require the person exercising such Option to represent and
warrant at the time of any such exercise that the Shares are being purchased
only for investment and without any present intention to sell or distribute such
Shares if, in the opinion of counsel for the Company, such a representation is
required by law.
17. RESERVATION OF SHARES. The Company, during the term of this Plan,
will at all times reserve and keep available such number of Shares as shall be
sufficient to satisfy the requirements of the Plan. The inability of the Company
to obtain authority from any regulatory body having jurisdiction, which
authority is deemed by the Company's counsel to be necessary to the lawful
issuance and sale of any Shares hereunder, shall relieve the Company of any
liability in respect of the failure to issue or sell such Shares as to which
such requisite authority shall not have been obtained.
18. AGREEMENTS. Options and Stock Purchase Rights shall be evidenced by
written agreements in such form as the Administrator shall approve from time to
time.
19. STOCKHOLDER APPROVAL. Continuance of the Plan shall be subject to
approval by the stockholders of the Company within twelve (12) months before or
after the date the Plan is adopted. Such stockholder approval shall be obtained
in the degree and manner required under applicable state and federal law and the
rules of any Stock Exchange upon which the Common Stock is listed. All Options
and Stock Purchase Rights issued under the Plan shall become void in the event
such approval is not obtained.
20. INFORMATION AND DOCUMENTS TO OPTIONEES AND PURCHASERS. The Company
shall provide financial statements at least annually to each Optionee and to
each individual who acquired Shares Pursuant to the Plan, during the period such
Optionee or purchaser has one or more Options or Stock Purchase Rights
outstanding, and in the case of an individual who acquired Shares pursuant to
the Plan, during the period such individual owns such Shares. The Company shall
not be required to provide such information if the issuance of Options or Stock
Purchase Rights under the Plan is limited to key employees whose duties in
connection with the Company assure their access to equivalent information. In
addition, at the time of issuance of any securities under the Plan, the Company
shall provide to the Optionee or the Purchaser a copy of the Plan and any
agreement(s) pursuant to which securities under the Plan are issued.
-13-
<PAGE>
ROSETTA INPHARMATICS, INC.
SERIES C PREFERRED STOCK
PURCHASE AGREEMENT
APRIL 1, 1999
<PAGE>
TABLE OF CONTENTS
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
1. Authorization and Sale of Series C Preferred Stock.........................................................1
1.1 Authorization of Series C Preferred Stock........................................................1
1.2 Sale of Series C Preferred Stock.................................................................1
2. Closing Date; Delivery.....................................................................................1
2.1 Closing Date.....................................................................................1
2.2 Delivery.........................................................................................1
2.3 Additional Closings..............................................................................1
3. Representations and Warranties of the Company..............................................................2
3.1 Organization and Standing........................................................................2
3.2 Corporate Power..................................................................................2
3.3 Subsidiaries.....................................................................................2
3.4 Capitalization...................................................................................3
3.5 Authorization....................................................................................3
3.6 Valid Issuance of Securities.....................................................................4
3.7 Title............................................................................................4
3.8 Compliance with Other Instruments................................................................4
3.9 Litigation.......................................................................................4
3.10 Employees; Proprietary Information..............................................................5
3.11 Registration Rights.............................................................................5
3.12 Governmental Consent............................................................................5
3.13 Material Contracts..............................................................................5
3.14 Patents and Trademarks..........................................................................6
3.15 Outstanding Indebtedness........................................................................7
3.16 Offering........................................................................................7
3.17 No Conflict of Interest.........................................................................7
3.18 Disclosure......................................................................................7
3.19 Financial Statements.............................................................................8
3.20 Changes..........................................................................................8
3.21 Tax Returns, Payments and Elections.............................................................9
3.22 Insurance.......................................................................................9
3.23 Finder's Fees..................................................................................10
3.24 Section 83(b) Elections........................................................................10
4. Representations and Warranties of the Purchasers; Restrictions on Transfer................................10
4.1 Representations and Warranties of the Purchasers................................................10
4.2 Legends.........................................................................................11
4.3 Removal of Legends and Transfer Restrictions....................................................12
-i-
<PAGE>
<CAPTION>
PAGE
----
<S> <C>
5. Conditions to Closing.....................................................................................12
5.1 Conditions to Purchasers'Obligations at Closing.................................................12
5.2 Condition to Company's Obligations at Closing...................................................13
6. Further Agreements........................................................................................14
6.1 Nondisclosure...................................................................................14
6.2 Cooperation.....................................................................................14
6.3 Proprietary Information Agreements..............................................................14
7. Miscellaneous.............................................................................................15
7.1 Waivers and Amendments..........................................................................15
7.2 Governing Law...................................................................................15
7.3 Survival........................................................................................15
7.4 Successors and Assigns..........................................................................15
7.5 Entire Agreement................................................................................15
7.6 Severability of this Agreement..................................................................15
7.7 Titles and Subtitles............................................................................15
7.8 Delays or Omissions.............................................................................15
7.9 Payment of Fees and Expenses....................................................................16
7.10 Notices........................................................................................16
7.11 Counterparts...................................................................................16
7.12 EXCULPATION AMONG PURCHASERS...................................................................16
EXHIBITS
Exhibit A Schedule of Purchasers
Exhibit B Amended and Restated Certificate of Incorporation
Exhibit C Schedule of Exceptions
Exhibit D Investors' Rights Agreement
Exhibit E Opinion of Venture Law Group
</TABLE>
-ii-
<PAGE>
ROSETTA INPHARMATICS, INC.
SERIES C PREFERRED STOCK PURCHASE AGREEMENT
This Series C Preferred Stock Purchase Agreement (the "AGREEMENT") is
made as of the 1st day of April, 1999 by and between Rosetta Inpharmatics, Inc.,
a Delaware corporation (the "COMPANY"), and the investors listed on EXHIBIT A
attached hereto (each a "PURCHASER" and together the "PURCHASERS").
1. AUTHORIZATION AND SALE OF SERIES C PREFERRED STOCK
1.1 AUTHORIZATION OF SERIES C PREFERRED STOCK . The Company
has authorized, or before the First Closing, as defined in paragraph 2.1 hereof,
will have authorized, the issuance and sale of up to 2,750,000 shares of its
Series C Preferred Stock (the "SERIES C PREFERRED") at a purchase price of $4.50
per share. The Series C Preferred has, or before the First Closing will have,
the rights provided for in the Company's Amended and Restated Certificate of
Incorporation in the form attached hereto as EXHIBIT B-1, as amended by the
Certificate of Designation in the form attached hereto as EXHIBIT B-2
(collectively, the "RESTATED CERTIFICATE").
1.2 SALE OF SERIES C PREFERRED STOCK . Subject to the terms
and conditions of this Agreement, each Purchaser agrees to purchase at the
Closing and the Company agrees to sell and issue to each Purchaser at the
Closing that number of shares of Series C Preferred indicated with respect to
such Purchaser on EXHIBIT A attached hereto. The Series C Preferred and the
Common Stock issuable upon conversion of the Series C Preferred (the "CONVERSION
STOCK") shall be hereinafter referred to as the "SECURITIES."
2. CLOSING DATE; DELIVERY
2.1 CLOSING DATE. The closing for the purchase and sale of the
Series C Preferred hereunder will be on April 1, 1999, or such other time and
place as the Company and the Purchasers shall agree upon (the "FIRST CLOSING")
at the offices of Venture Law Group, 4750 Carillon Point, Kirkland, Washington
98033 (the "CLOSING DATE").
2.2 DELIVERY. At the Closing, the Company will deliver to the
Purchasers a certificate registered in each Purchaser's name representing the
Series C Preferred to be purchased by such Purchaser at the Closing. At the
Closing, such Purchaser will pay the purchase price therefor, by check or wire
transfer, at the option of the Purchaser, to the Company's bank account.
2.3 ADDITIONAL CLOSINGS. If the full number of the authorized
shares of Series C Preferred of the Company is not sold at the First Closing,
the Company shall have the right, at any time prior to June 30, 1999, to sell
the remaining authorized but unissued shares of Series C Preferred to one or
more additional purchasers as determined by the Company, or to any Purchaser
hereunder who wishes to acquire additional shares of Series C Preferred at the
price and on the terms set forth herein, provided that any such additional
purchaser shall be required to execute an Addendum Agreement substantially in
the form attached hereto as EXHIBIT F (the
<PAGE>
closing of all such additional sales shall be referred to as "ADDITIONAL
CLOSINGS" and the First Closing and Additional Closings may be collectively
referred to as the "CLOSING"). Any additional purchaser so acquiring shares of
Series C Preferred shall be considered a "Purchaser" for purposes of this
Agreement and a "Holder" for purposes of the Investors Rights Agreement (as
defined below), and any Series C Preferred so acquired by such additional
purchaser shall be considered "Securities" for purposes of this Agreement and
all other agreements contemplated hereby and shall be considered "Registrable
Securities" for purposes of the Investors Rights Agreement..
3. REPRESENTATIONS AND WARRANTIES OF THE COMPANY
Except as set forth on the Schedule of Exceptions attached
hereto as EXHIBIT C, the Company hereby represents and warrants to the
Purchasers as follows:
3.1 ORGANIZATION AND STANDING. The Company is a corporation
duly organized and validly existing under, and by virtue of, the laws of
Delaware and is in good standing under such laws. The Company has the requisite
corporate power to own and operate its properties and assets, and to carry on
its business as presently conducted and as proposed to be conducted. The Company
is duly qualified to transact business and is in good standing in each
jurisdiction in which the failure to qualify would have a material adverse
effect on its business or properties.
3.2 CORPORATE POWER. The Company will have as of the Closing
Date all requisite legal and corporate power to execute and deliver this
Agreement and the Investors' Rights Agreement of even date herewith, in the form
attached hereto as EXHIBIT D (the "INVESTORS' RIGHTS AGREEMENT"), to sell and
issue the Series C Preferred hereunder, to issue the Conversion Stock and to
carry out and perform its obligations under the terms of this Agreement and the
Investors' Rights Agreement, provided, however, that the Company's ability to
perform the indemnification provisions of the Investors' Rights Agreement may be
limited by public policy.
3.3 SUBSIDIARIES. The Company owns 100% of the outstanding
capital stock of Acacia Biosciences, Inc., a Delaware corporation ("ACACIA") and
except for Acacia, the Company has no subsidiaries or affiliated companies and
does not otherwise own or control, directly or indirectly, any other
corporation, association or business entity.
3.4 CAPITALIZATION. The authorized capital stock of the
Company consists, or immediately prior to the First Closing will consist, of:
(a) PREFERRED STOCK. 12,000,000 shares of Preferred
Stock, 6,225,000 shares of which have been designated Series A Preferred Stock
(the "SERIES A PREFERRED"), of which 4,462,500 shares are issued and outstanding
immediately prior to the First Closing, 1,600,000 shares of Series B Preferred
Stock (the "SERIES B PREFERRED"), of which 1,387,298 shares are issued and
outstanding immediately prior to the First Closing, 2,750,000 shares of Series C
Preferred Stock (the "SERIES C PREFERRED"), none of which are issued and
outstanding
-2-
<PAGE>
immediately prior to the First Closing and 1,425,000 shares of undesignated
Preferred Stock. The rights, privileges and preferences of the Preferred Stock
are as stated in the Restated Certificate.
(b) COMMON STOCK. 23,000,000 shares of Common Stock,
4,987,210 shares of which are issued and outstanding. The Company has reserved
6,225,000 shares of Common Stock for issuance upon conversion of the Series A
Preferred, 1,600,000 shares of Common Stock for issuance upon conversion of the
Series B Preferred and 2,750,000 shares of Common Stock for issuance upon
conversion of the Series C Preferred. An additional 3,107,825 shares are
reserved for issuance pursuant to the Company's 1997 Stock Plan (the "PLAN") to
Employees and Consultants (as defined in the Plan), of which 236,297 shares have
been issued pursuant to option exercises, and 2,135,135 shares are subject to
outstanding, unexercised options.
(c) WARRANTS. Immediately prior to the First Closing,
there were issued and outstanding warrants to purchase up to an aggregate of (a)
793,667 shares of Common Stock (the "COMMON STOCK WARRANTS"), (b) 253,702 shares
of Rosetta Series A Preferred (the "SERIES A WARRANTS") and (c) 134,596 shares
of Series B Preferred (the "SERIES B WARRANTS" and together with the Common
Stock Warrants and the Series A Warrants, collectively, the "ROSETTA WARRANTS").
(d) All of the issued and outstanding shares of
Common Stock and Preferred Stock have been duly authorized and validly issued,
are fully paid and nonassessable and have been issued in compliance with
applicable federal and state securities laws. Except for (i) conversion
privileges of the Preferred Stock, (ii) the outstanding options issued pursuant
to the Plan and (iii) the Rosetta Warrants, and except as set forth in the
Investors' Rights Agreement, there are no outstanding options, warrants, rights
(including conversion or preemptive rights and rights of first refusal or
similar rights) or agreements, orally or in writing, for the purchase or
acquisition from the Company of any shares of its capital stock.
The Company is not aware of any voting agreements among its stockholders.
3.5 AUTHORIZATION. All corporate action on the part of the
Company, its directors and stockholders necessary for the authorization,
execution, delivery and performance of this Agreement and the Investors' Rights
Agreement by the Company, the authorization, sale, issuance and delivery of the
Securities, and the performance of the Company's obligations hereunder and
thereunder has been taken or will be taken prior to the Closing.
3.6 VALID ISSUANCE OF SECURITIES. The Series C Preferred that
is being issued to the Purchasers hereunder, when issued, sold and delivered in
accordance with the terms hereof for the consideration expressed herein, will be
duly and validly issued, fully paid and nonassessable and free of restrictions
on transfer other than restrictions on transfer under this Agreement, the
Investors' Rights Agreement and applicable state and federal securities laws.
Based in part upon the representations of the Purchasers in this Agreement and
subject to the provisions of Section 3.12 below, the Series C Preferred will be
issued in compliance with all applicable federal and state securities laws. The
Conversion Stock has been duly and validly
-3-
<PAGE>
reserved for issuance, and upon issuance in accordance with the terms of the
Restated Certificate, shall be duly and validly issued, fully paid and
nonassessable and free of restrictions on transfer other than restrictions on
transfer under this Agreement, the Investors' Rights Agreement and applicable
federal and state securities laws and will be issued in compliance with all
applicable federal and state securities laws.
3.7 TITLE. The Company and its subsidiaries have good and
marketable title to its properties and assets, and has good title to all its
leasehold interests, in each case subject to no mortgage, pledge, lien, lease,
encumbrance or charge, other than (a) the lien of current taxes not yet due and
payable and (b) such encumbrances and liens which arise in the ordinary course
of business and do not materially impair the Company's or its subsidiaries'
ownership or use of such property or assets.
3.8 COMPLIANCE WITH OTHER INSTRUMENTS. The Company is not in
violation of any term of its Restated Certificate or Bylaws or in any material
respect of any term or provision of any mortgage, indenture, contract,
agreement, instrument, judgment or decree and, to its knowledge, is not in
violation of any order, statute, rule or regulation applicable to the Company,
the violation of which would have a material adverse effect on the Company's
business or properties. The execution, delivery and performance of and
compliance with this Agreement and the Investors' Rights Agreement, and the
issuance of the Series C Preferred and the Conversion Stock, have not resulted
and will not result in any such violation, or be in conflict with, or constitute
a default under, or result in the creation of, any mortgage, pledge, lien,
encumbrance or charge upon any of the properties or assets of the Company.
3.9 LITIGATION. There are no actions, suits, proceedings or
investigations pending against the Company, its subsidiaries or any of their
respective properties before any court or governmental agency (nor, to the
Company's knowledge, is there any threat or basis therefor). Neither the Company
nor any of its subsidiaries is a party to any order, writ, injunction, judgment,
or decree of any court or governmental agency or instrumentality. There is no
action, suit, proceeding, or investigation by the Company or any of its
subsidiaries currently pending or that the Company or any of its subsidiaries
presently intends to initiate.
3.10 EMPLOYEES; PROPRIETARY INFORMATION. To the Company's
knowledge after due inquiry, no employee or consultant of the Company or any of
its subsidiaries is in violation of any term of any employment agreement, patent
disclosure agreement, information or technique allegedly proprietary to any
former employer or any other party, or any other contract or agreement relating
to the relationship of such employee with the Company or any other party because
of the nature of the business conducted or to be conducted by the Company. Each
officer, employee, or consultant of the Company has signed a proprietary
information agreement, each of which remains in full force and effect as of the
date hereof.
3.11 REGISTRATION RIGHTS. Except as set forth in the
Investors' Rights Agreement, the Company is not under any obligation to register
any of its presently outstanding securities or any of its securities which may
hereafter be issued.
-4-
<PAGE>
3.12 GOVERNMENTAL CONSENT. No consent, approval or
authorization of, or designation, declaration or filing with, any governmental
authority on the part of the Company is required in connection with the valid
execution and delivery of this Agreement and the Investors' Rights Agreement or
the offer, sale or issuance of the Series C Preferred and the Conversion Stock,
or the consummation of any other transaction contemplated hereby or thereby,
except (a) the filing of the Certificate of Designation in the office of the
Delaware Secretary of State and (b) the qualification (or taking such action as
may be necessary to ensure an exemption from qualification, if available) of the
offer and sale of the Series C Preferred and the Conversion Stock under the
Delaware General Corporation Law, Regulation D of the Securities Act of 1933, as
amended (the "SECURITIES ACT"), and other applicable state or federal securities
laws, which filings and qualification, if required, will be accomplished in a
timely manner, as required by such laws.
3.13 MATERIAL CONTRACTS. Schedule 3.13 contains a list of all
contracts and agreements to which the Company and its subsidiaries are a party
and that are material to the business, results of operations, or condition
(financial or otherwise), of the Company and its subsidiaries taken as a whole
(such contracts, agreements and arrangements as are required to be set forth in
Schedule 3.13 being referred to herein collectively as the "ROSETTA MATERIAL
CONTRACTS") which shall be categorized in Schedule 3.13 as follows:
(i) each contract and agreement (other than
routine purchase orders and pricing quotes in the ordinary course of business
covering a period of less than 1 year) for the purchase of equipment, inventory,
spare parts, other materials or personal property with any supplier or for the
furnishing of services to the Company or any of its subsidiaries under the terms
of which the Company or any of its subsidiaries: (A) paid or otherwise gave
consideration of more than Twenty-Five Thousand Dollars ($25,000) in the
aggregate during the calendar year ended December 31, 1998, (B) is likely to pay
or otherwise give consideration of more than Twenty-Five Thousand Dollars
($25,000) in the aggregate during the calendar year ended December 31, 1999, (C)
is likely to pay or otherwise give consideration of more than Twenty-Five
Thousand Dollars ($25,000) in the aggregate over the remaining term of such
contract or (D) cannot be canceled by the Company or its subsidiaries without
penalty or further payment of less than Twenty-Five Thousand Dollars ($25,000);
(ii) all material agreements relating to the
Company's and its subsidiaries' Intellectual Property or the Company's and its
subsidiaries' employees;
(iii) all material management contracts with
independent contractors or consultants (or similar arrangements) to which the
Company or any of its subsidiaries is a party;
(iv) all contracts and agreements (excluding
payroll, trade accounts payable or routine checking account overdraft agreements
involving petty cash amounts) under which the Company or any of its subsidiaries
have created, incurred, assumed or guaranteed (or may create, incur, assume or
guarantee) indebtedness or under which the
-5-
<PAGE>
Company or any of its subsidiaries have imposed (or may impose) a security
interest or lien on any of their respective assets, whether tangible or
intangible, to secure indebtedness;
(v) all contracts and agreements that limit
the ability of the Company or any of its subsidiaries, to compete in any line of
business as currently conducted or with any person or in any geographic area or
during any period of time, or to solicit any customer or client; and
(vi) all other contracts or agreements which
are material to the Company or any of its subsidiaries or the conduct of the
Company's business or any of its subsidiaries' business as currently conducted.
3.14 PATENTS AND TRADEMARKS. To its knowledge, the Company and
its subsidiaries have sufficient title, ownership or the right to use of all
trademarks, service marks, trade names, copyrights, trade secrets, information,
proprietary rights, processes, and patents in the United States, necessary for
its business as now conducted and as proposed to be conducted without any known
conflict with or infringement of the rights of others. Except as set forth on
Schedule 3.14, there are no material outstanding options, licenses, or
agreements of any kind relating to the foregoing between the Company or any of
its subsidiaries and any third party, nor is the Company or any of its
subsidiaries bound by or a party to any material options, licenses or agreements
of any kind with respect to the patents, trademarks, service marks, trade names,
copyrights, trade secrets, licenses, information, proprietary rights and
processes of any other person or entity. The Company has not received any
communications alleging that the Company or any of its subsidiaries has violated
or, by conducting its business as proposed, would violate any of the patents,
trademarks, service marks, trade names, copyrights or trade secrets or other
proprietary rights of any other person or entity. The Company is not aware that
any of its employees is obligated under any contract (including licenses,
covenants or commitments of any nature) or other agreement, or subject to any
judgment, decree or order of any court or administrative agency, that would
interfere with the use of his or her best efforts to promote the interests of
the Company or that would conflict with the Company's business as proposed to be
conducted. Neither the execution nor delivery of this Agreement, nor the
carrying on of the Company's business as presently conducted by the employees of
the Company, nor the conduct of the Company's business as proposed, will, to the
Company's knowledge after due inquiry, conflict with or will result in a breach
of the terms, conditions or provisions of, or constitute a default under, any
contract, covenant or instrument under which any of such employees or
consultants is now obligated.
3.15 OUTSTANDING INDEBTEDNESS. The Company does not have any
indebtedness for borrowed money, or other liabilities (fixed or contingent),
which the Company has directly or indirectly created, incurred, assumed, or
guaranteed, or with respect to which the Company has otherwise become directly
or indirectly liable. The Company and its subsidiaries have no liability or
obligation, absolute or contingent, other than liabilities or obligations of
less than $100,000 or, in the aggregate, less than $250,000, incurred in the
ordinary course of business.
-6-
<PAGE>
3.16 OFFERING. Subject to the accuracy of the Purchasers'
representations in Section 3.4 hereof and in written responses to the Company's
inquiries, the offer, sale and issuance of the Series C Preferred to be issued
in conformity with the terms of this Agreement and the issuance of the Common
Stock to be issued upon conversion of the Series C Preferred, constitute
transactions exempt from the registration requirements of federal and state
securities laws.
3.17 NO CONFLICT OF INTEREST. Neither the Company nor any of
its subsidiaries are indebted, directly or indirectly, to any of their
respective officers, directors or common stockholders; none of said officers,
directors or common stockholders, or any members of their immediate families,
are indebted to the Company or any of its subsidiaries, have entered into any
transaction with the Company or any of its subsidiaries other than the purchase
of common stock and consulting agreements or have any direct or indirect
ownership interest in any firm or corporation with which the Company or any of
its subsidiaries are affiliated or with which the Company or any of its
subsidiaries have a business relationship, or any firm or corporation which
competes with the Company or any of its subsidiaries except that such officers,
directors and common stockholders of the Company and its subsidiaries may own
less than two percent of the outstanding capital stock of publicly traded
companies which may compete with the Company. Neither the Company nor any of its
subsidiaries are a guarantor or indemnitor of any indebtedness of any other
person, firm or corporation.
3.18 DISCLOSURE. To the Company's knowledge, no statement by
the Company contained in this Agreement and the attached exhibits and any
written statement or certificate furnished or to be furnished to the Purchasers
pursuant to this Agreement or in connection with the transactions contemplated
hereby (when read together) contains any untrue statement of a material fact or
omits to state a material fact necessary in order to make the statements
contained herein or therein not misleading in light of the circumstances under
which they were made, except that with respect to the financial projections and
forecasts delivered to the Purchasers, if any, the Company represents only that
such projection and forecasts were prepared in good faith and on what the
Company believes is a reasonable basis. The Company does not warrant that it
will achieve such projections. All Business Plans of the Company distributed to
potential investors have been prepared in good faith and fairly represent the
business as conducted or as proposed to be conducted. To its knowledge, the
Company has provided the Purchasers with all the information they have
reasonably requested in connection with their decision to purchase the Series C
Preferred hereunder.
3.19 FINANCIAL STATEMENTS. Schedule 3.19 includes a true and
complete copy of the Company's and its subsidiaries' unaudited financial
statements (balance sheet, statement of operations, statement of stockholders'
equity and statement of cash flows) as of December 31, 1998 and for the fiscal
year ended December 31, 1998 and their unaudited financial statements (including
balance sheet, income statement and statement of cash flows) as of February 28,
1999 and for the two-month period ended February 28, 1999 (collectively, the
"ROSETTA FINANCIAL STATEMENTS"). The Rosetta Financial Statements have been
prepared in accordance with GAAP applied on a consistent basis throughout the
periods indicated and with each other. The Rosetta Financial Statements fairly
present the financial condition and operating results of the Company
-7-
<PAGE>
and its subsidiaries as of the dates, and for the periods, indicated therein,
subject to normal year-end audit adjustments. The Company has maintained a
standard system of accounting established and administered in accordance with
GAAP. Neither the Company nor any of its subsidiaries have any material
obligations or liabilities of any nature (matured or unmatured, fixed or
contingent) other than (a) those set forth or adequately provided for in the
balance sheets as of February 28, 1999 (collectively, the "ROSETTA BALANCE
SHEET"), (b) those incurred in the ordinary course of business and not required
to be set forth in the Rosetta Balance Sheet under GAAP, (c) those incurred in
the ordinary course of business since the date of the Rosetta Balance Sheet and
consistent with past practice and (d) those incurred in connection with the
execution of this Agreement.
3.20 CHANGES. Since February 28, 1999, there has not been:
(a) any change in the assets, liabilities, financial
condition or operating results of the Company or any of its subsidiaries from
that reflected in the Rosetta Financial Statements, except changes in the
ordinary course of business that have not been, in the aggregate, materially
adverse;
(b) any damage, destruction or loss, whether or not
covered by insurance, materially and adversely affecting the business,
properties, prospects, or financial condition of the Company or any of its
subsidiaries;
(c) any waiver or compromise by the Company or any of
its subsidiaries of a valuable right or of a material debt owed to it;
(d) any satisfaction or discharge of any lien, claim,
or encumbrance or payment of any obligation by the Company or any of its
subsidiaries, except in the ordinary course of business and that is not material
to the business, properties, prospects or financial condition of the Company and
its subsidiaries;
(e) any material change to a material contract or
agreement by which the Company, any of its subsidiaries or any of their
respective assets is bound or subject;
(f) any material change in any compensation
arrangement or agreement with any employee, officer, director or stockholder;
(g) any sale, assignment or transfer of any patents,
trademarks, copyrights, trade secrets or other intangible assets;
(h) any resignation or termination of employment of
any officer or key employee of the Company or any of its subsidiaries; and the
Company, is not aware of any impending resignation or termination of employment
of any such officer or key employee;
-8-
<PAGE>
(i) any mortgage, pledge, transfer of a security
interest in, or lien, created by the Company or any of its subsidiaries, with
respect to any of their respective material properties or assets, except liens
for taxes not yet due or payable;
(j) any loans or guarantees made by the Company or
any of its subsidiaries to or for the benefit of its employees, officers or
directors, or any members of their immediate families, other than travel
advances and other advances made in the ordinary course of its business;
(k) any declaration, setting aside or payment or
other distribution in respect to any of the Company's or any of its
subsidiaries' capital stock, or any direct or indirect redemption, purchase, or
other acquisition of any of such stock by the Company or any of its
subsidiaries;
(l) to the Company's knowledge, any other event or
condition of any character that might materially and adversely affect the
business, properties, prospects or financial condition of the Company or any of
its subsidiaries, taken as a whole; or
(m) any arrangement or commitment by the Company or
any of its subsidiaries to do any of the things described in this Section 3.20.
3.21 TAX RETURNS, PAYMENTS AND ELECTIONS. The Company and its
subsidiaries have filed all tax returns and reports as required by law. These
returns and reports are true and correct in all material respects. The Company
and its subsidiaries have paid all taxes and other assessments due, except those
contested by it in good faith. The provision for taxes of the Company and its
subsidiaries as shown in the Rosetta Balance Sheet is adequate for taxes due or
accrued as of the date thereof.
3.22 INSURANCE. The Company has in full force and effect fire,
casualty and liability insurance policies, which to the best of the Company's
knowledge are in such amounts and with such coverage as are carried by companies
similar to the Company.
3.23 FINDER'S FEES. The Company represents and warrants that
it has retained no finder or broker in connection with the transactions
contemplated by this Agreement and hereby agrees to indemnify and to hold the
Purchasers harmless of and from any liability for commission or compensation in
the nature of a finder's fee to any broker or other person or firm (and the
costs and expense of defending against such liability or asserted liability) for
which the Company, or any of its employees or representatives, are responsible.
3.24 SECTION 83(b) ELECTIONS. To the Company's knowledge, all
elections and notices required by Section 83(b) of the Internal Revenue Code and
any analogous provisions of applicable state tax laws have been timely filed by
Dr. Stephen H. Friend, Dr. Leroy Hood, Mr. John J. King, II and Dr. Alan
Blanchard.
-9-
<PAGE>
4. REPRESENTATIONS AND WARRANTIES OF THE PURCHASERS; RESTRICTIONS
ON TRANSFER
4.1 REPRESENTATIONS AND WARRANTIES OF THE PURCHASERS. Each
Purchaser hereby represents and warrants to the Company with respect to this
purchase of the Series C Preferred provided for herein as follows:
(a) All action on the part of the Purchaser for the
authorization, execution, delivery and performance by the Purchaser of this
Agreement has been taken. The Agreements, when executed and delivered by the
Purchaser, will constitute valid and legally binding obligations of the
Purchaser, enforceable in accordance with their terms.
(b) The Purchaser is an accredited investor within
the meaning of Regulation D prescribed by the Securities and Exchange Commission
(the "COMMISSION") pursuant to the Securities Act.
(c) The Purchaser is acquiring the Securities for
investment for its own account and not with a view to, or for resale in
connection with, any distribution. The Purchaser understands that the Securities
to be purchased have not been registered under the Act by reason of a specific
exemption from the registration provisions of the Act which depends upon, among
other things, the bona fide nature of the investment intent as expressed herein.
(d) The Purchaser acknowledges that the Securities
must be held indefinitely unless subsequently registered under the Act or an
exemption from such registration is available. The Purchaser is aware of the
provisions of Rule 144 promulgated under the Act which permits limited resale of
shares purchased in a private placement subject to the satisfaction of certain
conditions, including, in case the Purchaser has held the securities for less
than two (2) years or is an affiliate of the Company, among other things: the
availability of certain current public information about the Company, the resale
occurring not less than one (1) year after the securities were purchased from
the Company or an affiliate of the Company, the sale being through a "broker's
transaction" or in transactions directly with a "market maker," and the number
of shares being sold during any three (3) month period not exceeding specified
limitations.
(e) The Purchaser understands that no public market
now exists for any of the securities issued by the Company and that there can be
no assurance that a public market will ever exist for the Securities.
(f) The Purchaser has had an opportunity to discuss
the Company's business, management and financial affairs and the terms and
conditions of the offering of the Series C Preferred with the Company's
management.
(g) The Purchaser has not engaged any brokers,
finders, or agents and has not incurred, and will not incur, directly or
indirectly, any liability for brokerage or finder's fee or agents' commissions
or any similar charges in connection with this Agreement and the transactions
contemplated hereby and agrees to indemnify and to hold the Company harmless of
and from any liability for any commission or compensation in the nature of a
finder's fee to any
-10-
<PAGE>
broker or other person or firm (and the costs and expenses of defending against
such liability or asserted liability) for which the Purchaser, or any of its
employees or representatives, is responsible.
(h) If the Purchaser is not a United States person
(as defined by Section 7701(a)(30) of the Internal Revenue Code of 1986, as
amended), such Purchaser hereby represents that it has satisfied itself as to
the full observance of the laws of its jurisdiction in connection with any
invitation to subscribe for the Securities or any use of this Agreement,
including (i) the legal requirements within its jurisdiction for the purchase of
the Securities, (ii) any foreign exchange restrictions applicable to such
purchase, (iii) any governmental or other consents that may need to be obtained,
and (iv) the income tax and other tax consequences, if any, that may be relevant
to the purchase, holding, redemption, sale, or transfer of the Securities. Such
Purchaser's subscription and payment for and continued beneficial ownership of
the Securities, will not violate any applicable securities or other laws of the
Purchaser's jurisdiction.
4.2 LEGENDS. Each certificate representing the Securities
shall be endorsed with the following legend (in addition to any legend required
by applicable state securities laws):
(a) "THE SECURITIES REPRESENTED BY THIS CERTIFICATE
HAVE NOT BEEN REGISTERED UNDER THE SECURITIES ACT OF 1933, AND HAVE
BEEN ACQUIRED FOR INVESTMENT AND NOT WITH A VIEW TO, OR IN CONNECTION
WITH, THE SALE OR DISTRIBUTION THEREOF. NO SUCH SALE OR DISPOSITION MAY
BE EFFECTED WITHOUT AN EFFECTIVE REGISTRATION STATEMENT RELATED THERETO
OR AN OPINION OF COUNSEL FOR THE COMPANY THAT SUCH REGISTRATION IS NOT
REQUIRED UNDER THE SECURITIES ACT OF 1933."
(b) Any legend required by the Blue Sky laws of any
state to the extent such laws are applicable to the shares represented
by the certificate so legended.
The Company will not register a transfer of Securities, unless the
conditions specified in the foregoing legend are satisfied, and the Company may
instruct its transfer agent not to register the transfer of any of the
Securities unless the conditions specified in the foregoing legend are
satisfied.
In addition to any other limitations on transferability imposed under
the Act or applicable state securities laws, until such time as the Common
Shares are listed on a national securities exchange or Nasdaq National Market,
the Purchaser agrees not to offer for sale, sell, assign or otherwise dispose of
all or any portion of the Purchased Shares without the prior written consent of
the Company, such consent not to be unreasonably withheld. Notwithstanding the
foregoing, the Purchaser may, without the prior written consent of the Company
but subject to the Act or applicable state securities laws, transfer all or any
portion of the Securities to (i) any entity that controls, is controlled by or
is under common control with the Purchaser or (ii) any entity which purchases
all or substantially all of the assets of the Purchaser or any entity which
succeeds to the assets and liabilities of the Purchaser as a result of any
merger or consolidation with or into the Purchaser; provided that in any such
case the Purchaser provides the Company with prior written
-11-
<PAGE>
notice of the transfer, giving the name and particulars of the transfer, and the
transferee agrees in writing with the Company to be bound by and liable under
the terms and conditions of this Agreement, and any documents and agreements
ancillary hereto, as fully as if such transferee were a party to this Agreement.
4.3 REMOVAL OF LEGENDS AND TRANSFER RESTRICTIONS. The legend
relating to the Act endorsed on a stock certificate pursuant to paragraph 4.2 of
this Agreement and the stop transfer instructions with respect to the Securities
represented by such certificate shall be removed and the Company shall issue a
certificate without such legend to the holder of such Securities if such
Securities are registered under the Act and a prospectus meeting the
requirements of Section 10 of the Act is available or if such holder provides to
the Company an opinion of counsel for such holder of the Securities reasonably
satisfactory to the Company, or a no-action letter or interpretive opinion of
the staff of the Commission to the effect that a public sale, transfer or
assignment of such Securities may be made without registration and without
compliance with any restriction such as Rule 144. It is agreed that the Company
will not require opinions of counsel for transactions made pursuant to Rule 144
except in unusual circumstances.
5. CONDITIONS TO CLOSING
5.1 CONDITIONS TO PURCHASERS' OBLIGATIONS AT CLOSING. Each
Purchaser's obligation to purchase the Series C Preferred at the First Closing
is subject to the fulfillment on or prior to the Closing Date of the following
conditions, any of which may be waived in writing in whole or in part by the
Purchaser:
(a) The representations and warranties made by the
Company herein shall be true and correct when made, and shall be true and
correct on the Closing Date with the same force and effect as it they had been
made on and as of the same date; and the Company shall have performed all
obligations and conditions herein required to be performed or observed by it on
or prior to the Closing Date.
(b) The Company shall have obtained all consents,
permits and waivers necessary or appropriate for consummation of the
transactions contemplated by this Agreement which need to be obtained prior to
the First Closing.
(c) The Company shall have filed the Certificate of
Designation in the form attached as EXHIBIT B with the Delaware Secretary of
State.
(d) At the First Closing, the purchase of the Series
C Preferred by the Purchaser hereunder shall be legally permitted by all laws
and regulations to which such Purchaser or the Company are subject.
(e) The Company shall have delivered to the
Purchasers a certificate executed by the Chief Financing Officer of the Company,
dated as of the Closing Date, certifying to the fulfillment of the conditions
specified in subparagraphs (a) and (b) of this paragraph 5.1.
-12-
<PAGE>
(f) The Purchasers shall have received from Venture
Law Group, counsel to the Company, an opinion letter addressed to the
Purchasers, dated as of the Closing Date, substantially in the form attached
hereto as EXHIBIT E.
(g) The Company and the Purchasers shall have entered
into the Investors' Rights Agreement substantially in the form attached hereto
as EXHIBIT D.
(h) A total of at least $5,000,000 of Series C
Preferred shall be subscribed for at the First Closing.
5.2 CONDITION TO COMPANY'S OBLIGATIONS AT CLOSING. The
Company's obligation to sell and issue the Series C Preferred at the Closing is
subject to the fulfillment to the Company's satisfaction on or prior to the
Closing Date of the following conditions, any of which may be waived in writing
in whole or in part by the Company:
(a) The representations and warranties made by the
Purchasers herein shall be true and correct when made, and shall be true and
correct on the Closing Date with the same force and effect as if they had been
made on and as of the same date, and the Purchasers shall have performed all
obligations and conditions herein required to be performed or observed by them
on or prior to the Closing Date.
(b) The Company shall have obtained all consents,
permits and waivers necessary or appropriate for consummation of the
transactions contemplated by this Agreement which need to be obtained prior to
the Closing Date.
(c) The Company shall have filed the Certificate of
Designations in the form attached as EXHIBIT B with the Delaware Secretary of
State on or prior to the Closing Date.
(d) At the Closing, the purchase of the Series C
Preferred by the Purchasers hereunder shall be legally permitted by all laws and
regulations to which the Purchasers or the Company are subject.
(e) The Company and the Purchasers shall have entered
into the Investors' Rights Agreement substantially in the form attached hereto
as EXHIBIT D.
6. FURTHER AGREEMENTS
6.1 NONDISCLOSURE. Each Purchaser agrees not to use
Confidential Information (as hereinafter defined) of the Company for its own use
other than as permitted by agreement with the Company or for any purpose except
to evaluate its equity investment in the Company. Each Purchaser agrees not to
disclose such Confidential Information to any third parties or to any of its
employees except employees who are required to have the Confidential Information
to evaluate such Purchaser's investment in the Company or as permitted under the
terms of any other agreements between the parties. For purposes of this
paragraph, "Confidential Information" means any information, technical data or
know-how, including, but not limited to,
-13-
<PAGE>
the Company's research, products, software, services, development, inventions,
processes, designs, drawings, engineering, marketing or finances, disclosed by
the Company either directly or indirectly in writing, orally or by drawings or
inspection of parts or equipment and which the Company has marked
"confidential," "proprietary" or "secret" or has otherwise identified as being
such. Confidential Information does not include information, technical data or
know-how which (a) is in a Purchaser's possession at the time of disclosure as
shown by such Purchaser's files and records; (b) before or after it has been
disclosed to such Purchaser, is part of the public knowledge or literature, not
as a result of any action or inaction of such Purchaser; (c) is approved for
release by written authorization of the Company; (d) is disclosed to such
Purchaser by a third party not under an obligation of confidentiality to the
Company; or (e) is independently developed by Purchaser.
6.2 COOPERATION. The Company shall cooperate with the
Purchasers in supplying such information as may be reasonably requested by the
Purchasers to complete and file any information reporting forms presently or
hereafter required by the Commission as a condition to the availability of an
exemption, presently existing or hereafter adopted, from the Act for the sale of
the Securities.
6.3 PROPRIETARY INFORMATION AGREEMENTS. All current officers
and employees of the Company have executed, and, following the Closing all
future officers and employees of the Company shall be required to execute, a
Proprietary Information Agreement in the form approved by the Company's Board of
Directors.
7. MISCELLANEOUS
7.1 WAIVERS AND AMENDMENTS. With the written consent of the
record holders of a majority of the Securities then outstanding, the obligation
of the Company and the rights of the holders of the Securities under this
Agreement may be waived (either generally or in a particular instance, either
retroactively or prospectively and either for a specified period of time or
indefinitely), and with the same consent the Company, when authorized by
resolution of its Board of Directors, may enter into a supplementary agreement
for the purpose of adding any provisions to or changing in any manner or
eliminating any of the provisions of this Agreement. Neither this Agreement nor
any provisions hereof may be changed, waived, discharged or terminated orally,
but only by a signed statement in writing.
7.2 GOVERNING LAW. This Agreement shall be governed in all
aspects by the law of the State of Washington as such law is applied to
agreements between Washington residents entered into and to be performed
entirely within Washington.
7.3 SURVIVAL. The representations, warranties, covenants and
agreements made herein shall survive any investigation made by the Purchasers
and the Closing of the transaction contemplated hereby.
7.4 SUCCESSORS AND ASSIGNS. Except as otherwise expressly
provided herein, the provisions hereof shall inure to the benefit of, and be
binding upon, the successors, assigns, heirs, executors and administrators of
the parties hereto.
-14-
<PAGE>
7.5 ENTIRE AGREEMENT. This Agreement and the other documents
delivered pursuant hereto, including the exhibits, constitute the full and
entire understanding and agreement between the parties with regard to the
subjects hereof and thereof.
7.6 SEVERABILITY OF THIS AGREEMENT. In case any provision of
this Agreement shall be invalid, illegal or unenforceable, the validity,
legality and enforceability of the remaining provisions shall not in any way be
affected or impaired thereby.
7.7 TITLES AND SUBTITLES. The titles of the paragraphs and
subparagraphs of this Agreement are for convenience of reference only and are
not to be considered in construing this Agreement.
7.8 DELAYS OR OMISSIONS. It is agreed that no delay or
omission to exercise any right, power or remedy accruing to the Purchasers, upon
any breach or default of the Company under the Agreement, shall impair any such
right, power or remedy, nor shall it be construed to be a waiver of any such
breach or default, or any acquiescence therein, or of or in any similar breach
or default thereafter occurring; nor shall any waiver of any single breach or
default be deemed a waiver of any other breach or default theretofore or
thereafter occurring. It is further agreed that any waiver, permit, consent or
approval of any kind or character by the Purchasers of any breach or default
under this Agreement, or any waiver by the Purchasers of any provisions or
conditions of this Agreement must be in writing and shall be effective only to
the extent specifically set forth in writing and that all remedies, either under
this Agreement, or by law or otherwise afforded to the Purchasers, shall be
cumulative and not alternative.
7.9 PAYMENT OF FEES AND EXPENSES. The Company and the
Purchasers shall bear its own expenses incurred on its behalf with respect to
this Agreement and the transactions contemplated thereby. If any action at law
or in equity is necessary to enforce the terms of this Agreement or the Restated
Certificate, the prevailing party shall be entitled to reasonable attorney's
fees, costs and necessary disbursements in addition to any other relief to which
such party may be entitled.
7.10 NOTICES. Any notice or report required in this Agreement
or permitted to be given shall be given in writing and shall be deemed effective
upon delivery, when delivered personally or by overnight courier or sent by
telegram or fax (a) if to a Purchaser, at such Purchaser's address as set forth
below, or at such other address as such Purchaser shall have furnished to the
Company in writing, (b) if to any other holder of any Series C Preferred, at
such address as such holder shall have furnished the Company in writing, or,
until any such holder so furnishes an address to the Company, or (c) if to the
Company, one copy should be sent to its address set forth below and addressed to
the attention of the Corporate Secretary, or at such other address as the
Company shall have furnished to the Purchasers.
7.11 COUNTERPARTS. This Agreement may be executed in any
number of counterparts, each of which shall be an original, but all of which
together shall constitute one instrument.
-15-
<PAGE>
7.12 EXCULPATION AMONG PURCHASERS. Each Purchaser acknowledges
that it is not relying upon any person, firm or corporation, other than the
Company and its officers and directors, in making its investment or decision to
invest in the Company. Each Purchaser agrees that no Purchaser nor the
respective controlling persons, officers, directors, partners, agents, or
employees of any Purchaser shall be liable for any action heretofore or
hereafter taken or omitted to be taken by any of them in connection with the
Securities.
7.13 FEES AND EXPENSES. The Company shall pay the reasonable
fees and expenses (not to exceed $10,000) of Cooley Godward, LLP, the counsel
for the Purchasers, incurred with respect to this Agreement, the documents
referred to herein and the transactions contemplated hereby and thereby.
[Signature page follows]
-16-
<PAGE>
IN WITNESS WHEREOF, the parties have caused this Agreement to be duly
executed and delivered as of the day and year first written above.
COMPANY:
ROSETTA INPHARMATICS, INC.
By: /s/ John J. King
------------------------------
Name: John J. King
----------------------------
(print)
Title: Sr. Vice President, C.O.O.
---------------------------
Address: 12040 115th Avenue NE
Suite 210
Kirkland, Washington 98034
Number of shares of PURCHASERS:
Series C Preferred subscribed
at $4.50 per share: ____________________________________
(Print name of Purchaser)
____________________________
By:_________________________________
Name: ______________________________
(print)
Subscription Purchase Price: Title:______________________________
$____________________________ Address: ___________________________
___________________________
___________________________
[SIGNATURE PAGE TO SERIES C PREFERRED
STOCK PURCHASE AGREEMENT]
<PAGE>
EXHIBITS
EXHIBIT A - Schedule of Purchasers
EXHIBIT B - Form of Amended and Restated Certificate of Incorporation
EXHIBIT C - Schedule of Exceptions to Representations and Warranties
EXHIBIT D - Form of Investors' Rights Agreement
EXHIBIT E - Form of Legal Opinion of Venture Law Group
<PAGE>
ROSETTA INPHARMATICS, INC.
SERIES D PREFERRED STOCK
PURCHASE AGREEMENT
OCTOBER 1, 1999
<PAGE>
TABLE OF CONTENTS
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
1. Definitions................................................................................................1
2. Authorization of Shares....................................................................................2
2.1 Authorization of Preferred Stock.................................................................2
2.2 Sale of Shares...................................................................................2
3. Closing Date; Delivery.....................................................................................2
3.1 Closing Date.....................................................................................2
3.2 Delivery.........................................................................................3
4. Right to Sell Additional Stock.............................................................................3
4.1 Put Right........................................................................................3
4.2 Exercise of Right................................................................................3
4.3 Expiration.......................................................................................3
4.4 Closing..........................................................................................4
4.5 Delivery.........................................................................................4
4.6 Purchase Documents...............................................................................4
5. Representations and Warranties of the Company..............................................................4
5.1 Organization and Standing........................................................................4
5.2 Corporate Power..................................................................................4
5.3 Subsidiaries.....................................................................................5
5.4 Capitalization...................................................................................5
5.5 Authorization....................................................................................6
5.6 Valid Issuance of Securities.....................................................................6
5.7 Title............................................................................................6
5.8 Compliance with Other Instruments................................................................6
5.9 Litigation.......................................................................................7
5.10 Employees; Proprietary Information..............................................................7
5.11 Registration Rights.............................................................................7
5.12 Governmental Consent............................................................................7
5.13 Patents and Trademarks..........................................................................8
5.14 Offering........................................................................................8
5.15 Financial Statements.............................................................................8
5.16 Changes..........................................................................................9
5.17 Material Contracts.............................................................................10
5.18 Insurance......................................................................................11
5.19 Finder's Fees..................................................................................11
5.20 Disclosure.....................................................................................11
5.21 No Conflict of Interest........................................................................11
5.22 Tax Returns, Payments and Elections............................................................12
-i-
<PAGE>
TABLE OF CONTENTS
(CONTINUED)
<CAPTION>
PAGE
----
<S> <C>
5.23 Outstanding Indebtedness.......................................................................12
5.24 Year 2000......................................................................................12
6. Representations and Warranties of the Purchaser; Restrictions on Transfer.................................12
6.1 Representations and Warranties of the Purchaser.................................................12
6.2 Legends.........................................................................................14
6.3 Removal of Legends and Transfer Restrictions....................................................14
7. Conditions to Closing.....................................................................................14
7.1 Conditions to Purchaser's Obligations at Closing................................................15
7.2 Condition to Company's Obligations at Closing...................................................16
8. Covenants of the Company..................................................................................17
8.1 Financial Accounting Information................................................................17
8.2 Right of First Notification.....................................................................17
8.3 Observer Rights.................................................................................18
9. Confidentiality...........................................................................................18
10. Miscellaneous............................................................................................18
10.1 Waivers and Amendments.........................................................................18
10.2 Governing Law..................................................................................19
10.3 Survival of Warranties.........................................................................19
10.4 Successors and Assigns.........................................................................19
10.5 Entire Agreement...............................................................................19
10.6 Severability of this Agreement.................................................................19
10.7 Titles and Subtitles...........................................................................19
10.8 Delays or Omissions............................................................................19
10.9 Payment of Fees and Expenses...................................................................20
10.10 Notices.......................................................................................20
10.11 Counterparts..................................................................................20
EXHIBITS
Exhibit A Purchaser
Exhibit B Fifth Amended and Restated Certificate of Incorporation
Exhibit C Schedule of Exceptions
Exhibit D Fifth Amended Investors' Rights Agreement
Exhibit E Standstill Agreement
Exhibit F Opinion of Venture Law Group
Exhibit G Voting Agreement
</TABLE>
-ii-
<PAGE>
ROSETTA INPHARMATICS, INC.
SERIES D PREFERRED STOCK PURCHASE AGREEMENT
This Series D Preferred Stock Purchase Agreement (the "AGREEMENT") is
made as of the 1st day of October, 1999 by and between Rosetta Inpharmatics,
Inc., a Delaware corporation (the "COMPANY"), and Hewlett-Packard Company, a
Delaware corporation (the "PURCHASER") with the address set forth on EXHIBIT A.
RECITALS
A. The Purchaser and the Company have each determined that it is
in their respective best interests for the Purchaser to purchase from the
Company shares of the Company's Preferred Stock, which shall constitute an
investment in the Company of $12,000,000 for Series D Preferred Stock of the
Company (the "SERIES D PREFERRED").
B. On the Closing Date (as defined below), the Purchaser desires
to purchase and the Company desires to sell the Shares (as defined below) at the
Purchase Price (as defined below) (the "PURCHASE").
C. The Purchaser desires to grant the Company the right (the "PUT
RIGHT") to sell to the Purchaser an additional $10,000,000 of equity securities
on the terms set forth below.
