<PAGE> 1
AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON MARCH 10, 2000
REGISTRATION NO. 333-
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
------------------------
FORM S-1
REGISTRATION STATEMENT
UNDER
THE SECURITIES ACT OF 1933
------------------------
STRATAGENE HOLDING CORPORATION
(EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)
<TABLE>
<S> <C> <C>
DELAWARE 2836 33-0683641
(STATE OR OTHER JURISDICTION OF (PRIMARY STANDARD INDUSTRIAL (I.R.S. EMPLOYER
INCORPORATION OR ORGANIZATION) CLASSIFICATION CODE NUMBER) IDENTIFICATION NUMBER)
</TABLE>
11011 NORTH TORREY PINES ROAD
LA JOLLA, CA 92037
(858) 535-5400
(ADDRESS, INCLUDING ZIP CODE, AND TELEPHONE NUMBER, INCLUDING
AREA CODE, OF REGISTRANT'S PRINCIPAL EXECUTIVE OFFICES)
------------------------
JOSEPH A. SORGE, M.D.
CHAIRMAN AND CHIEF EXECUTIVE OFFICER
STRATAGENE HOLDING CORPORATION
11011 NORTH TORREY PINES ROAD
LA JOLLA, CA 92037
(858) 535-5400
(NAME, ADDRESS, INCLUDING ZIP CODE, AND TELEPHONE NUMBER,
INCLUDING AREA CODE, OF AGENT FOR SERVICE)
------------------------
COPIES TO:
<TABLE>
<S> <C>
THOMAS A. EDWARDS, ESQ. PETER J. LOUGHRAN, ESQ.
HOWARD L. ARMSTRONG, ESQ. DEBEVOISE & PLIMPTON
LATHAM & WATKINS 875 THIRD AVENUE
701 "B" STREET, SUITE 2100 NEW YORK, NEW YORK 10022
SAN DIEGO, CALIFORNIA 92101 (212) 909-6000
(619) 236-1234
</TABLE>
------------------------
APPROXIMATE DATE OF COMMENCEMENT OF PROPOSED SALE TO THE PUBLIC: As soon
as practicable after this Registration Statement becomes effective.
If any of the securities being registered on this Form are to be offered on
a delayed or continuous basis pursuant to Rule 415 under the Securities Act of
1933, check the following box. [ ]
If this form is filed to register additional securities for an offering
pursuant to Rule 462(b) under the Securities Act, 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 to 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,
check the following box. [ ]
------------------------
CALCULATION OF REGISTRATION FEE
<TABLE>
<CAPTION>
- --------------------------------------------------------------------------------------------------------------
- --------------------------------------------------------------------------------------------------------------
PROPOSED
TITLE OF EACH CLASS OF MAXIMUM AGGREGATE AMOUNT OF
SECURITIES TO BE REGISTERED OFFERING PRICE(1) REGISTRATION FEE
- --------------------------------------------------------------------------------------------------------------
<S> <C> <C>
Common Stock, $0.0001 par value.......................... $150,000,000 $39,600
- --------------------------------------------------------------------------------------------------------------
- --------------------------------------------------------------------------------------------------------------
</TABLE>
(1) Estimated solely for purposes of determining the registration fee pursuant
to Rule 457(o) under the Securities Act of 1933. Includes shares of common
stock issuable upon exercise of the underwriters' over-allotment options.
------------------------
THE REGISTRANT HEREBY AMENDS THIS REGISTRATION STATEMENT ON SUCH DATE OR
DATES AS MAY BE NECESSARY TO DELAY ITS EFFECTIVE DATE UNTIL THE REGISTRANT SHALL
FILE A FURTHER AMENDMENT WHICH SPECIFICALLY STATES THAT THIS REGISTRATION
STATEMENT SHALL THEREAFTER BECOME EFFECTIVE IN ACCORDANCE WITH SECTION 8(a) OF
THE SECURITIES ACT OF 1933 OR UNTIL THE REGISTRATION STATEMENT SHALL BECOME
EFFECTIVE ON SUCH DATE AS THE COMMISSION, ACTING PURSUANT TO SAID SECTION 8(a),
MAY DETERMINE.
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
<PAGE> 2
EXPLANATORY NOTE
This Registration Statement contains two forms of prospectus: one to be
used in connection with a U.S. and Canadian offering of the registrant's common
stock and one to be used in a concurrent international offering of the common
stock. The international prospectus will be identical to the U.S. prospectus
except that it will have a different front cover page, underwriting section and
back cover page. The U.S. prospectus is included herein and is followed by the
alternate front cover page, underwriting section and back cover page to be used
in the international prospectus, which each have been labeled "Alternative Page
for International Prospectus."
<PAGE> 3
THE INFORMATION IN THIS PROSPECTUS IS NOT COMPLETE AND MAY BE CHANGED.
WE MAY NOT SELL THESE SECURITIES UNTIL THE REGISTRATION STATEMENT FILED
WITH THE SECURITIES AND EXCHANGE COMMISSION IS EFFECTIVE. THIS
PROSPECTUS IS NOT AN OFFER TO SELL THESE SECURITIES AND IT IS NOT
SOLICITING AN OFFER TO BUY THESE SECURITIES IN ANY STATE WHERE THE OFFER
OR SALE IS NOT PERMITTED.
SUBJECT TO COMPLETION
PRELIMINARY PROSPECTUS DATED MARCH 10, 2000
PROSPECTUS
- ----------------
SHARES
[STRATAGENE HOLDING LOGO]
COMMON STOCK
----------------------
This is Stratagene Holding Corporation's initial public offering of common
stock. Stratagene is selling shares and Stratagene stockholders are
selling shares. The U.S. underwriters are offering
shares in the U.S. and Canada and the international managers are offering
shares outside of the U.S. and Canada.
We expect the public offering price to be between $ and $ per
share. Currently, no public market exists for the shares. After pricing of the
offering, we expect that the shares will be quoted on the Nasdaq National Market
under the symbol "STGN."
INVESTING IN THE COMMON STOCK INVOLVES RISKS THAT ARE DESCRIBED IN THE
"RISK FACTORS" SECTION BEGINNING ON PAGE 7 OF THIS PROSPECTUS.
----------------------
<TABLE>
<CAPTION>
PER SHARE TOTAL
--------- -----
<S> <C> <C>
Public offering price....................................... $ $
Underwriting discount....................................... $ $
Proceeds, before expenses, to Stratagene.................... $ $
Proceeds, before expenses, to the selling stockholders...... $ $
</TABLE>
The U.S. underwriters may also purchase up to an additional
shares from Stratagene, and up to an additional shares from the
selling stockholders, at the public offering price, less the underwriting
discount, within 30 days from the date of this prospectus to cover
over-allotments. The international managers may similarly purchase up to an
additional shares from Stratagene and up to an additional
shares from the selling stockholders.
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.
The shares will be ready for delivery on or about , 2000.
----------------------
MERRILL LYNCH & CO.
SALOMON SMITH BARNEY
DAIN RAUSCHER WESSELS
PRUDENTIAL VECTOR HEALTHCARE
A UNIT OF PRUDENTIAL SECURITIES
----------------------
The date of this prospectus is , 2000.
<PAGE> 4
INSIDE FRONT COVER: STRATEGENE LOGO AND STATEMENT: SERVING THE MOLECULAR BIOLOGY
RESEARCH MARKET SINCE 1984. ARTWORK SHOWING THE THREE AREAS OF THE MARKETS THAT
WE SERVE: GENETIC TECHNOLOGIES, NUCLEIC ACID PURIFICATION AND ANALYSIS, AND
GENOMICS AND BIOINFORMATICS.
INSIDE BACK COVER: TIMELINE SHOWING NEW PRODUCT INTRODUCTIONS AND PLANNED
INTRODUCTIONS.
<PAGE> 5
TABLE OF CONTENTS
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
Prospectus Summary.......................................... 1
Risk Factors................................................ 7
Note Regarding Forward-Looking Statements................... 15
Use of Proceeds............................................. 16
Dividend Policy............................................. 16
Capitalization.............................................. 17
Dilution.................................................... 18
Selected Combined Financial Data............................ 19
Management's Discussion and Analysis of Financial Condition
and Results of Operations................................. 22
Business.................................................... 28
Management.................................................. 48
Certain Transactions........................................ 54
Principal and Selling Stockholders.......................... 57
Description of Capital Stock................................ 59
Shares Eligible for Future Sale............................. 62
United States Federal Tax Considerations for Non-U.S.
Holders................................................... 64
Underwriting................................................ 66
Legal Matters............................................... 69
Experts..................................................... 69
Where You Can Find More Information......................... 69
Index to Financial Statements............................... F-1
</TABLE>
------------------------
You should rely only on the information contained in this prospectus. We
have not, and the underwriters have not, authorized any other person to provide
you with different information. If anyone provides you with different or
inconsistent information, you should not rely on it. We are not, and the
underwriters are not, making an offer to sell these securities in any
jurisdiction where the offer or sale is not permitted. You should assume that
the information appearing in this prospectus is accurate only as of the date on
the front cover of this prospectus. Our business, financial condition, results
of operations and prospects may have changed since that date.
CytoTrap, Gigapack, HybriZap, Lambda Zap, PathDetect, Pfu Turbo, StrataPrep
and StrataScript are trademarks of Stratagene registered with the U.S. Patent
and Trademark Office. GeneJammer, Gene Connection, Herculase and Sentinel are
trademarks of Stratagene for which registration applications have been filed
with the U.S. Patent and Trademark Office. All other trademarks or trade names
referred to in this prospectus are the property of their respective owners.
Unless the context otherwise requires, all references to "Stratagene,"
"we," "us" and "our" refer to Stratagene Holding Corporation and its
subsidiaries, giving effect to the merger of BioCrest Holdings, LLC, a company
under common management and control with Stratagene Holding Corporation, with
and into a wholly-owned subsidiary of Stratagene Holding Corporation upon the
closing of the offering.
i
<PAGE> 6
PROSPECTUS SUMMARY
This summary highlights selected information contained elsewhere in this
prospectus. To understand this offering fully, you should read the entire
prospectus carefully, including the risk factors and the financial statements
and related notes, before you decide whether to invest in our common stock.
STRATAGENE
Stratagene develops and manufactures biological products and instruments
designed to improve the speed and accuracy of molecular biology and genomics
research. We market our products to researchers at academic and government
institutions and pharmaceutical, biotechnology and industrial companies, in the
U.S. and internationally. These researchers use our products to identify genes,
study how cells are regulated by genes, determine the molecular mechanisms of
health and disease, search for new drug therapies and test the safety of
compounds used in food and pharmaceuticals. Our 1999 revenues were approximately
$51 million.
We have been serving the molecular biology research market since 1984 and
are a leader in the area of genetic technologies described below. We have a
reputation for developing and manufacturing quality products and providing
superior service to researchers. Our growth has been built primarily on
innovative product development by our internal research and development
organization. Our customers include almost all of the top academic,
pharmaceutical and biotechnology research laboratories, such as the National
Institutes of Health, Merck and Genentech.
Our products incorporate a diverse range of molecular biology technologies,
such as gene transfer, gene expression, gene cloning, gene libraries, functional
genomics, nucleic acid purification and analysis, microarrays, DNA replication
and DNA sequencing. We provide a summary description of these and other
technologies in the "Business -- Scientific Overview" section of this
prospectus. We offer a broad portfolio of products in each of the following
three market categories:
- Genetic Technologies: Our genetic technologies products help researchers
isolate and analyze genes and the proteins that they produce. These
products include reagents, kits, cells and cell-derived products, and
gene sequences.
- Nucleic Acid Purification and Analysis: Our nucleic acid purification
and analysis products help researchers purify and analyze DNA and RNA
from a variety of human and non-human sources.
- Genomics and Bioinformatics: Our products in this category include
proprietary and non-proprietary gene sequences, spotted as miniaturized
arrays on glass slides. This permits faster and more complex analysis of
the control of gene expression as required by high throughput screening
efforts. We have integrated unique Stratagene software tools, including
web-based gene analysis, with our microarrays and gene clones to permit
researchers to correlate information about the functions of genes.
Overall sales of molecular biology and genomics research products, which
include products in these three market categories, totaled approximately $2.5
billion in 1999. The established genetic technologies market is estimated to be
growing at almost 10% per year, with the nucleic acid purification and analysis
market and the genomics and bioinformatics market, though relatively smaller in
size, growing at almost 15% and approximately 25% to 50% per year, respectively.
We believe that the overall market for molecular biology and genomics research
products will continue to expand due to several factors, including:
- intensifying competition to discover new drugs;
- large amounts of new information generated by genome sequencing projects;
- increasing levels of government spending for life sciences research; and
- proliferation of new research initiatives made possible by rapidly
changing molecular biology and genomics research techniques.
1
<PAGE> 7
We believe that our competitive strengths position us to compete
effectively within the molecular biology and genomics research products market.
These strengths include innovative product research and development, a diverse
intellectual property portfolio, a dedication to quality and customer service,
effective sales and marketing, and an experienced management team.
Our strategy is to continue to develop leadership positions in existing and
emerging categories of the molecular biology and genomics research products
market by developing and marketing novel, innovative products that deliver
superior value to our customers. In executing our strategy, we will continue to
focus on our expertise in genetic technologies, such as chemical manipulation of
genes, while aggressively seeking to build on our expertise in nucleic acid
purification and analysis and genomics and bioinformatics. As part of our
strategy, we are also increasing our investments in research and development,
expanding our sales and marketing capabilities and introducing new products in
existing and newer target markets.
Our increased investments in research and development have been primarily
focused on the development of nucleic acid purification and analysis and
genomics and bioinformatics products. This has already resulted in a significant
increase in new product introductions over the last several months. Recent
product introductions include:
- Genetic Technologies: New product lines covering five technologies used
in the manipulation of genes.
- Nucleic Acid Purification and Analysis: Eleven new products that are
designed to improve the amplification, quantification and purification of
nucleic acids.
- Genomics and Bioinformatics: New microarrays and gene clones, including
over 10,000 gene sequences, which our customers can search and purchase
through our GeneConnection web site.
Our principal offices are located at 11011 North Torrey Pines Road, La
Jolla, California 92037. Our telephone number is (858) 535-5400. Our web site
address is www.stratagene.com. The information contained on our web site is not
part of this prospectus.
2
<PAGE> 8
THE OFFERING
Common stock offered:
By Stratagene
U.S. offering............ shares
International offering... shares
-------------------------------------------------------
Total.................. shares
By the selling stockholders
U.S. offering............ shares
International offering... shares
-------------------------------------------------------
Total.................. shares
Shares outstanding after the
offering...................... shares
Use of proceeds............... We estimate that our net proceeds from this
offering without exercise of the underwriters'
over-allotment options will be approximately
million. We intend to use these
net proceeds for:
- research and development;
- expansion of our sales and marketing
organization;
- repayment of debt;
- payments in connection with the termination
of phantom stock rights;
- the acquisition of BioCrest Holdings, LLC;
and
- general working capital and other corporate
purposes.
We will not receive any proceeds from the sale
of shares by the selling stockholders.
Risk factors.................. See "Risk Factors" and other information
included in this prospectus for a discussion of
factors you should carefully consider before
deciding to invest in shares of our common
stock.
Proposed Nasdaq National
Market symbol................. STGN
The number of shares that will be outstanding after the offering is based
on the number of shares outstanding as of March 9, 2000 and excludes
(1)1,468,000 shares of common stock issuable upon exercise of options
outstanding at March 9, 2000 and (2) 462,648 shares of common stock issuable
upon exercise of options to be issued contingent upon the closing of the
offering in connection with the termination of phantom stock rights and phantom
stock option rights under our phantom stock plan.
3
<PAGE> 9
Unless stated otherwise, all financial information and share and per share
data in this prospectus:
- gives effect to the merger of BioCrest Holdings, LLC with and into
Stratagene Holding Corporation which will occur upon the closing of this
offering;
- gives effect to the conversion as of January 1, 1999 of convertible
subordinated notes due December 1, 2002 into 9,600,000 shares of common
stock to be issued upon the closing of the offering;
- gives effect to the conversion of our class B common stock into class A
common stock and the reclassification of our class A common stock into
common stock contingent upon the closing of the offering;
- does not include shares reserved for issuance under our stock option
plan;
- assumes that the underwriters do not exercise their over-allotment
options; and
- reflects a 4 for 1 stock split which occurred in March 2000.
4
<PAGE> 10
SUMMARY COMBINED FINANCIAL DATA
(IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA)
You should read this summary financial data together with our financial
statements and related notes and "Management's Discussion and Analysis of
Financial Condition and Results of Operations" included elsewhere in this
prospectus.
The financial statements of Stratagene Holding Corporation and BioCrest
Holdings, LLC are presented on a combined basis because the companies are under
common management and control. BioCrest Holdings will be merged with and into
Stratagene Holding Corporation upon the closing of the offering.
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31
-------------------------------------------------------------------
1995 1996 1997 1998 1999
----------- ----------- ----------- ----------- -----------
<S> <C> <C> <C> <C> <C>
COMBINED STATEMENT OF
OPERATIONS DATA:
Total revenue......................... $ 39,933 $ 44,326 $ 49,387 $ 53,179 $ 51,318
Costs and expenses:
Cost of products sold (excludes $906
included in stock compensation
charges in 1999).................. 11,927 12,976 14,549 15,017 14,767
Contracts and government grants and
research.......................... 634 277 573 463 465
Proprietary research and development
(excludes $3,097 included in stock
compensation charges in 1999)..... 4,415 4,578 4,406 7,756 11,378
Selling and marketing (excludes $724
included in stock compensation
charges in 1999).................. 8,928 10,108 11,772 14,003 12,961
General and administrative (excludes
$808 included in stock
compensation charges in 1999)..... 5,241 5,432 5,662 7,514 8,434
Stock compensation charges(1)....... -- -- -- -- 5,535
Restructuring costs(2).............. -- -- 325 270 425
----------- ----------- ----------- ----------- -----------
Total costs and expenses..... $ 31,145 $ 33,371 $ 37,287 $ 45,023 $ 53,965
----------- ----------- ----------- ----------- -----------
Earnings (loss) from
operations................. $ 8,788 $ 10,955 $ 12,100 $ 8,156 $ (2,647)
----------- ----------- ----------- ----------- -----------
Total other expense, net..... (3,348) (1,888) (3,688) (3,063) (1,622)
----------- ----------- ----------- ----------- -----------
Earnings (loss) before income
taxes...................... $ 5,440 $ 9,067 $ 8,412 $ 5,093 $ (4,269)
----------- ----------- ----------- ----------- -----------
Income tax (expense)
benefit.................... (2,308) (3,279) (3,733) (2,368) 1,794
----------- ----------- ----------- ----------- -----------
Net earnings (loss)................... $ 3,132 $ 5,788 $ 4,679 $ 2,725 $ (2,475)
=========== =========== =========== =========== ===========
Net earnings (loss) per share:
Basic............................... $ 0.10 $ 0.19 $ 0.15 $ 0.09 $ (0.08)
=========== =========== =========== =========== ===========
Diluted............................. $ 0.10 $ 0.17 $ 0.14 $ 0.09 $ (0.08)
=========== =========== =========== =========== ===========
Weighted average shares:
Basic............................... 30,400,000 30,520,000 30,610,000 30,765,000 31,067,416
=========== =========== =========== =========== ===========
Diluted............................. 30,400,000 40,703,253 40,786,853 31,641,033 31,067,416
=========== =========== =========== =========== ===========
OTHER DATA:
Adjusted earnings from
operations(3)..................... $ 5,004 $ 2,995 $ 3,485
=========== =========== ===========
</TABLE>
5
<PAGE> 11
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31
-----------------------------------------
1997 1998 1999
----------- ----------- -----------
<S> <C> <C> <C>
PRO FORMA INFORMATION (UNAUDITED)(4):
Pro forma net earnings (loss)............................... $ 4,890 $ 2,925 $ (1,924)
=========== =========== ===========
Pro forma net earnings (loss) per share:
Basic..................................................... $ 0.16 $ 0.10 $ (.05)
=========== =========== ===========
Diluted................................................... $ 0.12 $ 0.09 $ (.05)
=========== =========== ===========
Pro forma weighted average shares:
Basic..................................................... 30,610,000 30,765,000 40,667,416
=========== =========== ===========
Diluted................................................... 40,786,853 31,641,033 40,667,416
=========== =========== ===========
</TABLE>
<TABLE>
<CAPTION>
AS OF DECEMBER 31, 1999
-----------------------------------
PRO FORMA
ACTUAL PRO FORMA AS ADJUSTED
------- --------- -----------
<S> <C> <C> <C>
COMBINED BALANCE SHEET DATA(5):
Cash and cash equivalents................................... $ 3,101 $ 3,101
Working capital............................................. 7,811 7,811
Total assets................................................ 36,476 36,476
Total debt.................................................. 36,559 18,682
Total stockholders' equity (deficit)........................ (7,102) 10,775
</TABLE>
- ---------------
(1) We recognized these stock compensation charges in connection with phantom
stock rights and phantom stock option rights due to the substantial increase
in our valuation in connection with this offering.
(2) Restructuring costs in 1997 are primarily related to consolidation of
European distribution activities. Restructuring costs for 1998 and 1999 are
primarily related to severance payments to former employees in connection
with the relocation of facilities to Texas and related organizational
changes. See Note 15 to our combined financial statements.
(3) Adjusted earnings from operations is defined as earnings from operations
adjusted for the exclusion of stock compensation charges and restructuring
costs from operating expenses. We present adjusted earnings from operations,
which is a non-GAAP measure, to enhance the understanding of our operating
results. We believe adjusted earnings from operations is an indicator of our
operating profitability since it excludes certain items which are not
directly attributable to our ongoing business operations. However, adjusted
earnings from operations relies upon management's judgement to determine
which items are directly attributable to our ongoing business operations and
is subjective in nature. Adjusted earnings from operations should not be
construed as an alternative to net income as an indicator of our operating
performance or as an alternative to cash flow from operations as a measure
of our liquidity.
(4) Pro forma net earnings (loss) gives effect to: (1) the conversion of our
convertible subordinated notes as of January 1, 1999 into shares of our
common stock which will occur upon the closing of the offering and the
after-tax interest expense reduction of $1.0 million; and (2) adjustments
for federal income taxes which we would have recorded if BioCrest Holdings
and its subsidiaries had been taxed as a "C" corporation in 1997, 1998 and
1999. Pro forma weighted average shares for the year ended December 31, 1999
gives effect to the issuance contingent upon the closing of the offering of
9,600,000 shares of our common stock upon the conversion of our convertible
subordinated notes. See Notes 5 and 16 to our combined financial statements.
(5) Pro forma balance sheet data give effect to the conversion of our
convertible subordinated notes into shares of our common stock upon the
closing of the offering. Pro forma as adjusted balance sheet data give
effect to the sale by us of shares of common stock in the offering and the
application of the net proceeds of the offering.
6
<PAGE> 12
RISK FACTORS
An investment in our common stock involves a high degree of risk. You
should carefully consider the following risks, as well as the other information
contained in this prospectus, before you decide to invest in our common stock.
If any of the following risks actually occur, our business could be harmed. In
that case, the trading price of our common stock could decline, and you might
lose all or part of your investment.
OUR FUTURE SUCCESS DEPENDS ON THE TIMELY INTRODUCTION OF NEW PRODUCTS AND THE
ACCEPTANCE OF THESE NEW PRODUCTS IN THE MARKETPLACE
Rapid technological change and frequent new product introductions are
typical for the markets we serve. Our future success will depend in large part
on continuous, timely development and introduction of new products that address
evolving market requirements.
We believe successful new product introductions provide a significant
competitive advantage because customers make an investment of time in selecting
and learning to use a new product, and are reluctant to switch thereafter. To
the extent that we fail to introduce new and innovative products, we may lose
market share to our competitors, which may be difficult to regain. Any
inability, for technological or other reasons, to successfully develop and
introduce new products could materially damage our business.
In the past we have experienced, and are likely to experience in the
future, delays in the development and introduction of products. We cannot assure
you that we will keep pace with the rapid rate of change in molecular biology
and genomics research, or that our new products will adequately meet the
requirements of the marketplace or achieve market acceptance. Some of the
factors affecting market acceptance of new products include:
- availability, quality and price relative to competitive products;
- the timing of introduction of the product relative to competitive
products;
- customers' opinions of the product's utility;
- citation of the product in published research; and
- general trends in molecular biology and genomics research.
The development, introduction and marketing of innovative and new products
in our rapidly evolving markets will require significant sustained investment.
We cannot assure you that cash from operations or other sources will be
sufficient to meet these ongoing requirements.
THE MARKETS FOR OUR PRODUCTS ARE EXTREMELY COMPETITIVE AND SUBJECT TO RAPID
TECHNOLOGICAL CHANGE AND IF WE FAIL TO COMPETE EFFECTIVELY, OUR BUSINESS MAY
SUFFER
The markets for our products are highly competitive. We compete with many
other suppliers of molecular biology and genomics research products. Many of our
competitors have greater financial, operational, and sales and marketing
resources and more experience in research and development than we do. These and
other companies may have developed or could in the future develop new
technologies that compete with our products or even render our products
obsolete. Competition in our markets is primarily driven by:
- product performance, features and reliability;
- price;
- timing of product introductions;
- ability to develop, maintain and protect proprietary products and
technologies;
- sales and distribution capabilities;
7
<PAGE> 13
- technical support and service; and
- breadth of product line.
If a competitor develops superior technology or cost-effective alternatives
to our products, our business, financial condition and results of operations
could be materially adversely affected.
Our competitors have in the past and may in the future compete by lowering
prices. We may respond by lowering our prices, which could reduce revenues and
profits. Conversely, failure to anticipate and respond to price competition may
damage our market share. In addition, we must continually adapt to new marketing
and distribution trends, such as the Internet, in order to compete effectively.
We believe that customers in our markets display a significant amount of
loyalty to their initial supplier of a particular product. Therefore, it may be
difficult to generate sales to customers who have purchased products from
competitors. To the extent we are unable to be the first to develop and supply
new products, our competitive position may suffer.
WE DEPEND SUBSTANTIALLY ON KEY EMPLOYEES, AND THE LOSS OF THE SERVICES OF ANY OF
OUR KEY EMPLOYEES OR THE FAILURE TO HIRE QUALIFIED EMPLOYEES COULD SERIOUSLY
DAMAGE OUR BUSINESS
To a large degree, we are dependent on our founder, chairman of our board
of directors and chief executive officer, Joseph A. Sorge, M.D. Dr. Sorge has
significant expertise in the molecular biology and genomics research market and
has been instrumental in establishing and executing our business plan. The loss
of Dr. Sorge's services would have a material adverse effect on our business. In
addition, because our products and services are highly technical in nature, only
highly qualified and trained scientists have the necessary skills to develop and
market our products and provide our services. As such, our future success also
will depend in large part on the continued service of our key scientific and
management personnel, including research and development, customer service,
marketing and sales staffs. We face intense competition for these professionals
from our competitors, our customers and other companies throughout our industry.
We do not generally enter into employment agreements requiring these employees
to continue in our employment for any period of time. Any failure on our part to
hire, train and retain a sufficient number of qualified professionals could
seriously damage our business.
WE MAY SPEND RESOURCES ON RESEARCH AND DEVELOPMENT PROJECTS WITHOUT BEING ABLE
TO ACHIEVE AN ADEQUATE RETURN, IF ANY, ON OUR INVESTMENT
It is important for us to continue to invest heavily in research and
development. However, because we compete in a relatively new and constantly
evolving market, we may pursue research and development projects that do not
result in viable commercial products. In addition, we have in the past, and may
in the future, terminate research efforts in a particular area after we have
made substantial initial funding commitments in that area. For example, we
terminated our single nucleotide polymorphism project in 1999 after we
determined that we could not compete successfully with larger competitors who
were investing heavily in this area. We spent approximately $2.1 million and
$1.2 million in 1999 and 1998, respectively, on this project. Any failure to
translate research and development expenditures into successful new product
introductions could have an adverse effect on our business.
IF WE FAIL TO MANAGE OUR GROWTH EFFECTIVELY, OUR BUSINESS COULD SUFFER
We have sought and will continue to seek growth in sales and profitability
primarily through the internal development of new products. A significant
portion of our historical revenue growth is attributable to internal product
development. Our ability to achieve our expansion objectives and to manage our
growth effectively depends upon a variety of factors, including our ability to
internally develop products, to attract and retain skilled employees, to
successfully position and market our products and to identify and license
technologies and intellectual property rights from third parties. If we are
unable to manage growth effectively, there could be a material adverse effect on
our business, financial condition and results of operations. For example,
problems associated with the relocation of our manufacturing facilities to the
8
<PAGE> 14
Austin, Texas area and related organizational changes resulted in charges to
earnings in 1999 and 1998, as well as delays in customer shipments and reduced
sales in 1999.
REDUCTIONS IN RESEARCH AND DEVELOPMENT BUDGETS OR GOVERNMENT FUNDING MAY IMPACT
OUR SALES
Fluctuations in the research and development budgets of our customers could
have a significant effect on the demand for our products. Research and
development budgets fluctuate due to changes in available resources, spending
priorities and institutional budgetary policies. Our business could be seriously
damaged by any significant decrease in research and development expenditures by
pharmaceutical and biotechnology companies, academic institutions or government
and private laboratories.
A substantial portion of our sales have been to researchers at
universities, government laboratories and private foundations whose funding is
dependent upon grants from government agencies, such as the U.S. National
Institutes of Health. Although the level of research funding has increased
during the past several years, we cannot assure you that this trend will
continue. Government funding of research and development is subject to the
political process. Our sales may be adversely affected if our customers delay
purchases as a result of uncertainties surrounding the approval of government
budget proposals. A reduction in government funding for the National Institutes
of Health or other government research agencies could seriously damage our
business.
In recent years, the U.S. pharmaceutical and biotechnology industries have
undergone substantial consolidation. Further mergers or corporate consolidations
in these industries could cause us to lose existing customers and potential
future customers, which could have a material adverse effect on our business,
financial condition and results of operations. In addition, health care reform
and other changes in the regulatory environment affecting these industries could
have an adverse impact on research and development expenditures by
pharmaceutical and biotechnology companies, which would negatively impact our
business.
Our academic customers generally receive funds from approved grants at
particular times of the year, as determined by the government. Grants have in
the past been frozen for extended periods or have otherwise become unavailable
to various institutions without advance notice. The timing of the receipt of
grant funds affects the timing of purchase decisions by our customers and, as a
result, can cause fluctuations in our sales and operating results.
FAILURE TO LICENSE NEW TECHNOLOGIES COULD IMPAIR OUR NEW PRODUCT DEVELOPMENT
In order to meet the needs of our customers, we must develop a broad
spectrum of products. To build a product line, it is sometimes advantageous or
necessary to license technologies from third parties. As a result, we believe
our ability to license new technologies from third parties is and will continue
to be important to our ability to offer new products. Over 25% of our 1999
revenues were attributable to products manufactured or sold under licenses from
third parties. Moreover, we expect that, as more and better capitalized
companies enter the molecular biology and genomics research market, licensing
new technologies will become more expensive.
A number of research and commercial entities, including Incyte
Pharmaceuticals, Celera Genomics and Human Genome Sciences, have recently
accelerated their efforts to discover and patent genetic sequences that may be
of current or future importance to a number of our products. If these efforts
result in the issuance of sustainable patents, our access to gene sequences may
be limited or we may be required to pay royalties for the use of these gene
sequences. If we are unable to gain access to sufficient gene sequences or if
the cost of gaining access to these gene sequences becomes prohibitive, our
business, financial condition and results of operations could suffer.
From time to time, we are notified or become aware of patents held by third
parties which are related to technologies we are selling or may sell in the
future. After a review of these patents, we may decide to obtain a license for
these technologies from these third parties. We can give you no assurance that
we will be able to negotiate licenses on commercially reasonable terms, or at
all.
9
<PAGE> 15
Our ability to gain access to technologies needed for new products and
services depends in part on our ability to convince inventors that we can
successfully commercialize their inventions. We cannot assure you that we will
be able to continue to identify new technologies developed by others. Even if we
are able to identify new technologies of interest, we may not be able to
negotiate licenses on commercially reasonable terms, or at all.
LOSS OF LICENSES COULD ADVERSELY AFFECT OUR BUSINESS
We cannot assure you that we will be able to renew our existing licenses on
commercially reasonable terms, or at all. If we lose the rights to a patented
technology, we may need to stop selling certain of our products or redesign our
products. As a result, we could lose a competitive advantage. Potential
competitors could license technologies that we fail to license. A loss of a
significant license could have a material adverse effect on our business.
Our licenses typically subject us to various commercialization,
sublicensing and other obligations. If we fail to comply with these
requirements, we could lose important rights under a license, such as the right
to exclusivity in a specified market. In some cases, we could also lose all
rights under a license. In addition, the licensor could lose patent protection
for a number of reasons, including invalidity of the licensed patent. We
typically do not receive significant indemnification from a licensor against
third party claims of intellectual property infringement.
INABILITY TO SECURE AND MAINTAIN INTELLECTUAL PROPERTY PROTECTION FOR OUR
PRODUCTS AND TECHNOLOGIES COULD ADVERSELY AFFECT OUR ABILITY TO COMPETE
Our success depends to a significant degree upon our ability to develop,
maintain and protect proprietary products and technologies. We file patent
applications in the U.S. and selectively in foreign countries as part of our
strategy to protect our proprietary products and technologies. However, patents
provide only limited protection of our intellectual property. The assertion of
patent protection involves complex legal and factual determinations and is
therefore uncertain and expensive. We cannot assure you that patents will be
granted with respect to any of our patent applications, that the scope of any of
our issued patents will be sufficiently broad to offer meaningful protection or
that we will develop additional proprietary technologies that are patentable.
Our issued patents or patents licensed to us could be successfully challenged,
invalidated or circumvented so that our patent rights would not create an
effective competitive barrier. The loss of a significant patent or the failure
of a patent to issue from a pending patent application that we consider
significant could have a material adverse effect on our business.
The laws governing the scope of patent coverage in the U.S. and abroad
continue to evolve, particularly in the areas of molecular biology and genomics.
The laws of some foreign countries may not protect our intellectual property
rights to the same extent as U.S. laws. We hold patents only in selected
countries. Therefore, third parties can make, use and sell products covered by
our patents in any country in which we do not have patent protection.
We give our customers the right to use some of our products under label
licenses that are for research purposes only. These licenses could be contested
and no assurances can be given that we would either be aware of an unauthorized
use or be able to enforce these restrictions in a cost-effective manner.
INTELLECTUAL PROPERTY LITIGATION COULD SERIOUSLY HARM OUR BUSINESS
Litigation involving patents and other intellectual property rights is
extensive in the biotechnology industry. We are aware that patents have been
applied for and in some cases issued to others claiming technologies which are
closely related to ours. We cannot assure you that we will not be found to
infringe these patents, other patents or proprietary rights of third parties. As
a result, and in part due to the ambiguities and evolving nature of intellectual
property law in the area of molecular biology and genomics, we periodically
receive notices of potential infringement of patents held by others. Although we
have generally been successful in resolving these types of claims, we may not be
able to do so in the future.
10
<PAGE> 16
In the event of an intellectual property dispute, we may become involved in
litigation or arbitration. Litigation could involve proceedings in court as well
as in the U.S. Patent and Trademark Office or the International Trade
Commission. Intellectual property litigation can be extremely expensive and may
divert management's time and resources away from our operations. Moreover, the
outcome of any such litigation is inherently uncertain. Even a successful
outcome may take years to achieve. Even if we achieve a successful result, the
costs associated with litigation, in terms of dollars spent and diversion of
management time and resources, could seriously harm our business.
If a third party claims an intellectual property right to technology we
use, we may be forced to discontinue an important product or product line, alter
our products and processes, pay license fees, pay damages for past infringement
or cease certain activities. Under these circumstances, we may attempt to obtain
a license to this intellectual property; however, we may not be able to do so on
commercially reasonable terms, or at all.
PUBLICITY OF TRADE SECRETS COULD AID OUR COMPETITORS
We attempt to protect our trade secrets by entering into confidentiality
agreements with employees, consultants and third parties. However, these
agreements can be breached and, if they are, there may not be an adequate remedy
available to us. Also, our trade secrets might become known to a third party
through means other than by breach of our confidentiality agreements, or they
could be independently developed by our competitors. If our trade secrets become
known, our business and competitive position could be adversely affected.
CHANGES IN DISTRIBUTION AND PURCHASING METHODS BY OUR CUSTOMERS MAY FORCE US TO
USE MORE EXPENSIVE MARKETING AND DISTRIBUTION CHANNELS
A number of our customers have developed purchasing initiatives to reduce
the number of vendors they purchase from in order to lower their supply costs.
In some cases, these customers have established agreements with large
distributors, which include discounts and the distributors' direct involvement
with the purchasing process. These activities may force us to supply these large
distributors with our products at a discount to continue to reach our customers.
For similar reasons, many of our larger customers, including the government,
have requested and may in the future request special pricing arrangements,
including blanket purchase agreements. These agreements may limit our pricing
flexibility, which could adversely impact our business, financial condition and
results of operations.
More recently, several of our customers have requested that we sell our
products through third party, e-commerce web sites. Offering our products
through these web sites would generally require us to agree to offer
volume-related discounts and pay commissions on the sales made through these web
sites to these third party e-commerce providers. Consequently, margins on sales
made through these third party web sites would generally be lower than those on
sales made through traditional channels. On the other hand, if we do not enter
into arrangements with these third party e-commerce providers, we may lose
customers who prefer to purchase products using these web sites. Our business
may be harmed as a result of these web sites or other sales methods which may be
developed in the future.
WE RELY ON THIRD PARTY MANUFACTURERS FOR RAW MATERIALS AND PRODUCT COMPONENTS
We rely on third party manufacturers to supply many of our raw materials
and product components. Some of these components are obtained from a single
supplier or a limited group of suppliers. Our reliance on outside vendors
generally, and a sole supplier or a limited group of suppliers in particular,
involves several risks, including:
- an inability to obtain an adequate supply of required components due to
manufacturing capacity constraints, the discontinuance of a product by a
third-party manufacturer or other supply constraints;
11
<PAGE> 17
- delays and long lead times in receiving materials from vendors; and
- reduced control over quality and pricing of components.
ADVERSE DEVELOPMENTS AFFECTING OUR INTERNATIONAL OPERATIONS OR FOREIGN CURRENCY
FLUCTUATIONS COULD HARM OUR RESULTS FROM OPERATIONS
Including sales made by our subsidiaries and distributors, our products are
currently marketed in over 45 countries throughout the world. Measured in U.S.
dollars, our product sales outside the U.S. represented 37% of our total sales
in 1999. We expect that international sales will continue to account for a
significant percentage of our revenues for the foreseeable future, in part
because we intend to expand our international operations. There are a number of
risks arising from our international business, including:
- difficulties and costs associated with staffing and managing foreign
operations;
- unexpected changes in regulatory requirements;
- the difficulties of compliance with a wide variety of foreign laws and
regulations;
- more limited protection for intellectual property rights in some
countries;
- changes in our international distribution network and direct sales force;
- potential trade restrictions and exchange controls;
- import and export licensing requirements;
- longer accounts receivable collection cycles in certain foreign
countries; and
- potential increased costs associated with overlapping tax structures.