NOW THEREFORE, the parties hereto agree as follows:
AGREEMENT
1. DEFINITIONS The following terms, as used herein, have the
following meanings:
"ANCILLARY AGREEMENTS" means (i) the Gene Expression
Collaboration Agreement by and between the Company and the Purchaser of even
date herewith (the "COLLABORATION AGREEMENT"), (ii) the Fifth Amended Investors'
Rights Agreement by and among the Company, the Purchaser and a majority of the
Investors, as defined in the Fourth Amended and Restated Investors' Rights
Agreement, of even date herewith in the form attached hereto as EXHIBIT D (the
"INVESTORS' RIGHTS AGREEMENT"), (iii) the Standstill Agreement by and between
the Company and the Purchaser of even date herewith in the form attached hereto
as EXHIBIT E (the "STANDSTILL AGREEMENT") and (iv) the Voting Agreement by and
between the Company, the Purchaser and a majority of the Investors, as defined
in the Voting Agreement, of even date herewith in the form attached hereto as
EXHIBIT G.
"IPO" means an underwritten public offering by the Company of
shares of its Common Stock pursuant to a registration statement under the
Securities Act of 1933, as amended.
"PURCHASE PRICE" means $5.25 per share of Series D Preferred.
<PAGE>
"PUT RIGHT PERIOD" means the period beginning on the Closing
and ending on the earlier of (i) the two-year anniversary of the Closing or (ii)
the closing of the IPO.
"PUT RIGHT PURCHASE PRICE" means (i) $5.75 per share, if the
Put Right is exercised prior to a Qualifying Equity Financing and prior to the
IPO, (ii) the purchase price paid by investors in a Qualifying Equity Financing,
if the Put Right is exercised concurrent with or after a Qualifying Equity
Financing (but before the IPO) or (iii) the price per share to the public in the
IPO, if the Put Right is exercised in connection with the IPO.
"PUT RIGHT SECURITY" means (i) Series D Preferred, if the Put
Right is exercised prior to a Qualifying Equity Financing and prior to the IPO,
(ii) the security purchased in a Qualifying Equity Financing, if the Put Right
is exercised concurrent with or after a Qualifying Equity Financing (but before
the IPO) or (iii) Common Stock, if the Put Right is exercised in connection with
the IPO.
"QUALIFYING EQUITY FINANCING" means an equity investment in
the Company (subsequent to the Closing) by one or more reputable institutional
or venture capital investors which results in gross proceeds to the Company of
at least $3,000,000 (excluding the proceeds from the Put Right).
"SECURITIES" means the Shares and the Common Stock issuable
upon conversion of the Shares (the "CONVERSION STOCK").
"SHARES" means 2,285,714 shares of Series D Preferred.
2. AUTHORIZATION OF SHARES
2.1 AUTHORIZATION OF SHARES. On or before the Closing, the
Company will have authorized the issuance and sale of the Shares and the Series
D Preferred will have the rights provided for in the Company's Fifth Amended and
Restated Certificate of Incorporation in the form attached hereto as EXHIBIT B
(the "RESTATED CERTIFICATE").
2.2 SALE OF SHARES. Subject to the terms and conditions of
this Agreement, at the Closing, the Purchaser agrees to purchase and the Company
agrees to sell and issue to the Purchaser, the Shares at an aggregate purchase
price of $12,000,000.
3. CLOSING DATE; DELIVERY
3.1 CLOSING DATE. The closing for the purchase and sale of the
Shares hereunder (the "CLOSING") will take place at 10:00 a.m. on October 1,
1999 (the "CLOSING DATE") at the offices of Venture Law Group, 4750 Carillon
Point, Kirkland, Washington 98033, or such other time and place as the Company
and the Purchaser shall agree upon.
3.2 DELIVERY. At the Closing, the Company will deliver to the
Purchaser a certificate registered in the Purchaser's name representing the
Series D Preferred to be purchased by the Purchaser at the Closing. At the
Closing, the Purchaser will pay the purchase price
-2-
<PAGE>
therefor, by check or wire transfer, at the option of the Purchaser, to the
Company's bank account.
4. RIGHT TO SELL ADDITIONAL STOCK.
4.1 PUT RIGHT. Subject to the terms and conditions hereof,
during the Put Right Period, the Company shall have the irrevocable (except as
set forth below in Section 4.3) and unconditional right to sell (by delivery of
Sale Notice (as defined below) to the Purchaser during the Put Right Period),
and the Purchaser shall have the irrevocable and unconditional obligation to
buy, Put Right Securities having an aggregate Put Right Purchase Price not to
exceed $10,000,000 (the "PUT RIGHT SHARES").
4.2 EXERCISE OF RIGHT. The Company shall give the Purchaser
written notice of the exercise of the Put Right (the "SALE NOTICE") specifying
the number of Put Right Shares to be purchased and the time and place of the
closing, which shall be 30 calendar days after the date of the Sale Notice (or
such earlier time as is mutually agreed in writing); PROVIDED, HOWEVER, that if
the Put Right is exercised in connection with the Company's IPO the closing
shall take place concurrently with the closing of the Company's IPO, which shall
not take place earlier than 30 calendar days after the date of the Sale Notice
unless mutually agreed in writing; and PROVIDED, FURTHER, the exercise of the
Put Right and the sale and issuance of shares pursuant thereto shall be
structured in such a way as to comply with federal and state securities laws and
the directives of the Securities and Exchange Commission.
4.3 EXPIRATION. The Company may give the Purchaser only one
Sale Notice (subject to the provisions set forth below), and the Put Right shall
expire if the Sale Notice has not been delivered by the Company to the Purchaser
prior to the expiration of the Put Right Period; PROVIDED, HOWEVER, if the Put
Right is exercised, and the Sale Notice provided by the Company, in connection
with the IPO or a Qualifying Equity Financing, and the IPO or the Qualifying
Equity Financing does not close for any reason whatsoever, the Company shall
retain the Put Right as if such Sale Notice had not been provided; PROVIDED,
FURTHER, if by performance of its obligations in connection with the exercise of
the Put Right by the Company, Purchaser would exceed the Threshold Percentage
(as defined in the Standstill Agreement) of Actual Voting Power (as defined in
the Standstill Agreement), then (i) the Put Right shall be deemed to have been
exercised for only such number of shares as shall cause Purchaser's Actual
Voting Power to equal the Threshold Percentage and the number of Put Right
Shares that the Company may require the Purchaser to purchase pursuant to the
exercise of such Put Right shall be reduced accordingly and (ii) the Company
shall retain the right to exercise, and the Purchaser shall remain obligated to
purchase (upon further exercise of the Put Right by the Company), the balance of
the Put Right during the remainder of the Put Right Period (the "RE-EXERCISE
RIGHT"). Notwithstanding the foregoing, the Company shall be entitled to
exercise the Re-exercise Right no more than three times (excluding the initial
exercise of the Put Right) and each exercise of the Re-exercise Right shall be
in the amount of at least $1,000,000, unless the Put Right Purchase Price
associated with all remaining Put Right Shares is less than $1,000,000 in which
case the Company shall be entitled to exercise the Re-Exercise Right
notwithstanding the foregoing.
-3-
<PAGE>
4.4 CLOSING. The closing of the purchase and sale of the Put
Right Shares (the "PUT RIGHT CLOSING") will take place at 10:00 a.m. on the date
specified in the Sale Notice (the "PUT RIGHT CLOSING DATE") at the offices of
Venture Law Group, 4750 Carillon Point, Kirkland, Washington 98033, or such
other time and place as the Company and the Purchaser shall agree upon.
4.5 DELIVERY. At the Put Right Closing, the Company will
deliver to the Purchaser a certificate registered in the Purchaser's name
representing the Put Right Shares to be purchased by the Purchaser at the Put
Right Closing. At the Put Right Closing, the Purchaser will pay the purchase
price therefor, by check or wire transfer, at the option of the Purchaser, to
the Company's bank account.
4.6 PURCHASE DOCUMENTS. At the Put Right Closing, the Company
and the Purchaser will enter into a stock purchase agreement and such ancillary
agreements as necessary on substantially the same terms as those contained in
this Agreement and the Ancillary Agreements (except the Collaboration Agreement
and the Standstill Agreement).
5. REPRESENTATIONS AND WARRANTIES OF THE COMPANY Except as set
forth on the Schedule of Exceptions attached hereto as EXHIBIT C, the Company
hereby represents and warrants to the Purchaser as follows:
5.1 ORGANIZATION AND STANDING. The Company is a corporation
duly organized and validly existing under, and by virtue of, the laws of
Delaware and is in good standing under such laws. The Company has the requisite
corporate power to own and operate its properties and assets, and to carry on
its business as presently conducted and as proposed to be conducted. The Company
is duly qualified to transact business and is validly in existence in the State
of Washington and is in good standing in each other jurisdiction in which the
failure to qualify would have a material adverse effect on its business or
properties. True and accurate copies of the Company's Certificate of
Incorporation and Bylaws, each as amended and in effect at the Closing, have
been delivered to the Purchaser.
5.2 CORPORATE POWER. The Company has and will have as of the
Closing Date all requisite legal and corporate power to execute and deliver this
Agreement and the Ancillary Agreements of even date herewith, to sell and issue
the Series D Preferred hereunder, to issue the Conversion Stock and to carry out
and perform its obligations under the terms of this Agreement and the Ancillary
Agreements, provided, however, that the Company's ability to perform the
indemnification provisions of the Investors' Rights Agreement may be limited by
public policy.
5.3 SUBSIDIARIES. The Company owns 100% of the outstanding
capital stock of Acacia Biosciences, Inc., a Delaware corporation ("ACACIA"),
and except for Acacia, the Company has no subsidiaries or affiliated companies
and does not otherwise own or control, directly or indirectly, or own any
securities of, any other corporation, association or business entity.
-4-
<PAGE>
5.4 CAPITALIZATION. The authorized capital stock of the
Company consists, or immediately prior to the Closing will consist, of:
(a) PREFERRED STOCK. 18,000,000 shares of Preferred
Stock, 6,225,000 shares of which have been designated Series A Preferred Stock
(the "SERIES A PREFERRED"), of which 4,462,500 shares are issued and outstanding
immediately prior to the Closing, 1,600,000 shares of Series B Preferred Stock
(the "SERIES B PREFERRED"), of which 1,387,298 shares are issued and outstanding
immediately prior to the Closing, 2,750,000 shares of Series C Preferred Stock
(the "SERIES C PREFERRED"), 2,019,452 of which are issued and outstanding
immediately prior to the Closing, 2,285,714 shares of which have been designated
Series D Preferred Stock (the "SERIES D PREFERRED"), none of which are issued as
outstanding immediately prior to the Closing, and 5,139,286 shares of
undesignated Preferred Stock. The rights, privileges and preferences of the
Preferred Stock are as stated in the Restated Certificate.
(b) COMMON STOCK. 36,000,000 shares of Common Stock,
5,075,044 shares of which are issued and outstanding, as of September 27, 1999.
The Company has reserved 6,225,000 shares of Common Stock for issuance upon
conversion of the Series A Preferred, 1,600,000 shares of Common Stock for
issuance upon conversion of the Series B Preferred and 2,750,000 shares of
Common Stock for issuance upon conversion of the Series C Preferred and
2,285,714 shares of Common Stock for issuance upon conversion of the Series D
Preferred. An additional 3,107,825 shares are reserved for issuance pursuant to
the Company's 1997 Stock Plan (the "PLAN") to Employees and Consultants (as
defined in the Plan), of which 324,131 shares have been issued pursuant to
option exercises, and 2,227,636 shares are subject to outstanding, unexercised
options, as of September 27, 1999.
(c) WARRANTS. Immediately prior to the Closing, there
were issued and outstanding warrants to purchase up to an aggregate of (a)
891,636 shares of Common Stock (the "COMMON STOCK WARRANTS"), (b) 254,823 shares
of Series A Preferred (the "SERIES A WARRANTS"), (c) 134,596 shares of Series B
Preferred (the "SERIES B WARRANTS") and (d) 54,949 shares of Series C Preferred
(the "SERIES C WARRANTS") (the Series A Warrants, the Series B Warrants, the
Series C Warrants and the Common Stock Warrants, collectively, the "ROSETTA
WARRANTS").
(d) All of the issued and outstanding shares of
Common Stock and Preferred Stock have been duly authorized and validly issued,
are fully paid and nonassessable and have been issued in compliance with
applicable federal and state securities laws. Except for (i) conversion
privileges of the Preferred Stock, (ii) the outstanding options issued pursuant
to the Plan and (iii) the Rosetta Warrants, and except as set forth in the
Investors' Rights Agreement, there are no outstanding options, warrants, rights
(including conversion or preemptive rights and rights of first refusal or
similar rights) or agreements, orally or in writing, for or relating to the
purchase or acquisition from the Company of any shares of its capital stock. The
Company is not aware of any voting agreements among its stockholders.
5.5 AUTHORIZATION. All corporate action on the part of the
Company, its directors and stockholders necessary for the authorization,
execution, delivery and performance of this Agreement and the Ancillary
Agreements by the Company, the authorization, sale,
-5-
<PAGE>
issuance and delivery of the Securities, and the performance of the Company's
obligations hereunder and thereunder has been taken or will be taken prior to
the Closing. The Agreement and the Ancillary Agreements, when executed and
delivered by the Company, will constitute valid and legally binding obligations
of the Company, enforceable in accordance with their terms, subject to: (i)
judicial principles respecting election of remedies or limiting the availability
of specific performance, injunctive relief, and other equitable remedies; (ii)
bankruptcy, insolvency, reorganization, moratorium or other similar laws now or
hereafter in effect generally relating to or affecting creditors' rights; and
(iii) limitations on the enforceability of the indemnification provisions of the
Investor Rights Agreement.
5.6 VALID ISSUANCE OF SECURITIES. The Series D Preferred that
is being issued to the Purchaser hereunder, when issued, sold and delivered in
accordance with the terms hereof for the consideration expressed herein, will be
duly and validly issued, fully paid and nonassessable and free of liens,
encumbrances and restrictions on transfer other than restrictions on transfer
under this Agreement, the Investors' Rights Agreement and applicable state and
federal securities laws. Based in part upon the representations of the Purchaser
in this Agreement and subject to the provisions of Section 5.12 below, the
Series D Preferred will be issued in compliance with all applicable federal and
state securities laws. The Conversion Stock has been duly and validly reserved
for issuance, and upon issuance in accordance with the terms of the Restated
Certificate, shall be duly and validly issued, fully paid and nonassessable and
free of liens, encumbrances and restrictions on transfer other than restrictions
on transfer under this Agreement, the Investors' Rights Agreement, the Company's
Bylaws and applicable federal and state securities laws and will be issued in
compliance with all applicable federal and state securities laws. The sale of
the Series D Preferred and the subsequent conversion of the Series D Preferred
into Conversion Stock are not and will not be subject to any preemptive rights
or rights of first refusal.
5.7 TITLE. The Company and its subsidiary have good and
marketable title to its properties and assets, and has good title to all its
leasehold interests, in each case subject to no mortgage, pledge, lien, lease,
encumbrance or charge, other than (a) the lien of current taxes not yet due and
payable and (b) such encumbrances and liens which arise in the ordinary course
of business and do not materially impair the Company's or its subsidiary's
ownership or use of such property or assets.
5.8 COMPLIANCE WITH OTHER INSTRUMENTS. The Company is not in
violation of any term of its Restated Certificate or Bylaws or in any material
respect of any term or provision of any mortgage, indenture, contract,
agreement, instrument, judgment or decree and, to its knowledge, is not in
violation of any order, statute, rule or regulation applicable to the Company,
the violation of which would have a material adverse effect on the Company's
business or properties. The execution, delivery and performance of and
compliance with this Agreement, the Ancillary Agreements, and the transactions
contemplated hereby and thereby, and the issuance of the Series D Preferred and
the Conversion Stock, have not resulted and will not result in any such
violation, or be in conflict with, or constitute, with or without the passage of
time or giving of notice, a default under, require any consent or waiver under
any such provision (other than any
-6-
<PAGE>
consents or waivers that have been obtained) or result in the creation of, any
mortgage, pledge, lien, encumbrance or charge upon any of the properties or
assets of the Company.
5.9 LITIGATION. There are no actions, suits, proceedings or
investigations pending against the Company, its subsidiary or any of their
respective properties before any court or governmental agency (nor, to the
Company's knowledge, is there any threat or basis therefor). The foregoing
includes, without limitation, actions, suits, proceedings or investigations
pending or threatened against the Company (or any basis therefor known to the
Company) that questions the validity of this Agreement, the Voting Agreement,
the Investors Rights Agreement or the Standstill Agreement or the right of the
Company to enter into any of them, or to consummate the transactions
contemplated hereby or thereby. Neither the Company nor its subsidiary is a
party to any order, writ, injunction, judgment, or decree of any court or
governmental agency or instrumentality. There is no action, suit, proceeding, or
investigation by the Company or its subsidiary currently pending or that the
Company or its subsidiary presently intends to initiate.
5.10 EMPLOYEES; PROPRIETARY INFORMATION. To the Company's
knowledge after due inquiry, no employee or consultant of the Company or its
subsidiary is in violation of any term of any employment agreement, patent
disclosure agreement, information or technique allegedly proprietary to any
former employer or any other party, or any other contract or agreement relating
to the relationship of such employee with the Company or any other party because
of the nature of the business conducted or to be conducted by the Company. Each
officer, employee, or consultant of the Company has signed a proprietary
information agreement, each of which remains in full force and effect as of the
date hereof.
5.11 REGISTRATION RIGHTS. Except as set forth in the
Investors' Rights Agreement, the Company is not under any obligation to register
any of its presently outstanding securities or any of its securities which may
hereafter be issued.
5.12 GOVERNMENTAL CONSENT. No consent, approval or
authorization of, or designation, declaration or filing with, any governmental
authority on the part of the Company is required in connection with the valid
execution and delivery of this Agreement and the Ancillary Agreements or the
offer, sale or issuance of the Series D Preferred and the Conversion Stock, or
the consummation of any other transaction contemplated hereby or thereby, except
(a) the filing of the Restated Certificate in the office of the Delaware
Secretary of State and (b) the qualification (or taking such action as may be
necessary to ensure an exemption from qualification, if available) of the offer
and sale of the Series D Preferred and the Conversion Stock under the Delaware
General Corporation Law, Regulation D of the Securities Act, and other
applicable state or federal securities laws, which filings and qualification, if
required, will be accomplished in a timely manner, as required by such laws.
5.13 PATENTS AND TRADEMARKS. To its knowledge, the Company and
its subsidiary have sufficient title, ownership or the right to use of all
trademarks, service marks, trade names, copyrights, trade secrets, information,
proprietary rights, processes, and patents in the United States, necessary for
its business as now conducted and as proposed to be conducted without any known
conflict with or infringement of the rights of others. Except as set forth on
-7-
<PAGE>
Schedule 5.17, there are no material outstanding options, licenses, or
agreements of any kind relating to the foregoing between the Company or its
subsidiary and any third party, nor is the Company or its subsidiary bound by or
a party to any material options, licenses or agreements of any kind with respect
to the patents, trademarks, service marks, trade names, copyrights, trade
secrets, licenses, information, proprietary rights and processes of any other
person or entity. The Company has not received any communications alleging that
the Company or its subsidiary has violated or, by conducting its business as
proposed, would violate any of the patents, trademarks, service marks, trade
names, copyrights or trade secrets or other proprietary rights of any other
person or entity. The Company is not aware that any of its employees is
obligated under any contract (including licenses, covenants or commitments of
any nature) or other agreement, or subject to any judgment, decree or order of
any court or administrative agency, that would interfere with the use of his or
her best efforts to promote the interests of the Company or that would conflict
with the Company's business as proposed to be conducted. Neither the execution
nor delivery of this Agreement, nor the carrying on of the Company's business as
presently conducted by the employees of the Company, nor the conduct of the
Company's business as proposed, will, to the Company's knowledge after due
inquiry, conflict with or will result in a breach of the terms, conditions or
provisions of, or constitute a default under, any contract, covenant or
instrument under which any of such employees or consultants is now obligated.
5.14 OFFERING. Subject to the accuracy of the Purchaser's
representations in Section 5.4 hereof and in written responses to the Company's
inquiries, the offer, sale and issuance of the Series D Preferred to be issued
in conformity with the terms of this Agreement and the issuance of the
Conversion Stock, constitute transactions exempt from the registration
requirements of federal and state securities laws.
5.15 FINANCIAL STATEMENTS. Schedule 5.15 includes a true and
complete copy of the Company's and its subsidiary's audited financial statements
(balance sheet, statement of operations, statement of stockholders' equity and
statement of cash flows) as of December 31, 1998 and for the fiscal year ended
December 31, 1998 and their consolidated unaudited financial statements
(including balance sheet, income statement and statement of cash flows) as of
June 30, 1999 (collectively, the "ROSETTA FINANCIAL STATEMENTS"). The Rosetta
Financial Statements have been prepared in accordance with generally accepted
accounting principles ("GAAP") applied on a consistent basis throughout the
periods indicated and with each other. The Rosetta Financial Statements fairly
present the financial condition and operating results of the Company and its
subsidiary as of the dates, and for the periods, indicated therein, subject to
normal year-end audit adjustments. The Company has maintained and will continue
to maintain a standard system of accounting established and administered in
accordance with GAAP. Neither the Company nor its subsidiary have any material
obligations or liabilities of any nature (matured or unmatured, fixed or
contingent) other than (a) those set forth or adequately provided for in the
balance sheet as of June 30, 1999 (the "ROSETTA BALANCE SHEET"), (b) those
incurred in the ordinary course of business and not required to be set forth in
the Rosetta Balance Sheet under GAAP, (c) those incurred in the ordinary course
of business since the date of the Rosetta Balance Sheet and consistent with past
practice and (d) those incurred in connection with the execution of this
Agreement and the Ancillary Agreements.
-8-
<PAGE>
5.16 CHANGES . Since June 30, 1999, there has not been:
(a) any change in the assets, liabilities, financial
condition or operating results of the Company, except changes in the ordinary
course of business that have not been, in the aggregate, materially adverse;
(b) any damage, destruction or loss, whether or not
covered by insurance, materially and adversely affecting the business,
properties, prospects, or financial condition of the Company;
(c) any waiver or compromise by the Company of a
valuable right or of a material debt owed to it;
(d) any satisfaction or discharge of any lien, claim,
or encumbrance or payment of any obligation by the Company, except in the
ordinary course of business and that is not material to the business,
properties, prospects or financial condition of the Company;
(e) any material change to a material contract or
agreement by which the Company or any of its assets is bound or subject;
(f) any material change in any compensation
arrangement or agreement with any employee of the Company;
(g) any sale, assignment or transfer of any patents,
trademarks, copyrights, trade secrets or other intangible assets of the Company;
(h) any resignation or termination of employment of
any officer or key employee of the Company;
(i) any declaration, setting aside or payment or
other distribution in respect to any of the Company's capital stock, or any
direct or indirect redemption, purchase, or other acquisition of any of such
stock by the Company;
(j) to the Company's knowledge, any other event or
condition of any character that might materially and adversely affect the
business, properties, prospects or financial condition of the Company, taken as
a whole; or
(k) any arrangement or commitment by the Company or
its subsidiary to do any of the things described in this Section 5.16.
5.17 MATERIAL CONTRACTS. Schedule 5.17 contains a list of all
contracts and agreements to which the Company and its subsidiary are a party and
that are material to the business, results of operations, or condition
(financial or otherwise), of the Company and its subsidiary taken as a whole
(such contracts, agreements and arrangements as are required to be set forth in
Schedule 5.17 being referred to herein collectively as the "ROSETTA MATERIAL
CONTRACTS") which shall be categorized in Schedule 5.17 as follows:
-9-
<PAGE>
(i) each contract and agreement (other than routine
purchase orders and pricing quotes in the ordinary course of business covering a
period of less than 1 year) for the purchase of equipment, inventory, spare
parts, other materials or personal property with any supplier or for the
furnishing of services to the Company or its subsidiary under the terms of which
the Company or its subsidiary: (A) paid or otherwise gave consideration of more
than Twenty-Five Thousand Dollars ($25,000) in the aggregate during the calendar
year ended December 31, 1998, (B) is likely to pay or otherwise give
consideration of more than Twenty-Five Thousand Dollars ($25,000) in the
aggregate during the calendar year ended December 31, 1999, (C) is likely to pay
or otherwise give consideration of more than Twenty-Five Thousand Dollars
($25,000) in the aggregate over the remaining term of such contract or (D)
cannot be canceled by the Company or its subsidiary without penalty or further
payment of less than Twenty-Five Thousand Dollars ($25,000);
(ii) all material agreements relating to the
Company's and its subsidiary's Intellectual Property or the Company's and its
subsidiary's employees;
(iii) all material management contracts with
independent contractors or consultants (or similar arrangements) to which the
Company or its subsidiary is a party;
(iv) all contracts and agreements (excluding
payroll, trade accounts payable or routine checking account overdraft agreements
involving petty cash amounts) under which the Company or its subsidiary have
created, incurred, assumed or guaranteed (or may create, incur, assume or
guarantee) indebtedness or under which the Company or its subsidiary have
imposed (or may impose) a security interest or lien on any of their respective
assets, whether tangible or intangible, to secure indebtedness;
(v) all contracts and agreements that limit
the ability of the Company or its subsidiary, to compete in any line of business
as currently conducted or with any person or in any geographic area or during
any period of time, or to solicit any customer or client; and
(vi) all other contracts or agreements which
are material to the Company or its subsidiary or the conduct of the Company's
business or its subsidiary's business as currently conducted.
5.18 INSURANCE. The Company has in full force and effect fire,
casualty and liability insurance policies, which to the best of the Company's
knowledge are in such amounts and with such coverage as are carried by companies
similar to the Company.
5.19 FINDER'S FEES. The Company represents and warrants that
it has retained no finder or broker in connection with the transactions
contemplated by this Agreement and hereby agrees to indemnify and to hold the
Purchaser harmless of and from any liability for commission or compensation in
the nature of a finder's fee to any broker or other person or firm (and the
costs and expense of defending against such liability or asserted liability) for
which the Company, or any of its employees or representatives, are responsible.
-10-
<PAGE>
5.20 DISCLOSURE. To the Company's knowledge, no statement by
the Company contained in this Agreement and the attached exhibits and any
written statement or certificate furnished or to be furnished to the Purchaser
pursuant to this Agreement or in connection with the transactions contemplated
hereby (when read together) contains any untrue statement of a material fact or
omits to state a material fact necessary in order to make the statements
contained herein or therein not misleading in light of the circumstances under
which they were made, except that with respect to the financial projections and
forecasts delivered to the Purchaser, if any, the Company represents only that
such projection and forecasts were prepared in good faith and on what the
Company believes is a reasonable basis. The Company does not warrant that it
will achieve such projections. To its knowledge, the Company has provided the
Purchaser with all the information it has reasonably requested in connection
with its decision to purchase the Series D Preferred hereunder.
5.21 NO CONFLICT OF INTEREST. Neither the Company nor its
subsidiary are indebted, directly or indirectly, to any of their respective
officers, directors or common stockholders; none of said officers, directors or
common stockholders, or any members of their immediate families, are indebted to
the Company or its subsidiary, have entered into any transaction with the
Company or its subsidiary other than the purchase of common stock and consulting
agreements or have any direct or indirect ownership interest in any firm or
corporation with which the Company or its subsidiary are affiliated or with
which the Company or its subsidiary have a business relationship, or any firm or
corporation which competes with the Company or its subsidiary except that such
officers, directors and common stockholders of the Company and its subsidiary
may own less than two percent of the outstanding capital stock of publicly
traded companies which may compete with the Company. Neither the Company nor its
subsidiary are a guarantor or indemnitor of any indebtedness of any other
person, firm or corporation.
5.22 TAX RETURNS, PAYMENTS AND ELECTIONS. The Company and its
subsidiary have filed all tax returns and reports as required by law. These
returns and reports are true and correct in all material respects. The Company
and its subsidiary have paid all taxes and other assessments due, except those
contested by it in good faith. The provision for taxes of the Company and its
subsidiary as shown in the Rosetta Balance Sheet is adequate for taxes due or
accrued as of the date thereof.
5.23 OUTSTANDING INDEBTEDNESS. The Company does not have any
indebtedness for borrowed money, or other liabilities (fixed or contingent),
which the Company has directly or indirectly created, incurred, assumed, or
guaranteed, or with respect to which the Company has otherwise become directly
or indirectly liable. The Company and its subsidiaries have no liability or
obligation, absolute or contingent, other than liabilities or obligations of
less than $100,000 or, in the aggregate, less than $250,000, incurred in the
ordinary course of business.
5.24 YEAR 2000. To the best of the Company's knowledge, all of
the Company's internal computer systems, including, without limitation, its
accounting systems, will record, store, process and calculate any information
dependent on or relating to dates in the same manner and with the same
functionality, data integrity and performance as the products record,
-11-
<PAGE>
store, process and calculate and present calendar dates on or before December
31, 1999, or calculate any information dependent on or relating to such dates.
6. REPRESENTATIONS AND WARRANTIES OF THE PURCHASER; RESTRICTIONS
ON TRANSFER
6.1 REPRESENTATIONS AND WARRANTIES OF THE PURCHASER. The
Purchaser hereby represents and warrants to the Company with respect to this
purchase of the Series D Preferred provided for herein as follows:
(a) All action on the part of the Purchaser for the
authorization, execution, delivery and performance by the Purchaser of this
Agreement has been taken. The Agreement and the Ancillary Agreements, when
executed and delivered by the Purchaser, will constitute valid and legally
binding obligations of the Purchaser, enforceable in accordance with their
terms, subject to: (i) judicial principles respecting election of remedies or
limiting the availability of specific performance, injunctive relief, and other
equitable remedies; (ii) bankruptcy, insolvency, reorganization, moratorium or
other similar laws now or hereafter in effect generally relating to or affecting
creditorS' rights; and (iii) limitations on the enforceability of the
indemnification provisions of the Investor Rights Agreement.
(b) The Purchaser is an accredited investor within
the meaning of Regulation D prescribed by the Securities and Exchange Commission
(the "COMMISSION") pursuant to the Securities Act.
(c) The Purchaser is acquiring the Securities for
investment for its own account and not with a view to, or for resale in
connection with, any distribution. The Purchaser understands that the Securities
to be purchased have not been registered under the Securities Act by reason of a
specific exemption from the registration provisions of the Securities Act which
depends upon, among other things, the bona fide nature of the investment intent
as expressed herein.
(d) The Purchaser acknowledges that the Securities
must be held indefinitely unless subsequently registered under the Securities
Act or an exemption from such registration is available. The Purchaser is aware
of the provisions of Rule 144 promulgated under the Securities Act which permits
limited resale of shares purchased in a private placement subject to the
satisfaction of certain conditions, including, in case the Purchaser has held
the securities for less than two (2) years or is an affiliate of the Company,
among other things: the availability of certain current public information about
the Company, the resale occurring not less than one (1) year after the
securities were purchased from the Company or an affiliate of the Company, the
sale being through a "broker's transaction" or in transactions directly with a
"market maker," and the number of shares being sold during any three (3) month
period not exceeding specified limitations.
(e) The Purchaser understands that no public
market now exists for any of the securities issued by the Company and that there
can be no assurance that a public market will ever exist for the Securities.
-12-
<PAGE>
(f) The Purchaser has had an opportunity to discuss
the Company's business, management and financial affairs and the terms and
conditions of the offering of the Series D Preferred with the Company's
management.
(g) The Purchaser has not engaged any brokers,
finders, or agents and has not incurred, and will not incur, directly or
indirectly, any liability for brokerage or finder's fee or agents' commissions
or any similar charges in connection with this Agreement and the transactions
contemplated hereby and agrees to indemnify and to hold the Company harmless of
and from any liability for any commission or compensation in the nature of a
finder's fee to any broker or other person or firm (and the costs and expenses
of defending against such liability or asserted liability) for which the
Purchaser, or any of its employees or representatives, is responsible.
(h) If the Purchaser is not a United States person
(as defined by Section 7701(a)(30) of the Internal Revenue Code of 1986, as
amended), the Purchaser hereby represents that it has satisfied itself as to the
full observance of the laws of its jurisdiction in connection with any
invitation to subscribe for the Securities or any use of this Agreement,
including (i) the legal requirements within its jurisdiction for the purchase of
the Securities, (ii) any foreign exchange restrictions applicable to such
purchase, (iii) any governmental or other consents that may need to be obtained,
and (iv) the income tax and other tax consequences, if any, that may be relevant
to the purchase, holding, redemption, sale, or transfer of the Securities. Such
Purchaser's subscription and payment for and continued beneficial ownership of
the Securities, will not violate any applicable securities or other laws of the
Purchaser's jurisdiction.
6.2 LEGENDS. Each certificate representing the Securities
shall be endorsed with the following legend (in addition to any legend required
by applicable state securities laws):
(a) "THE SECURITIES REPRESENTED BY THIS CERTIFICATE
HAVE NOT BEEN REGISTERED UNDER THE SECURITIES ACT OF 1933, AS AMENDED,
AND HAVE BEEN ACQUIRED FOR INVESTMENT AND NOT WITH A VIEW TO, OR IN
CONNECTION WITH, THE SALE OR DISTRIBUTION THEREOF. NO SUCH SALE OR
DISPOSITION MAY BE EFFECTED WITHOUT AN EFFECTIVE REGISTRATION STATEMENT
RELATED THERETO OR AN OPINION OF COUNSEL FOR THE COMPANY THAT SUCH
REGISTRATION IS NOT REQUIRED UNDER THE SECURITIES ACT OF 1933, AS
AMENDED."
(b) Any legend required by the Blue Sky laws of any
state to the extent such laws are applicable to the shares represented
by the certificate so legended.
The Company will not register a transfer of Securities, unless the
conditions specified in the foregoing legend are satisfied, and the Company may
instruct its transfer agent not to register the transfer of any of the
Securities unless the conditions specified in the foregoing legend are
satisfied.
In addition to any other limitations on transferability imposed under
the Securities Act or applicable state securities laws, until such time as the
Common Shares are listed on a national
-13-
<PAGE>
securities exchange or the Nasdaq National Market, the Purchaser agrees not to
offer for sale, sell, assign or otherwise dispose of all or any portion of the
Purchased Shares without the prior written consent of the Company, such consent
not to be unreasonably withheld. Notwithstanding the foregoing, the Purchaser
may, without the prior written consent of the Company but subject to the
Securities Act or applicable state securities laws, transfer all or any portion
of the Securities to (i) any entity that controls, is controlled by or is under
common control with the Purchaser or (ii) any entity which purchases all or
substantially all of the assets of the Purchaser or any entity which succeeds to
the assets and liabilities of the Purchaser as a result of any merger or
consolidation with or into the Purchaser; provided that in any such case the
Purchaser provides the Company with prior written notice of the transfer, giving
the name and particulars of the transfer, and the transferee agrees in writing
with the Company to be bound by and liable under the terms and conditions of
this Agreement, and any documents and agreements ancillary hereto, as fully as
if such transferee were a party to this Agreement.
6.3 REMOVAL OF LEGENDS AND TRANSFER RESTRICTIONS. The legend
relating to the Securities Act endorsed on a stock certificate pursuant to
Section 6.2 of this Agreement and the stop transfer instructions with respect to
the Securities represented by such certificate shall be removed and the Company
shall issue a certificate without such legend to the holder of such Securities
if such Securities are registered under the Securities Act and a prospectus
meeting the requirements of Section 10 of the Securities Act is available or if
such holder provides to the Company an opinion of counsel for such holder of the
Securities reasonably satisfactory to the Company, or a no-action letter or
interpretive opinion of the staff of the Commission to the effect that a public
sale, transfer or assignment of such Securities may be made without registration
and without compliance with any restriction such as Rule 144.
7. CONDITIONS TO CLOSING
7.1 CONDITIONS TO PURCHASER'S OBLIGATIONS AT CLOSING. The
Purchaser's obligation to purchase the Shares at the Closing is subject to the
fulfillment on or prior to the Closing Date of the following conditions, any of
which may be waived in writing in whole or in part by the Purchaser:
(a) The representations and warranties made by the
Company herein shall be true and correct when made, and shall be true and
correct on the Closing Date with the same force and effect as it they had been
made on and as of the same date; and the Company shall have performed all
obligations and conditions herein required to be performed or observed by it on
or prior to the Closing Date.
(b) The Company shall have obtained all consents,
permits and waivers necessary or appropriate for consummation of the
transactions contemplated by this Agreement which need to be obtained prior to
the Closing.
(c) The Company shall have filed the Restated
Certificate in the form attached as EXHIBIT B with the Delaware Secretary of
State.
-14-
<PAGE>
(d) At the Closing, the purchase of the Series D
Preferred by the Purchaser hereunder shall be legally permitted by all laws and
regulations to which the Purchaser or the Company are subject.
(e) The Company shall have delivered to the
Purchaser a certificate executed by the Chief Financing Officer of the Company,
dated as of the Closing Date, certifying to the fulfillment of the conditions
specified in subsections (a) and (b) of this Section 7.1.
(f) The Purchaser shall have received from Venture
Law Group, counsel to the Company, an opinion letter addressed to the Purchaser,
dated as of the Closing Date, substantially in the form attached hereto as
EXHIBIT F.
(g) The Company, the Purchaser and a majority of the
Investors (as defined in the Fourth Amended Investors' Rights Agreement) shall
have entered into the Investors' Rights Agreement substantially in the form
attached hereto as EXHIBIT D.
(h) A total of $12,000,000 of Series D Preferred
shall be subscribed for at the Closing.
(i) The Company and the Purchaser shall have
entered into the Collaboration Agreement.
(j) The Company and the Purchaser shall have
entered into the Standstill Agreement substantially in the form attached hereto
as EXHIBIT E.
(j) The Company, the Purchaser and a majority of the
Investors (as defined in the Voting Agreement) shall have entered into the
Voting Agreement substantially in the form attached hereto as EXHIBIT G.
(k) The Company's Bylaws shall provide for a Board
of Directors consisting of 12 members. As of the Closing Date, all necessary
corporate action shall have been taken such that, effective upon the Closing,
the Board of Directors shall consist of Stephen Friend, John King, Leroy Hood,
Stephen McKnight, Ruth Kunath, Charles Waite, Peter Svenillson, Steve Gillis,
Harvey Sadow and Jasper Rine. A representative designated by the Purchaser will
be appointed to the Board of Directors within a reasonable period of time
following the Closing.
7.2 CONDITION TO COMPANY'S OBLIGATIONS AT CLOSING. The
Company's obligation to sell and issue the Shares at the Closing is subject to
the fulfillment to the Company's satisfaction on or prior to the Closing Date of
the following conditions, any of which may be waived in writing in whole or in
part by the Company:
(a) The representations and warranties made by the
Purchaser herein shall be true and correct when made, and shall be true and
correct on the Closing Date with the same force and effect as if they had been
made on and as of the same date, and the Purchaser
-15-
<PAGE>
shall have performed all obligations and conditions herein required to be
performed or observed by it on or prior to the Closing Date.
(b) The Company shall have obtained all consents,
permits and waivers necessary or appropriate for consummation of the
transactions contemplated by this Agreement which need to be obtained prior to
the Closing Date.
(c) The Company shall have filed the Restated
Certificate in the form attached as EXHIBIT B with the Delaware Secretary of
State.
(d) At the Closing, the purchase of the Series D
Preferred by the Purchaser hereunder shall be legally permitted by all laws and
regulations to which the Purchaser or the Company are subject.
(e) The Company, the Purchaser and a majority of the
Investors (as defined in the Investors' Rights Agreement) shall have entered
into the Investors' Rights Agreement substantially in the form attached hereto
as EXHIBIT D.
(f) The Purchaser shall have delivered to the
Company a certificate executed by the Chief Financing Officer of the Purchaser,
dated as of the Closing Date, certifying to the fulfillment of the conditions
specified in subsection (a) of this Section 7.2.
(g) A total of $12,000,000 of Series D Preferred
shall be subscribed for at the Closing.
(h) The Company and the Purchaser shall have
entered into the Collaboration Agreement.
(i) The Company and the Purchaser shall have entered
into the Standstill Agreement substantially in the form attached hereto as
EXHIBIT E.
(j) The Company, the Purchaser and a majority of the
Investors (as defined in the Voting Agreement) shall have entered into the
Voting Agreement substantially in the form attached hereto as EXHIBIT G.
8. COVENANTS OF THE COMPANY
8.1 FINANCIAL ACCOUNTING INFORMATION. Beginning on the date
hereof, to the extent reasonably requested by the Purchaser, the Company shall,
and shall use reasonable commercial efforts to cause its employees, independent
public accountants and other representatives to, provide information regarding
the Company to, and otherwise cooperate with, the Purchaser so as to enable the
Purchaser to prepare financial statements in accordance with accounting
principles generally accepted in the United States and to comply with its
reporting, requirements and other disclosure obligations under applicable United
States securities laws and regulations; PROVIDED, HOWEVER, that (i) the Company
reserves the right to exclude such information if the Company believes upon
advice of counsel that such exclusion is reasonably
-16-
<PAGE>
necessary to preserve the attorney-client privilege, to protect highly
confidential proprietary information or for other similar reasons; (ii) any such
information shall be deemed to be Confidential Information (as defined in the
Collaboration Agreement) of the Company; and (iii) Purchaser shall not use, and
hereby covenants not to use, such information in violation of applicable state
and federal securities laws.
8.2 RIGHT OF FIRST NOTIFICATION. Provided the Company has
exercised the Put Right and Purchaser has acquired on exercise of the Put Right
at least $5,000,000 of Put Right Shares, then beginning on the date the Put
Right has been so exercised and ending on the second anniversary of the closing
of the IPO:
(i) if the Company decides to commence discussions
with any third party acquiror (an "ACQUIROR") with respect to any transaction
which would result in a change in control of the Company, whether through a
merger, stock exchange or sale of all or substantially all of its assets (a
"TRANSACTION"), then the Company shall promptly provide the Purchaser with a
written notice of such decision and shall not enter into any definitive
agreement with respect to a Transaction with an Acquiror third party until at
least thirty (30) days after delivery of such notice (the "THIRTY DAY PERIOD"),
and during the Thirty Day Period the Company shall not enter into any agreement
with an Acquiror that either (A) precludes it from negotiating with the
Purchaser with respect to a Transaction or (B) provides for a break-up fee in
the event of such a negotiation with the Purchaser; and
(ii) if the Company receives a proposal from an
Acquiror with respect to a Transaction (an "ACQUISITION PROPOSAL"), the Company
shall promptly provide the Purchaser with a written notice of the receipt of
such proposal and, to the extent permissible under the terms of the Acquisition
Proposal, a copy of the Acquisition Proposal, and the Company shall not enter
into any definitive agreement with respect to a Transaction with an Acquiror
until the earlier of ten (10) days after delivery of such notice or the
expiration of the Thirty Day Period (if the Acquisition Proposal is received
during the Thirty Day Period) (such period of time being referred to as the
"EXCLUSIVE PERIOD"), and during the Exclusive Period the Company shall not enter
into any agreement with an Acquiror that either (A) precludes it from
negotiating with the Purchaser with respect to a Transaction or (B) provides for
a break-up fee in the event of such a negotiation with the Purchaser.
8.3 OBSERVER RIGHTS. Beginning on the date hereof and ending
on the earlier of (i) the second anniversary of the closing of the IPO, (ii) the
termination of the Collaboration Agreement or (iii) the termination of the
Standstill Agreement, if Purchaser is not represented on the Company's Board of
Directors, the Company shall invite a representative of Purchaser to attend all
meetings of its Board of Directors in a nonvoting observer capacity (the
"OBSERVER RIGHT") and, in this respect, shall give such representative timely
copies of all notices, minutes, consents, and other material that it provides to
its directors; PROVIDED, HOWEVER, that the Company reserves the right to exclude
such representative from access to any material or meeting or portion thereof if
the Company believes upon advice of counsel that such exclusion is reasonably
necessary to preserve the attorney-client privilege, to protect highly
confidential proprietary information or for other similar reasons. Such
representative may participate in discussions of
-17-
<PAGE>
matters brought to the Board at the invitation of the Board. Purchaser agrees,
and will cause any representative of Purchaser to agree, to hold in confidence
and trust and not use or disclose any confidential information provided to or
learned by it in connection with its rights under this Agreement. The
confidentiality provisions hereof will survive any termination of this Observer
Right.
9. CONFIDENTIALITY. Neither the Company nor the Purchaser, nor
any of their officers, directors, employees, agents or representatives shall
issue any statement of communication to any third party, whether or not in
response to an inquiry, regarding the existence of subject matter of this
Agreement and the transactions contemplated hereby, without prior consent of the
other party, subject to the obligations of the parties to comply with applicable
securities laws and the rules and regulations of the New York Stock Exchange and
The Nasdaq National Market.
10. MISCELLANEOUS
10.1 WAIVERS AND AMENDMENTS. With the written consent of the
record holders of a majority of the Securities then outstanding, the obligation
of the Company and the rights of the holders of the Securities under this
Agreement may be waived (either generally or in a particular instance, either
retroactively or prospectively and either for a specified period of time or
indefinitely), and with the same consent the Company, when authorized by
resolution of its Board of Directors, may enter into a supplementary agreement
for the purpose of adding any provisions to or changing in any manner or
eliminating any of the provisions of this Agreement. Neither this Agreement nor
any provisions hereof may be changed, waived, discharged or terminated orally,
but only by a signed statement in writing.
10.2 GOVERNING LAW. This Agreement shall be governed in all
aspects by the law of the State of Washington as such law is applied to
agreements between Washington residents entered into and to be performed
entirely within Washington.
10.3 SURVIVAL OF WARRANTIES. The representations, warranties,
covenants and agreements made herein shall survive any investigation made by the
Purchaser, the execution and delivery of this Agreement and the Closings of the
transactions contemplated hereby.
10.4 SUCCESSORS AND ASSIGNS. Except as otherwise expressly
provided herein, the provisions hereof shall inure to the benefit of, and be
binding upon, the successors, assigns, heirs, executors and administrators of
the parties hereto. If the Purchaser shall, on or about November 1, 1999,
transfer certain assets and personnel dealing with the subject matter of the
Collaboration Agreement to Agilent Technologies, Inc. ("AGILENT"), this
Agreement shall on such date be automatically transferred to and be binding upon
Agilent.
10.5 ENTIRE AGREEMENT. This Agreement and the other documents
delivered pursuant hereto, including the exhibits, constitute the full and
entire understanding and agreement between the parties with regard to the
subjects hereof and thereof.
-18-
<PAGE>
10.6 SEVERABILITY OF THIS AGREEMENT. In case any provision of
this Agreement shall be invalid, illegal or unenforceable, the validity,
legality and enforceability of the remaining provisions shall not in any way be
affected or impaired thereby.
10.7 TITLES AND SUBTITLES. The titles of the sections and
subsections of this Agreement are for convenience of reference only and are not
to be considered in construing this Agreement.
10.8 DELAYS OR OMISSIONS. It is agreed that no delay or
omission to exercise any right, power or remedy accruing to the Purchaser, upon
any breach or default of the Company under the Agreement, shall impair any such
right, power or remedy, nor shall it be construed to be a waiver of any such
breach or default, or any acquiescence therein, or of or in any similar breach
or default thereafter occurring; nor shall any waiver of any single breach or
default be deemed a waiver of any other breach or default theretofore or
thereafter occurring. It is further agreed that any waiver, permit, consent or
approval of any kind or character by the Purchaser of any breach or default
under this Agreement, or any waiver by the Purchaser of any provisions or
conditions of this Agreement must be in writing and shall be effective only to
the extent specifically set forth in writing and that all remedies, either under
this Agreement, or by law or otherwise afforded to the Purchaser, shall be
cumulative and not alternative.
10.9 PAYMENT OF FEES AND EXPENSES. Each of the Company and the
Purchaser shall bear its own expenses incurred on its behalf with respect to
this Agreement and the transactions contemplated thereby. If any action at law
or in equity is necessary to enforce the terms of this Agreement or the Restated
Certificate, the prevailing party shall be entitled to reasonable attorney's
fees, costs and necessary disbursements in addition to any other relief to which
such party may be entitled.
10.10 NOTICES. Any notice or report required in this Agreement
or permitted to be given shall be given in writing and shall be deemed effective
upon delivery, when delivered personally or by overnight courier or sent by
telegram or fax (a) if to Purchaser, at Purchaser's address as set forth on
Exhibit A, or at such other address as Purchaser shall have furnished to the
Company in writing, (b) if to any other holder of any Series D Preferred, at
such address as such holder shall have furnished the Company in writing, or,
until any such holder so furnishes an address to the Company, (c) if to the
Company, one copy should be sent to its address set forth below and addressed to
the attention of the Corporate Secretary, or at such other address as the
Company shall have furnished to the Purchaser and (d) if to the Company, one
copy should be sent to William W. Ericson, Venture Law Group, 4750 Carillon
Point, Kirkland, WA 98033.
10.11 COUNTERPARTS. This Agreement may be executed in any
number of counterparts, each of which shall be an original, but all of which
together shall constitute one instrument.
[Signature page follows.]
-19-
<PAGE>
IN WITNESS WHEREOF, the parties have caused this Agreement to be duly
executed and delivered as of the day and year first written above.
COMPANY:
ROSETTA INPHARMATICS, INC.
By: /s/ John J. King
----------------------------------
Name: -------------------------------
(print)
Title: ------------------------------
Address: 12040 115th Avenue NE
Suite 210
Kirkland, Washington 98034
PURCHASER:
HEWLETT-PACKARD COMPANY
By: ---------------------------------
Name: -------------------------------
(print)
Title: ------------------------------
Address: 3500 Deer Creek Rd.
Palo Alto, CA 94304
[SIGNATURE PAGE TO SERIES D PREFERRED
STOCK PURCHASE AGREEMENT]
<PAGE>
EXHIBITS
EXHIBIT A - Purchaser
EXHIBIT B - Form of Amended and Restated Certificate of Incorporation
EXHIBIT C - Schedule of Exceptions to Representations and Warranties
EXHIBIT D - Form of Investors' Rights Agreement
EXHIBIT E - Form of Standstill Agreement
EXHIBIT F - Form of Legal Opinion of Venture Law Group
EXHIBIT G - Form of Voting Agreement
<PAGE>
ROSETTA INPHARMATICS, INC.
SERIES E PREFERRED STOCK AND CONVERTIBLE NOTE
PURCHASE AGREEMENT
MARCH 15, 2000
<PAGE>
TABLE OF CONTENTS
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
1. Authorization and Sale of Series E Preferred Stock.........................................................1
1.1 Authorization of Series E Preferred Stock.......................................................1
1.2 Sale of Series E Preferred Stock................................................................1
1.3 Sale and Issuance of Convertible Promissory Note................................................1
2. Closing Date; Delivery.....................................................................................1
2.1 Closing Date....................................................................................1
2.2 Delivery........................................................................................1
3. Representations and Warranties of the Company..............................................................2
3.1 Organization and Standing.......................................................................2
3.2 Corporate Power.................................................................................2
3.3 Subsidiaries....................................................................................2
3.4 Capitalization..................................................................................2
3.5 Authorization...................................................................................3
3.6 Valid Issuance of Securities....................................................................3
3.7 Title...........................................................................................4
3.8 Compliance with Other Instruments...............................................................4
3.9 Litigation......................................................................................4
3.10 Employees; Proprietary Information..............................................................4
3.11 Registration Rights.............................................................................4
3.12 Governmental Consent............................................................................4
3.13 Material Contracts..............................................................................5
3.14 Patents and Trademarks..........................................................................6
3.15 Outstanding Indebtedness........................................................................6
3.16 Offering........................................................................................6
3.17 No Conflict of Interest.........................................................................6
3.18 Disclosure......................................................................................7
3.19 Financial Statements............................................................................7
3.20 Changes.........................................................................................8
3.21 Tax Returns, Payments and Elections.............................................................9
3.22 Insurance.......................................................................................9
3.23 Finder's Fees...................................................................................9
3.24 Section 83(b) Elections.........................................................................9
4. Representations and Warranties of the Purchasers; Restrictions on Transfer.................................9
4.1 Representations and Warranties of the Purchasers................................................9
4.2 Legends........................................................................................11
4.3 Removal of Legends and Transfer Restrictions...................................................11
<PAGE>
TABLE OF CONTENTS
(continued)
Page
----
<S> <C>
5. Conditions to Closing.....................................................................................12
5.1 Conditions to Purchasers' Obligations at Closing...............................................12
5.2 Condition to Company's Obligations at Closing..................................................12
6. HSR Act Filings...........................................................................................13
7. Further Agreements........................................................................................13
7.1 Nondisclosure..................................................................................13
7.2 Cooperation....................................................................................14
7.3 Proprietary Information Agreements.............................................................14
8. Miscellaneous.............................................................................................14
8.1 Waivers and Amendments.........................................................................14
8.2 Governing Law..................................................................................14
8.3 Survival.......................................................................................14
8.4 Successors and Assigns.........................................................................14
8.5 Entire Agreement...............................................................................14
8.6 Severability of this Agreement.................................................................14
8.7 Titles and Subtitles...........................................................................15
8.8 Delays or Omissions............................................................................15
8.9 Payment of Fees and Expenses...................................................................15
8.10 Notices........................................................................................15
8.11 Counterparts...................................................................................15
8.12 Exculpation Among Purchasers...................................................................15
</TABLE>
EXHIBITS
Exhibit A Schedule of Purchasers
Exhibit B Amended and Restated Certificate of Incorporation
Exhibit C Schedule of Exceptions
Exhibit D Investors' Rights Agreement
Exhibit E Opinion of Venture Law Group
Exhibit F Form of Convertible Promissory Note
ii
<PAGE>
ROSETTA INPHARMATICS, INC.
SERIES E PREFERRED STOCK AND CONVERTIBLE NOTE PURCHASE
AGREEMENT
This Series E Preferred Stock and Convertible Note Purchase Agreement
(the "AGREEMENT") is made as of the 15th day of March, 2000 by and between
Rosetta Inpharmatics, Inc., a Delaware corporation (the "COMPANY"), and the
investors listed on EXHIBIT A attached hereto (each a "PURCHASER" and together
the "PURCHASERS").
1. AUTHORIZATION AND SALE OF SERIES E PREFERRED STOCK
1.1 AUTHORIZATION OF SERIES E PREFERRED STOCK. The
Company has authorized, or before the Closing, as defined in paragraph 2.1
hereof, will have authorized, the issuance and sale of up to 4,469,087 shares of
its Series E Preferred Stock (the "SERIES E PREFERRED") at a purchase price of
$9.36 per share. The Series E Preferred has, or before the Closing will have,
the rights provided for in the Company's Sixth Amended and Restated Certificate
of Incorporation in the form attached hereto as EXHIBIT B, (the "RESTATED
CERTIFICATE").
1.2 SALE OF SERIES E PREFERRED STOCK. Subject to the
terms and conditions of this Agreement, each Purchaser agrees to purchase at the
Closing and the Company agrees to sell and issue to each Purchaser at the
Closing that number of shares of Series E Preferred indicated with respect to
such Purchaser on EXHIBIT A attached hereto. The Series E Preferred and the
Common Stock issuable upon conversion of the Series E Preferred (the "CONVERSION
STOCK") shall be hereinafter referred to as the "SECURITIES."
1.3 SALE AND ISSUANCE OF CONVERTIBLE PROMISSORY NOTE.
Subject to the terms and conditions of this Agreement, the Purchaser executing a
convertible note (the "NOTE PURCHASER") agrees to purchase at the Closing and
the Company agrees to sell and issue to the Note Holder a convertible promissory
note in substantially the form attached hereto as EXHIBIT F (the "NOTE") in the
principle amount specified with respect to the Note Purchaser on SCHEDULE A to
this Agreement. The purchase price for the note shall be equal to 100% of the
principal amount of the Note.
2. CLOSING DATE; DELIVERY
2.1 CLOSING DATE. The closing for the purchase and sale
of the Series E Preferred hereunder will be on March 14, 2000, at the offices of
Venture Law Group, 4750 Carillon Point, Kirkland, Washington 98033 or such other
time and place as the Company and the Purchasers shall agree upon (the
"CLOSING").
2.2 DELIVERY. At the Closing, the Company will deliver to
the Purchasers a certificate registered in each Purchaser's name representing
the Series E Preferred to be purchased by such Purchaser at the Closing and
deliver to the Note Purchaser the Note. At the Closing, such Purchaser will pay
the purchase price therefor, by check or wire transfer, at the option of the
Purchaser, to the Company's bank account.
<PAGE>
3. REPRESENTATIONS AND WARRANTIES OF THE COMPANY
Except as set forth on the Schedule of Exceptions attached
hereto as EXHIBIT C, the Company hereby represents and warrants to the
Purchasers as follows:
3.1 ORGANIZATION AND STANDING. The Company is a
corporation duly organized and validly existing under, and by virtue of, the
laws of Delaware and is in good standing under such laws. The Company has the
requisite corporate power to own and operate its properties and assets, and to
carry on its business as presently conducted and as proposed to be conducted.
The Company is duly qualified to transact business and is in good standing in
each jurisdiction in which the failure to qualify would have a material adverse
effect on its business or properties.
3.2 CORPORATE POWER. The Company will have as of the
Closing Date all requisite legal and corporate power to execute and deliver this
Agreement and the Investors' Rights Agreement of even date herewith, in the form
attached hereto as EXHIBIT D (the "INVESTORS' RIGHTS AGREEMENT"), to sell and
issue the Series E Preferred hereunder, to issue the Conversion Stock and to
carry out and perform its obligations under the terms of this Agreement and the
Investors' Rights Agreement, provided, however, that the Company's ability to
perform the indemnification provisions of the Investors' Rights Agreement may be
limited by public policy.
3.3 SUBSIDIARIES. The Company owns 100% of the
outstanding capital stock of Acacia Biosciences, Inc., a Delaware corporation
("ACACIA") and except for Acacia, the Company has no subsidiaries or affiliated
companies and does not otherwise own or control, directly or indirectly, any
other corporation, association or business entity.
3.4 CAPITALIZATION. The authorized capital stock of the
Company consists, or immediately prior to the First Closing will consist, of:
(a) PREFERRED STOCK. 18,000,000 shares of
Preferred Stock, 6,225,000 shares of which have been designated Series A
Preferred Stock (the "SERIES A PREFERRED"), of which 4,462,500 shares are issued
and outstanding immediately prior to the Closing, 1,600,000 shares of Series B
Preferred Stock (the "SERIES B PREFERRED"), of which 1,387,298 shares are issued
and outstanding immediately prior to the Closing, 2,750,000 shares of Series C
Preferred Stock (the "SERIES C PREFERRED"), of which 2,019,452 shares are issued
and outstanding immediately prior to the Closing, 2,285,714 shares of which have
been designated Series D Preferred Stock (the "SERIES D PREFERRED"), all of
which are issued and outstanding immediately prior to the Closing, 4,469,087
shares of which have been designated Series E Preferred Stock (the "SERIES E
PREFERRED") outstanding none of which are issued and outstanding immediately
prior to the Closing and 2,139,285 shares of undesignated Preferred Stock. The
rights, privileges and preferences of the Preferred Stock are as stated in the
Restated Certificate.
(b) COMMON STOCK. 40,000,000 shares of Common
Stock, 6,250,633 shares of which are issued and outstanding. The Company has
reserved 6,225,000 shares of Common Stock for issuance upon conversion of the
Series A Preferred, 1,600,000 shares of
-2-
<PAGE>
Common Stock for issuance upon conversion of the Series B Preferred, 2,750,000
shares of Common Stock for issuance upon conversion of the Series C Preferred,
2,285,714 shares of Common Stock for issuance upon conversion of the Series D
Preferred and 3,300,000 shares of Common Stock for issuance upon conversion of
the Series E Preferred. An additional 5,286,913 shares are reserved for issuance
pursuant to the Company's 1997 Stock Plan (the "PLAN") to Employees and
Consultants (as defined in the Plan), of which 1,469,720 shares have been issued
pursuant to option exercises, and 1,984,583 shares are subject to outstanding,
unexercised options.
(c) WARRANTS. Immediately prior to the First
Closing, there were issued and outstanding warrants to purchase up to an
aggregate of (a) 891,636 shares of Common Stock (the "COMMON STOCK WARRANTS"),
(b) 254,823 shares of Rosetta Series A Preferred (the "SERIES A WARRANTS"), (c)
134,596 shares of Series B Preferred (the "SERIES B WARRANTS") and (d) 54,949
shares of Series C Preferred (the "SERIES C WARRANTS") and together with the
Common Stock Warrants, the Series A and the Series B Warrants, collectively, the
"ROSETTA WARRANTS").
(d) All of the issued and outstanding shares of
Common Stock and Preferred Stock have been duly authorized and validly issued,
are fully paid and nonassessable and have been issued in compliance with
applicable federal and state securities laws. Except for (i) conversion
privileges of the Preferred Stock, (ii) the outstanding options issued pursuant
to the Plan and (iii) the Rosetta Warrants, and except as set forth in the
Investors' Rights Agreement, there are no outstanding options, warrants, rights
(including conversion or preemptive rights and rights of first refusal or
similar rights) or agreements, orally or in writing, for the purchase or
acquisition from the Company of any shares of its capital stock. The Company is
not aware of any voting agreements among its stockholders.
3.5 AUTHORIZATION. All corporate action on the part of
the Company, its directors and stockholders necessary for the authorization,
execution, delivery and performance of this Agreement and the Investors' Rights
Agreement by the Company, the authorization, sale, issuance and delivery of the
Securities, and the performance of the Company's obligations hereunder and
thereunder has been taken or will be taken prior to the Closing.
3.6 VALID ISSUANCE OF SECURITIES. The Series E Preferred
that is being issued to the Purchasers hereunder, when issued, sold and
delivered in accordance with the terms hereof for the consideration expressed
herein, will be duly and validly issued, fully paid and nonassessable and free
of restrictions on transfer other than restrictions on transfer under this
Agreement, the Investors' Rights Agreement and applicable state and federal
securities laws. Based in part upon the representations of the Purchasers in
this Agreement and subject to the provisions of Section 3.12 below, the Series E
Preferred will be issued in compliance with all applicable federal and state
securities laws. The Conversion Stock has been duly and validly reserved for
issuance, and upon issuance in accordance with the terms of the Restated
Certificate, shall be duly and validly issued, fully paid and nonassessable and
free of restrictions on transfer other than restrictions on transfer under this
Agreement, the Investors' Rights Agreement and applicable federal and state
securities laws and will be issued in compliance with all applicable federal and
state securities laws.
-3-
<PAGE>
3.7 TITLE. The Company and its subsidiaries have good and
marketable title to its properties and assets, and has good title to all its
leasehold interests, in each case subject to no mortgage, pledge, lien, lease,
encumbrance or charge, other than (a) the lien of current taxes not yet due and
payable and (b) such encumbrances and liens which arise in the ordinary course
of business and do not materially impair the Company's or its subsidiaries'
ownership or use of such property or assets.
3.8 COMPLIANCE WITH OTHER INSTRUMENTS. The Company is not
in violation of any term of its Restated Certificate or Bylaws or in any
material respect of any term or provision of any mortgage, indenture, contract,
agreement, instrument, judgment or decree and, to its knowledge, is not in
violation of any order, statute, rule or regulation applicable to the Company,
the violation of which would have a material adverse effect on the Company's
business or properties. The execution, delivery and performance of and
compliance with this Agreement and the Investors' Rights Agreement, and the
issuance of the Series E Preferred and the Conversion Stock, have not resulted
and will not result in any such violation, or be in conflict with, or constitute
a default under, or result in the creation of, any mortgage, pledge, lien,
encumbrance or charge upon any of the properties or assets of the Company.
3.9 LITIGATION. There are no actions, suits, proceedings
or investigations pending against the Company, its subsidiaries or any of their
respective properties before any court or governmental agency (nor, to the
Company's knowledge, is there any threat or basis therefor). Neither the Company
nor any of its subsidiaries is a party to any order, writ, injunction, judgment,
or decree of any court or governmental agency or instrumentality. There is no
action, suit, proceeding, or investigation by the Company or any of its
subsidiaries currently pending or that the Company or any of its subsidiaries
presently intends to initiate.
3.10 EMPLOYEES; PROPRIETARY INFORMATION. To the Company's
knowledge after due inquiry, no employee or consultant of the Company or any of
its subsidiaries is in violation of any term of any employment agreement, patent
disclosure agreement, information or technique allegedly proprietary to any
former employer or any other party, or any other contract or agreement relating
to the relationship of such employee with the Company or any other party because
of the nature of the business conducted or to be conducted by the Company. Each
officer, employee, or consultant of the Company has signed a proprietary
information agreement, each of which remains in full force and effect as of the
date hereof.
3.11 REGISTRATION RIGHTS. Except as set forth in the
Investors' Rights Agreement, the Company is not under any obligation to register
any of its presently outstanding securities or any of its securities which may
hereafter be issued.
3.12 GOVERNMENTAL CONSENT. No consent, approval or
authorization of, or designation, declaration or filing with, any governmental
authority on the part of the Company is required in connection with the valid
execution and delivery of this Agreement and the Investors' Rights Agreement or
the offer, sale or issuance of the Series E Preferred and the Conversion Stock,
or the consummation of any other transaction contemplated hereby or thereby,
except (a) the filing of the Restated Certificate in the office of the Delaware
Secretary of State and
-4-
<PAGE>
(b) the qualification (or taking such action as may be necessary to ensure an
exemption from qualification, if available) of the offer and sale of the Series
E Preferred and the Conversion Stock under the Delaware General Corporation Law,
Regulation D of the Securities Act of 1933, as amended (the "SECURITIES ACT"),
and other applicable state or federal securities laws, which filings and
qualification, if required, will be accomplished in a timely manner, as required
by such laws.
3.13 MATERIAL CONTRACTS. Schedule 3.13 contains a list of
all contracts and agreements to which the Company and its subsidiaries are a
party and that are material to the business, results of operations, or condition
(financial or otherwise), of the Company and its subsidiaries taken as a whole
(such contracts, agreements and arrangements as are required to be set forth in
Schedule 3.13 being referred to herein collectively as the "ROSETTA MATERIAL
CONTRACTS") which shall be categorized in Schedule 3.13 as follows:
(i) each contract and agreement (other than
routine purchase orders and pricing quotes in the ordinary course of business
covering a period of less than 1 year) for the purchase of equipment, inventory,
spare parts, other materials or personal property with any supplier or for the
furnishing of services to the Company or any of its subsidiaries under the terms
of which the Company or any of its subsidiaries: (A) paid or otherwise gave
consideration of more than Twenty-Five Thousand Dollars ($25,000) in the
aggregate during the calendar year ended December 31, 1999, (B) is likely to pay
or otherwise give consideration of more than Twenty-Five Thousand Dollars
($25,000) in the aggregate during the calendar year ended December 31, 2000, (C)
is likely to pay or otherwise give consideration of more than Twenty-Five
Thousand Dollars ($25,000) in the aggregate over the remaining term of such
contract or (D) cannot be canceled by the Company or its subsidiaries without
penalty or further payment of less than Twenty-Five Thousand Dollars ($25,000);
(ii) all material agreements relating to the
Company's and its subsidiaries' Intellectual Property or the Company's and its
subsidiaries'employees;
(iii) all material management contracts with
independent contractors or consultants (or similar arrangements) to which the
Company or any of its subsidiaries is a party;
(iv) all contracts and agreements (excluding
payroll, trade accounts payable or routine checking account overdraft agreements
involving petty cash amounts) under which the Company or any of its subsidiaries
have created, incurred, assumed or guaranteed (or may create, incur, assume or
guarantee) indebtedness or under which the Company or any of its subsidiaries
have imposed (or may impose) a security interest or lien on any of their
respective assets, whether tangible or intangible, to secure indebtedness;
(v) all contracts and agreements that limit
the ability of the Company or any of its subsidiaries, to compete in any line of
business as currently conducted or with any person or in any geographic area or
during any period of time, or to solicit any customer or client; and
-5-
<PAGE>
(vi) all other contracts or agreements which
are material to the Company or any of its subsidiaries or the conduct of the
Company's business or any of its subsidiaries' business as currently conducted.
3.14 PATENTS AND TRADEMARKS. To its knowledge, the Company
and its subsidiaries have sufficient title, ownership or the right to use of all
trademarks, service marks, trade names, copyrights, trade secrets, information,
proprietary rights, processes, and patents in the United States, necessary for
its business as now conducted and as proposed to be conducted without any known
conflict with or infringement of the rights of others. Except as set forth on
Schedule 3.14, there are no material outstanding options, licenses, or
agreements of any kind relating to the foregoing between the Company or any of
its subsidiaries and any third party, nor is the Company or any of its
subsidiaries bound by or a party to any material options, licenses or agreements
of any kind with respect to the patents, trademarks, service marks, trade names,
copyrights, trade secrets, licenses, information, proprietary rights and
processes of any other person or entity. The Company has not received any
communications alleging that the Company or any of its subsidiaries has violated
or, by conducting its business as proposed, would violate any of the patents,
trademarks, service marks, trade names, copyrights or trade secrets or other
proprietary rights of any other person or entity. The Company is not aware that
any of its employees is obligated under any contract (including licenses,
covenants or commitments of any nature) or other agreement, or subject to any
judgment, decree or order of any court or administrative agency, that would
interfere with the use of his or her best efforts to promote the interests of
the Company or that would conflict with the Company's business as proposed to be
conducted. Neither the execution nor delivery of this Agreement, nor the
carrying on of the Company's business as presently conducted by the employees of
the Company, nor the conduct of the Company's business as proposed, will, to the
Company's knowledge after due inquiry, conflict with or will result in a breach
of the terms, conditions or provisions of, or constitute a default under, any
contract, covenant or instrument under which any of such employees or
consultants is now obligated.
3.15 OUTSTANDING INDEBTEDNESS. The Company does not have
any indebtedness for borrowed money, or other liabilities (fixed or contingent),
which the Company has directly or indirectly created, incurred, assumed, or
guaranteed, or with respect to which the Company has otherwise become directly
or indirectly liable. The Company and its subsidiaries have no liability or
obligation, absolute or contingent, other than liabilities or obligations of
less than $100,000 or, in the aggregate, less than $250,000, incurred in the
ordinary course of business.
3.16 OFFERING. Subject to the accuracy of the Purchasers'
representations in Section 3.4 hereof and in written responses to the Company's
inquiries, the offer, sale and issuance of the Series E Preferred to be issued
in conformity with the terms of this Agreement and the issuance of the Common
Stock to be issued upon conversion of the Series E Preferred, constitute
transactions exempt from the registration requirements of federal and state
securities laws.
3.17 NO CONFLICT OF INTEREST. Neither the Company nor any
of its subsidiaries are indebted, directly or indirectly, to any of their
respective officers, directors or common
-6-
<PAGE>
stockholders; none of said officers, directors or common stockholders, or any
members of their immediate families, are indebted to the Company or any of its
subsidiaries, have entered into any transaction with the Company or any of its
subsidiaries other than the purchase of common stock and consulting agreements
or have any direct or indirect ownership interest in any firm or corporation
with which the Company or any of its subsidiaries are affiliated or with which
the Company or any of its subsidiaries have a business relationship, or any firm
or corporation which competes with the Company or any of its subsidiaries except
that such officers, directors and common stockholders of the Company and its
subsidiaries may own less than two percent of the outstanding capital stock of
publicly traded companies which may compete with the Company. Neither the
Company nor any of its subsidiaries are a guarantor or indemnitor of any
indebtedness of any other person, firm or corporation.
3.18 DISCLOSURE. To the Company's knowledge, no statement
by the Company contained in this Agreement and the attached exhibits and any
written statement or certificate furnished or to be furnished to the Purchasers
pursuant to this Agreement or in connection with the transactions contemplated
hereby (when read together) contains any untrue statement of a material fact or
omits to state a material fact necessary in order to make the statements
contained herein or therein not misleading in light of the circumstances under
which they were made, except that with respect to the financial projections and
forecasts delivered to the Purchasers, if any, the Company represents only that
such projection and forecasts were prepared in good faith and on what the
Company believes is a reasonable basis. The Company does not warrant that it
will achieve such projections. All Business Plans of the Company distributed to
potential investors have been prepared in good faith and fairly represent the
business as conducted or as proposed to be conducted. To its knowledge, the
Company has provided the Purchasers with all the information they have
reasonably requested in connection with their decision to purchase the Series E
Preferred hereunder.
3.19 FINANCIAL STATEMENTS. Schedule 3.19 includes a true
and complete copy of the Company's and its subsidiaries' unaudited financial
statements (balance sheet, statement of operations, statement of stockholders'
equity and statement of cash flows) as of December 31, 1999 and for the fiscal
year ended December 31, 1999 and their unaudited financial statements (including
balance sheet, income statement and statement of cash flows) as of February 29,
2000 and for the two-month period ended February 29, 2000 (collectively, the
"ROSETTA FINANCIAL STATEMENTS"). The Rosetta Financial Statements have been
prepared in accordance with GAAP applied on a consistent basis throughout the
periods indicated and with each other. The Rosetta Financial Statements fairly
present the financial condition and operating results of the Company and its
subsidiaries as of the dates, and for the periods, indicated therein, subject to
normal year-end audit adjustments. The Company has maintained a standard system
of accounting established and administered in accordance with GAAP. Neither the
Company nor any of its subsidiaries have any material obligations or liabilities
of any nature (matured or unmatured, fixed or contingent) other than (a) those
set forth or adequately provided for in the balance sheets as of February 29,
2000 (collectively, the "ROSETTA BALANCE SHEET"), (b) those incurred in the
ordinary course of business and not required to be set forth in the Rosetta
Balance Sheet under GAAP, (c) those incurred in the ordinary course of business
since the date of the Rosetta Balance
-7-
<PAGE>
Sheet and consistent with past practice and (d) those incurred in connection
with the execution of this Agreement.
3.20 CHANGES. Since February 29, 2000, there has not
been:
(a) any change in the assets, liabilities,
financial condition or operating results of the Company or any of its
subsidiaries from that reflected in the Rosetta Financial Statements, except
changes in the ordinary course of business that have not been, in the aggregate,
materially adverse;
(b) any damage, destruction or loss, whether
or not covered by insurance, materially and adversely affecting the business,
properties, prospects, or financial condition of the Company or any of its
subsidiaries;
(c) any waiver or compromise by the Company or
any of its subsidiaries of a valuable right or of a material debt owed to it;
(d) any satisfaction or discharge of any lien,
claim, or encumbrance or payment of any obligation by the Company or any of its
subsidiaries, except in the ordinary course of business and that is not material
to the business, properties, prospects or financial condition of the Company and
its subsidiaries;
(e) any material change to a material contract
or agreement by which the Company, any of its subsidiaries or any of their
respective assets is bound or subject;
(f) any material change in any compensation
arrangement or agreement with any employee, officer, director or stockholder;
(g) any sale, assignment or transfer of any
patents, trademarks, copyrights, trade secrets or other intangible assets;
(h) any resignation or termination of employment
of any officer or key employee of the Company or any of its subsidiaries; and
the Company, is not aware of any impending resignation or termination of
employment of any such officer or key employee;
(i) any mortgage, pledge, transfer of a security
interest in, or lien, created by the Company or any of its subsidiaries, with
respect to any of their respective material properties or assets, except liens
for taxes not yet due or payable;
(j) any loans or guarantees made by the Company
or any of its subsidiaries to or for the benefit of its employees, officers or
directors, or any members of their immediate families, other than travel
advances and other advances made in the ordinary course of its business;
(k) any declaration, setting aside or payment or
other distribution in respect to any of the Company's or any of its
subsidiaries' capital stock, or any direct or indirect
-8-
<PAGE>
redemption, purchase, or other acquisition of any of such stock by the Company
or any of its subsidiaries;
(l) to the Company's knowledge, any other event
or condition of any character that might materially and adversely affect the
business, properties, prospects or financial condition of the Company or any of
its subsidiaries, taken as a whole; or
(m) any arrangement or commitment by the
Company or any of its subsidiaries to do any of the things described in this
Section 3.20.
3.21 TAX RETURNS, PAYMENTS AND ELECTIONS. The Company and
its subsidiaries have filed all tax returns and reports as required by law.
These returns and reports are true and correct in all material respects. The
Company and its subsidiaries have paid all taxes and other assessments due,
except those contested by it in good faith. The provision for taxes of the
Company and its subsidiaries as shown in the Rosetta Balance Sheet is adequate
for taxes due or accrued as of the date thereof.
3.22 INSURANCE. The Company has in full force and effect
fire, casualty and liability insurance policies, which to the best of the
Company's knowledge are in such amounts and with such coverage as are carried by
companies similar to the Company.
3.23 FINDER'S FEES. The Company represents and warrants
that it has retained no finder or broker in connection with the transactions
contemplated by this Agreement and hereby agrees to indemnify and to hold the
Purchasers harmless of and from any liability for commission or compensation in
the nature of a finder's fee to any broker or other person or firm (and the
costs and expense of defending against such liability or asserted liability) for
which the Company, or any of its employees or representatives, are responsible.
3.24 SECTION 83(B) ELECTIONS. To the Company's knowledge,
all elections and notices required by Section 83(b) of the Internal Revenue Code
and any analogous provisions of applicable state tax laws have been timely filed
by Dr. Stephen H. Friend, Dr. Leroy Hood, Mr. John J. King, II and Dr. Alan
Blanchard.
4. REPRESENTATIONS AND WARRANTIES OF THE PURCHASERS; RESTRICTIONS
ON TRANSFER
4.1 REPRESENTATIONS AND WARRANTIES OF THE PURCHASERS.
Each Purchaser hereby represents and warrants to the Company with respect to
this purchase of the Series E Preferred provided for herein as follows:
(a) All action on the part of the Purchaser for
the authorization, execution, delivery and performance by the Purchaser of this
Agreement has been taken. The Agreements, when executed and delivered by the
Purchaser, will constitute valid and legally binding obligations of the
Purchaser, enforceable in accordance with their terms.
-9-
<PAGE>
(b) The Purchaser is an accredited investor
within the meaning of Regulation D prescribed by the Securities and Exchange
Commission (the "COMMISSION") pursuant to the Securities Act.
(c) The Purchaser is acquiring the Securities
for investment for its own account and not with a view to, or for resale in
connection with, any distribution. The Purchaser understands that the Securities
to be purchased have not been registered under the Act by reason of a specific
exemption from the registration provisions of the Act which depends upon, among
other things, the bona fide nature of the investment intent as expressed herein.
(d) The Purchaser acknowledges that the
Securities must be held indefinitely unless subsequently registered under the
Act or an exemption from such registration is available. The Purchaser is
aware of the provisions of Rule 144 promulgated under the Act which permits
limited resale of shares purchased in a private placement subject to the
satisfaction of certain conditions, including, in case the Purchaser has held
the securities for less than two (2) years or is an affiliate of the Company,
among other things: the availability of certain current public information
about the Company, the resale occurring not less than one (1) year after the
securities were purchased from the Company or an affiliate of the Company,
the sale being through a "broker's transaction" or in transactions directly
with a "market maker," and the number of shares being sold during any three
(3) month period not exceeding specified limitations.
(e) The Purchaser understands that no public
market now exists for any of the securities issued by the Company and that there
can be no assurance that a public market will ever exist for the Securities.
(f) The Purchaser has had an opportunity to
discuss the Company's business, management and financial affairs and the
terms and conditions of the offering of the Series E Preferred with the
Company's management.
(g) The Purchaser has not engaged any brokers,
finders, or agents and has not incurred, and will not incur, directly or
indirectly, any liability for brokerage or finder's fee or agents' commissions
or any similar charges in connection with this Agreement and the transactions
contemplated hereby and agrees to indemnify and to hold the Company harmless of
and from any liability for any commission or compensation in the nature of a
finder's fee to any broker or other person or firm (and the costs and expenses
of defending against such liability or asserted liability) for which the
Purchaser, or any of its employees or representatives, is responsible.
(h) If the Purchaser is not a United States
person (as defined by Section 7701(a)(30) of the Internal Revenue Code of 1986,
as amended), such Purchaser hereby represents that it has satisfied itself as to
the full observance of the laws of its jurisdiction in connection with any
invitation to subscribe for the Securities or any use of this Agreement,
including (i) the legal requirements within its jurisdiction for the purchase of
the Securities, (ii) any foreign exchange restrictions applicable to such
purchase, (iii) any governmental or other consents that may need to be obtained,
and (iv) the income tax and other tax consequences, if
-10-
<PAGE>
any, that may be relevant to the purchase, holding, redemption, sale, or
transfer of the Securities. Such Purchaser's subscription and payment for and
continued beneficial ownership of the Securities, will not violate any
applicable securities or other laws of the Purchaser's jurisdiction.
4.2 LEGENDS. Each certificate representing the
Securities shall be endorsed with the following legend (in addition to any
legend required by applicable state securities laws):
(a) "THE SECURITIES REPRESENTED BY THIS
CERTIFICATE HAVE NOT BEEN REGISTERED UNDER THE SECURITIES ACT OF 1933,
AND HAVE BEEN ACQUIRED FOR INVESTMENT AND NOT WITH A VIEW TO, OR IN
CONNECTION WITH, THE SALE OR DISTRIBUTION THEREOF. NO SUCH SALE OR
DISPOSITION MAY BE EFFECTED WITHOUT AN EFFECTIVE REGISTRATION
STATEMENT RELATED THERETO OR AN OPINION OF COUNSEL FOR THE COMPANY
THAT SUCH REGISTRATION IS NOT REQUIRED UNDER THE SECURITIES ACT
OF 1933."
(b) Any legend required by the Blue Sky laws
of any state to the extent such laws are applicable to the shares
represented by the certificate so legended.
The Company will not register a transfer of Securities, unless the
conditions specified in the foregoing legend are satisfied, and the Company may
instruct its transfer agent not to register the transfer of any of the
Securities unless the conditions specified in the foregoing legend are
satisfied.
In addition to any other limitations on transferability imposed under
the Act or applicable state securities laws, until such time as the Common
Shares are listed on a national securities exchange or Nasdaq National Market,
the Purchaser agrees not to offer for sale, sell, assign or otherwise dispose of
all or any portion of the Purchased Shares without the prior written consent of
the Company, such consent not to be unreasonably withheld. Notwithstanding the
foregoing, the Purchaser may, without the prior written consent of the Company
but subject to the Act or applicable state securities laws, transfer all or any
portion of the Securities to (i) any entity that controls, is controlled by or
is under common control with the Purchaser or (ii) any entity which purchases
all or substantially all of the assets of the Purchaser or any entity which
succeeds to the assets and liabilities of the Purchaser as a result of any
merger or consolidation with or into the Purchaser; provided that in any such
case the Purchaser provides the Company with prior written notice of the
transfer, giving the name and particulars of the transfer, and the transferee
agrees in writing with the Company to be bound by and liable under the terms and
conditions of this Agreement, and any documents and agreements ancillary hereto,
as fully as if such transferee were a party to this Agreement.
4.3 REMOVAL OF LEGENDS AND TRANSFER RESTRICTIONS. The
legend relating to the Act endorsed on a stock certificate pursuant to paragraph
4.2 of this Agreement and the stop transfer instructions with respect to the
Securities represented by such certificate shall be removed and the Company
shall issue a certificate without such legend to the holder of such Securities
if such Securities are registered under the Act and a prospectus meeting the
requirements of Section 10 of the Act is available or if such holder provides to
the Company an
-11-
<PAGE>
opinion of counsel for such holder of the Securities reasonably satisfactory to
the Company, or a no-action letter or interpretive opinion of the staff of the
Commission to the effect that a public sale, transfer or assignment of such
Securities may be made without registration and without compliance with any
restriction such as Rule 144. It is agreed that the Company will not require
opinions of counsel for transactions made pursuant to Rule 144 except in unusual
circumstances.
5. CONDITIONS TO CLOSING
5.1 CONDITIONS TO PURCHASERS' OBLIGATIONS AT CLOSING.
Each Purchaser's obligation to purchase the Series E Preferred at the Closing is
subject to the fulfillment on or prior to the Closing of the following
conditions, any of which may be waived in writing in whole or in part by the
Purchaser:
(a) The representations and warranties made by
the Company herein shall be true and correct when made, and shall be true and
correct on the Closing with the same force and effect as it they had been made
on and as of the same date; and the Company shall have performed all obligations
and conditions herein required to be performed or observed by it on or prior to
the Closing.
(b) The Company shall have obtained all
consents, permits and waivers necessary or appropriate for consummation of
the transactions contemplated by this Agreement which need to be obtained
prior to the Closing.
(c) The Company shall have filed the Restated
Certificate in the form attached as EXHIBIT B with the Delaware Secretary of
State.
(d) At each Closing, the purchase of the Series
E Preferred by the Purchaser hereunder shall be legally permitted by all laws
and regulations to which such Purchaser or the Company are subject.
(e) The Company shall have delivered to the
Purchasers a certificate executed by the Chief Financing Officer of the Company,
dated as of the applicable Closing Date, certifying to the fulfillment of the
conditions specified in subparagraphs (a) and (b) of this paragraph 5.1.
(f) The Purchasers shall have received from
Venture Law Group, counsel to the Company, an opinion letter addressed to the
Purchasers, dated as of the Closing, substantially in the form attached hereto
as EXHIBIT E.
(g) The Company and the Purchasers shall have
entered into the Investors' Rights Agreement substantially in the form
attached hereto as EXHIBIT D.
5.2 CONDITION TO COMPANY'S OBLIGATIONS AT CLOSING. The
Company's obligation to sell and issue the Series E Preferred at the Closing is
subject to the fulfillment to the Company's satisfaction on or prior to the
Closing Date of the following conditions, any of which may be waived in writing
in whole or in part by the Company:
-12-
<PAGE>
(a) The representations and warranties made by
the Purchasers herein shall be true and correct when made, and shall be true and
correct on the Closing Date with the same force and effect as if they had been
made on and as of the same date, and the Purchasers shall have performed all
obligations and conditions herein required to be performed or observed by them
on or prior to the Closing Date.
(b) The Company shall have obtained all
consents, permits and waivers necessary or appropriate for consummation of the
transactions contemplated by this Agreement which need to be obtained prior to
the Closing Date.
(c) The Company shall have filed the Restated
Certificate in the form attached as EXHIBIT B with the Delaware Secretary of
State on or prior to the Closing.
(d) At each Closing, the purchase of the Series
E Preferred by the Purchasers hereunder shall be legally permitted by all laws
and regulations to which the Purchasers or the Company are subject.
(e) The Company and the Purchasers shall have
entered into the Investors' Rights Agreement substantially in the form attached
hereto as EXHIBIT D.
6. HSR ACT FILINGS. As soon as practicable after the Closing,
the Company and the Note Purchaser will separately file with the United States
Federal Trade Commission and the Antitrust Division of the Justice Department
pursuant to the HSR Act all requisite documents and notifications in order to
provide for conversion of the Note into shares of the Company's Series E
Preferred Stock. The parties will cooperate and coordinate with one another in
exchanging information and providing reasonable assistance as the other parties
may request in connection with the foregoing.
7. FURTHER AGREEMENTS
7.1 NONDISCLOSURE. Each Purchaser agrees not to use
Confidential Information (as hereinafter defined) of the Company for its own use
other than as permitted by agreement with the Company or for any purpose except
to evaluate its equity investment in the Company. Each Purchaser agrees not to
disclose such Confidential Information to any third parties or to any of its
employees except employees who are required to have the Confidential Information
to evaluate such Purchaser's investment in the Company or as permitted under the
terms of any other agreements between the parties. For purposes of this
paragraph, "Confidential Information" means any information, technical data or
know-how, including, but not limited to, the Company's research, products,
software, services, development, inventions, processes, designs, drawings,
engineering, marketing or finances, disclosed by the Company either directly or
indirectly in writing, orally or by drawings or inspection of parts or equipment
and which the Company has marked "confidential," "proprietary" or "secret" or
has otherwise identified as being such. Confidential Information does not
include information, technical data or know-how which (a) is in a Purchaser's
possession at the time of disclosure as shown by such Purchaser's files and
records; (b) before or after it has been disclosed to such Purchaser, is part of
the public knowledge or literature, not as a result of any action or inaction of
such Purchaser; (c) is
-13-
<PAGE>
approved for release by written authorization of the Company; (d) is disclosed
to such Purchaser by a third party not under an obligation of confidentiality to
the Company; or (e) is independently developed by Purchaser.
7.2 COOPERATION. The Company shall cooperate with the
Purchasers in supplying such information as may be reasonably requested by the
Purchasers to complete and file any information reporting forms presently or
hereafter required by the Commission as a condition to the availability of an
exemption, presently existing or hereafter adopted, from the Act for the sale of
the Securities.
7.3 PROPRIETARY INFORMATION AGREEMENTS. All current
officers and employees of the Company have executed, and, following the Closing
all future officers and employees of the Company shall be required to execute, a
Proprietary Information Agreement in the form approved by the Company's Board of
Directors.
8. MISCELLANEOUS
8.1 WAIVERS AND AMENDMENTS. With the written consent of
the record holders of a majority of the Securities then outstanding, the
obligation of the Company and the rights of the holders of the Securities under
this Agreement may be waived (either generally or in a particular instance,
either retroactively or prospectively and either for a specified period of time
or indefinitely), and with the same consent the Company, when authorized by
resolution of its Board of Directors, may enter into a supplementary agreement
for the purpose of adding any provisions to or changing in any manner or
eliminating any of the provisions of this Agreement. Neither this Agreement nor
any provisions hereof may be changed, waived, discharged or terminated orally,
but only by a signed statement in writing.
8.2 GOVERNING LAW. This Agreement shall be governed in
all aspects by the law of the State of Washington as such law is applied to
agreements between Washington residents entered into and to be performed
entirely within Washington.
8.3 SURVIVAL. The representations, warranties, covenants
and agreements made herein shall survive any investigation made by the
Purchasers and the Closing of the transaction contemplated hereby.
8.4 SUCCESSORS AND ASSIGNS. Except as otherwise expressly
provided herein, the provisions hereof shall inure to the benefit of, and be
binding upon, the successors, assigns, heirs, executors and administrators of
the parties hereto.
8.5 ENTIRE AGREEMENT. This Agreement and the other
documents delivered pursuant hereto, including the exhibits, constitute the full
and entire understanding and agreement between the parties with regard to the
subjects hereof and thereof.
8.6 SEVERABILITY OF THIS AGREEMENT. In case any provision
of this Agreement shall be invalid, illegal or unenforceable, the validity,
legality and enforceability of the remaining provisions shall not in any way be
affected or impaired thereby.
-14-
<PAGE>
8.7 TITLES AND SUBTITLES. The titles of the paragraphs
and subparagraphs of this Agreement are for convenience of reference only and
are not to be considered in construing this Agreement.
8.8 DELAYS OR OMISSIONS. It is agreed that no delay or
omission to exercise any right, power or remedy accruing to the Purchasers, upon
any breach or default of the Company under the Agreement, shall impair any such
right, power or remedy, nor shall it be construed to be a waiver of any such
breach or default, or any acquiescence therein, or of or in any similar breach
or default thereafter occurring; nor shall any waiver of any single breach or
default be deemed a waiver of any other breach or default theretofore or
thereafter occurring. It is further agreed that any waiver, permit, consent or
approval of any kind or character by the Purchasers of any breach or default
under this Agreement, or any waiver by the Purchasers of any provisions or
conditions of this Agreement must be in writing and shall be effective only to
the extent specifically set forth in writing and that all remedies, either under
this Agreement, or by law or otherwise afforded to the Purchasers, shall be
cumulative and not alternative.
8.9 PAYMENT OF FEES AND EXPENSES. The Company and the
Purchasers shall bear its own expenses incurred on its behalf with respect to
this Agreement and the transactions contemplated thereby. If any action at law
or in equity is necessary to enforce the terms of this Agreement or the Restated
Certificate, the prevailing party shall be entitled to reasonable attorney's
fees, costs and necessary disbursements in addition to any other relief to which
such party may be entitled.
8.10 NOTICES. Any notice or report required in this
Agreement or permitted to be given shall be given in writing and shall be deemed
effective upon delivery, when delivered personally or by overnight courier or
sent by telegram or fax (a) if to a Purchaser, at such Purchaser's address as
set forth below, or at such other address as such Purchaser shall have furnished
to the Company in writing, (b) if to any other holder of any Series E Preferred,
at such address as such holder shall have furnished the Company in writing, or,
until any such holder so furnishes an address to the Company, or (c) if to the
Company, one copy should be sent to its address set forth below and addressed to
the attention of the Corporate Secretary, or at such other address as the
Company shall have furnished to the Purchasers.
8.11 COUNTERPARTS. This Agreement may be executed in any
number of counterparts, each of which shall be an original, but all of which
together shall constitute one instrument.
8.12 EXCULPATION AMONG PURCHASERS. Each Purchaser
acknowledges that it is not relying upon any person, firm or corporation, other
than the Company and its officers and directors, in making its investment or
decision to invest in the Company. Each Purchaser agrees that no Purchaser nor
the respective controlling persons, officers, directors, partners, agents, or
employees of any Purchaser shall be liable for any action heretofore or
hereafter taken or omitted to be taken by any of them in connection with the
Securities.
[Signature page follows]
-15-
<PAGE>
IN WITNESS WHEREOF, the parties have caused this Agreement to be duly
executed and delivered as of the day and year first written above.
COMPANY:
ROSETTA INPHARMATICS, INC.
By: /s/ John J. King
---------------------------------
Name: John J. King
-------------------------------
(print)
Title:
-------------------------------
Address: 12040 115th Avenue NE
Suite 210
Kirkland, Washington 98034
Number of shares of PURCHASERS:
Series E Preferred subscribed
at $9.36 per share:
------------------------------------
- ----------------------------- (Print name of Purchaser)
By:
----------------------------------
Name:
-------------------------------
(print)
Subscription Purchase Price: Title:
-------------------------------
$ Address:
- --------------------------- ------------------------------
------------------------------
------------------------------
[SIGNATURE PAGE TO SERIES E PREFERRED
STOCK PURCHASE AGREEMENT]
<PAGE>
EXHIBITS
EXHIBIT A - Schedule of Purchasers
EXHIBIT B - Form of Amended and Restated Certificate of Incorporation
EXHIBIT C - Schedule of Exceptions to Representations and Warranties
EXHIBIT D - Form of Investors' Rights Agreement
EXHIBIT E - Form of Legal Opinion of Venture Law Group
EXHIBIT F - Form of Addendum Agreement
<PAGE>
ROSETTA BIOSYSTEMS, INC.
COMMON STOCK PURCHASE AGREEMENT
This Common Stock Purchase Agreement (the "AGREEMENT") is made as of
January 31, 1997 by and between Rosetta Biosystems, Inc., a Delaware
corporation (the "COMPANY"), and Stephen H. Friend ("PURCHASER").
1. SALE OF STOCK. Subject to the terms and conditions of this
Agreement, on the Purchase Date (as defined below) the Company will issue and
sell to Purchaser, and Purchaser agrees to purchase from the Company, 500,000
shares of the Company's Common Stock (the "SHARES") at a purchase price of $.01
per Share for a total purchase price of $ 5,000.00. The term "Shares" refers to
the purchased Shares and all securities received in replacement of or in
connection with the Shares pursuant to stock dividends or splits, all securities
received in replacement of the Shares in a recapitalization, merger,
reorganization, exchange or the like, and all new, substituted or additional
securities or other properties to which Purchaser is entitled by reason of
Purchaser's ownership of the Shares.
2. PURCHASE. The purchase and sale of the Shares under this Agreement
shall occur at the principal office of the Company simultaneously with the
execution of this Agreement by the parties, or on such other date as the Company
and Purchaser shall agree (the "PURCHASE DATE"). On the Purchase Date, the
Company will deliver to Purchaser a certificate representing the Shares to be
purchased by Purchaser (which shall be issued in Purchaser's name) against
payment of the purchase price therefor by Purchaser by delivery of a check in
the amount of $5,000.
3. REPRESENTATIONS, WARRANTIES AND COVENANTS OF THE COMPANY. The
Company hereby represents, warrants and covenants to Purchaser that the
authorized capital of the Company consists, as of the Purchase Date, of
5,000,000 shares of Preferred Stock, none of which are issued and
outstanding, and 10,000,000 shares of Common Stock, 2,575,000 shares of which
will be issued and outstanding as of the Purchase Date. All of the
outstanding shares of Common Stock have been duly authorized, fully paid and
are nonassessable and issued in compliance with all applicable federal and
state securities laws.
4. LIMITATIONS ON TRANSFER. In addition to any other limitation on
transfer created by applicable securities laws, Purchaser shall not assign,
encumber or dispose of any interest in the Shares while the Shares are subject
to the Company's Repurchase Option (as defined below), except as provided below.
After any Shares have been released from the Repurchase Option, Purchaser shall
not assign, encumber or dispose of any interest in such Shares except in
compliance with the provisions below and applicable securities laws.
(a) REPURCHASE OPTION.
(i) In the event of the voluntary or involuntary
termination of Purchaser's employment or consulting relationship with the
Company for any reason (including death or disability), with or without cause,
the Company shall upon the date of such termination
<PAGE>
(the "TERMINATION DATE") have an irrevocable, exclusive option (the "REPURCHASE
OPTION") for a period of 60 days from such date to repurchase all or any portion
of the Shares held by Purchaser as of the Termination Date which have not yet
been released from the Company's Repurchase Option at the original purchase
price per Share specified in Section 1 (adjusted for any stock splits, stock
dividends and the like); provided, however, that the Repurchase Option shall
continue for a period of up to one year from the Termination Date to the extent
that the Company reasonably determines that such an extension of time is
necessary to prevent the repurchase of Purchaser's Shares from causing other
capital stock of the Company to not qualify as "small business stock" under
Section 1202 of the Internal Revenue Code of 1986, as amended.
(ii) The Repurchase Option shall be exercised by the
Company by written notice to Purchaser or Purchaser's executor and, at the
Company's option, (A) by delivery to Purchaser or Purchaser's executor with such
notice of a check in the amount of the purchase price for the Shares being
purchased, or (B) in the event Purchaser is indebted to the Company, by
cancellation by the Company of an amount of such indebtedness equal to the
purchase price for the Shares being repurchased, or (C) by a combination of (A)
and (B) so that the combined payment and cancellation of indebtedness equals
such purchase price. Upon delivery of such notice and payment of the purchase
price in any of the ways described above, the Company shall become the legal and
beneficial owner of the Shares being repurchased and all rights and interest
therein or related thereto, and the Company shall have the right to transfer to
its own name the number of Shares being repurchased by the Company, without
further action by Purchaser.
(iii) One hundred percent (100%) of the Shares shall
initially be subject to the Repurchase Option. 1/8 of the Shares shall be
released from the Repurchase Option on the date that is six (6) months after the
Vesting Commencement Date (as set forth on the signature page of this
Agreement), and 1/48 of the total number of Shares shall be released from the
Repurchase Option at the end of each month thereafter, until all Shares are
released from the Repurchase Option (provided in each case that Purchaser's
employment or consulting relationship with the Company has not been terminated
prior to the date of any such release). Fractional shares shall be rounded to
the nearest whole share.
(iv) Notwithstanding the above, in the event of
Purchaser's death or disability at such time as more than fifty percent (50%) of
the Shares remain subject to the Repurchase Option, all Shares in excess of such
fifty percent (50%) that remain subject to the Repurchase Option shall be deemed
to be released from the Repurchase Option as of the time of such death or
disability.
(v) Notwithstanding the above, in the event
Purchaser's employment or consulting relationship with the Company is
involuntarily terminated without cause (excluding Purchaser's death or
disability), fifty percent (50%) of the of the Shares held by Purchaser which
are still subject to the Company's Repurchase Option as of the Termination Date
shall be deemed to have been released from the Repurchase Option immediately
prior to the Termination Date.
-2-
<PAGE>
(vi) Notwithstanding the above, if Purchaser
voluntarily terminates his employment or consulting relationship with the
Company prior to (i) the closing of a sale of equity securities by the Company
in which the gross proceeds to the Company when added together with all other
amounts previously received by the Company for the sale of equity securities are
greater than One Million Dollars ($1,000,000) or (ii) May 1, 1997, then all of
Purchasers' Shares shall remain subject to the Repurchase Option.
(b) RIGHT OF FIRST REFUSAL. Before any Shares held by
Purchaser or any transferee of Purchaser (either being sometimes referred to
herein as the "HOLDER") may be sold or otherwise transferred (including transfer
by gift or operation of law), the Company or its assignee(s) shall have a right
of first refusal to purchase the Shares on the terms and conditions set forth in
this Section 4(b) (the "RIGHT OF FIRST REFUSAL").
(i) NOTICE OF PROPOSED TRANSFER. The Holder of the
Shares shall deliver to the Company a written notice (the "NOTICE") stating: (A)
the Holder's bona fide intention to sell or otherwise transfer such Shares; (B)
the name of each proposed purchaser or other transferee ("PROPOSED TRANSFEREE");
(C) the number of Shares to be transferred to each Proposed Transferee; and (D)
the terms and conditions of each proposed sale or transfer. The Holder shall
offer the Shares at the same price (the "OFFERED PRICE") and upon the same terms
(or terms as similar as reasonably possible) to the Company or its assignee(s).
(ii) EXERCISE OF RIGHT OF FIRST REFUSAL. At any time
within thirty (30) days after receipt of the Notice, the Company and/or its
assignee(s) may, by giving written notice to the Holder, elect to purchase all,
but not less than all, of the Shares proposed to be transferred to any one or
more of the Proposed Transferees, at the purchase price determined in accordance
with subsection (iii) below.
(iii) PURCHASE PRICE. The purchase price ("PURCHASE
PRICE") for the Shares purchased by the Company or its assignee(s) under this
Section 4(b) shall be the Offered Price. If the Offered Price includes
consideration other than cash, the cash equivalent value of the non-cash
consideration shall be determined by the Board of Directors of the Company in
good faith. In the event the transfer occurs by gift or operation of law, the
Offered Price shall be equal to the fair market value as determined by the Board
of Directors of the Company in its reasonable judgment.
(iv) PAYMENT. Payment of the Purchase Price shall be
made, at the option of the Company or its assignee(s), in cash (by check), by
cancellation of all or a portion of any outstanding indebtedness of the Holder
to the Company (or, in the case of repurchase by an assignee, to the assignee),
or by any combination thereof within 30 days after receipt of the Notice or in
the manner and at the times set forth in the Notice.