A significant portion of our business is conducted in currencies other than
the U.S. dollar, which is our reporting currency. We recognize foreign currency
gains or losses arising from our operations in the period incurred. As a result,
currency fluctuations among the U.S. dollar and the currencies in which we do
business could adversely affect our results of operations. We cannot predict the
effects of exchange rate fluctuations upon our future operating results because
of the number of currencies involved, the variability of currency exposures and
the potential volatility of currency exchange rates. We engage in foreign
currency exchange hedging transactions to manage our foreign currency exposure,
but we cannot assure you that our strategies will adequately protect our
operating results from the effects of exchange rate fluctuations.
OUR ACTIVITIES INVOLVE HAZARDOUS MATERIALS AND MAY SUBJECT US TO COSTLY
ENVIRONMENTAL LIABILITY
Portions of our operations require the controlled use of hazardous and
radioactive materials. We are subject to federal, state and local laws and
regulations governing the use, manufacture, storage, handling and disposal of
these materials and certain waste products. The risk of accidental contamination
of property or injury to individuals from these materials cannot be completely
eliminated. In the event of such an accident, we could be liable for any damages
that result, which could have a material adverse affect on our business,
financial condition and results of operations. Additionally, any accident could
partially or completely shut down our research and manufacturing facilities and
operations. We may also have to incur substantial costs to comply with current
or future environmental laws and regulations.
DAMAGES TO OUR MANUFACTURING FACILITIES COULD ADVERSELY IMPACT OUR ABILITY TO
EFFECTIVELY OPERATE OUR BUSINESS
We maintain manufacturing facilities in La Jolla, California and in the
Austin, Texas area. Damage to these facilities due to fire, earthquake or other
natural disaster, power loss, unauthorized entry or other events could cause an
interruption in the production of our products. We do not have or plan to obtain
earthquake insurance. A prolonged interruption in our manufacturing operations
could have a material adverse impact on our ability to effectively operate our
business.
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<PAGE> 18
POTENTIAL PRODUCT LIABILITY CLAIMS COULD ADVERSELY AFFECT OUR BUSINESS,
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
We face a potential risk of liability resulting from the use of our
products. We carry product liability insurance coverage that is limited in scope
and amount. We cannot assure you that we will be able to maintain this insurance
at reasonable cost, on commercially reasonable terms, or at all. We also cannot
assure you that this insurance will be adequate to protect us against a product
liability claim, should one arise.
IF OUR ACCESS TO NECESSARY TISSUE SAMPLES IS RESTRICTED OR ETHICAL CONCERNS
SURROUNDING THE USE OF GENETIC INFORMATION BECOME WIDESPREAD, OUR BUSINESS COULD
SUFFER
We require access to human and other tissue samples and other biological
materials to continue to develop our products. We compete with many other
companies for these materials and may not be able to obtain or maintain access
to these materials on acceptable terms, or at all. In addition, genetic testing
has raised ethical issues regarding confidentiality and the appropriate use of
the resulting information. Governmental regulation in the U.S. and foreign
countries could limit access to, or use of, human and other tissue samples or
restrict the use of, or regulate, genetic testing. If we lose access to
sufficient numbers or sources of tissue samples, or if tighter restrictions are
imposed on our customers' use of the information generated from tissue samples,
our business could suffer.
INCREASED REGULATION OF THE INTERNET COULD HARM OUR BUSINESS
Our business is subject to governmental regulation relating to the
Internet. Although only a small portion of our current sales are made through
the Internet, we expect that Internet sales volume will increase in the next few
years. Because of the increasing use of the Internet as a communication and
commercial medium, the government has adopted, and may in the future adopt, laws
and regulations relating to liability for information retrieved from or
transmitted over the Internet, as well as on-line content regulation and
taxation. Moreover, it may take years to determine whether and how existing
laws, such as those governing intellectual property, privacy and the regulation
of the sale of specified goods and services, apply to the Internet. Any new
Internet related legislation or regulation, or any unanticipated application or
interpretation of existing laws to the Internet, may affect the growth in the
use of the Internet by us or our customers. This could in turn decrease the
demand for our products, increase our cost of doing business or otherwise have
an adverse effect on our business.
OUR FOUNDER AND CHAIRMAN OF THE BOARD EXERTS CONSIDERABLE CONTROL OVER US
Following this offering, approximately % of our common stock will be
owned or voted by Dr. Sorge, our founder, chairman of our board of directors and
chief executive officer. Dr. Sorge will, therefore, be able to exercise
effective control of Stratagene and will be able to control matters requiring
approval of our stockholders, including the election of directors and the
approval of mergers or other business combinations. Such a concentration of
ownership may have the effect of delaying or preventing transactions resulting
in a change of control of Stratagene, including transactions where stockholders
might otherwise receive a premium for their shares over then current market
prices.
ANTI-TAKEOVER PROVISIONS COULD IMPAIR OUR STOCK PRICE
A number of provisions of our certificate of incorporation, bylaws and
Delaware law could be used by our management to make it substantially more
difficult for a third party to acquire control of us. These provisions could
discourage potential takeover attempts, including transactions where
stockholders might otherwise receive a premium for their shares over then
current market prices. This could adversely affect the market price of our
common stock. See "Description of Capital Stock -- Anti-Takeover Provisions of
Charter, Bylaws and Delaware Law."
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<PAGE> 19
WE HAVE BROAD DISCRETION OVER THE PROCEEDS WE WILL RECEIVE IN THIS OFFERING
We will retain a significant amount of discretion over the application of
the net proceeds we will receive in this offering, as well as over the timing of
expenditures. A large portion of the proceeds is allocated for working capital
and other general corporate purposes and we have not determined how we will use
these proceeds. The failure of our management to use such funds effectively
could adversely affect our business.
THE LIQUIDITY OF OUR COMMON STOCK IS UNCERTAIN SINCE IT HAS NOT BEEN PUBLICLY
TRADED
There has not been a public market for our common stock. We cannot predict
the extent to which investor interest in our company will lead to the
development of an active, liquid trading market. Active trading markets
generally result in lower price volatility and more efficient execution of buy
and sell orders for investors. The initial public offering price for the shares
will be determined by negotiations between us and the representatives of the
underwriters and may not be indicative of prices that will prevail in the
trading market after the offering.
VOLATILITY IN OUR STOCK PRICE COULD IMPAIR YOUR INVESTMENT
The price of our common stock may fluctuate substantially due to a variety
of factors, including:
- quarterly fluctuations in our operating and earnings per share results;
- technological innovations or new product introductions by us or our
competitors;
- delays in development and introduction of new products;
- disputes concerning patents, licenses or other proprietary rights;
- changes in earnings estimates by equity and market research analysts;
- sales of common stock by existing holders;
- loss of key personnel; and
- securities class action or other litigation.
Any failure to meet analysts' expectations could have an adverse effect on
the market price for our common stock. In addition, the stock market is subject
to extreme price and volume fluctuations. This volatility has had a significant
effect on the market prices of securities issued by many companies for reasons
unrelated to the operating performance of these companies. In the past,
following periods of volatility in the market price of a company's securities,
securities class action litigation has often been instituted against that
company. If similar litigation were instituted against us, it could result in
substantial costs and a diversion of our management's attention and resources,
which could have an adverse effect on our business, financial condition and
results of operations.
FUTURE SALES OF CURRENTLY OUTSTANDING SHARES COULD ADVERSELY AFFECT OUR STOCK
PRICE
The market price of our common stock could decline as a result of sales of
a large number of shares in the market after this offering or in response to the
perception that such sales could occur. Upon completion of this offering, we
will have shares of common stock outstanding. Of these shares,
approximately will be freely tradable. All of the remaining
approximately shares may be sold in accordance with Rule 144 and Rule
701 of the Securities Act. Following this offering, approximately
shares will be subject to 180-day lock-up agreements. After expiration of the
lock-up period, all of these shares will be eligible for immediate sale, in most
instances subject to the limitations of Rule 144. Merrill Lynch & Co. can
release shares from one or more of the lock-up agreements without our approval.
Holders of shares will have the right to request that we register
their shares for sale in the public market. See "Shares Eligible for Future
Sale."
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<PAGE> 20
NOTE REGARDING FORWARD-LOOKING STATEMENTS
This prospectus includes forward-looking statements relating to, among
other things, future results of operations, our plans and expectations regarding
our future products and general industry and business conditions applicable to
Stratagene. We have based these forward-looking statements on our current
expectations and projections about future events. These forward-looking
statements are subject to a number of risks, uncertainties and assumptions about
Stratagene, including those we describe in the "Risk Factors" section of this
prospectus. In light of these risks, uncertainties and assumptions, the forward-
looking events discussed in this prospectus might not occur. We undertake no
obligation to publicly update or revise any forward-looking statements, whether
as a result of new information or future events.
We use market data and industry forecasts and projections throughout this
prospectus, which we have obtained from internal surveys, market research,
publicly available information and industry publications. Industry publications
generally state that the information they provide has been obtained from sources
believed to be reliable, but that the accuracy and completeness of such
information is not guaranteed. The forecasts and projections are based on
industry surveys and the preparers' experience in the industry and there is no
assurance that any of the projected amounts will be achieved. Similarly, we
believe that the surveys and market research we or others have performed are
reliable, but we have not independently verified this information.
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<PAGE> 21
USE OF PROCEEDS
We expect to receive approximately $ million from the sale of
shares of common stock by us at an assumed initial public offering
price of $ per share, after deducting underwriting discounts and
estimated expenses to be paid by us. We expect to receive an additional
$ million net proceeds if the underwriters exercise their
over-allotment options in full.
We intend to use the proceeds of this offering for:
- research and development;
- expansion of our sales and marketing organization;
- repayment of approximately $6.8 million of debt;
- payments of approximately $1.2 million in connection with the termination
of phantom stock rights;
- the acquisition of BioCrest Holdings for approximately $0.6 million; and
- general working capital and other corporate purposes.
The debt which we intend to repay is as follows: (1) approximately $6.3
million under a note payable to a bank that matures in December 2001 and which
had an effective interest rate of 8.72% at December 31, 1999; and (2)
approximately $0.5 million of debt payable to a related party, which is due upon
the closing of the offering and has an interest rate of 10.00%.
Pending these uses, we intend to invest the net proceeds from this offering
primarily in short-term, investment-grade, interest-bearing securities.
DIVIDEND POLICY
We currently intend to retain earnings, if any, to support the development
of our business and do not anticipate paying cash dividends for the foreseeable
future. Payment of future dividends, if any, will be at the discretion of our
board of directors after taking into account factors such as our financial
condition, operating results and current and anticipated cash needs. We are a
holding company. Accordingly, our ability to pay dividends in the future will
depend on receiving dividends or other distributions from our subsidiaries which
would be subject to applicable state law requirements.
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<PAGE> 22
CAPITALIZATION
The table below sets forth our capitalization as of December 31, 1999:
- on an actual basis;
- on a pro forma basis, giving effect to: (1) the issuance of 9,600,000
shares of common stock upon the conversion of our convertible
subordinated notes; and (2) the reclassification of our class A and class
B common stock into shares of common stock upon the closing of the
offering.
- on a pro forma basis, as adjusted to reflect the sale of shares
of common stock at an assumed initial offering price of $ per
share after deducting the underwriting discount, estimated offering
expenses payable by us and our receipt and application of the net
proceeds of this offering.
This information should be read in conjunction with our combined financial
statements and the related notes included elsewhere in this prospectus.
<TABLE>
<CAPTION>
DECEMBER 31, 1999
-----------------------------------------------
PRO FORMA
ACTUAL PRO FORMA AS ADJUSTED
----------- ------------ --------------
(IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA)
<S> <C> <C> <C>
Long-term debt, including current portion................ $ 36,559 $ 18,682 $
Stockholders' equity (deficit):
Preferred Stock, par value $0.0001 per share; 4,000,000
shares authorized actual; shares authorized
pro forma and pro forma as adjusted................. -- --
Common Stock, Class A, par value $0.0001 per share;
96,000,000 shares authorized actual; no shares
authorized pro forma and pro forma as adjusted;
30,933,336 shares issued and outstanding actual; no
shares issued and outstanding pro forma and pro
forma as adjusted................................... 3 --
Common Stock, Class B, par value $0.0001 per share;
4,000,000 shares authorized actual; no shares
authorized pro forma and pro forma as adjusted;
254,080 shares issued and outstanding, actual; no
shares issued and outstanding pro forma and pro
forma as adjusted................................... -- --
Common Stock, par value $0.0001 per share; no shares
authorized actual; shares authorized pro
forma and pro forma as adjusted; no shares issued
and outstanding actual; shares issued and
outstanding pro forma; shares issued and
outstanding pro forma as adjusted................... -- 4
Additional paid-in capital............................. 5,639 23,515
Accumulated deficit.................................... (10,055) (10,055)
Notes receivable from stockholders..................... (2,590) (2,590)
Accumulated other comprehensive loss................... (99) (99)
-------- -------- ------
Total stockholders' equity (deficit)........... $ (7,102) $ 10,775 $
-------- -------- ------
Total capitalization........................... $ 29,457 $ 29,457 $
======== ======== ======
</TABLE>
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<PAGE> 23
DILUTION
The pro forma net tangible book value of our common stock as of December
31, 1999 was approximately $9.1 million, or $0.22 per share. Pro forma net
tangible book value per share represents the amount of our total assets,
excluding net intangible assets, less our total liabilities, divided by the
total number of shares of common stock outstanding, after giving effect to the
conversion of the outstanding convertible subordinated notes into an aggregate
of 9,600,000 shares of common stock. Dilution in pro forma net tangible book
value per share represents the difference between the amount per share paid by
investors in this offering and the pro forma net tangible book value per share
of our common stock immediately after the offering. After giving effect to the
sale of the shares of common stock by us in this offering, at an
assumed initial public offering price of $ per share, and after
deducting the underwriting discount and estimated offering expenses payable by
us, the pro forma net tangible book value of our common stock would have been
$ million, or $ per share. This represents an immediate
increase in pro forma net tangible book value of $ per share to
existing stockholders and an immediate dilution of $ per share to new
investors. The following table illustrates this per share dilution:
<TABLE>
<S> <C> <C>
Assumed initial public offering price per share............. $
------
Pro forma net tangible book value per share as of December
31, 1999............................................... $ 0.22
------
Increase per share attributable to new investors.......... $
------
Pro forma net tangible book value per share after this
offering.................................................. $
------
Dilution per share to new investors......................... $
------
</TABLE>
If the underwriters' over-allotment options are exercised in full, the pro
forma net tangible book value per share after the offering would be $ per
share, the increase in pro forma net tangible book value per share to existing
stockholders would be $ per share and the dilution in pro forma net tangible
book value to new investors would be $ per share.
The following table summarizes, on a pro forma basis, as of December 31,
1999:
- the number of shares of common stock purchased from us;
- the total consideration paid to us;
- the average price per share paid by existing stockholders; and
- the average price per share paid by new investors, before deducting the
underwriting discount and estimated offering expenses payable by us.
<TABLE>
<CAPTION>
SHARES PURCHASED TOTAL CONSIDERATION
------------------ -------------------- AVERAGE PRICE
NUMBER PERCENT AMOUNT PERCENT PER SHARE
------- ------- -------- -------- -------------
<S> <C> <C> <C> <C> <C>
Existing stockholders................. % $ % $
------- ------- ------- ------- -------
New investors......................... % $ % $
------- ------- ------- ------- -------
Total....................... % $ % $
======= ======= ======= ======= =======
</TABLE>
The information in the above table excludes 1,468,000 shares of common
stock issuable upon exercise of options outstanding at December 31, 1999, with a
weighted average exercise price of $2.67 per share and shares of
common stock issuable upon exercise of options granted between January 1, 2000
and , 2000, with a weighted average exercise price of $ per
share. Giving effect to the full vesting and exercise of all options outstanding
as of December 31, 1999 and the conversion of our convertible subordinated
notes, the pro forma net tangible book value per share as of December 31, 1999
would be $0.21, the dilution per share to the new investors would be
$ , and the consideration paid by the existing stockholders and the new
investors would represent % and %, respectively, of the
total consideration paid for all shares.
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<PAGE> 24
SELECTED COMBINED FINANCIAL DATA
The financial statements of Stratagene Holding Corporation and BioCrest
Holdings, LLC are presented on a combined basis because the companies are under
common management and control. BioCrest Holdings will be merged with and into
Stratagene Holding Corporation upon the closing of the offering.
The selected data presented below under the captions "Combined Statement of
Operations Data" and "Combined Balance Sheet Data" for, and as of the end of,
each of the years in the five-year period ended December 31, 1999, are derived
from the combined financial statements of Stratagene Holding Corporation and
Biocrest Holdings, which financial statements have been audited by KPMG LLP, our
independent certified public accountants. The combined financial statements as
of December 31, 1998, and 1999 and for each of the years in the three-year
period ended December 31, 1999, and the report thereon, are included elsewhere
in this prospectus. When you read this selected historical financial data, it is
important that you read along with it the historical financial statements and
related notes as well as the section titled "Management's Discussion and
Analysis of Financial Condition and Results of Operations" included elsewhere in
this prospectus.
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31
---------------------------------------------------------------------------
1995 1996 1997 1998 1999
---------- -------------- -------------- -------------- -----------
(IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA)
<S> <C> <C> <C> <C> <C>
COMBINED STATEMENT OF
OPERATIONS DATA:
Revenue
Product sales................... $ 39,299 $ 44,049 $ 48,814 $ 52,716 $ 50,853
Contracts and government
grants....................... 634 277 573 463 465
---------- ----------- ----------- ----------- -----------
Total revenue........... $ 39,933 $ 44,326 $ 49,387 $ 53,179 $ 51,318
---------- ----------- ----------- ----------- -----------
Costs and expenses:
Cost of products sold (excludes
$906 included in stock
compensation charges in
1999)........................ 11,927 12,976 14,549 15,017 14,767
Contracts and government grants
and research................. 634 277 573 463 465
Proprietary research and
development (excludes $3,097
included in stock
compensation charges in
1999)........................ 4,415 4,578 4,406 7,756 11,378
Selling and marketing (excludes
$724 included in stock
compensation charges in
1999)........................ 8,928 10,108 11,772 14,003 12,961
General and administrative
(excludes $808 included in
stock compensation charges in
1999)........................ 5,241 5,432 5,662 7,514 8,434
Stock compensation charges(1)... -- -- -- -- 5,535
Restructuring costs(2).......... -- -- 325 270 425
---------- ----------- ----------- ----------- -----------
Total costs and
expenses.............. $ 31,145 $ 33,371 $ 37,287 $ 45,023 $ 53,965
---------- ----------- ----------- ----------- -----------
Earnings (loss) from
operations............ $ 8,788 $ 10,955 $ 12,100 $ 8,156 $ (2,647)
---------- ----------- ----------- ----------- -----------
Foreign currency transaction gains
(losses)........................ (253) 75 (418) (281) 290
Equity income (loss) on investment
in unconsolidated entity........ -- -- -- (2) 166
Other income (expense), net....... (3,200) 812 27 (37) 755
Interest expense.................. (292) (3,001) (4,055) (3,540) (3,232)
</TABLE>
19
<PAGE> 25
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31
---------------------------------------------------------------------------
1995 1996 1997 1998 1999
---------- -------------- -------------- -------------- -----------
(IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA)
<S> <C> <C> <C> <C> <C>
COMBINED STATEMENT OF
OPERATIONS DATA (CONTINUED):
Interest income................... 397 226 758 797 399
---------- ----------- ----------- ----------- -----------
Total other expense,
net................... $ (3,348) $ (1,888) $ (3,688) $ (3,063) $ (1,622)
---------- ----------- ----------- ----------- -----------
Earnings (loss) before
income taxes.......... 5,440 9,067 8,412 5,093 (4,269)
Income tax (expense) benefit...... (2,308) (3,279) (3,733) (2,368) 1,794
---------- ----------- ----------- ----------- -----------
Net earnings (loss)..... $ 3,132 $ 5,788 $ 4,679 $ 2,725 $ (2,475)
========== =========== =========== =========== ===========
Net earnings (loss) per share:
Basic........................... $ 0.10 $ 0.19 $ 0.15 $ 0.09 $ (0.08)
========== =========== =========== =========== ===========
Diluted......................... $ 0.10 $ 0.17 $ 0.14 $ 0.09 $ (0.08)
========== =========== =========== =========== ===========
Weighted average shares:
Basic........................... 30,400,000 30,520,000 30,610,000 30,765,000 31,067,416
========== =========== =========== =========== ===========
Diluted......................... 30,400,000 40,703,253 40,786,853 31,641,033 31,067,416
========== =========== =========== =========== ===========
OTHER DATA:
Adjusted earnings from
operations(3)................ $ 5,004 $ 2,995 $ 3,485
=========== =========== ===========
PRO FORMA INFORMATION (UNAUDITED):
Pro forma net earnings
(loss)(4)....................... $ 4,890 $ 2,925 $ (1,924)
=========== =========== ===========
Pro forma net earnings (loss) per
share:
Basic........................... $ 0.16 $ 0.10 $ (0.05)
=========== =========== ===========
Diluted......................... $ 0.12 $ 0.09 $ (0.05)
=========== =========== ===========
Pro forma weighted average shares:
Basic........................... 30,610,000 30,765,000 40,667,416
=========== =========== ===========
Diluted......................... 40,786,853 31,641,033 40,667,416
=========== =========== ===========
<CAPTION>
DECEMBER 31
---------------------------------------------------------------------------
1995 1996 1997 1998 1999
---------- -------------- -------------- -------------- -----------
(IN THOUSANDS)
<S> <C> <C> <C> <C> <C>
COMBINED BALANCE SHEET DATA:
Cash and cash equivalents......... $ 23,875 $ 5,191 $ 6,770 $ 8,636 $ 3,101
Working capital................... (172) 6,828 6,721 11,484 7,811
Total assets...................... 37,453 19,944 33,366 39,896 36,476
Total debt........................ 52,577 30,286 37,568 41,066 36,559
Total stockholders' deficit....... (22,626) (16,687) (11,986) (9,191) (7,102)
</TABLE>
- ---------------
(1) We recognized these stock compensation charges in connection with phantom
stock rights and phantom stock option rights due to the substantial increase
in our valuation in connection with this offering.
(2) Restructuring costs in 1997 are primarily related to consolidation of
European distribution activities. Restructuring costs for 1998 and 1999 are
primarily related to severance payments to former employees in connection
with the relocation of facilities to Texas and related organizational
changes. See Note 15 to our combined financial statements.
20
<PAGE> 26
(3) Adjusted earnings from operations is defined as earnings from operations
adjusted for the exclusion of stock compensation charges and restructuring
costs from operating expenses. We present adjusted earnings from operations,
which is a non-GAAP measure, to enhance the understanding of our operating
results. We believe adjusted earnings from operations is an indicator of our
operating profitability since it excludes certain items which are not
directly attributable to our ongoing business operations. However, adjusted
earnings from operations relies upon management's judgment to determine
which items are directly attributable to our ongoing business operations and
is subjective in nature. Adjusted earnings from operations should not be
construed as an alternative to net income as an indicator of our operating
performance or as an alternative to cash flow from operations as a measure
of our liquidity.
(4) Pro forma net earnings (loss) gives effect to: (1) the conversion of our
convertible subordinated notes as of January 1, 1999 into shares of our
common stock which will occur upon the closing of the offering and the
after-tax interest expense reduction of $1.0 million; and (2) adjustments
for federal income taxes which we would have recorded if BioCrest Holdings
and its subsidiaries had been taxed as a "C" corporation in 1997, 1998 and
1999. Pro forma weighted average shares for the year ended December 31, 1999
gives effect to the issuance contingent upon the closing of the offering of
9,600,000 shares of our common stock upon the conversion of our convertible
subordinated notes. See Notes 5 and 16 to our combined financial statements.
21
<PAGE> 27
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
You should read the following description of our financial condition and
results of operations in conjunction with our financial statements and the
related notes and the other financial information appearing elsewhere in this
prospectus. This section includes forward-looking information that involves
risks and uncertainties. Our actual results could differ materially from those
anticipated by forward-looking information due to factors discussed under "Risk
Factors," "Business" and elsewhere in this prospectus.
OVERVIEW
Since our inception in 1984, we have been engaged in developing,
manufacturing and marketing products used to conduct molecular biology research.
A substantial majority of our revenue comes from the sale of these products,
with the remainder coming from research grants, net shipping revenue and other
sources. In 1999, approximately 52%, 47% and 1% of our product sales were in the
areas of genetic technologies, nucleic acid purification and analysis, and
genomics and bioinformatics, respectively. We intend to introduce a number of
new products in 2000 which we expect will increase the proportion of product
sales attributable to the area of genomics and bioinformatics. Our products are
used for research purposes and their use is not regulated by the U.S. Food and
Drug Administration or by any comparable international organization.
We manufacture our products in our facilities near Austin, Texas and in La
Jolla, California. Our sales activities are primarily conducted through a
dedicated direct sales organization in North America and Europe. Approximately
15% of our product sales in 1999 were to international distributors in selected
countries in Europe and Asia, who resell them to researchers. Total product
sales outside the U.S. accounted for approximately 37% of our total product
sales in 1999. We intend to use a portion of the proceeds from this offering to
enhance our sales and distribution infrastructure.
We market our products to academic and government institutions and
pharmaceutical, biotechnology and industrial companies. Historically, a
substantial portion of our product sales have been to researchers at these
academic and government institutions.
We anticipate that our results of operations may fluctuate from quarter to
quarter and will be difficult to predict. The timing and degree of fluctuations
will depend upon several factors, including:
- our ability to successfully and timely develop and introduce new
products;
- introductions of competing technologies or products;
- changes in customer research budgets and government funding of molecular
biology and genomics research;
- our ability to manufacture our products efficiently; and
- our ability to control or adjust research and development, sales and
marketing, and general and administrative expenses in response to changes
in revenue.
RECENT DEVELOPMENTS
Organizational Changes. We have made substantial organizational changes in
recent years to better coordinate research and development, improve and expand
our manufacturing capabilities, and more efficiently allocate our sales and
marketing resources. Beginning in 1997, we significantly increased our
recruitment of experienced and highly qualified sales representatives for our
domestic and international sales territories. We also reorganized our European
operations by establishing a centralized location in the Netherlands and
expanding our direct sales efforts.
In 1998, we began the process of moving our storage and shipping functions,
and most of our production and customer service operations, from La Jolla,
California to our new facility in the Austin, Texas area. This relocation was
completed in 1999. The site was chosen for its central location and
22
<PAGE> 28
qualified labor pool. The relocation and reorganization of these operations
involved significant changes in work force, management reporting structures and
systems. These changes created significant disruptions in our operations which
limited our ability to manufacture and deliver products to customers during most
of 1999. In large part because of these changes, we were unable to sustain
revenue growth consistent with that achieved in prior years. Normal customer
service and delivery functions were restored by the end of the third quarter of
1999.
Despite the short-term disruptions, we believe that the Texas relocation
and related organizational changes have improved our manufacturing base,
creating significant capacity for future growth while increasing productivity
and efficiency. Specifically, these changes have resulted in improvements in
material procurement, production scheduling, production processes, packaging,
inventory control and storage and shipping functions.
Research and Development Efforts. In 1998 and 1999, we significantly
increased expenditures in research and development, both in absolute dollars and
as a percentage of product sales. These increases were primarily related to the
development of capabilities and products in the areas of nucleic acid
purification and analysis and genomics and bioinformatics, including microarrays
and quantitative PCR systems. We intend to spend over two-thirds of our research
and development budget in 2000 on these areas.
SNP Discovery Project. In 1997, we identified an opportunity to invest in
the discovery and cataloging of unique single nucleotide polymorphisms, or SNPs.
Because this opportunity represented a departure from our core business
strategy, we formed a new company, Phenogenex, to pursue significant research
and development investments in this area. In 1999, we determined that several
companies with substantially greater resources than us were beginning to pursue
similar strategies in this area. For this reason, we discontinued this project
in 1999.
Stock Compensation Charges. One of our subsidiaries, Stratagene, has a
phantom stock plan providing for phantom stock rights and phantom stock option
rights for some of our employees. The plan was intended to provide additional
compensation and incentives for employees without providing stockholder rights.
We have historically recognized expense in connection with this plan based on
valuations prepared by an independent third party. In 1999, we recognized
charges of approximately $5.5 million in connection with phantom stock rights
and phantom stock option rights under the phantom stock plan. Of this $5.5
million charge, approximately $4.3 million will be settled through the issuance
of options to acquire our common stock to holders of phantom stock option
rights. The balance will be settled in cash payments to holders of phantom stock
rights. The expenses recorded in previous years in connection with this plan
were not material. The 1999 expenses were significantly higher than the amounts
recognized for previous years due to the substantial increase in our valuation
in connection with this offering.
In March 2000, the holders of phantom stock rights agreed, subject to the
completion of the offering, to terminate these rights in exchange for a cash
payment equal to the value of such phantom stock rights, based on the initial
public offering price, and options to purchase our common stock. We also agreed,
subject to the completion of the offering, to convert the phantom stock option
rights into options to purchase our common stock. As a result of the termination
of the phantom stock plan, upon the closing of the offering we will issue
options to purchase an aggregate of approximately 462,648 shares of our common
stock and make aggregate cash payments of approximately $1.2 million. We expect
to incur total non-cash charges of approximately $0.5 million over the next
several years in connection with the termination of the phantom stock plan.
RESULTS OF OPERATIONS
Stratagene and BioCrest Holdings are under common management and ownership.
Accordingly, we have presented audited financial statements of the two companies
on a combined basis. Our financial statements reflect the combined results of
the two companies for all periods presented. Upon the consummation of the
offering, BioCrest Holdings will be merged with and into Stratagene Holding
Corporation. See Note 1 to our combined financial statements for additional
information.
23
<PAGE> 29
YEARS ENDED DECEMBER 31, 1999 AND 1998
Total Revenue. Revenue decreased $1.9 million, or 3%, from $53.2 million
in 1998 to $51.3 million in 1999. Product sales also decreased $1.9 million, or
4%, from $52.7 million in 1998 to $50.9 million in 1999. These decreases were
primarily attributable to significant operational disruptions resulting from the
Texas relocation and related organizational changes, and the effect of European
currency exchange rates. Netting out the currency effects from international
direct sales, total worldwide product sales decreased 2% in 1999 from 1998. We
expect that future revenue will depend on a number of factors, including the
market acceptance of our new products, competitive conditions, and the continued
funding of customer research budgets.
Cost of Products Sold. Cost of products sold decreased $0.2 million, or
2%, from $15.0 million in 1998 to $14.8 million in 1999. As a percentage of
product sales, cost of products sold increased from 28% in 1998 to 29% in 1999.
Cost of products sold for these periods included $0.4 million and $0.5 million,
respectively, in overhead costs associated with the Texas relocation and related
organizational changes. Excluding these costs, cost of products sold as a
percentage of product sales would have been 28% for both of these periods. The
absolute decrease in cost of products sold is primarily the result of the
decrease in product sales in 1999.
Proprietary Research and Development Expenses. Proprietary research and
development expenses increased $3.6 million, or 47%, from $7.8 million in 1998
to $11.4 million in 1999. As a percentage of product sales, proprietary research
and development expenses increased from 15% in 1998 to 22% in 1999. The increase
resulted primarily from our strategic decision in early 1999 to significantly
increase our investment in research and product development. The increase also
resulted from expenses associated with the SNP discovery program, which has
since been discontinued. We spent $1.2 million and $2.1 million on the SNP
discovery program in 1998 and 1999, respectively. We intend to continue to spend
significant amounts on proprietary research and development in the future in an
effort to accelerate new product introductions. However, we expect that
proprietary research and development expenses as a percentage of revenues will
decrease gradually as revenues increase.
Selling and Marketing Expenses. Selling and marketing expenses decreased
$1.0 million, or 7%, from $14.0 million in 1998 to $13.0 million in 1999. As a
percentage of total revenue, selling and marketing expenses decreased from 26%
in 1998 to 25% in 1999. The decrease in selling and marketing expenses resulted
primarily from the impact of the streamlining of our sales and marketing
operations in early 1999. In the future, we expect to increase our spending on
selling and marketing in an effort to increase our market penetration and to
support new product launches.
General and Administrative Expenses. General and administrative expenses
increased by $0.9 million, or 12%, from $7.5 million in 1998 to $8.4 million in
1999. As a percentage of total revenue, general and administrative expenses
increased from 14% to 17% for these periods. These increases were primarily due
to higher overhead associated with new facilities and increased spending on
operating infrastructure and information systems to support anticipated future
growth.
Stock Compensation Charges. We incurred stock compensation charges in 1999
of $5.5 million in connection with phantom stock rights and phantom stock option
rights under our phantom stock plan. See "-- Recent Developments -- Stock
Compensation Charges" for more information.
Restructuring Costs. We incurred $0.3 million and $0.4 million in
restructuring costs in 1998 and 1999, respectively. These costs were primarily
related to severance payments to former employees in connection with the Texas
relocation and related organizational changes.
Other Income (Expense), Net. Other income, net increased to $0.8 million
in 1999 from 1998, primarily from our receipt of a settlement of a dispute with
a third party related to patent interferences.
Provision for Income Taxes. We recorded a $1.8 million tax benefit in
1999. Our effective tax rate decreased from 47% in 1998 to 42% in 1999, due to
state tax planning strategies.
24
<PAGE> 30
Adjusted Earnings from Operations. Adjusted earnings from operations of
$3.5 million in 1999 is defined as earnings from operations adjusted for the
exclusion of stock compensation charges and restructuring costs from operating
expenses. Adjusted earnings from operations of $3.0 million in 1998 reflects
earnings from operations adjusted for the exclusion of restructuring costs from
operating expenses.
YEARS ENDED DECEMBER 31, 1998 AND 1997
Total Revenue. Revenue increased $3.8 million, or 8%, from $49.4 million
in 1997 to $53.2 million in 1998. Product sales increased $3.9 million, or 8%,
from $48.8 million in 1997 to $52.7 million in 1998. These increases were
primarily the result of strong market demand, particularly for our genetic
technologies and enzyme preparation products.
Cost of Products Sold. Cost of products sold increased $0.5 million, or
3%, from $14.5 million in 1997 to $15.0 million in 1998. As a percentage of
product sales, cost of products sold decreased from 30% in 1997 to 28% in 1998.
Cost of products sold for 1998 included $0.4 million in overhead costs
associated with the Texas relocation and related organizational changes. The
decreases in cost of products sold as a percentage of product sales resulted
primarily from a shift in product sales mix towards higher margin products.
Proprietary Research and Development Expenses. Proprietary research and
development expenses increased $3.3 million, or 76%, from $4.4 million in 1997
to $7.8 million in 1998. As a percentage of product sales, proprietary research
and development costs increased from 9% in 1997 to 15% in 1998. Proprietary
research and development expenses for 1998 included $1.2 million in costs
associated with the SNP discovery program, which has since been discontinued.
The remainder of the increase in proprietary research and development expenses
related to our increased emphasis on the development of capabilities in the
areas of genomics and bioinformatics, and nucleic acid purification and
analysis.
Selling and Marketing Expenses. Selling and marketing expenses increased
$2.2 million, or 19%, from $11.8 million in 1997 to $14.0 million in 1998. As a
percentage of total revenue, selling and marketing expenses increased from 24%
in 1997 to 26% in 1998. The increase was the result of increased costs
associated with the Texas relocation and related organizational changes, and the
expansion of our sales and marketing organization in Europe.
General and Administrative Expenses. General and administrative expenses
increased $1.9 million, or 33%, from $5.7 million in 1997 to $7.5 million in
1998. As a percentage of total revenue, general and administrative expenses
increased from 11% to 14% for these periods. The increase was primarily due to
increased overhead associated with new facilities and increased costs associated
with the Texas relocation and related organizational changes.
Restructuring Costs. We incurred $0.3 million in restructuring costs in
each of 1997 and 1998. In 1997, these costs were primarily related to the
consolidation of our European sales operations. In 1998, these costs were
primarily related to severance payments to former employees in connection with
our Texas relocation and related organizational changes.
Provision for Income Taxes. Our effective tax rate increased from 44% in
1997 to 47% in 1998, due to the adjustment of deferred tax assets related
primarily to changes in where we conduct our business and the related
jurisdictional tax rates.
Adjusted Earnings from Operations. Adjusted earnings from operations of
$5.0 million and $3.0 million in 1997 and 1998, respectively, is defined as
earnings from operations adjusted for the exclusion of restructuring costs from
operating expenses.
LIQUIDITY AND CAPITAL RESOURCES
Our liquidity requirements have historically consisted principally of
research and development expenses, sales and marketing expenses, debt service,
capital expenditures, working capital and general corporate purposes. We have
funded these requirements primarily through cash from operations, supplemented
with borrowings under our credit facilities.
25
<PAGE> 31
We generated net cash from operating activities of $1.4 million in 1999. We
used $0.5 million of net cash in our investing activities in 1999. Capital
expenditures and additions to patents for 1999 totaled $3.5 million and $0.7
million, respectively. We used $6.2 million in net cash for our financing
activities in 1999, which included the repayment of $10.8 million in debt.
As of December 31, 1999, we had cash, cash equivalents and restricted cash
totaling $4.2 million and working capital totaling $5.0 million. Our funds are
currently invested in U.S. Treasury and government agency obligations,
commercial paper and interest-bearing securities.
As of December 31, 1999, we had $36.6 million in total debt. This debt
included $17.9 in convertible subordinated notes, $9.1 million in industrial
revenue bonds, $6.6 million under our term loan facility and $3.0 million in
other debt and notes payable. We are not in compliance with certain financial
covenants as of December 31, 1999 under our bank credit facilities. The lender
under these credit facilities has waived our failure to comply with these
covenants. In March 2000, we repaid $2.5 million under our revolving credit
facility. In connection with the offering, the convertible subordinated notes
will be converted into shares of our common stock. With the exception of the
industrial revenue bonds, we will repay in full all outstanding debt with a
portion of the proceeds from this offering.
Upon the closing of the offering, we will have $5.0 million in available
borrowing capacity under our revolving credit facility. All of our assets and
the shares of capital stock of our subsidiaries, Stratagene and BioCrest
Manufacturing, are pledged to the lender under the revolving credit facility to
secure borrowings thereunder. The revolving credit facility contains a number of
financial and restrictive covenants, including restrictions on our ability to
pay dividends to our stockholders.
We expect that the proceeds from the offering, our funds from operations,
our existing funds and our available borrowing capacity will be sufficient to
fund our operations and meet our capital requirements for the foreseeable
future. If this offering is not completed, we believe that our existing
resources would be sufficient to fund our operations and meet our capital
requirements for the foreseeable future, although this may limit our ability to
grow our business. Our future capital requirements and the adequacy of our
available funds will depend on many factors, including the magnitude of our
research and development programs, the success of those programs in producing
commercial products, the effectiveness of our expanded sales and marketing
efforts, the cost involved in procuring, maintaining and enforcing intellectual
property rights, and competing technological and market developments.
CURRENCY HEDGING AND FOREIGN CURRENCY TRANSLATION
We conduct business transactions with our subsidiaries and distributors in
Europe and Canada, in local currencies. The translation from local currencies to
the U.S. dollar is translated for balance sheet accounts using the current
exchange rate in effect at the balance sheet date and for revenues and expense
accounts using the average exchange rate during the period. The effects of
translation are recorded as a component of accumulated other comprehensive
income (loss). Exchange gains and losses are recorded using the actual exchange
differences on the date of the transaction.