(v) HOLDER'S RIGHT TO TRANSFER. If all of the Shares
proposed in the Notice to be transferred to a given Proposed Transferee are not
purchased by the Company and/or its assignee(s) as provided in this Section
4(b), then the Holder may sell or otherwise transfer such Shares to that
Proposed Transferee at the Offered Price or at a higher price, provided that
such sale or other transfer is consummated within 60 days after the date of the
-3-
<PAGE>
Notice and provided further that any such sale or other transfer is effected in
accordance with any applicable securities laws and the Proposed Transferee
agrees in writing that the provisions of this Section 4 shall continue to apply
to the Shares in the hands of such Proposed Transferee. If the Shares described
in the Notice are not transferred to the Proposed Transferee within such period,
or if the Holder proposes to change the price or other terms to make them more
favorable to the Proposed Transferee, a new Notice shall be given to the
Company, and the Company and/or its assignees shall again be offered the Right
of First Refusal before any Shares held by the Holder may be sold or otherwise
transferred.
(vi) EXCEPTION FOR CERTAIN FAMILY TRANSFERS. Anything
to the contrary contained in this Section 4(b) notwithstanding, the transfer of
any or all of the Shares during Purchaser's lifetime or on Purchaser's death by
will or intestacy to Purchaser's Immediate Family or a trust for the benefit of
Purchaser's Immediate Family shall be exempt from the provisions of this Section
4(b). "IMMEDIATE FAMILY" as used herein shall mean spouse, lineal descendant or
antecedent, father, mother, brother or sister. In such case, the transferee or
other recipient shall receive and hold the Shares so transferred subject to the
provisions of this Section, and there shall be no further transfer of such
Shares except in accordance with the terms of this Section 4.
(c) INVOLUNTARY TRANSFER.
(i) COMPANY'S RIGHT TO PURCHASE UPON INVOLUNTARY
TRANSFER. In the event, at any time after the date of this Agreement, of any
transfer by operation of law or other involuntary transfer (including death or
divorce, but excluding a transfer to Immediate Family as set forth in Section
4(b)(vi) above) of all or a portion of the Shares by the record holder thereof,
the Company shall have an option to purchase all of the Shares transferred at
the greater of the purchase price paid by Purchaser pursuant to this Agreement
or the fair market value of the Shares on the date of transfer. Upon such a
transfer, the person acquiring the Shares shall promptly notify the Secretary of
the Company of such transfer. The right to purchase such Shares shall be
provided to the Company for a period of thirty (30) days following receipt by
the Company of written notice by the person acquiring the Shares.
(ii) PRICE FOR INVOLUNTARY TRANSFER. With respect to
any stock to be transferred pursuant to Section 4(c)(i), the price per Share
shall be a price set by the Board of Directors of the Company that will reflect
the current value of the stock in terms of present earnings and future prospects
of the Company. The Company shall notify Purchaser or his or her executor of the
price so determined within thirty (30) days after receipt by it of written
notice of the transfer or proposed transfer of Shares. However, if the Purchaser
does not agree with the valuation as determined by the Board of Directors of the
Company, the Purchaser shall be entitled to have the valuation determined by an
independent appraiser to be mutually agreed upon by the Company and the
Purchaser and whose fees shall be borne equally by the Company and the
Purchaser.
(d) ASSIGNMENT. The right of the Company to purchase any part
of the Shares may be assigned in whole or in part to any stockholder or
stockholders of the Company or other
-4-
<PAGE>
persons or organizations; provided, however, that an assignee, other than a
corporation that is the parent or a 100% owned subsidiary of the Company, must
pay the Company, upon assignment of such right, cash equal to the difference
between the original purchase price and fair market value, if the original
purchase price is less than the fair market value of the Shares subject to the
assignment.
(e) RESTRICTIONS BINDING ON TRANSFEREES. All transferees of
Shares or any interest therein will receive and hold such Shares or interest
subject to the provisions of this Agreement, including, insofar as applicable,
the Repurchase Option. Any sale or transfer of the Company's Shares shall be
void unless the provisions of this Agreement are met.
(f) TERMINATION OF RIGHTS. The right of first refusal granted
the Company by Section 4(b) above and the option to repurchase the Shares in the
event of an involuntary transfer granted the Company by Section 4(c) above shall
terminate upon the first sale of Common Stock of the Company to the general
public pursuant to a registration statement filed with and declared effective by
the Securities and Exchange Commission under the Securities Act. Upon
termination of the right of first refusal described in Section 4(b) and the
expiration or exercise of the Repurchase Option, a new certificate or
certificates representing the Shares not repurchased shall be issued, on
request, without the legend referred to in Section 7(a)(ii) below and delivered
to Purchaser.
5. ESCROW OF UNVESTED SHARES. For purposes of facilitating the
enforcement of the provisions of Section 4 above, Purchaser agrees, immediately
upon receipt of the certificate(s) for the Shares subject to the Repurchase
Option, to deliver such certificate(s), together with an Assignment Separate
from Certificate in the form attached to this Agreement as EXHIBIT A executed by
Purchaser and by Purchaser's spouse (if required for transfer), in blank, to the
Secretary of the Company, or the Secretary's designee, to hold such
certificate(s) and Assignment Separate from Certificate in escrow and to take
all such actions and to effectuate all such transfers and/or releases as are in
accordance with the terms of this Agreement. Purchaser hereby acknowledges that
the Secretary of the Company, or the Secretary's designee, is so appointed as
the escrow holder with the foregoing authorities as a material inducement to
make this Agreement and that said appointment is coupled with an interest and is
accordingly irrevocable. Purchaser agrees that said escrow holder shall not be
liable when acting in good faith to any party hereof (or to any other party).
The escrow holder may rely upon any letter, notice or other document executed by
any signature purported to be genuine and may resign at any time. Purchaser
agrees that if the Secretary of the Company, or the Secretary's designee,
resigns as escrow holder for any or no reason, the Board of Directors of the
Company shall have the power to appoint a successor to serve as escrow holder
pursuant to the terms of this Agreement.
6. INVESTMENT AND TAXATION REPRESENTATIONS. In connection with the
purchase of the Shares, Purchaser represents to the Company the following:
(a) Purchaser is aware of the Company's business affairs and
financial condition and has acquired sufficient information about the Company to
reach an informed and
-5-
<PAGE>
knowledgeable decision to acquire the Shares. Purchaser is purchasing the Shares
for investment for his or her own account only and not with a view to, or for
resale in connection with, any "distribution" thereof within the meaning of the
Securities Act.
(b) Purchaser understands that the Shares have not been
registered under the Securities Act by reason of a specific exemption therefrom,
which exemption depends upon, among other things, the bona fide nature of
Purchaser's investment intent as expressed herein.
(c) Purchaser further acknowledges and understands that the
Shares must be held indefinitely unless they are subsequently registered under
the Securities Act or an exemption from such registration is available.
Purchaser further acknowledges and understands that the Company is under no
obligation to register the Shares. Purchaser understands that the certificate
evidencing the Shares will be imprinted with a legend which prohibits the
transfer of the Shares unless they are registered or such registration is not
required in the opinion of counsel for the Company.
(d) Purchaser is familiar with the provisions of Rules 144 and
701, each promulgated under the Securities Act, which, in substance, permit
limited public resale of "restricted securities" acquired, directly or
indirectly, from the issuer thereof (or from an affiliate of such issuer), in a
non-public offering subject to the satisfaction of certain conditions. Rule 701
provides that if the issuer qualifies under Rule 701 at the time of issuance of
the securities, such issuance will be exempt from registration under the
Securities Act. In the event the Company becomes subject to the reporting
requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934 (the
"EXCHANGE ACT"), the securities exempt under Rule 701 may be resold by Purchaser
ninety (90) days thereafter, subject to the satisfaction of certain of the
conditions specified by Rule 144, including, among other things: (1) the sale
being made through a broker in an unsolicited "broker's transaction" or in
transactions directly with a market maker (as said term is defined under the
Exchange Act); and (2) in the case of an affiliate, the availability of certain
public information about the Company, and the amount of securities being sold
during any three month period not exceeding the limitations specified in Rule
144(e), if applicable. Notwithstanding this Section 6(d), Purchaser acknowledges
and agrees to the restrictions set forth in Section 6(f) hereof.
In the event that the Company does not qualify under Rule 701 at the
time of purchase, then the Shares may be resold by Purchaser in certain limited
circumstances subject to the provisions of Rule 144, which requires, among other
things: (1) the availability of certain public information about the Company;
(2) the resale occurring not less than two years after the party has purchased,
and made full payment of (within the meaning of Rule 144), the securities to be
sold; and, in the case of an affiliate, or of a non-affiliate who has held the
securities less than three years, (3) the sale being made through a broker in an
unsolicited "broker's transaction" or in transactions directly with a market
maker (as such term is defined under the Exchange Act) and the amount of
securities being sold during any three month period not exceeding the specified
limitations stated therein, if applicable.
-6-
<PAGE>
(e) Purchaser further understands that at the time he or she
wishes to sell the Shares there may be no public market upon which to make such
a sale, and that, even if such a public market then exists, the Company may not
be satisfying the current public information requirements of Rule 144 or 701,
and that, in such event, Purchaser would be precluded from selling the Shares
under Rule 144 or 701 even if the two-year minimum holding period had been
satisfied.
(f) Purchaser further understands that in the event all of the
applicable requirements of Rule 144 or 701 are not satisfied, registration under
the Securities Act, compliance with Regulation A, or some other registration
exemption will be required; and that, notwithstanding the fact that Rules 144
and 701 are not exclusive, the Staff of the Securities and Exchange Commission
has expressed its opinion that persons proposing to sell private placement
securities other than in a registered offering and otherwise than pursuant to
Rule 144 or 701 will have a substantial burden of proof in establishing that an
exemption from registration is available for such offers or sales, and that such
persons and their respective brokers who participate in such transactions do so
at their own risk.
(g) Purchaser understands that Purchaser may suffer adverse
tax consequences as a result of Purchaser's purchase or disposition of the
Shares. Purchaser represents that Purchaser has consulted any tax consultants
Purchaser deems advisable in connection the purchase or disposition of the
Shares and that Purchaser is not relying on the Company for any tax advice.
7. RESTRICTIVE LEGENDS AND STOP-TRANSFER ORDERS.
(a) LEGENDS. The certificate or certificates representing the
Shares shall bear the following legends (as well as any legends required by
applicable state and federal corporate and securities laws):
(i) THE SHARES REPRESENTED BY THIS CERTIFICATE HAVE NOT BEEN
REGISTERED UNDER THE SECURITIES ACT OF 1933 OR UNDER THE
SECURITIES LAWS OF ANY PARTICULAR STATE, AND HAVE BEEN
ACQUIRED FOR INVESTMENT AND NOT WITH A VIEW TO, OR IN
CONNECTION WITH, THE SALE OR DISTRIBUTION THEREOF. NO
SUCH SALE OR DISPOSITION MAY BE EFFECTED WITHOUT AN
EFFECTIVE REGISTRATION STATEMENT RELATED THERETO OR AN
OPINION OF COUNSEL FOR THE COMPANY THAT SUCH
REGISTRATION IS NOT REQUIRED UNDER THE SECURITIES ACT OF
1933.
(ii) THE SHARES REPRESENTED BY THIS CERTIFICATE MAY BE
TRANSFERRED ONLY IN ACCORDANCE WITH THE TERMS OF AN
AGREEMENT BETWEEN
-7-
<PAGE>
THE COMPANY AND THE STOCKHOLDER, A COPY OF WHICH IS ON
FILE WITH THE SECRETARY OF THE COMPANY.
(iii) Any legend required to be placed thereon by the
Washington secretary of state or other applicable state
securities laws.
(b) STOP-TRANSFER NOTICES. Purchaser agrees that, in order to
ensure compliance with the restrictions referred to herein, the Company may
issue appropriate "stop transfer" instructions to its transfer agent, if any,
and that, if the Company transfers its own securities, it may make appropriate
notations to the same effect in its own records.
(c) REFUSAL TO TRANSFER. The Company shall not be required (i)
to transfer on its books any Shares that have been sold or otherwise transferred
in violation of any of the provisions of this Agreement or (ii) to treat as
owner of such Shares or to accord the right to vote or pay dividends to any
purchaser or other transferee to whom such Shares shall have been so
transferred.
8. NO EMPLOYMENT RIGHTS. Nothing in this Agreement shall affect in any
manner whatsoever the right or power of the Company, or a parent or subsidiary
of the Company, to terminate Purchaser's employment, for any reason, with or
without cause.
9. SECTION 83(b) ELECTION. Purchaser understands that Section 83(a) of
the Internal Revenue Code of 1986, as amended (the "CODE"), taxes as ordinary
income the difference between the amount paid for the Shares and the fair market
value of the Shares as of the date any restrictions on the Shares lapse. In this
context, "RESTRICTION" means the right of the Company to buy back the Shares
pursuant to the Repurchase Option set forth in Section 4(a) of this Agreement.
Purchaser understands that Purchaser may elect to be taxed at the time the
Shares are purchased, rather than when and as the Repurchase Option expires, by
filing an election under Section 83(b) (an "83(b) ELECTION") of the Code with
the Internal Revenue Service within 30 days from the date of purchase. Even if
the fair market value of the Shares at the time of the execution of this
Agreement equals the amount paid for the Shares, the election must be made to
avoid income under Section 83(a) in the future. Purchaser understands that
failure to file such an election in a timely manner may result in adverse tax
consequences for Purchaser. Purchaser further understands that an additional
copy of such election form should be filed with his or her federal income tax
return for the calendar year in which the date of this Agreement falls.
Purchaser acknowledges that the foregoing is only a summary of the effect of
United States federal income taxation with respect to purchase of the Shares
hereunder, and does not purport to be complete. Purchaser further acknowledges
that the Company has directed Purchaser to seek independent advice regarding the
applicable provisions of the Code, the income tax laws of any municipality,
state or foreign country in which Purchaser may reside, and the tax consequences
of Purchaser's death.
Purchaser agrees that he will execute and deliver to the
Company with this executed Agreement a copy of the Acknowledgment and Statement
of Decision Regarding Section 83(b) Election (the "ACKNOWLEDGMENT"), attached
hereto as EXHIBIT B. Purchaser further
-8-
<PAGE>
agrees that Purchaser will execute and submit with the Acknowledgment a copy of
the 83(b) Election, attached hereto as EXHIBIT C, if Purchaser has indicated in
the Acknowledgment his or her decision to make such an election.
10. MARKET STANDOFF AGREEMENT. In connection with the initial public
offering of the Company's securities and upon request of the Company or the
underwriters managing any underwritten offering of the Company's securities,
Purchaser agrees not to sell, make any short sale of, loan, grant any option for
the purchase of, or otherwise dispose of any Shares (other than those included
in the registration) without the prior written consent of the Company or such
underwriters, as the case may be, for such period of time (not to exceed 180
days) from the effective date of such registration as may be requested by the
Company or such managing underwriters and to execute an agreement reflecting the
foregoing as may be requested by the underwriters at the time of the public
offering.
11. REGISTRATION RIGHTS. The Company will use best efforts to ensure
that Purchaser shall be entitled to the same or substantially similar piggy-back
registration rights that the Company grants to investors in the Company.
12. MISCELLANEOUS.
(a) GOVERNING LAW. This Agreement and all acts and
transactions pursuant hereto and the rights and obligations of the parties
hereto shall be governed, construed and interpreted in accordance with the laws
of the State of Washington, without giving effect to principles of conflicts of
law.
(b) ENTIRE AGREEMENT; ENFORCEMENT OF RIGHTS. This Agreement
sets forth the entire agreement and understanding of the parties relating to the
subject matter herein and merges all prior discussions between them. No
modification of or amendment to this Agreement, nor any waiver of any rights
under this Agreement, shall be effective unless in writing signed by the parties
to this Agreement. The failure by either party to enforce any rights under this
Agreement shall not be construed as a waiver of any rights of such party.
(c) SEVERABILITY. If one or more provisions of this Agreement
are held to be unenforceable under applicable law, the parties agree to
renegotiate such provision in good faith. In the event that the parties cannot
reach a mutually agreeable and enforceable replacement for such provision, then
(i) such provision shall be excluded from this Agreement, (ii) the balance of
the Agreement shall be interpreted as if such provision were so excluded and
(iii) the balance of the Agreement shall be enforceable in accordance with its
terms.
(d) CONSTRUCTION. This Agreement is the result of negotiations
between and has been reviewed by each of the parties hereto and their respective
counsel, if any; accordingly, this Agreement shall be deemed to be the product
of all of the parties hereto, and no ambiguity shall be construed in favor of or
against any one of the parties hereto.
(e) NOTICES. Any notice required or permitted by this
Agreement shall be in writing and shall be deemed sufficient when delivered
personally or sent by telegram or fax or
-9-
<PAGE>
forty-eight (48) hours after being deposited in the U.S. mail, as certified or
registered mail, with postage prepaid, and addressed to the party to be notified
at such party's address as set forth below or as subsequently modified by
written notice.
(f) COUNTERPARTS. This Agreement may be executed in two or
more counterparts, each of which shall be deemed an original and all of which
together shall constitute one instrument.
(g) SUCCESSORS AND ASSIGNS. The rights and benefits of this
Agreement shall inure to the benefit of, and be enforceable by the Company's
successors and assigns. The rights and obligations of Purchaser under this
Agreement may only be assigned with the prior written consent of the Company.
[Signature Page Follows]
-10-
<PAGE>
The parties have executed this Agreement as of the date first set forth
above.
ROSETTA BIOSYSTEMS, INC.
By: /s/ Roger E. Bumgarner
--------------------------------------
Title: Vice President
-----------------------------------
Address:
c/o Venture Law Group
4750 Carillon Point
Kirkland, WA 98033
PURCHASER ACKNOWLEDGES AND AGREES THAT THE VESTING OF SHARES PURSUANT
TO SECTION 4 HEREOF IS EARNED ONLY BY CONTINUING SERVICE AS AN EMPLOYEE OR
CONSULTANT AT THE WILL OF THE COMPANY OR BY THE PROVISIONS OF SECTION 4(A)(IV)
AND SECTION 4(A)(V). PURCHASER FURTHER ACKNOWLEDGES AND AGREES THAT NOTHING IN
THIS AGREEMENT SHALL CONFER UPON PURCHASER ANY RIGHT WITH RESPECT TO
CONTINUATION OF SUCH EMPLOYMENT OR CONSULTING RELATIONSHIP WITH THE COMPANY, NOR
SHALL IT INTERFERE IN ANY WAY WITH PURCHASER'S RIGHT OR THE COMPANY'S RIGHT TO
TERMINATE PURCHASER'S EMPLOYMENT OR CONSULTING RELATIONSHIP AT ANY TIME, WITH OR
WITHOUT CAUSE.
PURCHASER:
STEPHEN H. FRIEND
/s/ Stephen H. Friend
------------------------------------------
(Signature)
Address:
-------------------------------------
--------------------------------------
Vesting Commencement
Date: July 1, 1996
I, Diana Gayle Bowman Friend, spouse of Stephen H. Friend , have read and
hereby approve the foregoing Agreement. In consideration of the Company's
granting my spouse the right to purchase the Shares as set forth in the
Agreement, I hereby agree to be irrevocably bound by the Agreement and
further agree that any community property or other such interest shall be
similarly bound by the Agreement. I hereby appoint my spouse as my
attorney-in-fact with respect to any amendment or exercise of any rights
under the Agreement.
/s/ Diana Gayle Bowman Friend
------------------------------------------
-11-
<PAGE>
EXHIBIT A
ASSIGNMENT SEPARATE FROM CERTIFICATE
FOR VALUE RECEIVED and pursuant to that certain Common Stock
Purchase Agreement between the undersigned ("PURCHASER") and Rosetta
Biosystems, Inc. (the "COMPANY") dated January 31, 1997 (the "AGREEMENT"),
Purchaser hereby sells, assigns and transfers unto the Company
_________________________________ (________) shares of the Common Stock of
the Company standing in Purchaser's name on the Company's books and
represented by Certificate No. __, and does hereby irrevocably constitute and
appoint _____________________________ to transfer said stock on the books of
the Company with full power of substitution in the premises. THIS ASSIGNMENT
MAY ONLY BE USED AS AUTHORIZED BY THE AGREEMENT AND THE EXHIBITS THERETO.
Dated: ______________________
Signature:
/s/ Stephen H. Friend
-----------------------------------------
Stephen H. Friend
/s/ Diana Gayle Bowman Friend
-----------------------------------------
Diana Gayle Bowman Friend
Instruction: Please do not fill in any blanks other than the signature line. The
purpose of this assignment is to enable the Company to exercise its repurchase
option set forth in the Agreement without requiring additional signatures on the
part of Purchaser.
<PAGE>
EXHIBIT B
ACKNOWLEDGMENT AND STATEMENT OF DECISION
REGARDING SECTION 83(b) ELECTION
The undersigned has entered a stock purchase agreement with Rosetta
Biosystems, Inc., a Delaware corporation (the "COMPANY"), pursuant to which the
undersigned is purchasing 500,000 shares of Common Stock of the Company (the
"SHARES"). In connection with the purchase of the Shares, the undersigned hereby
represents as follows:
1. The undersigned has carefully reviewed the stock purchase
agreement pursuant to which the undersigned is purchasing the Shares.
2. The undersigned either [check and complete as applicable]:
(a) ____ has consulted, and has been fully advised by, the
undersigned's own tax advisor, __________________________,
whose business address is _____________________________,
regarding the federal, state and local tax consequences of
purchasing the Shares, and particularly regarding the
advisability of making elections pursuant to Section 83(b)
of the Internal Revenue Code of 1986, as amended (the "CODE")
and pursuant to the corresponding provisions, if any, of
applicable state law; or
(b) ____ has knowingly chosen not to consult such a tax advisor.
3. The undersigned hereby states that the undersigned has
decided [check as applicable]:
(a) ____ to make an election pursuant to Section 83(b) of the
Code, and is submitting to the Company, together with the
undersigned's executed Common Stock Purchase Agreement, an
executed form entitled "Election Under Section 83(b) of the
Internal Revenue Code of 1986;" or
(b) ____ not to make an election pursuant to Section 83(b) of the Code.
<PAGE>
4. Neither the Company nor any subsidiary or representative of
the Company has made any warranty or representation to the undersigned with
respect to the tax consequences of the undersigned's purchase of the Shares or
of the making or failure to make an election pursuant to Section 83(b) of the
Code or the corresponding provisions, if any, of applicable state law.
Date: 2/13/97 /s/ Stephen H. Friend
---------------------------------- ---------------------------
Stephen H. Friend
Date: 2/13/97 /s/ Diana Gayle Bowman Friend
---------------------------------- -----------------------------
Diana Gayle Bowman Friend
-2-
<PAGE>
EXHIBIT C
ELECTION UNDER SECTION 83(b)
OF THE INTERNAL REVENUE CODE OF 1986
The undersigned taxpayer hereby elects, pursuant to Section 83(b) of
the Internal Revenue Code, to include in taxpayer's gross income for the current
taxable year, the amount of any compensation taxable to taxpayer in connection
with taxpayer's receipt of the property described below:
1. The name, address, taxpayer identification number and taxable year of
the undersigned are as follows:
NAME OF TAXPAYER: Stephen H. Friend
NAME OF SPOUSE: Diana Gail Bowman Friend
---------------------------------
ADDRESS:
----------------------------------------
----------------------------------------
IDENTIFICATION NO. OF TAXPAYER:
-------------------
IDENTIFICATION NO. OF SPOUSE:
-------------------
TAXABLE YEAR: 1997
2. The property with respect to which the election is made is described
as follows:
437,500 shares of the Common Stock (the "Shares"), $.001 par value, of
Rosetta Biosystems, Inc., a Delaware corporation (the "Company").
3. The date on which the property was transferred is: January 31, 1997
4. The property is subject to the following restrictions:
Repurchase option at cost in favor of the Company upon termination of
taxpayer's employment or consulting relationship.
5. The fair market value at the time of transfer, determined without
regard to any restriction other than a restriction which by its terms
will never lapse, of such property is: $4,375.00
6. The amount (if any) paid for such property: $4,375.00
The undersigned has submitted a copy of this statement to the person for whom
the services were performed in connection with the undersigned's receipt of the
above-described property. The transferee of such property is the person
performing the services in connection with the transfer of said property.
THE UNDERSIGNED UNDERSTANDS THAT THE FOREGOING ELECTION MAY NOT BE REVOKED
EXCEPT WITH THE CONSENT OF THE COMMISSIONER.
Dated: 1/31/97 /s/ Stephen H. Friend
----------------------------- -------------------------
Taxpayer
Dated: /s/ Diana B. Friend
----------------------------- -------------------------
Spouse of Taxpayer
<PAGE>
RECEIPT
Rosetta Biosystems, Inc. hereby acknowledges receipt of a check in the
amount of $5,000.00 given by Stephen H. Friend as consideration for Certificate
No.4 for 500,000 shares of Common Stock of Rosetta Biosystems, Inc.
Dated: ________________
Rosetta Biosystems, Inc.
By: /s/ Roger E. Bumgarner
-------------------------------
Title: Vice President
----------------------------
<PAGE>
RECEIPT AND CONSENT
The undersigned hereby acknowledges receipt of a photocopy of
Certificate No.4 for 500,000 shares of Common Stock of Rosetta Biosystems, Inc.
(the "COMPANY").
The undersigned further acknowledges that the Secretary of the Company,
or his or her designee, is acting as escrow holder pursuant to the Common Stock
Purchase Agreement Purchaser has previously entered into with the Company. As
escrow holder, the Secretary of the Company, or his or her designee, holds the
original of the aforementioned certificate issued in the undersigned's name.
Dated: _________________________
___________________________
Stephen H. Friend
<PAGE>
ROSETTA BIOSYSTEMS, INC.
COMMON STOCK PURCHASE AGREEMENT
This Common Stock Purchase Agreement (the "AGREEMENT") is made as of
May 15, 1997 by and between Rosetta Biosystems, Inc., a Delaware corporation
(the "COMPANY"), and John King ("PURCHASER").
1. SALE OF STOCK. Subject to the terms and conditions of this
Agreement, on the Purchase Date (as defined below) the Company will issue and
sell to Purchaser, and Purchaser agrees to purchase from the Company, 164,415
shares of the Company's Common Stock (the "SHARES") at a purchase price of $.01
per Share for a total purchase price of $1,644.15. The term "Shares" refers to
the purchased Shares and all securities received in replacement of or in
connection with the Shares pursuant to stock dividends or splits, all securities
received in replacement of the Shares in a recapitalization, merger,
reorganization, exchange or the like, and all new, substituted or additional
securities or other properties to which Purchaser is entitled by reason of
Purchaser's ownership of the Shares.
2. PURCHASE. The purchase and sale of the Shares under this Agreement
shall occur at the principal office of the Company simultaneously with the
execution of this Agreement by the parties, or on such other date as the Company
and Purchaser shall agree (the "PURCHASE DATE"). On the Purchase Date, the
Company will deliver to Purchaser a certificate representing the Shares to be
purchased by Purchaser (which shall be issued in Purchaser's name) against
payment of the purchase price therefor by Purchaser by delivery of a check in
the amount of $1,644.15.
3. REPRESENTATIONS, WARRANTIES AND COVENANTS OF THE COMPANY. The
Company hereby represents, warrants and covenants to Purchaser that the
authorized capital of the Company consists, as of the Purchase Date, of
5,000,000 shares of Preferred Stock, none of which are issued and outstanding,
and 10,000,000 shares of Common Stock, 8,547,207 shares of which will be issued
and outstanding as of the Purchase Date. All of the outstanding shares of Common
Stock have been duly authorized, fully paid and are nonassessable and issued in
compliance with all applicable federal and state securities laws.
4. LIMITATIONS ON TRANSFER. In addition to any other limitation on
transfer created by applicable securities laws, Purchaser shall not assign,
encumber or dispose of any interest in the Shares while the Shares are subject
to the Company's Repurchase Option (as defined below), except as provided below.
After any Shares have been released from the Repurchase Option, Purchaser shall
not assign, encumber or dispose of any interest in such Shares except in
compliance with the provisions below and applicable securities laws.
(a) REPURCHASE OPTION.
(i) In the event of the voluntary or
involuntary termination of Purchaser's employment or consulting relationship
with the Company for any reason (including death or disability), with or without
cause, the Company shall upon the date of such termination (the "TERMINATION
DATE") have an irrevocable, exclusive option (the
<PAGE>
"REPURCHASE OPTION") for a period of 60 days from such date to repurchase all or
any portion of the Shares held by Purchaser as of the Termination Date which
have not yet been released from the Company's Repurchase Option at the original
purchase price per Share specified in Section 1 (adjusted for any stock splits,
stock dividends and the like); PROVIDED, HOWEVER, that the Repurchase Option
shall continue for a period of up to one year from the Termination Date to the
extent that the Company reasonably determines that such an extension of time is
necessary to prevent the repurchase of Purchaser's Shares from causing other
capital stock of the Company to not qualify as "small business stock" under
Section 1202 of the Internal Revenue Code of 1986, as amended.
(ii) The Repurchase Option shall be exercised by the
Company by written notice to Purchaser or Purchaser's executor and, at the
Company's option, (A) by delivery to Purchaser or Purchaser's executor with such
notice of a check in the amount of the purchase price for the Shares being
purchased, or (B) in the event Purchaser is indebted to the Company, by
cancellation by the Company of an amount of such indebtedness equal to the
purchase price for the Shares being repurchased, or (C) by a combination of (A)
and (B) so that the combined payment and cancellation of indebtedness equals
such purchase price. Upon delivery of such notice and payment of the purchase
price in any of the ways described above, the Company shall become the legal and
beneficial owner of the Shares being repurchased and all rights and interest
therein or related thereto, and the Company shall have the right to transfer to
its own name the number of Shares being repurchased by the Company, without
further action by Purchaser.
(iii) One hundred percent (100%) of the Shares shall
initially be subject to the Repurchase Option. 1/12 of the Shares shall be
released from the Repurchase Option on the date that is one (1) month after the
Vesting Commencement Date (as set forth on the signature page of this
Agreement), and 1/12 of the total number of Shares shall be released from the
Repurchase Option at the end of each month thereafter, until all Shares are
released from the Repurchase Option (provided in each case that Purchaser's
employment or consulting relationship with the Company has not been terminated
prior to the date of any such release). Fractional shares shall be rounded to
the nearest whole share.
(iv) Notwithstanding the above, in the event
of Purchaser's death or disability at such time as more than fifty percent (50%)
of the Shares remain subject to the Repurchase Option, all Shares in excess of
such fifty percent (50%) that remain subject to the Repurchase Option shall be
deemed to be released from the Repurchase Option as of the time of such death or
disability.
(v) Notwithstanding the above, in the event
Purchaser's employment or consulting relationship with the Company is
involuntarily terminated without cause (excluding Purchaser's death or
disability), fifty percent (50%) of the Shares held by Purchaser which are still
subject to the Company's Repurchase Option as of the Termination Date shall be
deemed to have been released from the Repurchase Option immediately prior to the
Termination Date.
(b) RIGHT OF FIRST REFUSAL. Before any Shares held by
Purchaser or any transferee of Purchaser (either being sometimes referred to
herein as the "HOLDER") may be
-2-
<PAGE>
sold or otherwise transferred (including transfer by gift or operation of law),
the Company or its assignee(s) shall have a right of first refusal to purchase
the Shares on the terms and conditions set forth in this Section 4(b) (the
"RIGHT OF FIRST REFUSAL").
(i) NOTICE OF PROPOSED TRANSFER. The Holder of the
Shares shall deliver to the Company a written notice (the "NOTICE") stating: (A)
the Holder's bona fide intention to sell or otherwise transfer such Shares; (B)
the name of each proposed purchaser or other transferee ("PROPOSED TRANSFEREE");
(C) the number of Shares to be transferred to each Proposed Transferee; and (D)
the terms and conditions of each proposed sale or transfer. The Holder shall
offer the Shares at the same price (the "OFFERED PRICE") and upon the same terms
(or terms as similar as reasonably possible) to the Company or its assignee(s).
(ii) EXERCISE OF RIGHT OF FIRST REFUSAL. At any
time within thirty (30) days after receipt of the Notice, the Company and/or its
assignee(s) may, by giving written notice to the Holder, elect to purchase all,
but not less than all, of the Shares proposed to be transferred to any one or
more of the Proposed Transferees, at the purchase price determined in accordance
with subsection (iii) below.
(iii) PURCHASE PRICE. The purchase price
("PURCHASE PRICE") for the Shares purchased by the Company or its assignee(s)
under this Section 4(b) shall be the Offered Price. If the Offered Price
includes consideration other than cash, the cash equivalent value of the
non-cash consideration shall be determined by the Board of Directors of the
Company in good faith. In the event the transfer occurs by gift or operation of
law, the Offered Price shall be equal to the fair market value as determined by
the Board of Directors of the Company in its reasonable judgment.
(iv) PAYMENT. Payment of the Purchase Price
shall be made, at the option of the Company or its assignee(s), in cash (by
check), by cancellation of all or a portion of any outstanding indebtedness of
the Holder to the Company (or, in the case of repurchase by an assignee, to the
assignee), or by any combination thereof within 30 days after receipt of the
Notice or in the manner and at the times set forth in the Notice.
(v) HOLDER'S RIGHT TO TRANSFER. If all of the
Shares proposed in the Notice to be transferred to a given Proposed Transferee
are not purchased by the Company and/or its assignee(s) as provided in this
Section 4(b), then the Holder may sell or otherwise transfer such Shares to that
Proposed Transferee at the Offered Price or at a higher price, provided that
such sale or other transfer is consummated within 60 days after the date of the
Notice and provided further that any such sale or other transfer is effected in
accordance with any applicable securities laws and the Proposed Transferee
agrees in writing that the provisions of this Section 4 shall continue to apply
to the Shares in the hands of such Proposed Transferee. If the Shares described
in the Notice are not transferred to the Proposed Transferee within such period,
or if the Holder proposes to change the price or other terms to make them more
favorable to the Proposed Transferee, a new Notice shall be given to the
Company, and the Company and/or its assignees shall again be offered the Right
of First Refusal before any Shares held by the Holder may be sold or otherwise
transferred.
-3-
<PAGE>
(vi) EXCEPTION FOR CERTAIN FAMILY TRANSFERS.
Anything to the contrary contained in this Section 4(b) notwithstanding, the
transfer of any or all of the Shares during Purchaser's lifetime or on
Purchaser's death by will or intestacy to Purchaser's Immediate Family or a
trust for the benefit of Purchaser's Immediate Family shall be exempt from the
provisions of this Section 4(b). "IMMEDIATE FAMILY" as used herein shall mean
spouse, lineal descendant or antecedent, father, mother, brother or sister. In
such case, the transferee or other recipient shall receive and hold the Shares
so transferred subject to the provisions of this Section, and there shall be no
further transfer of such Shares except in accordance with the terms of this
Section 4.
(c) INVOLUNTARY TRANSFER.
(i) COMPANY'S RIGHT TO PURCHASE UPON
INVOLUNTARY TRANSFER. In the event, at any time after the date of this
Agreement, of any transfer by operation of law or other involuntary transfer
(including death or divorce, but excluding a transfer to Immediate Family as set
forth in Section 4(b)(vi) above) of all or a portion of the Shares by the record
holder thereof, the Company shall have an option to purchase all of the Shares
transferred at the greater of the purchase price paid by Purchaser pursuant to
this Agreement or the fair market value of the Shares on the date of transfer.
Upon such a transfer, the person acquiring the Shares shall promptly notify the
Secretary of the Company of such transfer. The right to purchase such Shares
shall be provided to the Company for a period of thirty (30) days following
receipt by the Company of written notice by the person acquiring the Shares.
(ii) PRICE FOR INVOLUNTARY TRANSFER. With
respect to any stock to be transferred pursuant to Section 4(c)(i), the price
per Share shall be a price set by the Board of Directors of the Company that
will reflect the current value of the stock in terms of present earnings and
future prospects of the Company. The Company shall notify Purchaser or his or
her executor of the price so determined within thirty (30) days after receipt by
it of written notice of the transfer or proposed transfer of Shares. However, if
the Purchaser does not agree with the valuation as determined by the Board of
Directors of the Company, the Purchaser shall be entitled to have the valuation
determined by an independent appraiser to be mutually agreed upon by the Company
and the Purchaser and whose fees shall be borne equally by the Company and the
Purchaser.
(d) ASSIGNMENT. The right of the Company to purchase any part
of the Shares may be assigned in whole or in part to any stockholder or
stockholders of the Company or other persons or organizations; provided,
however, that an assignee, other than a corporation that is the parent or a 100%
owned subsidiary of the Company, must pay the Company, upon assignment of such
right, cash equal to the difference between the original purchase price and fair
market value, if the original purchase price is less than the fair market value
of the Shares subject to the assignment.
(e) RESTRICTIONS BINDING ON TRANSFEREES. All transferees of
Shares or any interest therein will receive and hold such Shares or interest
subject to the provisions of this Agreement, including, insofar as applicable,
the Repurchase Option. Any sale or transfer of the Company's Shares shall be
void unless the provisions of this Agreement are met.
-4-
<PAGE>
(f) TERMINATION OF RIGHTS. The right of first refusal granted
the Company by Section 4(b) above and the option to repurchase the Shares in the
event of an involuntary transfer granted the Company by Section 4(c) above shall
terminate upon the first sale of Common Stock of the Company to the general
public pursuant to a registration statement filed with and declared effective by
the Securities and Exchange Commission under the Securities Act. Upon
termination of the right of first refusal described in Section 4(b) and the
expiration or exercise of the Repurchase Option, a new certificate or
certificates representing the Shares not repurchased shall be issued, on
request, without the legend referred to in Section 7(a)(ii) below and delivered
to Purchaser.
5. ESCROW OF UNVESTED SHARES. For purposes of facilitating the
enforcement of the provisions of Section 4 above, Purchaser agrees, immediately
upon receipt of the certificate(s) for the Shares subject to the Repurchase
Option, to deliver such certificate(s), together with an Assignment Separate
from Certificate in the form attached to this Agreement as EXHIBIT C executed by
Purchaser and by Purchaser's spouse (if required for transfer), in blank, to the
Secretary of the Company, or the Secretary's designee, to hold such
certificate(s) and Assignment Separate from Certificate in escrow and to take
all such actions and to effectuate all such transfers and/or releases as are in
accordance with the terms of this Agreement. Purchaser hereby acknowledges that
the Secretary of the Company, or the Secretary's designee, is so appointed as
the escrow holder with the foregoing authorities as a material inducement to
make this Agreement and that said appointment is coupled with an interest and is
accordingly irrevocable. Purchaser agrees that said escrow holder shall not be
liable when acting in good faith to any party hereof (or to any other party).
The escrow holder may rely upon any letter, notice or other document executed by
any signature purported to be genuine and may resign at any time. Purchaser
agrees that if the Secretary of the Company, or the Secretary's designee,
resigns as escrow holder for any or no reason, the Board of Directors of the
Company shall have the power to appoint a successor to serve as escrow holder
pursuant to the terms of this Agreement.
6. INVESTMENT AND TAXATION REPRESENTATIONS. In connection with the
purchase of the Shares, Purchaser represents to the Company the following:
(a) Purchaser is aware of the Company's business affairs and
financial condition and has acquired sufficient information about the Company to
reach an informed and knowledgeable decision to acquire the Shares. Purchaser is
purchasing the Shares for investment for his or her own account only and not
with a view to, or for resale in connection with, any "distribution" thereof
within the meaning of the Securities Act.
(b) Purchaser understands that the Shares have not been
registered under the Securities Act by reason of a specific exemption therefrom,
which exemption depends upon, among other things, the bona fide nature of
Purchaser's investment intent as expressed herein.
(c) Purchaser understands that the Shares are "restricted
securities" under applicable U.S. federal and state securities laws and that,
pursuant to these laws, Purchaser must hold the Shares indefinitely unless they
are registered with the Securities and Exchange Commission and qualified by
state authorities, or an exemption from such registration and
-5-
<PAGE>
qualification requirements is available. Purchaser acknowledges that the Company
has no obligation to register or qualify the Shares for resale. Purchaser
further acknowledges that if an exemption from registration or qualification is
available, it may be conditioned on various requirements including, but not
limited to, the time and manner of sale, the holding period for the Shares, and
requirements relating to the Company which are outside of the Purchaser's
control, and which the Company is under no obligation and may not be able to
satisfy.
(d) Purchaser understands that Purchaser may suffer adverse
tax consequences as a result of Purchaser's purchase or disposition of the
Shares. Purchaser represents that Purchaser has consulted any tax consultants
Purchaser deems advisable in connection the purchase or disposition of the
Shares and that Purchaser is not relying on the Company for any tax advice.
7. RESTRICTIVE LEGENDS AND STOP-TRANSFER ORDERS.
(a) LEGENDS. The certificate or certificates representing the
Shares shall bear the following legends (as well as any legends required by
applicable state and federal corporate and securities laws):
(i) THE SHARES REPRESENTED BY THIS CERTIFICATE
HAVE NOT BEEN REGISTERED UNDER THE
SECURITIES ACT OF 1933 OR UNDER THE
SECURITIES LAW OF ANY PARTICULAR STATE, AND
HAVE BEEN ACQUIRED FOR INVESTMENT AND NOT
WITH A VIEW TO, OR IN CONNECTION WITH, THE
SALE OR DISTRIBUTION THEREOF. NO SUCH SALE
OR DISPOSITION MAY BE EFFECTED WITHOUT AN
EFFECTIVE REGISTRATION STATEMENT RELATED
THERETO OR AN OPINION OF COUNSEL FOR THE
COMPANY THAT SUCH REGISTRATION IS NOT
REQUIRED UNDER THE SECURITIES ACT OF 1933.
(ii) THE SHARES REPRESENTED BY THIS CERTIFICATE
MAY BE TRANSFERRED ONLY IN ACCORDANCE WITH
THE TERMS OF AN AGREEMENT BETWEEN THE
COMPANY AND THE STOCKHOLDER, A COPY OF WHICH
IS ON FILE WITH THE SECRETARY OF THE
COMPANY.
(iii) Any legend required to be placed thereon by
the Washington Secretary of State or other
applicable state securities law.
(b) STOP-TRANSFER NOTICES. Purchaser agrees that, in order to
ensure compliance with the restrictions referred to herein, the Company may
issue appropriate "stop
-6-
<PAGE>
transfer" instructions to its transfer agent, if any, and that, if the Company
transfers its own securities, it may make appropriate notations to the same
effect in its own records.
(c) REFUSAL TO TRANSFER. The Company shall not be required (i)
to transfer on its books any Shares that have been sold or otherwise transferred
in violation of any of the provisions of this Agreement or (ii) to treat as
owner of such Shares or to accord the right to vote or pay dividends to any
purchaser or other transferee to whom such Shares shall have been so
transferred.
8. NO EMPLOYMENT RIGHTS. Nothing in this Agreement shall affect in any
manner whatsoever the right or power of the Company, or a parent or subsidiary
of the Company, to terminate Purchaser's employment, for any reason, with or
without cause.
9. SECTION 83(b) ELECTION. Purchaser understands that Section 83(a) of
the Internal Revenue Code of 1986, as amended (the "CODE"), taxes as ordinary
income the difference between the amount paid for the Shares and the fair market
value of the Shares as of the date any restrictions on the Shares lapse. In this
context, "RESTRICTION" means the right of the Company to buy back the Shares
pursuant to the Repurchase Option set forth in Section 4(a) of this Agreement.
Purchaser understands that Purchaser may elect to be taxed at the time the
Shares are purchased, rather than when and as the Repurchase Option expires, by
filing an election under Section 83(b) (an "83(b) ELECTION") of the Code with
the Internal Revenue Service within 30 days from the date of purchase. Even if
the fair market value of the Shares at the time of the execution of this
Agreement equals the amount paid for the Shares, the election must be made to
avoid income under Section 83(a) in the future. Purchaser understands that
failure to file such an election in a timely manner may result in adverse tax
consequences for Purchaser. Purchaser further understands that an additional
copy of such election form should be filed with his or her federal income tax
return for the calendar year in which the date of this Agreement falls.
Purchaser acknowledges that the foregoing is only a summary of the effect of
United States federal income taxation with respect to purchase of the Shares
hereunder, and does not purport to be complete. Purchaser further acknowledges
that the Company has directed Purchaser to seek independent advice regarding the
applicable provisions of the Code, the income tax laws of any municipality,
state or foreign country in which Purchaser may reside, and the tax consequences
of Purchaser's death.
Purchaser agrees that he will execute and deliver to the
Company with this executed Agreement a copy of the Acknowledgment and Statement
of Decision Regarding Section 83(b) Election (the "ACKNOWLEDGMENT"), attached
hereto as EXHIBIT D. Purchaser further agrees that Purchaser will execute and
submit with the Acknowledgment a copy of the 83(b) Election, attached hereto as
EXHIBIT E, if Purchaser has indicated in the Acknowledgment his or her decision
to make such an election.
-7-
<PAGE>
10. MARKET STANDOFF AGREEMENT. In connection with the initial public
offering of the Company's securities and upon request of the Company or the
underwriters managing any underwritten offering of the Company's securities,
Purchaser agrees not to sell, make any short sale of, loan, grant any option for
the purchase of, or otherwise dispose of any Shares (other than those included
in the registration) without the prior written consent of the Company or such
underwriters, as the case may be, for such period of time (not to exceed 180
days) from the effective date of such registration as may be requested by the
Company or such managing underwriters and to execute an agreement reflecting the
foregoing as may be requested by the underwriters at the time of the public
offering.
11. REGISTRATION RIGHTS. The Company will use best efforts to ensure
that Purchaser shall be entitled to the same or substantially similar piggy-back
registration rights that the Company grants to investors in the Company.
12. MISCELLANEOUS.
(a) GOVERNING LAW. This Agreement and all acts and
transactions pursuant hereto and the rights and obligations of the parties
hereto shall be governed, construed and interpreted in accordance with the laws
of the State of Washington, without giving effect to principles of conflicts of
law.
(b) ENTIRE AGREEMENT; ENFORCEMENT OF RIGHTS. This Agreement
sets forth the entire agreement and understanding of the parties relating to the
subject matter herein and merges all prior discussions between them. No
modification of or amendment to this Agreement, nor any waiver of any rights
under this Agreement, shall be effective unless in writing signed by the parties
to this Agreement. The failure by either party to enforce any rights under this
Agreement shall not be construed as a waiver of any rights of such party.
(c) SEVERABILITY. If one or more provisions of this Agreement
are held to be unenforceable under applicable law, the parties agree to
renegotiate such provision in good faith. In the event that the parties cannot
reach a mutually agreeable and enforceable replacement for such provision, then
(i) such provision shall be excluded from this Agreement, (ii) the balance of
the Agreement shall be interpreted as if such provision were so excluded and
(iii) the balance of the Agreement shall be enforceable in accordance with its
terms.
(d) CONSTRUCTION. This Agreement is the result of negotiations
between and has been reviewed by each of the parties hereto and their respective
counsel, if any; accordingly, this Agreement shall be deemed to be the product
of all of the parties hereto, and no ambiguity shall be construed in favor of or
against any one of the parties hereto.
(e) NOTICES. Any notice required or permitted by this
Agreement shall be in writing and shall be deemed sufficient when delivered
personally or sent by telegram or fax or forty-eight (48) hours after being
deposited in the U.S. mail, as certified or registered mail, with postage
prepaid, and addressed to the party to be notified at such party's address as
set forth below or as subsequently modified by written notice.
-8-
<PAGE>
(f) COUNTERPARTS. This Agreement may be executed in two or
more counterparts, each of which shall be deemed an original and all of which
together shall constitute one instrument.
(g) SUCCESSORS AND ASSIGNS. The rights and benefits of this
Agreement shall inure to the benefit of, and be enforceable by the Company's
successors and assigns. The rights and obligations of Purchaser under this
Agreement may only be assigned with the prior written consent of the Company.
[Signature Page Follows]
-9-
<PAGE>
The parties have executed this Agreement as of the date first set forth
above.
ROSETTA BIOSYSTEMS, INC.
By: /s/ Stephen H. Friend
-----------------------------------
Title: President
--------------------------------
Address:
c/o Venture Law Group
4750 Carillon Point
Kirkland, WA 98033
PURCHASER ACKNOWLEDGES AND AGREES THAT THE VESTING OF SHARES PURSUANT
TO SECTION 4 HEREOF IS EARNED ONLY BY CONTINUING SERVICE AS AN EMPLOYEE OR
CONSULTANT AT THE WILL OF THE COMPANY OR BY THE PROVISIONS OF SECTION 4(A)(IV)
AND SECTION 4(A)(V). PURCHASER FURTHER ACKNOWLEDGES AND AGREES THAT NOTHING IN
THIS AGREEMENT SHALL CONFER UPON PURCHASER ANY RIGHT WITH RESPECT TO
CONTINUATION OF SUCH EMPLOYMENT OR CONSULTING RELATIONSHIP WITH THE COMPANY, NOR
SHALL IT INTERFERE IN ANY WAY WITH PURCHASER'S RIGHT OR THE COMPANY'S RIGHT TO
TERMINATE PURCHASER'S EMPLOYMENT OR CONSULTING RELATIONSHIP AT ANY TIME, WITH OR
WITHOUT CAUSE.
PURCHASER:
JOHN KING
/s/ John J. King
--------------------------------------
(Signature)
Address:
--------------------------------------
--------------------------------------
Vesting Commencement
Date: April 15, 1997
I, __________, spouse of John King, have read and hereby approve the foregoing
Agreement. In consideration of the Company's granting my spouse the right to
purchase the Shares as set forth in the Agreement, I hereby agree to be
irrevocably bound by the Agreement and further agree that any community property
or other such interest shall be similarly bound by the Agreement. I hereby
appoint my spouse as my attorney-in-fact with respect to any amendment or
exercise of any rights under the Agreement.
______________________________________
-10-
<PAGE>
EXHIBIT A
ASSIGNMENT SEPARATE FROM CERTIFICATE
FOR VALUE RECEIVED and pursuant to that certain Common Stock Purchase
Agreement between the undersigned ("PURCHASER") and Rosetta Biosystems, Inc.
(the "COMPANY") dated May __, 1997 (the "AGREEMENT"), Purchaser hereby sells,
assigns and transfers unto the Company _________________________________
(________) shares of the Common Stock of the Company standing in Purchaser's
name on the Company's books and represented by Certificate No. ______, and does
hereby irrevocably constitute and appoint _____________________________ to
transfer said stock on the books of the Company with full power of substitution
in the premises. THIS ASSIGNMENT MAY ONLY BE USED AS AUTHORIZED BY THE AGREEMENT
AND THE EXHIBITS THERETO.
Dated: ______________________
Signature:
/s/ John J. King
------------------------------
John King
/s/ Pamela S. King
------------------------------
Spouse of John King (if applicable)
Instruction: Please do not fill in any blanks other than the signature line. The
purpose of this assignment is to enable the Company to exercise its repurchase
option set forth in the Agreement without requiring additional signatures on the
part of Purchaser.