We purchase short-term, forward exchange contracts to hedge the impact of
foreign currency fluctuations on certain underlying assets, liabilities and
commitments for operating costs denominated in foreign currencies. We enter into
these contracts to protect against economic losses associated with foreign
exchange transactions. Gains and losses on the hedges offset a majority of the
increases or decreases in our local currency operating income in the
corresponding periods. The contracts have maturity dates that do not normally
exceed 12 months. The unrealized gains and losses on these contracts are
deferred and recognized in the results of operations in the period in which the
hedged transaction impacts earnings. We do not purchase short-term forward
exchange contracts for trading purposes. We recorded $0.3 million in foreign
currency transaction gains in 1999 as a result of our hedging activities.
26
<PAGE> 32
QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
Our primary financial market risks include fluctuations in currency
exchange rates and interest rates. As of December 31, 1999, we had outstanding
foreign currency forward contracts totaling $4.2 million for the purchase of 2.6
million British pounds and $4.0 million for the purchase of 4.0 million Euros.
At December 31, 1999 a hypothetical 100 basis point change in short-term
interest rates on our variable rate debt would have resulted in a change of $0.1
million in annual pre-tax income.
RECENT ACCOUNTING PRONOUNCEMENTS
In June 1998, the Financial Accounting Standards Board issued SFAS No. 133,
"Accounting for Derivative Instruments and Hedging Activities," which
establishes accounting and reporting standards for derivative instruments and
hedging activities. SFAS 133 requires that an entity recognize all derivatives
as either assets or liabilities in the statement of financial position and
measure those instruments at fair value. This statement was amended by SFAS 137
which defers the effective date to all fiscal quarters of fiscal years beginning
after June 15, 2000. SFAS 133 is effective for our first quarter in the fiscal
year ending December 31, 2001 and is not expected to have a material effect on
our financial position or results of operations.
YEAR 2000 EFFECT ON COMPUTER SYSTEMS
Prior to January 1, 2000, there was a great deal of concern regarding the
ability of computers to adequately recognize 21st century dates from 20th
century dates due to the two-digit date fields used in many systems. We made the
transition from the 20th century to the 21st century without any immediate
adverse impact. However, computer experts have warned that there may still be
residual consequences of the change in centuries; consequently, we cannot
provide assurances that we, our customers or our suppliers will not suffer Year
2000 issues in the coming months. As a result, we will continue to monitor our
Year 2000 compliance and the Year 2000 compliance of our customers and
suppliers. Given the general uncertainty surrounding Year 2000 issues and our
inability to control Year 2000 compliance of our customers and suppliers, we are
unable to determine at this time whether the Year 2000 problem will have a
material adverse effect on our business.
The discovery of Year 2000 errors or defects in our internal systems could
disrupt our business and require us to incur significant, unanticipated expenses
to remedy them. Year 2000 defects could also result in claims and litigation
against us, which could subject us to significant costs and could require
substantial attention from our management. Similarly, the demand for our
products could be affected by Year 2000 issues affecting our customers and
suppliers, which would harm our operating results.
27
<PAGE> 33
BUSINESS
OUR COMPANY
We develop and manufacture biological products and instruments designed to
improve the speed and accuracy of molecular biology and genomics research. We
market our products to researchers at academic and government institutions and
pharmaceutical, biotechnology and industrial companies, in the U.S. and
internationally. These researchers use our products to identify genes, study how
cells are regulated by genes, determine the molecular mechanisms of health and
disease, search for new drug therapies and test the safety of compounds used in
food and pharmaceuticals.
Our products incorporate a diverse range of molecular biology technologies,
such as gene transfer, gene expression, gene cloning, gene libraries, functional
genomics, nucleic acid purification and analysis, microarrays, DNA replication
and DNA sequencing. We offer a broad portfolio of products in each of the
following three market categories:
- Genetic Technologies: Our genetic technologies products help researchers
isolate and analyze genes and the proteins that they produce. These
products include reagents, kits, cells and cell-derived products, and
gene sequences.
- Nucleic Acid Purification and Analysis: Our nucleic acid purification
and analysis products help researchers purify and analyze DNA and RNA
from a variety of human and non-human sources.
- Genomics and Bioinformatics: Our products in this category include
proprietary and non-proprietary gene sequences, spotted as miniaturized
arrays on glass slides. This permits faster and more complex analysis of
the control of gene expression as required by high throughput screening
efforts. We have integrated unique Stratagene software tools, including
web-based gene analysis, with our microarrays and gene clones to permit
researchers to correlate information about the functions of genes.
Overall sales of molecular biology and genomics research products, which
include products in these three market categories, totaled approximately $2.5
billion in 1999. The established genetic technologies market is estimated to be
growing at almost 10% per year. Estimates indicate that the nucleic acid
purification and analysis market and the genomics and bioinformatics market are
growing at almost 15% and approximately 25% to 50% per year, respectively. We
believe that the overall molecular biology and genomics research products market
will continue to expand due to several factors, including:
- intensifying competition between pharmaceutical and biotechnology
companies to discover new drugs;
- a growing need to identify genes and to analyze their functions based on
new information generated by genome sequencing projects;
- increasing levels of government spending for life sciences research; and
- a proliferation of new research initiatives made possible by rapidly
changing molecular biology and genomics research techniques.
We believe that our competitive strengths position us to compete
effectively within the molecular biology and genomics research products market.
These strengths include innovative product research and development, a diverse
intellectual property portfolio, a dedication to quality and customer service,
effective sales and marketing, and an experienced management team.
Our strategy is to continue to develop leadership positions in existing and
emerging categories of the molecular biology and genomics research products
market by developing and marketing novel, innovative products that deliver
superior value to our customers. In executing our strategy, we will continue to
focus on our expertise in genetic technologies, such as chemical manipulation of
genes, while aggressively
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seeking to build on our expertise in nucleic acid purification and analysis and
genomics and bioinformatics. As part of our strategy, we are:
- increasing our investments in research and development to accelerate new
product development and intellectual property creation;
- expanding our sales and marketing capabilities in new product areas and
geographic regions; and
- introducing new products in existing and newer target markets.
SCIENTIFIC OVERVIEW
DNA is the Genetic Blueprint That Directs Cell Activity
Living material is typically compartmentalized into cells. Each cell
contains a set of instructions, or genetic information, which directs the cell's
activities. This genetic information is encoded in a large, double stranded
chemical chain called deoxyribonucleic acid, or DNA. There are four "letters"
which comprise the genetic code, corresponding to chemical side groups, or
nucleotides, on the chain. These nucleotides are labeled adenosine (A), cytosine
(C), guanosine (G), and thymidine (T). The sequence of the letters in a DNA
chain contains information, much as the specific sequence of dots and dashes in
Morse code contains information. The entire human genetic code, referred to as
the human "genome," is believed to contain about 3 billion letters.
DNA can be copied by an enzyme called a DNA polymerase. The polymerase
facilitates the synthesis of a new copy of the DNA code by using the original
copy as a template. Cells copy their DNA when they divide, so that a cell will
inherit the same information as its parent cell. Cells also copy their DNA into
ribonucleic acid, or RNA, using an enzyme called an RNA polymerase. Of the 3
billion letters of the human genetic code, approximately 10% is copied into RNA.
This 10% contains what is referred to as the "genes" within the genetic code.
The function of the other 90% of the genetic code is not yet clear, although
some of it is involved in turning genes on and off.
Some RNA copies of genes act as "messengers," carrying information from the
DNA to the protein synthetic machinery of the cell, and are accordingly referred
to as messenger RNA. This protein synthetic machinery uses another specific type
of RNA, called "transfer RNA," to interpret the code of the messenger RNA and
use it to build proteins. Typically, groups of three letters comprise a word, or
"codon." Each codon corresponds to a specific amino acid. The codon sequence in
a given messenger RNA corresponds to the amino acid sequence of the derived
protein.
Proteins form the architecture of the cell and carry out various tasks,
such as metabolizing nutrients and disposing of wastes. DNA polymerases and RNA
polymerases are proteins. Accordingly, a cell may contain "feedback loops,"
whereby genetic information is translated into proteins and such proteins can in
turn affect the translation of genetic information. The control signals for
these feedback loops are being characterized by researchers and are part of the
field referred to as gene expression analysis. While all cells contain the same
genetic information, different types of cells translate different parts of their
genetic code into RNA and proteins and, therefore, have different functions. The
translation of this information into RNA and proteins is often called gene
expression. For example, a skin cell may need to express proteins involved in
the creation of skin pigment whereas a blood cell may need to express proteins
involved in the transport of oxygen. The signals for such differential gene
expression are contained in the DNA, but can only be interpreted if a cell
contains the proper proteins capable of recognizing such signals. The cascading
feedback loops involved in the development of a multicellular organism from a
single cell are enormously complex and form the basis for current molecular
biology and genomics research activity.
Genomics is Changing the Way Drugs are Developed
Much of the current drug development process is focused on the protein
products of cells. Proteins can be "drug targets." This means that a drug can
enhance or interfere with the action of a cellular protein in a way that creates
a beneficial effect. In the past, researchers would laboriously purify proteins
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from natural sources to provide target proteins for drug screening assays, or
analysis. However, recombinant DNA technology has provided a faster and less
expensive route to the production of protein targets for drug discovery. With
this technology, the researcher will clone, or copy, the gene containing
instructions for the synthesis of protein products. This recombinant protein
product can then be used as a relatively inexpensive, renewable source of
targets in high throughput drug screening assays. This route to drug discovery
requires knowledge of the protein target likely to be involved in a disease
process and the sequence of the gene that encodes the protein.
While there are many definitions for genomics, the general concept is to
apply DNA technologies on a whole-genome scale. Genomics entails viewing the
genetic code of an organism as a whole, rather than on a gene by gene basis.
Gene sequences are being found at a rate that far exceeds the rate at which
researchers can determine the functions of the proteins corresponding to these
gene sequences. For the past 20 years, researchers have been isolating and
sequencing one gene at a time. Now, efforts funded by the National Institutes of
Health, Incyte Pharmaceuticals, Human Genome Sciences, Celera Genomics and
others are aimed at determining the sequence of entire genomes. It is likely
that by the end of the year 2000, most of the 3 billion letters of the human
genetic code will be known. Full genome sequences for yeast, worms (C. Elegans),
the fruit fly (D. Melanogaster) and a number of bacterial species are now known
or will soon be released.
While the genetic codes for many species will be known, the specific
sequences of the individual genes within the genetic code will take some time to
uncover. Gene identification efforts are being undertaken by researchers both in
academia and in biotechnology companies. Computers are extremely helpful in this
effort. However, computer-based identification can be facilitated greatly by
supplementing the genome sequence with additional laboratory information. This
will expand the demand for molecular biology and genomic research products.
Determining the functions of human genes and their corresponding proteins,
especially as these functions relate to the processes that cause disease,
including their interactions and relationships to each other, will present
significant challenges to researchers. Accordingly, this will require large
expenditures and long-term research efforts. In addition, molecular biology and
genomics are being applied to livestock and agriculture, as well as the food
industry. Thus, molecular biology, and its application to genomics, is a core
expertise needed for most life sciences research today.
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How Stratagene Helps Molecular Biology and Genomics Researchers
Almost all molecular biology research, whether in an academic laboratory or
at a pharmaceutical or biotechnology company, involves the manipulation of genes
and the proteins produced from genes. These researchers use the core tools and
techniques shown below to identify, analyze and determine the function of genes.
[GENETIC RESEARCH FLOW CHART]
Genetic Technologies
Genetic technologies help researchers identify genes and produce proteins.
Identifying genes and producing proteins from genes, either in cells or in
isolation, are crucial to identifying potential therapeutic drugs. For example,
a pharmaceutical researcher might want to develop assays that measure the
relative binding strengths of a specified chemical to the protein produced by a
gene that appears to be involved in a type of brain tumor. If so, the researcher
will want to obtain copies of the relevant genes. In addition,
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the researcher might want host cells that are engineered to express these
relevant genes, such that, when a binding event occurs a measurable signal is
generated.
Genetic technologies are typically designed to achieve three results:
GENE CLONING. If a desired gene is not available to a researcher, the
researcher will want to search for the gene in a gene library. It is important
to recognize that having the DNA sequence of a gene does not mean that the
chemical gene entity is available. While small genes can be synthesized
chemically, larger genes currently need to be obtained from a biological source.
Gene libraries are large collections of the genes from a species of interest.
The genes typically are placed into DNA "vectors" that permit the replication of
such genes in foreign species, such as bacteria. This process is known as
cloning.
Most gene cloning experiments are performed in laboratory strains of
bacteria that have been made safe for day to day handling. We have genetically
engineered several laboratory strains to optimize them for their ability to
accept foreign, or non-bacterial, DNA and to create foreign proteins. Bacteria
that have been treated in a way to accept foreign DNA are called "transformation
competent." Stratagene leads the industry in producing transformation competent
bacteria with the highest chemical transformation efficiencies. These high
efficiencies allow researchers to make very large gene libraries from small
amounts of DNA.
Researchers typically screen gene libraries using specially designed DNA or
RNA probes to find specific genes of interest. Because DNA sequences having
similar or identical codes "hybridize," or stick to each other, under
appropriate conditions, it is possible to find genes of interest within a gene
library by looking for specific hybridization to clones contained in a gene
library. Stratagene has been selling gene and complementary DNA, or cDNA,
libraries for over 10 years, and has produced libraries from many different
species.
GENE EXPRESSION. While bacteria and mammals use the same genetic code to
make proteins, certain codons in the genetic code are found more commonly in
mammals than in bacteria. Thus, bacteria are not efficient at reading these
mammalian codons. Consequently, bacteria do not make mammalian proteins as
efficiently as they make bacterial proteins. By placing certain mammalian-like
transfer RNAs into bacteria and increasing the level of transfer RNA in
bacterial cells, Stratagene's gene expression technologies have enhanced the
ability of bacteria to make large amounts of mammalian proteins.
GENE FUNCTION. As more genome sequences become known, researchers will
shift their attention from looking for genes by traditional gene sequencing
techniques to looking for genes using some aspect of their function as the
detection mechanism. For example, a gene screening system called the "two-hybrid
system" looks for interactions between the protein products of genes. This
system enables researchers to find proteins that normally interact with other
proteins, thus providing a means for mapping out protein interaction pathways.
The pathways are important because they represent the communication pathways
within cells. For example, cells may have proteins on their surface that can
detect a hormone. The hormone's signal may be communicated to the interior of
the cell by a series of interactions between proteins. Knowing the specific
proteins involved in these interactions can be useful when attempting to find
drugs that block or mimic certain signaling events.
Another method for analyzing gene function involves the use of "expression
libraries." These libraries utilize "expression vectors." Expression vectors
contain a specific gene of interest. Expression vectors are capable of directing
the synthesis of the protein encoded by this gene in a way that allows the
protein to be fully functional. Retroviruses, which are RNA containing viruses,
make good expression vectors. The genomes of these viruses can be engineered so
that they carry an RNA copy of a gene of interest as well as the viral genes
needed for movement of the genes into a cell and the expression of such genes.
Stratagene sells a number of retroviral expression vectors.
A gene library constructed using a retroviral expression vector can
introduce various genes into mammalian target cells, and the expressed genes can
have a detectable impact on the mammalian cells. For example, suppose that
mammalian cells are engineered such that they produce a detectable signal, such
as fluorescent light emission, if a particular protein-signaling pathway has
been activated. These cells
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can then be used as hosts for infection by a retroviral expression library. The
host cells become infected with different retroviral expression vectors
containing different genes. Hundreds of thousands of cells can be examined for
fluorescent light emission, and those cells that produce a fluorescent light
signal may contain a gene from the library that activates the protein-signaling
pathway. The gene within the retroviral expression vector can be identified and
then further studied for its role in cellular signaling and control. Such
protein pathways can lead to the discovery of potential targets for drug
intervention.
Sometimes researchers wish to alter the genetic code of a gene to study the
impact of mutations on gene or protein function. For example, certain genes that
control cell division can cause cancer if mutated at certain locations within
the genetic code. Researchers sometimes wish to replicate such mutations in the
laboratory, or to find new mutations that may have similar effects. Stratagene's
QuikChange kits allow researchers to alter the genetic code of genes precisely.
As more and more genes are discovered, the interest in such mutation work should
increase significantly.
Once researchers have their DNA clones of interest, whether natural or
mutant, they often wish to place the relevant DNA clone into a host cell to make
the encoded protein. If they wish to place the DNA into a mammalian cell, which
is referred to as "transfection," some type of gene transfer chemical is
typically used. Stratagene's transfection products are among the most efficient
at facilitating the transfer of DNA into mammalian cells.
Sometimes genes contain the proper regulatory sequences to permit
expression after transfection into mammalian cells. More often researchers want
to join a specific part of the gene known as the "open reading frame" with
powerful regulatory sequences derived from other genes. Regulatory sequences
derived from viral genes are particularly advantageous, since viruses are
generally well equipped to activate themselves in many different cell types and
in high levels. Stratagene sells a number of expression vectors with viral
regulatory sequences.
One particularly interesting gene for gene expression studies produces
green fluorescent protein. Green fluorescent proteins are found in many species,
although the genes for only a few of them have been cloned. We have isolated a
gene for green fluorescent protein from the organism Renilla reniformis,
commonly known as the "sea pansy." This gene has particularly advantageous
spectral properties. If the gene is placed into an expression vector, host cells
containing the gene will glow a green color. If the open reading frame of this
green fluorescent protein is attached to the open reading frame of another gene
of interest, the resultant protein can be visualized with a microscope, and its
location in the cell can give information regarding the function of the gene of
interest. In addition, this green fluorescent protein gene can be placed into a
cell in association with regulatory sequences that are part of a
protein-signaling pathway. Activation of this green fluorescent protein gene,
detected by light emission, indicates that the particular protein-signaling
pathway has been activated. This can be very helpful in dissecting the elements
of protein-signaling pathways.
Nucleic Acid Purification and Analysis
Not all molecular biology research applications involve the cloning of
genes initially. Often, researchers wish to study the natural state of DNA or
RNA straight from the species of interest. For example, researchers may wish to
determine whether there are mutations in the DNA of an individual, or they may
wish to determine whether specific genes are present in greater or fewer copies
than normal. Researchers may also study the level of messenger RNA corresponding
to certain genes to determine how active such genes are in a given cell. As an
initial step, these processes require the purification of DNA or RNA from other
cellular components, and our purification kits address this need.
To determine which gene or genes might be of interest for further study,
researchers chemically label cellular RNA to make a probe. This is followed by
the hybridization of this probe to DNA of interest. DNA sequences that are
complementary to the RNA probe bind most strongly. If a researcher compares the
binding of the probes obtained from different RNA samples to the particular
collection of genes, it is possible to find genes whose RNA is differentially
expressed among the tissue sources from which the RNA was prepared.
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A newer approach involves the use of microarrays. Microarrays consist of
many gene fragments printed onto a glass surface. Hybridization of RNA provides
researchers a highly parallel way of determining which genes are more or less
active in various tissues. This type of information can give clues as to which
genes may be involved in certain disease pathways or developmental pathways, or
involved in basic cellular control mechanisms.
Once genes have been identified using microarrays, researchers will want to
validate their observations with a more quantitative method, such as
quantitative, real-time PCR, known as QPCR. The polymerase chain reaction, known
as PCR, is a process for replicating specific DNA sequences, such as a target
gene, in a test-tube. This process is widely used in molecular biology research.
The DNA is repeatedly heated and cooled in the presence of a DNA polymerase. The
DNA polymerase duplicates the DNA in each heating and cooling cycle. In theory,
there is a two-fold increase in the amount of DNA present in the test-tube after
each cycle. Actual yields are slightly less than two-fold per cycle and vary
with the DNA being duplicated and the quality of the DNA polymerase being used.
After 20 to 30 heating and cooling cycles, previously undetectable amounts of
specifically targeted DNA can be increased in yield by over a million-fold.
Ideal characteristics of DNA polymerases include stability, processivity, that
is, the length of chains replicated, accuracy and yield.
The availability of heat-stable DNA polymerases has greatly increased the
versatility of PCR. These polymerases can withstand boiling water temperatures
that are needed in the PCR process. The market leading thermostable polymerase,
Taq DNA polymerase, suffers from several limitations. For example, genes
replicated with Taq DNA polymerase often contain undesired mutations. We have
isolated another DNA polymerase, Pfu, from an archeabacterium called Pyrococcus
furiosus, which is found in deep-sea thermal vents.
Polymerases in cells typically function together with a number of protein
accessory factors. These factors can greatly enhance the yield of PCR reactions.
Current formulations of Pfu, including these accessory factors, provide more
accurate and longer DNA copies than Taq DNA polymerase in comparable yields.
Stratagene holds patents and patent applications covering Pfu polymerase,
accessory factors and a range of Pfu formulations.
The quantitative PCR process measures the rate of increase in yield of
specific DNA molecules. From this growth rate, the initial concentration of such
DNA can be determined. A process called reverse transcriptase PCR can determine
the starting concentration of an RNA molecule by first replicating it into a DNA
molecule, using a polymerase called reverse transcriptase, and then amplifying
the amount of the DNA molecule using PCR. Quantitative PCR can be carried out on
several DNA or RNA target molecules simultaneously, thus making it possible to
measure their relative initial concentrations quantitatively. This information
can be used to validate differential RNA measurements made with DNA microarrays.
Genomics and Bioinformatics
With the advent of high throughput DNA sequencing efforts, the amount of
genetic sequence information available from human and other organisms has
dramatically increased over the last few years. The availability of this
information has profound consequences for molecular biology and genomics
researchers. Researchers can now save time and money by rapidly focusing their
research on classes of related genes. However, effectively using this
information also requires that researchers have available several enabling
technologies. These bioinformatics technologies include software and hardware
for large-scale sequence recognition and predictive and statistical analysis of
gene sequences and protein structure. In anticipation of revolutionary changes
in genomics, we have developed a number of new products that target the fast
growing genomics and bioinformatics market.
The cataloging of known and previously unknown related families of genes is
currently progressing in earnest. A substantial part of the human genome that
encodes proteins has been sequenced and similar efforts to sequence the entire
genome are expected to be completed within the next few years. Easily
accessible, well-annotated data banks to compare these sequences with a
researcher's gene sequence of
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interest are highly valuable. Proprietary sequences, unique to given databases,
greatly enhance the value of the database as does the ability to order the
desired genes in a well-defined genetic context. Stratagene's product offerings
include proprietary clones, gene sequence analysis and web-based ordering of
well-characterized clones.
With the increased number of gene sequences, researchers need to analyze a
large number of genes in parallel. The arraying of genes on a solid surface,
known as microarrays, provides a highly versatile means of analyzing a large
number of gene sequences at the same time. Researchers can screen such
microarrays for evidence of differential gene expression between normal and
diseased tissues. Genes that are differentially expressed are candidates for
researchers to seek to obtain physical copies of the gene itself. Stratagene's
microarray products target this fast growing market with proprietary and
non-proprietary gene sequences.
A number of genes, such as those involved in cancer, cell death, protein
signaling, cell growth, DNA repair and other interesting cellular processes, are
of particular interest to molecular biology researchers. The availability of
these genes as sequences on microarrays, in expression systems and in cells is
highly valuable to researchers. Stratagene has created a broad line of products
to address the emerging genomics and bioinformatics market, including numerous
proprietary genes and several alternatively spliced versions of known gene
sequences.
MARKET OPPORTUNITY
Sales of molecular biology and genomics research products, including
genetic technologies, nucleic acid purification and analysis products and newer
genomics and bioinformatics products, totaled approximately $2.5 billion in
1999. Researchers spent over $1.6 billion in 1999 on genetic technology products
and supplies, such as chemicals, reagents, enzymes and kits. This market is
estimated to be growing at almost 10% per year. In addition, sales of nucleic
acid purification and analysis products totaled approximately $700 million and
are growing at almost 15% per year. The newer market for genomics and
bioinformatics products is estimated at $300 million and is growing at
approximately 25% to 50% per year.
The market for these products and for related services consists of the
academic market, which includes universities and government institutions, and
the commercial market, which includes pharmaceutical, biotechnology and
industrial companies. Several factors are driving the growth of the molecular
biology and genomics research products market:
- Accelerated investment in commercial research and intensifying
competition to discover drug therapies. As more genes of the human and
other genomes are sequenced, we believe that the focus of research will
shift toward discovering the specific functions of each gene,
particularly those implicated in the processes that cause disease.
Companies trying to develop commercially viable therapeutic and
diagnostic products based on such discoveries hope to rapidly establish
and protect intellectual property rights by obtaining patents or licenses
covering these full-length genes and their encoded proteins. The desire
to secure proprietary positions increasingly leads companies to seek a
competitive advantage by adopting methods that can accelerate their
efforts to discover new drugs.
- High throughput sequencing and genome sequencing projects. High
throughput automated DNA sequencing is a recent innovation that has made
it technically and economically feasible to sequence the entire DNA in a
genome. The U.S. government launched the Human Genome Project in October
1990, at which time it committed $3.0 billion to the project to determine
the DNA sequence of the estimated 3 billion nucleotide letters contained
in the human genome. The U.S. government has announced its intention to
accelerate the pace of the human genome project, producing a "rough
draft" of the genome in the year 2000 and a complete human genome
sequence by 2003. This has greatly accelerated the use of molecular
biology and genomics research tools. Accordingly, we believe that the
market for gene cloning, gene expression and gene analysis technologies
will continue to expand as researchers attempt to determine the function
of the many genes for which sequence data will become available.
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- Increasing government funding. The National Institutes of Health is the
largest purchaser of research products and services in the world. In
October 1998, the U.S. Congress approved a 15% increase in NIH funding,
raising its 1999 budget to $15.6 billion. The U.S. Congress has stated
its intention to double the NIH budget in the next five to seven years.
Other governments are similarly increasing funding for biomedical
research. In the past, funding increases of this nature have resulted in
a corresponding increase in the purchase of molecular biology research
products and services.
- Proliferation of high throughput molecular biology techniques. The
advent of high throughput technologies for DNA sequencing and gene
expression analysis has greatly increased the number of genes that
researchers can analyze. In addition, these newer technologies have
enabled research to be performed on a much larger scale. For example,
researchers previously used to study one or two genes at a time. Newer
microarray technologies simultaneously provide information on tens or
hundreds of genes. High throughput techniques have increased demand for
biological products and detection instrumentation.
These factors have increased demand for new products and technologies which
lower the cost and increase the efficiency and accuracy of molecular biology and
genomics research.
STRATEGY
Our long-term growth has been built primarily on innovative product
development by our internal research and development organization. Dr. Sorge and
over 40 other doctorate level employees identify emerging market opportunities
and develop innovative products to address these opportunities. We maintain a
strong research and development expertise across diverse molecular biology and
genomics research applications. The breadth of research and development
expertise and emphasis on new product offerings has fostered a culture within
Stratagene that promotes innovation.
Our strategy is to continue to develop leadership positions in existing and
emerging categories of the molecular biology and genomics research products
market by developing and marketing novel, innovative products that deliver
superior value to our customers. The key elements of our strategy include:
- Lead through innovative research and development. We emphasize the
development of new products based on the latest innovations and
scientific discoveries. In recent years, we have increased our investment
in research and development as part of our ongoing efforts to accelerate
the development of new products and strengthen our intellectual property
portfolio. We believe this increased investment in research and
development will allow us to continue to build on our expertise in
genetic technologies, nucleic acid purification and analysis, and, more
recently, genomics and bioinformatics.
- Leverage our strong and established customer relationships to increase
sales in existing and emerging growth markets. A key part of our
strategy is to increase sales of new products in emerging growth markets
by capitalizing on our existing customer relationships. The same
customers who purchase our genetic technologies products are now also
purchasing nucleic acid purification and analysis and genomics and
bioinformatics products. We believe that our 15 year history of supplying
innovative, high-quality genetic technologies products to our customers
will enhance our ability to sell products in the nucleic acid
purification and analysis and genomics and bioinformatics markets. We
believe that we are ideally positioned to be the one-stop supplier of
choice across the molecular biology and genomics research market.
- Expand sales and marketing capabilities. We intend to increase the
number of our direct sales representatives and establish additional
direct sales and distribution channels in new geographic markets. We are
also expanding the capabilities of our web site to enable us to serve the
needs of our customers as they shift from conventional procurement
processes to e-commerce over the Internet.
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- Continue to deliver superior value to customers. We will continue to
deliver superior value and support for our customers through rapid
delivery times, high-quality products, knowledgeable sales and technical
support and an information-rich web site.
COMPETITIVE STRENGTHS
Our competitive strengths are critical to successfully implementing our
strategy. We believe that our competitive strengths position us to compete
effectively within the molecular biology and genomics research products market.
These strengths include:
Innovative new product research and development. We have a long history of
simplifying difficult laboratory procedures by developing products that utilize
innovative technologies. For example, the introduction of our CodonPlus cells
solves a long-standing problem of inefficient expression of human genes in E.
coli bacteria. By placing certain human-like protein synthesis elements into E.
coli, we are able to greatly enhance the bacteria's ability to synthesize human
proteins.
We intend to maintain and continually improve on our expertise in genetic
technologies, such as gene transfer, gene expression, gene replication and gene
detection. In addition, we recently introduced a number of new nucleic acid
purification and analysis products that are competitive with those of current
market leaders. We are also building on our expertise in genetic technologies by
creating innovative genomics and bioinformatics product offerings that serve
this rapidly growing market. Our recent increase in research and development
expenditures has already resulted in a significant improvement in the rate of
new product introductions over the last several months compared to historical
patterns.
Diverse intellectual property portfolio. We have a diverse portfolio of
intellectual property covering products and technologies related to research in
molecular biology and genomics. We offer many products in which we have a
proprietary interest. As of February 29, 2000, we had 54 issued U.S. patents and
over 60 pending U.S. patent applications and 34 granted foreign patents and 37
pending foreign patent applications. Additionally, we have entered into over 35
licenses with academic, government or commercial entities, which provide us with
access to additional technologies.
Dedication to quality and customer service. We carefully monitor various
quality parameters for each of our products, and reject products that do not
meet or exceed specifications. We have instituted many checks and balances in
our manufacturing processes to yield very high quality products. Our internal
quality controls are intended to ensure that our products meet or exceed
customers' expectations.
Our customers rely on us for our swift and comprehensive product support,
which includes access to our highly trained technical and customer service
representatives. We provide free technical support and product ordering by
telephone, fax and e-mail. Our web site is available 24 hours each day for
technical and ordering information. We typically fulfill most orders within 24
to 48 hours, using overnight couriers for delivery.
Effective sales and marketing network. We have developed effective sales,
marketing and distribution capabilities in the molecular biology and genomics
research market. We market our products in more than 45 countries through our
annual catalog and quarterly Strategies newsletter. We currently employ a
technically trained U.S. sales force of 23 individuals and have 16 foreign sales
representatives. We also utilize a network of 29 independent foreign
distributors.
Our sales and marketing effort is supported by our web site. Through our
web site, we provide researchers with information, including announcements about
new products, on-line catalogs, newsletters, technical manuals and scientific
information, as well as access to free bioinformatics tools which allow our
customers to search for and order our products on-line. Our web site received
40,000 hits in January 2000.
Experienced management. Our founder, chairman of our board of directors
and chief executive officer, Dr. Sorge, is directly involved in setting our
strategic direction and overseeing new product research and development. Our
management team is comprised of individuals with many years of industry
experience in research and development, sales and marketing, manufacturing, and
intellectual property
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protection and licensing. In addition to Dr. Sorge, we employ over 40 doctorate
level employees. As a result of the long-standing presence of our management
team in the scientific community, we believe that we are well positioned to
create new and innovative products.
OUR PRODUCTS AND PRODUCT LINES
Our on-line catalog currently has over 2,500 stock keeping units, which are
represented in approximately 140 different product families. In 1999, we
introduced 20 products, and we plan to introduce an additional 40 products in
2000. The following table summarizes some of our major products, product lines
and products we plan to launch in 2000.
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GENETIC TECHNOLOGIES
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Genomic and cDNA Libraries More than 250 different collections of genes
from over 20 different species
Two-Hybrid Libraries and Vectors Open reading frames cloned into two-hybrid
vectors for interaction screening
Expression Libraries and Vectors cDNAs cloned into retroviral expression
vectors for functional screening
Competent E. coli Principal host cells used for gene cloning
and library creation
Lambda Phage Technologies Highly efficient gene transfer technology for
library creation
QuikChange Mutagenesis Kit Kit for making rapid and accurate changes in
the genetic code of cloned genes
CodonPlus E. coli Host cells engineered to more efficiently
produce animal proteins
GeneJammer Transfection Reagent Chemical preparation for the efficient
transfer of genes into animal cells
Renilla Reniformis GFP A gene that produces a protein that emits a
fluorescent green light used for visual
detection of gene expression
Chemokine Receptor Assays Human chemokines and their receptors
formatted for high throughput screening
PathDetect Indicator Cell Lines Mammalian cell lines containing reporter
genes under the control of regulatory
sequences from important gene pathways
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NUCLEIC ACID PURIFICATION AND ANALYSIS
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StrataPrep Nucleic Acid
Purification Kits Kits that simplify the purification of DNA
and RNA from several sources in single or
96-well formats
Enzyme Preparations Herculase, one of our new enzyme
preparations, Pfu DNA polymerase, Taq2000 DNA
polymerase and Pfu Turbo are polymerase
formulations that facilitate the replication
of DNA, especially when used in the PCR
process
Molecular Beacons and Kits Probes and enzymes for quantitative,
real-time PCR analysis
Sentinel 2000 Instrument A four-color instrument that measures
fluorescent light during the PCR process,
providing a means to make quantitative PCR
measurements in real time
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- --------------------------------------------------------------------------------
GENOMICS AND BIOINFORMATICS
- --------------------------------------------------------------------------------
GeneConnection Discovery
Microarrays cDNAs spotted on a glass surface
GeneConnection Discovery Clones cDNA clones with sequences available in a
searchable database
GeneConnection Expression Clones Full length cDNA clones in an expression
vector with sequences in a searchable
database
GeneConnection Virtual Lab Web-based, searchable database of proprietary
and public gene sequences with links to
catalog numbers and related products
pKO Gene Knockout System Kits for removing specific genes of interest
to determine the biological effects resulting
from such removal
Genetic Technologies
Genomic and cDNA Libraries. We are well known for our genomic and cDNA
library collections. These libraries have been made from over 20 different
species. We have also introduced a human universal cDNA library that contains
cDNAs from 29 different human tissues. This library has been arrayed onto
filters to facilitate gene screening and has been organized into isolated clones
in a number of 384-well plates. These libraries represent a valuable genomics
resource, and have enabled us to begin to create diverse clone collections.
Two-Hybrid Libraries and Vectors. The two-hybrid system produces positive
results when two different proteins interact with each other. We have assembled
libraries of open reading frames of genes in a two-hybrid vector. These
libraries are used by researchers to look for clones that produce proteins
capable of binding to their proteins of interest. Because we have already
created the libraries, researchers simply need a clone or clones of interest,
and need not create libraries of their own. We have developed libraries both in
standard transcription-factor two-hybrid vectors and in our proprietary CytoTrap
vector. The CytoTrap system uses a different method to detect interactions and
allows researchers to identify clones that produce proteins that normally reside
in the cytoplasm of the cell. These clones are more difficult to find using
standard transcription-factor two-hybrid vectors. Pharmaceutical companies are
particularly interested in membrane-bound proteins that act as receptors, since
these proteins make good drug development targets. We also sell HybriZap
vectors, which can be used by researchers to make their own two-hybrid
libraries.
Expression Libraries and Vectors. Expression libraries are constructed in
vectors that express genes contained within the vectors. We have developed viral
vectors, which have been stripped of their replication genes, capable of
efficiently transferring genes into mammalian cells and expressing them in high
concentration. Our retroviral vectors and retroviral libraries can be used to
move hundreds of thousands of genes into mammalian target cells very
efficiently. We offer these libraries as DNA in host cells, which researchers
must convert to virus particles prior to use, or as frozen suspensions of virus
particles. These suspensions are very easy to use. Researchers simply thaw them
and add them to target cell cultures.
Competent E. coli. Gene libraries are usually first constructed in E. coli
bacteria. This requires the transfer of millions of genes into host E. coli. If
the E. coli do not take up DNA efficiently, the libraries may be too small for
researchers to use. We prepare the most efficient E. coli available for chemical
transformation, permitting the creation of the most complete libraries. We have
genetically engineered these E. coli to be more suitable for downstream
applications. For example, DNA derived from these libraries is typically
sequenced or mapped with specific enzymes. Our E. coli have been engineered to
produce large amounts of pure DNA for these applications. We also have created
strains that are more
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<PAGE> 45
suited for replicating unstable DNA sequences and other strains that allow
higher levels of mammalian protein expression.
Lamda Phage Technologies. The most efficient way to move genes into E.
coli bacteria is by using a lambda bacteriophage vector. This is essentially a
virus capable of infecting E. coli. We offer a collection of lambda phage
vectors in our Lambda Zap family, as well as a protein extract, Gigapack, which
are capable of packaging lambda DNA molecules into so-called phage particles.
These phage particles can infect E. coli extremely efficiently. Lambda phage
libraries can be made extremely large, thereby increasing the probability of
containing all or most genes of interest.
QuikChange Mutagenesis Kit. One way to determine the function of a gene is
to modify its genetic code and determine the effect of the change when the
mutant gene is introduced into a host cell. Sometimes researchers wish to change
only a single nucleotide base of the genetic code of a gene. Making these
precise changes in the genetic code requires a very accurate procedure. Our
QuikChange site directed mutagenesis kit allows researchers to alter one or more
nucleotide bases of the genetic code with a high degree of accuracy. The
procedure is simple, fast and highly robust. The QuikChange mutagenesis kit is
the market leading kit for making changes in the genetic code.
CodonPlus E. coli. For expression of mammalian genes in E. coli bacteria,
we have engineered strains of bacteria to contain higher amounts of transfer
RNAs, which are used by cells to "read" messenger RNA and build proteins.
Bacteria do not efficiently read mammalian codons, and thus do not make
mammalian proteins as efficiently as they make bacterial proteins. By placing
mammalian-like transfer RNAs into E. coli bacteria, we have enhanced the ability
of these bacteria to produce mammalian proteins. Researchers can use our
Codon-Plus strains for producing high levels of recombinant proteins.
GeneJammer Transfection Reagent. The transfer of genes into mammalian
cells is challenging. While viral vectors are extremely efficient at
transferring genes into mammalian cells, sometimes it is not convenient to place
a gene into a viral vector and the viral genes sometimes produce undesired
effects. Genes also can be moved into mammalian cells with chemical reagents. We
have been developing various chemical reagents to accomplish this. Our
GeneJammer transfection reagent is one of the highest efficiency, non-viral
reagents for mammalian gene transfer. It permits researchers to move genes into
mammalian cells without the need for any viral vector or other extraneous DNA
sequences. We plan to launch our GeneJammer transfection reagent by the end of
the first quarter 2000.
Renilla Reniformis GFP. Most researchers use a green fluorescent protein
isolated from a type of jellyfish. We recently cloned a green fluorescent
protein gene from Renilla reniformis, better known as the "sea pansy." The
Renilla protein has interesting spectral properties. This product will offer
researchers a new reporter gene that can be used independently or in conjunction
with other reporters in target cells. We plan to launch our Renilla Reniformis
GFP in the second half of 2000.