-11-
<PAGE>
EXHIBIT B
ACKNOWLEDGMENT AND STATEMENT OF DECISION
REGARDING SECTION 83(b) ELECTION
The undersigned has entered a stock purchase agreement with Rosetta
Biosystems, Inc., a Delaware corporation (the "COMPANY"), pursuant to which the
undersigned is purchasing 102,450 shares of Common Stock of the Company (the
"SHARES"). In connection with the purchase of the Shares, the undersigned hereby
represents as follows:
1. The undersigned has carefully reviewed the stock purchase
agreement pursuant to which the undersigned is purchasing the Shares.
2. The undersigned either [check and complete as applicable]:
(a) ____ has consulted, and has been fully advised by, the
undersigned's own tax advisor, __________________________,
whose business address is _____________________________,
regarding the federal, state and local tax consequences of
purchasing the Shares, and particularly regarding the
advisability of making elections pursuant to Section 83(b) of
the Internal Revenue Code of 1986, as amended (the "CODE")
and pursuant to the corresponding provisions, if any, of
applicable state law; or
(b) ____ has knowingly chosen not to consult such a tax advisor.
3. The undersigned hereby states that the undersigned has
decided [check as applicable]:
(a) ____ to make an election pursuant to Section 83(b) of the
Code, and is submitting to the Company, together with the
undersigned's executed Common Stock Purchase Agreement, an
executed form entitled "Election Under Section 83(b) of the
Internal Revenue Code of 1986;" or
(b) ____ not to make an election pursuant to Section 83(b) of the Code.
<PAGE>
4._______Neither the Company nor any subsidiary or representative of
the Company has made any warranty or representation to the undersigned with
respect to the tax consequences of the undersigned's purchase of the Shares or
of the making or failure to make an election pursuant to Section 83(b) of the
Code or the corresponding provisions, if any, of applicable state law.
Date: 5/15/97 /s/ John J. King
------------------------ --------------------------
John King
Date:
------------------------ --------------------------
Spouse of John King
<PAGE>
EXHIBIT E
ELECTION UNDER SECTION 83(b)
OF THE INTERNAL REVENUE CODE OF 1986
The undersigned taxpayer hereby elects, pursuant to Section 83(b) of
the Internal Revenue Code, to include in taxpayer's gross income for the current
taxable year, the amount of any compensation taxable to taxpayer in connection
with taxpayer's receipt of the property described below:
1. The name, address, taxpayer identification number and taxable year of
the undersigned are as follows:
NAME OF TAXPAYER: John King
NAME OF SPOUSE: _______________________
ADDRESS:
IDENTIFICATION NO. OF TAXPAYER:
IDENTIFICATION NO. OF SPOUSE:
TAXABLE YEAR: 1997
2. The property with respect to which the election is made is described as
follows:
164,415 shares of the Common Stock (the "Shares"), $.001 par value, of
Rosetta Biosystems, Inc., a Delaware corporation (the "Company").
3. The date on which the property was transferred is: May __, 1997
4. The property is subject to the following restrictions:
Repurchase option at cost in favor of the Company upon termination of
taxpayer's employment or consulting relationship.
5. The fair market value at the time of transfer, determined without
regard to any restriction other than a restriction which by its terms
will never lapse, of such property is: $1,644.15
6. The amount (if any) paid for such property: $1,644.15
The undersigned has submitted a copy of this statement to the person for whom
the services were performed in connection with the undersigned's receipt of the
above-described property. The transferee of such property is the person
performing the services in connection with the transfer of said property.
THE UNDERSIGNED UNDERSTANDS THAT THE FOREGOING ELECTION MAY NOT BE REVOKED
EXCEPT WITH THE CONSENT OF THE COMMISSIONER.
Dated: /s/ John J. King
------------------------ --------------------------
Taxpayer
Dated: /s/ Pamela S. King
------------------------ --------------------------
Spouse of Taxpayer
<PAGE>
RECEIPT
Rosetta Biosystems, Inc. hereby acknowledges receipt of a check in the
amount of $1,644.15 given by John King as consideration for Certificate No. __
for 164,415 shares of Common Stock of Rosetta Biosystems, Inc.
Dated: ________________
Rosetta Biosystems, Inc.
By: /s/ Stephen H. Friend
---------------------------------
Title: President
---------------------------------
<PAGE>
RECEIPT AND CONSENT
The undersigned hereby acknowledges receipt of a photocopy of
Certificate No. ___ for 164,415 shares of Common Stock of Rosetta Biosystems,
Inc. (the "COMPANY").
The undersigned further acknowledges that the Secretary of the Company,
or his or her designee, is acting as escrow holder pursuant to the Common Stock
Purchase Agreement Purchaser has previously entered into with the Company. As
escrow holder, the Secretary of the Company, or his or her designee, holds the
original of the aforementioned certificate issued in the undersigned's name.
Dated: _________________________
/s/ John J. King
-------------------------------
John King
<PAGE>
STANDARD INDUSTRIAL LEASE
CONFIDENTIAL BLICKMAN
TURKUS COMMERCIAL
INDUSTRIAL
REAL ESTATE
----------------------------------------------------
An Affiliate of the Woodmont Companies
----------------------------------------------------
1. PARTIES. This Lease, dated, for reference purposes only, DECEMBER 17, 1996 is
made by and between LEONARD AND ROBERTA COHN, DONALD AND DIANE ROSENBERG, ET.
AL. DBA C&R INVESTMENTS (herein called "Lessor") and ACACIA BIOSCIENCES, INC., A
DELAWARE CORPORATION (herein called "Lessee").
2. PREMISES. Lessor hereby leases to Lessee and Lessee leases from Lessor for
the term, at the rental, and upon all of the conditions set forth herein, that
certain real property situated in the County of CONTRA COSTA State of
California, commonly known as 4136 LAKESIDE DRIVE, RICHMOND and described as
APPROXIMATELY 5,560 RENTABLE SQUARE FEET OF OFFICE AND LABS SPACE. Said real
property including the land and all improvements thereon, is herein called "the
Premises".
3. TERM.
3.1 TERM. The term of this Lease shall be for THREE (3) YEARS
commencing on MARCH 1, 1997 and ending on FEBRUARY 28, 2000 unless sooner
terminated pursuant to any provision hereof.
3.2 DELAY IN COMMENCEMENT. Notwithstanding said commencement date, if
for any reason Lessor cannot deliver possession of the Premises to Lessee on
said date, Lessor shall not be subject to any liability therefor, nor shall such
failure affect the validity of this Lease or the obligations of Lessee hereunder
or extend the term hereof, but in such case Lessee shall not be obligated to pay
rent until possession of the Premises is tendered to Lessee; provided, however,
that if Lessor shall not have delivered possession of the Premises within sixty
(60) days from said commencement date, Lessee may, at Lessee's option, by notice
in writing to Lessor within ten (10) days thereafter, cancel this Lease, in
which event the parties shall be discharged from all obligations hereunder, if
Lessee occupies the Premises prior to said commencement date, such occupancy
shall be subject to all provisions hereof, such occupancy shall not advance the
termination date, and Lessee shall pay rent for such period at the initial
monthly rates set forth below.
4. RENT. Lessee shall pay to Lessor as rent for the Premises equal monthly
payments of $4,170.00, in advance, on the 1ST day of each month of the term
hereof. Lessee shall pay Lessor upon the execution hereof $4,726.00 as rent for
the LAST MONTH. Rent for any period during the
-1-
<PAGE>
term hereof which is for less than one month shall be a pro rata portion of the
monthly installment. Rent shall be payable in lawful money of the United States
to Lessor at the address stated herein or to such other persons or at such other
places as Lessor may designate in writing.
5. SECURITY DEPOSIT. Lessee shall deposit with Lessor upon execution hereof
$4,170.00 as security for Lessee's faithful performance of Lessee's obligations
hereunder. If Lessee fails to pay rent or other charges due hereunder, or
otherwise defaults with respect to any provision of this Lese, Lessor may use,
apply or retain all or any portion of said deposit for the payment of any rent
or other charge in default or for he payment of any other sum to which Lessor
may become obligated by reason of Lessee's default, or to compensate Lessor for
any loss or damage which Lessor may suffer thereby. If Lessor so uses or applies
all or any portion of said deposit, Lessee shall within ten (10) days after
written demand therefor deposit cash with Lessor in an amount sufficient to
restore said deposit to the full amount hereinabove stated and Lessee's failure
to do so shall be a material breach of this Lease. Lessor shall not be required
to keep said deposit separate from its general accounts. If Lessee performs all
of Lessee's obligations hereunder, said deposit, or so much thereof as has not
theretofore been applied by Lessor, shall be returned, without payment of
interest or other increment for its use, to Lessee (or, at Lessor's option, the
last assignee, if any, of Lessee's interest hereunder) at the expiration of the
term hereof, and after Lessee has vacated the Premises. No trust relationship is
created herein between Lessor and Lessee with respect to said Security Deposit.
6. USE.
6.1 USE. The Premises shall be used and occupied only OFFICE,
LABORATORY, RESEARCH AND DEVELOPMENT, AND OTHER INCIDENTAL USES and for no other
purpose.
6.2 COMPLIANCE WITH LAW.
(a) Lessor warrants to Lessee that the Premises, in its
existing state, but without regard to the use for which Lessee will use the
Premises, does not violate any applicable building code, regulation or ordinance
at the time this Lease is executed. In the event it is determined that this
warranty has been violated, then it shall be the obligation of the Lessor, after
written notice from Lessee, to promptly, at Lessor's sole cost and expense,
rectify any such violation. In the event Lessee does not give to Lessor written
notice of the violation of this warranty within 1 year from the commencement of
the term of this Lease, it shall be conclusively deemed that such violation did
not exist and the correction of the same shall be the obligation of the Lessee.
(b) Except as provided in paragraph 6.2 (a), Lessee shall, at
Lessee's expense, comply promptly with all applicable statutes, ordinances,
rules, regulations, orders, restrictions of record, and requirements in effect
during the term or any part of the term hereof regulating the use by Lessee of
the Premises. Lessee shall not use nor permit the use of the Premises in any
manner that will tend to create waste or a nuisance or if there shall be more
than one tenant in the building containing the Premises, shall tend to disturb
such other tenants.
-2-
<PAGE>
6.3 CONDITION OF PREMISES. Except as provided in paragraph 6.2 (a)
Lessee hereby accepts the Premises in their condition existing as of the date of
the execution hereof, subject to all applicable zoning, municipal, county and
state laws, ordinances and regulations governing and regulating the use of the
Premises, and accepts this Lease subject thereto and to all matters disclosed
thereby and by any exhibits attached hereto. Lessee acknowledges that neither
Lessor nor Lessor's agent has made any representation or warranty as to the
suitability of the Premises for the conduct of Lessee's business.
7. MAINTENANCE REPAIRS AND ALTERATIONS.
7.1 LESSOR'S OBLIGATIONS. Subject to the provisions of Paragraph 6.2
(a) and 9 and except for damage caused by any negligent or intentional act or
omission of Lessee, Lessee's agents, employees, or invitees in which event
Lessee shall repair the damage, Lessor, at Lessor's expense shall keep in good
order, condition and repair the foundations, exterior walls and the exterior
roof of the Premises. Lessor shall not, however, be obligated to paint such
exterior, nor shall Lessor be required to maintain the interior surface of
exterior walls, windows, doors or plate glass. Lessor shall have no obligation
to make repairs under this Paragraph 7.1 until a reasonable time after receipt
of written notice of the need for such repairs. Lessee expressly waives the
benefits of any statute now or hereafter in effect which would otherwise afford
Lessee the right to make repairs at Lessor's expense or to terminate this Lease
because of Lessor's failure to keep the Premises in good order, condition and
repair.
7.2 LESSEE'S OBLIGATIONS.
(a) Subject to the provisions of Paragraphs 6.2 (a), 7 and 9,
Lessee, at Lessee's expense, shall keep in good order, condition and repair the
Premises and every part thereof (whether or not the damaged portion of the
Premises or the means of repairing the same are reasonably or readily accessible
to Lessee) including, without limiting the generality of the foregoing, all
plumbing, heating, airconditioning, ventilating, electrical and lighting
facilities and equipment within the Premises, fixtures, interior walls and
interior surface of exterior walls, ceilings, windows, doors, plate glass, and
skylights, located within the Premises, and all and signs located in the
Premises and all adjacent to the Premises. Lessee expressly waives the benefit
of any statute now or hereinafter in effect which would otherwise afford Lessee
the right to make repairs at Lessor's expense or to terminate this Lease because
of Lessor's failure to keep the Premises in good order, condition and repair.
*(see Addendum I)
(b) If Lessee fails to perform Lessee's obligations under this
Paragraph 7.2, Lessor may at Lessor's option enter upon the Premises after 10
days prior written notice to Lessee, and put the same in good order, condition
and repair, and the cost thereof together with interest thereon at the rate of
10% per annum shall be due and payable as additional rent to Lessor together
with Lessee's next rental installment.
-3-
<PAGE>
(c) On the last day of the term hereof, or on any sooner
termination, Lessee shall surrender the Premises to Lessor in the same condition
as received, broom clean, ordinary wear and tear excepted, Lessee shall repair
any damage to the Premises occasioned by the removal of its trade fixtures,
furnishings and equipment pursuant to Paragraph 7.3 (d), which repair shall
include the patching and filling of holes and repair of structural damage.
7.3 ALTERATIONS AND ADDITIONS.
(a) Lessee shall not, without Lessor's prior written consent
make any alterations, improvements, addition, or Utility Installations in, on or
about the Premises, except for nonstructural alterations not exceeding
$10,000.00 in cost. As used in this Paragraph 7.3 the term "Utility
Installation" shall mean bus ducting, power panels, wiring, fluorescent
fixtures, space heaters, conduits, airconditioning and plumbing. Lessor may
require that Lessee remove any or all of said alterations, improvements,
additions or Utility Installations at the expiration of the term, and restore
the Premises to their prior condition. Lessor may require Lessee to provide
Lessor, at Lessee's sole cost and expense, a lien and completion bond in an
amount equal to one and one-half times the estimated cost of such improvements,
to insure Lessor against any liability for mechanic's and materialmen's liens
and to insure completion of the work. Should Lessee make any alterations,
improvements, additions or Utility Installations without the prior approval of
Lessor, Lessor may require that Lessee remove any or all of such.
(b) Any alterations, improvements, additions or Utility
Installations in, or about the Premises that Lessee shall desire to make and
which requires the consent of the Lessor shall be presented to Lessor in written
form, with proposed detailed plans. If Lessor shall give its consent the consent
shall be deemed conditioned upon Lessee acquiring a permit to do so from
appropriate governmental agencies, the furnishing of a copy thereof to Lessor
prior to the commencement of the work and compliance by Lessee of all conditions
of said permit in a prompt and expeditious manner.
(c) Lessee shall pay, when due, all claims for labor or
materials furnished or alleged to have been furnished to or for Lessee at or for
use in the Premises, which claims are or may be secured by any mechanics' or
materialmen's lien against the Premises or any interest therein. Lessee shall
give Lessor not less than ten (10) days notice prior to the commencement of any
work in the Premises, and Lessor shall have the right to post notices of
non-responsibility in or on the Premises as provided by law. If Lessee shall, in
good faith, contest the validity of any such lien, claim or demand, then Lessee
shall, at its sole expense defend itself and Lessor against the same and shall
pay and satisfy any such adverse judgement that may be rendered thereon before
the enforcement thereof against the Lessor or the Premises, upon the completion
that if Lessor shall require, Lessee shall furnish to Lessor a surety bond
satisfactory to Lessor in an amount equal to such contested lien claim or demand
indemnifying Lessor against liability for the same and holding the Premises free
from the effect of such lien or claim. In addition, Lessor may require Lessee to
pay Lessor's attorneys fees and costs in participating in such action if Lessor
shall decide it is to its best interest to do so.
-4-
<PAGE>
(d) Unless Lessor requires their removal, as set forth in
Paragraph 7.3 (a), all alterations, improvements, additions and Utility
Installations (whether or not such Utility Installations constitute trade
fixtures of Lessee), which may be made on the Premises, shall become the
property of Lessor and remain upon and be surrendered with the Premises at the
expiration of the term. Notwithstanding the provisions of the this Paragraph 7.3
(d), Lessee's machinery and equipment, other than that which is affixed to the
Premises so that it cannot be removed without material damage to the Premises,
shall remain the property of Lessee and may be removed by Lessee subject to the
provisions of Paragraph 7.2 (c).
8. INSURANCE; INDEMNITY.
8.1 LIABILITY INSURANCE. Lessee shall, at Lessee's expense obtain and
keep in force during the term of this Lease a policy of Combined Single Limit,
Bodily Injury and Property Damage insurance insuring Lessor and Lessee against
any liability arising out of the ownership, use, occupancy or maintenance of the
Premises and all areas appurtenant thereto. Such insurance shall be a combined
single limit policy in an amount not less than $500,000. The policy shall
contain cross liability endorsements and shall insure performance by Lessee of
the indemnity provisions of this Paragraph 8. The limits of said insurance shall
not, however, limit the liability of Lessee hereunder. In the event that the
Premises constitute a part of a larger property said insurance shall have a
Lessor's Protective Liability endorsement attached thereto. If Lessee shall fail
to procure and maintain said insurance Lessor may, but shall not be required to,
procure and maintain the same, but at the expense of Lessee. Not more frequently
than each 5 years, if, in the reasonable opinion of Lessor, the amount of
liability insurance required hereunder is not adequate, Lessee shall increase
said insurance coverage as required by Lessor. Provided, however, that in no
event shall the amount of the liability insurance increase by more than fifty
percent greater than the amount thereof during the preceding five years of the
term of this lease. However, the failure of Lessor to require any additional
insurance coverage shall not be deemed to relieve Lessee from any obligations
under this Lease.
8.2 PROPERTY INSURANCE.
(a) Lessor shall obtain and keep in force during the term of
this Lease a policy of policies of insurance covering loss or damage to the
Premises, but not Lessee's fixtures, equipment or tenant improvements in the
amount of the full replacement value thereof, providing protection against all
perils included within the classification of fire, extended coverage, vandalism,
malicious mischief, special extended perils (all risk) but not plate glass
insurance. In addition, the Lessor shall obtain and keep in force, during the
term of this Lease, a policy of rental income insurance covering a period of six
months, with loss payable to Lessor which insurance shall also cover all real
estate taxes and insurance costs for said period. In the event that the Premises
contains sprinklers then the insurance coverage shall include sprinkler leakage
insurance.
(b) Lessee shall pay to Lessor, during the term hereof, in
addition to the rent, the amount of any increase in premiums for the insurance
required under this Paragraph 8.2 over and above such premiums paid during the
Base Period, as hereinafter defined, whether such premium
-5-
<PAGE>
increase shall be the result of the nature of Lessee's occupancy, any act of
omission of Lessee, requirements of the holder of a mortgage or deed of trust
covering the Premises, or increased valuation of the Premises or general rate
increases. In the event that the Premises have been occupied previously the
words "Base Period" shall mean the last twelve months of the prior occupancy and
in the event that the Premises have never been previously occupied the words
"Base Period" shall mean the lowest premium reasonably obtainable for the said
insurance for the Premises assuming the most nominal use of the Premises.
(c) If the Premises being leased herein are part of a larger
property, then Lessee shall not be responsible for paying any increase in the
property insurance caused by the acts or omissions of any other tenant of the
building of which the Premises are a part.
(d) Lessee shall pay any such premium increases to Lessor
within 30 days after receipt by Lessee of a copy of the premium statement or
other satisfactory evidence of the amount due. If the insurance policies
maintained hereunder cover other improvements in addition to the Premises,
Lessor shall also deliver to Lessee a statement of the amount of such increase
attributable to the Premises and showing in reasonable detail the manner in
which such amount was computed. If the term of this Lease shall not expire
concurrently with the expiration of the period covered by such Insurance,
Lessee's liability for premium increases shall be prorated on an annual basis.
8.3 INSURANCE POLICIES. Insurance required hereunder shall be in
companies holding a "General Policyholders Rating" of B plus or better as set
forth in the most current issue of "Best Insurance Guide". Lessee shall deliver
to Lessor copies of policies of liability insurance required under Paragraph 8.1
or certificates evidencing the existence and amounts of such insurance with loss
payable clauses satisfactory to Lessor. No such policy shall be cancelable or
subject to reduction of coverage or other modification except after ten (10)
days prior written notice to Lessor. Lessee shall, within ten (10) days prior to
the expiration date of such policies, furnish Lessor with renewals or "binders"
thereof, or Lessor may order such insurance and charge the cost thereof to
Lessee, which amount shall be payable by Lessee upon demand. Lessee shall not do
or permit to be done anything which shall invalidate the insurance policies
referred to in Paragraph 8.2.
8.4 WAIVER OF SUBROGATION. Lessee and Lessor each hereby waives any and
all rights of recovery against the other, or against the officers, employees,
agents and representatives of the other, for loss of or damage to such waiving
party or its property or the property of others under its control, where such
loss or damage is insured against under any insurance policy in force at the
time of such loss or damage. Lessee and Lessor shall, upon obtaining the
policies of insurance required hereunder, give notice to the insurance carrier
or carriers that the foregoing mutual waiver of subrogation is contained in this
Lease.
8.5 INDEMNITY. Lessee shall indemnify and hold harmless Lessor from and
against any and all claims arising from Lessee's use of the Premises, or from
the conduct of Lessee's
-6-
<PAGE>
business or from any activity, work or things done, permitted or suffered by
Lessee in or about the Premises or elsewhere and shall further indemnify and
hold harmless Lessor from and against any and all claims arising from any breach
or default in the performance of any obligation on Lessee's part to be performed
under the terms of this Lease, or arising from any negligence of the Lessee, or
any of Lessee's agents, contractors, or employees, and from and against all
costs, attorney's fees, expenses and liabilities incurred in the defense of any
such claim or any action or proceeding brought thereon; and in case any action
or proceeding be brought against Lessor by reason of any such claim, Lessee upon
notice from Lessor shall defend the same at Lessee's expense by counsel
satisfactory to Lessor. Lessee, as a material part of the consideration to
Lessor, hereby assumes all risk of damage to property or injury to persons, in,
upon or about the Premises arising from any cause and Lessee hereby waives all
claims in respect thereof against Lessor.
8.6 EXEMPTION OF LESSOR FROM LIABILITY. Lessee hereby agrees that
Lessor shall not be liable for injury to Lessee's business or any loss of income
therefrom or for damage to the goods, wares, merchandise or other property of
Lessee, Lessee's employees, invitees, customers, or any other person in or about
the Premises, nor shall Lessor be liable for injury to the person of Lessee,
Lessee's employees, agents or contractors, whether such damage or injury is
caused by or results from fire, steam, electricity, gas, water or rain, or from
the breakage, leakage, obstruction or other defects of pipes, sprinklers, wires,
appliances, plumbing, air conditioning or lighting fixtures, or from any other
cause, whether the said damage or injury results from conditions arising upon
the Premises or upon other portions of the building of which the Premises are a
part, or from other sources or places, and regardless of whether the cause of
such damage or injury or the means of repairing the same is inaccessible to
Lessee. Lessor shall not be liable for any damages arising from any act or
neglect of any other tenant, if any, of the building in which the Premises are
located.
9. DAMAGE OR DESTRUCTION.
9.1 PARTIAL DAMAGE-INSURED. Subject to the provisions of Paragraphs 9.3
and 9.4, if the Premises are damaged and such damage was caused by a casualty
covered under an insurance policy required to be maintained pursuant to
Paragraph 8.2, Lessor shall at Lessor's expense repair such damage as soon as
reasonably possible and this Lease shall continue in full force and effect but
Lessor shall not repair or replace Lessee's fixtures, equipment or tenant
improvements.
9.2 PARTIAL DAMAGE-UNINSURED. Subject to the provisions of Paragraphs
9.3 and 9.4, if at any time during the term hereof the Premises are damaged,
except by a negligent or willful act of Lessee (in which event Lessee shall make
the repairs, at its expense) and such damage was caused by a casualty not
covered under an insurance policy required to be maintained by Lessor pursuant
to Paragraph 8.2, Lessor may at Lessor's option either (i) repair such damage as
soon as reasonably possible at Lessor's expense, in which event this Lease shall
continue in full force and effect, or (ii) give written notice to Lessee within
thirty (30) days after the date of the occurrence of such damage of Lessor's
intention to cancel and terminate this Lease as of the date of the occurrence of
such damage. In the event Lessor elects to give such notice of Lessor's
intention to cancel and terminate this Lease, Lessee shall have the right within
ten (10) days after
-7-
<PAGE>
the receipt of such notice to give written notice to Lessor of Lessee's
intention to repair such damage at Lessee's expense, without reimbursement from
Lessor, in which event this Lease shall continue in full force and effect, and
Lessee shall proceed to make such repairs as soon as reasonably possible. If
Lessee does not give such notice within such 10-day period this Lease shall be
cancelled and terminated as of the date of the occurrence of such damage.
9.3 TOTAL DESTRUCTION. If at any time during the term hereof the
Premises are totally destroyed from any cause whether or not covered by the
insurance required to be maintained by Lessor pursuant to Paragraph 8.2
(including any total destruction required by any authorized public authority)
this Lease shall automatically terminate as of the date of such total
destruction.
9.4 DAMAGE NEAR END OF TERM. If the Premises are partially destroyed or
damaged during the last six months of the term of this Lease, Lessor may at
Lessor's option cancel and terminate this Lease as of the date of occurrence of
such damage by giving written notice to Lessee of Lessor's election to do so
within 30 days after the date of occurrence of such damage. Said termination
right shall be mutual.
9.5 ABATEMENT OF RENT; LESSEE'S REMEDIES.
(a) If the Premises are partially destroyed or damaged and
Lessor or Lessee repairs or restores them pursuant to the provisions of this
Paragraph 9, the rent payable hereunder for the period during which such damage,
repair or restoration continues shall be abated in proportion to the degree to
which Lessee's use of the Premises is impaired. Except for abatement of rent, if
any, Lessee shall have no claim against Lessor for any damage suffered by reason
of any such damage, destruction repair or restoration.
(b) If Lessor shall be obligated to repair or restore the
Premises under the provisions of this Paragraph 9 and shall not commence such
repair or restoration within 90 days after such obligations shall accrue, Lessee
may at Lessee's option cancel and terminate this Lease by giving Lessor written
notice of Lessee's election to do so at any time prior to the commencement of
such repair or restoration. In such event this Lease shall terminate as of the
date of such notice.
9.6 TERMINATION- ADVANCE PAYMENTS. Upon termination of this Lease
pursuant to this Paragraph 9, an equitable adjustment shall be made concerning
advance rent and any advance payments made by Lessee to Lessor. Lessor shall, in
addition, return to Lessee so much of Lessee's security deposit as has not
theretofore been applied by Lessor.
9.7 WAIVER. Lessee waives the provisions of California Civil Code
Sections 1932 (2) and 1933 (4) which relate to termination of leases when the
thing leased is destroyed and agrees that such event shall be governed by the
terms of this Lease.
10. REAL PROPERTY TAXES.
-8-
<PAGE>
10.1 PAYMENT OF TAX INCREASE. Lessor shall pay all real property taxes
applicable to the Premises; provided, however, that Lessee shall pay in addition
to rent, the amount, if any, by which real property taxes applicable to the
Premises increase over the fiscal tax year 1996 1997. Such payment shall be made
by Lessee within thirty (30) days after receipt of Lessor's written statement
setting forth the amount of such increase and the computation thereof. If the
term of this Lease shall not expire concurrently with the expiration of the tax
fiscal year, Lessee's liability for increase taxes for the last partial lease
year shall be prorated on an annual basis.
10.2 DEFINITION OF "REAL PROPERTY" TAX. As used herein, the term "real
property tax" shall include any form of assessment, license fee, commercial
rental tax, levy, penalty, or tax (other than inheritance or estate taxes),
imposed by any authority having the direct or indirect power to tax, including
any city, county, state or federal government, or any school, agricultural,
lighting, drainage or other improvement district thereof, as against any legal
or equitable interest of Lessor in the Premises or in the real property of which
the Premises are a part, as against Lessor's right to rent or other income
therefrom, or as against Lessor's business of leasing the Premises or any tax
imposed in substitution, partially or totally, of any tax previously included
within the definition of real property tax, or any additional tax the nature of
which was previously included within the definition of real property tax.
10.3 JOINT ASSESSMENT. If the Premises are not separately assessed,
Lessee's liability shall be an equitable proportion of the real property taxes
for all of the land and improvements included within the tax parcel assessed,
such proportion to be determined by Lessor from the respective valuations
assigned in the assessor's work sheets or such other information as may be
reasonable available. Lessor's reasonable determination thereof, in good faith,
shall be conclusive.
10.4 PERSONAL PROPERTY TAXES.
(a) Lessee shall pay prior to delinquency all taxes assessed
against and levied upon trade fixtures, furnishings, equipment and all other
personal property to be assessed and billed separately from the real property of
Lessor.
(b) If any of Lessee's said personal property shall be
assessed with Lessor's real property, Lessee shall pay Lessor the taxes
attributable to Lessee within 10 days after receipt of a written statement
setting forth the taxes applicable to Lessee's property.
11. UTILITIES. Lessee shall pay for all water, gas, heat, light, power,
telephone and other utilities and services supplied to the Premises, together
with any taxes thereon. If any such services are not separately metered to
Lessee, Lessee shall pay a reasonable proportion to be determined by Lessor of
all charges jointly metered with other premises.
12. ASSIGNMENT AND SUBLETTING.
-9-
<PAGE>
12.1 LESSOR'S CONSENT REQUIRED. Lessee shall not voluntarily or by
operation of law assign, transfer, mortgage, sublet, or otherwise transfer or
encumber all or any part of Lessee's interest in this Lease or in the Premises,
without Lessor's prior written consent, which Lessor shall not unreasonably
withhold. Any attempted assignment, transfer, mortgage, encumbrance or
subletting without such consent shall be void, and shall constitute a breach of
this Lease.
12.2 LESSEE AFFILIATE. Notwithstanding the provisions of paragraph 12.1
hereof, Lessee may assign or sublet the Premises, or any portion thereof,
without Lessor's consent, to any corporation which controls, is controlled by or
is under common control with Lessee, or to any corporation resulting from the
merger or consolidation with Lessee, or to any person or entity which acquires
all the assets of Lessee as a going concern of the business that is being
conducted on the Premises, provided that said assignee assumes, in full, the
obligations of Lessee under this Lease. Any such assignment shall not, in any
way, affect or limit the liability of Lessee under the terms of this Lease even
if after such assignment or subletting the terms of this Lease are materially
changed or altered without the consent of Lessee, the consent of whom shall not
be necessary.
12.3 NO RELEASE OF LESSEE. Regardless of Lessor's consent, no
subletting or assignment shall release Lessee of Lessee's obligation or alter
the primary liability of Lessee to pay the rent and to perform all other
obligations to be performed by Lessee hereunder. The acceptance of rent by
Lessor from any other person shall not be deemed to be a waiver by Lessor of any
provision hereof. Consent to one assignment or subletting shall not be deemed
consent to any subsequent assignment or subletting. In the event of default by
any assignee of Lessee or any successor of Lessee, in the performance of any of
the terms hereof. Lessor may proceed directly against Lessee without the
necessity of exhausting remedies against said assignee. Lessor may consent to
subsequent assignments or subletting of this Lease or amendments or
modifications to this Lease with assignees of Lessee, without notifying Lessee,
or any successor of Lessee, and without obtaining its or their consent thereto
and such action shall not relieve Lessee of liability under this Lease.
12.4 ATTORNEY'S FEES. In the event Lessee shall assign or sublet the
Premises or request the consent of Lessor to any assignment or subletting or if
Lessee shall request the consent of Lessor for any act Lessee proposes to do
then Lessee shall pay Lessor's reasonable attorneys fees incurred in connection
therewith, such attorneys fees not to exceed $250.00 for each such request.
13. DEFAULTS; REMEDIES.
13.1 DEFAULTS. The occurrence of any one or more of the following
events shall constitute a material default and breach of this Lease by Lessee:
(a) The vacating or abandonment of the Premises by Lessee.
-10-
<PAGE>
(b) The failure by Lessee to make any payment of rent or any
other payment required to be made by Lessee hereunder, as and when due, where
such failure shall continue for a period of five (5) business days after written
notice thereof from Lessor to Lessee.
(c) The failure bye Lessee to observe or perform any of the
covenants, conditions or provisions of this Lease to be observed or performed by
Lessee, other than described in paragraph (b) above, where such failure shall
continue for a period of 30 days after written notice hereof from Lessor to
Lessee; provided, however, that if the nature of Lessee's default is such that
more than 30 days are reasonably required for its cure, then Lessee shall not be
deemed to be in default if Lessee commenced such cure within said 30-day period
and thereafter diligently prosecutes such cure to completion.
(d) (i) The making by Lessee of any general arrangement for
the benefit of creditors; (ii) the filing by or against Lessee of a petition to
have Lessee adjudged a bankrupt or a petition for reorganization or arrangement
under any law relating to bankruptcy (unless, in the case of a petition filed
against Lessee, the same is dismissed within 60 days); (iii) the appointment of
a trustee or receiver to take possession of substantially all of Lessee's assets
located at the Premises or of Lessee's interest in this Lease, where possession
is not restored to Lessee within 30 days, or (iv) the attachment, execution or
other judicial seizure of substantially all of Lessee's assets located at the
Premises or of Lessee's interest in this Lease where such seizure is not
discharged within 30 days.
(e) The discovery by Lessor that any financial statement
given to Lessor by Lessee, any assignee of Lessee, any subtenant of Lessee,
any successor in interest of Lessee or any guarantor of Lessee's obligation
hereunder, and any of them, was materially false.
13.2 REMEDIES. In the event of any such material default or breach by
Lessee, Lessor may at any time thereafter, with or without notice or demand and
without limiting Lessor in the exercise of any right or remedy which Lessor may
have by reason of such default or breach:
(a) Terminate Lessee's right to possession of the Premises by any lawful means,
in which case this Lease shall terminate and Lessee shall immediately surrender
possession of the Premises to Lessor, in such event Lessor shall be entitled to
recover from Lessee all damages incurred by Lessor by reason of Lessee's default
including, but not limited to, the cost of recovering possession of the
Premises; expenses of reletting, including necessary renovation and alteration
of the Premises, reasonable attorney's fees, and any real estate commission
actually paid; the work at the time of award by the court having jurisdiction
thereof of the amount by which the unpaid rent for the balance of the term after
the time of such award exceeds the amount of such rental loss for the same
period that Lessee proves could be reasonably avoided; that portion of the
leasing commission paid by Lessor pursuant to Paragraph 15 applicable to the
unexpired term of this Lease.
(b) Maintain Lessee's right to possession in which case this
Lease shall continue in effect whether or not Lessee shall have abandoned the
Premises. In such event Lessor shall be
-11-
<PAGE>
entitled to enforce all of Lessor's rights and remedies under this Lease,
including the right to recover the rent as it becomes due hereunder.
(c) Pursue any other remedy now or hereafter available to
Lessor under the laws or judicial decisions of the State of California.
13.3 DEFAULT BY LESSOR. Lessor shall not be in default unless Lessor
fails to perform obligations required of Lessor within a reasonable time, but in
no event later than thirty (30) days after written notice by Lessee to Lessor
and to the holder of any first mortgage or deed of trust covering the Premises
whose name and address shall have theretofore been furnished to Lessee in
writing, specifying wherein Lessor has failed to perform such obligation;
provided, however, that if the nature of Lessor's obligation is such that more
than thirty (30) days are required for performance then Lessor shall not be in
default if Lessor commences performance within such 30-day period and thereafter
diligently prosecutes the same to completion.
13.4 LATE CHARGES. Lessee hereby acknowledges that late payment by
Lessee to Lessor of rent and other sums due hereunder will cause Lessor to incur
costs not contemplated by this Lease, the exact amount of which will be
extremely difficult to ascertain. Such costs include, but are not limited to,
processing and accounting charges, and late charges which may be imposed on
Lessor by the terms of any mortgage or trust deed covering the Premises.
Accordingly, if any installment of rent or any other sum due from Lessee shall
not be received by Lessor or Lessor's designee within ten (10) days after such
amount shall be due, Lessee shall pay to Lessor a late charge equal to 6% of
such overdue amount. The parties hereby agree that such late charge represents a
fair and reasonable estimate of the costs Lessor will incur by reason of late
payment by Lessee. Acceptance of such late charge by Lessor shall in no event
constitute a waiver of Lessee's default with respect to such overdue amount, nor
prevent Lessor from exercising any of the other rights and remedies granted
hereunder.
14. CONDEMNATION. If the Premises or any portion thereof are taken under the
power of eminent domain, or sold under the threat of the exercise of said power
(all of which are herein called "condemnation"), this Lease shall terminate as
to the part so taken as of the date the condemning authority takes title or
possession, whichever first occurs. If more than 10% of the floor area of the
improvements on the premises, or more than 25% of the land area of the Premises
which is not occupied by any improvements is taken by condemnation. Lessee may,
at Lessee's option, to be exercised in writing only within ten (10) days after
Lessor shall have given Lessee written notice of such taking (or in the absence
of such notice within ten (10) days after the condemning authority shall have
taken possession) terminate this Lease as of the date the condemning authority
takes such possession. If Lessee does not terminate this Lease is accordance
with the foregoing, this Lease shall remain in full force and effect as to the
portion of the Premises remaining, except that the rent shall be reduced in the
proportion that the floor area taken bears to the total floor area of the
building situated on the Premises. Any award for the taking of all or any part
of the Premises under the power of eminent domain or any payment made under
threat of the exercise of such power shall be the property of the Lessor,
whether such award shall be made as compensation for diminution in value of the
leasehold or for the taking of the fee, or as severance damages; provided,
however, that Lessee shall be entitled to any award
-12-
<PAGE>
for loss of or damage to Lessee's trade fixtures and removable personal
property. In the event that this Lease is not terminated by reason of such
condemnation, Lessor shall, to the extent of severance damages received by
Lessor in connection with such condemnation, repair any authority, Lessee shall
pay any amount in excess of such severance damages required to complete such
repair.
15. BROKER'S FEE. Upon execution of this Lease by both parties, Lessor shall pay
to CB COMMERCIAL, a licensed real estate broker, a fee as set forth in a
separate agreement between Lessor and said broker, for brokerage services
rendered by said broker to Lessor in this transaction. Lessor further agrees
that if Lessee exercises any option granted herein or any option substantially
similar thereto, either to extend the term of this Lease, to renew this Lease,
to purchase said Premises or any part thereof and/or any adjacent property which
Lessor may own or in which Lessor has an interest, or any other option granted
herein, or if said broker is the procuring cause of any other lease or sale
entered into between the parties pertaining to the Premises and/or any adjacent
property in which Lessor has an interest, then as to any of said transactions
Lessor shall pay said broker a fee in accordance with the schedule of said
broker in effect at the time of execution of this lease. Lessor agrees to pay
said fee not only on behalf of Lessor but also on behalf of any person,
corporation, association, or other entity having an ownership interest in said
real property or any part thereof, when such fee is due hereunder. Any
transferee of Lessor's interest in this Lease, by accepting an assignment of
such interest, shall be deemed to have assumed Lessor's obligation under this
Paragraph 15. Said broker shall be a third party beneficiary of the provisions
of this Paragraph.
16. GENERAL PROVISIONS.
16.1 ESTOPPEL CERTIFICATE.
(a) Lessee shall at any time upon not less than ten (10) days
prior written notice from Lessor execute, acknowledge and deliver to Lessor a
statement in writing (i) certifying that this Lease is unmodified and in full
force and effect (or, if modified, stating the nature of such modification and
certifying that this Lease, as so modified, is in full force and effect) and the
date to which the rent and other charges are paid in advance, if any, and (ii)
acknowledging that there are not, to Lessee's knowledge, any uncured defaults on
the part of Lessor hereunder, or specifying such defaults if any are claimed.
Any such statement may be conclusively relied upon by any prospective purchaser
or encombrancer of the Premises.
(b) Lessee's failure to deliver such statement within such
time shall be conclusive upon Lessee (i) that this Lease is in full force and
effect without modification except as may be represented by Lessor, (ii) that
there are no uncured defaults in Lessor's performance, and (iii) that not more
than one month's rent has been paid in advance or such failure may be considered
by Lessor as a default by Lessee under this Lease.
(c) If Lessor desires to finance or refinance the Premises, or
nay part thereof, Lessee hereby agrees to deliver to any lender designated by
Lessor such financial statements of Lessee as may be reasonably required by such
lender. Such statements shall include the past
-13-
<PAGE>
three years financial statements of Lessee. All such financial statements shall
be received by Lessor in confidence and shall be used only for the purposes
herein set forth.
16.2 LESSOR'S LIABILITY. The term "Lessor" as used herein shall mean
only the owner or owners at the time in question of the fee title or a lessee's
interest in a ground lease of the Premises, and except as expressly provided in
Paragraph 15, in the event of any transfer of such title or interest. Lessor
herein named (and in case of any subsequent transfers the then grantor) shall be
relieved from and after the date of such transfer of all liability as respects
Lessor's obligations thereafter to be performed, provided that any funds in the
hands of Lessor or the then grantor at the time of such transfer, in which
Lessee has an interest, shall be delivered to the grantee. The obligations
contained in this Lease to be performed by Lessor shall, subject as aforesaid,
be binding on Lessor's successors and assigns, only during their respective
periods of ownership.
16.3 SEVERABILITY. The invalidity of any provision of this Lease as
determined by a court of competent jurisdiction, shall in no way affect the
validity of any other provision hereof.
16.4 INTEREST ON PAST-DUE OBLIGATIONS. Except as expressly herein
provided, any amount due to Lessor not paid when due shall bear interest at 10%
per annum from the date due. Payment of such interest shall not excuse or cure
any default by Lessee under this Lease, provided, however, that interest shall
not be payable on late charges incurred by Lessee nor on any amounts upon which
late charges are paid by Lessee.
16.5 TIME OF ESSENCE. Time is of the essence.
16.6 CAPTIONS. Article and paragraph captions are not a part
hereof.
16.7 INCORPORATION OF PRIOR AGREEMENTS; AMENDMENTS. This Lease contains
all agreements of the parties with respect to any matter mentioned herein. No
prior agreement or understanding pertaining to any such matter shall be
effective. This Lease may be modified in writing only, signed by the parties in
interest at the time of the modification. Except as otherwise stated in this
Lease, Lessee hereby acknowledges that neither the real estate broker listed in
Paragraph 15 hereof nor any cooperating broker on this transaction nor the
Lessor or any employees or agents of any of said persons has made any oral or
written warranties or representations to Lessee relative to the condition or use
by Lessee of said Premises and Lessee acknowledges that Lessee assumes all
responsibility regarding the Occupational Safety Health Act, the legal use and
adaptability of the Premises and the compliance thereof with all applicable laws
and regulations in effect during the term of this Lease except as otherwise
specifically stated in this Lease.
16.8 NOTICES. Any notice required or permitted to be given hereunder
shall be in writing and may be given by personal delivery or by certified mail,
and if given personally or by mail, shall be deemed sufficiently given if
addressed to Lessee or to Lessor at the address noted below the signature of the
respective parties, as the case may be. Either party may be notice to the other
specify a different address for notice purposes except that upon Lessee's taking
possession of the Premises, the Premises shall constitute Lessee's address for
notice purposes. A
-14-
<PAGE>
copy of all notices required or permitted to be given to Lessor hereunder shall
be concurrently transmitted to such party or parties at such addresses as Lessor
may from time to time hereafter designate by notice to Lessee.
16.9 WAIVERS. No waiver by Lessee of any provision hereof shall be
deemed a waiver of any other provision hereof or of any subsequent breach by
Lessee of the same or any other provision. Lessor's consent to or approval of
any act shall not be deemed to render unnecessary the obtaining of Lessor's
consent to or approval of any subsequent act by Lessee. The acceptance of rent
hereunder by Lessor shall not be a waiver of any preceding breach by Lessee of
any provision hereof, other than the failure of Lessee to pay the particular
rent so accepted, regardless of Lessor's knowledge of such preceding breach at
the time of acceptance of such rent.
16.10 RECORDING. Lessee shall not record this Lease without Lessor's
prior written consent, and such recordation shall, at the option of Lessor,
constitute a non-curable default of Lessee hereunder. Either party shall, upon
request of the other, execute, acknowledge and deliver to the other a "short
form" memorandum of this Lease for recording purposes.
16.11 HOLDING OVER. If Lessee remains in possession of the Premises or
any part thereof after the expiration of the term hereof without the express
written consent of Lessor, such occupancy shall be a tenancy from month to month
at a rental in the amount of the last monthly rental plus al other charges
payable hereunder, and upon all the terms hereof applicable to a month-to-month
tenancy.
16.12 CUMULATIVE REMEDIES. No remedy or election hereunder shall be
deemed exclusive but shall, wherever possible, be cumulative with all other
remedies at law or in equity.
16.13 COVENANTS AND CONDITIONS. Each provision of this Lease
performable by Lessee shall be deemed both a covenant and a condition.
16.14 BINDING EFFECT; CHOICE OF LAW. Subject to any provisions hereof
restricting assignment or subletting by Lessee and subject to the provisions of
Paragraph 16.2, this Lease shall bind the parties, their personal
representatives, successors and assigns. This Lease shall be governed by the
laws of the State of California.
16.15 SUBORDINATION.
(a) This Lease, at Lessor's option, shall be subordinate to
any ground lease, mortgage, deed of trust, or any other hypothecation for
security now or hereafter placed upon the real property of which the Premises
are a part and to any and all advances made on the security thereof and to all
renewals, modifications, consolidations, replacements and extensions thereof.
Notwithstanding such subordination, Lessee's right to quiet possession of the
Premises shall not be disturbed if Lessee is not in default and so long as
Lessee shall pay the rent and observe and perform all of the provisions of this
Lease, unless this Lease is otherwise terminated pursuant to its terms, if any
mortgagee, trustee or ground lessor shall elect to have this Lease prior to the
lien of its mortgage, deed of trust or ground lease, and shall give written
notice thereof to Lessee, this Lease shall be deemed prior to such mortgage,
deed of trust or ground lease, whether this Lease
-15-
<PAGE>
is dated prior or subsequent to the date of said mortgage, deed of trust or
ground lease or the date of recording thereof.
(b) Lessee agrees to execute any documents required to
effectuate such subordination or to make this Lease prior to the lien of any
mortgage, deed of trust or ground lease, as the case may be, and failing to do
so within ten (10) days after written demand, does hereby make, constitute and
irrevocably appoint Lessor as Lessee's attorney in fact and in Lessee's name,
place and stead, to do so.
16.16 ATTORNEY'S FEES. If either party or the broker named herein
brings an action to enforce the terms hereof or declare rights hereunder, the
prevailing party in any such action, on trial or appeal, shall be entitled to
his reasonable attorney's fees to be paid by the losing party as fixed by the
court. The provisions of this paragraph shall inure to the benefit of the broker
named herein who seeks to enforce a right hereunder.
16.17 LESSOR'S ACCESS. Lessor and Lessor's agents shall have the right
to enter the Premises at reasonable times for the purpose of inspecting the
same, showing the same to prospective purchasers, lenders, or lessees, and
making such alterations, repairs, improvements or additions to the Premises or
to the building of which they are a part as Lessor may deem necessary or
desirable. Lessor may at any time place on or about the Premises any ordinary
"For Sale" signs and Lessor may at any time during the last 120 days of the
terms hereof place on or about the Premises any ordinary "For Lease" signs, all
without rebate of rent or liability to Lessee.
16.18 SIGNS AND AUCTIONS. Lessee shall not place any sign upon the
Premises or conduct any auction thereon without Lessor's prior written consent
except that Lessee shall have the right, without the prior permission of Lessor
to place ordinary and usual for rent or sublet signs thereon.
16.19 MERGER. The voluntary or other surrender of this Lease by Lessee,
or a mutual cancellation thereof, or a termination by Lessor, shall not work a
merger, and shall, at the option of Lessor, terminate all or any existing
subtenancies or may, at the option of Lessor, operate as an assignment to Lessor
of any or all of such subtenancies.
16.20 CORPORATE AUTHORITY. If Lessee is a corporation, each individual
executing this Lease on behalf of said corporation represents and warrants that
he is duly authorized to execute and deliver this Lease on behalf of said
corporation in accordance with a duly adopted resolution of the Board of
Directors of said corporation or in accordance with the Bylaws of said
corporation, and that this Lease is binding upon said corporation in accordance
with its terms. If Lessee is a corporation Lessee shall, within thirty (30) days
after execution of this Lease, deliver to Lessor a certified copy of a
resolution of the Board of Directors of said corporation authorizing or
ratifying the execution of this Lease.
16.21 CONSENTS. Wherever in this Lease the consent of one party is
required to an act of the other party such consent shall not be unreasonably
withheld.
-16-
<PAGE>
16.22 GUARANTOR. In the event that there is a guarantor of this Lease,
said guarantor shall have the same obligations as Lessee under Paragraphs 16.1
and 16.20 of this Lease.
16.23 QUIET POSSESSION. Upon Lessee paying the fixed rent reserved
hereunder and observing and performing all of the covenants, conditions and
provisions on Lessee's part to be observed and performed hereunder, Lessee shall
have quiet possession of the Premises for the entire term hereof subject to all
of the provisions of this Lease.
16.24 OPTIONS. In the event that the Lessee, under the terms of this
Lease, has any option to extend the term of this Lease, or any option to
purchase the premises or any right of first refusal to purchase the premises or
other property of Lessor, then each of such options and rights are personal to
Lessee and may be not exercised or be assigned, voluntarily or involuntarily, by
or to any one other than Lessee except that it may be exercised by or assigned
to any of the entities described in paragraph 12.2 hereof for whom Lessee does
not need the consent of Lessor to assign this Lease. In the event that Lessee
hereunder has any multiple options to extend this Lease a later option to extend
the lease cannot be exercised unless the prior option has been so exercised. No
option may be exercised at a time when the Lessee is in default under its
obligations under this Lease.
16.25 MULTIPLE TENANT BUILDING. In the event that the Premises are part
of a larger building or group of buildings then Lessee agrees that it will abide
by, keep and observe all reasonable rules and regulations which Lessor may make
from time to time for the management, safety, care, and cleanliness of the
building and grounds, the parking of vehicles and the preservation of good order
therein as well as for the convenience of other occupants and tenants of the
building. Further, Lessee will promptly pay its prorata share, as reasonably
determined by Lessor, of any maintenance or repair of such portion of the
Premises or such portion of the property of which the premises are a part, which
are common areas or used by Lessee and other occupants thereof. The violations
of any such rules and regulations, or the failure to pay such prorata share of
costs, shall be deemed a material breach of this Lease by Lessee.
16.26 ADDITIONAL PROVISIONS. If there are no additional provisions draw
a line from this point to the next printed word after the space left here. If
there are additional provisions place the same here.
<PAGE>
The parties hereto have executed this Lease at the place on the dates specified
immediately adjacent to their respective signatures.
IF THIS LEASE HAS BEEN FILLED IN IT HAS BEEN PREPARED FOR SUBMISSION TO YOUR
ATTORNEY FOR HIS APPROVAL. NO REPRESENTATION OR RECOMMENDATION IS MADE BY THE
REAL ESTATE BROKER OR ITS AGENTS OR EMPLOYEES AS TO THE LEGAL SUFFICIENCY, LEGAL
EFFECT, OR TAX CONSEQUENCES OF THIS LEASE OR THE TRANSACTION RELATING THERETO.