Chemokine Receptor Assays. Chemokines and their receptors represent an
area of interest for drug discovery. Chemokines are a class of specific receptor
proteins that exert a specific cellular affect upon binding their specific cell
surface receptors. We have cloned and expressed a series of different chemokines
and their associated receptors. Pharmaceutical companies are actively seeking
new drugs that can bind to chemokine receptors and thereby modulate their
activity. We have developed a special expression vector that produces very high
levels of chemokine receptors in mammalian cells. Receptor-bearing membranes are
then prepared from such cells and sold to pharmaceutical companies for drug
screening. Because pharmaceutical companies use such assays in high throughput
drug screening efforts, we have received single orders for hundreds of thousands
of assays for a single chemokine receptor.
PathDetect Indicator Cell Lines. The transfer of information within cells
proceeds along pathways that involve interactions between proteins. Activation
of such pathways often cause certain genes to be turned on or off. This is
achieved through the binding of cellular factors to regulatory sequences
upstream of the particular gene. Our PathDetect cell lines contain reporter
genes, for example, genes that effect the emission of light, under the control
of regulatory elements that normally control expression of certain genes of
interest to researchers. Cells bearing these reporter genes emit light when a
pathway that activates the
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<PAGE> 46
reporter gene is stimulated. Accordingly, these cells can be used to identify
drugs that activate a particular pathway. In addition, introduction of
expression libraries, such as those provided by Stratagene, into live PathDetect
cells can be used to find genes that activate the expression of specific genes
of interest. When this product is introduced, it will be possible for a
researcher to recover a gene responsible for activating a pathway in these live
PathDetect cells.
Nucleic Acid Purification and Analysis
StrataPrep Nucleic Acid Purification Kits. StrataPrep DNA purification
kits permit the easy purification of DNA from various sources. The kits are in
single tube and 96-well plate formats. Genomic DNA can be isolated from blood
without the need for centrifugation. The StrataPrep RNA purification kits permit
the easy purification of RNA from tissue and cellular sources. These kits also
are available in single tube and 96-well formats that permit ready use in high
throughput applications.
Enzyme Preparations. We have commercialized several different enzyme
preparations that are used in DNA synthesis and the polymerase chain reaction,
or PCR. Pfu, a DNA polymerase, synthesizes DNA with very high accuracy. However,
Pfu alone does not produce as much DNA as Taq polymerase, the most widely used
thermostable DNA polymerase. We have discovered factors that assist Pfu in the
DNA synthesis process, thereby increasing yield. Our Pfu Turbo polymerase yields
equivalent amounts of DNA as Taq polymerase and is five to ten times more
accurate than Taq polymerase.
Our Herculase product is a new formulation containing Pfu DNA polymerase
that exceeds the yields obtained with Taq polymerase, and is also more accurate
than Taq polymerase. We have positioned Herculase to compete in the
approximately $200 million Taq polymerase market, rather than solely in the
approximately $15 million high accuracy market which our other DNA polymerase
formulations currently serve. We also market a recombinant form of Taq
polymerase called Taq2000. For the conversion of RNA to DNA, we sell a reverse
transcriptase product called StrataScript.
Molecular Beacons and Kits. Quantitative PCR is facilitated by fluorescent
probes that permit the measurement of PCR product yield during the PCR process.
We have developed fluorescent DNA probes, called Sentinel Molecular Beacons,
that can quantitatively detect DNA during the PCR process. The beacons contain a
fluorescent emitter and a fluorescent quencher. When free in solution, the
beacon does not emit significant levels of light. However, upon binding to a DNA
target, the beacon emits light as a result of an increase in the molecular
distance between the emitter and the quencher. Sentinel Molecular Beacons are
used by researchers to detect and quantify DNA or RNA in sample preparations, as
well as to detect single nucleotide polymorphisms, or differences, known as
SNPs.
We have also developed enzyme kits for use in quantitative PCR reactions.
These kits contain buffers, nucleotides, enzymes, controls and protocols used in
quantitative PCR analysis.
Sentinel 2000 Instrument. Quantitative PCR is best carried out in an
instrument that can perform thermocycling and fluorescent detection
simultaneously. The Sentinel 2000 is designed for 96-well PCR reactions using a
novel heating and cooling design. The fluorescent detection capability utilizes
four separate emission light colors and four separate detection channels.
Quantitative PCR probes will emit a fluorescent signal that grows in intensity
as the target DNA sequence grows in intensity. Multiple quantitative PCR probes,
having different fluorescent wavelength properties, can be detected
simultaneously. This is particularly useful to researchers who wish to measure
the relative levels of several DNAs and/or RNAs simultaneously. This makes the
determination of relative RNA levels easy and accurate. For example, researchers
can confirm that one type of RNA molecule may be elevated in certain tumors
relative to a baseline RNA molecule, but that another type of RNA molecule may
be reduced in concentration in the same tumors. This type of evidence would
suggest that the genes that encode such RNA molecules, and their corresponding
proteins, might be involved in the cancer process. The Sentinel 2000 is
completely automated with an easy to use software interface. We plan to launch
our Sentinel 2000 product in the second quarter of 2000.
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Genomics and Bioinformatics
GeneConnection Discovery Microarrays. Each of our microarrays has over
4,000 different spotted and arrayed DNAs on glass slides. These microarrays also
contain many genes that are not available elsewhere and whose sequences are not
present in public databases. Thus, researchers using our Discovery microarrays
have a higher chance of discovering novel genes. Each DNA on a microarray is
derived from a clone that has been sequenced, and our method of producing DNA
ensures high purity of the DNA spotted on the microarrays.
Our microarray DNAs are unique in that they are prepared from the
"untranslated" regions of complementary DNA clones. The "translated" regions of
cDNAs encode protein sequences. As a result, the translated regions of the genes
for two family members of a gene family can be very similar to each other. If
sequences corresponding to the translated regions of these genes are placed onto
microarrays, various family members can bind to the same arrayed DNAs. This can
cause the researcher considerable confusion about the expression levels of genes
for specific members of a gene family. Untranslated regions tend to be unique
for each gene and thus are highly specific for each corresponding messenger RNA.
As a result, untranslated regions of each cDNA spotted on Stratagene microarrays
are much less likely to show undesirable reactions between gene family members.
GeneConnection Discovery Clones. We have systematically sequenced regions
of clones from our DNA libraries and recorded the sequence data into searchable
databases. Some of these sequenced clones are spotted onto our Discovery
Microarrays, and then added to our Discovery clone collection. Other clones are
simply added to the Discovery clone collection, and are available to researchers
as individual clones or as groups of clones. Our Discovery clones can be found
using a key word and sequence search engine available for free on the
GeneConnection Virtual Lab section of our web site. For example, a researcher
who has found an interesting sequence by browsing sequences available in the
public domain can also search our GeneConnection site for the same sequences. If
a sequence match is found, the researcher can order a clone of the related gene
from us. Our GeneConnection bioinformatics site is integrated into our
e-commerce web site. This allows researchers to place electronic orders when
they are searching for sequences, and to easily go back and forth between
ordering and searching. Approximately 20% of our Discovery clones are currently
not available in public clone collections, thus giving researchers the ability
to acquire genes from us that are not available elsewhere.
GeneConnection Expression Clones. Some clones are of particular interest
to researchers, such as those that encode cell surface receptors, tumor
suppressor genes and signaling pathways. We have been systematically cloning the
full-length open reading frames of human genes into expression vectors that are
capable of expressing in either E. coli or mammalian cells. The DNA sequence of
each clone is carefully sequenced, which has led to interesting discoveries of
gene variants, family members and single nucleotide polymorphisms. These clones
can be found using a key word and sequence search engine available for free on
the GeneConnection Virtual Lab section of our web site. We plan to launch our
GeneConnection Expression Clones in the second quarter of 2000.
GeneConnection Virtual Lab. A number of companies offer search tools for
finding products of molecular biology suppliers. In order to maintain our close
customer relationships, and to address the efforts of these companies that are
seeking to act as intermediaries between us and our customers, we have developed
our own bioinformatics search tools. Our GeneConnection Virtual Lab allows
researchers to search our databases, at no cost, on our web site. This tool can
be used to locate our molecular biology and genomics research products using
search terms, such as keywords, gene names, genomic accession numbers or
biological sequence information. We also offer registered customers a tool for
searching public domain databases. While bioinformatics and Internet companies
charge for such services, we currently provide them on our web site to attract
customers to the Stratagene site. Our web site integrates bioinformatics with
e-commerce. Having customers frequently visit the site for reference information
allows us to promote products during these visits. Moreover, when customers find
"hits" during their search sessions, our web site automatically identifies the
Stratagene products and catalog numbers related to such hits. Customers can
order products on-line and at the same time continue their bioinformatics
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searches. This not only helps to sell products, but also helps to profile the
interests of our customers for future marketing initiatives.
pKO Gene Knockout System. We have a relationship with Lexicon Genetics
whereby we distribute vectors that can be used to "knockout" genes in mice. The
vectors are introduced into early stage mouse embryos. These vectors have been
designed to "damage" a targeted gene in such embryos. If a researcher wishes to
study the natural role of a specific gene, then the researcher can clone that
gene into a knockout vector, introduce the gene into mouse embryos, and
ultimately obtain mice that are deficient in that gene. If the mice show an
abnormality, then it is likely that such gene is involved in a pathway
responsible for the normal trait. This method has been used to look for genes
involved in a number of medical conditions, such as obesity and tumor
susceptibility. Drug discovery companies use knockout technology to validate
candidate drug targets and confirm that they are involved in certain signaling
pathways.
RESEARCH AND DEVELOPMENT
We have a strong scientific team. Our research and development department
has over 80 employees, 22 of whom have Ph.D.s or M.D.s. Our employees actively
stay abreast of scientific and industry developments in an effort to identify
and acquire innovative technologies from researchers and research institutions
throughout the world. We own 88 patents and have over 100 patent applications
pending. We spent $4.4 million, $7.8 million and $11.4 million on proprietary
research and development activities during the years 1997, 1998 and 1999,
respectively. In 2000, we expect to increase our investment in research and
development by an additional 10% over our 1999 research and development
expenditures.
Our core strengths are in the areas of molecular biology, including gene
cloning, gene expression and gene libraries. We have focused research groups in
DNA replication factors, nucleic acid purification, E. coli and mammalian
genetics, microarrays and bioinformatics. We have an internal DNA sequencing and
bioinformatics facility capable of generating proprietary DNA sequence data in a
high throughput setting.
SALES AND MARKETING
We currently market our products in over 45 countries worldwide. We sell
our products directly to customers in the U.S., Canada, Germany, France, the
United Kingdom and 14 other countries. In addition, we use specialized
distributors to market our products in more than 25 other countries. As of
January 31, 2000, we employed 80 highly trained and skilled people in our sales
and marketing department to market our products and provide customer technical
support and service. Over 70% of our sales and marketing staff have degrees in
biological sciences and over 50% have advanced degrees.
Our customers include most major pharmaceutical and biotechnology
companies, including Merck, Pfizer, Amgen and Genentech. We also serve almost
all academic research laboratories, including the National Institutes of Health,
Harvard University, Stanford University and the University of California system.
As a result of our long history of providing products to the molecular biology
research market, we enjoy a high degree of brand awareness.
Due to the highly technical nature of our products, we employ and train
scientists to work as technical sales representatives. Each technical sales
representative has an extensive background in molecular biology, including time
spent in the laboratory doing research prior to being hired by the sales
department. To guide the professional training of our technical sales
representatives, we have developed a comprehensive product training and
consultative selling skills curriculum called Stratagene University. Technical
sales representatives matriculate through a series of courses to increase their
product knowledge and develop the skills necessary to assist customers in making
informed buying decisions. Strong consultative skills, in-depth product
knowledge and a thorough understanding of molecular biology techniques and the
research process allow our sales representatives to become advisors, acting in a
consultative role with their customers. Our technical sales representatives also
seek to identify unmet market needs and opportunities for licensing and product
development.
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Our marketing departments in La Jolla, California and Amsterdam, the
Netherlands combine various types of advertising media and methods to inform
customers of new product developments and enhancements to existing products. We
advertise in many prominent scientific journals, periodically publish a product
catalog, distribute quarterly Strategies newsletters and conduct direct mail
campaigns to researchers in the U.S. and Europe. We also reach a broad range of
scientists by presenting at scientific seminars and exhibiting at scientific
meetings.
Our web site allows researchers to learn about new products, view an
on-line catalog, place orders, download technical manuals and vector sequences,
read our newsletter and subscribe to monthly announcements about new products
and other pertinent scientific information. In January 2000, our web site logged
40,000 hits. We currently accept orders on-line and are working to make our
entire order fulfillment and billing processes available to our customers
electronically. As a result, we expect to be fully able to support our customers
as they seek to shift their purchasing from current conventional procurement
processes to e-commerce over the Internet.
MANUFACTURING
We maintain manufacturing facilities in La Jolla, California and the
Austin, Texas area. Operations at the La Jolla facility focus on fermentation,
high capacity purification of native and recombinant proteins, as well as the
production of microarrays and gene clone and library collections. Our Texas
facility, which was completed in 1999, supports both biological and
instrumentation manufacturing. Biological manufacturing includes fermentation,
bulk production of competent E. coli and engineered mammalian cell lines, and
production of vectors, cloning kits and kits for nucleic acid purification,
labeling and detection. Our Texas facility also includes production lines for
all instrumentation products, with instrument service facilities housed at both
the Austin and Amsterdam sites. The addition of our Texas facility has
significantly increased our production capacity. Manufacturing at both the La
Jolla and Austin facilities are supported by an integrated planning, purchasing
and warehousing system, which includes incoming materials inspection and quality
assurance testing. New product introductions, and existing product and process
improvements are supported by a biological process improvement department within
the manufacturing sector. All products must meet or exceed rigid quality control
testing specifications.
PATENTS AND PROPRIETARY TECHNOLOGIES
We consider the protection of our proprietary technologies and products to
be important to the success of our business. We rely on a combination of
patents, licenses, trade secrets and trademarks to establish and protect our
proprietary rights in our technologies and products. Our product portfolio
includes many products in which we have a proprietary interest. As of February
29, 2000, we had 54 issued U.S. patents and over 60 pending U.S. patent
applications and 34 granted foreign patents and 37 pending foreign patent
applications. Additionally, we have entered into over 35 licenses with academic,
government or commercial entities, which provide us with access to additional
technologies. To stimulate growth, we increased our investment in research and
development in 1999 to over 20% of product sales. This increased investment in
research and development is designed to continue an accelerated rate of new
intellectual property creation.
Generally, patents issued in the U.S. have a term of 17 years from the date
of issue for patents issued from applications submitted prior to June 8, 1995
and 20 years from the date of filing of the application in the case of patents
issued from applications submitted on or after June 8, 1995. Patents in most
other countries have a term of 20 years from the date of filing the patent
application. Most patent applications in the U.S. are maintained in secrecy
until the patents are issued. Patent applications in foreign countries are
usually not published until 18 months after they are filed. Also, the
publication of discoveries in scientific or patent literature tends to lag
behind actual discoveries by at least several months. As a result, there may be
patent applications or scientific discoveries we are not currently aware of.
Accordingly, we cannot assure you that patents will issue from any of our patent
applications or from applications licensed to us.
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Our success depends to a significant degree upon our ability to develop
proprietary products and technologies. It is important to our success that we
adequately protect our intellectual property associated with these products and
technologies. We intend to continue to file patent applications as we develop
new products and technologies. Patents provide some degree of protection for our
intellectual property. However, the assertion of patent protection involves
complex legal and factual determinations and is therefore uncertain and
expensive. See "Risk Factors -- Inability to Secure and Maintain Intellectual
Property Protection for Our Products and Technologies Could Adversely Affect Our
Ability to Compete" and "-- Intellectual Property Litigation Could Seriously
Harm Our Business."
TECHNOLOGY LICENSING
Products accounting for over 25% of our total revenues in 1999 were sold
pursuant to license agreements. Under these agreements, we pay royalties to the
licensor based upon a percentage of the sales of the products containing or
utilizing the licensed technology and/or intellectual property rights. We
believe that our ability to license new technologies from third parties is and
will continue to be important to our ability to offer new products.
Our significant licenses include:
- PCR Research Reagent Products. We have acquired a non-exclusive license
from Hoffmann-La Roche and Roche Molecular Systems, Inc. which includes
rights to use PCR and Taq polymerase in our research efforts as well as
rights to manufacture, promote and sell products, including Taq
polymerase and enzymes we develop or license, for PCR for the research
field of use.
- Thermal Cyclers/PCR. We have acquired a non-exclusive license from PE
Biosystems which grants rights to promote and sell to end-users thermal
cyclers and temperature cycling instruments as authorized thermal cyclers
for the automated performance of PCR for the research field of use.
In addition to these licenses, we maintain a portfolio of license rights to
make, use and/or sell many of the various technologies underlying our products.
In order to secure these licenses, we provide various financial and other
considerations to the patent holder or the holder of such license rights.
Typically, our licenses include an initial license fee and continuing royalties.
A number of these licenses also include annual maintenance fees and/or minimum
annual royalties. A license may contain other undertakings by us, such as a
commitment to diligently pursue development and marketing of commercial products
utilizing the licensed technology and/or intellectual property rights and
payments at certain milestones, for example, at the first commercial sale of a
product.
There can be no assurance that we will be able to continue to successfully
identify new technologies developed by others. Even if we are able to identify
new technologies of interest, we may not be able to negotiate a license on
favorable terms, or at all. See "Risk Factors -- Failure to License New
Technologies Could Impair Our New Product Development." Some of our licenses may
not run for the life of the applicable patent. We may not be able to renew our
existing licenses on favorable terms, or at all. If we lose our rights to
patented technology, we may need to redesign our products or we may lose a
competitive advantage. Potential competitors could license technologies that we
fail to license and potentially erode our market share for certain products. See
"Risk Factors -- Loss of Licenses Could Adversely Affect Our Business."
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COMPETITION
The markets for our products are highly competitive. We expect the
intensity of competition to increase. Our principal competitors in each of our
three market categories include the following:
<TABLE>
<CAPTION>
NUCLEIC ACID PURIFICATION GENOMICS AND
GENETIC TECHNOLOGIES AND ANALYSIS BIOINFORMATICS
- -------------------------- ------------------------- ---------------------
<S> <C> <C>
Invitrogen Corporation Qiagen Incyte
Pharmaceuticals
Clontech (Becton, PE Biosystems Celera Genomics
Dickinson)
Amersham Pharmacia Biotech Invitrogen
Corporation
(Nycomed Amersham) Affymetrix
Life Technologies Human Genome Sciences
Promega Corporation
New England Biolabs
</TABLE>
Many of our competitors have greater financial, operational and sales and
marketing resources and more experience in research and development than us.
These competitors and other companies may have developed or could in the future
develop new technologies that compete with our products or which could render
our products obsolete. See "Risk Factors -- The Markets for Our Products are
Extremely Competitive and Subject to Rapid Technological Change and If We Fail
to Compete Effectively, Our Business May Suffer."
We believe that customers in our markets display a significant amount of
loyalty to their initial supplier of a particular product. Therefore, there is a
significant competitive advantage in being the first to introduce a new product
to market. Accordingly, we believe that to compete effectively, we will need to
consistently be first to market with innovative new research products and
services. See "Risk Factors -- Our Future Success Depends on the Timely
Introduction of New Products and the Acceptance of These New Products in the
Marketplace."
GOVERNMENT REGULATION
We are not subject to direct governmental regulation other than the laws
and regulations generally applicable to businesses in the jurisdictions in which
we operate, including those governing the handling and disposal of hazardous
wastes and other environmental matters. Our research and development activities
involve the controlled use of small amounts of hazardous materials, chemicals
and radioactive compounds. Although we believe that our safety procedures for
handling and disposing of such materials comply with applicable regulations, the
risk of accidental contamination or injury from these materials cannot be
completely eliminated. In the event of such an accident, we could be held liable
for resulting damages. Any such liability could have a material adverse effect
on us. However, we do not expect that compliance with the governmental
regulations to which we are subject will have a material effect on our capital
expenditures, earnings or competitive position.
EMPLOYEES
As of January 31, 2000, we employed 355 persons, of whom 41 hold Ph.D. or
M.D. degrees. As of that date, 83 employees were engaged in research and
development, 80 in sales and marketing, 120 in manufacturing and 72 in
supporting business development, information services, intellectual property,
legal, finance and other functions. We believe that we maintain good relations
with our employees.
FACILITIES
We lease an approximately 52,000 square foot facility in La Jolla,
California which serves as our headquarters, as well as our base for marketing
and product support operations and research and development activities. We own
an approximately 6,000 square foot facility in Jackson Hole, Wyoming, operated
exclusively for genomics research and development activities. We also own
approximately 42 contiguous acres in the Austin, Texas area, where during 1998
and 1999 we constructed a modern 85,000
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square foot facility to support product manufacturing activities, warehousing
and distribution. We also lease an approximately 7,300 square foot facility in
Amsterdam, the Netherlands to support European sales and distribution. Our
manufacturing operations occupy approximately 15,000 square feet in our La
Jolla, California facility and approximately 25,000 square feet in our Texas
facility. We believe that adequate facilities will be available upon the
conclusion of our current leases to operate our business.
LEGAL PROCEEDINGS
As of the date of this prospectus, we are not engaged in any legal
proceeding that we expect to have a material adverse effect on our business,
financial condition or results of operations.
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MANAGEMENT
EXECUTIVE OFFICERS AND DIRECTORS
Our executive officers and directors and their ages as of February 29, 2000
are as follows:
<TABLE>
<CAPTION>
NAME AGE POSITIONS
- ---- --- ---------
<S> <C> <C>
Joseph A. Sorge, M.D. ............... 45 Chairman of the Board, Chief Executive Officer and Chief
Financial Officer
Ronni L. Sherman..................... 43 Executive Vice President, General Counsel and Assistant
Secretary
John R. Pouk......................... 44 Vice President, Sales and Customer Service
Michael L. Muhich, Ph.D. ............ 42 Vice President, Operations
Carlton J. Eibl...................... 39 Director
Stephen A. Kaplan.................... 41 Director
Harold S. Eastman.................... 61 Director
Stephen O. James..................... 55 Director
</TABLE>
Joseph A. Sorge, M.D., a founder of Stratagene, has served as chairman of
our board of directors and as our chief executive officer since 1986 and as our
chief financial officer since March 2000. Dr. Sorge earned B.S. degrees in
biology and chemistry from the Massachusetts Institute of Technology in 1975 and
earned his M.D. degree from Harvard Medical School in 1979. Dr. Sorge served as
a resident surgeon at Brown University from 1979 to 1980. In addition to his
medical experience, Dr. Sorge trained as a post-doctoral fellow at Cold Spring
Harbor Laboratories from 1980 to 1983 and served as an Assistant Member of the
Department of Basic and Clinical Research for Scripps Clinic and Research
Foundation from January 1983 to September 1986. Dr. Sorge is currently an
Adjunct Member of Scripps Clinic and Research Foundation. He is a member of the
American Society of Human Genetics and the American Society for Microbiology.
Ronni L. Sherman currently serves as our executive vice president and
general counsel. Ms. Sherman joined Stratagene in April 1988. Prior to joining
us, Ms. Sherman served as associate counsel for Hybritech Incorporated from
August 1984 to April 1988. Ms. Sherman earned her J.D. from Emory University
School of Law and holds a B.S. degree in biology from the State University of
New York at Binghamton. She is a member of the bar in the states of California
and Texas, and is registered to practice before the U.S. Patent and Trademark
Office.
John R. Pouk currently serves as our vice president of sales and customer
service. Before being appointed to this position in October 1999, he served as
our director of North American sales from July 1996 until December 1997 and as
our director of worldwide sales from December 1997 until October 1999. From
September 1979 until joining Stratagene, Mr. Pouk served in various capacities
within the life-sciences and medical divisions of Fisher Scientific Company,
including serving as the vice president and general manager of the western
region from October 1989 until July 1996. Mr. Pouk holds a B.A. degree in
biology and a graduate degree in medical technology from Augustana College.
Michael L. Muhich, Ph.D. has served as our vice president of operations
since October 1999. Before being appointed to this position, Dr. Muhich served
as the general manager of our molecular systems division from February 1999 to
September 1999 and as the business manager of our nucleic acid analysis &
enzymes business unit from March 1996 to January 1999. Before joining
Stratagene, Dr. Muhich held various positions in the biotech development
division of Beckman Instruments Inc. Dr. Muhich holds a doctorate in biology
from the University of California, Los Angeles, was a postdoctoral fellow in
microbiology and immunology at the Stanford University School of Medicine and
was a senior research fellow in the chemistry and chemical engineering division
at the California Institute of Technology.
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<PAGE> 54
Carlton J. Eibl has served as a member of our board of directors since
February 1999. Since December 1999, Mr. Eibl has served as president and chief
executive officer of Maxwell Technologies, Inc., a publicly held power and
computing technology company. From February 1999 until November 1999, Mr. Eibl
served as our president and chief operating officer. Before joining Stratagene,
Mr. Eibl held various executive positions with Mycogen Corporation, including
serving as Mycogen's chief executive officer from June 1997 until February 1999
and its president and chief operating officer from June 1995 until June 1997. He
holds a B.A. degree from Cornell University and a J.D. degree from Boston
University School of Law. Mr. Eibl also serves on the board of directors of
Maxwell Technologies, Inc.
Stephen A. Kaplan has served as a member of our board of directors since
January 1996. Since June 1995, Mr. Kaplan has been a principal of Oaktree
Capital Management, LLC. From November 1993 until May 1995, he was Managing
Director of the Trust Company of the West. He holds a J.D. degree from New York
University School of Law and a B.S. degree in political science for the State
University of New York at Stony Brook. Mr. Kaplan serves on the boards of
directors of Acorn Products, Inc., Biopure Corporation, Cherokee International
LLC, CollaGenex Pharmaceuticals, Inc., Geologistics Corporation, KinderCare
Learning Centers, Inc and Roller Bearing Holding Company, Inc.
Harold S. Eastman has served as a member of our board of directors since
January 1996. Mr. Eastman has been president of Peregrine Capital since 1993.
From 1989 to 1993 he was president and vice chairman of McCaw Cellular and from
1986 to 1989 he was president of Fisher Scientific Company. Mr. Eastman received
a B.A. in economics from the University of Puget Sound and an M.B.A. from the
Stanford Graduate School of Business.
Stephen O. James has served as a member of our board of directors since
January 1996. Mr. James has been an independent executive business consultant
since July 1993. From 1984 to July 1993, Mr. James was president and chief
executive officer of Biomagnetic Technologies, Inc. Mr. James also serves on the
boards of directors of SCC Communications and Inflow. He received his B.A.
degree in economics from Denison University.
COMMITTEES OF OUR BOARD OF DIRECTORS
Prior to the completion of this offering, we will form an audit committee
and a compensation committee of our board of directors. The audit committee of
our board of directors will recommend the appointment of our independent
auditors, review our internal accounting procedures and financial statements and
consult with and review the services provided by our independent auditors,
including the results and scope of their audit. The compensation committee of
our board of directors will review and recommend to our board of directors the
compensation and benefits of our executive officers and establish and review
general policies relating to compensation and benefits of our employees.
COMPOSITION OF OUR BOARD OF DIRECTORS
Our board of directors is currently fixed at five directors. Messrs. Kaplan
and Eastman were elected to serve on our board of directors under a stockholders
agreement entered into in connection with the issuance of our convertible
subordinated notes. Messrs. Kaplan and Eastman are the designees of TCW Special
Credits Fund V, one of our stockholders. After this offering, TCW Special
Credits Fund V will be entitled to designate two members to our board of our
directors, subject to the terms of the stockholders agreement. See "Certain
Transactions -- Issuance of Convertible Subordinated Notes."
Upon the closing of this offering, our amended and restated certificate of
incorporation will provide that the terms of office of the members of our board
of directors will be divided into three classes: Class I, whose term will expire
at the annual meeting of stockholders to be held in 2001; Class II, whose term
will expire at the annual meeting of stockholders to be held in 2002; and Class
III, whose terms will expire at the annual meeting of stockholders to be held in
2003. The Class I director will be Mr. James, the Class II directors will be Mr.
Eastman and Mr. Eibl, and the Class III directors will be Mr. Kaplan and Dr.
Sorge. At each annual meeting of stockholders after the initial classification,
the successors to directors whose term will then expire will be elected to serve
from the time of election and qualification until the
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<PAGE> 55
third annual meeting following their election. Our non-employee directors devote
such time to our affairs as is necessary to discharge their duties. There are no
family relationships among any of our directors, officers or key employees.
DIRECTOR COMPENSATION
Except for reimbursement of reasonable travel expenses relating to
attendance at board meetings and discretionary grants of stock options, our
directors are not currently compensated for their services as directors. We have
issued a promissory note to TCW Special Credits Fund V in the principal amount
of $425,000 as consideration for financial advisory services provided to us by
TCW Special Credits Fund V. See "Certain Transactions -- Financial Advisory
Fee." Mr. Kaplan and Mr. Eastman serve on our board of directors as the
designees of TCW Special Credits Fund V. See "Certain Transactions -- Issuance
of Convertible Subordinated Notes."
EXECUTIVE COMPENSATION
The following table sets forth information regarding compensation received
during the year ended December 31, 1999 by our chief executive officer and the
four other current and former executive officers whose total cash compensation
earned during the year ended December 31, 1999 exceeded $100,000.
<TABLE>
<CAPTION>
LONG-TERM
COMPENSATION
ANNUAL COMPENSATION -----------------
-------------------- SHARES UNDERLYING
NAME AND PRINCIPAL POSITIONS SALARY($) BONUS($) OPTIONS/SARS(#)
- ---------------------------- --------- -------- -----------------
<S> <C> <C> <C>
Joseph A. Sorge, M.D.(1).................................... 928,803 -- 31,092
Chairman of the Board and Chief Executive Officer
Ronni L. Sherman............................................ 273,388 8,000 120,000
Executive Vice President, General Counsel and
Assistant Secretary
John R. Pouk................................................ 184,517 -- 208,000
Vice President, Sales and Customer Service
Michael L. Muhich, Ph.D. ................................... 156,250 -- 60,000
Vice President, Operations
Carlton J. Eibl(2).......................................... 277,324 -- 249,600
Director; Former President and Chief Operating Officer
</TABLE>
- ---------------
(1) Dr. Sorge's salary includes payments made to Dr. Sorge by us, our
subsidiaries and our affiliates. This amount excludes approximately $1.3
million we paid to Dr. Sorge in 1999 as consideration for his personal
guarantee of our outstanding indebtedness. See "Certain Transactions -- Loan
Guarantee Payment."
(2) Mr. Eibl was employed by us between February 1999 and November 1999. The
amount shown in the salary column reflects amounts we actually paid to Mr.
Eibl in 1999.
OPTION GRANTS
The following table sets forth information regarding grants of stock
options to each of the executive officers named in the executive compensation
table above during the year ended December 31, 1999. The percentage of total
options set forth below is based on 1,338,000 options granted during the year
ended December 31, 1999. All options were granted at the fair market value of
our common stock, as determined by the board of directors on the date of grant.
Potential realizable values are net of exercise price, but before taxes
associated with exercise. Amounts represent hypothetical gains that could be
achieved for the options if exercised at the end of the option term. The assumed
5% and 10% rates of stock price
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<PAGE> 56
appreciation are provided in accordance with rules of the SEC and do not
represent our estimate or projection of the future common stock price.
<TABLE>
<CAPTION>
POTENTIAL REALIZABLE VALUE
NUMBER OF PERCENTAGE AT ASSUMED ANNUAL RATES
SHARES OF TOTAL OF STOCK PRICE APPRECIATION
UNDERLYING OPTIONS EXERCISE FOR OPTION TERMS($)
OPTIONS GRANTED TO PRICE PER EXPIRATION ---------------------------
NAME GRANTED(#) EMPLOYEES SHARE($) DATE 5% 10%
- ---- ---------- ---------- --------- ---------- ------------ ------------
<S> <C> <C> <C> <C> <C> <C>
Joseph A. Sorge, M.D. .............. -- -- -- -- -- --
Ronni L. Sherman.................... -- -- -- -- -- --
John R. Pouk........................ -- -- -- -- -- --
Michael L. Muhich, Ph.D. ........... -- -- -- -- -- --
Carlton J. Eibl(1).................. 1,248,000 93.3% $3.75 5/15/06 1$,905,230.. $4,439,996
</TABLE>
- ---------------
(1) We granted Mr. Eibl this option in February 1999. The option terminated with
respect to 998,400 shares in November 1999.
OPTION EXERCISES AND FISCAL YEAR-END OPTION VALUES
The following table sets forth information about the exercise of options to
acquire our common stock by the named executive officers during 1999 and
year-end option amounts and values. The value realized upon the exercise of
options is calculated based on the difference between the assumed initial public
offering price of $ per share and the option exercise price, multiplied by
the number of shares to which the exercise relates. The value of unexercised
in-the-money options at fiscal year-end is calculated based on the difference
between the assumed initial public offering price of $ per share and the
option exercise price, multiplied by the number of shares underlying the option.
<TABLE>
<CAPTION>
NUMBER OF SECURITIES VALUE OF UNEXERCISED
UNDERLYING UNEXERCISED IN-THE-MONEY OPTIONS AT
SHARES OPTIONS AT FISCAL YEAR-END FISCAL YEAR-END
ACQUIRED ON VALUE --------------------------- ---------------------------
NAME EXERCISE REALIZED EXERCISABLE UNEXERCISABLE EXERCISABLE UNEXERCISABLE
- ---- ----------- -------- ----------- ------------- ----------- -------------
<S> <C> <C> <C> <C> <C> <C>
Joseph A. Sorge, M.D. ......... -- -- -- -- -- --
Ronni L. Sherman............... -- -- 80,000 40,000 $ $
John R. Pouk................... -- -- 85,920 122,080 $ $
Michael L. Muhich, Ph.D. ...... -- -- 36,000 24,000 $ $
Carlton J. Eibl................ -- -- -- 249,600 -- $
</TABLE>
EMPLOYMENT AGREEMENTS
We entered into an employment agreement with Dr. Sorge on December 6, 1995.
The term of this agreement ends December 1, 2002, but we and Dr. Sorge may agree
to extend the term for up to two successive one-year terms. Pursuant to the
employment agreement, Dr. Sorge is employed as the chairman of our board of
directors and chief executive officer and receives an annual base salary of
$750,000 subject to minimum annual increases of 5.0%. Dr. Sorge has agreed to
reduce his annual salary upon the closing of this offering to $450,000. This
salary will be subject to annual increases at the discretion of our board of
directors. Dr. Sorge is also entitled to receive other benefits we make
available to our executive officers under our employee benefit plans.
If Dr. Sorge is terminated without cause, as defined in the employment
agreement, he is entitled to receive the following benefits:
- a severance payment equal to all salary, benefits and other compensation
due under the employment agreement;
- the vesting of all stock options issued by us to him under any of our
stock option plans;
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<PAGE> 57
- the forgiveness by us of any obligations owed to us by him, including the
repayment of any loans payable by him to us and the termination of any
stock pledges granted by him to us;
- the right to have us purchase all or any portion of the shares of our
stock held by him and to pay for such shares at fair market value within
thirty days after the termination of his employment; and
- the right to continued participation in our benefit plans for the
remainder of the term of employment.
If Dr. Sorge's employment is terminated due to death, resignation or for
cause, as defined in the employment agreement, all salary and benefits cease
immediately.
We entered into an employment agreement with Mr. Pouk on July 1, 1996. The
term of this agreement ends July 1, 2001, but we may agree with Mr. Pouk to
extend the term for successive one-year periods. Pursuant to the employment
agreement, Mr. Pouk is employed as director of North American sales and receives
a minimum base annual salary of $135,000 and is eligible to receive a
performance-based bonus. We may provide Mr. Pouk with such salary increases as
we, in our sole discretion, determine. If we choose to terminate Mr. Pouk's
employment without cause, Mr. Pouk will be entitled to a severance payment equal
to the continuation of his base salary for up to one year from the date of
termination, subject to certain limitations should Mr. Pouk accept comparable
employment elsewhere. In no event, however, will our severance obligations to
Mr. Pouk exceed an amount equal to one year's base salary minus any compensation
payable to him from some other source in exchange for his services. If Mr.
Pouk's employment relationship with us is terminated for any other reason, Mr.
Pouk's right to receive his salary and benefits ceases immediately.
Pursuant to the employment agreement, we granted Mr. Pouk options to
purchase 208,000 shares of our common stock. Of these options, 83,200 options
vest at a rate of 20% per year on each of the first five anniversaries of the
vesting commencement date. The remaining 124,800 options vest if Mr. Pouk
satisfies certain performance targets for the sale of products in the
territories under his management. As of December 31, 1999, 36,000 of these
performance-based options had vested.
401(k) PROFIT SHARING PLAN
Our 401(k) plan covers all eligible employees and is intended to qualify as
a tax-qualified plan under the Internal Revenue Code. Employees are eligible to
participate in the plan on the first day of the month following three months of
service at our company. The plan provides that each participant may contribute
up to 15% of his or her pre-tax gross compensation up to a statutory limit,
which is $10,500 in 2000. All amounts contributed by participants and earnings
on participant contributions are fully vested at all times. Effective January 1,
2000, we match 25% of the contributions of employees with one to three years of
service up to a maximum of $1,000, 25% of the contributions of employees with
three to six years of service up to maximum of $1,750, and 30% of the
contributions of employees with six or more years of service up to a maximum of
$2,500. Our contributions vest immediately.
STOCK OPTION PLAN
Prior to the offering, we will amend and restate our existing stock option
plan. Our stock option plan is intended to promote our long-term growth and
profitability, improve stockholder value, and attract, retain and reward highly
motivated and qualified employees. The stock option plan is currently
administered by a single administrator; however, after the completion of the
offering, the stock option plan will be administered by a committee of our board
of directors.
As amended, the stock option plan will authorize our board to grant options
to purchase shares of our common stock. We can grant options to
employees, officers and consultants in the form of incentive stock options and
nonstatutory stock options.
The stock option plan provides that the administrator will interpret and
administer the stock option plan and all decisions of the administrator are
final. The administrator therefore has the authority to select
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<PAGE> 58
the persons to whom grants are to be made, to designate the number of shares of
common stock to be covered by such grants, to determine the exercise price of
options, and to make all other determinations and to take all other actions
necessary or advisable for the administration of the plan.
The exercise price of incentive stock options granted under the stock
option plan must not be less than the fair market value of a share of our common
stock on the date of grant. In the case of nonstatutory stock options, the
exercise price must not be less than the fair market value on the date of grant
unless otherwise agreed to by the board of directors. With respect to an
incentive stock option granted to an optionee who owns stock representing more
than 10% of the voting power of all classes of our outstanding capital stock,
the exercise price of the option must be equal to at least 110% of fair market
value on the date of grant, and the term of the option may not exceed five
years. The terms of all other options may not exceed five years and three
months. The aggregate fair market value of the common stock for which incentive
stock options may become exercisable for the first time by any optionee may not
exceed $100,000 in any calendar year.
Except as may be specifically provided for under a particular stock option
agreement, in the event of a change of control, as defined in the plan,
outstanding options will terminate unless the company acquiring us assumes the
option or substitutes a substantially equivalent option for stock in the company
acquiring us.
Under the plan, all options, to the extent unexercised and exercisable on
the date of the optionee's termination of employment, may be exercised at any
time prior to one year after the death or total and permanent disability of the
optionee and three months after the termination of employment in cases other
than death or disability.