Executed at C & R Investments
---------------------- ----------------------------------
on 1-11-97 By /s/: Leonard D. Cohn
------------------------------- -------------------------------
Address 5 Sierra CT. By /s/: Donald Rosenberg
------------------------- -------------------------------
Moraga, CA 94556 "LESSOR" (Corporate seal)
- ---------------------------------
Executed at Acacia Biosciences, Inc.
---------------------- ----------------------------------
on By /s/: Bruce A. Cohen
------------------------------- -------------------------------
Address By
-------------------------- --------------------------------
"LESSEE" (Corporate seal)
- ---------------------------------
<PAGE>
FIRST ADDENDUM
TO
STANDARD INDUSTRIAL LEASE
LESSOR: Leonard and Roberta Cohn, Donald and Diane Rosenberg, et. al.,
dba C & R Investments
LESSEE: Acacia Biosciences, Inc., a Delaware corporation
THIS FIRST ADDENDUM shall amend that certain Standard Industrial Lease
dated as of December 17, 1996 (the "Lease") entered into by and between Leonard
and Roberta Cohn, Donald and Diane Rosenberg, et. al. dba C & R Investments as
Lessor and Acacia Biosciences, Inc. as Lessee. Unless otherwise indicated
herein, all terms initially capitalized herein shall have the same meanings
attributed to such terms in the Lease and references to section numbers
hereinbelow is to sections of the Lease. The Lease is hereby amended as follows:
1. BASE RENT [PARAGRAPH 4].
Base Rent for initial term of this lease shall be as follows:
March 1, 1997 - February 29, 1998: $.75 per rentable square foot
March 1, 1998 - February 28, 1999: $.80 per rentable square foot
March 1, 1999 - February 28, 2000: $.85 per rentable square foot
2. OPTION TO RENEW.
Provided that Lessee is not in default hereunder, either at the time of
exercise or at the time the extended Term commences, Lessee shall have the
option to extend the initial Term of this Lease for three (3) one (1) year
periods on the same terms, covenants and conditions provided herein, except that
upon such renewal the Base Monthly Rent due hereunder shall be as follows:
Option One: $.90 per rentable square foot;
Option Two: $.93 per rentable square foot;
Option Three: $.96 per rentable square foot.
Lessee shall exercise its option by giving Lessor written notice ("Option
Notice") at least one hundred eighty (180) days prior to the expiration of the
initial Term of the Lease.
3. TENANT IMPROVEMENTS. Lessor, at Lessor's sole cost and expense,
shall provide Lessee with a $10,000 tenant improvement allowance. Said allowance
shall be used for real property improvements only and shall be payable within
thirty (30) days of Lessor's receipt from Lessee of paid approved invoices.
<PAGE>
4. MAINTENANCE REPAIRS AND ALTERATIONS. [PARAGRAPH 7]
Equipment Leasing / Lessor's Lien:
Notwithstanding anything herein to the contrary, Lessor waives any and
all rights, title and interest Lessor now has, or hereafter may have, whether
statutory or otherwise, to Lessee's inventory, equipment, furnishings, trade
fixtures, books and records, personal property, and tenant improvements paid for
by Lessee located at the Premises (single and/or collectively, the
"Collateral"). Lessor acknowledges that Lessor further agrees that Lessee shall
have the right, at its discretion, to mortgage, pledge, hypothecate or grant a
security interest in the Collateral as security for its obligations under any
equipment lease or other financing arrangement related to the conduct of
Lessee's business at the Premises. Lessor further agrees to execute and deliver
within five (5) business days any UCC filing statement or other documentation
required to be executed by Lessor in connection with any such lease or financing
arrangement, including but not limited to a Lessor's Waiver and Consent form.
5. INSURANCE; INDEMNITY [PARAGRAPH 8]
Notwithstanding anything to the contrary contained herein, Tenant shall
not be required to remove (i) any of the initial Tenant Improvements construct
by or on behalf of Tenant, and (ii) any alterations, additions or improvements
for which Tenant has obtained Landlord's consent, unless Landlord has indicated,
at the time of granting such consent, that such removal will be required. Upon
approval by Lessor, Tenant shall be entitled to remove any alterations,
additions or improvements, provided Tenant repairs any damage to the Premise
caused by such removal.
6. DAMAGE AND DESTRUCTION. [PARAGRAPH 9]
If Tenant is unable, despite its diligent efforts, to secure any
permit, approval, license, occupancy permit or other governmental authorization
needed for Tenant's occupancy of the Premises or the conduct of its business at
the Premises by February 15, 1997, Tenant may thereafter terminate this Lease by
providing Landlord written notice of its election to do so (the "Termination
Notice"), and the Lease shall terminate 2 days from the date of the Termination
Notice. Upon receipt of the Termination Notice, Landlord shall refund to Tenant
all sums and deposits paid hereunder and neither party shall have any further
liability to the other on account hereof.
7. CONTROLLING EFFECT.
The provisions of this First Addendum shall supersede provisions of the
Lease which are inconsistent herewith.
IN WITNESS WHEREOF, the parties have executed this First Addendum to the
Standard Industrial Lease as of the date and year set forth below.
<PAGE>
LESSEE: LESSOR:
Acacia Biosciences, Inc., Leonard and Roberta Cohn, Donald
a Delaware corporation and Diane Rosenberg, et. al.
dba C & R Investments
BY: /s/: Bruce A. Cohen BY: /s/: Leonard D. Cohn
-------------------------- -----------------------------
BY: Bruce A. Cohen BY: /s/: Donald Rosenberg
-------------------------- -----------------------------
ITS: President and CEO ITS:
-------------------------- -----------------------------
Dated: January 10, 1997 Dated: January 11, 1997
<PAGE>
STANDARD INDUSTRIAL LEASE
BLICKMAN TURKUS COMMERCIAL INDUSTRIAL REAL ESTATE
AN AFFILIATE OF THE WOODMONT COMPANIES
1. PARTIES. This Lease, dated, for reference purposes only, January 21,
1997 is made by and between Overaa Properties - 200 Parr Blvd, Richmond CA 94801
510-234-0926 (herein called "Lessor") and Acacia Biosciences, Inc., a Delaware
Corporation (herein called "Lessee").
2. PREMISES. Lessor hereby leases to Lessee and Lessee leases from Lessor
for the term, at the rental, and upon all of the conditions set forth herein,
that certain real property situated in the County of Contra Costa State of
California, commonly known as 4138 Lakeside Drive, Richmond, CA 94806 and
described as a plus or minus 6,132 square foot office unit. Said real property
including the land and all improvements thereon, is herein called "the
Premises."
3. TERM.
3.1 Term. The term of this Lease shall be for three (3) years
commencing on March 1, 1997 and ending on February 28, 2000 unless sooner
terminated pursuant to any provision hereof.
3.2 Delay in Commencement. Notwithstanding said commencement date, if
for any reason Lessor cannot deliver possession of the Premises to Lessee on
said date, Lessor shall not be subject to any liability therefor, nor shall such
failure affect the validity of this Lease or the obligations of Lessee hereunder
or extend the term hereof, but in such case Lessee shall not be obligated to pay
rent until possession of the Premises is tendered to Lessee; provided, however,
that if Lessor shall not have delivered possession of the Premises within sixty
(60) days from said commencement date, Lessee may, at Lessee's option, by notice
in writing to Lessor within ten (10) days thereafter, cancel this Lease, in
which event the parties shall be discharged from all obligations hereunder. If
Lessee occupies the Premises prior to said commencement date, such occupancy
shall be subject to all provisions hereof, such occupancy shall not advance the
termination date, and Lessee shall pay rent for such period at the initial
monthly rates set forth below.
4. RENT. Lessee shall pay to Lessor as rent for the Premises equal monthly
payments of $3,000*, in advance, on the 1st day of each month of the term
hereof. Lessee shall pay Lessor upon the execution hereof $3,000 as rent for
March 1997 (*See addendum Section 1, Base Rent). Rent for any period during the
term hereof which is for less than one month shall be a pro rata portion of the
monthly installment. Rent shall be payable in lawful money of the United States
to Lessor at the address stated herein or to such other persons or at such other
places as Lessor may designate in writing.
5. SECURITY DEPOSIT. Lessee shall deposit with Lessor upon execution
hereof $4,500.00 as security for Lessee's faithful performance of Lessee's
obligations hereunder. If Lessee fails to pay rent or other charges due
hereunder, or otherwise defaults with respect to any provision of this Lease,
Lessor may use, apply or retain all or any portion of said deposit for the
payment of any rent or other charge in default or for the payment of any other
sum to which Lessor may become obligated by reason of Lessee's default, or to
compensate Lessor for any loss or damage which lessor may suffer thereby. If
Lessor so uses or applies all or any portion of said deposit, Lessee shall
within ten (10) days after written demand therefor deposit cash with Lessor in
an amount sufficient to restore said deposit to the full amount hereinabove
stated and Lessee's failure to do so shall be a material breach of this Lease.
Lessor shall not be required to keep said deposit separate from its general
accounts. If Lessee performs all of Lessee's obligations hereunder, said deposit
or so much thereof as has not theretofore been applied by Lessor, shall be
returned without payment of interest or other increment for its use, to Lessee
(or, at Lessor's option, to the last assignee, if any, of Lessee's interest
hereunder) at the expiration of the term hereof and after Lessee has vacated the
Premises. No trust relationship is created herein between Lessor and Lessee with
respect to said Security Deposit.
6. USE.
6.1 Use. The Premises shall be used and occupied only for office,
laboratory, research and development and other incidental uses and for no other
purpose.
<PAGE>
6.2 Compliance with Law.
(a) Lessor warrants to Lessee that the Premises, in its existing
state, but without regard to the use for which Lessee will use the Premises does
not violate any applicable building code, regulation or ordinance at the time
this Lease is executed. In the event it is determined that this warranty has
been violated, then it shall be the obligation of the Lessor, after written
notice from Lessee, to promptly at Lessor's sole cost and expense, rectify any
such violation. In the event Lessee does not give to Lessor written notice of
the violation of this warranty within 1 year from the commencement of the term
of this Lease, it shall be conclusively deemed that such violation did not exist
and the correction of the same shall be the obligation of the Lessee.
(b) Except as provided in paragraph 6.2(a), Lessee shall, at
Lessee's expense, comply promptly with all applicable statutes, ordinances,
rules, regulations, orders, restrictions of record, and requirements in effect
during the term or any part of the term hereof regulating the use by Lessee of
the Premises. Lessee shall not use nor permit the use of the Premises in any
manner that will tend to create waste or a nuisance or, if there shall be more
than one tenant in the building containing the Premises, shall tend to disturb
such other tenants.
6.3 Condition of Premises. Except as provided in paragraph 6.2(a)
Lessee hereby accepts the Premises in their condition existing as of the date of
the execution hereof, subject to all applicable zoning, municipal, county and
state laws, ordinances and regulations governing and regulating the use of the
Premises, and accepts this Lease subject thereto and to all matters disclosed
thereby and by any exhibits attached hereto. Lessee acknowledges that neither
Lessor nor Lessor's agent has made any representation or warranty as to the
suitability of the Premises for the conduct of Lessee's business.
7. MAINTENANCE REPAIRS AND ALTERATIONS.
7.1 Lessor's Obligations. Subject to the provision of Paragraph 6.2(a)
and 9 and except for damage caused by any negligent or intentional act or
omission of Lessee, Lessee's agents, employees, or invitees in which event
Lessee shall repair the damage, Lessor, at Lessor's expense, shall keep in good
order, condition and repair the foundations, exterior walls and the exterior
roof of the Premises. Lessor shall not, however, be obligated to paint such
exterior, nor shall Lessor be required to maintain the interior surface of
exterior walls, windows, doors or plate glass. Lessor shall have no obligation
to make repairs under this Paragraph 7.1 until a reasonable time after receipt
of written notice of the need for such repairs. Lessee expressly waives the
benefits of any statute now or hereafter in effect which would otherwise afford
Lessee the right to make repairs at Lessor's expense or to terminate this Lease
because of Lessor's failure to keep the Premises in good order, condition and
repair.
7.2 Lessee's Obligations.
(a) Subject to the provisions of Paragraphs 6.2(a), 7 and 9,
Lessee, at Lessee's expenses, shall keep in good order, condition and repair the
Premises and every part thereof (whether or not the damaged portion of the
premises or the means of repairing the same are reasonably or readily accessable
to Lessee) including, without limiting the generality of the foregoing, all
plumbing, heating, air conditioning, ventilating, electrical and lighting
facilities and equipment within the Premises, fixtures, interior walls and
interior surface of exterior walls, ceilings, windows, doors, plate glass, and
skylights, located within the Premises and signs located in the Premises. Lessee
expressly waives the benefit of any statute now or hereinafter in effect which
would otherwise afford Lessee the right to make repairs at Lessor's expense or
to terminate this Lease because of Lessor's failure to keep the Premises in good
order, condition and repair.
(b) If Lessee fails to perform Lessee's obligations under this
Paragraph 7.2, Lessor may at Lessor's option enter upon the Premises after 10
days' prior written notice to Lessee, and put the same in good order, condition
and repair, and the cost thereof together with interest thereon at the rate of
10% per annum shall be due and payable as additional rent to Lessor together
with Lessee's next rental installment.
(c) On the last day of the term hereof, or on any sooner
termination, Lessee shall surrender the Premises to Lessor in the same condition
as received, broom clean, ordinary wear and tear excepted.
-2-
<PAGE>
Lessee shall repair any damage to the Premises occasioned by the removal of its
trade fixtures, furnishings and equipment pursuant to Paragraph 7.3 (d), which
repair shall include the patching and filling of holes and repair of structural
damage.
7.3 Alterations and Additions.
(a) Lessee shall not, without Lessor's prior written consent
make any alterations, improvements, additions, or Utility Installations in, on
or about the Premises, except for nonstructural alterations not exceeding
$10,000.00 in cost. As used in this Paragraph 7.3 the term "Utility
Installation" shall mean bus ducting, power panels, wiring, fluorescent
fixtures, space heaters, conduits, air conditioning and plumbing. Lessor may
require that Lessee remove any or all of said alterations, improvements,
additions or Utility Installations at the expiration of the term, and restore
the Premises to their prior condition. Lessor may require Lessee to proved
Lessor, at Lessee's sole cost and expense, a lien and completion bond in an
amount equal to one and one-half times the estimated cost of such improvements,
to insure Lessor against any liability for mechanic's and materialmen's liens
and to insure completion of the work. Should Lessee make any alterations,
improvements, additions or Utility Installations without the prior approval of
Lessor, Lessor may require that Lessee remove any or all of such.
(b) Any alterations, improvements, additions or Utility
Installations in, or about the Premises that Lessee shall desire to make and
which requires the consent of the Lessor shall be presented to Lessor in written
form, with proposed detailed plans. If Lessor shall give its consent the consent
shall be deemed conditioned upon Lessee acquiring a permit to do so from
appropriate governmental agencies, the furnishing of a copy thereof to Lessor
prior to the commencement of the work and the compliance by Lessee of all
conditions of said permit in a prompt and expeditious manner.
(c) Lessee shall pay, when due, all claims for labor or
materials furnished or alleged to have been furnished to or for Lessee at or for
use in the Premises, which claims are or may be secured by any mechanics' or
materialmen's lien against the Premises or any interest therein. Lessee shall
give Lessor not less than ten (10) days notice prior to the commencement of any
work in the Premises, and Lessor shall have the right to post notices of
non-responsibility in or on the Premises as provided by law. If Lessee shall, in
good faith, contest the validity of any such lien, claim or demand, then Lessee
shall, at its sole expense defend itself and Lessor against the same and shall
pay and satisfy any such adverse judgement that may be rendered thereon before
the enforcement thereof against the Lessor or the Premises, upon the condition
that if Lessor shall require, Lessee shall furnish to Lessor a surety bond
satisfactory to Lessor in an amount equal to such contested lien claim or demand
indemnifying Lessor against liability for the same and holding the Premises free
from the effect of such lien or claim. In addition, Lessor may require Lessee to
pay Lessor's attorney's fees and costs in participating in such action if Lessor
shall decide it is to its best interest to do so.
(d) Unless Lessor requires their removal, as set forth in
Paragraph 7.3 (a), all alterations, improvements, additions and Utility
Installations (whether or not such Utility Installations constitute trade
fixtures of Lessee), which may be made on the Premises, shall become the
property of Lessor and remain upon and be surrendered with the Premises at the
expiration of the term. Notwithstanding the provisions of this Paragraph 7.3
(d), Lessee's machinery and equipment, other than that which is affixed to the
Premises so that it cannot be removed without material damage to Premises, shall
remain on the property of Lessee and may be removed by Lessee subject to the
provisions of Paragraph 7.2 (c).
8. INSURANCE; INDEMNITY.
8.1 Liability Insurance Lessee shall at Lessee's expense obtain and
keep in force during the term of this Lease a policy of Combined Single Limit,
Bodily Injury and Property Damage insurance insuring Lessor and Lessee against
any liability arising out of the ownership, use, occupancy or maintenance of the
Premises and all areas appurtenant thereto. Such insurance shall be a combined
single limit policy in an amount not less than $500,000. The policy shall
contain cross liability endorsements and shall insure performance by Lessee of
the indemnity provisions of this Paragraph 8. The limits of said insurance shall
not, however, limit the liability of Lessee hereunder. In the event that the
Premises constitute a part of a larger property said insurance shall have a
Lessor's Protective
-3-
<PAGE>
Liability endorsement attached thereto. If Lessee shall fail to procure and
maintain said insurance Lessor may, but shall not be required to, procure and
maintain the same, but at the expense of Lessee. Not more frequently than each 5
years. If, in the reasonable opinion of Lessor, the amount of liability
insurance required hereunder is not adequate, Lessee shall increase said
insurance coverage as required by Lessor. Provided, however that in no event
shall the amount of the liability insurance increase be more than fifty percent
greater than the amount thereof during the preceding five years of the term of
this lease. However, the failure of Lessor to require any additional insurance
coverage shall not be deemed to relieve Lessee from any obligations under this
Lease.
8.2 Property Insurance.
(a) Lessor shall obtain and keep in force during the term of
this Lease a policy or policies of insurance covering loss or damage to the
Premises, but not Lessee's fixtures, equipment or tenant improvements in the
amount of the full replacement value thereof, providing protection against all
0permits included within the classification of fire, extended coverage,
vandalism, malicious mischief, special extended perils (all risk) but not plate
glass insurance. In addition, the Lessor shall obtain and keep in force, during
the term of this Lease, a policy of rental income insurance covering a period of
six months, with loss payable to Lessor which insurance shall also cover all
real estate taxes and insurance costs for said period. In the event that the
Premises contains sprinklers then the insurance coverage shall include sprinkler
leakage insurance.
(b) Lessee shall pay to Lessor, during the term hereof, in
addition to the rent, the amount of any increase in premiums for the insurance
required under this Paragraph 8.2 over and above such premiums paid during the
Base Period, as hereinafter defined, whether such premium increase shall be the
result of the nature of Lessee's occupancy, any act or omission of Lessee,
requirements of the holder of a mortgage or deed of trust covering the Premises,
or increased valuation of the Premises or general rate increases. In the event
that the Premises have been occupied previously the words "Base Period" shall
mean the last twelve months of the prior occupancy and in the event that the
Premises have never been previously occupied the words "Base Period" shall mean
the lowest premium reasonably obtainable for the said insurance for the Premises
assuming the most nominal use of the Premises.
(c) If the Premises being leased herein are part of a larger
property, then Lessee shall not be responsible for paying any increase in the
property insurance caused by the acts or omissions of any other tenant of the
building of which the Premises are a part.
(d) Lessee shall pay any such premium increases to Lessor
within 30 days after receipt by Lessee of a copy of the premium statement or
other satisfactory evidence of the amount due. If the insurance policies
maintained hereunder cover other improvements in addition to the Premises,
Lessor shall also deliver to Lessee a statement of the amount of such increase
attributable to the Premises and showing in reasonable detail the manner in
which such amount was computed. If the term of this Lease shall not expire
concurrently with the expiration of the period covered by such insurance,
Lessee's ability for premium increases shall be prorated on an annual basis.
8.3 Insurance Policies. Insurance required hereunder shall be in
companies holding a "General Policyholders Rating" of B plus or better as set
forth in the most current issue of "Best Insurance Guide." Lessee shall deliver
to Lessor copies of policies of liability insurance required under Paragraph 8.1
or certificates evidencing the existence and amounts of such insurance with loss
payable clauses satisfactory to Lessor. No such policy shall be cancellable or
subject to reduction of coverage or other modification except after ten (10)
days' prior written notice to Lessor. Lessee shall, within ten (10) days prior
to the expiration of such policies, furnish Lessor with renewals or "binders"
thereof, or Lessor may order such insurance and charge the cost thereof to
Lessee, which amount shall be payable by Lessee upon demand. Lessee shall not do
or permit to be done anything which shall invalidate the insurance policies
referred to in Paragraph 8.2.
8.4 Waiver of Subrogation. Lessee and Lessor each hereby waives any and
all rights of recovery against the other, or against the officers, employees,
agents and representatives of the other, for less of or damage to such waiving
party or its property or the property of others under its control, where such
loss or damage is insured against under any insurance policy in force at the
time of such loss or damage. Lessee and Lessor shall, upon obtaining the
policies of insurance required hereunder, give
-4-
<PAGE>
notice to the insurance carrier or carriers that the foregoing mutual waiver of
subrogation is contained in this Lease.
8.5 Indemnity. Lessee shall indemnify and hold harmless Lessor from and
against any and all claims arising form Lessee's use of the Premises, or from
the conduct of Lessee's business or from any activity, work or things done,
permitted or suffered by Lessee in or about the Premises or elsewhere and shall
further indemnify and hold harmless Lessor from and against any and all claims
arising from any breach or default in the performance of any obligation on
Lessee's part to be performed under the terms of this Lease, or arising from any
negligence of the Lessee, or any of Lessee's agents, contractors, or employees,
and from and against all costs, attorney's fees, expenses and liabilities
incurred in the defense of any such claim or any action or proceeding brought
thereon; and in case any action or proceeding be brought against Lessor by
reason of any such claim. Lessee upon notice from Lessor shall defend the same
at Lessee's expense by counsel satisfactory to Lessor. Lessee, as a material
part of the consideration to Lessor, hereby assumes all risk of damage to
property or injury to persons, in, upon or about the Premises arising from any
cause and Lessee hereby waives all claims in respect thereof against Lessor.
8.6 Exemption of Lessor from Liability. Lessee hereby agrees that
Lessor shall not be liable for injury to Lessee's business or any loss of income
therefrom or for damage to the goods, wares, merchandise or other property of
Lessee, Lessee's employees, invitees, customers, or any other person in or about
the Premises, nor shall Lessor be liable for injury to the person of Lessee,
Lessee's employees, agents or contractors, whether such damage or injury is
cause by or results from fire, steam, electricity gas, water or rain, or from
the breakage, leakage, obstruction or other defects of pipes, sprinklers, wires,
appliances, plumbing, air conditioning or lighting fixtures, or from any other
cause, whether the said damage or injury results from conditions arising upon
the Premises or upon other portions of the building of which the Premises are a
part, or from other sources or places, and regardless of whether the cause of
such damage or injury or the means of repairing the same is inaccessible to
Lessee, Lessor shall not be liable for any damages arising from any act or
neglect of any other tenant, if any, of the building in which the Premises are
located.
9. DAMAGE OR DESTRUCTION.
9.1 Partial Damage-Insured. Subject to the provisions of Paragraph 9.3
and 9.4, if the Premises are damaged and such damage was caused by a casualty
covered under an insurance policy required to be maintained pursuant to
Paragraph 8.2, Lessor shall at Lessor's expense repair such damage as soon as
reasonably possible and this Lease shall continue in full force and effect but
Lessor shall not repair or replace Lessee's fixtures, equipment or tenant
improvements.
9.2 Partial Damage-Uninsured. Subject to the provisions of Paragraphs
9.3 and 9.4, if at any time during the term hereof the Premises are damaged,
except by a negligent or willful act of Lessee (in which event Lessee shall make
the repairs, at its expense) and such damage was caused by a casualty not
covered under an insurance policy required to be maintained by Lessor pursuant
to Paragraph 8.2, Lessor may at Lessor's option, either (i) repair such damage
as soon as reasonably possible at Lessor's expense, in which event this Lease
shall continue in full force and effect or (ii) give written notice to Lessee
within thirty (30) days after the date of the occurrence of such damage of
Lessor's intention to cancel and terminate this Lease as of the date of the
occurrence of such damage. In the event Lessor elects to give such notice of
Lessor's intention to cancel and terminate this Lease, Lessee shall have the
right within ten (10) days after the receipt of such notice to give written
notice to Lessor of Lessee's intention to repair such damage at Lessee's
expense, without reimbursement from Lessor, in which event this Lease shall
continue in full force and effect, and Lessee shall proceed to make such repairs
as soon as reasonably possible. If Lessee does not give such notice within such
10-day period this Lease shall be cancelled and terminated as of the date of the
occurrence of such damage.
9.3 Total Destruction. If at any time during the term hereof the
Premises are totally destroyed from any cause whether or not covered by the
insurance required to be maintained by Lessor pursuant to Paragraph 8.2
(including any total destruction required by any authorized public authority)
this Lease shall automatically terminate as of the date of such total
destruction.
-5-
<PAGE>
9.4 Damage Near End of Term. If the Premises are partially destroyed or
damaged during the last six months of the term of this Lease, Lessor may at
Lessor's option cancel and terminate this Lease as of the date of occurrence of
such damage by giving written notice to Lessee of Lessor's election to do so
within 30 days after the date of occurrence of such damage. Said termination
shall be mutual.
9.5 Abatement of Rent; Lessee's Remedies.
(a) If the Premises are partially destroyed or damaged and
Lessor or Lessee repairs or restores them pursuant to the provisions of this
Paragraph 9, the rent payable hereunder for the period during which such damage,
repair or restoration continues shall be abated in proportion to the degree to
which Lessee's use of the Premises is impaired. Except for abatement of rent, if
any, Lessee shall have no claim against Lessor for any damage suffered by reason
of any such damage, destruction, repair or restoration.
(b) If Lessor shall be obligated to repair or restore the
Premises under the provisions of this Paragraph 9 and shall not commence such
repair or restoration within 90 days after such obligations shall accrue, Lessee
may at Lessee's option cancel and terminate this Lease by giving Lessor written
notice of Lessee's election to do so at any time prior to the commencement of
such repair or restoration in such event this Lease shall terminate as of the
date of such notice.
9.6 Termination- Advance Payments. Upon termination of this Lease
pursuant to this Paragraph 9, an equitable adjustment shall be made concerning
advance rent and any advance payments made by Lessee to Lessor, Lessor shall, in
addition, return to Lessee so much of Lessee's security deposit as has not
theretofore been applied by Lessor.
9.7 Waiver. Lessee waives the provisions of California Civil Code
Sections 1932 (2) and 1933 (4) which relate to termination of leases when the
thing leased is destroyed and agrees that such event shall be governed by the
terms of this Lease.
10. REAL PROPERTY TAXES.
10.1 Payment of Tax Increase. Lessor shall pay all real property taxes
applicable to the premises; provided, however, that Lessee shall pay, in
addition to rent, the amount, if any, by which real property taxes applicable to
the Premises increase over the fiscal tax year 19__ 19__. Such payment shall be
made by Lessee within thirty (30) days after receipt of Lessor's written
statement setting forth the amount of such increase and the computation hereof.
If the term of this Lease shall not expire concurrently with the expiration of
the tax fiscal year, Lessee's liability for increased taxes for the last partial
lease year shall be prorated on an annual basis.
10.2 Definition of "Real Property" Tax. As used herein, the term "real
property tax" shall include any form of assessment, license fee, commercial
rental tax, levy, penalty, or tax (other than inheritance or estate taxes),
imposed by any authority having the direct or indirect power to tax, including
any city, county, state or federal government, or any school, agricultural,
lighting, drainage or other improvement district thereof, as against any legal
or equitable interest of Lessor in the Premises or in the real property of which
the Premises are a part, as against Lessor's right to rent or other income
therefrom, or as against Lessor's business of leasing the Premises or any tax
imposed in substitution, partially or totally, of any tax previously included
within the definition of real property tax, or any additional tax the nature of
which was previously included within the definition of real property tax.
10.3 Joint Assessment. If the Premises are not separately assessed,
Lessee's ability shall be an equitable proportion of the real property taxes for
all of the land and improvements included within the tax parcel assessed, such
proportion to be determined by Lessor from the respective valuations assigned in
the assessor's work sheets or such other information as may be reasonably
available. Lessor's reasonable determination thereof, in good faith, shall be
conclusive.
10.4 Personal Property Taxes.
-6-
<PAGE>
(a) Lessee shall pay prior to delinquency all taxes assessed
against and levied upon trade fixtures, furnishings, equipment and all other
personal property of Lessee contained in the Premises or elsewhere. When
possible, Lessee shall cause said trade fixtures, furnishings, equipment and all
other personal property to be assessed and billed separately from the real
property of Lessor.
(b) If any of Lessee's said personal property shall be
assessed with Lessor's real property, Lessee shall pay Lessor the taxes
attributable to Lessee within 10 days after receipt of a written statement
setting forth the taxes applicable to Lessee's property.
11. UTILITIES. Lessee shall pay for all water, gas, heat, light, power,
telephone and other utilities and services supplied to the Premises, together
with any taxes thereon. If any such services are not separately metered to
Lessee, Lessee shall pay a reasonable proportion to be determined by Lessor of
all charges jointly metered with other premises.
12. ASSIGNMENT AND SUBLETTING.
12.1 Lessor's Consent Required. Lessee shall not voluntarily or by
operation of law assign, transfer, mortgage, sublet, or otherwise transfer or
encumber all or any part of Lessee's interest in this Lease or in the Premises,
without Lessor's prior written consent, which Lessor shall not unreasonably
withhold. Any attempted assignment, transfer, mortgage, encumbrance or
subletting without such consent shall be void, and shall constitute a breach of
this Lease.
12.2 Lessee Affiliate. Notwithstanding the provisions of paragraph 12.1
hereof, Lessee may assign or sublet the Premises, or any portion thereof,
without Lessor's consent, to any corporation which controls, is controlled by or
is under common control with Lessee, or to any corporation resulting from the
merger or consolidation with Lessee, or to any person or entity which acquires
all the assets of Lessee as a going concern of the business that is being
conducted on the Premises, provided that said assignee assumes, in full, the
obligations of Lessee under this Lease. Any such assignment shall not, in any
way, affect or limit the liability of Lessee under the terms of this Lease even
if after such assignment or subletting the terms of this Lease are materially
changed or altered without the consent of Lessee, the consent of whom shall not
be necessary.
12.3 No Release of Lessee. Regardless of Lessor's consent, no
subletting or assignment shall release Lessee of Lessee's obligation or alter
the primary liability of Lessee to pay the rent and to perform all other
obligations to be performed by Lessee hereunder. The acceptance of rent by
Lessor from any other personal shall not be deemed to be a waiver by Lessor of
any provision hereof. Consent to one assignment or subletting shall not be
deemed consent to any subsequent assignment or subletting. In the event of
default by an assignee of Lessee or any successor of Lessee, in the performance
of any of the terms hereof. Lessor may proceed directly against Lessee without
the necessity of exhausting remedies against said assignees. Lessor may consent
to subsequent assignments of subletting of this Lease or amendments or
modifications to this Lease with assignees of Lessee, without notifying Lessee,
or any successor of Lessee, and without obtaining its or their consent thereto
and such action shall not relieve Lessee of liability under this Lease.
12.4 Attorney's Fees. In the event Lessee shall assign or sublet the
Premises or request the consent of Lessor to any assignment or subletting or if
Lessee shall request the consent of Lessor for any act Lessee proposes to do
then Lessee shall pay Lessor's reasonable attorneys fees incurred in connection
therewith, such attorneys fees not to exceed $250.00 for each such request.
13. DEFAULTS; REMEDIES.
13.1 Defaults. The occurrence of any one or more of the following
events shall constitute a material default and breach of this Lease by Lessee:
(a) The vacating or abandonment of the Premises by
Lessee.
(b) The failure by Lessee to make any payment of rent or any
other payment required to be made by Lessee hereunder, as and when due, where
such failure shall continue for a period of five (5) business days after written
notice thereof from Lessor to Lessee.
-7-
<PAGE>
(c) The failure by Lessee to observe or perform any of the
covenants, conditions or provisions of this Lease to be observed or performed by
Lessee, other than described in paragraph (b) above, where such failure shall
continue for a period of 30 days after written notice hereof from Lessor to
Lessee; provided, however, that if the nature of Lessee's default is such that
more than 30 days are reasonably required for its cure, then Lessor shall not be
deemed to be in default if Lessee commenced such cure within said 30-day period
and thereafter diligently prosecutes such cure to completion.
(d) (i) The making by Lessee of any general arrangement for
the benefit of creditors; (ii) the filing by or against Lessee of a petition to
have Lessee adjudged a bankrupt or a petition for reorganization or arrangement
under any law relating to bankruptcy (unless, in the case of a petition filed
against Lessee, the same is dismissed within 60 days), (iii) the appointment of
a trustee or receiver to take possession of substantially all of Lessee's assets
located at the Premises or of Lessee's interest in this Lease, where possession
is not restored to Lessee within 30 days or (iv) the attachment, execution or
other judicial seizure of substantially all of Lessee's assets located at the
Premises or of Lessee's interest in this Lease where such seizure is not
discharged within 30 days.
(e) The discovery by Lessor that any financial statement given
to Lessor by Lessee, any assignee of Lessee, any subtenant of Lessee, any
successor in interest of Lessee or any guarantor of Lessee's obligation
hereunder, and any of them, was materially false.
13.2 Remedies. In the event of any such material default or breach by
Lessee, Lessor may at any time thereafter, with or without notice or demand and
without limiting Lessor in the exercise of any right or remedy which Lessor may
have by reason of such default or breach:
(a) Terminate Lessee's right to possession of the Premises by
any lawful means, in which case this Lease shall terminate and Lessee shall
immediately surrender possession of the Premises to Lessor. In such event Lessor
shall be entitled to recover from Lessee all damages incurred by Lessor by
reason of Lessee's default including, but not limited to, the cost of recovering
possession of the Premises; expenses of reletting, including necessary
renovation and alteration of the Premises, reasonable attorney's fees, and any
real estate commission actually paid; the worth at the time of award by the
court having jurisdiction thereof of the amount by which the unpaid rent for the
balance of the term after the time of such award exceeds the amount of such
rental loss for the same period that Lessee proves could be reasonably avoided;
that portion of the leasing commission paid by Lessor pursuant to Paragraph 15
applicable to the expired term of this Lease.
(b) Maintain Lessee's rights to possession in which case this
Lease shall continue in effect whether or not Lessee shall have abandoned the
Premises. In such event Lessor shall be entitled to enforce all of Lessor's
rights and remedies under this Lease, including the right to recover the rent as
it becomes due hereunder.
(c) Pursue any other remedy now or hereafter available to
Lessor under the laws or judicial decisions of the State of California.
13.3 Default by Lessor. Lessor shall not be in default unless Lessor
fails to perform obligations required of Lessor within a reasonable time, but in
no event later than thirty (30) days after written notice by Lessee to Lessor
and to the holder of any first mortgage or deed of trust covering the Premises
whose name and address shall have theretofore been furnished to Lessee in
writing, specifying wherein Lessor has failed to perform such obligation;
provided, however, that if the nature of Lessor's obligation is such that more
than thirty (30) days are required for performance then Lessor shall not be in
default if Lessor commences performance within such 30-day period and thereafter
diligently prosecutes the same to completion.
13.4 Late Charges. Lessee hereby acknowledges that late payment by
Lessee to Lessor of rent and other sums due hereunder will cause Lessor to incur
costs not contemplated by this Lease, the exact amount of which will be
extremely difficult to ascertain. Such costs include, but are not limited to,
processing and accounting charges, and late charges which may be imposed on
Lessor by the terms of any mortgage or trust deed covering the Premises.
Accordingly, if any installment of rent or any other sum due from Lessee shall
not be received by Lessor or Lessor's designee within ten (10) days after such
amount shall be due. Lessee shall pay to Lessor a late charge equal to 6% of
such overdue
-8-
<PAGE>
amount. The parties hereby agree that such late charge represents a fair and
reasonable estimate of the costs Lessor will incur by reason of late payment by
Lessee. Acceptance of such late charge represents a fair and reasonable estimate
of the costs Lessor will incur by reason of late payment by Lessee. Acceptance
of such late charge by Lessor shall in no event constitute a waiver of Lessee's
default with respect to such overdue amount, nor prevent Lessor from exercising
any of the other rights and remedies granted hereunder.
14. CONDEMNATION. If the Premises or any portion thereof are taken under
the power of eminent domain, or sold under the threat of the exercise of said
power (all of which are herein called "condemnation"), this Lease shall
terminate as to the part so taken as of the date the condemning authority takes
title or possession, whichever first occurs. If more than 10% of the floor areas
of the improvements on the premises, or more than 25% of the land area of the
Premises which is not occupied by any improvements, is taken by condemnation,
Lessee may, at Lessee's option, to be exercised in writing only when ten (10)
days after Lessor shall have given Lessee written notice of such taking (or in
the absence of such notice within ten (10) days after the condemning authority
shall have taken possession) terminate this Lease as of the date the condemning
authority takes such possession. If Lessee does not terminate this Lease in
accordance with the foregoing, this Lease shall remain in full force and effect
as to the portion of the Premises remaining, except that the rent shall be
reduced in the proportion that the floor area taken bears to the total floor
area of the building situated on the Premises. Any award for the taking of all
or any part of the Premises under the power of eminent domain or any payment
made under threat of the exercise of such power shall be the property of Lessor,
whether such award shall be made as compensation for diminution in value of the
leasehold or for the taking of the fee, or as severance damages, provided,
however, that Lessee shall be entitled to any award for loss of or damage to
Lessee's trade fixtures and removable personal property in the event that this
Lease is not terminated by reason of such condemnation, Lessor shall, to the
extent of severance damages received by Lessor in connection with such
condemnation, repair any damage to the Premises caused by such condemnation
except to the extent that Lessee has been reimbursed therefor by the condemning
authority. Lessee shall pay any amount in excess of such severance damages
required to complete such repair.
15. BROKER'S FEE. Upon execution of this Lease by both parties, Lessor
shall pay to CB Commercial Real Estate Group, Inc., licensed real estate broker,
a fee as set forth in a separate agreement between Lessor and said broker, or in
the event there is no separate agreement between Lessor and said broker, the sum
of $per agreement for brokerage services rendered by said broker to Lessor in
this transaction, Lessor further agrees that if Lessee exercises any option
granted herein or any option substantially similar thereto, either to extend the
term of this Lease, to renew this Lease, to purchase said Premises or any part
thereof and/or any adjacent property which Lessor may own or in which Lessor has
an interest, or any other option granted herein, or if said broker is the
procuring cause of any other lease or sale entered into between the parties
pertaining to the Premises and/or any adjacent property in which Lessor has an
interest, then as to any of said transactions. Lessor shall pay said broker a
fee in accordance with the schedule of said broker in effect at the time of
execution of this lease. Lessor agrees to pay said fee not only on behalf of
Lessor but also on behalf of any person, corporation, association, or other
entity having an ownership interest in said real property or any part thereof,
when such fee is due hereunder. Any transferee of Lessor's interest in this
Lease, by accepting an assignment of such interest, shall be deemed to have
assumed Lessor's obligation under this Paragraph 15. Said broker shall be a
third party beneficiary of the provisions of this Paragraph.
16. GENERAL PROVISIONS.
16.1 Estoppel Certificate.
(a) Lessee shall at any time upon not less than ten (10) days'
prior written notice from Lessor execute, acknowledge and deliver to Lessor a
statement in writing (i) certifying that this Lease is unmodified and in full
force and effect (or, if modified, stating the nature of such modification and
certifying that this Lease, as so modified, is in full force and effect) and the
date to which the rent and other charges are paid in advance, if any, and (ii)
acknowledging that there are not, to Lessee's knowledge, any uncured defaults on
the part of Lessor hereunder, or specifying such defaults if any are claimed.
Any such statement may be conclusively relied upon by any prospective purchaser
or encumbrance of the Premises.
-9-
<PAGE>
(b) Lessee's failure to deliver such statement within such
time shall be conclusive upon Lessee (i) that this Lease is in full force and
effect without modification except as may be represented by Lessor, (ii) that
there are no uncured defaults in Lessor's performance, and (iii) that not more
than one month's rent has been paid in advance or such failure may be considered
by Lessor as a default by Lessee under this Lease.
(c) If Lessor desires to finance or refinance the Premises, or
any part thereof, Lessee hereby agrees to deliver to any lender designated by
Lessor such financial statements of Lessee as may be reasonably required by such
lender. Such statements shall include the past three years' financial statements
of Lessee. All such financial statement shall be received by Lessor in
confidence and shall be used only for the purposes herein set forth.
16.2 Lessor's Liability. The term "Lessor" as used herein shall mean
only the owner or owners at the time in question of the fee title or a lessee's
interest in a ground lease of the Premises, and except as expressly provided in
Paragraph 15. In the event of any transfer of such title or interest, Lessor
herein named (and in case of any subsequent transfers the then grantor) shall be
relieved from and after the date of such transfer of all liability as respects
Lessor's obligation thereafter to be performed, provided that any funds in the
hands of Lessor or the then grantor at the time of such transfer, in which
Lessee has an interest, shall be delivered to the grantee. The obligations
contained in this Lease to be performed by Lessor shall, subject as aforesaid,
be binding on Lessor's successors and assigns, only during their respective
periods of ownership.
16.3 Severability. The invalidity of any provision of this Lease as
determined by a court of competent jurisdiction, shall in no way affect the
validity of any other provision hereof.
16.4 Interest on Past-due Obligations. Except as expressly herein
provided, any amount due to Lessor not paid when due shall bear interest at 10%
per annum from the date due. Payment of such interest shall not excuse or cure
any default by Lessee under this Lease, provided, however, that interest shall
not be payable on late charges incurred by Lessee nor on any amounts upon which
late charges are paid by Lessee.
16.5 Time of Essence. Time is of the essence.
16.6 Captions. Article and paragraph captions are not a part
hereof.
16.7 Incorporation of Prior Agreements; Amendments. This Lease contains
all agreements of the parties with respect to any matter mentioned herein. No
prior agreement or understanding pertaining to any such matter shall be
effective. This Lease may be modified in writing only, signed by the parties in
interest at the time of the modification. Except as otherwise stated in this
Lease, Lessee hereby acknowledges that neither the real estate broker listed in
Paragraph 15 hereof nor any cooperating broker on this transaction nor the
Lessor or any employees or agents of any of said persons has made any oral or
written warranties or representations to Lessee relative to the condition or use
by Lessee of said Premises and Lessee acknowledges that Lessee assumes all
responsibility regarding the Occupational Safety Health Act, the legal use and
adaptability of the Premises and the compliance thereof with all applicable laws
and regulations in effect during the tern of this Lease except as otherwise
specifically stated in this Lease.
16.8 Notices. Any notice required or permitted to be given hereunder
shall be in writing and may be given by personal delivery or by certified mail,
and if given personally or by mail, shall be deemed sufficiently given if
addressed to Lessee or to Lessor at the address noted below the signature of the
respective parties, as the case may be. Either party may by notice to the other
specify a different address for notice purposes except that upon Lessee's taking
possession of the Premises, the Premises shall constitute Lessee's address for
notice purposes. A copy of all notices required or permitted to be given to
Lessor hereunder shall be concurrently transmitted to such party or parties at
such addresses as Lessor may from time to time hereafter designate by notice to
Lessee.
16.9 Waivers. No waiver by Lessor of any provision hereof shall be
deemed a waiver of any other provision hereof or of any subsequent breach by
Lessee of the same or any other provision. Lessor's consent to or approval of
any act shall not be deemed to render unnecessary the obtaining of
-10-
<PAGE>
Lessor's consent to or approval of any subsequent act by Lessee. The acceptance
of rent hereunder by Lessor shall not be a waiver of any preceding breach by
Lessee of any provision hereof, other than the failure of Lessee to pay the
particular rent so accepted, regardless of Lessor's knowledge of such preceding
breach at the time of acceptance of such rent.
16.10 Recording. Lessee shall not record this Lease without Lessor's
prior written consent, and such recordation shall, at the option of Lessor,
constitute a non-curable default of Lessee hereunder. Either party shall, upon
request of the other, execute, acknowledge and deliver to the other a "short
form" memorandum of this Lease for recording purposes.
16.11 Holding Over. If Lessee remains in possession of the Premises or
any part thereof after the expiration of the term hereof without the express
written consent of Lessor, such occupancy shall be a tenancy from month to month
at a rental in the amount of the last monthly rental plus all other charges
payable hereunder, and upon all the terms hereof applicable to a month-to-month
tenancy.
16.12 Cumulative Remedies. No remedy or election hereunder shall be
deemed exclusive but shall, wherever possible, be cumulative with all other
remedies at law or in equity.
16.13 Covenants and Conditions. Each provision of this Lease
performable by Lessee shall be deemed both a covenant and a condition.
16.14 Binding Effect; Choice of Law. Subject to any provisions hereof
restricting assignment or subletting by Lessee and subject to the provisions of
Paragraph 16.2, this Lease shall bind the parties, their personal
representatives, successors and assigns. This Lease shall be governed by the
laws of the State of California.
16.15 Subordination.
(a) This Lease, at Lessor's option, shall be subordinate to
any ground lease, mortgage, deed of trust, or any other hypothecation for
security now or hereafter placed upon the real property of which the Premises
are a part and to any and all advances made on the security thereof and to all
renewals, modifications, consolidations, replacements and extensions thereof.
Notwithstanding such subordination, Lessee's right to quiet possession of the
Premises shall not be disturbed if Lessee is not in default and so long as
Lessee shall pay the rent and observe and perform all of the provisions of this
Lease, unless this Lease is otherwise terminated pursuant to its terms. If any
mortgage, trustee or ground lessor shall elect to have this Lease prior to the
lien of its mortgage, deed of trust or ground lease, and shall give written
notice thereof to Lessee, this Lease shall be deemed prior to such mortgage,
deed of trust, or ground lease, whether this Lease is dated prior or subsequent
to the date of said mortgage, deed of trust or ground lease or the date of
recording thereof.
(b) Lessee agrees to execute any documents required to
effectuate such subordination or to make this Lease prior to the lien of any
mortgage, deed of trust or ground lease, as the case may be, and failing to do
so within ten (10) days after written demand, does hereby make, constitute and
irrevocably appoint Lessor as Lessee's attorney in fact and in Lessee's name,
place and stead, to do so.
16.16 Attorney's Fees. If either party or the broker named herein
brings an action to enforce the terms hereof or declare rights hereunder, the
prevailing party in any such action, on trial or appeal, shall be entitled to
his reasonable attorney's fees to be paid by the losing party as fixed by the
court. The provisions of this paragraph shall inure to the benefit of the broker
named herein who seeks to enforce a right hereunder.
16.17 Lessor's Access. Lessor and Lessor's agents shall have the right
to enter the Premises at reasonable times for the purpose of inspecting the
same, showing the same to prospective purchasers, lenders, or lessees, and
making such alterations, repairs, improvements or additions to the Premises or
to the building of which they are a part as Lessor may deem necessary or
desirable. Lessor may at any time place on or about the Premises any ordinary
"For Sale" signs and Lessor may at any time during the last 120 days of the term
hereof place on or about the Premises any ordinary "For Lease" signs, all
without rebate of rent or liability to Lessee.
-11-
<PAGE>
16.18 Signs and Auctions. Lessee shall not place any sign upon the
Premises or conduct any auction thereon without Lessor's prior written consent
except that Lessee shall have the right, without the prior permission of Lessor
to place ordinary and usual for rent or sublet signs thereon.
16.19 Merger. The voluntary or other surrender of this Lease by Lessee,
or a mutual cancellation thereof, or a termination by Lessor, shall not work a
merger, and shall, at the option of Lessor, terminate all or any existing
subtenancies or may, at the option of Lessor, operate as an assignment to Lessor
of any or all of such subtenancies.
16.20 Corporate Authority. If Lessee is a corporation, each individual
executing this Lease on behalf of said corporation represents and warrants that
he is duly authorized to execute and deliver this Lease on behalf of said
corporation in accordance with a duly adopted resolution of the Board of
Directors of said corporation or in accordance with the Bylaws of said
corporation, and that this Lease is binding upon said corporation in accordance
with its terms. If Lessee is a corporation Lessee shall, within thirty (30) days
after execution of this Lease, deliver to Lessor a certified copy of a
resolution of the Board of Directors of said corporation authorizing or
ratifying the execution of this Lease.
16.21 Consents. Wherever in this Lease the consent of one party is
required to an act of the other party such consent shall not be unreasonably
withheld.
16.22 Guarantor. In the event that there is a guarantor of this Lease,
said guarantor shall have the same obligations as Lessee under Paragraphs 16.1
and 16.20 of this Lease.
16.23 Quiet Possession. Upon Lessee paying the fixed rent reserved
hereunder and observing and performing all of the covenants, conditions and
provisions on Lessee's part to be observed and performed hereunder, Lessee shall
have quiet possession of the Premises for the entire term hereof subject to all
of the provisions of this Lease.
16.24 Options. In the event that the Lessee, under the terms of this
Lease, has any option to extend the term of this Lease, or any option to
purchase the premises or any right of first refusal to purchase the premises or
other property of Lessor, then each of such options and rights are personal to
Lessee and may not be exercised or be assigned, voluntarily or involuntarily, by
or to any one other than Lessee except that it may be exercised by or assigned
to any of the entities described in paragraph 12.2 hereof for whom Lessee does
not need the consent of Lessor to assign this Lease. In the event that Lessee
hereunder has any multiple options to extend this Lease a later option to extend
the lease cannot be exercised unless the prior option has been so exercised. No
option may be exercised at a time when the Lessee is in default under its
obligation under this Lease.
16.25 Multiple Tenant Building. In the event that the Premises are part
of a larger building or group of buildings then Lessee agrees that it will abide
by, keep and observe all reasonable rules and regulations which Lessor may make
from time to time for the management, safety, care, and cleanliness of the
building and grounds, the parking of vehicles and the preservation of good order
therein as well as for the convenience of other occupants and tenants of the
building. Further, Lessee will promptly pay its prorata share, as reasonably
determined by Lessor, of any maintenance or repair of such portion of the
Premises or such portion of the property of which the Premises are a part, which
are common areas or used by Lessee and other occupants thereof. The violations
of any such rules and regulations, or the failure to pay such prorata share of
costs, shall be deemed a material breach of this Lease by Lessee.
16.26 Additional Provisions. If there are no additional provisions draw
a line from this point to the next printed word after the space left here. If
there are additional provisions place the same here.
The parties hereto have executed this Lease at the place on the dates
specified immediately adjacent to their respective signatures.
If this Lease has been filled in it has been prepared for submission to
your attorney for his approval. No representation or recommendation is made by
the real estate broker or its agents or employees as to the legal sufficiency,
legal effect, or tax consequences of this Lease or the transaction relating
thereto.