The administrator may terminate or amend the stock option plan or option
agreements thereunder at any time; however, subject to certain exceptions, an
optionee's consent must be obtained if the proposed amendment would impair the
rights of that optionee. Options granted under the stock option plan are not
transferable otherwise than by will or by the laws of descent and distribution,
and may be exercised during the optionee's lifetime only by the optionee or the
optionee's guardian or legal representative.
As of December 31, 1999, we have granted currently outstanding options to
purchase 1,468,000 shares of common stock under our stock option plan, at
exercise prices ranging from $1.25 to $3.75 per share. Such options generally
vest over five years, with 20% vesting on each anniversary of the vesting
commencement date, and generally expire five years and three months from the
date of grant.
Upon the closing of the offering, we intend to grant options to purchase an
aggregate of approximately 1,459,200 shares of our common stock to our
employees, officers and directors at an exercise price equal to the initial
public offering price. Of these options, we intend to grant an option to
purchase 100,000 shares of our common stock to each of Mr. Eibl and Ms. Sherman.
PHANTOM STOCK PLAN
One of our subsidiaries, Stratagene, has a phantom stock plan which
provided for phantom stock rights and phantom stock option rights for some of
our employees. In March 2000, the holders of phantom stock rights agreed,
subject to the completion of the offering, to terminate these rights in exchange
for a cash payment equal to the value of such phantom stock rights, based on the
initial public offering price, and options to purchase our common stock. We also
agreed, subject to the completion of the offering, to convert the phantom stock
option rights into options to purchase our common stock.
As a result of the termination of the phantom stock plan upon the closing
of the offering, we will issue options to purchase an aggregate of approximately
462,648 shares of our common stock and make aggregate cash payments of
approximately $1.2 million.
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<PAGE> 59
CERTAIN TRANSACTIONS
Formation of Stratagene Holding Corporation. We were formed by Dr. Sorge
in 1995 to acquire all of the outstanding capital stock of one of our
subsidiaries, Stratagene. We purchased all of the capital stock of Stratagene
not held by Dr. Sorge in December 1995. The prior holders of this stock included
Dr. Sorge's father and brother and entities affiliated with Dr. Sorge's father
and brother.
Issuance of Convertible Subordinated Notes. In December 1995, we sold
approximately $23.8 million of principal amount of convertible subordinated
notes due December 1, 2002 to TCW Special Credits Fund V -- The Principal Fund
in exchange for a cash payment of approximately $12.3 million. We used the
proceeds from the issuance of these notes to pay a portion of the purchase price
for the outstanding capital stock of Stratagene.
The holder of over a majority of the principal amount of the notes has
agreed to convert its notes into shares of our common stock upon the closing of
the offering. Accordingly, under the instrument governing the notes, we intend
to convert these notes, together with the remainder of the notes, into 9,600,000
shares of our common stock upon the closing of the offering. As a result of the
conversion, TCW Special Credits Fund V will hold more than 5% of our common
stock.
Under a stockholders agreement entered into in connection with the issuance
of these notes, we agreed that TCW Special Credits Fund V would be entitled to
designate two members of our board of directors. Dr. Sorge also agreed to vote
his shares of common stock in favor of the two persons designated by TCW Special
Credits Fund V. After the offering, we have agreed to nominate, and Dr. Sorge
has agreed to vote in favor of, two directors designated by TCW Special Credits
Fund V for so long as they hold at least 50% of the common stock they will
receive upon conversion of the convertible subordinated notes. If TCW Special
Credits Fund V owns more than 5% but less than 10% of our outstanding common
stock, we have agreed to nominate, and Dr. Sorge has agreed to vote in favor of,
one director designated by TCW Special Credits Fund V. Mr. Kaplan and Mr.
Eastman currently serve on our board of directors as the designees of TCW
Special Credits Fund V.
We also granted registration rights to the holders of the convertible
subordinated notes. See "Description of Capital Stock -- Registration Rights."
Financial Advisory Fees. In December 1996, we agreed to pay TCW Special
Credits Fund V an annual financial advisory fee of $250,000 in each of 1996,
1997 and 1998. In July 1999, TCW Special Credits Fund V agreed to reduce the
total amount of advisory fees from $750,000 to $425,000. At this time, we issued
TCW Special Credits Fund V a promissory note in the principal amount of
$425,000. The note bears interest at 10.00% per annum and was originally due and
payable on April 1, 2000. In March 2000, we and TCW Special Credits Fund V
amended the terms of the note to provide that the note is now due and payable on
the earlier to occur of September 30, 2000 or the closing of this offering. We
intend to use a portion of the proceeds of this offering to repay this note.
Loans to Officers. We have made a number of loans to Dr. Sorge and
entities affiliated with Dr. Sorge over the past several years in exchange for
promissory notes. Interest rates on the promissory notes vary between 5.91% and
9.50%, as of December 31, 1999. The loans are generally secured by pledges of
our common stock held by Dr. Sorge and are non-recourse to him. The largest
aggregate outstanding principal amount that Dr. Sorge owed us during the period
from 1997 to 1999 was approximately $4.2 million in August 1998. Dr. Sorge
repaid $400,000 of the amount he owed us in September 1998. Dr. Sorge applied
the loan guarantee payment we paid to him in January 1999 to repay approximately
$1.3 million of the amount he owed us. See "-- Loan Guarantee Payment" and Note
6 to our combined financial statements. As of February 29, 2000, Dr. Sorge owed
us approximately $2.6 million under these promissory notes.
In April 1996, we loaned $106,525 to Ms. Sherman, our general counsel and
executive vice president, in exchange for two promissory notes. The promissory
notes bear interest at the prime rate, are secured by the pledge of 85,220
shares of our common stock held by Ms. Sherman and are non-recourse to her. All
principal and interest under the promissory notes is due and payable on the
earlier to occur of events
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<PAGE> 60
specified in the promissory notes or April 10, 2001. As of February 29, 2000,
Ms. Sherman owed us approximately $142,000 under these promissory notes.
Loan Guarantee Payment. In January 1996, we agreed to provide Dr. Sorge a
payment in consideration for his personal guarantee of debt owed by us to
various parties, including debt under our bank credit facilities. In January
1999, we paid Dr. Sorge approximately $1.3 million to satisfy this obligation.
Dr. Sorge used this loan guarantee payment to repay a portion of the outstanding
amount he owed us pursuant to a series of loans we had made to Dr. Sorge in
1997, 1998 and 1999. See "-- Loans to Officers."
Matters Relating to Carlton J. Eibl. Mr. Eibl served as our president and
chief operating officer from February 1999 through November 1999. When Mr. Eibl
commenced his employment with us, he purchased 133,336 shares of our common
stock at a price of $3.75 per share and 33,334 membership interests in BioCrest
Holdings at a price of $0.05 per interest. We had the right to repurchase these
shares if Mr. Eibl's employment terminated for any reason before the one-year
anniversary of his employment with us. In February 1999, we also issued Mr. Eibl
an option to acquire 1,248,000 shares of our common stock at an exercise price
of $3.75 per share and an option to acquire 312,000 membership interests in
BioCrest Holdings at an exercise price of $0.005 per interest. This option was
granted at an exercise price that equaled the fair value of our stock as of the
date of grant.
We entered into a resignation agreement with Mr. Eibl in November 1999.
Pursuant to his resignation agreement, we agreed that Mr. Eibl would continue to
serve as a member of our board of directors until his successor is elected. We
also agreed to grant Mr. Eibl an option to acquire shares of our common stock
for each year he sits on our board. Mr. Eibl agreed to provide consulting
services to us for a maximum period of four months following his resignation.
Under the terms of his employment agreement, Mr. Eibl's option continued to
vest through February 15, 2000 with respect to 249,600 shares. The remaining
options to acquire 998,400 shares terminated in November 1999. In addition, we
waived our right to repurchase 133,336 shares of common stock owned by Mr. Eibl.
BioCrest Holdings also agreed to waive its repurchase rights with respect to
33,334 membership interests in BioCrest Holdings held by Mr. Eibl. As of
February 15, 2000, Mr. Eibl held vested options to acquire 62,400 membership
interests in BioCrest Holdings. The remaining options to acquire 249,600
membership interests in BioCrest Holdings terminated in November 1999.
Issuance of Stock Options to Mr. Eastman. In 1996, we issued an option to
acquire 400,000 shares of common stock to Mr. Eastman, a member of our board of
directors, at an exercise price of $1.25 per share, which equaled the fair value
of our common stock as of the date of grant. Mr. Eastman exercised a portion of
the option in 1998 and the remainder of the option in 1999.
Transactions with Affiliates of BioCrest Holdings. Pursuant to the terms
of a merger agreement entered into in March 2000, BioCrest Holdings, a company
under common control and management with Stratagene Holding Corporation, has
agreed to merge with and into us. This merger is contingent upon the closing of
the offering. The membership interests in BioCrest Holdings are beneficially
owned by members of our management and our stockholders, including Dr. Sorge, an
affiliate of TCW Special Credits Fund V, Mr. Eibl, Mr. Eastman, Ms. Sherman and
Mr. James. In exchange for their membership interests in BioCrest Holdings, we
have agreed to pay the members of BioCrest Holdings aggregate consideration
equal to the book value of BioCrest Holdings' assets as of the effective date of
the merger. We expect that the book value of these assets will be approximately
$600,000. The table below indicates
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<PAGE> 61
the percentage of the total consideration that we will pay to each beneficial
owner of membership interests upon the consummation of the merger:
<TABLE>
<CAPTION>
PERCENTAGE OF AGGREGATE
NAME OF BENEFICIAL OWNER CONSIDERATION TO BE RECEIVED
- ------------------------ ----------------------------
<S> <C>
Joseph A. Sorge, M.D. ................................ 73.7%
TCW Special Credits Fund V............................ 22.9%
Carlton J. Eibl....................................... 0.9%
Harold S. Eastman..................................... 1.4%
Ronni L. Sherman...................................... 0.7%
Stephen O. James...................................... 0.3%
</TABLE>
We intend to use a portion of the proceeds of the offering to pay the
merger consideration.
BioCrest Holdings owns 100% of the ownership interests in Phenogenex, LLC.
As a result of our merger with BioCrest Holdings, Phenogenex will become one of
our subsidiaries. In 1998 and 1999, we contracted with Phenogenex to perform
research and development services for us on a cost plus basis. The expenses we
incurred under this research and development contract were approximately $1.5
million in 1998 and approximately $4.3 million in 1999.
BioCrest Holdings also holds a 49% interest in Cenetron Diagnostics. Dr.
Sorge is a member of Cenetron's board of directors. Cenetron leases space from
us in our Texas facility for approximately $10,000 per month. In 1999, Cenetron
paid us approximately $40,000 under this lease.
Acquisition of Affiliated Entities. In December 1998, we acquired from
BioCrest Holdings all of BioCrest Holdings' membership interests in BioCrest
Distribution, LLC and BioCrest Wyoming, LLC. In consideration for these
membership interests, we released BioCrest Holdings from all further obligations
under a prior manufacturing, marketing and distribution agreement with us. We
also assumed all outstanding obligations and liabilities of BioCrest
Distribution and BioCrest Wyoming except for net accounts payable of $83,000
BioCrest Distribution owed us. In connection with this agreement, BioCrest
Partners, L.P., a partnership under common control with us, granted BioCrest
Holdings an option to purchase 25.7 acres of unimproved land adjacent to our
facility near Austin, Texas at a price equal to the original $285,000 purchase
price paid by BioCrest Partners for such land. BioCrest Holdings also issued us
a promissory note bearing interest at 5.00% per year and due January 2004 in the
principal amount of $864,000 for funds we previously advanced to BioCrest
Holdings in connection with BioCrest Holdings' purchase of a 49% equity interest
in Cenetron Diagnostics and certain assets of Phenogenex, LLC.
Other Related Party Disclosures. In connection with our purchase in
December 1995 of the outstanding stock of one of our subsidiaries, Stratagene,
that was held by affiliates of Dr. Sorge's father and brother, we issued them
promissory notes in an aggregate principal amount of approximately $1.9 million.
These promissory notes carried an interest rate of 7.5% per annum. We repaid
these promissory notes in full in September 1999. In addition, we paid
approximately $1.4 million in 1997 and 1998 to these individuals under covenants
not to compete and settlement agreements related to the December 1995 stock
purchase.
In November 1999, BioCrest Holdings declared and paid a $0.2 million
distribution to the holders of its membership interests on a pro rata basis. Dr.
Sorge received approximately $150,000 of this distribution.
In 1997, we paid Dr. Sorge $0.2 million for the use of specified
intellectual property rights.
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<PAGE> 62
PRINCIPAL AND SELLING STOCKHOLDERS
The following table sets forth certain information with respect to
beneficial ownership of our common stock as of March 9, 2000 and as adjusted to
reflect the conversion of the convertible subordinated notes and the sale of
shares of common stock offered in this offering, as to:
- each person, or group of affiliated persons, known by us to own
beneficially more than 5% of our outstanding common stock;
- each of our directors;
- each of the executive officers named in the executive compensation table;
and
- all our directors and executive officers as a group.
Beneficial ownership is determined in accordance with the rules of the SEC
and generally includes voting or investment power with respect to securities.
All shares of common stock subject to options exercisable within 60 days
following March 9, 2000 are deemed to be outstanding and beneficially owned by
the person holding those options for the purpose of computing the number of
shares beneficially owned and the percentage of ownership of that person. They
are not, however, deemed to be outstanding and beneficially owned for the
purpose of computing the percentage ownership of any other person.
Except as indicated in the other footnotes to the table and subject to
applicable community property laws, based on information provided by the persons
named in the table, these persons have sole voting and investment power with
respect to all shares of the common stock shown as beneficially owned by them.
Unless otherwise indicated, the address of each of the individuals and entities
named below is: 11011 North Torrey Pines Road, La Jolla, California 92037.
<TABLE>
<CAPTION>
SHARES BENEFICIALLY SHARES BENEFICIALLY
OWNED OWNED
BEFORE THE OFFERING NUMBER OF AFTER THE OFFERING
-------------------- SHARES --------------------
BENEFICIAL OWNER NUMBER PERCENT BEING OFFERED NUMBER PERCENT
- ---------------- ---------- ------- ------------- ---------- -------
<S> <C> <C> <C> <C> <C>
Joseph A. Sorge, M.D.(1).................... 30,831,092 75.5%
Ronni L. Sherman(2)......................... 260,000 *
John R. Pouk(3)............................. 85,920 *
Michael L. Muhich, Ph.D.(4)................. 48,000 *
Carlton J. Eibl(5).......................... 382,936 *
Harold S. Eastman(6)........................ 556,000 1.4%
Stephen O. James(7)......................... 120,000 *
Stephen A. Kaplan(8)........................ 9,132,724 22.4%
TCW Special Credits Fund V -- The Principal
Fund(9)................................... 9,132,724 22.4%
All directors and executive officers as a
group (8 persons)......................... 40,976,672 99.2%
</TABLE>
- ---------------
* Less than 1%.
(1) Includes 934,256 shares of common stock held by Joseph A. Sorge Trust I,
453,120 shares of common stock held by Joseph A. Sorge Trust II, 934,256
shares of common stock held by Joseph A. Sorge Trust III, and 453,120
shares of common stock held by Joseph A. Sorge Trust IV. Also includes
480,000 shares of common stock held by BioSense Partners, L.P., of which
Dr. Sorge is the general partner. Also includes 40,000 shares of common
stock held by Mr. James and 400,000 shares of common stock held by Mr.
Eastman, over which Dr. Sorge has voting power. Also includes options for
31,092 shares of common stock which are exercisable within 60 days of March
9, 2000.
(2) Includes options for 100,000 shares of common stock which are exercisable
within 60 days of March 9, 2000.
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<PAGE> 63
(3) Includes options for 85,920 shares of common stock which are exercisable
within 60 days of March 9, 2000.
(4) Includes options for 48,000 shares of common stock which are exercisable
within 60 days of March 9, 2000.
(5) Includes options for 249,600 shares of common stock which are exercisable
within 60 days of March 9, 2000.
(6) Includes 156,000 shares of common stock to be issued upon conversion of our
convertible subordinated notes. Dr. Sorge has voting control over 40,000
shares held by Mr. Eastman.
(7) Dr. Sorge has voting control over 40,000 shares held by Mr. James.
(8) Represents 9,132,724 shares of common stock held by TCW Special Credits
Fund V, of which Mr. Kaplan is a principal of its general partner. Mr.
Kaplan disclaims beneficial ownership of these shares.
(9) Represents the portion of the 9,600,000 shares of common stock to be issued
to the holders of our convertible subordinated notes that will be held by
TCW Special Credits Fund V upon the closing of the offering. The address of
TCW Special Credits Fund V is c/o Oaktree Capital Management, LLC, 333
South Grand Avenue, 28th Floor, Los Angeles, CA 90071.
(10) Includes options for 514,612 shares of common stock which are exercisable
within 60 days of March 9, 2000; and 9,132,724 shares of common stock held
by TCW Special Credits Fund V, as to which Mr. Kaplan disclaims beneficial
ownership.
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<PAGE> 64
DESCRIPTION OF CAPITAL STOCK
Upon the closing of this offering, our authorized capital stock will
consist of shares of common stock, $0.0001 par value per share, and
shares of preferred stock, $0.0001 par value per share. The following
is a summary of the material terms of our common stock and preferred stock which
will be in effect upon the closing of the offering. Please see the form of our
amended and restated certificate of incorporation, filed as an exhibit to the
registration statement of which this prospectus is a part, for more detailed
information.
COMMON STOCK
We currently have two classes of common stock, voting class A common stock
and non-voting class B common stock. Upon the consummation of the offering, each
currently outstanding share of class B common stock will be automatically
converted into class A common stock and the class A common stock will be
reclassified as common stock. After giving pro forma effect to the conversion of
our convertible subordinated notes into shares of our common stock and the
conversion and reclassification of the class A and B common stock, as of March
9, 2000, there were approximately 40,787,416 shares of common stock outstanding
that were held of record by approximately 14 stockholders. There will be
shares of common stock outstanding (assuming no exercise of
outstanding options) after giving effect to the sale of shares of common stock
offered by this prospectus.
Each holder of common stock will be entitled to one vote per share on all
matters to be voted upon by our stockholders. Subject to preferences that may be
applicable to any outstanding preferred stock, the holders of our common stock
will be entitled to receive ratably any dividends that may be declared from time
to time by our board of directors out of funds legally available therefor. In
the event of our liquidation, dissolution or winding up, the holders of our
common stock will be entitled to share ratably in all assets remaining after
payment of liabilities, subject to prior rights of holders of preferred stock,
if any, then outstanding. The common stock will have no preemptive, conversion
rights or other subscription rights. There will be no redemption or sinking fund
provisions available to the common stock. All outstanding shares of common stock
will be fully paid and non-assessable.
PREFERRED STOCK
Upon the closing of the offering, we will be permitted to issue up to
shares of undesignated preferred stock in accordance with the terms
of our amended and restated certificate of incorporation. Our board of directors
will have the authority, without further action by our stockholders, to issue
preferred stock in one or more series. In addition, our board of directors will
be able to prescribe for each series of preferred stock they establish, the
number of shares in that series, the number of votes, if any, to which the
shares in that series are entitled, the consideration to be received for
issuance of the shares in that series, and the designations, powers, preferences
and other rights, qualifications, limitations or restrictions of the shares in
that series.
We believe that the availability of the preferred stock will provide us
with increased flexibility in structuring possible future financings and in
meeting other corporate needs that may arise. The authorized shares of preferred
stock, as well as our common stock, will be available for issuance without
further stockholder action, unless action is required by applicable law, the
rules of any stock exchange on which our securities may be listed, any
then-existing contractual restrictions or unless we are restricted by the terms
of any then-outstanding preferred stock.
Depending upon the rights prescribed for a series of preferred stock, the
issuance of preferred stock could have an adverse effect on the voting power of
the holders of common stock and could adversely affect holders of common stock
by delaying or preventing a change in control of us, making removal of our
present management more difficult or imposing restrictions upon the payment of
dividends and other distributions to the holders of common stock.
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<PAGE> 65
REGISTRATION RIGHTS
Pursuant to the terms of a registration rights agreement dated December 6,
1995 between us and TCW Special Credits Fund V, we granted registration rights
to TCW Special Credits Fund V with respect to shares of our common stock they
will receive upon conversion of the convertible subordinated notes. Holders of
50% of such shares are entitled to demand that we register their shares under
the Securities Act of 1933 subject to limitations described in the registration
rights agreement. We are not required to effect more than one registration for
such holders pursuant to these demand registration rights.
In connection with this offering, Stratagene and TCW Special Credits Fund V
have agreed to amend the registration rights agreement and add Dr. Sorge as a
party to the agreement. Pursuant to the amended registration rights agreement,
upon the earlier of 18 months following the completion of this offering or such
time as TCW Special Credits Fund V has received at least $25 million of gross
proceeds from its sales of our common stock other than in connection with this
offering, Dr. Sorge and his affiliates will be granted one demand registration
right and the right to participate pro rata with TCW Special Credits Fund V in
unlimited piggyback registrations initiated by Stratagene. Dr. Sorge and his
affiliates have also been granted the right to participate pro rata with TCW
Special Credits Fund V in this offering. Under the original terms of the
registration rights agreement, Dr. Sorge and his affiliates would be prohibited
from registering any of his shares of our common stock until TCW Special Credits
Fund V had sold all of its shares of our common stock.
If we propose to register our equity securities either for our own account
or for the account of other security holders, these holders will have piggyback
registration rights entitling them to include their shares in the registration,
subject to limitations. We are generally required to bear all of the expenses of
all of these registrations, including the reasonable fees of a single counsel
acting on behalf of all selling stockholders not in excess of $50,000. The
registration rights of the parties to the registration rights agreement expire
on the earlier to occur of the date which is five years after our first
underwritten offering of our common stock or, with respect to each qualified
holder, the date when all of the shares held by such qualified holder may be
sold in any 90-day period pursuant to Rule 144. As a result of the amendment to
the registration rights agreements, the holders of virtually all of the
outstanding shares of our common stock prior to the offering will have
registration rights.
ANTI-TAKEOVER PROVISIONS OF CHARTER, BYLAWS AND DELAWARE LAW
Our amended and restated certificate of incorporation and bylaws will
contain provisions that are intended to enhance the likelihood of continuity and
stability in the composition of our board of directors and in the policies
formulated by our board of directors. In addition, provisions of Delaware law
may hinder or delay an attempted takeover of us other than through negotiation
with our board of directors. These provisions could have the effect of
discouraging attempts to acquire us or remove incumbent management even if some
or a majority of our stockholders believe this action to be in their best
interest, including attempts that might result in the stockholders receiving a
premium over the market price for their shares of common stock.
Removal and replacement of directors. Under our amended and restated
certificate of incorporation and bylaws, directors may only be removed with
cause. In addition, a majority of the directors then in office can fill board
vacancies and newly-created directorships resulting from any increase in the
size of the board of directors, even if those directors do not constitute a
quorum or only one director is left in office. These provisions could prevent
stockholders, including parties who want to take over or acquire us, from
removing incumbent directors without cause and filling the resulting vacancies
with their own nominees.
Classified board. Our amended and restated certificate of incorporation
provides that, upon the closing of this offering, the board of directors will be
divided into three classes of directors, with each class serving a staggered
three-year term. See "Management -- Composition of Our Board of Directors." The
classification system of electing directors may discourage a third party from
making a tender offer or otherwise attempting to obtain control of us and may
maintain the incumbency of the board of directors,
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<PAGE> 66
because the classification of the board of directors generally increases the
difficulty of replacing a majority of the directors.
Advance notice provisions for stockholder proposals and stockholder
nominations of directors. Our bylaws establish an advance notice procedure
regarding stockholder proposals and nominations for directors. The advance
notice procedure will not apply to proposals by our board of directors or
management. Any stockholder that wishes to make a proposal or nominate a
director for election at an annual meeting must deliver to us notice of the
proposal or the nomination not less than 45 days nor more than 90 days before
the first anniversary of the proxy statement for the preceding year's annual
meeting. For a special meeting, the notice must generally be delivered not less
than 70 days nor more than 90 days before a special meeting or ten days
following the day on which public announcement of the meeting is first made.
This advance notice proposal could prevent someone interested in acquiring us
from proposing actions that could facilitate the takeover.
Special meetings of stockholders and actions in lieu of a meeting. Our
amended and restated certificate of incorporation and bylaws permit special
meetings of the stockholders to be called only by the board of directors, the
chairman of the board or the chief executive officer. The stockholders may take
action by written consent in lieu of a meeting only if such consent is signed by
all stockholders. These provisions may make it more difficult for stockholders
to take actions opposed by the board of directors.
Authorized but unissued shares. Without further stockholder approval, we
can issue shares of common stock and preferred stock up to the number of shares
authorized for issuance in our amended and restated certificate of
incorporation, except as limited by Nasdaq National Market rules. We could use
these additional shares for a variety of corporate purposes. These purposes
include future public offerings to raise additional capital, corporate
acquisitions and employee benefit plans. Our ability to issue these shares of
common stock and preferred stock could make it more difficult, or discourage an
attempt, to obtain control of us by means of a proxy contest, tender offer,
merger or otherwise.
Section 203 of Delaware Law. In addition to the foregoing provisions of
our amended and restated certificate of incorporation and bylaws, we will be
subject to the provisions of Section 203 of the Delaware General Corporation
Law. In general, the statute prohibits a publicly-held Delaware corporation from
engaging in a "business combination" with an "interested stockholder" for a
period of three years after the date that the person became an interested
stockholder unless, with exceptions, the business combination or the transaction
in which the person became an interested stockholder is approved in a prescribed
manner. Generally, a "business combination" includes a merger, asset or stock
sale or other transaction resulting in a financial benefit to the stockholder,
and an "interested stockholder" is a person who, together with affiliates and
associates, owns, or within three years prior, did own, 15% or more of the
corporation's outstanding voting stock. This provision may have the effect of
delaying, deferring or preventing a change in control of us without further
action by our stockholders.
TRANSFER AGENT AND REGISTRAR
The Transfer Agent and Registrar for the common stock will be ChaseMellon
Shareholder Services LLC.
LISTING
We have applied to have our common stock approved for listing on the Nasdaq
National Market under the trading symbol "STGN."
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<PAGE> 67
SHARES ELIGIBLE FOR FUTURE SALE
Before this offering, there has been no public market for our common stock.
A significant public market for our common stock may not develop or be sustained
after this offering. Future sales of substantial amounts of our common stock in
the public market, or the possibility of these sales occurring, could adversely
affect prevailing market prices for our common stock or our future ability to
raise capital through an offering of equity securities.
Upon completion of this offering, we will have outstanding shares
of common stock. Of these shares, the shares to be sold in this
offering, shares if the underwriters' over-allotment options are
exercised in full, will be freely tradable in the public market without
restriction under the Securities Act, unless the shares are held by "affiliates"
of Stratagene, as that term is defined in Rule 144 under the Securities Act.
Almost all of the remaining shares of common stock outstanding upon completion
of this offering may be sold in the public market only if they are registered or
if they qualify for an exemption from registration under Rule 144 or Rule 701
under the Securities Act, as summarized below.
Pursuant to "lock-up" agreements, all executive officers and directors and
substantially all stockholders, including holders of vested options, have agreed
with the underwriters not to offer, sell, contract to sell, grant any option to
purchase or otherwise dispose of any of their shares for a period of 180 days
from the date of this prospectus. A total of outstanding shares of
common stock and shares underlying options are subject to these lock-up
agreements. We also have entered into an agreement with the underwriters that we
will not offer, sell or otherwise dispose of common stock for a period of 180
days from the date of this prospectus, subject to limited exceptions. However,
Merrill Lynch & Co. may in its sole discretion, at any time without notice,
consent to the release of all or any portion of the shares subject to lock-up
agreements.
Taking into account the lock-up agreements, and assuming Merrill Lynch &
Co. does not release stockholders from these agreements, the following shares
will be eligible for sale in the public market at the following times:
- on the date of this prospectus, the shares sold in the offering
will be immediately available for sale in the public market; and
- 181 days after the date of the prospectus, approximately shares
will be eligible for sale, of which will be eligible for sale
under Rule 144 from time to time.
In general, under Rule 144, beginning 90 days after the date of this
prospectus, a person, or persons whose shares are aggregated, 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 not to exceed the
greater of (1) one percent of the then outstanding shares of common stock or (2)
the average weekly trading volume of our common stock during the four calendar
weeks preceding the filing of a Form 144 with respect to the sale. Sales under
Rule 144 are also subject to manner of sale and notice requirements, as well as
to the availability of current public information about us. Under Rule 144(k), a
person who is not deemed to have been an affiliate at any time during the 90
days preceding a sale and who has beneficially owned the shares proposed to be
sold for at least two years is entitled to sell the shares without complying
with the manner of sale, public information, volume limitation or notice
provisions of Rule 144.
As of March 9, 2000, we have outstanding options to purchase 1,468,000
shares of common stock. Shares issued upon exercise of options granted by us
prior to the date of this prospectus will be available for sale in the public
market under Rule 701 of the Securities Act, following expiration of the 180-day
lock-up period. Rule 701 permits resales of these shares in reliance upon Rule
144 but without compliance with various restrictions, including the holding
period requirement, imposed under Rule 144.
In addition, we intend to file, after the effective date of this offering,
a registration statement on Form S-8 to register approximately shares
of common stock reserved for issuance under our stock option plan. The
registration statement will become effective automatically upon filing. Shares
issued
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<PAGE> 68
under our stock option plan, after the filing of the registration statement may
be sold in the open market following expiration of the 180-day lock-up period,
subject, in the case of some holders, to the Rule 144 limitations applicable to
affiliates and vesting restrictions imposed by us.
In addition, following this offering, the holders of shares of
outstanding common stock will, under some circumstances, have rights to require
us to register their shares for future sale. See "Description of Capital
Stock -- Registration Rights."
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<PAGE> 69
UNITED STATES FEDERAL TAX CONSIDERATIONS FOR NON-U.S. HOLDERS
The following is a summary of certain United States federal income and
estate tax consequences of the ownership and disposition of our common stock by
non-U.S. holders. As used herein, "non-U.S. holder" means any person or entity
that holds our common stock, other than:
- an individual citizen or resident of the United States;
- a corporation created or organized in or under the laws of the United
States, or of any state of the United States or the District of Columbia;
or
- a partnership, trust or estate treated, for United States federal income
tax purposes, as a domestic partnership, trust or estate.
This summary is based on provisions of the U.S. Internal Revenue Code of
1986, as amended, existing, temporary and proposed United States Treasury
regulations promulgated thereunder and administrative and judicial
interpretations of each, all as of the date hereof and all of which are subject
to change, possibly on a retroactive basis.
This summary is for general information only. The tax treatment of a
particular non-U.S. holder may vary depending on the holder's particular
situation. In addition, this summary does not include any description of the tax
laws of any state, local or non-U.S. government that may be applicable to a
particular non-U.S. holder.
PROSPECTIVE PURCHASERS ARE URGED TO CONSULT THEIR OWN TAX ADVISORS WITH
RESPECT TO THE PARTICULAR U.S. FEDERAL INCOME AND ESTATE TAX CONSEQUENCES TO
THEM OF THE OWNERSHIP AND DISPOSITION OF OUR COMMON STOCK, AS WELL AS THE TAX
CONSEQUENCES UNDER STATE, LOCAL, NON-U.S. AND OTHER U.S. FEDERAL INCOME TAX LAWS
AND THE POSSIBLE EFFECTS OF CHANGES IN TAX LAWS.
INCOME TAX
Dividends
Generally, dividends paid on our common stock to a non-U.S. holder will be
subject to U.S. federal income tax. Except for dividends that are effectively
connected with a non-U.S. holder's conduct of a trade or business within the
United States, this tax is imposed and collected by withholding at the rate of
30% of the amount of the dividend, unless reduced by an applicable income tax
treaty. Currently, dividends paid to an address in a country other than the
United States are presumed to be paid to a resident of that country in
determining whether a non-U.S. holder can benefit from a reduced withholding tax
rate pursuant to a tax treaty.
However, under United States Treasury regulations applicable to dividend
and other payments made after December 31, 2000, a non-U.S. holder who is the
beneficial owner (within the meaning of the regulations) of dividends paid on
our common stock and who wishes to claim the benefit of an applicable treaty is
generally required to satisfy certification and documentation requirements,
including (in certain cases) the need to make recertifications for periods after
December 31, 2000. Special rules apply to claims for treaty benefits made by
non-U.S. persons that are entities rather than individuals and to beneficial
owners (within the meaning of the regulations) of dividends paid to entities in
which the beneficial owners hold interests.
A non-U.S. holder that is eligible for a reduced rate of U.S. withholding
tax pursuant to a tax treaty may obtain a refund of any excess amounts withheld
by filing an appropriate claim for refund with the Internal Revenue Service.
Except as may be otherwise provided in an applicable income tax treaty,
dividends paid on our common stock to a non-U.S. holder that are effectively
connected with the holder's conduct of a trade or business within the United
States are subject to tax at ordinary U.S. federal income tax rates. This tax is
not collected by withholding (except as described below under "-- Backup
Withholding and Information Reporting"). All or part of any effectively
connected dividends received by a non-U.S. corporation may
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<PAGE> 70
also, under certain circumstances, be subject to an additional branch profits
tax which will be imposed at a 30% rate or, possibly, a reduced rate under an
applicable income tax treaty. A non-U.S. holder who wishes to claim an exemption
from withholding for effectively connected dividends is generally required to
satisfy certain certification and documentation requirements.
Disposition of Our Common Stock
Generally, non-U.S. holders will not be subject to U.S. federal income tax
(or withholding thereof) in respect of gain recognized on a disposition of our
common stock unless:
(i) the gain is effectively connected with the holder's conduct of a
trade or business within the United States (in which case the branch
profits tax described above may also apply if the holder is a non-U.S.
corporation);
(ii) in the case of a holder who is a non-resident alien individual
and holds our common stock as a capital asset, the holder is present in the
United States for 183 or more days in the taxable year of the sale and
other conditions are met;
(iii) we are or have been a "United States real property holding
corporation" for U.S. federal income tax purposes (which we do not believe
we are or have been and do not expect to become in the future) and certain
other conditions are met; or
(iv) the holder is subject to tax pursuant to United States federal
income tax provisions applicable to certain United States expatriates.
Estate Tax
If an individual non-U.S. holder owns, or is treated as owning, our common
stock at the time of his or her death, such stock would be includable in the
individual's gross estate for U.S. federal estate tax purposes and may be
subject to U.S. federal estate tax imposed on the estates of nonresident aliens,
in the absence of a contrary provision contained in an applicable tax treaty.
BACKUP WITHHOLDING AND INFORMATION REPORTING
Dividends
Under current law, dividends paid on our common stock to a non-U.S. holder
at an address outside the United States are generally exempt from backup
withholding tax and U.S. information reporting requirements (but not from
regular withholding tax as discussed above). Under the Treasury regulations that
are applicable to dividends paid after December 31, 2000, a non-U.S. person must
generally provide proper documentation indicating the person's non-U.S. status
to a withholding agent in order to avoid backup withholding tax.
Broker Sales
Payments of proceeds from the sale of our common stock by a non-U.S. holder
made to or through a U.S. office of a broker are generally subject to both
information reporting and backup withholding at a rate of 31% unless the holder
certifies its non-U.S. status under penalties of perjury or otherwise
establishes entitlement to an exemption. Payments of proceeds from the sale of
our common stock by a non-U.S. holder made to or through a non-U.S. office of a
broker generally will not be subject to information reporting or backup
withholding. However, payments made to or through certain non-U.S. offices,
including the non-U.S. offices of a U.S. broker, are generally subject to
information reporting (but not backup withholding) unless the holder certifies
its non-U.S. status under penalties of perjury or otherwise establishes
entitlement to an exemption.
A non-U.S. holder may obtain a refund of any excess amounts withheld under
the backup withholding rules by filing an appropriate claim for refund with the
I.R.S.
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<PAGE> 71
UNDERWRITING
We intend to offer the shares in the U.S. and Canada through the U.S.
underwriters and elsewhere through the international managers. Merrill Lynch,
Pierce, Fenner & Smith Incorporated, Salomon Smith Barney Inc., Dain Rauscher
Incorporated and Prudential Securities Incorporated are acting as U.S.
representatives of the U.S. underwriters named below. Subject to the terms and
conditions described in a U.S. purchase agreement among us, the selling
stockholders and the U.S. underwriters, and concurrently with the sale of
shares to the international managers, we and the selling stockholders
have agreed to sell to the U.S. underwriters, and the U.S. underwriters
severally have agreed to purchase from us and the selling stockholders, the
number of shares listed opposite their names below.
<TABLE>
<CAPTION>
NUMBER
U.S. UNDERWRITER OF SHARES
---------------- ---------
<S> <C>
Merrill Lynch, Pierce, Fenner & Smith
Incorporated...................................
Salomon Smith Barney Inc....................................
Dain Rauscher Incorporated..................................
Prudential Securities Incorporated..........................
--------
Total..........................................
========
</TABLE>
We and the selling stockholders have also entered into an international
purchase agreement with the international managers for sale of the shares
outside the U.S. and Canada for whom Merrill Lynch International, Salomon
Brothers International Limited, Dain Rauscher Incorporated and Prudential-Bache
(U.K.) Inc. are acting as lead managers. Subject to the terms and conditions in
the international purchase agreement, and concurrently with the sale of
shares to the U.S. underwriters pursuant to the U.S. purchase
agreement, we and the selling stockholders have agreed to sell to the
international mangers, and the international managers severally have agreed to
purchase shares from us and the selling stockholders. The initial
public offering price per share and the total underwriting discount per share
are identical under the U.S. purchase agreement and the international purchase
agreement.
The U.S. underwriters and the international managers have agreed to
purchase all of the shares sold under the U.S. and international purchase
agreements if any of these shares are purchased. If an underwriter defaults, the
U.S. and international purchase agreements provide that the purchase commitments
of the nondefaulting underwriters may be increased or the purchase agreements
may be terminated. The closings for the sale of shares to be purchased by the
U.S. underwriters and the international managers are conditioned on one another.
We, our two principal operating subsidiaries, Stratagene and BioCrest
Manufacturing, and the selling stockholders have agreed to indemnify the U.S.
underwriters and the international managers against certain liabilities,
including liabilities under the Securities Act, or to contribute to payments the
U.S. underwriters and international managers may be required to make in respect
of those liabilities.
The underwriters are offering the shares, subject to prior sale, when, as
and if issued to and accepted by them, subject to approval of legal matters by
their counsel, including the validity of the shares, and other conditions
contained in the purchase agreements, such as the receipt by the underwriters of
officer's certificates and legal opinions. The underwriters reserve the right to
withdraw, cancel or modify offers to the public and to reject orders in whole or
in part.
COMMISSIONS AND DISCOUNTS
The U.S. representatives have advised us and the selling stockholders that
the U.S. underwriters propose initially to offer the shares to the public at the
initial public offering price on the cover page of this prospectus and to
dealers at that price less a concession not in excess of $ per share.
The U.S. underwriters may allow, and the dealers may reallow, a discount not in
excess of $ per share
66
<PAGE> 72
to other dealers. After the initial public offering, the public offering price,
concession and discount may be changed.
The following table shows the public offering price, underwriting discount
and proceeds before expenses to Stratagene and the selling stockholders. The
information assumes either no exercise or full exercise by the U.S. underwriters
and the international managers of their over-allotment options.