-12-
<PAGE>
Executed at Overaa Properties
--------------------- --------------------------------------
on By /s/ G.D. Overaa
------------------------------ ------------------------------------
Address By G.D. Overaa
------------------------- ------------------------------------
"LESSOR" (Corporate seal)
- -------------------------------
Executed at Acacia Biosciences, Inc.
------------------- --------------------------------------
on By /s/ Bruce A. Cohen
----------------------------- ------------------------------------
Address By Bruce A. Cohen
------------------------ ------------------------------------
"LESSEE" (Corporate seal)
- -------------------------------
-13-
<PAGE>
Page #1 of 2
FIRST ADDENDUM
TO
STANDARD INDUSTRIAL LEASE
LESSOR: Overaa Properties
LESSEE: Acacia Biosciences, Inc., a Delaware corporation
THIS FIRST ADDENDUM shall amend that certain Standard
Industrial Lease dated as of January 21, 1997 (the "Lease")
entered into by and between Overra Properties as Lessor and Acacia
Biosciences, Inc. as Lessee. Unless otherwise indicated herein,
all terms initially capitalized herein shall have the same
meanings attributed to such terms in the Lease and references to
section numbers hereinbelow is to sections of the Lease. The Lease
is hereby amended as follows:
1. BASE RENT [PARAGRAPH 4].
Base Rent for initial term of this lease shall be as follows:
March 1, 1997 August 31, 1997: $3,000 per month
September 1, 1997 February 28, 1998: $3,500 per month
March 1, 1998 August 31, 1998: $4,000 per month
September 1, 1998 February 28, 2000: $4500 per month
2. COMMON AREA MAINTENANCE.
In addition to the base rent, Tenant shall pay $250.00
per month for its share of all common area maintenance.
3. OPTION TO RENEW.
Provided that Lessee is not in default hereunder, either
at the time of exercise or at the time the extended Term
commences, Lessee shall have the option to extend the initial
Term of this Lease for three (3) one (1) year periods on the
same terms, covenants and conditions provided herein, except
that upon such renewal the Base Monthly Rent due hereunder
shall be follows:
Option One: $5,000 per month
Option Two: $5,200 per month
Option Three: $5,400 per month
Lessee shall exercise its option by giving Lessor written
notice ("Option Notice") at least one hundred eighty (180) days
prior to the expiration of the initial Term of the Lease.
4. TENANT IMPROVEMENTS.
Lessor, at Lessor's sole cost and expense, shall provide
Lessee with a $10,000 tenant improvement allowance. Said
allowance shall be used within the initial three (3) year term.
Lessor at Lessor's sole cost and expenses shall complete the
following tenant improvements which are not included in the
above referenced $10,000 tenant improvement allowance.
1) Add one ramp;
2) Double the width of the existing concrete walkway; and
3) Repair roof leaks.
5. POTENTIAL ADA REQUIREMENTS.
Attached Exhibit A find Woldemar letter dated February 15,
1997, outlining possible ADA issues.
Landlord will install item #1 - handicap parking at no
cost to the tenant. Item #2-7 - "Minor deficiencies" will be
corrected by landlord if required by the issuance of a building
permit for future tenant improvement. Possible deficiencies to
be remedied at that time if necessary. The cost of this work
will not exceed $1,000 of the $10,000 T.I. allowance thereby
leaving at least $9,000 for other tenant T.I's.
6. MAINTENANCE REPAIRS AND ALTERATIONS [PARAGRAPH 7].
<PAGE>
Page 2 of 2
Equipment Leasing/Lessor's Lien:
Notwithstanding anything herein to the contrary,
Lessor waives any and all rights, title and interest Lessor
now has, or hereafter may have, whether statutory or
otherwise, to Lessee's inventory, equipment, furnishings,
trade fixtures, books and records, personal property, and
Tenant improvements paid for by Lessee located at the Premises
(single and/or collectively, the "Collateral"'). Lessor
acknowledges that Lessor further agrees that Lessee shall have
the right, at its discretion, to mortgage, pledge, hypothecate
or grand a security interest in the Collateral as security for
its obligations under any equipment lease or other financing
arrangement related to the conduct of Lessee's business at the
Premises. Lessor further agrees to execute and deliver within
five (5) business days any UCC filing statement or other
documentation required to be executed by Lessor in connection
with any such lease or financing arrangement, including but
not limited to a Lessor's Waiver and Consent form.
7. INSURANCE/INDEMNITY [PARAGRAPH 8].
Notwithstanding anything to the contrary contained
herein, Tenant shall not be required to remove (i) any of the
initial Tenant Improvements constructed by or on behalf of
Tenant, and (ii) any alterations, additions or improvements
for which Tenant has obtained Landlord's consent, unless
Landlord has indicated, at the time of granting such consent,
that such removal will be required. Upon approval by Lessor,
Tenant shall b entitled to remove any alterations, additions,
or improvements, provided Tenant repairs any damage to the
Premises caused by such removal.
8. DAMAGE AND DESTRUCTION.
If Tenant is unable, despite its diligent efforts, to
secure any permit, approval, license occupancy permit or other
governmental authorization needed for Tenant's occupancy of
the Premises or the conduct of its business at the Premises by
February 15, 1997, Tenant may thereafter terminate this Lease
by providing Landlord written notice of its election to do so
(the "Termination Notice"), and the Lease shall terminate two
(2) days from the date of the Termination Notice. Upon receipt
of the Termination Notice, Landlord shall refund to Tenant all
sums and deposits paid hereunder and neither party shall have
any further liability to the other on account hereof.
9. CONTROLLING EFFECT.
The provisions of this First Amendment shall
supersede provisions of the Lease which are inconsistent
herewith.
IN WITNESS WHEREOF, the parties have executed this
First Amendment to the Standard Industrial Lease as of the
date and year set forth below.
LESSEE: LESSOR:
Acacia Biosciences, Inc., Overaa Properties
a Delaware corporation
By:______________________ By:_________________________
By:______________________ By:_________________________
Its:_____________________ Its:________________________
Dated: Feb 21, 1997 Dated: Feb 22, 1997
<PAGE>
EXHIBIT A
BASIC LEASE INFORMATION
Lease Date: February 19, 1997
Landlord: Riggs Bank N.A., as Trustee of the
Multi-Employer Property Trust
Address of Landlord: c/o Trammell Crow Company
626 120th Avenue N.E.
Suite B104 Bellevue, WA 98005
Tenant: Rosetta BioSystems, a Delaware corporation
Premises: 12040 115th Ave NE
Suite 210
Kirkland, WA 98034
Paragraph 1 "Premises": approximately 18,691 rentable square feet
in Building G of approximately 31,637 rentable square
feet, such Premises being shown and outlined in red
on the plan attached hereto as Exhibit A, and being
part of the real property described in Exhibit B
attached hereto. Tenant accepts Landlord's
approximation of the square footage of the Premises.
Paragraph 1 "Lease Term": Commencing on the "Commencement Date"
as hereinafter defined and ending 60 months
thereafter, except that in the event the Commencement
Date is a date other than the first day of a calendar
month, the Lease Term shall end 60 months after the
last day of the calendar month containing the
Commencement Date.
Paragraph 1 Scheduled Term Commencement Date: July 2, 1997.
Paragraph 2 Monthly Base Rent: $26,479.00, Triple Net.
Paragraph 2(B) Security Deposit: $30,879.00. (See Additional
Paragraph 32: Letter of Credit).
Paragraph 4(A) Tenant's Initial Monthly Escrow Payment for Taxes and
Other Charges: $1,962.00.
Paragraph 7 Tenant's Initial Monthly Common Area Maintenance
Charge: $2,251.
Paragraph 13(B) Tenant's Initial Monthly Insurance Escrow Payment:
$187.00.
Tenant's Initial Monthly Payment Total: $30,879.00.
The foregoing Basic Lease Information is hereby incorporated into and
made a part of this Lease. Each reference in this Lease to any of the Basic
Lease Information shall mean the respective information herein above set forth
and shall be construed to Incorporate all of the terms provided under the
particular Lease paragraph pertaining to such information, In the event of any
conflict between any Basic Lease Information and the Lease, the former shall
control.
Please Initial: Tenant LH ; Landlord
---- -------------
<PAGE>
<TABLE>
<CAPTION>
TABLE OF CONTENTS
<S> <C> <C>
1. PREMISES AND TERM...............................................................................1
2. BASE RENT AND SECURITY DEPOSIT..................................................................1
3. USE/HAZARDOUS SUBSTANCES........................................................................2
4. TAXES AND OTHER CHARGES.........................................................................3
5. TENANT'S MAINTENANCE............................................................................4
6. LANDLORD'S REPAIRS..............................................................................5
7. MONTHLY COMMON-AREA MAINTENANCE CHARGE..........................................................5
8. ALTERATIONS.....................................................................................6
9. SIGNS...........................................................................................6
10. INSPECTION......................................................................................6
11. UTILITIES.......................................................................................7
12. ASSIGNMENT AND SUBLETTING.......................................................................7
13. INSURANCE, F1RE AND CASUALTY DAMAGE.............................................................8
14. LIABILITY......................................................................................10
15. CONDEMNATION...................................................................................10
16. HOLDING OVER...................................................................................11
17. QUIET ENJOYMENT................................................................................11
18. EVENTS OF DEFAULT..............................................................................11
19. REMEDIES.......................................................................................12
20. LANDLORD'S LIEN................................................................................14
21. MORTGAGES......................................................................................14
22. LANDLORD'S DEFAULT.............................................................................14
23. MECHANIC'S AND OTHER LIENS.....................................................................14
24. NOTICES........................................................................................15
25. MISCELLANEOUS..................................................................................16
26. LIABILITY OF LANDLORD..........................................................................17
27. ADDITIONAL PROVISIONS..........................................................................17
</TABLE>
-i-
<PAGE>
LEASE AGREEMENT
THIS LEASE AGREEMENT, made and entered into by and between Riggs Bank
N.A., as Trustee of the Multi-Employer Property Trust, hereinafter referred to
as "Landlord", and Rosetta Biosystems, a Delaware corporation, hereinafter
referred to as "Tenant";
WITNESSETH
1. PREMISES AND TERM.
A. In consideration of the obligation of Tenant to pay Rent as herein
provided, and in consideration of the other terms, provisions and covenants
hereof, Landlord hereby demises and leases to Tenant, and Tenant hereby takes
and leases from Landlord those certain Premises as outlined in red on Exhibit
"A" attached hereto (hereinafter referred to as the "Premises") and incorporated
herein by reference, together with all rights, privileges, easements,
appurtenances, and amenities belonging to or in any way appertaining to the
Premises and together with the buildings and other improvements situated or to
be situated upon land described in Exhibit "B" attached hereto.
B. TO HAVE AND TO HOLD the same for a term commencing on the
"Commencement Date", as hereinafter defined, and ending thereafter as specified
in the Basic Lease Information, attached hereto, (the "Lease Term").
C. The "Commencement Date" shall be the Scheduled Term Commencement
Date shown in the Basic Lease Information, attached hereto and incorporated
herein by reference, or the date upon which the Premises shall have been vacated
by the current tenant (Procyte Corporation), whichever is later. The Landlord
will use good faith efforts to secure the removal of the current tenant from the
Premises before the close of business on July 1, 1997 (if no holdover agreement
is executed between Landlord and current tenant), or July 15, 1997 (if holdover
agreement is executed between Landlord and current tenant). If the Premises
shall not be available for occupancy as aforesaid by the Scheduled Term
Commencement Date, Tenant's obligations to pay Rent and its other obligations
for payment under this Lease shall commence on the date the Tenant occupies the
Premises, and Landlord shall not be liable to Tenant for any loss or damage
resulting from such delay. Landlord shall notify Tenant in writing as soon as
Landlord deems the Premises ready for occupancy. The Tenant accepts the Premises
in "as-is" condition subject to all faults and deficiencies (and as further set
forth In Exhibit C hereto). Tenant acknowledges that no representations as to
the repair of the Premises have been made by Landlord, unless such are expressly
set forth in this Lease. After the Commencement Date, Tenant shall, upon demand,
execute and deliver to Landlord a letter of acceptance of delivery of the
Premises, specifying the Commencement Date and the rent commencement date, in
recordable form.
2. BASE RENT AND SECURITY DEPOSIT.
A. Tenant agrees to pay to Landlord Base Rent for the Premises, in
advance, without demand, deduction or set off, for the entire Lease Term hereof
at the rate specified in the Basic Lease Information, payable in monthly
installments. One such monthly installment shall be due and payable on the date
hereof and a like monthly installment shall be due and payable on or before the
first day of each calendar month succeeding the Commencement Date recited above
during the Lease Term, except that the rental payment for any fractional
calendar month at the commencement or end of the Lease period shall be prorated
on the basis of the number of days in said month.
B. In addition, Tenant agrees to deposit with Landlord on the date
hereof a cash security deposit in the amount specified in the Basic Lease
Information, which sum shall be held by Landlord, without
-1-
<PAGE>
obligation for interest, as security for the performance of Tenant's covenants
and obligations under this Lease, it being expressly understood and agreed that
such deposit is not an advance rental deposit, not the last month's Rent nor a
measure of Landlord's damages in the event of Tenant's default. Upon the
occurrence of any event of default by Tenant, Landlord may, from time to time,
without prejudice to any other remedy provided herein or provided by law, use
such deposit to the extent necessary to make good any arrears of rent or other
payments due Landlord hereunder, and any other damage, injury, expense or
liability caused by such event of default, or to perform any obligation required
of Tenant under the Lease, and Tenant shall pay to Landlord on demand the amount
so applied in order to restore the security deposit to its original amount.
Although the security deposit shall be deemed the property of Landlord, any
remaining balance of such deposit shall be returned by Landlord to Tenant at
such time after termination of this Lease that all of Tenant's obligations under
this Lease have been fulfilled. Further security provisions are contained in
Additional Paragraph 32: Letter of Credit).
3. USE/HAZARDOUS SUBSTANCES.
A. USE. The Premises shall be used only for the purposes of
research and development (laboratory), general office, receiving, storing,
shipping, assembly, light manufacturing, and selling (other than retail)
products, materials and merchandise made and/or distributed by Tenant and for
such other lawful purposes as may be incidental thereto. Outside storage,
including without limitation, trucks and other vehicles, is prohibited without
Landlord's prior written consent. Tenant shall at its own cost and expense
obtain any and all licenses and permits necessary for its use of the Premises.
Subject to the provisions of this Lease dealing with Access Laws, Tenant shall
comply with all governmental laws, ordinances and regulations applicable to the
use of the Premises, and shall promptly comply with all governmental orders and
directives including but not limited to those regarding the correction,
prevention and abatement of nuisances in or upon, or connected with, the
Premises, all at Tenant's sole expense. Tenant shall not permit any
objectionable or unpleasant odors, smoke, dust, gas, noise or vibrations to
emanate from the Premises, nor take any other action which would constitute a
nuisance or would disturb or endanger any other tenants of the building in which
the Premises are situated or unreasonably interfere with their use of their
respective Premises. In addition to any other remedies Landlord may have for a
breach by Tenant of the terms of this paragraph 3, Landlord shall have the right
to have Tenant evicted from the Premises. Without Landlord's prior written
consent, Tenant shall not receive, store or otherwise handle any product,
material or merchandise which is explosive or highly inflammable. Tenant will
not permit the Premises to be used for any purpose or in any manner (including
without limitation any method of storage) which would render the insurance
thereon void or the insurance risk more hazardous or cause the State Board of
Insurance or other insurance authority to disallow any sprinkler credits. In the
event Tenant's use of the Premises shall result in an increase in insurance
premiums, Tenant shall be solely responsible for said increase.
B. HAZARDOUS SUBSTANCES.
(1) Tenant agrees that neither Tenant nor its employees,
agents, licensees or invitees will store, place, generate, manufacture, refine,
handle, or locate on, in or around the Premises any Hazardous Substances, as
defined below, except for the storage, handling and use of Hazardous Substances
of types and in quantities as are reasonably necessary for the operation of
Tenant's business as described in the paragraph of this Lease setting forth
permitted uses; provided that (a) the storage, handling and use of such
permitted Hazardous Substances must at all times conform to all Governmental
Requirements and to all applicable fire, safety and insurance requirements, (b)
the types and quantities of permitted Hazardous Substances which are stored in
the Premises must be reasonable and appropriate to the nature and size of the
Tenant's operation in the Premises and reasonable and appropriate for
first-class industrial office parks located in the 1-405 Corridor market area,
(c) no fluid Hazardous Substances shall be stored in above-ground or
below-ground tanks or drums in the Premises or in sealed containers larger than
five (5) gallons, and (d) no Hazardous Substance shall be spilled or disposed of
on, in or around the Premises or the building of which the Premises
-2-
<PAGE>
is a part (the "Building") or any area adjacent thereto; provided further that,
in no event will Tenant be permitted to store, handle or use on, in or around
the Premises any Hazardous Substance which will increase the rate of fire or
extended coverage insurance on the Premises or the Building, unless (i) such
Hazardous Substance and the expected rate increase have been specifically
disclosed in writing to Landlord, (ii) Tenant has agreed in writing to pay any
rate increase related to each such Hazardous Substance, and (iii) Landlord has
approved in writing each such Hazardous Substance, which approval shall be
subject to Landlord's sole and absolute discretion. Tenant shall indemnify,
defend and hold harmless the Landlord from and against any and all loss,
liability, damage, expense, cost, claim or injury arising out of any breach of
any provision of this paragraph, including, but not limited to, attorneys' fees,
laboratory testing fees, personal injury claims, clean-up costs, and
environmental consultants' consultants' fees. Tenant agrees that Landlord may be
irreparably harmed by Tenant's breach of this paragraph and that a specific
performance action may be appropriately brought by Landlord; provided that,
Landlord's election to bring or not bring any such specific performance action
shall in no way limit, waive, impair or hinder Landlord's other remedies against
Tenant.
(2) The term "Governmental Requirements" means any and all
statutes, ordinances, codes, laws, rules, regulations and directives of the
United States, the state in which the Premises is located, any political
subdivision of that state or any board, agency or authority associated with any
such governmental entity, including, but not limited to, the regulations of the
fire department having jurisdiction over the Premises, excepting only the
Americans with Disabilities Act of 1990 as now or hereafter amended. The term
"Hazardous Substance(s)" means asbestos petroleum or petroleum based chemicals
or substances, urea formaldehyde or any chemical, material, element, compound,
solution, mixture, substance or other matter of any kind whatsoever which is now
or hereafter defined, classified, listed, designated or regulated as hazardous,
toxic or radioactive by any federal, state, or local governmental entity or
agency.
4. TAXES AND OTHER CHARGES.
A. Tenant agrees to pay its proportionate share of any and all real and personal
property taxes, installments of regular and special assessments, license fees,
public service impact fees and other charges of any kind and nature whatsoever,
payable by Landlord as a result of any public or quasi-public authority, private
party, or owner's association levy, assessment or imposition against, or arising
out of Landlord's ownership of or interest in, the real estate described in
Exhibit "B" attached hereto, together with the Building and the grounds, parking
areas, driveways, roads, and alleys around the Building in which the Premises
are located, or any part thereof (hereinafter collectively referred to as the
"Charges"). During each month of the Lease Term, Tenant shall make a monthly
escrow deposit with Landlord (the "Escrow Payment") equal to 1/12 of its
proportionate share of the Charges which will be due and payable for that
particular calendar year. Any lump sum public service impact fees paid by
Landlord shall be amortized over ten (10) years at interest not to exceed twelve
percent (12%) Interest per annum, and equal installments of such fee, together
with interest accrued thereon, shall be payable monthly as a portion of the
Charges. Tenant authorizes Landlord to use the funds deposited by Tenant with
Landlord under this paragraph 4 to pay the Charges. Each Escrow Payment shall be
due and payable, as additional rent at the same time and in the same manner as
the payment of monthly rental as provided herein. The amount of the Initial
Monthly Escrow Payment will be specified in the Basic Lease Information. The
initial Escrow Payment is based upon Tenant's proportionate share of the
estimated Charges for this year, and the monthly Escrow Payment is subject to
increase or decrease as determined by the Landlord to reflect an accurate escrow
amount of Tenant's estimated proportionate share of the Charges. The Escrow
[PHOTOCOPY ERROR] [ACCOUNT?] of Tenant shall be reconciled annually. If Tenant's
total Escrow Payments [PHOTOCOPY ERROR] than Tenant's actual pro rata share of
the Charges, Tenant shall pay to Landlord upon [PHOTOCOPY ERROR] and the
difference; if the Tenant's total Escrow Payments are more than Tenant's actual
pro rata share of the Charges, Landlord shall retain such excess and credit it
to Tenant's Escrow for the successive year's Charges. Tenant's proportionate
share of the Charges shall be computed by multiplying the Charges by a fraction,
the numerator of which shall be the number of gross leasable square feet of
floor space in the Premises and the
-3-
<PAGE>
denominator of which shall be the total applicable gross leasable square
footage; or such other equitable apportionment as may be adopted.
B. If Tenant should fail to pay any Escrow Payments required to
be paid by Tenant hereunder, in addition to any other remedies provided herein,
Landlord may, if it so elects, pay such Escrow Payments or taxes, assessments,
license fees and other Charges. Any sums so paid by Landlord shall be deemed to
be so much additional rental owing by Tenant to Landlord and due and payable
upon demand as additional rental plus interest at the rate of eighteen percent
(18%) per annum from the date of payment by Landlord until repaid by Tenant.
C. (1) If at any time during the Lease Term, the present method
of taxation shall be changed so that in lieu of the whole or
any part of any taxes, assessments, fees or charges levied,
assessed or imposed on real estate and the improvements
thereon, there shall be levied, assessed or imposed on
Landlord a capital levy or other tax directly on the rents
received therefrom and/or a franchise tax, assessment, levy or
charge measured by or based, in whole or in part, upon such
rents e~ of the present or any future building or buildings,
then all such taxes, assessments, fees or charges, or the part
thereof so measured or based, shall be deemed to be included
within the term "Charges" for the purposes hereof.
(2) Tenant may, alone or along with other tenants of the
building containing the Premises, at its sole cost and
expense, in its or their own name(s) dispute and contest any
Charges by appropriate proceedings diligently conducted in
good faith, but only after Tenant and all other tenants, if
any, joining with Tenant in such contest have deposited with
Landlord the amount so contested and unpaid or their
proportionate shares thereof as the case may be, which shall
be held by Landlord without obligation for interest until the
termination of the proceedings, at which. time the amount(s)
deposited shall be applied by Landlord toward the payment of
the items held valid (plus any court costs, Interest,
penalties and other liabilities associated with the
proceeding(s)), and Tenant's share of any excess shall be
returned to Tenant. Tenant further agrees to pay to Landlord
upon demand Tenant's share (as among all Tenants who
participated in the contest) of all court costs, interest,
penalties and other liabilities relating to such proceedings.
Tenant hereby indemnifies and agrees to hold harmless the
Landlord from and against any cost, damage or expense
(including attorney's fees) in connection with any such
proceedings.
(3) Any payment to be made pursuant to this paragraph 4 with
respect to the calendar year in which this Lease commences or
terminates shall bear the same ratio to the payment which
would be required to be made for the full calendar year as
that part of such calendar year covered by the Lease Term
bears to a full calendar year.
D. Tenant shall be liable for all taxes levied against personal
property and trade fixtures placed by Tenant in the Premises. If any such taxes
are levied against Landlord or Landlord's property and if Landlord elects to pay
the same or if the assessed value of Landlord's property is increased by
inclusion of personal property and trade fixtures placed by Tenant in the
Premises and Landlord elects to pay the taxes based on such increase, Tenant
shall pay to Landlord upon demand that part of such taxes for which Tenant is
primarily liable hereunder.
5. TENANT'S MAINTENANCE.
A. Tenant shall at its own cost and expense keep and maintain all parts
of the Premises (except those for which Landlord is expressly responsible under
the terms of this Lease) in good condition, ordinary wear and tear (of the
nature typical of an office tenant) excepted, promptly making all necessary
repairs and
-4-
<PAGE>
replacements, including but not limited to, windows, glass and plate glass,
doors, any special office entry, interior walls and finish work, floor and floor
covering, heating and air-conditioning systems, plumbing work and fixtures
located within the inside face of the exterior walls of the Premises, termite
and pest extermination, regular removal of trash and debris, and keeping the
Premises in a clean and sanitary condition. Tenant shall not be obligated to
repair any damage caused by Landlord's acts or omissions, condemnation, or fire,
tornado, or other casualty, except that Tenant shall be obligated to repair all
wind damage to glass except with respect to tornado or hurricane damage.
B. Tenant shall not damage any demising wall or disturb the integrity
and support provided by any demising wall and shall, at its sole cost and
expense, promptly repair any damage or injury to any demising wall caused by
Tenant or its employees, agents, licensees or invitees.
C. Tenant and its employees, customers and licensees shall have the
right to use the parking areas, if any, as may be designated by Landlord in
writing, subject to such reasonable rules and regulations as Landlord may from
time to time prescribe and subject to rights of ingress and egress of other
tenants. Landlord shall not be responsible for enforcing Tenant's exclusive
parking rights against any third parties. Tenant's parking rights are subject to
the provisions of Addendum to Paragraph 5(C). If Tenant or any other particular
tenant of the building can be clearly identified as being responsible for
obstructions or stoppage of a common sanitary sewage line, then Tenant, if
Tenant is responsible, or such other responsible Tenant, shall pay the entire
cost thereof, upon demand, as additional Rent.
D. Tenant shall, at its own cost and expense, enter into a regularly
scheduled preventive maintenance/service contract with a maintenance contractor
for servicing all heating and air-conditioning systems and equipment within the
Premises.
6. LANDLORD'S REPAIRS.
After reasonable notice from Tenant, Landlord shall make any necessary
repairs to the roof, exterior walls, and foundations, and the costs thereof
shall be shared as provided in paragraph 7; provided, that the costs of any such
repairs which constitute capital repairs under generally accepted accounting
standards shall be amortized, together with twelve percent (12%) interest, over
the useful life of the repaired item, and Tenant shall only be required to pay
its share of the portion of said amortized costs attributable to the term of
this Lease (including any exercised option terms). Tenant shall repair and pay
for any damage to such items to be maintained by Landlord caused by any act,
omission or negligence of Tenant, or Tenant's employees, agents, licensees or
invitees, or caused by Tenant's default hereunder. The term "walls" as used
herein shall not include windows, glass or plate glass, doors, special store
fronts or office entries. Tenant shall immediately give Landlord written notice
of defect or need for repairs, after which Landlord shall have a reasonable
opportunity and time to repair same or cure such defect. Landlord's liability
with respect to any defects, repairs or maintenance for which Landlord is
responsible under any of the provisions of this Lease shall be limited to the
cost of such repairs or maintenance or the curing of such defect.
7. MONTHLY COMMON-AREA MAINTENANCE CHARGE.
Tenant agrees to pay as an additional charge each month its
proportionate share of the cost of operation and maintenance of the Common Area
which shall be defined from time to time by Landlord. Common Area costs which
may be incurred by Landlord, at its discretion, may include, but not be limited
to, costs incurred for lighting, water, sewage, trash removal, exterior
painting, exterior window cleaning, accounting, policing, sweeping, services
negotiation, a customary third-party property management fee not to exceed 5% of
rentals, sewer lines, plumbing, paving, landscape maintenance, plant material
replacement, maintenance and repair of parking areas, driveways, alleys, dock
boards, truck doors, dock bumpers, downspouts, gutters, and other like charges,
and for administration of the items set forth in this paragraph.
-5-
<PAGE>
Landlord shall maintain the Common Areas in reasonably good condition and
repair. The proportionate share to be paid by Tenant of the cost of operation
and maintenance of the Common Area shall be computed on the ratio that the gross
leasable square feet of the Premises bears to the total applicable gross
leasable square footage or such other equitable apportionment as may be adopted
by Landlord. Tenant shall make monthly or other periodic payments based upon the
estimated annual cost of operation and maintenance of the Common Area, payable
in advance but subject to adjustment after the end of the year on the basis of
the actual cost for such year. Any such periodic charges shall be due and
payable upon delivery of notice thereof. The initial Common-Area Maintenance
Charges, subject to adjustment as provided herein, shall be due and payable, as
additional rent, at the same time and in the same manner as the time and manner
of the payment of monthly rental as provided herein. The amount of the initial
monthly Common-Area Maintenance Charge shall be as specified in the Basic Lease
Information.
8. ALTERATIONS.
A. Tenant shall not make any alterations, additions or
improvements to the Premises (including but not limited to roof and wall
penetrations) without the prior written consent of Landlord. Tenant may, without
the consent of Landlord, but at its own cost and expense and in a good
workmanlike manner erect such shelves, bins, machinery and trade fixtures as it
may deem advisable, without altering the basic character of the Building or
improvements and without overloading or damaging the Building or improvements,
and in each case complying with all applicable governmental laws, ordinances,
regulations and other requirements. All alterations, additions, improvements and
partitions erected by Tenant shall be and remain the property of Tenant during
the Term of this Lease and Tenant shall, unless Landlord otherwise elects as
hereinafter provided, remove all alterations, additions, improvements and
partitions erected by Tenant and restore the Premises to their original
condition by the date of termination of this Lease or upon earlier vacating of
the Premises; provided, however, that if Landlord so elects prior to termination
of this Lease or upon earlier vacating of the Premises, such alterations,
additions, improvements and partitions shall become the property of Landlord as
of the date of termination of this Lease or upon earlier vacating of the
Premises and shall be delivered up to the Landlord with the Premises. All
shelves, bins, machinery and trade fixtures installed by Tenant at its cost may
be removed by Tenant prior to the termination of this Lease if Tenant so elects,
and shall be removed by the date of termination of this Lease or upon earlier
vacating of the Premises if required by Landlord; upon any such removal Tenant
shall restore the Premises to their original condition. All such removals and
restoration shall be accomplished in good workmanlike manner so as not to damage
the primary structure or structural qualities of the buildings and other
improvements situated on the Premises.
B. Notwithstanding anything to the contrary contained herein,
Landlord agrees that the. Tenant shall not be responsible for, and Landlord
shall hold Tenant harmless against, any costs of cleanup or removal arising from
or associated with any hazardous material existing in, on or throughout the
Premises, as of the date Tenant occupies the Premises pursuant to the terms of
this Lease.
9. SIGNS.
Tenant shall not install signs upon the Premises without Landlord's
prior written approval, and any such signage shall be subject to any applicable
governmental laws, ordinances, regulations and other requirements, including the
Kirkland 405 Corporate Center Sign Policy attached as Exhibit H. Tenant shall
remove all such signs by the termination of this Lease. Any installations and
removals shall be made in such a manner as to avoid injury or defacement of the
building and other improvements, and Tenant shall repair any injury or
defacement, including without limitation discoloration caused by such
installation and/or removal.
10. INSPECTION.
-6-
<PAGE>
A. Landlord and Landlord's agents and representatives shall have the
right to enter and inspect the Premises at any reasonable time during business
hours, for the purpose of ascertaining the condition of the Premises or in order
to make such repairs as may be required or permitted to be made by Landlord
under the terms of this Lease. During the period that is six (6) months prior to
the end of the Term hereof, Landlord and Landlord's agents and representatives
shall have the right to enter the Premises at any reasonable time during
business hours for the purpose of showing the Premises and shall have the right
to erect on the Premises a suitable sign indicating the Premises are available.
B. Tenant shall give written notice to Landlord at least thirty (30)
days prior, to vacating the Premises and shall arrange to meet with Landlord for
a joint Inspection of the Premises prior to vacating. In the event of Tenant's
failure to give such notice or arrange such joint inspection, Landlord's
inspection at or after Tenant's vacating the Premises shall be conclusively
deemed correct for the purposes of determining Tenant's responsibility for
repairs and restoration. it shall be the responsibility of Tenant, prior to
vacating the Premises, to clean and repair the Premises and restore them to the
condition in which they were in upon delivery of the Premises to Tenant at the
Commencement Date, reasonable wear and tear (of the nature typical of an office
tenant) excepted. Cleaning, repair and restoration shall include, but not be
limited to, removal of all trash, cleaning and repainting of walls, where
necessary, cleaning of carpet and flooring, replacement of light bulbs and
tubes, cleaning and wiping down of all fixtures, maintenance and repair of all
heating and air-conditioning systems, and all similar work, which shall be done
at the latest practical date prior to vacation of the Premises.
11. UTILITIES.
Landlord agrees to provide at its cost water, electricity and gas
service connections into the Premises. Tenant shall pay for all water, gas,
heat, light, power, telephone, sewer, sprinkler charges and other utilities and
services used on or from the Premises, together with any taxes, penalties,
surcharges or the like pertaining thereto and any maintenance charges for
utilities. If any such services are not separately metered to Tenant, Tenant
shall pay a reasonable proportion as determined by Landlord of alt charges
jointly metered with other premises. The Landlord may, at its option and
expense, cause to be installed a separate water meter to monitor water and sewer
Charges for the Premises. Landlord shall in no event be liable for any
interruption or failure of utility services on the Premises.
12. ASSIGNMENT AND SUBLETTING.
A. Tenant shall have the right, voluntarily or involuntarily, to
assign, convey, transfer, mortgage or sublet the whole or any part of the
Premises under this Lease without with the prior written consent of Landlord,
which consent shall not be unreasonable withheld. Landlord's rights to withhold
consent to any proposed assignment or sublease are specifically set forth in
Addendum to Paragraph 12(A), below. In the event Tenant applies to Landlord for
consent to assign, convey, transfer or sublet the Premises, Landlord may
condition such consent upon the right to receive one-half of the profit, if any,
which Tenant may realize on account of such assignment, conveyance, transfer or
sublease of the Premises. For purposes of this paragraph, "profit" shall mean
any sum which Tenant receives from the assignee, sublessee or transferee is
required to pay, or which is credited to Tenant as rent in excess of the rents
required to be paid by Tenant to Landlord under this Lease, less all of Tenant's
reasonable costs in obtaining such assignment or sublease, including without
limitation leasing commissions, attorneys' fees, tenant improvements and tenant
credits and allowances. Landlord also reserves the right to recapture the
Premises or applicable portion thereof in lieu of giving its consent by notice
given to Tenant within twenty (20) days after receipt of Tenant's written
request for assignment or subletting. Such recapture shall terminate this Lease
as to the applicable space effective on the prospective date of assignment or
subletting, which shall be the last day of a calendar month and not earlier than
sixty (60) days after receipt of Tenant's request hereunder. In the event that
Landlord shall not
-7-
<PAGE>
elect to recapture and shall thereafter give its consent, in addition to any
fees paid to outside parties assisting Tenant in subletting or assignment,
Tenant shall pay Landlord Landlord's agent a fee of $500.00, plus Landlord's
reasonable attorneys' fees, if any, to reimburse Landlord for processing and
leasing costs incurred in connection with such consent.
B. Notwithstanding any permitted assignment or subletting, Tenant shall
at all times remain directly, primarily and fully responsible and liable for the
payment of the rent herein specified and for compliance with all of its other
obligations under the terms, provisions and covenants of this Lease. Upon the
occurrence of an "event of default" as hereinafter defined, if the Premises or
any part thereof are then assigned or sublet, Landlord, in addition to any other
remedies herein provided, or provided by law, may at its option collect directly
from such assignee or subtenant all rents becoming due to Tenant under such
assignment, transfer or sublease and apply such rent against any sums due to
Landlord from Tenant hereunder, and no such collection shall be construed to
constitute a novation or a release of Tenant from the further performance of
Tenant's obligations hereunder.
13. INSURANCE, F1RE AND CASUALTY DAMAGE.
A. Landlord agrees to maintain insurance covering the Building of which
the Premises are a part in an amount not less than eighty percent (80%) (or such
greater percentage as may be necessary to comply with the provisions of any
co-insurance clauses of the policy) of the "replacement cost" thereof as such
term is defined in the Replacement Cost Endorsement to be attached thereto,
insuring against the perils of Fire, Lightning, Extended Coverage, Vandalism and
Malicious Mischief, extended by Special Extended Coverage Endorsement to insure
against all other Risks of Direct Physical Loss, such coverages and endorsements
to be as defined, provided and limited in the standard bureau forms prescribed
by the insurance regulatory authority for the State in which the Premises are
situated for use by insurance companies admitted in such state for the writing
of such insurance on risks located within such state. Subject to the provisions
of subparagraph 13(C-E) below, such insurance shall be for the sole benefit of
Landlord and under its sole control. In the event the insurance policy shall
contain a deductible, Tenant shall be liable for and pay its pro rata share of
any deductible withheld from insurance proceeds or payable under the terms of
the insurance policy in the event of a claim or insured loss thereunder.
Landlord acknowledges that damage, caused by an event or condition for which
Landlord has failed to procure any insurance at all, shall not be deemed to be a
"deductible" for purposes of the preceding sentence.
B. Tenant agrees to pay its proportionate share of Landlord's cost of
carrying fire and extended coverage insurance ("Insurance") on the building.
During each month of the term of this Lease, Tenant shall make a monthly escrow
deposit with Landlord equal to one-twelfth of its proportionate share of the
Insurance on the buildings and grounds which will be due and payable for that
particular year. Tenant authorizes Landlord to use the funds deposited by it
with Landlord under this paragraph to pay the cost of such Insurance. Each
Insurance Escrow Payment shall be due and payable, as additional rent, at the
same time and manner of the payment of the monthly rental as provided herein.
The initial share of the estimated insurance for this year, and the monthly
Insurance Escrow Payment, is subject to increase or decrease as determined by
Landlord to reflect an accurate monthly escrow of Tenant's estimated
proportionate share of said Insurance. The Insurance Escrow Payment account of
Tenant shall be reconciled annually. If the Tenant's total Insurance Escrow
Payments are less than Tenant's actual pro rate share of the Insurance, Tenant
shall pay to Landlord upon demand the difference; if the total Insurance Escrow
Payments of Tenant are more than Tenant's actual pro rate share of the
Insurance, Landlord shall promptly refund the balance of such excess to Tenant
after first crediting the excess to the next monthly payment by Tenant for its
proportionate share of Taxes and Insurance. Tenant's cost of insurance shall be
computed by multiplying the cost of Insurance by a fraction, the numerator of
which shall be the number of gross leasable square feet of floor space in the
Premises and the denominator of which shall be the total applicable gross
leasable square
-8-
<PAGE>
footage. The amount of the initial monthly Insurance Escrow Payment will be as
specified in the Basic Lease Information.
C. If the Building of which the Premises are a part,. should be
damaged or destroyed by fire, tornado or other casualty, Tenant shall give
immediate written notice thereof to Landlord.
D. If the Building of which the Premises are a part, should be totally
destroyed by fire, tornado or other casualty, or if it should be so damaged
thereby that rebuilding or repairs cannot in Landlord's estimation be completed
within two hundred (200) days after the date upon which Landlord is notified by
Tenant of such damage, this Lease shall terminate and the rent shall be abated
during the unexpired portion of this Lease, effective upon the date of the
occurrence of such damage. If the casualty event or condition is isolated to the
Building, and does not damage other improvements or real property, Landlord
shall give notice to Tenant in writing of its determination to terminate this
Lease within sixty (60) days following the date of the occurrence of such
damage. However, if the casualty event or condition damages improvements or real
property in addition to the Building, Landlord shall give notice to Tenant in
writing of its determination to terminate this Lease within ninety (90) days
following the date of the occurrence of such damage.
E. If the Building of which the Premises are a part, should be damaged
by any peril covered by the Insurance to be provided by Landlord under
subparagraph 13(A) above, but only to such extent that rebuilding or repairs can
in Landlord's estimation be completed within two hundred (200) days after the
date upon which Landlord is notified by Tenant of such damage, this Lease shall
not terminate, and Landlord shall at its sole cost and expense thereupon proceed
with reasonable diligence to rebuild and repair the Building to substantially
the condition in which it existed prior to such damage, except that Landlord
shall not be required to rebuild, repair or replace any part of the partition,
fixtures, additions and other improvements which may have been placed in, or
about the Premises by Tenant. If the Premises are untenantable in whole or in
part following such damage, the rent payable hereunder during the period in
which they are untenantable shall be reduced to such extent as may be fair and
reasonable under all of the circumstances. In the event that Landlord shall fail
to complete such repairs and rebuilding within two hundred (200) days after the
date upon which Landlord is notified by Tenant of such damage, Tenant may at its
option terminate this Lease by delivering written notice of termination as
Tenant's exclusive remedy, whereupon all rights and obligations hereunder shall
cease and terminate.
F. Notwithstanding anything herein to the contrary, in the event the
holder of any indebtedness secured by a mortgage or deed of trust covering the
Premises requires that the Insurance proceeds be applied to such indebtedness,
then Landlord shall have the right to terminate this Lease by delivering written
notice of termination to Tenant within fifteen (15) days after such requirement
is made by any such holder, whereupon all rights and obligations hereunder shall
cease and terminate.
G. Each of Landlord and Tenant hereby release each other from any loss
or damage to property caused by fire or any other perils insured through or
under them by way of subrogation or otherwise for any loss or damage to property
caused by fire or any other perils insured in policies of Insurance covering
such property, even if such loss or damage shall have been caused by the fault
or negligence of the other party, or anyone for whom such party may be
responsible; provided, however, that this release shall be applicable and in
force and effect only with respect to loss or damage occurring during such times
as the releasor's policies shall contain a clause or endorsement to the effect
that any such release shall not adversely affect or impair said policies or
prejudice the right of the releasor to recover thereunder and then only to the
extent of the Insurance proceeds payable under such policies. Landlord and
Tenant agree that they will request their respective Insurance carriers to
include in their policies such a clause or endorsement. If extra cost shall be
charged therefor, each party shall advise the other thereof and of the amount of
the extra cost, and the other party, at its election, may pay the same, but
shall not be obligated to do so.
-9-
<PAGE>
14. LIABILITY.
Landlord shall not be liable to Tenant or Tenant's employees, agents,
servants, guests, invitees or visitors, or to any other person whomsoever, for
any injury to person or damage to property on or about the Premises, resulting
from and/or caused in part or whole by the negligence or misconduct of Tenant,
its employees, agents, servants, guests, invitees or visitors, or of any other
person entering upon the Premises, or caused by the building and improvements
located on the Premises becoming out of repair, or caused by leakage of gas,
oil, water or steam or by electricity emanating from the Premises, or due to any
cause whatsoever, and Tenant hereby covenants and agrees that it will at all
times indemnify and hold safe and harmless the property, the Landlord (including
without (imitation the trustee and beneficiaries if Landlord is a trust),
Landlord's employees, agents, servants, guests, invitees and visitors from any
loss, liability, claims, suits, costs, expenses, including without limitation
attorneys' fees and damages, both real and alleged, arising out of any such
damage or injury, except injury to persons or damage to property the sole cause
of which is the negligence of Landlord or the failure of Landlord to repair any
part of the Premises which Landlord is obligated to repair and maintain
hereunder within a reasonable time after the receipt of written notice from
Tenant of needed repairs. Tenant's obligation to indemnify Landlord under this
paragraph 14 includes an obligation to indemnify for losses resulting from death
or injury to Tenant's employees, and Tenant accordingly hereby waives any and
all immunities it now has or hereafter may have under any Industrial Insurance
Act, or other worker's compensation, disability benefit or other similar act
which would otherwise be applicable in the case of such a claim. Tenant shall
procure and maintain throughout the term of this Lease a policy or policies of
Insurance, at its sole Cost and expense, insuring both Landlord and Tenant
against all claims, demands or actions arising out of or in connection with: (i)
the Premises; (ii) the condition of the Premises; (iii) Tenant's operations in
and maintenance and use of the Premises; and (iv) Tenant's liability assumed
under this Lease, the limits of such policy or policies to be in the amount of
not less than $1,000,000 per occurrence in respect of injury to persons
(including death) and in respect of property damage or destruction, including
loss of use thereof. All such policies shall be procured by Tenant from
responsible Insurance companies satisfactory to Landlord. Certified copies of
such policies, together with receipt evidencing payment of premiums therefor,
shall be delivered to Landlord prior to the Commencement Date of this Lease. Not
less than fifteen (15) days prior to the expiration date of any such policies,
certified copies of the renewals thereof (bearing notations evidencing the
payment of renewal premiums) shall be delivered to Landlord. Such policies shall
further provide that not less than thirty (30) days written notice shall be
given to Landlord before such policy may be canceled or changed to reduce
insurance provided thereby.
15. CONDEMNATION.
A. If the whole or any substantial part of the Premises should be taken
for any public or quasi-public use under governmental law, ordinance or
regulation, or by right of eminent domain, or by private purchase in lieu
thereof and the taking would prevent or materially interfere with the use of the
Premises for the purpose for which they are being used, this Lease shall
terminate and the rent shall be abated during the unexpired portion of this
Lease, effective when the physical taking of said Premises shall occur.
B. If part of the Premises shall be taken for any public or
quasi-public use under any governmental law, ordinance or regulation, or by
right of eminent domain, or by private purchase in lieu thereof, and this Lease
is not terminated as provided in the subparagraph above, this Lease shall not
terminate but the rent payable hereunder during the unexpired portion of this
Lease shall be reduced to such extent as may be fair and reasonable under all of
the circumstances.
C. In the event of any such taking or private purchase in lieu thereof,
Landlord shall be entitled to receive the entire award. Tenant shall be entitled
to make a claim in any condemnation proceedings which
-10-
<PAGE>
does not reduce the amount of Landlord's award, for the value of any furniture,
furnishings and fixtures installed by and at the sole expense of Tenant.
16. HOLDING OVER.
Tenant will, at the termination of this Lease by lapse of time or
otherwise, yield up immediate possession to Landlord. If Landlord agrees in
writing that Tenant may hold over after the expiration or termination of this
Lease, unless the parties hereto otherwise agree in writing on the terms of such
holding over, the hold over tenancy shall be subject to termination by Landlord
at any time upon not less than five (5) days advance written notice, or by
Tenant at any time upon not less than thirty (30) days advance written notice,
and all of the other terms and provisions of this Lease shall be applicable
during that period, except that Tenant shall pay Landlord from time to time upon
demand, as rental for the period of any hold over, an amount equal to one and
one-half (1-1/2) the Base Rent in effect on the termination date, plus all
additional rental as defined herein, computed on a daily basis for each day of
the hold over period. No holding over by Tenant, whether with or without consent
of Landlord, shall operate to extend this Lease except as otherwise expressly
provided. The preceding provisions of this paragraph 16 shall not be construed
as Landlord's consent for Tenant to hold over.
17. QUIET ENJOYMENT.
Landlord covenants that it now has, or will acquire before Tenant takes
possession of the Premises, good fee or leasehold title to the Premises, free
and clear of all liens and encumbrances, excepting only the lien for current
taxes not yet due, such mortgage or mortgages as are permitted by the terms of
this Lease, zoning ordinances and other building and fire ordinances and
governmental regulations relating to the use of such property, and easements,
restrictions and other conditions of record. In the event this Lease is a
sublease, then Tenant agrees to take the Premises subject to the provisions of
the prior leases. Landlord represents and warrants that it has full right and
authority to enter into this Lease and that Tenant, upon paying the rental
herein set forth and performing its other covenants and agreements herein set
forth, shall peaceably and quietly have, hold and enjoy the Premises for the
term hereof without hindrance or molestation from Landlord, subject to the terms
and provisions of this Lease.
18. EVENTS OF DEFAULT.
The following events shall be deemed to be events of default by Tenant
under this Lease:
A. Tenant shall fail to pay any installment of the rent herein reserved
when due, or any payment with respect to taxes hereunder when due, or any other
payment or reimbursement to Landlord required herein when due, and such failure
shall Continue for a period of five (5) days from the date such payment was due.
On no more than two occasions each lease year (from commencement date to
anniversary thereof, and from anniversary date to anniversary date), Tenant's
failure to pay as provided in the preceding sentence shall not constitute an
event of default unless such failure continues for five days after Tenant
receives written notice (which may be delivered by facsimile) from Landlord of
Tenant's failure to make any such payment when due.
B. Tenant shall become insolvent, or shall make a transfer in fraud of
creditors, or shall make an assignment for the benefit of creditors.
C. Tenant shall file a petition under any section or chapter of
the National Bankruptcy Act, as amended, or under any similar law or statute of
the United States or any State thereof; or Tenant shall be adjudged bankrupt or
insolvent in proceedings filed against Tenant thereunder.
-11-
<PAGE>
D. A receiver or trustee shall be appointed for all or substantially
all of the assets of Tenant.
E. Tenant shall desert or vacate any substantial portion of the
Premises for more than 14 consecutive days, unless, prior to such desertion or
vacation, Tenant shall have delivered to Landlord written notice of its intent
to continue to comply with all of its obligations under this Lease.
F. Tenant shall fail to comply with any term, provision or covenant of
this Lease (other than the foregoing in this paragraph 18), and shall not cure
such failure within twenty (20) days after written notice thereof to Tenant, or
such longer period (of no more than 90 days) as is reasonably necessary to
complete the cure, so long as the same is commenced within the 20-day period and
pursued In good faith.
19. REMEDIES.
Upon the occurrence of any such events of default described in
Paragraph 18 hereof, Landlord shall have the option to pursue any one or more of
the following remedies without any notice or demand whatsoever.
A. If Landlord terminates this Lease because of Tenant's default,
Landlord shall have the right to recover from Tenant as damages:
(i) The worth at the time of award of unpaid rent and other
sums due and payable which had been earned at the time of termination;
plus
(ii) The worth at the time of award of the amount by which the
unpaid rent and other sums which would have been payable after
termination but before the time of award exceeds the amount of such
rent loss that can be reasonably avoided; plus
(iii) The worth at the time of award of the amount by which
the unpaid rent and other sums due and payable for the balance of the
regularly scheduled term and any exercised extensions thereof after the
time of award exceeds the amount of such rent loss that can be
reasonably avoided; plus
(iv) Any other amount which is necessary to compensate
Landlord for all the detriment proximately caused by Tenant's failure
to perform Tenant's obligations under this Lease, including, without
limitation, any costs or expense reasonably incurred by Landlord: (1)
in retaking possession of the Premises; (2) In maintaining, repairing,
preserving, restoring, replacing, cleaning, altering or rehabilitating
the Premises or any portion thereof, including such acts for reletting
to a new Tenant or Tenants; (3) for leasing commissions; or (4) for any
other costs necessary or appropriate to relet the Premises.
(v) The "worth at the time of award" of the amounts referred
to in subparagraphs (i) and (ii) is computed by allowing interest at
the rate of twelve percent (12%) per annum on the unpaid rent and other
sums due and payable from the due date or dates thereof (or the
termination date If not yet due) through the date of award. The "worth
at the time of award" of the amount referred to in subparagraph (iii)
is computed by discounting such amount at the discount rate of the
Federal Reserve Bank of San Francisco at the time of award.
B. Terminate this Lease, in which event Tenant shall immediately
surrender the Premises to Landlord, and if Tenant fails so to do, Landlord may,
without prejudice to any other remedy which it may have for possession or
arrearages in rent, enter upon and take possession of the Premises and expel or
remove Tenant and any other person who may be occupying such Premises or any
part thereof, by force if necessary,
-12-
<PAGE>
without being liable for prosecution or any claim of damages therefor, and
Tenant agrees to pay to Landlord on demand the amount of all loss and damage
which Landlord may suffer by reason of such termination, whether through
inability to relet the Premises on satisfactory terms or otherwise.