<TABLE>
<CAPTION>
PER SHARE WITHOUT OPTION WITH OPTION
--------- -------------- -----------
<S> <C> <C> <C>
Public offering price.................................. $ $ $
Underwriting discount.................................. $ $ $
Proceeds, before expenses, to Stratagene............... $ $ $
Proceeds, before expenses, to the selling
stockholders......................................... $ $ $
</TABLE>
The expenses of the offering, not including the underwriting discount, are
estimated at $ and are payable by Stratagene.
OVER-ALLOTMENT OPTION
We and the selling stockholders have granted options to the U.S.
underwriters to purchase up to additional shares at the public
offering price less the underwriting discount. The U.S. underwriters may
exercise these options for 30 days from the date of this prospectus solely to
cover any over-allotments. If the U.S. underwriters exercise these options, each
will be obligated, subject to conditions contained in the purchase agreements,
to purchase a number of additional shares proportionate to that U.S.
underwriter's initial amount reflected in the above table.
We and the selling stockholders have also granted options to the
international managers, exercisable for 30 days from the date of this
prospectus, to purchase up to additional shares to cover any
over-allotments on terms similar to those granted to the U.S. underwriters.
INTERSYNDICATE AGREEMENT
The U.S. underwriters and the international managers have entered into an
intersyndicate agreement that provides for the coordination of their activities.
Under the intersyndicate agreement, the U.S. underwriters and the international
managers may sell shares to each other for purposes of resale at the initial
public offering price, less an amount not greater than the selling concession.
Under the intersyndicate agreement, the U.S. underwriters and any dealer to whom
they sell shares will not offer to sell or sell shares to persons who are
non-U.S. or non-Canadian persons or to persons they believe intend to resell to
persons who are non-U.S. or non-Canadian persons, except in the case of
transactions under the intersyndicate agreement. Similarly, the international
managers and any dealer to whom they sell shares will not offer to sell or sell
shares to U.S. persons or Canadian persons or to persons they believe intend to
resell to U.S. or Canadian persons, except in the case of transactions under the
intersyndicate agreement.
RESERVED SHARES
At our request, the underwriters have reserved for sale, at the initial
public offering price, up to 5% of the shares offered by this prospectus for
sale to some of our employees, directors and to some individuals designated by
them. If these persons purchase reserved shares, this will reduce the number of
shares available for sale to the general public. Any reserved shares that are
not orally confirmed for purchase within one day of the pricing of this offering
will be offered by the underwriters to the general public on the same terms as
the other shares offered by this prospectus.
NO SALES OF SIMILAR SECURITIES
We, the selling stockholders, our executive officers and directors and
substantially all existing stockholders, including holders of vested options,
have agreed not to sell or transfer any common stock for
67
<PAGE> 73
180 days after the date of this prospectus without first obtaining the written
consent of Merrill Lynch. Specifically, we and these other persons have agreed
not to directly or indirectly
- offer, pledge, sell or contract to sell any common stock,
- sell any option or contract to purchase any common stock,
- purchase any option or contract to sell any common stock,
- grant any option, right or warrant for the sale of any common stock,
- lend or otherwise dispose of or transfer any common stock,
- request or demand that we file a registration statement related to the
common stock, or
- enter into any swap or other agreement that transfers, in whole or in
part, the economic consequence of ownership of any common stock whether
any such swap or transaction is to be settled by delivery of shares or
other securities, in cash or otherwise.
This lock-up provision applies to common stock and to securities
convertible into or exchangeable or exercisable for or repayable with common
stock. It also applies to common stock owned now or acquired later by the person
executing the agreement or for which the person executing the agreement later
acquires the power of disposition. We may continue to issue shares and options
under our stock option plan and file an S-8 registration statement relating to
our stock option plan.
QUOTATION ON THE NASDAQ NATIONAL MARKET
We expect the shares to be approved for quotation on the Nasdaq National
Market, subject to notice of issuance, under the symbol "STGN."
Before this offering, there has been no public market for our common stock.
The initial public offering price will be determined through negotiations among
us, the selling stockholders and the U.S. representatives and lead managers. In
addition to prevailing market conditions, the factors to be considered in
determining the initial public offering price are
- the valuation multiples of publicly traded companies that the U.S.
representatives and the lead managers believe to be comparable to us,
- our financial information,
- the history of, and the prospects for, our company and the industry in
which we compete,
- an assessment of our management, its past and present operations, and the
prospects for, and timing of, our future revenues,
- the present state of our development and
- the above factors in relation to market values and various valuation
measures of other companies engaged in activities similar to ours.
An active trading market for the shares may not develop. It is also
possible that after the offering the shares will not trade in the public market
at or above the initial public offering price. The underwriters do not expect to
sell more than 5% of the shares in the aggregate to accounts over which they
exercise discretionary authority.
PRICE STABILIZATION, SHORT POSITIONS AND PENALTY BIDS
Until the distribution of the shares is completed, SEC rules may limit
underwriters and selling group members from bidding for and purchasing our
common stock. However, the U.S. representatives may engage in transactions that
stabilize the price of the common stock, such as bids or purchases to peg, fix
or maintain that price.
68
<PAGE> 74
If the underwriters create a short position in the common stock in
connection with the offering, i.e., if they sell more shares than are listed on
the cover of this prospectus, the U.S. representatives may reduce that short
position by purchasing shares in the open market. The U.S. representatives may
also elect to reduce any short position by exercising all or part of the
over-allotment option described above. Purchases of the common stock to
stabilize its price or to reduce a short position may cause the price of the
common stock to be higher than it might be in the absence of such purchases.
The U.S. representatives may also impose a penalty bid on underwriters and
selling group members. This means that if the U.S. representatives purchase
shares in the open market to reduce the underwriter's short position or to
stabilize the price of such shares, they may reclaim the amount of the selling
concession from the underwriters and selling group members who sold those
shares. The imposition of a penalty bid may also affect the price of the shares
in that it discourages resales of those shares.
Neither we nor any of the underwriters makes any representation or
prediction as to the direction or magnitude of any effect that the transactions
described above may have on the price of the common stock. In addition, neither
we nor any of the underwriters makes any representation that the U.S.
representatives or the lead managers will engage in these transactions or that
these transactions, once commenced, will not be discontinued without notice.
LEGAL MATTERS
The validity of the common stock offered hereby will be passed upon for us
by Latham & Watkins, San Diego, California. Certain legal matters in connection
with this offering will be passed upon for the underwriters by Debevoise &
Plimpton, New York, New York.
EXPERTS
The combined financial statements and schedule of Stratagene Holding
Corporation and subsidiaries and BioCrest Holdings, LLC and subsidiaries as of
December 31, 1998, and 1999 and for each of the years in the three-year period
ended December 31, 1999, have been included herein and in the registration
statement in reliance upon the report of KPMG LLP, independent certified public
accountants, appearing elsewhere herein, and upon the authority of said firm as
experts in accounting and auditing.
WHERE YOU CAN FIND MORE INFORMATION
We have filed with the SEC a registration statement on Form S-1, including
the exhibits and schedules thereto, under the Securities Act with respect to the
shares to be sold in this offering. This prospectus does not contain all the
information set forth in the registration statement. For further information
about us and the shares to be sold in the offering, please refer to the
registration statement. Statements contained in this prospectus as to the
contents of any contract, agreement or other document referred to, are not
necessarily complete, and in each instance please refer to the copy of the
contract, agreement or other document filed as an exhibit to the registration
statement, each statement being qualified in all respects by this reference.
You may read and copy all or any portion of the registration statement or
any reports, statements or other information we file with the SEC at the SEC's
public reference room at Room 1024, Judiciary Plaza, 450 Fifth Street, N.C.,
Washington, D.C. 20549 and at the regional offices of the SEC located at Seven
World Trade Center, 13th Floor, New York, New York 10048 and the Northwestern
Atrium Center, 500 West Madison Street, Suite 1400, Chicago, Illinois 60661. You
can request copies of these documents, upon payment of a duplicating fee, by
writing to the SEC. Please call the SEC at 1-800-SEC-0330 for further
information on the operation of the public reference rooms. Our SEC filings,
including the registration statement, will also be available to you on the SEC's
web site. The address of this site is http://www.sec.gov.
69
<PAGE> 75
STRATAGENE HOLDING CORPORATION
INDEX TO COMBINED FINANCIAL STATEMENTS
<TABLE>
<S> <C>
Independent Auditors' Report................................ F-2
Combined Balance Sheets as of December 31, 1998 and 1999.... F-3
Combined Statements of Operations for the Years ended
December 31, 1997, 1998 and 1999.......................... F-4
Combined Statements of Stockholders' Deficit for the Years
ended December 31, 1997, 1998 and 1999.................... F-5
Combined Statements of Cash Flows for the Years ended
December 31, 1997, 1998 and 1999.......................... F-6
Notes to Combined Financial Statements...................... F-8
</TABLE>
F-1
<PAGE> 76
INDEPENDENT AUDITORS' REPORT
The Board of Directors
Stratagene Holding Corporation:
We have audited the accompanying combined balance sheets of Stratagene
Holding Corporation and subsidiaries and BioCrest Holdings, LLC and subsidiaries
(the Company) as of December 31, 1998 and 1999 and the related combined
statements of operations, stockholders' deficit and cash flows for each of the
years in the three-year period ended December 31, 1999. These combined financial
statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on these combined financial statements
based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the combined financial statements referred to above present
fairly, in all material respects, the financial position of Stratagene Holding
Corporation and subsidiaries and BioCrest Holdings, LLC and subsidiaries as of
December 31, 1998 and 1999 and the results of their operations and their cash
flows for each of the years in the three-year period ended December 31, 1999, in
conformity with generally accepted accounting principles.
KPMG LLP
San Diego, California
March 9, 2000
F-2
<PAGE> 77
STRATAGENE HOLDING CORPORATION
COMBINED BALANCE SHEETS
DECEMBER 31, 1998 AND 1999
<TABLE>
<CAPTION>
1998 1999
----------- ------------
<S> <C> <C>
ASSETS (PLEDGED)
Current assets:
Cash and cash equivalents................................. $ 8,636,288 $ 3,100,568
Cash -- restricted........................................ 4,129,299 1,099,340
Foreign currency exchange contracts....................... 183,066 151,382
Accounts receivable, less allowance for doubtful accounts
of $605,000 in 1998 and $266,000 in 1999................ 6,020,391 5,546,177
Inventories............................................... 5,373,675 6,195,980
Income taxes receivable................................... -- 205,846
Deferred income taxes..................................... 1,563,000 2,811,000
Prepaid expenses and other current assets................. 769,275 1,378,678
----------- ------------
Total current assets............................... 26,674,994 20,488,971
Property and equipment, net................................. 10,996,933 12,726,302
Other assets................................................ 410,215 612,505
Intangible assets, net of accumulated amortization of
$1,110,166 in 1998 and $1,348,523 in 1999................. 1,043,790 1,711,542
Investment in unconsolidated entity......................... 770,439 936,946
----------- ------------
Total assets....................................... $39,896,371 $ 36,476,266
=========== ============
LIABILITIES AND STOCKHOLDERS' DEFICIT
Current liabilities:
Accounts payable.......................................... $ 3,416,399 $ 2,516,687
Accrued compensation...................................... 1,337,586 2,228,912
Accrued expenses and other liabilities.................... 3,002,018 1,824,372
Note payable to related party............................. -- 425,000
Line of credit............................................ -- 2,500,000
Current portion of long-term debt......................... 7,192,857 3,062,858
Deferred revenue.......................................... 78,445 120,387
Income taxes payable...................................... 164,000 --
----------- ------------
Total current liabilities.......................... 15,191,305 12,678,216
Notes payable to former stockholders........................ 1,903,168 --
Long-term debt, less current portion........................ 31,970,464 30,571,497
Deferred income taxes....................................... 22,000 329,000
----------- ------------
Total liabilities.................................. 49,086,937 43,578,713
----------- ------------
Commitments and contingencies
Stockholders' equity (deficit):
Preferred stock, $.0001 par value; 4,000,000 shares
authorized; none outstanding............................ -- --
Common stock, Class A, $.0001 par value; 96,000,000 shares
authorized; 30,600,000 and 30,933,336 shares issued and
outstanding in 1998 and 1999, respectively.............. 3,060 3,093
Common stock, Class B, $.0001 par value; 4,000,000 shares
authorized; 200,000 and 254,080 shares issued and
outstanding in 1998 and 1999, respectively.............. 20 25
Additional paid-in capital................................ 548,181 5,639,043
Accumulated deficit....................................... (7,379,576) (10,054,622)
Notes receivable from stockholders........................ (2,410,309) (2,590,721)
Accumulated other comprehensive income (loss)............. 48,058 (99,265)
----------- ------------
Total stockholders' deficit........................ (9,190,566) (7,102,447)
----------- ------------
Total liabilities and stockholders' deficit........ $39,896,371 $ 36,476,266
=========== ============
</TABLE>
See accompanying notes to combined financial statements.
F-3
<PAGE> 78
STRATAGENE HOLDING CORPORATION
COMBINED STATEMENTS OF OPERATIONS
YEARS ENDED DECEMBER 31, 1997, 1998 AND 1999
<TABLE>
<CAPTION>
1997 1998 1999
----------- ----------- -----------
<S> <C> <C> <C>
Revenue:
Product sales..................................... $48,813,921 $52,715,364 $50,852,184
Contracts and government grants................... 572,756 463,424 465,416
----------- ----------- -----------
Total revenue............................. 49,386,677 53,178,788 51,317,600
----------- ----------- -----------
Costs and expenses:
Cost of products sold (excludes $905,445 included
in stock compensation charges in 1999)......... 14,548,596 15,016,822 14,767,105
Contracts and government grants research and
development.................................... 572,756 463,424 465,416
Proprietary research and development (excludes
$3,096,773 included in stock compensation
charges in 1999)............................... 4,405,755 7,755,682 11,377,748
Selling and marketing (excludes $724,389 included
in stock compensation charges in 1999)......... 11,772,573 14,003,230 12,960,627
General and administrative (excludes $808,235
included in stock compensation charges in
1999).......................................... 5,661,908 7,513,924 8,434,273
Stock compensation charges........................ -- -- 5,534,842
Restructuring costs............................... 325,462 269,783 424,976
----------- ----------- -----------
Total costs and expenses.................. 37,287,050 45,022,865 53,964,987
----------- ----------- -----------
Earnings (loss) from operations........... 12,099,627 8,155,923 (2,647,387)
----------- ----------- -----------
Foreign currency transaction gains (losses)......... (417,954) (281,471) 289,615
Equity income (loss) on investment in unconsolidated
entity............................................ -- (1,676) 166,507
Other income (expense), net......................... 26,923 (36,890) 755,068
Interest expense.................................... (4,054,615) (3,540,070) (3,232,305)
Interest income..................................... 758,123 797,164 399,456
----------- ----------- -----------
(3,687,523) (3,062,943) (1,621,659)
----------- ----------- -----------
Earnings (loss) before income taxes....... 8,412,104 5,092,980 (4,269,046)
Income tax (expense) benefit........................ (3,733,000) (2,368,000) 1,794,000
----------- ----------- -----------
Net earnings (loss)....................... $ 4,679,104 $ 2,724,980 $(2,475,046)
=========== =========== ===========
Net earnings (loss) per share:
Basic............................................. $ 0.15 $ 0.09 $ (0.08)
=========== =========== ===========
Diluted........................................... $ 0.14 $ 0.09 $ (0.08)
=========== =========== ===========
Weighted average shares:
Basic............................................. 30,610,000 30,765,000 31,067,416
=========== =========== ===========
Diluted........................................... 40,786,853 31,641,033 31,067,416
=========== =========== ===========
Pro forma information (unaudited):
Earnings (loss) before income taxes............... 8,412,104 5,092,980 (4,269,046)
Pro forma income tax (expense) benefit............ (3,522,000) (2,168,000) 1,345,000
----------- ----------- -----------
Pro forma net earnings (loss)..................... 4,890,104 2,924,980 (2,924,046)
=========== =========== ===========
Pro forma net earnings (loss) per share:
Basic............................................. $ 0.16 $ 0.10 $ (0.09)
=========== =========== ===========
Diluted........................................... $ 0.12 $ 0.09 $ (0.09)
=========== =========== ===========
</TABLE>
See accompanying notes to combined financial statements.
F-4
<PAGE> 79
STRATAGENE HOLDING CORPORATION
COMBINED STATEMENTS OF STOCKHOLDERS' DEFICIT
YEARS ENDED DECEMBER 31, 1997, 1998 AND 1999
<TABLE>
<CAPTION>
COMMON STOCK -- COMMON STOCK -- NOTES ACCUMULATED
CLASS A CLASS B ADDITIONAL RECEIVABLE OTHER
------------------- ---------------- PAID-IN ACCUMULATED FROM COMPREHENSIVE
SHARES AMOUNT SHARES AMOUNT CAPITAL DEFICIT STOCKHOLDERS INCOME (LOSS)
---------- ------ ------- ------ ---------- ----------- ------------ -------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Balance as of December
31, 1996.............. 30,400,000 $3,040 160,000 $16 197,704 (14,783,660) (2,129,184) 25,382
Class A common stock
issued upon exercise
of stock options...... 100,000 10 -- -- 124,990 -- -- --
Notes receivable from
stockholders of SHC... -- -- -- -- -- -- (135,561) --
Net earnings............ -- -- -- -- -- 4,679,104 -- --
Foreign currency
translation........... -- -- -- -- -- -- -- 32,013
Comprehensive income.... -- -- -- -- -- -- -- --
---------- ------ ------- --- --------- ----------- ---------- ---------
Balance as of December
31, 1997.............. 30,500,000 3,050 160,000 16 322,694 (10,104,556) (2,264,745) 57,395
Class A and B common
stock issued upon
exercise of stock
options............... 100,000 10 40,000 4 174,987 -- -- --
Notes receivable from
stockholders of SHC... -- -- -- -- -- -- (145,564) --
Capital contributions
from BCH members...... -- -- -- -- 50,500 -- -- --
Net earnings............ -- -- -- -- -- 2,724,980 -- --
Foreign currency
translation........... -- -- -- -- -- -- -- (9,337)
Comprehensive income.... -- -- -- -- -- -- -- --
---------- ------ ------- --- --------- ----------- ---------- ---------
Balance as of December
31, 1998.............. 30,600,000 3,060 200,000 20 548,181 (7,379,576) (2,410,309) 48,058
Class A and B common
stock issued upon
exercise of stock
options............... 200,000 20 54,080 5 319,974 -- -- --
Class A common stock
issued for cash....... 133,336 13 -- -- 499,987 -- -- --
Notes receivable from
stockholders of SHC... -- -- -- -- -- -- (180,412) --
Capital contributions
from BCH members...... -- -- -- -- 217 -- -- --
Distributions paid to
BCH members........... -- -- -- -- -- (200,000) -- --
Compensation expense
recognized pursuant to
phantom stock
options............... -- -- -- -- 4,270,684 -- -- --
Net loss................ -- -- -- -- -- (2,475,046) -- --
Foreign currency
translation........... -- -- -- -- -- -- -- (147,323)
Comprehensive loss...... -- -- -- -- -- -- -- --
---------- ------ ------- --- --------- ----------- ---------- ---------
Balance as of December
31, 1999.............. 30,933,336 $3,093 254,080 $25 5,639,043 (10,054,622) (2,590,721) (99,265)
========== ====== ======= === ========= =========== ========== =========
<CAPTION>
TOTAL
COMPREHENSIVE STOCKHOLDERS'
INCOME (LOSS) DEFICIT
------------- ----------------
<S> <C> <C>
Balance as of December
31, 1996.............. -- (16,686,702)
Class A common stock
issued upon exercise
of stock options...... -- 125,000
Notes receivable from
stockholders of SHC... -- (135,561)
Net earnings............ 4,679,104 4,679,104
Foreign currency
translation........... 32,013 32,013
----------
Comprehensive income.... 4,711,117 --
========== -----------
Balance as of December
31, 1997.............. (11,986,146)
Class A and B common
stock issued upon
exercise of stock
options............... -- 175,001
Notes receivable from
stockholders of SHC... -- (145,564)
Capital contributions
from BCH members...... -- 50,500
Net earnings............ 2,724,980 2,724,980
Foreign currency
translation........... (9,337) (9,337)
----------
Comprehensive income.... 2,715,643 --
========== -----------
Balance as of December
31, 1998.............. (9,190,566)
Class A and B common
stock issued upon
exercise of stock
options............... -- 319,999
Class A common stock
issued for cash....... -- 500,000
Notes receivable from
stockholders of SHC... -- (180,412)
Capital contributions
from BCH members...... -- 217
Distributions paid to
BCH members........... -- (200,000)
Compensation expense
recognized pursuant to
phantom stock
options............... -- 4,270,684
Net loss................ (2,475,046) (2,475,046)
Foreign currency
translation........... (147,323) (147,323)
----------
Comprehensive loss...... (2,622,369) --
========== -----------
Balance as of December
31, 1999.............. (7,102,447)
===========
</TABLE>
See accompanying notes to combined financial statements.
F-5
<PAGE> 80
STRATAGENE HOLDING CORPORATION
COMBINED STATEMENTS OF CASH FLOWS
YEARS ENDED DECEMBER 31, 1997, 1998 AND 1999
<TABLE>
<CAPTION>
1997 1998 1999
------------ ----------- -----------
<S> <C> <C> <C>
Cash flows from operating activities:
Net earnings (loss).............................. $ 4,679,104 $ 2,724,980 $(2,475,046)
Adjustments to reconcile net earnings to net cash
provided by operating activities:
Depreciation and amortization................. 1,046,988 1,021,905 1,813,030
Non-cash stock compensation charges........... -- -- 4,270,684
Loss on disposal of assets.................... 31,522 120,816 199,984
Non-cash interest on notes receivable from
stockholders................................ (135,561) (145,564) (180,412)
Equity (income) loss on investment in
unconsolidated entity....................... -- 1,676 (166,507)
Accretion of interest on notes payable and
long-term debt.............................. 1,367,940 1,507,361 1,663,889
Accretion of interest on notes payable to
former stockholders......................... 198,599 184,771 --
Deferred income taxes......................... 169,662 531,000 (941,000)
Changes in assets and liabilities:
Foreign currency exchange contracts......... 238,834 (183,066) 31,684
Accounts receivable, net.................... (511,043) (665,178) 324,824
Inventories................................. 266,318 (681,329) (1,013,793)
Prepaid expenses and other current assets... (399,367) (2,022) (639,009)
Income taxes receivable..................... (653,026) 34,115 (412,415)
Other assets................................ (439,321) (29,062) (217,611)
Accounts payable............................ 1,326,836 209,431 (963,451)
Accrued expenses and other liabilities...... 682,172 43,334 (63,708)
Deferred revenue............................ 5,503 (64,625) 18,788
Income taxes payable........................ (222,487) 28,982..... 103,201
------------ ----------- -----------
Net cash provided by operating
activities............................. 7,652,673 4,637,525 1,353,132
------------ ----------- -----------
Cash flows from investing activities:
Purchases of property and equipment.............. (1,821,978) (9,285,326) (3,542,510)
Investment in Cenetron........................... -- (772,115) --
Additions to intangibles......................... (229,584) (358,972) (671,426)
Changes in restricted cash....................... (8,566,587) -- 965,190
Cash transferred from trustee for capital
purchases..................................... -- 5,836,478.. 2,730,109
------------ ----------- -----------
Net cash used in investing activities.... (10,618,149) (4,579,935) (518,637)
------------ ----------- -----------
Cash flows from financing activities:
Proceeds from issuance of notes payable to
related party................................. -- -- 425,000
Proceeds from long-term debt..................... 9,100,000 5,150,000 --
Principal payments on long-term debt............. (2,142,857) (2,192,856) (7,192,856)
Borrowings under lines of credit................. -- -- 4,200,000
Payments on lines of credit...................... -- -- (1,700,000)
Sinking fund payments............................ (146,979) (212,864) (664,736)
</TABLE>
F-6
<PAGE> 81
STRATAGENE HOLDING CORPORATION
COMBINED STATEMENTS OF CASH FLOWS
YEARS ENDED DECEMBER 31, 1997, 1998 AND 1999 -- (CONTINUED)
<TABLE>
<CAPTION>
1997 1998 1999
------------ ----------- -----------
<S> <C> <C> <C>
Proceeds from issuance of common stock to
director/officer.............................. 125,000 175,001 800,000
Proceeds from capital contributions.............. -- 50,500 217
Distributions paid to BCH members................ -- -- (200,000)
Payments on notes payable to former
stockholders.................................. (1,241,238) (1,150,000) (1,903,168)
------------ ----------- -----------
Net cash provided by (used in) financing
activities............................. 5,693,926 1,819,781 (6,235,543)
------------ ----------- -----------
Effect of foreign currency exchange rates on cash
and cash equivalents............................. (109,909) (10,971) (134,672)
------------ ----------- -----------
Net increase (decrease) in cash and cash
equivalents............................ 2,618,541 1,866,400 (5,535,720)
Cash and cash equivalents at beginning of year..... 4,151,347 6,769,888 8,636,288
------------ ----------- -----------
Cash and cash equivalents at end of year........... $ 6,769,888 $ 8,636,288 $ 3,100,568
============ =========== ===========
Supplemental disclosure of cash flow information:
Cash paid (received) during the year for:
Interest...................................... $ 1,276,725 $ 1,507,441 $ 996,592
Income taxes.................................. $ 4,058,700 $ 2,522,234 $ (170,055)
</TABLE>
Supplemental disclosure of noncash investing and financing activities:
During 1999, SHC issued common stock to a stockholder in exchange for a note
receivable in the amount of $19,999.
See accompanying notes to combined financial statements.
F-7
<PAGE> 82
STRATAGENE HOLDING CORPORATION
NOTES TO COMBINED FINANCIAL STATEMENTS
(1) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
(a) Description of Business and Principles of Combination and Consolidation
The financial statements of Stratagene Holding Corporation (SHC) and
BioCrest Holdings, LLC (collectively, Stratagene Holding Corporation or the
Company) are presented on a combined basis as the companies are under common
management and control.
SHC was incorporated in Delaware in November 1995 and was formed for the
purpose of acquiring the outstanding stock of Stratagene, a California
corporation, (Stratagene California) and its related subsidiaries. Effective
December 31, 1995, SHC acquired substantially all of the outstanding common and
preferred stock of Stratagene California and its subsidiaries in a transaction
accounted for as a leveraged recapitalization and recorded on an historical
basis in a manner similar to a pooling-of-interests. The consolidated financial
statements of SHC include the accounts of SHC and all of its wholly owned
subsidiaries. SHC is involved in the development, production and marketing of a
variety of products utilizing new and innovative genetic research technologies.
BioCrest Holdings, LLC (BCH) was established as a limited liability company
in Delaware in July 1997. The consolidated financial statements of BCH include
the accounts of BCH and all of its wholly owned subsidiaries. BCH is currently
involved in inventing products utilizing new and innovative genetic research
technologies.
All significant intercompany balances and transactions have been eliminated
in consolidation and combination of SHC and BCH.
(b) Cash Equivalents
Cash equivalents consist of money market accounts and a certificate of
deposit, stated at cost, which approximates market, with original maturities of
three months or less.
(c) Restricted Cash
Restricted cash held by the bank totaled $4,129,299 and $1,099,340 at
December 31, 1998 and 1999, respectively. Restricted cash deposits at December
31, 1999 relate to sinking fund payments required under the Bastrop County bond
indenture agreement. At December 31, 1998, the restricted cash related to funds
held in trust associated with the bonds and a sinking fund for notes to former
stockholders. Annual sinking fund deposits of $870,000 are required through
April 2022.
(d) Inventories
Inventories are stated at the lower of cost or market. Cost is determined
on a first-in, first-out basis.
(e) Property and Equipment
Property and equipment are stated at cost. Depreciation on furniture and
equipment, autos and trucks is calculated using the straight-line method based
upon an estimated useful life of three to five years. The building is
depreciated over 25 years using the straight-line method. Leasehold improvements
are amortized using the straight-line method over the shorter of the lease term
or estimated useful life of the asset, generally five years.
(f) Notes Receivable from Stockholders
At December 31, 1998 and 1999, SHC had unsecured notes receivable totaling
$2,410,309 and $2,590,721, respectively, from stockholders of SHC, primarily for
the exercise of options for common stock
F-8
<PAGE> 83
STRATAGENE HOLDING CORPORATION
NOTES TO COMBINED FINANCIAL STATEMENTS -- (CONTINUED)
of its subsidiary, Stratagene California, and to replace certain other
previously outstanding notes. These notes bear interest at rates ranging from
5.91% to prime plus 1.0% (8.75% and 9.5% at December 31, 1998 and 1999,
respectively). Interest and principal are due on April 10, 2001 through December
6, 2002.
(g) Patent Costs
Included in intangible assets, net, are costs incurred in connection with
patent applications, consisting principally of legal fees. Amortization is
calculated using the straight-line method over the estimated useful lives of the
patents, generally seven years.
(h) Research and Development Costs
All research and development costs are expensed in the period incurred.
(i) Revenue Recognition
Revenue is recognized when products are shipped and title has transferred.
Contracts and government grants revenue related to research activities are
recognized when earned, generally as related research activities progress.
Revenues from service contracts are deferred and recognized over the period of
the contract.
(j) Income Taxes
SHC and its subsidiaries record income taxes using the asset and liability
method of accounting for income taxes. Under the asset and liability method,
deferred tax assets and liabilities are recognized for the future tax
consequences attributable to differences between the financial statement
carrying amounts of existing assets and liabilities and their respective tax
bases. Deferred tax assets and liabilities are measured using enacted tax rates
expected to apply to taxable income in the years in which those temporary
differences are expected to be recovered or settled. The effect on deferred tax
assets and liabilities of a change in tax rates is recognized in operations in
the period that includes the enactment date.
BCH and its subsidiaries are limited liability companies; therefore, any
related income tax liabilities are the responsibility of the members and
partners. As a result, the operations of BCH do not reflect a provision for
income taxes.
Pro forma tax information is provided to account for the effects of
treating the combined limited liability companies as C Corporations. See Note
16.
(k) Foreign Currency Translation and Foreign Currency Exchange Contracts
The accounts of foreign subsidiaries and affiliates of the Company are
measured using the local currency as the functional currency. For these
operations, assets and liabilities are translated into U.S. dollars at
period-end exchange rates, and income and expense accounts are translated at
average monthly exchange rates. Net translation gains or losses are excluded
from net income and accumulated in accumulated other comprehensive income (loss)
on the accompanying combined balance sheets.
The Company periodically enters into foreign currency exchange contracts to
manage fluctuations in foreign currency exchange rates related to its foreign
subsidiaries. At December 31, 1998, the Company had outstanding foreign currency
exchange contracts, maturing through March 1999, with contract amounts of
approximately $7,489,675. At December 31, 1999, the Company had outstanding
foreign currency exchange contracts, maturing through March 2000, with contract
amounts of approximately
F-9
<PAGE> 84
STRATAGENE HOLDING CORPORATION
NOTES TO COMBINED FINANCIAL STATEMENTS -- (CONTINUED)
$8,267,362. The foreign currency exchange contracts are accounted for on a
mark-to-market basis with realized and unrealized gains or losses recognized in
the accompanying combined statements of operations.
(l) Impairment of Long-Lived Assets and Long-Lived Assets to Be Disposed Of
The Company accounts for long-lived assets in accordance with the
provisions of Statement of Financial Accounting Standards (SFAS) No. 121,
Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets to
Be Disposed Of. This Statement requires that long-lived assets and certain
identifiable intangibles be reviewed for impairment whenever events or changes
in circumstances indicate that the carrying amount of an asset may not be
recoverable. Recoverability of assets to be held and used is measured by a
comparison of the carrying amount of an asset to the future net cash flows
expected to be generated by the asset. If such assets are considered to be
impaired, the impairment to be recognized is measured by the amount by which the
carrying amounts of the assets exceed the fair values of the assets. Assets to
be disposed of are reported at the lower of the carrying amount or fair value
less costs to sell.
(m) Stock Options
The Company accounts for its stock option plan in accordance with the
alternate provisions of SFAS No. 123, Accounting for Stock Based Compensation.
SFAS No. 123 allows entities to continue to apply the provisions of APB Opinion
No. 25, Accounting for Stock Issued to Employees, and provide pro forma
disclosures for employee stock option grants made in 1996 and future years as if
the fair-value-based method defined in SFAS No. 123 had been applied. The
Company has elected to continue to apply the provisions of APB Opinion No. 25
and provide the pro forma disclosure provisions of SFAS No. 123.
(n) Earnings Per Share
Earnings per common share are calculated in accordance with Statement of
Financial Accounting Standards No 128, Earnings per Share. Basic earnings per
common share excludes the dilutive effects of options, warrants and other
convertible securities compared to diluted earnings per share which reflects the
potential dilution of options and other convertible securities that could share
in the earnings of the Company. Calculations of basic and diluted earnings per
share use the weighted-average number of shares outstanding during the year.
Diluted earnings per common share for the years ended December 31, 1997, 1998
and 1999 include the dilutive effects of potential common stock from options and
convertible debt totaling 10,176,853, 876,033, and 0, respectively. The
calculation of diluted earnings per share for the year ended December 31, 1997
assumes the conversion of the convertible subordinated notes and a $925,788
reduction to net earnings reflecting the after-tax interest expense related to
the convertible subordinated notes. Diluted earnings per share excludes options
and convertible debt representing potential common shares of 374,400,
10,286,400, and 11,068,000, for the years ended December 31, 1997, 1998 and
1999, respectively, since the effect of their inclusion would have been
anti-dilutive.
(o) Segment Reporting
In 1999, the Company adopted SFAS 131, Disclosures about Segments of an
Enterprise and Related Information, which establishes reporting standards for a
company's operating segments and related disclosures about its products,
services, geographic areas and major customers. An operating segment is defined
as a component of an enterprise that engages in business activities from which
it may earn revenues and incur expenses, and about which separate financial
information is regularly evaluated by the chief operating decision maker in
deciding how to allocate resources. This Statement allows aggregation of similar
operating segments into a single operating segment if the businesses are
considered similar under
F-10
<PAGE> 85
STRATAGENE HOLDING CORPORATION
NOTES TO COMBINED FINANCIAL STATEMENTS -- (CONTINUED)
the criteria of this Statement. The Company believes it operates in a single
segment, biotechology products.
(p) Use of Estimates
Management of SHC and BCH has made a number of estimates and assumptions
relating to the reporting of assets and liabilities, revenue and expenses, and
the disclosure of contingent assets and liabilities to prepare these combined
financial statements in conformity with generally accepted accounting
principles. Actual results could differ from those estimates.
(2) FAIR VALUE OF FINANCIAL INSTRUMENTS
The carrying amount of cash and cash equivalents, restricted cash, foreign
currency exchange contracts, accounts receivable, income taxes receivable,
prepaid expenses and other current assets, accounts payable, accrued expenses
and other liabilities, note payable to related party and line of credit are
considered to be representative of their respective fair values because of the
short-term nature of these financial instruments. The carrying amount of the
notes payable to former stockholders and long-term debt are reasonable estimates
of fair value, as the loans have terms based on market rates available for
similar debt instruments.
(3) INVENTORIES
Inventories of primarily biological products and instruments consisted of
the following at December 31:
<TABLE>
<CAPTION>
1998 1999
---------- ----------
<S> <C> <C>
Raw materials and supplies.......................... $2,793,000 $3,417,554
Work-in-process..................................... 161,291 323,534
Finished goods...................................... 2,419,384 2,454,892
---------- ----------
$5,373,675 $6,195,980
========== ==========
</TABLE>
(4) PROPERTY AND EQUIPMENT
Property and equipment are summarized as follows:
<TABLE>
<CAPTION>
1998 1999
----------- -----------
<S> <C> <C>
Land.............................................. $ 604,640 $ 604,640
Building.......................................... -- 8,435,756
Furniture and equipment........................... 7,180,156 6,653,557
Leasehold improvements............................ 1,033,145 391,587
Autos and trucks.................................. 114,945 88,815
Construction-in-process........................... 6,735,258 224,156
----------- -----------
15,668,144 16,398,511
Less accumulated depreciation and amortization.... (4,671,211) (3,672,209)
----------- -----------
$10,996,933 $12,726,302
=========== ===========
</TABLE>
F-11
<PAGE> 86
STRATAGENE HOLDING CORPORATION
NOTES TO COMBINED FINANCIAL STATEMENTS -- (CONTINUED)
(5) LONG-TERM DEBT
At December 31, long-term debt consisted of the following:
<TABLE>
<CAPTION>
1998 1999
----------- -----------
<S> <C> <C>
Note payable to bank bearing interest at the lower of
prime rate plus 1% or LIBOR plus 2.5% (8.72% at December
31, 1999). Monthly principal installments of $178,571
plus accrued interest, balance of $2,321,438 due
December 2001. This SHC note is secured by substantially
all of the Company's assets and guaranteed by BioCrest
Manufacturing and Strategene California................. $ 8,750,000 $ 6,607,143
Revolving line of credit not to exceed $5,000,000 with
interest rates at Prime or Libor plus 2% (As of December
31, 1999, $750,000 at 8.5% and $1,750,000 at 8.47%.)
Maturity date of July 31, 2001. This BioCrest
Manufacturing line is secured by substantially all of
the Company's assets and is guaranteed by SHC and
Strategene California................................... -- 2,500,000
10%, unsecured convertible subordinated notes with a face
value of $23,759,179, due December 1, 2002. Convertible,
at the option of the holder, at any time prior to
maturity into 9,600,000 shares of SHC common stock upon
or after the occurrence of a conversion event as defined
in the Securities Purchase Agreement.................... 16,213,321 17,877,212
Debt from bond indenture agreement with Bastrop County,
Texas totaling $9,100,000, at an average interest rate
of 4.17% (5.9% at December 31, 1999). Sinking fund
payments are required through April 2022 when the bonds
mature. Proceeds are restricted to the purchase of land,
building and equipment in Bastrop County, Texas.
Collateralized by land, building and equipment.......... 9,100,000 9,100,000
7.5%, senior subordinated notes due to former stockholders
paid in full September 1999............................. 1,903,168 --
Unsecured note payable to bank bearing interest at prime
rate. Paid in full March 1999........................... 5,000,000 --
Note payable to Consolidated Technologies, Inc. bearing
interest at prime rate (8.5% at December 31, 1999).
Principal and accrued interest due October 1, 2000...... 100,000 50,000
----------- -----------
41,066,489 36,134,355
Current portion........................................... 7,192,857 5,562,858
----------- -----------
Long-term debt, less current portion............ $33,873,632 $30,571,497
=========== ===========
</TABLE>
The various debt agreements contain restrictive covenants requiring the
Company to maintain minimum debt service coverage ratios and a minimum tangible
net worth. At December 31, 1999, the Company was not in compliance with the
covenants contained in the note payable to the bank and the revolving line of
credit. The Company received waivers from the bank related to these covenants
through January 1, 2001.
The aggregate maturities of long-term debt principal payments for each of
the five years subsequent to December 31, 1999 are as follows: 2000, $5,562,858;
2001, $5,334,284; 2002, $18,747,211; 2003, $870,000; 2004, $870,000; and
thereafter, $4,750,000 which includes sinking fund payments of $870,000 a year.
Included in the 2000 debt principal payments is the Company's revolving line of
credit for $2,500,000, since the Company repaid this line in February of 2000.