C. Enter upon and take possession of the Premises and expel or remove
Tenant and any other person who may be occupying such Premises or any part
thereof, by force if necessary, without being liable for prosecution or any
claim for damages therefor, and relet the Premises for such terms ending before,
on or after the expiration date of the .Lease Term, at such rentals and upon
such other conditions (including concessions and prior occupancy periods) as
Landlord in its sole discretion may determine, and receive the rent therefor;
and Tenant agrees to pay to the Landlord on demand any deficiency that may arise
by reason of such reletting. Landlord shall only be required to undertake
commercially reasonable efforts to relet the Premises and collect rent from any
such tenant. In the event Landlord is successful in reletting the Premises at a
rental in excess of that agreed to be paid by Tenant pursuant to the terms of
this Lease, Landlord and Tenant each mutually agree that Tenant shall not be
entitled, under any circumstances, to such excess rental, and Tenant does hereby
specifically waive any claim to such excess rental.
D. Enter upon the Premises, by force If necessary, without being liable
for prosecution or any claim for damages therefor, and do whatever Tenant is
obligated to do under the terms of this Lease; and Tenant agrees to reimburse
Landlord on demand for any expenses which Landlord may incur in thus effecting
compliance with Tenant's obligations under this Lease, and Tenant further agrees
that Landlord shall not be liable for any damages resulting to the Tenant from
such action, unless caused by the willful acts of Landlord.
E. Whether or not Landlord retakes possession or relets the Premises,
Landlord shall have the right to recover unpaid rent and all damages caused by
Tenant's default, including attorney's fees. Damage shall include, without
limitation, all rents lost, all legal expenses and other related costs
reasonably incurred by Landlord following Tenant's default, all costs reasonably
incurred by Landlord in restoring the Premises to good order and condition, or
in remodeling, renovating or otherwise preparing the Premises for reletting, all
costs (including without limitation any brokerage commissions and the value of
Landlord's time) reasonably incurred by Landlord, plus interest thereon from the
date of expenditure until fully repaid at the rate of eighteen percent (18%) per
annum.
F. In the event Tenant fails to pay any installment of rent,
additional rent or other charges hereunder as and when such installment is due,
to help defray the additional cost to Landlord for processing such late payments
Tenant shall pay to Landlord on demand a late charge in an amount equal to five
percent (5%) of such installment, and the failure to pay such late charge within
ten (10) days after demand therefor shall be an event of default hereunder. The
provision for such late charge shall be in addition to all of Landlord's other
rights and remedies hereunder or at law and shall not be construed as liquidated
idamages or as limiting Landlord's remedies in any manner.
G. Pursuit of any of the foregoing remedies shall not preclude
pursuit of any of the other remedies herein provided or any other remedies
provided by law, such remedies being cumulative and non-exclusive, nor shall
pursuit of any remedy herein provided Constitute a forfeiture or waiver of any
rent due to Landlord hereunder or of any damages accruing to Landlord by reason
of the violation of any of the terms, provisions and covenants herein contained.
No act or thing done by the Landlord or its agents during the Lease Term hereby
granted shall be deemed a termination of this Lease or an acceptance of the
surrender of the Premises, and no agreement to terminate this Lease or accept a
surrender of said Premises shall be valid unless in writing signed by Landlord.
No waiver by Landlord of any violation or breach of any of the terms, provisions
and covenants herein contained shall be deemed or construed to constitute a
waiver of any other violation or breach of any of the terms, provisions and
covenants herein contained. Landlord's acceptance of the payment of rental or
other payments hereunder after the occurrence of an event of default shall not
be
-13-
<PAGE>
construed as a waiver of such default, unless Landlord so notifies Tenant in
writing. Forbearance by Landlord to enforce one or more of the remedies herein
provided upon an event of default shall not be deemed or construed to constitute
a waiver of such default or of Landlord's right to enforce any such remedies
with respect to such default or any subsequent default. If, on account of any
breach or default by Tenant in Tenant's obligations under the terms and
conditions of this Lease, it shall become necessary or appropriate for Landlord
to employ or consult with an attorney concerning or to enforce or defend any of
Landlord's rights or remedies hereunder, Tenant agrees to pay any reasonable
attorney's fees so incurred.
20. LANDLORD'S LIEN.
In addition to any statutory lien for rent in Landlord's favor,
Landlord shall have and Tenant hereby grants to Landlord a continuing security
interest for all rentals and other sums of money becoming due hereunder from
Tenant, upon all goods, wares, equipment, fixtures, furniture, inventory,
accounts, contract rights, chattel paper and other personal property of Tenant
situated on the Premises, and such property shall not be removed therefrom
without the consent of Landlord until all arrearages in rent as well as any and
all other sums of money then due to Landlord hereunder shall first have been
paid and discharged. In the event of a default under this Lease, Landlord shall
have, in addition to any other remedies provided herein or by law, all rights
and remedies under the Uniform Commercial Code, including without limitation the
right to sell the property described in this paragraph 20 at public or private
sale. Tenant hereby agrees to execute such financing statements and other
instruments necessary or desirable in Landlord's discretion to perfect the
security interest hereby created. Any statutory lien for rent is not hereby
waived, the express contractual lien herein granted being in addition and
supplementary thereto. Landlord shall not unreasonably refuse to subordinate the
non-statutory portion of the security interest granted herein to the interest of
entities providing operational or purchase-money financing to Tenant.
21. MORTGAGES.
Tenant accepts this Lease subject and subordinate to any mortgage(s)
and/or deed(s) of trust now or at any time hereafter constituting a lien or
charge upon the Premises or the improvements situated thereon7 provided,
however, that if the mortgagee, trustee, or holder of any such mortgage or deed
of trust elects to have Tenant's Interest in this Lease superior to any such
instrument, then by notice to Tenant from such mortgagee, trustee or holder,
this Lease shall be deemed superior to such lien, whether this Lease was
executed before or after said mortgage or deed of trust. Tenant shall at any
time hereafter on demand execute any instruments, releases or other documents
which may be required by any mortgagee for the purpose of subjecting and
subordinating this Lease to the lien of any such mortgage.
22. LANDLORD'S DEFAULT.
In the event Landlord should become in default in any payment due on
any such mortgage described in paragraph 21 hereof or in the payment of taxes or
any other item which might become a lien upon the Premises and which Tenant is
not obligated to pay under the terms and provisions of this Lease, Tenant is
authorized and empowered after giving Landlord five (5) days prior written
notice of such default and Landlord's failure to cure such default, to pay any
such items for and on behalf of Landlord, and the amount of any item so paid by
Tenant for or on behalf of Landlord, together with any interest or penalty
required to be paid in connection therewith, shall be payable on demand by
Landlord to Tenant; provided, however, that Tenant shall not be authorized and
empowered to make any payment under the terms of this paragraph 22 unless the
item paid shall be superior to Tenant's interest hereunder. In the event Tenant
pays any mortgage debt in full, in accordance with this paragraph, it shall, at
its election, be entitled to the mortgage security by assignment or subrogation.
23. MECHANIC'S AND OTHER LIENS.
-14-
<PAGE>
Tenant shall have no authority, express or implied, to create or place
any lien or encumbrance of any kind or nature whatsoever upon, or in any manner
to bind, the interest of Landlord in the Premises or to charge the rentals
payable hereunder for any claim in favor of any person dealing with Tenant,
including those who may furnish materials or perform labor for any construction
or repairs, and each such claim shall affect and each such lien shall attach to,
if at all, only the leasehold interest granted to Tenant by this instrument
Lease. Tenant covenants and agrees that it will pay or cause to be paid all sums
legally due and payable by it on account of any labor performed or materials
furnished in connection with any work performed on the Premises on which any
lien is or can be validly and legally asserted against its leasehold interest in
the Premises or the improvements thereon and that it will save and hold Landlord
harmless from any and all loss, cost or expense based on or arising Out of
asserted claims or liens against the leasehold estate or against the right,
title and interest of the Landlord in the Premises or under the terms of this
Lease.
24. NOTICES.
Unless otherwise specifically provided in this Lease, each provision of
this Lease or of any applicable governmental laws, ordinances, regulations and
other requirements with reference to the sending, mailing or delivery of any
notice or the making of any payment by Landlord to Tenant or with reference to
the sending, mailing or delivery of any notice or the making of any payment by
Tenant to Landlord shall be deemed to be complied with when and if the following
steps are taken:
A. All rent and other payments required to be made by Tenant to
Landlord hereunder shall be payable to Landlord at the address set forth below
or at such other address as Landlord may specify from time to time by written
notice delivered in accordance herewith. Tenant's obligation to pay rent and any
other amounts to Landlord under the terms of this Lease shall not be deemed
satisfied until such rent and other amounts have been actually received by
Landlord.
B. All payments required to be made by Landlord to Tenant
hereunder shall be payable to Tenant at the address hereinbelow set forth, or at
such other address within the continental United States as Tenant may specify
from time to time by written notice delivered in accordance herewith.
C. Any notice or document required or permitted to be delivered
hereunder shall be deemed to be delivered whether actually received or not when
deposited in the United States Mail, postage prepaid, Certified or Registered
Mail, addressed to the parties hereto at the respective addresses set out below,
or at such other address as they have theretofore specified by written notice
delivered in accordance herewith:
LANDLORD: TENANT:
Riggs Bank N.A. Rosetta Biosystems
c/o Trammell Crow Company 12040 - 115th Ave NE
626 120th Avenue N.E., Suite B104 Kirkland, WA 98034
Suite 210 Bellevue, WA 98005
with a copy to: with a copy to:
Riggs Bank N.A./MEPT Bill Ericson
808 17th Street N.W. Venture Law Group
P.O. Box 96202 4750 Carillon Pt
Washington, D.C. 20090-6202 Kirkland, WA 98033
Attn: Leanne Tobias
-15-
<PAGE>
Marc Winters
McNaul Ebel Nawrot Helgren & Vance
600 University Street Suite 2700
Seattle, WA 98101-3143
If and when included within the term "Landlord", as used in this Lease, there is
more than one person, firm or corporation, all shall jointly arrange among
themselves for their joint execution of such a notice specifying some individual
at some specific address for the receipt of notices and payments to Landlord; if
and when included within the term "Tenant", as used in this Lease, there is more
than one person, firm or corporation, all shall jointly arrange among themselves
for their joint execution of such a notice specifying some individual at some
specific address within the continental United States for the receipt of notices
and payments to Tenant. All parties included within the terms "Landlord" and
"Tenant", respectively, shall be bound by notices given in accordance with the
provisions of this paragraph to the same effect as if each had received such
notice.
25. MISCELLANEOUS.
A. Words of any gender used in this Lease shall be held and
construed to include any other gender, and words in the singular number shall be
held to include the plural, unless the context otherwise requires.
B. The terms, provisions and covenants and conditions contained
in this Lease shall apply to, inure to the benefit of, and be binding upon, the
parties hereto and upon their respective heirs, legal representatives,
successors and permitted assigns, except as otherwise herein expressly provided.
Landlord shall have the right to assign any of its rights and obligations under
this Lease. Each party agrees to furnish to the other, promptly upon demand, a
corporate resolution, proof of due authorization by partners, or other
appropriate documentation evidencing the due authorization of such party to
enter into this Lease, and each party hereby covenants to the other that the
person signing this Lease on its behalf is duly authorized to do so, and that
this Lease is the binding and enforceable act of each party.
C. The captions inserted in this Lease are for convenience only
and in no way define, limit or otherwise describe the scope or intent of this
Lease, or any provision hereof, or in any way affect the interpretation of this
Lease.
D. Tenant agrees from time to time within ten (10) days after
request of Landlord, to deliver to Landlord, or Landlord's designee, an estoppel
certificate stating that this Lease is in full force and effect, the date to
which rent has been paid, the unexpired term of this Lease .and such other
matters pertaining to this Lease as may be requested by Landlord. It is
understood and agreed that Tenant's obligation to furnish such estoppel
certificates in a timely fashion is a material inducement for Landlord's
execution of this Lease.
E. This Lease may not be altered, changed or amended except by an
instrument in writing signed by both parties hereto.
F. All obligations of Tenant hereunder not fully performed as of
the expiration or earlier termination of the term of this Lease shall survive
the expiration or earlier termination of the Term hereof, including without
limitation all payment obligations with respect to taxes and insurance and all
obligations concerning the condition of the Premises. Upon the expiration or
earlier termination of the Term hereof, and prior to Tenant vacating the
Premises, Tenant shall pay to Landlord any amount reasonably estimated by
Landlord as necessary to put the Premises, including without limitation all
heating and air-conditioning systems and equipment therein, in the condition and
repair in which Tenant is obligated to maintain them. Tenant shall also, prior
to vacating the Premises, pay to Landlord the amount, as estimated by Landlord,
of
-16-
<PAGE>
Tenant's obligation hereunder for real estate taxes and insurance premiums for
the year in which the Lease expires or terminates. All such amounts shall be
used and held by Landlord for payment of such obligations of Tenant hereunder,
with Tenant being liable for any additional costs therefor upon demand by
Landlord, or with any excess to be returned to Tenant after all such obligations
have been determined and satisfied, as the case may be. Any security deposit
held by Landlord shall be credited against the amount payable by Tenant under
this paragraph 25(F).
G. If any clauses or provision of this Lease is illegal, invalid or
unenforceable under present or future laws effective during the Term of this
Lease, then and in that event, it is the intention of the parties hereto that
the remainder of this Lease shall not be affected thereby, and it is also the
intention of the parties to this Lease that in lieu of each clause or provision
of this Lease that is illegal, invalid or unenforceable, there be added as part
of this Lease contract a clause or provision as similar in terms to such
illegal, invalid or unenforceable clause or provision as may be possible and be
legal, valid and enforceable.
H. All references in this Lease to "the date hereof" or similar
references shall be deemed to refer to the last date, in point of time, on which
all parties hereto have executed this Lease.
I. During the term of this Lease and any subsequent option periods,
Landlord shall have the right to request and obtain Tenant's current financial
statements with reasonable advance notice. Tenant shall comply with Landlord's
request for financial statements in a reasonable time frame not to exceed thirty
(30) days from the date of request.
26. LIABILITY OF LANDLORD.
Tenant agrees that no trustee, officer, employee, agent or individual
partner of Landlord, or its constituent entities, shall be personally liable for
any obligation of Landlord hereunder, and that Tenant must look solely to the
interests of Landlord, or its constituent entities in the subject real estate,
and any rents, sale proceeds, insurance proceeds, condemnation awards and other
proceeds thereof for the enforcement of any claims against Landlord arising
hereunder.
27. ADDITIONAL PROVISIONS.
The addendum and Additional Paragraph(s) attached hereto are hereby
incorporated and made a part of this Lease. In the event of any conflict between
the terms of the Addendum and the terms of the printed form portion of this
Lease, the terms of the Addendum shall control.
-17-
<PAGE>
LANDLORD: TENANT:
Riggs Bank N.A., as trustee of the Rosetta Biosystems, a Delaware
Multi-Employer Property Trust corporation
By: /s/ Leanne Tobias By: /s/ Leroy Hoop
------------------------------- -----------------------------
Leanne Tobias Its: CEO
Its: Vice President -----------------------------
STATE OF WASHINGTON )
)ss.
COUNTY OF KING )
On this 20th day of February, 1997, before me, a Notary Public in and
for the State of Washington, personally appeared Leanne Tobias, to me known to
be the Vice President of Riggs Bank N.A., formerly known as The Riggs National
Bank of Washington, D.C., Trustee of the Multi-Employer Property Trust, the
national banking association that executed the within and foregoing instrument
and acknowledged said Instrument to be the free and voluntary act and deed of
said national banking association as trustee for the uses and purposes therein
mentioned, and on oath stated that she was authorized to execute said
instrument.
WITNESS my hand and official seal hereto affixed the day and year first
as above written.
/s/ Chris E. Tucker
-------------------------------------------------
Name: Chris E. Tucker
--------------------------------------------
Notary Public in and for the State of Washington,
residing at Seattle
----------------
My commission expires 3/15/00
-------------------
[SEAL]
STATE OF WASHINGTON )
)ss.
COUNTY OF KING.... )
On this 21st day of February, 1997, before me, the undersigned, a
Notary Public in and for said county and state, personally appeared Leroy Hood,
to me known to be the CEO of Rosetta BioSystems, Inc.,
-18-
<PAGE>
and acknowledged that he executed the foregoing agreement on behalf of such
corporation and for the uses and purposes therein mentioned, and on oath stated
that he was authorized to execute such agreement.
WITNESS my hand and official seal hereto affixed the day and year first
as above written.
Name: Denise M. Hoopes
--------------------------------------------
Notary Public in and for the State of Washington,
residing at MONROE
--------------------------------------
My commission expires 10/9/00
----------------------------
[SEAL]
-19-
<PAGE>
ADDENDUM TO LEASE AGREEMENT:
Riggs Bank N.A., as trustee of
the Multi-Employer Property Trust
and
Rosetta BioSystems, a Delaware Corporation
ADDENDUM TO PARAGRAPH 5(C). PARKING.
Tenant shall be allowed to use approximately 2.3 parking stalls per
1,000 rentable square feet, on a first-come, first-serve basis. Landlord will
undertake commercially reasonable efforts to increase the no-cost parking
available to Tenant, but shall not be liable for any failure to do so.
ADDENDUM TO PARAGRAPH 12(A). SUBLEASE.
With respect to Landlord's consent to sublease in the first sentence of
Paragraph 12(A), it shall not be unreasonable for MEPT Landlord to withhold its
consent for any one or more of the following reasons:
(a) The proposed subtenant is or will be unwilling or unable to execute
and deliver to Landlord ERISA Representations as set forth in Additional
Paragraph 28 of this Lease, or Landlord believes that the proposed sublease
would constitute a prohibited transaction under or otherwise violate ERISA;
(b) The proposed subtenant does not, in Landlord's good faith
judgement, have financial worth or creditworthiness sufficient to Insure Its
full and timely performance under the proposed sublease;
(c) Landlord has, in its reasonable opinion, received insufficient
evidence of the financial worth or creditworthiness of the proposed subtenant to
make the determination set forth in subparagraph (b) above;
(d) In Landlord's reasonable opinion, the proposed subtenant has a
track record of engaging in disputes in contractual relations, falling to
observe and perform its contractual obligations in a timely and complete manner
or of negative business relations in the business community for or otherwise as
a tenant of property;
(e) Landlord has had prior negative leasing experience with the
proposed subtenant. Landlord shall provide evidence of said negative leasing
experience to Rosetta Tenant upon request;
(f) The use of the Premises by the proposed subtenant will not be in
conformance with existing law;
(g) In Landlord's reasonable judgment,, the proposed subtenant is
engaged in a business, or the Premises or any part of the Premises will be used
in a manner, that is not in keeping with the then standards of the Kirkland 405
Corporate Center, or that is not compatible with the businesses of other tenants
in the Center or that is inappropriate for the Center, or that will violate any
negative covenant as to use contained in any other lease of space in the Center,
provided, that Landlord agrees that a sublease to an entity affiliated with
Tenant and engaged in research, development and/or laboratory work would not
violate this sub-section, and that vivarium use is generally not incompatible;
(h) Tenant is in material default of any obligation of Tenant under the
Lease, or Rosetta has materially defaulted under the Lease on three (3) or more
occasions during the twenty-four (24) months preceding the date that Tenant
shall request such consent;
-1-
<PAGE>
(i) Landlord does not approve of any of the tenant improvements
required for the proposed subtenant, and such disapproval is reasonable; or
(j) Landlord has had active contact with the proposed subtenant, In the
six (6) months preceding Tenant's request, regarding the leasing by the proposed
subtenant of other, comparable space in any buildings owned by Landlord in the
metropolitan area in which the Premises is located.
ADDITIONAL PARAGRAPH 28. ERISA.
Tenant represents and warrants to Landlord that, with the exception of
this Lease, neither the Tenant nor any affiliate of the Tenant is a tenant under
a lease or any other tenancy arrangement: (a) with: (1) The Riggs National Bank
of Washington, D.C., as Trustee of the Multi-Employer Property Trust; (2) the
Multi-Employer Property Trust; (3) The National Bank of Washington
Multi-Employer Property Trust, the previous name of the Multi-Employer Property
Trust; (4) Alameda Industrial Properties Joint Venture; (5) Harman International
Business Campus Joint Venture; (6) Beaverton-Redmond Tech Properties; (7)
Corporate Drive Corporation as trustee of the Corporate Drive Nominee Realty
Trust; (8) Goldbelt Place Joint Venture; (9) Boca 1515; (10) Arboretum Lakes-i,
L.L.C.; (ii) Village Green of Rochester Hills Associates L.L.C.; or (12) Pine
Street Development, L.L.C.; or (b) involving any property in which the entities
named in clauses (a)(1), (a)(2) or (a)(3) are known by the Tenant to have an
ownership interest.
ADDITIONAL PARAGRAPH 29. ACCESS LAWS AND GOVERNMENTAL REGULATIONS.
A. As used in this Section, the term "Access Laws" shall mean the
Americans with Disabilities Act of 1990, the Fair Housing Amendments Act of
1988, all state and local laws or ordinances related to handicapped access, or
any statute, rule, regulation, ordinance, order of governmental bodies or
regulatory agencies, or order or decree of any court adopted or enacted with
respect to any of the foregoing. The term Access Laws shall include all Access
Laws now in existence or hereafter enacted adopted or applicable.
B. To the best of Landlord's actual knowledge, which is limited
to the information available at the office of property manager, the building and
the area outside of the Premises are, as of the date hereof, in compliance with
Access Laws. If required by law and subject to subparagraph D below, the
building and the area outside of the Premises will be brought into compliance
with Access Laws at Landlord's cost and expense.
C. Tenant agrees to notify Landlord immediately if Tenant becomes
aware of (a) any condition or situation in or on the Premises which would
constitute a violation of any Access Laws, or (b) any threatened or actual lien,
action or notice of the Premises not being in compliance with any Access Laws.
Tenant shall inform Landlord of the nature of any such condition, situation,
lien, action or notice and of the action Tenant proposes to take in response
thereto.
D. Tenant shall be solely responsible for all costs and expenses
relating to or incurred in connection with (i) bringing the Premises into
compliance with the Access Laws if and to the extent such costs and expenses
arise out of or relate to a change in Tenant's use of the Premises or
modifications, improvements or alterations to the Premises made during the term
or any extension of this Lease, and (ii) bringing the Building or Common Areas
of the project of which the Building is a part into compliance with the Access
Laws if such costs and expenses are required solely because of a change in
Tenant's use of the Premises or solely because of modifications, improvements or
alterations to the Premises made during the term or any extension of this Lease.
Any cost or expense to bring the Premises, the Building or Common Areas of the
project of which the Building is a part into compliance with Access Laws which
is not covered by the preceding sentence and which is paid for or incurred by
Landlord shall be amortized over the useful economic life of the improvement
(not to exceed ten (10) years) at an interest rate of twelve percent (12%)
-2-
<PAGE>
per annum, and Tenant shall pay equal monthly installments of such amortized
cost or expense, together with interest accrued thereon, as a portion of the
monthly common area maintenance charges described elsewhere in this Lease.
E. Tenant agrees to indemnify, defend and hold harmless Landlord
from and against any and all claims, demands, damages, losses, liens,
liabilities, penalties, fines, lawsuits, and other proceedings and expenses
(including attorneys' fees), arising directly or indirectly from or out of, or
in any way connected with any activity on or use of the Premises, the Building
or the Common Areas by Tenant, its agents, employees, contractors, invitees, or
subtenant, which activity or use results in the Premises violating any
applicable Access Laws.
F. The provisions in subparagraphs A through E of this Additional
Paragraph 29 shall supersede any other provisions in this Lease regarding Access
Laws to the extent inconsistent with the provisions of such provisions. The
provisions of this Additional Paragraph 29 shall survive the expiration of the
Lease Term or the termination of this Lease for any other reason whatsoever.
ADDITIONAL PARAGRAPH 30. EXCULPATORY PROVISION.
Landlord has executed this Lease by its Trustee signing solely in a
representative capacity. Notwithstanding anything contained in this Lease to the
contrary, Tenant confirms that the covenants of Landlord are made and intended,
not as personal covenants of the trustee, or for the purpose of binding the
trustee personally, but solely in the exercise of the representative powers
conferred upon the trustee by its principal. Liability with respect to the entry
and performance of this Lease by or on behalf of Landlord, however it may arise,
shall be asserted and enforced only against the Landlord's estate and interest
in the Building, and any rents, sale proceeds, insurance proceeds, condemnation
awards and other proceeds thereof, and Landlord shall have no personal liability
in the event of any claim against Landlord arising out of or in connection with
this Lease, the relationship of Landlord and Tenant or Tenant's use of the
Premises. Further, in no event whatsoever shall any and all partners, officers,
agents, employees, trustees, investment advisors and consultants of Landlord
have any liability or responsibility whatsoever arising out of or in connection
with this Lease, the relationship of Landlord and Tenant or Tenant's use of the
Premises. Any and all personal liability, if any, beyond that which may be
asserted under this paragraph, is expressly waived and released by Tenant and
all persons claiming by, through or under Tenant.
ADDITIONAL PARAGRAPH 31. OPTION TO RENEW.
So long as there is no monetary event of default default, or material
non-monetary event of default then existing under the Lease, and subject to the
terms and conditions of this Additional Paragraph 31, Tenant shall have one (1)
Option to Renew the term of the Lease for a period of three (3) years ("Option
Term"). If the Option to Renew referenced in the preceding sentence is exercised
during any applicable cure period following an event, which with the passage of
time or the giving of notice, or both, would constitute en event all of default,
then such exercise shall be void and of no further force or effect unless the
cure is fully completed within the applicable cure period, but in no event later
than the expiration or earlier termination of the Lease. Except as set forth in
this Additional Paragraph 31, all terms and conditions of the Lease shall remain
the same during the Option Term except The Monthly Base Rent at the end of the
initial term as defined in Paragraph 2 of the Lease, shall be adjusted as to the
then-current market Rent for comparable biotechnology laboratory space in the
Kirkland, Redmond, or Bothell/Northcreek Area of like quality, size and
amenities. In no event will the Rent for the Option Term be less than the Rent
for the month preceding the expiration of the initial Lease Term. Unless
otherwise agreed, there shall be no rent concessions or tenant improvements. For
purposes of this Additional Paragraph 31 the Option to Renew the term for a
period of three (3) years Is referred to as the "Option to Renew."
-3-
<PAGE>
As a condition to the Tenant's right to exercise the Option to Renew, Tenant
shall give Landlord written notice of its intent to exercise its Option to Renew
at least nine (9) months but not more than ten (10) months prior to the
expiration of the initial Lease Term ("Notice Period"), together with Tenant's
determination ("Tenant's Determination") of the Prevailing Fair Market Base
Rental Rate ("PFMBRR"). If Tenant timely delivers notice of its Intent to
exercise its Option to Renew but fails to timely deliver Tenant's Determination,
said attempt to exercise the Option to Renew shall be ineffective. If Landlord
does not agree with Tenant's Determination, Landlord shall provide Tenant with
notice of its determination of the PFMBRR ("Landlord's Determination") within
twenty days of Landlord's receipt of Tenant's Determination. If Landlord fails
to provide Landlord's Determination within such time, the PFMBRR for the Option
Term shall be that set forth in Tenant's Determination.
If Landlord and Tenant each timely submit their respective
Determinations as set forth above, said Determinations are different, and the
parties are unable to agree upon the PFMBRR within sixty days of Tenant's
receipt of Landlord's Determination, the parties shall within fifteen days
together appoint a mutually acceptable arbitrator or, if they are unable to
agree upon such an arbitrator, shall apply to the American Arbitration
Association for the designation of an arbitrator (the "Arbitrator") in the
Seattle; Washington metropolitan area to render a final determination of the
PFMBRR. Unless otherwise agreed by the parties, the Arbitrator shall be a real
estate appraiser or consultant who shall be a M.A.I. member and who shall have
at least fifteen years continuous experience in the business of appraising
commercial office buildings in the greater Seattle area. The Arbitrator shall
conduct such hearings and Investigations as the Arbitrator shall deem
appropriate and shall, within sixty days after having been appointed, choose
either the Landlord's or Tenant's Determination (the "Option Term Base Rent"),
and that choice by the Arbitrator shall be final and binding upon the parties.
The party whose Determination is not chosen shall pay all the fees and expenses
of the Arbitrator and the American Arbitration Association, if any. The
Arbitrator shall not have the power to add to, modify, or change any of the
provisions of this Lease.
In the event that Landlord's and Tenant's PFMBRRs differ by ten percent
or less (based on the higher number), then the PFMBRR shall not be determined by
arbitration, but shall instead be set by taking the average of the parties'
Determinations.
If for any reason the Option Term Base Rent has not been arrived at
prior to the commencement of the Option Term, Tenant shall pay each month as
Base Rent the lower of the two Determinations until the Option Term Base Rent is
finalized, at which point Tenant will immediately pay to Landlord any rent
differential.
Any determination of the PFMBRR, whether by Tenant or Landlord, shall
include a statement of the elements of rent included In such determination
(whether tenant improvement allowances, free rent, common area cost allowances,
or otherwise) sufficient to permit a calculation of the effective rent of the
Premises.
Upon determination of the Option Term Base Rent, the payment of Monthly
Base Rent due for the first month of the Option Term shall be deposited with
Landlord.
In addition to the provisions set forth above, the Option to Renew
shall be conditioned upon the following: (i) at the time of Tenant's notice to
Landlord of its intent to exercise the Option to Renew, and continuing
thereafter until the commencement of the Option Term, Tenant shall have been In
possession of and occupying the Premises for the conduct of its business therein
and there shall have been no assignment of this Lease or subletting of all of
the Premises; and (ii) the notice of the Intent to exercise shall constitute a
representation and promise by Tenant to Landlord effective as of the date of the
notice that Tenant does not intend to and shall not seek to assign the Lease in
whole or in part, or sublet all or any portion of the Premises, at any time
during any remaining Initial Lease Term or the Option Term, the election to
extend the term being for purposes of utilizing the Premises for Tenant's
purposes in the conduct of Tenant's business
-4-
<PAGE>
therein. This Option to Renew is personal to Rosetta BioSystems and shall not
apply to any subtenant, assignee or licensee.
ADDITIONAL PARAGRAPH 32. LETTER OF CREDIT.
A. Prior to, or upon, execution of this Lease Tenant shall provide an
unconditional, irrevocable, on-sight Letter of Credit ("LOC") in the amount of
Three Hundred and Seventy-Five Thousand Dollars ($375,000.00), issued by Silicon
Valley Bank, in the form attached to this Lease as Exhibit I. The LOC shall name
Landlord as beneficiary. The LOC shall remain in full force and effect as
follows: the Lease is validly terminated by Landlord (pursuant to the terms of
this Lease) as the result of the occurrence of a material breach by Tenant of
the Lease, the LOC shall remain in full force and effect for one year after the
date of said termination; and if the Lease term expires without Tenant being in
material default thereof at that time, the LOC shall remain in full force and
effect until that time. The LOC shall be renewed at least annually, and my be in
such lower amounts at each renewal as consented to by Landlord. In addition,
Landlord will consider in good faith eliminating the LOC requirement at such
time as Tenant has received, in Landlord's reasonable opinion, significant
financing and has reserved therefrom sufficient funds to satisfy Its obligations
under the Lease.
B. If Landlord has not received written notification from the issuer of
the LOC, at least five days before the date on which any required renewal of the
LOC is to occur, that it will cause the LOC to be renewed as required by the
Lease, then, regardless of whether Landlord has suffered or incurred any damages
at that point, Landlord shall be entitled to draw down the entire amount of the
LOC prior to its expiration as security for Tenant's performance of its Lease
obligations. Upon any reinstatement of the LOC thereafter, Landlord shall return
all withdrawn amounts (other than any amounts to be retained to compensate
Landlord for any actual damages suffered or incurred by Landlord at that point)
to the Issuer.
C. Landlord or its agents shall have the right to draw upon the LOC for
the purpose of compensating Landlord for actual damages, suffered or incurred
(or to be suffered or incurred) by Landlord and which are caused by Tenant's
failure to perform, or delay in performance of, any of its obligations under the
Lease. Landlord may draw upon the LOC at such time, and from time to time, as
its actual damages have been reasonably determined by Landlord.
ADDITIONAL PARAGRAPH 34, BROKER'S FEES.
Landlord shall be responsible for payment of any reasonable broker's
fees incurred as a result of the execution of this Lease. Tenant represents that
its sole broker for the purpose of this paragraph 34 is CB Commercial Real
Estate Group, Inc., attn: Paul Sweeney, 110 - 110th Avenue N.E., Suite 100,
Bellevue, WA 98004.
<PAGE>
FIRST AMENDMENT TO LEASE
THIS FIRST AMENDMENT TO LEASE is made this 1st day of July 1998, by and between
Riggs & Company, a division of Riggs Bank NA., as Trustee of the Multi-Employer
Property Trust (the "Landlord") and Rosetta Inpharmatics, Inc., a Delaware
Corporation (the "Tenant").
WHEREAS, Landlord and Tenant entered into a Lease Agreement dated
February 19, 1997, for space in Building G, Suite 210 of the Kirkland 405
Business Center, (the "Premises"), as more filly described in the Lease; and
WHEREAS, Tenant desires to expand the Premises and modify the Lease.
NOW, THEREFORE, in consideration of the covenants and agreements
contained herein, the Landlord and Tenant hereby agree as follows:
1. The Lease is hereby amended to reflect that effective February 1,
1999, the Premises shall be increased by approximately 5,440 rentable square
feet to a total rentable area of approximately 24,119 rentable square feet as
outlined in red on Exhibit A attached hereto (herein referred to as the
"Expanded Premises").
2. The Lease Term for the Expanded Premises shall be a period of 41
months commencing February 1, 1999 and expiring July 1, 2002.
3. Landlord hereby acknowledges receipt of the sum of $2,400.00 as an
additional security deposit.
4. Effective February 1, 1999, monthly Base Rent as provided for in
Paragraph 2 of the Lease Shall be increased by $ 6,573.00 per month for months
1-21, and $6,800 per month for months 22-41, and the Rent schedule for the
Expanded Premises shall be as outlined below.
5. Total monthly Rent, including the Rent as described in Paragraph 2
of the Lease, plus the increase in Rent required for the Expansion Space shall
be:
<TABLE>
<CAPTION>
- ------------------------------------------------------------------------------------------------------------
DATE ORIGINAL PREMISES RENT EXPANSION SPACE RENT TOTAL BASE RENT
- ------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
2/1/99 -- 10/31/00 $26,479.00/Mo. $6,573.00/Mo. $33,052.00/Mo.
- ------------------------------------------------------------------------------------------------------------
11/1/00 -- 7/1/02 $26,479.00/Mo. $6,800.00/Mo. $33,279.00/Mo.
- ------------------------------------------------------------------------------------------------------------
</TABLE>
6. The Landlord agrees to provide a tenant improvement allowance equal
to $5.50 per rentable square foot, or $29,920.00 for improvements to the
Premise. Tenant shall reimburse Landlord for all costs associated with the
tenant improvements in excess of the allowance described herein except for space
planning services.
7. Tenant hereby affirms that on the date hereof no known breach or
known default
<PAGE>
by either party has occurred and that the Lease, and all of its terms,
conditions, covenants, agreements and provisions, except as hereby modified, are
in full force and effect.
8. Except as expressly modified above, all terms and conditions of the
Lease REMAIN in full force and effect and are hereby ratified and confirmed.
LANDLORD: TENANT:
Riggs & Company, a division of Rosetta Inpharmatics, Inc.
Riggs Bank NA., as Trustee of the a Delaware Corporation
Multi-Employer Property Trust
By: /s/ By: /s/
-------------------------------- ---------------------------------
Its: Managing Director Its: Sr. Vice President
--------------------------------
-2-
<PAGE>
STATE OF WASHINGTON )
)ss.
COUNTY OF KING )
On this 8th day of July, 1998, before me, the undersigned, a Notary
Public in and for the State of Washington, duly commissioned and sworn,
personally appeared John J. King, to me known to be the person who signed as Sr.
V.P. of Rosetta Inpharmatics, the corporation that executed the within and
foregoing instrument, and acknowledged said instrument to be the free and
voluntary act. and deed of said corporation for the uses and purposes therein
mentioned; and on oath stated that he was authorized to execute said instrument
on behalf of said corporation.
IN WITNESS WHEREOF I have hereunto set my hand and official seal the
day and year first as above written.
/s/
----------------------------------------
NOTARY PUBLIC,
residing at Seattle
-----------------------------
My appointment Expires 5/20/99
------------------
DISTRICT OF COLUMBIA________________)
)SS.
On this 24th day of November, 1998, before me, a Notary Public in and
for the District of Columbia, personally appeared Leanne Tobias, to me known to
be the Managing Director of Riggs & Company, a division of Riggs Bank N.A.,
formerly known as The Riggs Bank of Washington, D.C., Trustee of the
Multi-Employer Property Trust, the national banking association that executed
the within and foregoing instrument as______________ , and acknowledged said
instrument to be the free and voluntary act. and deed of said national banking
association as Trustee and______________, for the uses and purposes therein
mentioned, and on oath stated that she was authorized to execute said instrument
WITNESS my hand and official seal hereto affixed the day and year first
as above written.
Name: Denise Hart-Gamble /s/
---------------------------------------------
Notary Public in and for the District of Columbia,
Residing at Riggs Bank N.A.
---------------------------------------
My commission Expires March 31, 2003
-----------------------------
-5-
<PAGE>
SECOND AMENDMENT TO LEASE
THIS SECOND AMENDMENT TO LEASE is made this 1st day of May, 1999, by and between
Riggs & Company, a division of Riggs Bank NA., as Trustee of the Multi-Employer
Property Trust (the "Landlord") and Rosetta Inpharmatics, Inc., a Delaware
Corporation (the "Tenant").
WHEREAS, Landlord and Tenant entered into a Lease Agreement dated
February 19, 1997, and First Amendment to Lease dated July 1, 1998, for space in
Building G, Suite 210 of the Kirkland 405 Business Center, (the "Premises"), as
more fully described in the Lease; and
WHEREAS, Tenant desires to expand the Premises and modify the Lease.
NOW, THEREFORE, in consideration of the covenants and agreements
contained herein, the Landlord and Tenant hereby agree as follows:
1. The Lease is hereby amended to reflect that effective May 1, 1999,
the Premises shall be increased by approximately 1,407 rentable square feet to a
total rentable area of approximately 25,516 rentable square feet as outlined in
red on Exhibit A attached hereto (herein referred to as the "Expanded
Premises").
2. The Lease Term for the Expanded Premises shall be a period of 37
months commencing May 1, 1999 and expiring July 1, 2002.
3. Effective May 1, 1999, monthly Base Rent as provided for in
Paragraph 2 of the Lease and previously modified in First Amendment to Lease
dated July 1, 1998, shall be increased by $1,843.00 per month for months 1-11,
and $2,080.00 per month for months 12-37, and the Rent schedule for the Expanded
Premises shall be as outlined below.
4. Total monthly Rent, including the Rent as described in Paragraph 2
of the Lease, the revised Rent described in Paragraph 5 of the First Amendment,
plus the increase in Rent required for the Expansion Space shall be:
<TABLE>
<CAPTION>
- ----------------------------------------------------------------------------------------
DATE ORIGINAL BASE RENT EXPANSION SPACE RENT TOTAL BASE RENT
- ----------------------------------------------------------------------------------------
<S> <C> <C> <C>
5/1/99 -- 3/31/00 $33,052.00/Mo. $1,843.00/Mo. $34,895.00/Mo.
- ----------------------------------------------------------------------------------------
4/1/00 -- 7/1/02 $33,279.00/Mo. $2,080.00/Mo. $35,359.00/Mo.
- ----------------------------------------------------------------------------------------
</TABLE>
5. The Landlord agrees to provide a tenant improvement allowance equal
to Ten Thousand and 00/100 ($10,000).00) for improvements to the Premise. Tenant
shall reimburse Landlord for all costs associated with the tenant improvements
in excess of the allowance described herein.
6. Tenant hereby affirms that on the date hereof no known breach or
known default by either party has occurred and that the Lease, and all of its
terms, conditions, covenants, agreements and provisions, except as hereby
modified, are in full force and effect.
<PAGE>
7. Except as expressly modified above, all terms and conditions of the
Lease remain in full force and effect and are hereby ratified and confirmed.
8. ADDITIONAL PARAGRAPH 34; Deleted in its entirety from the Lease
Agreement dated February 19, 1997.
LANDLORD: TENANT:
Riggs & Company, a division of Rosetta Inpharmatics, Inc.
Riggs Bank NA., as Trustee of the a Delaware Corporation
Multi-Employer Property Trust
By: /s/ By: /s/ John J. King
--------------------------------- --------------------------------
Its: Managing Director Its: Sr. Vice President & C.O.O.
-2-
<PAGE>
THIRD AMENDMENT TO LEASE
THIS SECOND AMENDMENT TO LEASE is made this 6th day of December, 1999, by
and between Riggs & Company, a division of Riggs Bank NA., as Trustee of the
Multi-Employer Property Trust (the "Landlord") and Rosetta Inpharmatics, Inc., a
Delaware Corporation (the "Tenant").
WHEREAS, Landlord and Tenant entered into a Lease Agreement dated
February 19, 1997, First Amendment to Lease dated July 1, 1998, and Second
Amendment to Lease dated May 6, 1999, for space in Building G, Suite 210 of the
Kirkland 405 Business Center, (the "Premises"), as more fully described in the
Lease; and
WHEREAS, Tenant desires to expand the Premises and modify the Lease.
NOW, THEREFORE, in consideration of the covenants and agreements
contained herein, the Landlord and Tenant hereby agree as follows:
1. The Lease is hereby amended to reflect that effective January 1,
2000, the Premises shall be increased by approximately 3,257 rentable square
feet to a total rentable area of approximately 28,773 rentable square feet as
outlined in red on Exhibit A attached hereto (herein referred to as the
"Expanded Premises").
2. The Lease Term for the Expanded Premises shall be a period of 30
months commencing January 1, 2000 and expiring July 1, 2002.
3. Effective January 1, 2000, monthly Base Rent as provided for in
Paragraph 2 of the Lease and previously modified in First Amendment to Lease
dated July 1, 1998, and Second Amendment to Lease dated May 6, 1999, shall be
increased by $4,266.00 per month for months 1-3, and $4,821.00 per month for
months 4-30, and the Rent schedule for the Expanded Premises shall be as
outlined below.
4. Total monthly Rent, including the Rent as described in Paragraph 2
of the Lease, the revised Rent described in Paragraph 5 of the First Amendment,
the revised Rent described in paragraph 4 of the Second Amendment, plus the
increase in Rent required for the Expansion Space shall be:
<TABLE>
<CAPTION>
- ------------------------------------------------------------------------------------------------------------------------------
DATE ORIGINAL BASE RENT EXPANSION SPACE RENT TOTAL BASE RENT
- ------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
1/1/00 -- 3/31/00 $34,895.00/Mo. $4,266.00/Mo. $39,161.00/Mo.
- ------------------------------------------------------------------------------------------------------------------------------
4/1/00 -- 7/1/02 $35,359.00/Mo. $4,821.00/Mo. $40,180.00/Mo.
- ------------------------------------------------------------------------------------------------------------------------------
</TABLE>
5. The Landlord agrees to provide a tenant improvement allowance equal
to Thirty-two thousand five hundred seventy dollars and 00/100 ($32,570.00).00)
for improvements to the Premise. Tenant shall reimburse Landlord for all costs
associated with the tenant improvements in excess of the allowance described
herein.
<PAGE>
6. Tenant hereby affirms that on the date hereof no known breach or
known default by either party has occurred and that the Lease, and all of its
terms, conditions, covenants, agreements and provisions, except as hereby
modified, are in full force and effect.
7. Except as expressly modified above, all terms and conditions of the
Lease remain in full force and effect and are hereby ratified and confirmed.
LANDLORD: TENANT:
Riggs & Company, a division of Rosetta Inpharmatics, Inc.
Riggs Bank NA., as Trustee of the a Delaware Corporation
Multi-Employer Property Trust
By: /s/ Leanne Tobias By: /s/ John J. King
-------------------------------- -----------------------------
Its: Managing Director Its: Sr. Vice President
<PAGE>
STATE OF WASHINGTON )
)ss.
COUNTY OF KING )
On this 13th day of December, 1999, before me, the undersigned, a
Notary Public in and for the State of Washington, duly commissioned and sworn,
personally appeared John J. King, to me known to be the person who signed as of
Rosetta Inpharmatics, the Sr. V.P. & CO.O. that executed the within and
foregoing instrument, and acknowledged said instrument to be the free and
voluntary act. and deed of corporation for the uses and purposes therein
mentioned; and on oath stated that he was authorized to execute said instrument
on behalf of said corporation.
IN WITNESS WHEREOF I have hereunto set my hand and official seal the
day and year first as above written.
/s/ Regina R. Warmoth
--------------------------------------
Notary Public in and for the state of
washington
residing at Seattle
---------------------------
My appointment Expires 7/15/02
----------------
DISTRICT OF COLUMBIA________________)
)SS.
On this 22nd day of December, 1999, before me, a Notary Public in and
for the District of Columbia, personally appeared Leanne Tobias, to me known to
be the Managing Director of Riggs & Company, a division of Riggs Bank N.A.,
formerly known as The Riggs Bank of Washington, D.C., Trustee of the
Multi-Employer Property Trust, the national banking association that executed
the within and foregoing instrument as Managing Director, and acknowledged said
instrument to be the free and voluntary act. and deed of said national banking
association as Trustee and she, for the uses and purposes therein mentioned, and
on oath stated that she was authorized to execute said instrument
WITNESS my hand and official seal hereto affixed the day and year first
as above written.
Name: Denise Hart-Gamble /s/
-----------------------------------------------
Notary Public in and for the District of Columbia,
Residing at Riggs Bank N.A.
-----------------------------------------
My commission Expires March 31, 2003
-------------------------------
<PAGE>
EXHIBIT A
[Building G]
<PAGE>
ROSETTA INPHARMATICS
OPERATING LEASE COMMITMENT SCHEDULE
AS OF 12/31/99
<TABLE>
<CAPTION>
2000 2001 2002 2003 2004 Thereafter
------------ ------------- ------------ ------------ ------------- ----------
<S> <C> <C> <C> <C> <C> <C>
Multi-Employer Trust--12040 115th Ave NE, Blg. G 584,307 592,624 299,074 -- -- --
Siemens Medical Systems - 12004 115th Ave NE, Bldg. H 72,072 42,487 -- -- -- --
Acacia Lease - C&R Investments 9,452 -- -- -- -- --
Acacia Lease - C&R Overaa 9,000 -- -- -- -- --
Ikon Office - Ricoh Copier 3,363 1,121
Toshiba - Fax 744 496
Toshiba - (2) Copiers 5,229 --
Pitney Bowes - Mail machine 2,376 1,188
Totals 686,543 637,916 299,074 -- -- --
------------ ------------- ------------ ------------ ------------- ----------
------------ ------------- ------------ ------------ ------------- ----------
</TABLE>
MULTI-EMPLOYER SUPPORT
<TABLE>
<CAPTION>
Monthly Amounts
========================================================
Base Triple Net
Rent Expenses Total
------------------ ------------------ -----------------
<S> <C> <C> <C>
1/1/00 - 3/31/00 39,161 8,767 47,928
4/1/00 - 12/31/00 40,180 8,767 48,947
1/1/01 - 12/31/01 40,180 9,205 49,385
1/1/02 - 7/1/09 40,180 9,666 49,846
</TABLE>
Note - triple net expenses for 1001-2001 are based on 2000 rate, increased 5%
each year.
<PAGE>
Note - includes all amounts through amendment 3 (amendment 3 for the Omni space)
SIEMENS SUPPORT
<TABLE>
<CAPTION>
Monthly Amounts
========================================================
Base Triple Net
Rent Expenses Total
------------------ ------------------ -----------------
<S> <C> <C> <C>
1/1/00 - 12/31/00 4,736 1,270 6,006
1/1/01 - 7/31/01 4,736 1,334 6,070
</TABLE>
Note - triple net expenses for 2001 are based on 2000 rate, increased 5%.
IKON OFFICE SOLUTIONS-IKON CAPITAL
Ricoh 4527 Copier 48 month lease-04/97
.093 excess copies
<TABLE>
<CAPTION>
Monthly Amounts
=====================================
Base
Rent Total
------------------ ------------------
<S> <C> <C>
01/01/2000 - 12/31/2000 280.27 3363.24
01/01/01 - 7/31/2001 280.27 1121.08
</TABLE>
TOSHIBA EASY LEASE
Fax machine with memory and cassette
36 month lease 08/03/98
<TABLE>
<CAPTION>
Monthly Amounts
=====================================
Base
Rent Total
------------------ ------------------
<S> <C> <C>
01/01/2000 - 12/31/2000 62 744
01/01/01 - 07/31/2001 62 496
</TABLE>
<PAGE>
TOSHIBA EASY LEASE
Two (2) Copy machines lease with sorter
36 month lease 07/10/97
<TABLE>
<CAPTION>
Monthly Amounts
=====================================
Base
Rent Total
------------------ ------------------
<S> <C> <C>
01/01/2000 - 07/31/2000 747 5229
</TABLE>
PITNEY BOWES CREDIT CORP.
Mail machine and postage by phone
51 month lease 06/17/97
<TABLE>
<CAPTION>
Monthly Amounts
=====================================
Base
Rent Total
------------------ ------------------
<S> <C> <C>
01/01/2000 - 12/31/2000 198 2376
01/01/2001 - 06/30/2001 198 1188
</TABLE>
<PAGE>
CONSENT OF INDEPENDENT ACCOUNTANTS
We hereby consent to the use in this Registration Statement on Form S-1 of
our report dated February 18, 2000 relating to the financial statements of
Rosetta Inpharmatics, Inc., and our report dated March 19, 1999 relating to
the financial statements of Acacia Biosciences, Inc. which appear in such
Registration Statement. We also consent to the reference to us under the
headings "Expert" and "Selected Financial Data" in such Registration
Statement.
Seattle, Washington
March 16, 2000
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> DEC-31-1999
<PERIOD-START> JAN-01-1999
<PERIOD-END> DEC-31-1999
<CASH> 8,312
<SECURITIES> 10,951
<RECEIVABLES> 156
<ALLOWANCES> 0
<INVENTORY> 0
<CURRENT-ASSETS> 287
<PP&E> 5,471
<DEPRECIATION> 1,362
<TOTAL-ASSETS> 34,607
<CURRENT-LIABILITIES> 4,255
<BONDS> 1,389
0
10
<COMMON> 5
<OTHER-SE> 25,640
<TOTAL-LIABILITY-AND-EQUITY> 34,607
<SALES> 0
<TOTAL-REVENUES> 983
<CGS> 0
<TOTAL-COSTS> 21,066
<OTHER-EXPENSES> 82
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 293
<INCOME-PRETAX> (19,820)
<INCOME-TAX> 0
<INCOME-CONTINUING> (19,820)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (19,820)
<EPS-BASIC> (4.92)
<EPS-DILUTED> (4.92)
</TABLE>