F-12
<PAGE> 87
STRATAGENE HOLDING CORPORATION
NOTES TO COMBINED FINANCIAL STATEMENTS -- (CONTINUED)
(6) RELATED PARTY TRANSACTIONS
In December 1996, SHC agreed to pay one of the holders of the convertible
subordinated notes, an annual financial advisory fee of $250,000 in each of
1996, 1997 and 1998. In July 1999, the holder agreed to reduce the total amount
of advisory fees from $750,000 to $425,000. At this time, SHC issued a
promissory note in the principal amount of $425,000 to the holder. The note
bears interest at 10% per annum and was originally due and payable on April 1,
2000. In March 2000, SHC and the holder amended the terms of the note to provide
that the note is now due and payable on the earlier to occur of September 30,
2000 or the closing of the contemplated offering described in note 17.
Included in other assets is an amount due from a stockholder of SHC
consisting of unsecured loans totaling $1,314,636 and $46,971 at December 31,
1998 and 1999, respectively, including interest. The notes bear interest at 6%
and interest and principal are due on or before August 15, 2001. During 1998,
the Company reduced the stockholder's note of $1,314,636 by $1,292,732 as
compensation for personal guarantees provided by the stockholder to secure notes
payable to the bank. Under this guarantee fee arrangement, the Company incurred
interest expense of $940,548, $352,184, and $173,900 for the years ended
December 31, 1997, 1998 and 1999, respectively. See also note 1(f).
(7) STOCKHOLDERS' EQUITY
In December 1995, the Company authorized 4,000,000 shares of preferred
stock at a par value of $.0001 of which none has been issued. Also authorized
were 96,000,000 shares of Class A common stock at a par value of $.0001 and
4,000,000 shares of Class B common stock at a par value of $.0001. The Class A
common stock has voting rights while the Class B does not. On March 9, 2000, SHC
completed a 4 for 1 stock split. All share and per share amounts for all periods
presented have been adjusted to reflect the split.
Pursuant to the terms of a registration rights agreement dated December 6,
1995 between SHC and one of the holders of the convertible subordinated notes
due December 1, 2002, we granted registration rights to the holder with respect
to shares of SHC's common stock that it will receive upon any conversion of the
convertible subordinated notes. SHC is not required to effect more than one
registration for the holder pursuant to the demand registration rights. In
addition, after an initial public offering the holder will be entitled to
piggyback registration rights with respect to the registration of its shares of
SHC's common stock. In connection with the contemplated offering described in
note 17, SHC and the holder have agreed to amend the registration rights
agreement and add Dr. Sorge, SHC's founder, chairman of the board and chief
executive officer, as a party to the agreement.
(8) STOCK OPTIONS
In 1996, SHC adopted a non-qualified stock option plan (the Plan), which
provides for the grant of options to employees of SHC or a subsidiary of SHC to
purchase up to 2,000,000 shares of Class B common stock at exercise prices of
not less than the fair value of the Class B common stock. Options under the Plan
vest over a period determined by the Board of Directors of SHC, but not longer
than five years and three months after the date of grant.
In 1996, by special action of the SHC Board of Directors, an option to
purchase 400,000 shares of SHC Class A common stock was granted to a Board
member. The option was granted at fair value and vests over four equal annual
installments, but must be exercised before seven years. In 1997, 1998, and 1999
the Board member exercised 100,000, 100,000, and 200,000 of these options,
respectively.
In 1997, Stratagene Genomics, Inc. (SGI), a wholly-owned subsidiary of SHC,
adopted a non-qualified stock option plan (the SGI Plan), which provides for the
grant of options to purchase up to
F-13
<PAGE> 88
STRATAGENE HOLDING CORPORATION
NOTES TO COMBINED FINANCIAL STATEMENTS -- (CONTINUED)
850,000 shares of Class A common stock of SGI. Options are granted to employees
of SGI or a parent corporation or a subsidiary of SGI at the fair value of the
Class A common stock. Options under the Plan vest over a period determined by
the Board of Directors of SGI, but not longer than five years and three months
after the date of grant. During 1997, 500,000 options were issued to an employee
of SGI. This plan was terminated in 1998. Outstanding options, all of which were
unvested, under this plan were cancelled.
In 1999, by special action of the Board of Directors, options to purchase
1,248,000 shares of Class A common stock of SHC was granted to an officer of
SHC. The options were granted at fair value and vest over five equal annual
installments, but must be exercised before seven years, three months.
Subsequently, the officer resigned from SHC and 249,600 of his options vested
and the remaining 998,400 were forfeited.
The Company accounts for stock options in accordance with the alternate
provisions of SFAS No. 123, Accounting for Stock Based Compensation. Had the
Company determined compensation cost based on the fair value at the grant date
for stock options under SFAS No. 123, SHC's net earnings (loss) would have been
adjusted to the pro forma amounts indicated below (these amounts do not include
any pro forma adjustments described in note 17 to the combined financial
statements):
<TABLE>
<CAPTION>
1997 1998 1999
---------- ---------- -----------
<S> <C> <C> <C>
Net earnings (loss), as reported.............. $4,679,104 $2,724,980 $(2,475,046)
Pro forma..................................... $4,597,570 $2,668,093 $(2,490,665)
Earnings (loss) per share, as reported
Basic....................................... 0.15 0.09 (0.08)
Diluted..................................... 0.14 0.09 (0.08)
Earnings (loss) per common share, pro forma
Basic....................................... 0.15 0.09 (0.08)
Diluted..................................... 0.14 0.08 (0.08)
</TABLE>
Pro forma net earnings (loss) reflect only options granted in 1997, 1998
and 1999. Therefore, the full impact of calculating compensation expense for
stock options under Statement No. 123 is not reflected in the pro forma net
earnings (loss) amounts presented above since compensation expense is reflected
over the stock option vesting periods, and compensation expense for stock
options granted prior to January 1, 1995 are not considered.
F-14
<PAGE> 89
STRATAGENE HOLDING CORPORATION
NOTES TO COMBINED FINANCIAL STATEMENTS -- (CONTINUED)
The following table summarizes SHC option activity:
<TABLE>
<CAPTION>
WEIGHTED
AVERAGE
OPTIONS EXERCISE PRICE
---------- --------------
<S> <C> <C>
Outstanding, December 31, 1996............................. 1,248,000 $1.33
Granted.................................................. 166,400 2.43
Exercised................................................ (100,000) 1.25
----------
Outstanding, December 31, 1997............................. 1,314,400 1.48
Granted.................................................. 520,000 3.65
Exercised................................................ (140,000) 1.25
Forfeited................................................ (24,000) 1.25
----------
Outstanding, December 31, 1998............................. 1,670,400 2.18
Granted.................................................. 1,338,000 3.75
Exercised................................................ (256,000) 1.25
Forfeited................................................ (1,284,400) 3.44
----------
Outstanding, December 31, 1999............................. 1,468,000 2.67
==========
</TABLE>
The following table summarizes information about SHC stock options
outstanding as of December 31, 1999:
<TABLE>
<CAPTION>
OPTIONS OUTSTANDING OPTIONS EXERCISABLE
- ------------------------------------------------------------------- -------------------------
NUMBER WEIGHTED- NUMBER
OUTSTANDING AVERAGE WEIGHTED- EXERCISABLE WEIGHTED-
AS OF REMAINING AVERAGE AS OF AVERAGE
RANGE OF DECEMBER 31, CONTRACTUAL EXERCISE DECEMBER 31, EXERCISE
EXERCISE PRICES 1999 LIFE PRICE 1999 PRICE
- --------------- ------------ ----------- --------- ------------ ---------
<S> <C> <C> <C> <C> <C>
$1.25.................... 444,000 1.29 $1.25 266,400 $1.25
$1.75.................... 208,000 4.60 1.75 85,920 1.75
$2.00.................... 24,400 5.29 2.00 18,400 2.00
$2.50.................... 12,000 2.54 2.50 12,000 2.50
$3.75.................... 779,600 3.91 3.75 337,600 3.75
--------- -------
$1.25 - $3.75............ 1,468,000 3.22 2.67 720,320 2.49
========= =======
</TABLE>
All stock options granted in 1997, 1998 and 1999 were granted with exercise
prices in excess of the fair value of the underlying common stock, and the
weighted-average fair value of stock options granted was $2.43, $3.65, and
$3.75, respectively. The fair value of each option grant is estimated on the
date of grant using the Black-Scholes option-pricing model with the following
weighted-average assumptions: 1997 -- expected dividend yield of 0%, risk-free
interest rate of 5.6%, expected life of 4.4 years and expected volatility of
zero. 1998 -- expected dividend yield of 0%, risk-free interest rate of 4.3%,
expected life of 3.8 years and expected volatility of zero. 1999 -- expected
dividend yield of 0%, risk-free interest rate of 5.9%, expected life of 3.2
years and expected volatility of zero.
(9) PHANTOM STOCK PLAN
Stratagene California has a phantom stock plan whereby employees with one
year of service can receive their bonus in the form of cash or phantom stock.
There are 300,000 phantom shares authorized in this plan. Each share is intended
to fluctuate in value in a manner similar to one share of Stratagene California
common stock, and accordingly, to function as an "equity-like" interest in the
value and growth
F-15
<PAGE> 90
STRATAGENE HOLDING CORPORATION
NOTES TO COMBINED FINANCIAL STATEMENTS -- (CONTINUED)
of Stratagene California. However, the holders of shares of phantom stock will
not be entitled to any actual stockholder rights such as voting, dividend or
liquidation rights. Stratagene California has recorded a liability of $257,171
and $1,425,720 included in accrued compensation, related to the plan as of
December 31, 1998 and 1999, respectively.
As a part of the phantom stock plan, Strategene California may grant
options to purchase phantom stock. The exercise price of such options are set by
the administrator provided, however, that the exercise price shall not be less
than 100% of the fair value of the common stock of Stratagene California on the
date such option is granted unless otherwise agreed to by the Board. The Company
recognized stock compensation expense of $4,270,684 for the year ended December
31, 1999 based on the difference between the estimated fair value of the
Company's common stock at December 31, 1999 and the exercise price of phantom
options. This stock compensation charge is included in each of the combined
statement of operations captions as follows: Cost of product sold, $905,445;
Proprietary research and development, $3,096,773; Selling and marketing,
$724,389, and General and administrative, $808,235. No compensation expense was
recognized in 1997 or 1998 for the phantom stock options.
(10) 401(k) SAVINGS PLAN
SHC has a qualified 401(k) Employee Savings Plan (the Savings Plan)
available to substantially all full-time employees over the age of 21. SHC may
make discretionary contributions to the Savings Plan, which vest immediately.
There were no discretionary contributions for the years ended December 31, 1997,
1998 or 1999.
Effective January 1, 2000, the Company will match 25% of the contributions
of employees with one to three years of service up to a maximum of $1,000, 25%
of the contributions of employees with three to six years of service up to a
maximum of $1,750, and 30% of the contributions of employees with six or more
years of service up to a maximum of $2,500. The contributions vest immediately.
(11) CONTRACTS AND GOVERNMENT GRANTS
The Company is routinely awarded research contracts and grants by various
government agencies, which vary in amount and duration. Under the terms of
government grants and contracts, the Company holds the rights to patent and
commercialize any technology that is developed. In exchange for providing the
funding, the government receives a royalty-free license to use for governmental
purposes any technology developed by the Company.
F-16
<PAGE> 91
STRATAGENE HOLDING CORPORATION
NOTES TO COMBINED FINANCIAL STATEMENTS -- (CONTINUED)
(12) INCOME TAXES
Components of income tax expense (benefit) of SHC are as follows:
<TABLE>
<CAPTION>
1997 1998 1999
---------- ---------- -----------
<S> <C> <C> <C>
Current:
Federal..................................... $3,579,000 $1,505,000 $ (853,000)
State....................................... 692,000 321,000 --
Foreign..................................... 94,000 12,000 --
---------- ---------- -----------
4,365,000 1,838,000 (853,000)
---------- ---------- -----------
Deferred:
Federal..................................... (563,000) 478,000 (937,000)
State....................................... (69,000) 52,000 (4,000)
---------- ---------- -----------
(632,000) 530,000 (941,000)
---------- ---------- -----------
$3,733,000 $2,368,000 $(1,794,000)
========== ========== ===========
</TABLE>
The actual income taxes differ from the "expected" income taxes (computed
by applying the federal income tax rate of 34% to SHC's earnings (loss) before
income taxes) as follows:
<TABLE>
<CAPTION>
1997 1998 1999
---------- ---------- -----------
<S> <C> <C> <C>
Computed "expected" federal income taxes of
SHC......................................... 2,860,000 1,732,000 (1,452,000)
Foreign operations, net of tax................ (189,000) 59,000 12,000
State income taxes, net of federal benefit.... 411,000 246,000 (2,000)
General business credit....................... (105,000) (130,000) --
Partnership (income) loss not included in
corporate group............................. 211,000 200,000 (449,000)
Non-deductible expenses....................... 545,000 261,000 97,000
---------- ---------- -----------
$3,733,000 $2,368,000 $(1,794,000)
========== ========== ===========
</TABLE>
F-17
<PAGE> 92
STRATAGENE HOLDING CORPORATION
NOTES TO COMBINED FINANCIAL STATEMENTS -- (CONTINUED)
Deferred income taxes result from temporary differences between the tax
basis of an asset or a liability and its reported amount in the accompanying
combined balance sheets. The components that comprise deferred tax assets and
liabilities at December 31, 1998 and 1999 are as follows:
<TABLE>
<CAPTION>
1998 1999
---------- ----------
<S> <C> <C>
Deferred tax assets:
Accounts receivable....................................... $ 141,000 $ 49,000
Inventories............................................... 579,000 404,000
Property and equipment.................................... 69,000 --
Accrued expenses and other liabilities.................... 843,000 2,358,000
Long-term debt............................................ 232,000 169,000
State net operating losses................................ -- 33,000
---------- ----------
Deferred tax assets............................... 1,864,000 3,013,000
---------- ----------
Deferred tax liabilities:
Patents................................................... (323,000) (463,000)
Property and equipment.................................... -- (68,000)
---------- ----------
Net deferred tax assets........................... $1,541,000 $2,482,000
========== ==========
</TABLE>
Management believes that it is more likely than not that the deferred tax
assets will be realized in the normal course of operations and, accordingly, no
valuation allowance has been recorded in the accompanying combined balance
sheets.
(13) COMMITMENTS AND CONTINGENT LIABILITIES
(a) Operating Lease Commitments
The Company leases certain facilities and equipment under noncancelable
operating leases expiring December 28, 2001 to September 30, 2003. Management
expects that in the normal course of business, leases that expire will be
renewed or replaced by other leases. Future minimum lease payments under
noncancelable operating leases, subsequent to December 31, 1999, as follows:
2000, $1,704,206; 2001, $1,734,928; 2002, $1,280,987; and 2003, $792,469. Total
rental expense under all operating leases was $1,081,825, $1,116,439 and
$1,443,299, in 1997, 1998 and 1999, respectively.
(b) License Agreements
In connection with its research and development efforts, SHC has entered
into various license agreements with unrelated parties which provide SHC with
rights to develop, produce and market products using certain technologies and
patent rights maintained by the parties. The terms of the various agreements
require SHC to pay royalties ranging from 1% to 45% of sales on products which
have been produced using the technologies. Such agreements generally provide for
terms that commence upon execution and continue until expiration of the last
patent relative to the technology. During 1997, 1998 and 1999, royalty expenses
under the aforementioned license agreements aggregated approximately $2,386,000,
$2,752,000 and $2,753,000, respectively, and were included in cost of products
sold in the accompanying combined statements of operations.
(c) Litigation
During 1995, Stratagene California entered into covenants not to compete
and settlement agreements with two former stockholders of Stratagene California.
Under the terms of these agreements, Stratagene
F-18
<PAGE> 93
STRATAGENE HOLDING CORPORATION
NOTES TO COMBINED FINANCIAL STATEMENTS -- (CONTINUED)
California was required to make payments totaling $250,000 at December 1997. In
December 1998, Stratagene made a final payment of $1,150,000 to the former
stockholders.
The Company is involved in various other legal proceedings arising in the
ordinary course of business. While the outcome of these proceedings cannot be
predicted with certainty, the Company's management, after taking into
consideration information furnished by legal counsel, does not believe that any
of these proceedings will have a material adverse effect on the operations or
financial position of either company.
(14) SEGMENT INFORMATION
Product sales and net earnings (loss) by geographic segment are as follows:
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
------------------------------------------
1997 1998 1999
----------- ----------- ------------
<S> <C> <C> <C>
Product sales:
U.S. .................................... $38,843,491 $42,248,746 $ 40,881,733
Foreign.................................. 9,970,430 10,466,618 9,970,451
----------- ----------- ------------
$48,813,921 $52,715,364 $ 50,852,184
=========== =========== ============
Net earnings (loss)
U.S. .................................... $ 6,289,153 $ 2,239,662 $ (2,246,295)
Foreign.................................. (1,610,049) 485,318 (228,751)
----------- ----------- ------------
$ 4,679,104 $ 2,724,980 $ (2,475,046)
=========== =========== ============
</TABLE>
Long-lived assets by geographic region at December 31, are as follows:
<TABLE>
<CAPTION>
1998 1999
----------- -----------
<S> <C> <C>
U.S. ..................................................... $ 8,389,321 $11,334,857
Foreign................................................... 3,651,402 3,102,987
----------- -----------
$12,040,723 $14,437,844
=========== ===========
</TABLE>
(15) RESTRUCTURING COSTS
The Company has recorded certain restructuring costs in accordance with
EITF 94-3. In 1997, the Company restructured its European sales and distribution
activities and closed down its subsidiaries in the UK and Germany. Distribution
activities were consolidated in Amsterdam, the Netherlands, in order to serve
customers in a more cost effective manner. Costs associated with the closing of
the two foreign facilities, including severance for employees and termination of
remaining lease obligations, totaled $325,462 in 1997. This amount was paid in
1997. In 1998, the Company was in the process of restructuring its operations in
California by moving manufacturing to their new facility in Texas. The Company's
manufacturing is primarily performed in Texas while research and development are
primarily conducted in the California location. Costs associated with the
transfer relate to severance for employees and totaled $269,783 in 1998. This
amount was accrued as of December 31, 1998 and was fully paid in 1999. In 1999,
the Company completed the process of restructuring its operations by eliminating
a business unit structure and implementing one unified structure with
centralized and better-coordinated research and development, manufacturing and
marketing functions. Amounts expensed and paid associated with severance and
out-placement fees for employees totaled $424,976 in 1999.
F-19
<PAGE> 94
STRATAGENE HOLDING CORPORATION
NOTES TO COMBINED FINANCIAL STATEMENTS -- (CONTINUED)
(16) PRO FORMA INCOME TAX ADJUSTMENTS TO FINANCIAL STATEMENTS (UNAUDITED)
BCH and its subsidiaries are limited liability companies and accordingly
reflect no provision for income taxes in the combined statements of operations
for the years ended December 31, 1997, 1998 and 1999.
Upon the closing of the Company's initial public offering, BCH and its
subsidiaries will be merged with and into Stratagene Holding Company and will be
taxed as a C Corporation for federal and state income tax purposes.
The combined statements of operations for the years ended December 31,
1997, 1998 and 1999 have been presented to give pro forma effect assuming BCH
and its subsidiaries were taxed as C corporations as follows:
<TABLE>
<CAPTION>
1997 1998 1999
----------- ----------- ----------
<S> <C> <C> <C>
Historical income tax (expense) benefit.............. $(3,733,000) $(2,368,000) $1,794,000
Pro forma adjustment................................. 211,000 200,000 (449,000)
----------- ----------- ----------
Pro forma income tax (expense) benefit............... $(3,522,000) $(2,168,000) $1,345,000
=========== =========== ==========
</TABLE>
(17) SUBSEQUENT EVENTS
In March 2000, the board of directors of SHC authorized the management of
SHC to file a registration statement with the Securities and Exchange Commission
for an initial public offering of its common stock.
Also in March 2000, BCH entered into a merger agreement with SHC. This
merger is contingent upon the closing of the offering. The membership interests
in BCH are beneficially owned by the management of SHC and its stockholders. In
exchange for their membership interests in BCH, the Company has agreed to pay
the members of BCH an amount equal to the book value of BCH's assets as of the
effective date of the merger.
Subject to the completion of the initial public offering, the phantom stock
plan will terminate. As a result of the termination of the phantom stock plan,
upon the closing of the offering, SHC will issue options to purchase an
aggregate of approximately 462,648 shares of common stock and make aggregate
cash payments of approximately $1.2 million. See note 9.
The holder of a majority in principal amount of the convertible
subordinated notes due December 1, 2002 agreed in March 2000 to convert its
notes into shares of common stock upon the closing of the initial public
offering referred to above. Under the instrument governing the notes, SHC is
entitled to, and intends to, convert this holder's note, together with the
remainder of the notes, into a total of 9,600,000 shares of common stock upon
the closing of the offering.
F-20
<PAGE> 95
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
Through and including , 2000 (the 25th day after the date of
this prospectus), all dealers effecting transactions in these securities,
whether or not participating in this offering, may be required to deliver a
prospectus. This is in addition to the dealers' obligation to deliver a
prospectus when acting as underwriters and with respect to their unsold
allotments or subscriptions.
SHARES
STRATAGENE HOLDING LOGO
COMMON STOCK
----------------------
PROSPECTUS
----------------------
MERRILL LYNCH & CO.
SALOMON SMITH BARNEY
DAIN RAUSCHER WESSELS
PRUDENTIAL VECTOR HEALTHCARE
A UNIT OF PRUDENTIAL SECURITIES
, 2000
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
<PAGE> 96
THE INFORMATION IN THIS PROSPECTUS IS NOT COMPLETE AND MAY BE CHANGED.
WE MAY NOT SELL THESE SECURITIES UNTIL THE REGISTRATION STATEMENT
FILED WITH THE SECURITIES AND EXCHANGE COMMISSION IS EFFECTIVE. THIS
PROSPECTUS IS NOT AN OFFER TO SELL THESE SECURITIES AND IT IS NOT
SOLICITING AN OFFER TO BUY THESE SECURITIES IN ANY STATE WHERE THE
OFFER OR SALE IS NOT PERMITTED.
[Alternative Page for International Prospectus]
SUBJECT TO COMPLETION
PRELIMINARY PROSPECTUS DATED MARCH 10, 2000
PROSPECTUS
- ----------------
SHARES
[STRATAGENE HOLDING LOGO]
COMMON STOCK
----------------------
This is Stratagene Holding Corporation's initial public offering of common
stock. Stratagene is selling shares and Stratagene stockholders are
selling shares. The international managers are offering
shares outside of the U.S. and Canada and the U.S. underwriters are offering
shares in the U.S. and Canada.
We expect the public offering price to be between $ and $ per
share. Currently, no public market exists for the shares. After pricing of the
offering, we expect that the shares will be quoted on the Nasdaq National Market
under the symbol "STGN."
INVESTING IN THE COMMON STOCK INVOLVES RISKS THAT ARE DESCRIBED IN THE
"RISK FACTORS" SECTION BEGINNING ON PAGE 7 OF THIS PROSPECTUS.
----------------------
<TABLE>
<CAPTION>
PER SHARE TOTAL
--------- -----
<S> <C> <C>
Public offering price....................................... $ $
Underwriting discount....................................... $ $
Proceeds, before expenses, to Stratagene.................... $ $
Proceeds, before expenses, to the selling stockholders...... $ $
</TABLE>
The international managers may also purchase up to an additional
shares from Stratagene, and up to an additional shares
from the selling stockholders, at the public offering price, less the
underwriting discount, within 30 days from the date of this prospectus to cover
over-allotments. The U.S. underwriters may similarly purchase up to an
additional shares from Stratagene and up to an additional
shares from the selling stockholders.
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.
The shares will be ready for delivery on or about , 2000.
----------------------
MERRILL LYNCH INTERNATIONAL
SALOMON SMITH BARNEY INTERNATIONAL
DAIN RAUSCHER WESSELS
PRUDENTIAL-BACHE SECURITIES
----------------------
The date of this prospectus is , 2000.
X-1
<PAGE> 97
[Alternative Page for International Prospectus]
UNDERWRITING
We intend to offer the shares outside in the U.S. and Canada through the
international managers and in the U.S. and Canada through the U.S. underwriters.
Merrill Lynch International, Salomon Brothers International Limited, Dain
Rauscher Incorporated and Prudential-Bache (U.K.) Inc. are acting as lead
managers for the international managers named below. Subject to the terms and
conditions described in our international purchase agreement among us, the
selling stockholders and the international managers, and concurrently with the
sale of shares to the U.S. underwriters, we and the selling
stockholders have agreed to sell to the international managers, and the
international managers severally have agreed to purchase from us and the selling
stockholders, the number of shares listed opposite their names below.
<TABLE>
<CAPTION>
NUMBER
INTERNATIONAL MANAGER OF SHARES
--------------------- ---------
<S> <C>
Merrill Lynch International.................................
Salomon Brothers International Limited......................
Dain Rauscher Incorporated..................................
Prudential-Bache (U.K.) Inc.................................
--------
Total..........................................
========
</TABLE>
We and the selling stockholders have also entered into U.S. purchase
agreement with the U.S. underwriters for sale of the shares in the U.S. and
Canada for whom Merrill Lynch Pierce, Fenner & Smith Incorporated, Salomon Smith
Barney Inc., Dain Rauscher Incorporated and Prudential Securities Incorporated
are acting as U.S. representatives. Subject to the terms and conditions in the
U.S. purchase agreement, and concurrently with the sale of shares to
the international managers pursuant to the international purchase agreement, we
and the selling stockholders have agreed to sell to the U.S. underwriters, and
the U.S. underwriters severally have agreed to purchase shares from us
and the selling stockholders. The initial public offering price per share and
the total underwriting discount per share are identical under the international
purchase agreement and the U.S. purchase agreement.
The international managers and the U.S. underwriters have agreed to
purchase all of the shares sold under the international and U.S. purchase
agreements if any of these shares are purchased. If an underwriter defaults, the
U.S. and international purchase agreements provide that the purchase commitments
of the nondefaulting underwriters may be increased or the purchase agreements
may be terminated. The closings for the sale of shares to be purchased by the
international managers and the U.S. underwriters are conditioned on one another.
We, our two principal operating subsidiaries, Stratagene and BioCrest
Manufacturing, and the selling stockholders have agreed to indemnify the
international managers and the U.S. underwriters against certain liabilities,
including liabilities under the Securities Act, or to contribute to payments the
international managers and U.S. underwriters may be required to make in respect
of those liabilities.
The underwriters are offering the shares, subject to prior sale, when, as
and if issued to and accepted by them, subject to approval of legal matters by
their counsel, including the validity of the shares, and other conditions
contained in the purchase agreements, such as the receipt by the underwriters of
officer's certificates and legal opinions. The underwriters reserve the right to
withdraw, cancel or modify offers to the public and to reject orders in whole or
in part.
COMMISSIONS AND DISCOUNTS
The lead managers have advised us and the selling stockholders that the
international managers propose initially to offer the shares to the public at
the initial public offering price on the cover page of this prospectus, and to
dealers at that price less a concession not in excess of $ per share.
The
X-2
<PAGE> 98
[Alternative Page for International Prospectus]
international managers may allow, and the dealers may reallow, a discount not in
excess of $ per share to other dealers. After the initial public
offering, the public offering price, concession and discount may be changed.
The following table shows the public offering price, underwriting discount
and proceeds before expenses to Stratagene and the selling stockholders. The
information assumes either no exercise or full exercise by the international
managers and the U.S. underwriters of their over-allotment options.
<TABLE>
<CAPTION>
PER SHARE WITHOUT OPTION WITH OPTION
--------- -------------- -----------
<S> <C> <C> <C>
Public offering price.................................. $ $ $
Underwriting discount.................................. $ $ $
Proceeds, before expenses, to Stratagene............... $ $ $
Proceeds, before expenses, to the selling
stockholders......................................... $ $ $
</TABLE>
The expenses of the offering, not including the underwriting discount, are
estimated at $ and are payable by Stratagene.
OVER-ALLOTMENT OPTION
We and the selling stockholders have granted options to the international
managers to purchase up to additional shares at the public offering
price less the underwriting discount. The international managers may exercise
these options for 30 days from the date of this prospectus solely to cover any
over-allotments. If the international managers exercise these options, each
international manager will be obligated, subject to conditions contained in the
purchase agreements, to purchase a number of additional shares proportionate to
that international manager's initial amount reflected in the above table.
We and the selling stockholders have also granted options to the U.S.
underwriters, exercisable for 30 days from the date of this prospectus, to
purchase up to additional shares to cover any over-allotments on terms
similar to those granted to the international managers.
INTERSYNDICATE AGREEMENT
The international managers and the U.S. underwriters have entered into an
intersyndicate agreement that provides for the coordination of their activities.
Under the intersyndicate agreement, the international managers and the U.S.
underwriters may sell shares to each other for purposes of resale at the initial
public offering price, less an amount not greater than the selling concession.
Under the intersyndicate agreement, the international managers and any dealer to
whom they sell shares will not offer to sell or sell shares to U.S. or Canadian
persons or to persons they believe intend to resell to U.S. or Canadian persons,
except in the case of transactions under the intersyndicate agreement.
Similarly, the U.S. underwriters and any dealer to whom they sell shares will
not offer to sell or sell shares to persons who are non-U.S. or non-Canadian
persons or to persons they believe intend to resell to persons who are non-U.S.
or non-Canadian persons, except in the case of transactions under the
intersyndicate agreement.
RESERVED SHARES
At our request, the underwriters have reserved for sale, at the initial
public offering price, up to 5% of the shares offered by this prospectus for
sale to some of our employees, directors and to some individuals designated by
them. If these persons purchase reserved shares, this will reduce the number of
shares available for sale to the general public. Any reserved shares that are
not orally confirmed for purchase within one day of the pricing of this offering
will be offered by the underwriters to the general public on the same terms as
the other shares offered by this prospectus.
X-3
<PAGE> 99
[Alternative Page for International Prospectus]
NO SALES OF SIMILAR SECURITIES
We, the selling stockholders, our executive officers and directors and
substantially all existing stockholders, including all holders of vested
options, have agreed, not to sell or transfer any common stock for 180 days
after the date of this prospectus without first obtaining the written consent of
Merrill Lynch. Specifically, we and these other persons have agreed not to
directly or indirectly
- offer, pledge, sell or contract to sell any common stock,
- sell any option or contract to purchase any common stock,
- purchase any option or contract to sell any common stock,
- grant any option, right or warrant for the sale of any common stock,
- lend or otherwise dispose of or transfer any common stock,
- request or demand that we file a registration statement related to the
common stock, or
- enter into any swap or other agreement that transfers, in whole or in
part, the economic consequence of ownership of any common stock whether
any such swap or transaction is to be settled by delivery of shares or
other securities, in cash or otherwise.
This lockup provision applies to common stock and to securities convertible
into or exchangeable or exercisable for or repayable with common stock. It also
applies to common stock owned now or acquired later by the person executing the
agreement or for which the person executing the agreement later acquires the
power of disposition. We may continue to issue shares and options under our
stock option plan and file an S-8 registration statement relating to our stock
option plan.
QUOTATION ON THE NASDAQ NATIONAL MARKET
We expect the shares to be approved for quotation on the Nasdaq National
Market, subject to notice of issuance, under the symbol "STGN."
Before this offering, there has been no public market for our common stock.
The initial public offering price will be determined through negotiations among
us, the selling stockholders and the U.S. representatives and lead managers. In
addition to prevailing market conditions, the factors to be considered in
determining the initial public offering price are
- the valuation multiples of publicly traded companies that the U.S.
representatives and the lead managers believe to be comparable to us,
- our financial information,
- the history of, and the prospects for, our company and the industry in
which we compete,
- an assessment of our management, its past and present operations, and the
prospects for, and timing of, our future revenues,
- the present state of our development and
- the above factors in relation to market values and various valuation
measures of other companies engaged in activities similar to ours.
An active trading market for the shares may not develop. It is also
possible that after the offering the shares will not trade in the public market
at or above the initial public offering price. The underwriters do not expect to
sell more than 5% of the shares in the aggregate to accounts over which they
exercise discretionary authority.
X-4
<PAGE> 100
[Alternative Page for International Prospectus]
PRICE STABILIZATION, SHORT POSITIONS AND PENALTY BIDS
Until the distribution of the shares is completed, SEC rules may limit
underwriters and selling group members from bidding for and purchasing our
common stock. However, the U.S. representatives may engage in transactions that
stabilize the price of the common stock, such as bids or purchases to peg, fix
or maintain that price.
If the underwriters create a short position in the common stock in
connection with the offering, i.e., if they sell more shares than are listed on
the cover of this prospectus, the U.S. representatives may reduce that short
position by purchasing shares in the open market. The U.S. representatives may
also elect to reduce any short position by exercising all or part of the
over-allotment option described above. Purchases of the common stock to
stabilize its price or to reduce a short position may cause the price of the
common stock to be higher than it might be in the absence of such purchases.
The U.S. representatives may also impose a penalty bid on underwriters and
selling group members. This means that if the U.S. representatives purchase
shares in the open market to reduce the underwriter's short position or to
stabilize the price of such shares, they may reclaim the amount of the selling
concession from the underwriters and selling group members who sold those
shares. The imposition of a penalty bid may also affect the price of the shares
in that it discourages resales of those shares.
Neither we nor any of the underwriters makes any representation or
prediction as to the direction or magnitude of any effect that the transactions
described above may have on the price of the common stock. In addition, neither
we nor any of the underwriters makes any representation that the U.S.
representatives or the lead managers will engage in these transactions or that
these transactions, once commenced, will not be discontinued without notice.
UK SELLING RESTRICTIONS
Each international manager has agreed that
- it has not offered or sold and will not offer or sell any shares of
common stock to persons in the United Kingdom, except to persons whose
ordinary activities involve them in acquiring, holding, managing, or
disposing of investments (as principal or agent) for the purposes of
their businesses or otherwise in circumstances which do not constitute an
offer to the public in the United Kingdom with the meaning of the Public
Offers of Securities Regulations 1995;
- it has complied and will comply with all applicable provisions of the
Financial Services Act 1986 with respect to anything done by it in
relation to the common stock in, from or otherwise involving the United
Kingdom; and
- it has only issued or passed on and will only issue or pass on in the
United Kingdom any document received by it in connection with the
issuance of common stock to a person who is of a kind described in
Article 11(3) of the Financial Services Act 1986 (Investment
Advertisements) (Exemptions) Order 1996 as amended by the Financial
Services Act of 1986 (Investment Advertisements)(Exemptions) Order 1997
or is a person to whom such document may otherwise lawfully be issued or
passed on.
NO PUBLIC OFFERING OUTSIDE THE UNITED STATES
No action has been or will be taken in any jurisdiction (except in the
United States) that would permit a public offering of the shares of common
stock, or the possession, circulation, or distribution of this prospectus or any
other material relating to our company, the selling stockholders, or shares of
our common stock in any jurisdiction where action for that purpose is required.
Accordingly, the shares of our common stock may not be offered or sold, directly
or indirectly, and neither this prospectus nor any other offering materials or
advertisements in connection with the shares of common stock may be distributed
or
X-5
<PAGE> 101
[Alternative Page for International Prospectus]
published, in or from any country or jurisdiction except in compliance with any
applicable rules and regulations or any such country or jurisdiction.
Purchasers or the shares offered by this prospectus may be required to pay
stamp taxes and other charges in accordance with the laws and practices of the
country of purchase in addition to the offering price on the cover page of this
prospectus.
X-6
<PAGE> 102
[Alternative Page for International Prospectus]
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
Through and including , 2000 (the 25th day after the date of
this prospectus), all dealers effecting transactions in these securities,
whether or not participating in this offering, may be required to deliver a
prospectus. This is in addition to the dealers' obligation to deliver a
prospectus when acting as underwriters and with respect to their unsold
allotments or subscriptions.
SHARES
STRATAGENE HOLDING LOGO
COMMON STOCK
----------------------
PROSPECTUS
----------------------
MERRILL LYNCH INTERNATIONAL
SALOMON SMITH BARNEY INTERNATIONAL
DAIN RAUSCHER WESSELS
PRUDENTIAL-BACHE SECURITIES
, 2000
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
X-7
<PAGE> 103
PART II
INFORMATION NOT REQUIRED IN PROSPECTUS
ITEM 13. OTHER EXPENSES OF ISSUANCE AND DISTRIBUTION
The expenses to be paid by Stratagene in connection with the distribution
of the securities being registered are as set forth in the following table:
<TABLE>
<C> <S> <C>
Securities and Exchange Commission Fee...................... $39,600
NASD Filing Fee............................................. 15,500
Nasdaq National Market Listing Fee..........................
* Legal Fees and Expenses.....................................
* Accounting Fees and Expenses................................
* Printing Expenses...........................................
* Blue Sky Fees and Expenses..................................
* Registrar and Transfer Agent Fees and Expenses..............
* Miscellaneous...............................................
-------
* Total....................................................... $
=======
</TABLE>
- ---------------
* Estimated
ITEM 14. INDEMNIFICATION OF DIRECTORS AND OFFICERS
Stratagene's amended and restated certificate of incorporation provides
that, to the fullest extent permitted by Delaware law, as it may be amended from
time to time, no director of Stratagene shall be liable to Stratagene or its
stockholders for monetary damages resulting from a breach of fiduciary duty as a
director, except for (i) liability resulting from a breach of the director's
duty of loyalty to Stratagene and its stockholders, (ii) acts or omissions which
are not in good faith or which involve intentional misconduct or a knowing
violation of law, (iii) unlawful payment of dividends or unlawful stock
repurchases or redemptions as provided in Section 174 of the Delaware General
Corporation Law, or (iv) a transaction from which the director derived an
improper personal benefit. While the amended and restated certificate of
incorporation provides directors, officers, employees and agents with protection
from awards for monetary damages for breaches of their duty of care, it does not
eliminate such duty. Accordingly, the amended and restated certificate of
incorporation will have no effect on the availability of equitable remedies such
as an injunction or rescission based on a breach of such person's duty of care.
Stratagene's amended and restated certificate of incorporation and the
bylaws also provide mandatory indemnification for the benefit of directors,
officers, employees and agents of Stratagene to the fullest extent permitted by
Delaware law, as amended from time to time, including most circumstances under
which indemnification otherwise would be discretionary. In addition, Stratagene
has entered into individual indemnification agreements with each of its
directors and officers providing indemnification benefits. Such indemnification
rights include reimbursement for expenses incurred by such person in advance of
the final disposition of a proceeding in accordance with the applicable
provisions of Delaware law. Insofar as indemnification for liabilities arising
under the Securities Act of 1933 may be permitted to directors, officers or
persons controlling Stratagene pursuant to the foregoing provisions, Stratagene
has been informed that in the opinion of the Securities and Exchange Commission,
such indemnification is against public policy as expressed in the Securities Act
of 1933 and is therefore unenforceable. Stratagene also will provide directors'
and officers' liability insurance coverage for its directors and officers.
II-1
<PAGE> 104
ITEM 15. RECENT SALES OF UNREGISTERED SECURITIES
Since March 1997, Stratagene has issued and sold unregistered securities as
follows:
(1) Stratagene issued to Harold S. Eastman, through the exercise of stock
options at an exercise price of $1.25 per share, 100,000 shares of
common stock on July 7, 1997, 100,000 shares of common stock on June 2,
1998 and 200,000 shares of common stock on September 11, 1999.
(2) Stratagene issued to Stephen O. James, through the exercise of stock
options at an exercise price of $1.25 per share, 40,000 shares of
common stock on May 20, 1998 and 40,000 shares of common stock on
September 5, 1999.
(3) On March 1, 1999, Stratagene issued 14,080 shares of common stock to
Jill Nunez through the exercise of stock options held by Ms. Nunez at
an exercise price of $1.25 per share.
(4) On February 18, 1999, Carlton J. Eibl purchased 133,336 shares of
common stock from Stratagene at a price of $3.75 per share pursuant to
the terms of his employment agreement with Stratagene.
(5) As of December 31, 1999, Stratagene has outstanding stock options to
employees, officers, directors and consultants to purchase an aggregate
of 1,468,000 shares of common stock at a weighted average exercise
price of $2.67.
The sales of the securities listed in paragraphs (1) through (4) above were
made in reliance upon Section 4(2) of the Securities Act, which provides
exemptions for transactions not involving a public offering. The issuances of
the options described in paragraphs (1) through (3) and paragraph (5) above were
exempt from registration under the Securities Act pursuant to Rule 701
promulgated thereunder, on the basis that the stock options were issued pursuant
to the terms and conditions provided by Rule 701. Stratagene did not retain
underwriters in connection with the issuance of any of Stratagene's currently
outstanding securities. All of the financial information and share data
described above gives effect to (1) a 4 for 1 stock split in March 2000 and (2)
the conversion of Stratagene's class B common stock into class A common stock
and the reclassification of Stratagene's class A common stock into common stock
contingent upon the closing of the offering
ITEM 16. EXHIBITS AND FINANCIAL STATEMENT SCHEDULES
(a) EXHIBITS
<TABLE>
<C> <S>
1.1 (2) Form of U.S. Purchase Agreement
3.1 (2) Form of Amended and Restated Certificate of Incorporation of
Stratagene Holding Corporation
3.2 (2) Form of Bylaws, as amended, of Stratagene Holding
Corporation
4.1 (2) Form of Specimen Common Stock Certificate for Stratagene
Holding Corporation
5.1 (2) Opinion of Latham & Watkins
10.1 (2) Form of Indemnification Agreement entered into by Stratagene
Holding Corporation and each of its executive officers and
directors and schedule listing all executive officers and
directors who have executed an Indemnification Agreement
10.2 (2) Amended and Restated Stock Option Plan of Stratagene Holding
Corporation
10.3 (2) Employment Agreement between Stratagene Holding Corporation
and Joseph A. Sorge, M.D., dated as of December 6, 1995
10.4 (2) Employment Agreement between Stratagene Holding Corporation
and John R. Pouk, dated as of July 1, 1996
10.5 (2) Non-Qualified Stock Option Agreement between Stratagene
Holding Corporation and John R. Pouk, dated as of July 1,
1996
10.6 (2) Securities Purchase Agreement between Stratagene Holding
Corporation and TCW Special Credits Fund V -- The Principal
Fund, dated as of December 6, 1995
</TABLE>
II-2
<PAGE> 105
<TABLE>
<C> <S>
10.7 (2) Stockholders Agreement between Stratagene Holding
Corporation, TCW Special Credits Fund V -- The Principal
Fund, Joseph A. Sorge, M.D., J. A. Sorge Trust I, J.A. Sorge
Trust II, J.A. Sorge Trust III and J.A. Sorge Trust IV,
dated as of December 6, 1995, and schedule of additional
parties to Stockholders Agreement pursuant to Joinder
Agreements
10.8 (2) Registration Rights Agreement between Stratagene Holding
Corporation and TCW Special Credits Fund V -- The Principal
Fund, dated as of December 6, 1995
10.9 (2) Loan Agreement between Bastrop County Industrial Development
Corporation and BioCrest Partners, L.P., dated as of April
1, 1997
10.10(1) Thermal Cycler Supplier Authorization Agreement between The
Perkin-Elmer Corporation and Stratagene, dated as of January
1, 1995*
10.11(1) Patent License Agreement between Roche Molecular Systems,
Inc. and P. Hoffmann-La Roche Ltd. and Stratagene, dated as
of July 26, 1994*
10.12(2) Form of Industrial Real Estate Triple Net Lease between
Equitable Life Assurance Society of the United States and
Stratagene, dated as of January 30, 1990, as amended
10.13(2) Credit Agreement and Note between Union Bank of California,
N.A. and BioCrest Manufacturing, L.P., dated as of August
30, 1999, as amended
21.1 (2) Subsidiaries of the Registrant
23.1 (1) Independent Auditors' Report on Schedule and Consent
23.2 (2) Consent of Latham & Watkins (included in Exhibit 5.1)
24.1 (1) Powers of Attorney (contained on the signature page of this
Registration Statement)
27.1 (1) Financial Data Schedule
</TABLE>
- ---------------
(1) Filed herewith.
(2) To be filed by amendment.
* The Registrant is seeking confidential treatment with respect to portions of
this exhibit.
(b) FINANCIAL STATEMENT SCHEDULES
Schedule II -- Valuation and Qualifying Accounts
All other schedules are omitted because they are not required, are not
applicable, or the information is included in our financial statements or
notes thereto.
ITEM 17. UNDERTAKINGS
The undersigned registrant hereby undertakes to provide to the underwriter
at the closing specified in the underwriting agreement, certificates in such
denominations and registered in such names as required by the underwriter to
permit prompt delivery to each purchaser.
Insofar as indemnification for liabilities arising under the Securities Act
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 Securities Act
of 1933 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 Securities
Act of 1933 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
II-3
<PAGE> 106
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-4
<PAGE> 107
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 San Diego, State of
California, on March 10, 2000.
STRATAGENE HOLDING CORPORATION
By: /s/ JOSEPH A. SORGE
------------------------------------
Joseph A. Sorge, M.D.
Chairman of the Board, Chief
Executive Officer and Chief
Financial Officer
POWER OF ATTORNEY
KNOW ALL PERSONS BY THESE PRESENTS, that each person whose signature
appears below does hereby constitute and appoint Dr. Joseph A. Sorge, with full
power of substitution and full power to act, his true and lawful
attorney-in-fact and agent to act for him in his name, place and stead, in any
and all capacities, to sign any and all amendments (including post-effective
amendments) to this Registration Statement, any and all registration statements
filed pursuant to Rule 462(b) of the Securities Act of 1933 (including
post-effective amendments) and to file this Registration Statement, with all
exhibits thereto, and other documents in connection therewith, with the
Securities and Exchange Commission, granting unto said attorney-in-fact and
agent, full power and authority to do and perform each and every act and thing
requisite and necessary to be done in order to effectuate the same as fully, to
all intents and purposes, as they or he might or could do in person, hereby
ratifying and confirming all that said attorney-in-fact and agent, may lawfully
do or cause to be done by virtue hereof.
Pursuant to the requirements of the Securities Act of 1933, this
Registration Statement has been signed by each of the following persons in the
capacities and on the dates indicated:
<TABLE>
<CAPTION>
SIGNATURE TITLE DATE
--------- ----- ----
<C> <S> <C>
/s/ JOSEPH A. SORGE Chairman of the Board and Chief March 10, 2000
- --------------------------------------------------- Executive Officer and Chief
Joseph A. Sorge, M.D. Financial Officer (Principal
Executive Officer and Principal
Financial Officer and Principal
Accounting Officer)
/s/ CARLTON J. EIBL Director March 10, 2000
- ---------------------------------------------------
Carlton J. Eibl
/s/ STEPHEN A. KAPLAN Director March 10, 2000
- ---------------------------------------------------
Stephen A. Kaplan
/s/ HAROLD S. EASTMAN Director March 10, 2000
- ---------------------------------------------------
Harold S. Eastman
/s/ STEPHEN O. JAMES Director March 10, 2000
- ---------------------------------------------------
Stephen O. James
</TABLE>
II-5
<PAGE> 108
SCHEDULE II
STRATAGENE HOLDING CORPORATION
VALUATION AND QUALIFYING ACCOUNTS
<TABLE>
<CAPTION>
ADDITIONS
BALANCE AT ------------------------- BALANCE
BEGINNING PROVISIONS OTHER AT END OF
ALLOWANCE FOR DOUBTFUL ACCOUNTS OF YEAR (REDUCTION) WRITE-OFFS ADDITIONS YEAR
------------------------------- ---------- ----------- ---------- --------- ---------
<S> <C> <C> <C> <C> <C>
Year ended December 31, 1997....... 304,000 159,000 (6,000) -- 457,000
Year ended December 31, 1998....... 457,000 180,000 (32,000) -- 605,000
Year ended December 31, 1999....... 605,000 (6,000) (113,000) -- 266,000
</TABLE>
S-1
<PAGE> 109
EXHIBIT INDEX
<TABLE>
<C> <S>
1.1 (2) Form of U.S. Purchase Agreement
3.1 (2) Form of Amended and Restated Certificate of Incorporation of
Stratagene Holding Corporation
3.2 (2) Form of Bylaws, as amended, of Stratagene Holding
Corporation
4.1 (2) Form of Specimen Common Stock Certificate for Stratagene
Holding Corporation
5.1 (2) Opinion of Latham & Watkins
10.1 (2) Form of Indemnification Agreement entered into by Stratagene
Holding Corporation and each of its executive officers and
directors and schedule listing all executive officers and
directors who have executed an Indemnification Agreement
10.2 (2) Amended and Restated Stock Option Plan of Stratagene Holding
Corporation
10.3 (2) Employment Agreement between Stratagene Holding Corporation
and Joseph A. Sorge, M.D., dated as of December 6, 1995
10.4 (2) Employment Agreement between Stratagene Holding Corporation
and John R. Pouk, dated as of July 1, 1996
10.5 (2) Non-Qualified Stock Option Agreement between Stratagene
Holding Corporation and John R. Pouk, dated as of July 1,
1996
10.6 (2) Securities Purchase Agreement between Stratagene Holding
Corporation and TCW Special Credits Fund V -- The Principal
Fund, dated as of December 6, 1995
10.7 (2) Stockholders Agreement between Stratagene Holding
Corporation, TCW Special Credits Fund V -- The Principal
Fund, Joseph A. Sorge, M.D., J. A. Sorge Trust I, J.A. Sorge
Trust II, J.A. Sorge Trust III, J.A. Sorge Trust IV, dated
as of December 6, 1995, and schedule of additional parties
to Stockholders Agreement pursuant to Joinder Agreements
10.8 (2) Registration Rights Agreement between Stratagene Holding
Corporation and TCW Special Credits Fund V -- The Principal
Fund, dated as of December 6, 1995
10.9 (2) Loan Agreement between Bastrop County Industrial Development
Corporation and BioCrest Partners, L.P., dated as of April
1, 1997
10.10(1) Thermal Cycler Supplier Authorization Agreement between The
Perkin-Elmer Corporation and Stratagene, dated as of January
1, 1995*
10.11(1) Patent License Agreement between Roche Molecular Systems,
Inc. and P. Hoffmann-La Roche Ltd. and Stratagene, dated as
of July 26, 1994*
10.12(2) Form of Industrial Real Estate Triple Net Lease between
Equitable Life Assurance Society of the United States and
Stratagene, dated as of January 30, 1990, as amended
10.13(2) Credit Agreement and Note between Union Bank of California,
N.A. and BioCrest Manufacturing, L.P., dated as of August
30, 1999, as amended
21.1 (2) Subsidiaries of the Registrant
23.1 (1) Independent Auditors' Report on Schedule and Consent
23.2 (2) Consent of Latham & Watkins (included in Exhibit 5.1)
24.1 (1) Powers of Attorney (contained on the signature page of this
Registration Statement)
27.1 (1) Financial Data Schedule
</TABLE>
- ---------------
(1) Filed herewith.
(2) To be filed by amendment.
* The Registrant is seeking confidential treatment with respect to portions of
this exhibit.
<PAGE> 1
EXHIBIT 10.10
THERMAL CYCLER SUPPLIER
AUTHORIZATION AGREEMENT
PORTIONS OF THIS EXHIBIT HAVE BEEN OMITTED
PURSUANT TO A REQUEST FOR CONFIDENTIAL TREATMENT
<PAGE> 2
THERMAL CYCLER SUPPLIER
AUTHORIZATION AGREEMENT
This Agreement ("Agreement"), effective January 1, 1995 ("Effective
Date"), is made by and between The Perkin-Elmer Corporation, a New York
corporation having an office at 761 Main Avenue, Norwalk, Connecticut 06859
("Perkin-Elmer"), and Stratagene, a California corporation having an office at
11011 North Torrey Pines Road, La Jolla, California 92037 ("Thermal Cycler
Supplier"), referred to collectively herein as the "Parties".
Whereas, Perkin-Elmer has the power to convey limited rights for
research and in certain other fields under U.S. Patent Nos. 4,683,195,
4,683,202 and 4,965,188, describing and claiming gene amplification processes,
including a process known as the polymerase chain reaction ("PCR") process,
which are owned by Hoffman-La Roche Inc., and corresponding counterpart patents
and patent applications in other countries, which are owned by F. Hoffmann-La
Roche Ltd (both of which are referred to collectively herein as "Roche").
Whereas, Perkin-Elmer offers to PCR users commercial and non-commercial
license rights under these patents and patent applications for automated
performance of the PCR process for research and certain other fields that
include, inter alia, an up-front fee component based on the capacity of thermal
cyclers used to perform the process.
Whereas, Perkin-Elmer offers to suppliers of thermal cyclers certain
license rights under those patents, namely, an authorization to sell and
distribute their instruments with a label conveying to their customers rights
under the up-front fee component of the PCR licenses described above, and the
right to promote their instruments as "Authorized Thermal Cyclers" for PCR.
Whereas, Perkin-Elmer also has the power to convey limited license
rights under U.S. Patent Nos. 5,038,852 and 5,333,675, describing and claiming
automated apparatus suitable for performing the PCR process, any apparatus
claim issuing from an application claiming priority of U.S. application
-1-
<PAGE> 3
Serial No. 833,368 or U.S. application Serial No. 899,061 (both filed in 1986)
and apparatus claims in corresponding counterpart patents and patent
applications in other countries ("PCR Instrument Patents").
WHEREAS, Perkin-Elmer offers the above process rights and apparatus rights
separately or in combination and, Thermal Cycler Supplier has requested PCR
process license rights only, without rights under any apparatus claims.
NOW, THEREFORE, the Parties agree as follows:
1. DEFINITIONS
1.1 "AMPLIFICATION PATENT RIGHTS" shall mean the nucleic acid
amplification processes, including particularly the PCR process, covered by:
United States Patent Nos. 4,683,195, 4,683,202 and 4,695,188; any amplification
process claim issuing from an application claiming priority of U.S. application
Serial No. 833,368 or U.S. application Serial No. 899,061 (both filed in 1986);
and any corresponding amplification process claim in patents and patent
applications in other countries claiming priority of any of them.
1.2 "AUTHORIZED REAGENT" shall mean a DNA polymerase whose use in
performance of the PCR process is covered by the running-royalty component of a
PCR process license for internal research and development. The running-royalty
component of that license may be obtained through the purchase of reagents
bearing a valid label conveying the running-royalty component; alternatively, it
may be purchased from Perkin-Elmer. Other PCR process licenses in the Fields
also require use of Authorized Reagents.
1.3 "AUTHORIZED THERMAL CYCLER" shall mean a thermal cycler or
temperature cycling instrument whose use in automated performance of the PCR
process is covered by the up-front fee component of a PCR process license for
internal research and development. The up-front fee component of that license
may be obtained through the purchase of a thermal cycler or temperature
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<PAGE> 4
cycling instrument bearing a valid label conveying the up-front component;
alternatively, it may be purchased from Perkin-Elmer. Other PCR process licenses
in the Fields also require use of an instrument whose use is similarly covered,
i.e., an 'Authorized Thermal Cycler".
1.4 "FIELDS" shall mean research and development, quality assurance or
control, environmental testing, plant diagnostics, identity testing (other than
parentage testing for humans) and forensics.
1.5 "TERRITORY" shall mean worldwide.
1.6 "THIRD PARTY" shall mean a party other than the Parties.
2. GRANT
2.1 Upon the terms and subject to the exceptions and conditions of this
Agreement, Perkin-Elmer grants to Thermal Cycler Supplier the following
personal, non-transferable, royalty-bearing, non-exclusive rights in the
Territory under the Amplification Patent Rights:
(a) Thermal Cycler Supplier is hereby authorized to sell and distribute
to end users, directly or through its distributors and under Thermal Cycler
Supplier's name and trademarks, thermal cyclers and temperature cycling
instruments manufactured by Thermal Cycler Supplier or manufactured for Thermal
Cycler Supplier for sale under its name and trademarks, but not otherwise to
sell or distribute to thermal cycler suppliers, with a label conveying to end
users (including Thermal Cycler Supplier itself) in the Fields the up-front
rights of PCR process licenses as specified in the label set forth in Section
5.1 below, that is, with an Authorized Thermal Cycler label; and
(b) Thermal Cycler Supplier may advertise and promote thermal cyclers
and temperature cycling instruments so labeled as Authorized Thermal Cyclers for
PCR.
-3-
<PAGE> 5
2.2 No right, immunity, authorization or license is granted under this
Agreement, expressly or by implication, under any apparatus claim of any patent
or patent application owned by or licensed to Perkin-Elmer or Roche. Neither
this Agreement nor any grant hereunder shall affect the rights of the Parties
with respect to any such claim vis-a-vis any thermal cycler or temperature
cycling instrument, or the enforcement of those rights.
2.3 No right, immunity, authorization or license is granted under this
Agreement, expressly or by implication, for any other purpose, or in any other
field, including: to make, have made, use or sell any polymerase amplification
reagent or kit; or to perform PCR or nucleic acid amplification that is not
fully licensed under the Amplification Patent Rights. No right, immunity,
authorization or license is granted under this Agreement, expressly or by
implication, under any patent or patent application not expressly included in
Amplification Patent Rights.
2.4 Rights granted to Thermal Cycler Supplier by this Agreement are
personal to Thermal Cycler Supplier alone. Thermal Cycler Supplier shall have no
right to sublicense, assign or otherwise transfer or share it rights hereunder.
Notwithstanding the foregoing, Thermal Cycler Supplier may exercise its right to
market, sell and distribute under Section 2.1 through independent distributors.
3. FEES, ROYALTIES, RECORDS AND REPORTS
3.1 For the authorization rights granted under Article 2, Thermal
Cycler Supplier shall pay to Perkin-Elmer: a license issue fee of $*** plus,
for each thermal cycler or temperature cycling instrument delivered of invoiced
by the Thermal Cycler Supplier after the Effective Date of this Agreement, a
royalty payment as follows,
(a) for calendar year 1995: $*** for a capacity of up to *** samples
plus $*** for each additional *** samples or part thereof:
Payment($) = *** + *** x (maximum sample capacity - ***)/***,
where the calculated fraction, (maximum sample capacity - ***)/***, is
rounded to the next higher whole number; and,
*** PORTIONS OF THIS EXHIBIT HAVE BEEN OMITTED
PURSUANT TO A REQUEST FOR CONFIDENTIAL TREATMENT
-4-
<PAGE> 6
(b) from January 1, 1996: $*** for a capacity of up to *** samples plus
$*** for each additional *** samples or part thereof;
Payment($) = *** + *** x (maximum sample capacity - ***)/***,
where the calculated fraction, (maximum sample capacity - ***)/***, is
rounded to the next higher whole number.
The license issue fee shall be due and owing and shall be paid on execution of
this Agreement. The per-thermal cycler fees shall be paid as specified in
Sections 3.4 and 3.5. Each instrument for which that fee is paid shall be an
Authorized Thermal Cycler and shall be so designated pursuant to Article 5
hereof.
3.2 All amounts payable hereunder shall be payable in United States
dollars.
3.3 Thermal Cycler Supplier shall keep full true and accurate books of
account containing all particulars necessary to show the amount payable to
Perkin-Elmer under this Agreement. Such books and the supporting data shall be
open at all reasonable times, for three (3) years following the end of the
calendar year to which they pertain (and access shall not be denied thereafter,
if reasonably available), to the inspection of an independent inspector retained
by Perkin-Elmer. If in dispute, such records shall be kept until the dispute is
settled. Inspection shall be at Perkin-Elmer's expense, unless the inspector
concludes that the amount payable that is stated in a report is understated by
five percent (5%) or more, in which case expenses shall be paid by Thermal
Cycler Supplier.
3.4 Thermal Cycler Supplier shall within thirty (30) days after the
first of each January, April, July and October deliver to Perkin-Elmer a true
and accurate accounting report. This report shall give such particulars of the
business conducted by Thermal Cycler Supplier during the preceding three (3)
calendar months as are pertinent to accounting under this Agreement and shall be
in accordance with, and include all information specified in, the royalty report
form attached hereto as Appendix A.
*** PORTIONS OF THIS EXHIBIT HAVE BEEN OMITTED
PURSUANT TO A REQUEST FOR CONFIDENTIAL TREATMENT
-5-
<PAGE> 7
The correctness and completeness of each report shall be attested to in
writing by the responsible financial officer of Thermal Cycler Supplier or by
Thermal Cycler Supplier's external auditor.
3.5 Simultaneously with the delivery of each royalty report, Thermal
Cycler Supplier shall pay to Perkin-Elmer the monies then due under this
Agreement for the period covered by the report. Each report and payment shall be
sent by the due date to the following address:
Applied Biosystems Division
The Perkin-Elmer Corporation
850 Lincoln Centre Drive
Foster City, California, U.S.A. 94404
Attention: Director of Licensing
or to any address that Perkin-Elmer may advise in writing.
3.6 If Thermal Cycler Supplier shall fail to pay any amount owing under
this Agreement by the due date, the amount owed shall bear interest at two
percent (2%) over the Citibank NA base lending rate ("prime rate") from the due
date until paid, provided, however, that if this interest rate is held to be
unenforceable for any reason, the interest rate shall be the maximum rate
allowed by law at the time the payment is due.
3.7 Failure of Thermal Cycler Supplier to pay any amount specified
under this Agreement within thirty (30) days after the due date will give
Perkin-Elmer the right to terminate under Section 6.7.
4. PAST SALES AND ACTIVITIES
4.1 Upon execution of this Agreement Thermal Cycler Supplier shall pay
to Perkin-Elmer the sum of $*** which shall be due and owing on that date.
In consideration therefor all thermal cyclers delivered or invoiced by Thermal
Cycler Supplier prior to the Effective Date of this Agreement shall be
considered Authorized Thermal Cyclers, subject to the conditions of Sections 4.2
*** PORTIONS OF THIS EXHIBIT HAVE BEEN OMITTED
PURSUANT TO A REQUEST FOR CONFIDENTIAL TREATMENT
-6-
<PAGE> 8
and 5.3; and all earlier use of such thermal cyclers by customers, direct or
indirect, of Thermal Cycler Supplier shall be deemed to have been use of a
thermal cycler within the grant of this Agreement.
4.2 Thermal Cycler Supplier shall send to the original end-user
customers of the thermal cyclers that are the subject of Section 3.1 or Section
4.1 but were shipped without labels specified in Section 5.1 Authorized Thermal
Cycler notices in accordance with Section 5.1 with a means reasonably
satisfactory to Perkin-Elmer to relate each such notice to the appropriate
thermal cycler. Any such thermal cycler not having an authorization notice by
July 31, 1995 shall cease to be an Authorized Thermal Cycler unless Thermal
Cycler Supplier establishes to the reasonable satisfaction of Perkin-Elmer that
(a) the thermal cycler falls within Section 4.1 and (b) the Authorized Thermal
Cycler notice for the thermal cycler has not been applied to another instrument.
5. AUTHORIZATION NOTICE
5.1 Thermal Cycler Supplier agrees to include in the front of the
user's manual for each Authorized Thermal Cycler, and for no other thermal
cycler, a Notice as specified from time to time by Perkin-Elmer. Unless and
until Perkin-Elmer reasonably instructs differently, the Notice shall be:
AUTHORIZED THERMAL CYCLER
THIS INSTRUMENT, SERIAL NO.____, IS IN AUTHORIZED THERMAL CYCLER.
ITS PURCHASE PRICE INCLUDES THE UP-FRONT FEE COMPONENT OF A
LICENSE UNDER THE PATENTS ON THE POLYMERASE CHAIN REACTION (PCR)
PROCESS, WHICH ARE OWNED BY HOFFMANN-LA ROCHE INC. AND F.
HOFFMANN-LA ROCHE LTD, TO PRACTICE THE PCR PROCESS FOR INTERNAL
RESEARCH AND DEVELOPMENT USING THIS INSTRUMENT. THE
RUNNING-ROYALTY COMPONENT OF THAT LICENSE MAY BE PURCHASED FROM
PERKIN-ELMER OR OBTAINED BY PURCHASING AUTHORIZED REAGENTS. THIS
INSTRUMENT IS ALSO AN AUTHORIZED THERMAL CYCLER FOR USE WITH
APPLICATIONS LICENSES AVAILABLE FROM PERKIN-ELMER. ITS USE WITH
AUTHORIZED REAGENTS ALSO PROVIDES A LIMITED PCR LICENSE IN
ACCORDANCE WITH THE LABEL RIGHTS ACCOMPANYING SUCH REAGENTS.
PURCHASE OF THIS PRODUCT DOES NOT ITSELF CONVEY TO THE PURCHASER
A COMPLETE LICENSE OR RIGHT TO PERFORM THE PCR PROCESS. FURTHER
INFORMATION ON PURCHASING LICENSES TO PRACTICE THE PCR PROCESS
MAY BE OBTAINED BY CONTACTING THE DIRECTOR OF LICENSING AT THE
PERKIN-ELMER CORPORATION, 850 LINCOLN CENTRE DRIVE, FOSTER CITY,
CALIFORNIA 94404.
PERKIN-ELMER DOES NOT GUARANTEE THE PERFORMANCE OF THIS
INSTRUMENT.
-7-
<PAGE> 9
5.2 Thermal Cycler Supplier agrees to affix permanently and prominently
to each Authorized Thermal Cycler the designation "Authorized Thermal Cycler,"
its Serial Number and a direction to consult the user's manual for license
information.
5.3 Thermal Cycler Supplier further agrees to instruct the ultimate
purchaser that transfer of the thermal cycler without the Serial Number or the
Notice shall automatically terminate the authorization granted by this Agreement
and the thermal cycler shall cease to be an Authorized Thermal Cycler.
5.4 To avoid confusion among thermal cycler users, Thermal Cycler
Supplier agrees not to designate or refer to its Authorized Thermal Cyclers as
"licensed" under the Amplification Patent Rights or "licensed" for PCR. However,
Perkin-Elmer agrees that Thermal Cycler Supplier may designate or refer to its
Authorized Thermal Cyclers as carrying up-front license rights under the
Amplification Patent Rights in a manner that fairly does not suggest that use of
an Authorized Thermal Cycler conveys a full license under the Amplification
Patent Rights.
6. TERM AND TERMINATION
6.1 This Agreement, unless sooner terminated, shall continue until the
expiration of the last-to-expire of the Amplification Patent Rights.
6.2 This Agreement shall terminate upon a holding of invalidity or
unenforceability of all claims of the Amplification Patent Rights by a final
court decision from which no appeal is or can be taken.
6.3 Thermal Cycler Supplier may terminate this Agreement for any reason
by giving written notice to Perkin-Elmer and ceasing to advertise or promote its
thermal cyclers as Authorized Thermal Cyclers. Such termination shall be
effective ninety (90) days after said notice or cessation, whichever is later.
-8-
<PAGE> 10
6.4 The decision of a Court or Administrative body finding Perkin-Elmer
liable or culpable due to Thermal Cycler Supplier's manufacture, sale or
distribution of Authorized Thermal Cyclers shall give Perkin-Elmer the right to
terminate this Agreement immediately upon notice.
6.5 This Agreement shall terminate upon (i) an adjudication of Thermal
Cycler Supplier as bankrupt or insolvent, or Thermal Cycler Supplier's admission
in writing of its inability to pay its obligations as they mature; (a) an
assignment by Thermal Cycler Supplier for the benefit of creditors; (iii) the
appointment of, or Thermal Cycler Supplier's applying for or consenting to the
appointment of a receiver, trustee or similar officer for a substantial part of
its property; (iv) the institution of or any act of Thermal Cycler Supplier
instituting any bankruptcy, insolvency arrangement, or similar proceeding; (v)
the issuance or levy of any judgment, writ, warrant of attachment or execution
or similar process against a substantial part of the property of Thermal Cycler
Supplier; or (vi) loss of Thermal Cycler Suppliers federal or state licenses,
permits or accreditation necessary for distribution of Authorized Thermal
Cyclers.
6.6 Perkin-Elmer may terminate this Agreement immediately on notice
upon any change in the ownership or control of Thermal Cycler Supplier or of its
assets. For such purposes, a "change in ownership or control" shall mean that
***% or more of the voting stock of Thermal Cycler Supplier becomes subject to
the ownership or control of a person or entity, or any related group of persons
or entities acting in concert, which person(s) or entity(ies) did not own or
control any portion of the voting stock on the Effective Date hereof.
Perkin-Elmer shall have the same right to terminate upon any transfer of ***% or
more of the assets of Thermal Cycler Supplier. Thermal Cycler Supplier warrants
that no portion of its voting stock was owned on the Effective Date hereof by
any instrument manufacturer or biotechnology company.
6.7 Upon any breach of or default of a material term under this
Agreement by Thermal Cycler Supplier, Perkin-Elmer may terminate this Agreement
upon thirty (30) days' written notice. Perkin-Elmer will withdraw such notice
if, during the notice period, Thermal Cycler Supplier fully cures such breach or
default to Perkin-Elmer's reasonable satisfaction.
*** PORTIONS OF THIS EXHIBIT HAVE BEEN OMITTED
PURSUANT TO A REQUEST FOR CONFIDENTIAL TREATMENT
-9-
<PAGE> 11
6.8 Upon expiration or termination of this Agreement, all rights granted
to Thermal Cycler Supplier shall revert to or be retained by Perkin-Elmer.
6.9 Thermal Cycler Supplier's obligations to report and pay royalties as
to activities under the Agreement shall survive termination or expiration.
7. CONFIDENTIALITY - PUBLICITY
7.1 In advertisements, catalogs, brochures, sales literature and
promotional literature for Authorized Thermal Cyclers, Thermal Cycler Supplier
shall state the following prominently in type and location:
Practice of the patented polymerase chain reaction (PCR) process
requires a license. Stratagene's thermal cycler is an Authorized
Thermal Cycler. Its use with Authorized Reagents provides a
limited PCR license in accordance with the label rights
accompanying such reagents. It may also be used with PCR licenses
available from The Perkin-Elmer Corporation.
7.2 With respect to Thermal Cycler Supplier's distribution of any
written information to Third Parties, including but not limited to advertising,
brochures, catalogs, promotional and sales material, and public relations
material, Perkin-Elmer shall have the right to prescribe changes regarding
references to, or descriptions of: Perkin-Elmer, PCR, the Amplification Patent
Rights, the PCR Instrument Patents, PCR licenses or authorizations, or this
Agreement. Thermal Cycler Supplier agrees to comply with Perkin-Elmer's
reasonable prescriptions.
7.3 Except as provided in Sections 7.1 and 7.2, Thermal Cycler Supplier
shall, to the extent reasonably practicable, maintain the confidentiality of the
provisions of this Agreement and shall refrain from disclosing the terms of this
Agreement without the prior written consent of Perkin-Elmer, except to the
extent Thermal Cycler Supplier concludes in good faith that such disclosure is
required under applicable law or regulation, in which case Perkin-Elmer shall be
notified in advance.
-10-
<PAGE> 12
8. COMPLIANCE AND QUALITY
8.1 In the exercise of any and all rights and in performance hereunder,
it shall be the duty of the Thermal Cycler Supplier, not Perkin-Elmer, to
comply fully with all applicable laws, regulations and ordinances and to obtain
and keep in affect licenses, permits and other governmental approvals (federal,
state or local) necessary or appropriate to carry on activities hereunder.
8.2 Perkin-Elmer does not approve or endorse thermal cyclers of Thermal
Cycler Supplier in any way or for any purpose, including PCR. Quality and
quality control with respect to suitability for PCR, according to standards and
requirements that may exist in the marketplace from time to time, are the sole
responsibility of Thermal Cycler Supplier.
9. ASSIGNMENT
9.1 This Agreement shall not be assigned by Thermal Cycler Supplier
(including without limitation any assignment or transfer that would arise from a
sale or transfer of Thermal Cycler Supplier's business).
9.2 Perkin-Elmer may assign all or any part of its rights and
obligations under this Agreement at any time without the consent of Thermal
Cycler Supplier. Thermal Cycler Supplier agrees to execute such further
acknowledgments or other instruments as Perkin-Elmer may reasonably request in
connection with such assignment.
10. NEGATION OF WARRANTIES AND INDEMNITY
10.1 Nothing in this Agreement shall be construed as: (a) a warranty or
representation by Perkin-Elmer as to the validity or scope of any patent; (b) a
warranty or representation that the practice under the Amplification Patent
Rights is or will be free from infringement of patents of Third Parties; (c) an
authority or obligation to sublicense or to sue Third Parties for infringement;
(d) except as expressly set forth herein, conferring the right to use in
advertising, publicity or otherwise, in any form, the name of, or any trademark
or trade name of, Perkin-Elmer or Roche; (e) conferring
-11-
<PAGE> 13
by implication, estoppel or otherwise any license, immunity or right under any
patent owned by or licensed to Perkin-Elmer or Roche other than those specified,
regardless of whether such patent is dominant or subordinate to the
Amplification Patent Rights; (f) an obligation to furnish any know-how; or (g)
creating any agency, partnership, joint venture or similar relationship between
Perkin-Elmer or Roche and Thermal Cycler Supplier.
10.2 PERKIN-ELMER MAKES NO EXPRESS OR IMPLIED WARRANTIES OF
MERCHANTABILITY OR FITNESS FOR A PARTICULAR PURPOSE.
10.3 Thermal Cycler Supplier agrees to take all reasonable precautions
to prevent death, personal injury, illness and property damage from the use of
Authorized Thermal Cyclers. Thermal Cycler Supplier shall assume full
responsibility for its operation under the Amplification Patent Rights, the
manufacture of Authorized Thermal Cyclers and the use thereof and shall defend,
indemnify and hold Perkin-Elmer harmless from and against all liability,
demands, damages, expenses (including attorneys' fees) and losses for death,
personal injury, illness, property damage or any other injury or damage,
including any damages or expenses arising in connection with state or federal
regulatory action, in view of the use by Thermal Cycler Supplier, its officers,
directors, agents and employees of the Amplification Patent Rights, and the
manufacture and use of Authorized Thermal Cyclers except that Thermal Cycler
Supplier shall not be liable to Perkin-Elmer for injury or damage arising solely
out of or resulting from Perkin-Elmer's negligence, willful conduct or
intentional acts or intentional omissions with respect to a Perkin-Elmer-
supplied product.
11. ***
*** PORTIONS OF THIS EXHIBIT HAVE BEEN OMITTED
PURSUANT TO A REQUEST FOR CONFIDENTIAL TREATMENT
-12-
<PAGE> 14
;
12. GENERAL
12.1 This Agreement constitutes the entire agreement between the Parties
as to the subject matter hereof, and all prior negotiations, representations,
agreements and understandings are merged into, extinguished by and completely
expressed by it. This Agreement may be modified or amended only by a writing
executed by authorized officers of each of the Parties.
12.2 Any notice required or permitted to be given by this Agreement
shall be given by postpaid, first class, registered or certified mail, or by
courier or facsimile, property addressed to the other party at the respective
address as shown below:
-14-
<PAGE> 15
If to Perkin-Elmer:
Applied Biosystems Division
The Perkin-Elmer Corporation
850 Lincoln Centre Drive
Foster City, California U.S.A. 94404
Att'n.: Director of Licensing
If to Thermal Cycler Supplier:
Stratagene
11011 North Torrey Pines Road
La Jolla, California U.S.A. 92037
Att'n.: Chief Executive Officer
Either party may change its address by providing notice to the other. A notice
shall be deemed given four (4) full business days after the day of mailing, or
one full day after the date of delivery to the courier, or the date of facsimile
transmission, as the case may be.
12.3 Governing Law and Venue. This Agreement shall be deemed made in the
County and State of New York, and it shall be construed and enforced in
accordance with the law of the State of New York. The Parties agree that the
exclusive jurisdiction and venue for any dispute or controversy arising from
this Agreement shall be in the state or federal courts in New York.
12.4 Arbitration
(a) If arbitration is demanded within the applicable statute of
limitations for commencement of an action in a New York court, disputes
concerning solely the determination of certain facts shall be settled by final
and binding arbitration at a mutually convenient location in the State of New
York pursuant to the commercial arbitration rules of the American Arbitration
Association in accordance with the following procedure: the arbitration tribune
shall consist of three arbitrators, one selected by each party and the third,
the chairman, selected by those two within sixty (60) days of the filing of the
answer.
(b) Factual disputes subject to arbitration under this section include:
royalty payments due under Section 3.1 or Section 3.3, Thermal Cycler Supplier's
compliance with Sections 5.2 and
-15-
<PAGE> 16
5.3, Thermal Cycler Supplier's compliance with the second sentence of Section
5.4, the occurrence of facts triggering expiration under Section 6.1 or
termination under Section 6.2 or Section 6.6, and Thermal Cycler Supplier's
right to notification and option under Article 11. Other factual disputes and
issues of law, including but not limited to the validity, enforceability, scope
or infringement of any patent, shall not be subject to arbitration under this
section.
(c) The decision of the arbitration tribunal shall be final and judgment
thereon may be entered in any competent state or federal court in New York for
judicial acceptance of such award and order of enforcement. Each party hereby
submits itself to the jurisdiction of the state and federal courts in New York
for the entry of judgment with respect to decisions of arbitrators hereunder.
12.5 Negotiation. Prior to commencing any lawsuit with respect to any
claim or controversy under this Agreement or the interpretation thereof, or
prior to demanding arbitration under Section 12.4, each party agrees to consult
with the other party to attempt to resolve the claim or controversy. The Parties
agree to attempt in good faith to achieve a resolution through consultation.
12.6 Nothing in this Agreement shall be construed to require the
commission of any act contrary to law, and wherever there is any conflict
between any provision of this Agreement or concerning the legal right of the
Parties to enter into this contract and any statute, law or ordinance, the
latter shall prevail, but the provision shall be limited only to the extent
necessary.
12.7 If any provision of this Agreement is held or discovered to both
parties' satisfaction to be illegal, invalid or unenforceable in any
jurisdiction or to render any patent in that jurisdiction unenforceable, the
provisions as it applies to that jurisdiction only shall be replaced
automatically, as part of the document, by a provision as similar in terms as
possible but not subject to such infirmity, in order to achieve the intent of
the parties to the extent possible. In any event, as to that jurisdiction all
other provisions of this Agreement shall be deemed valid and enforceable to the
full extent possible.
-16-
<PAGE> 17
IN WITNESS WHEREOF, the Parties hereto, have duly executed this
Agreement on the date(s) indicated below.
THE PERKIN-ELMER CORPORATION STRATAGENE
By: /s/ MICHAEL W. HUNKAPILLER By: /s/ [Signature Illegible]
-------------------------------- --------------------------------
Michael W. Hunkapiller, Ph.D.
Title: Vice President Title: CFO
----------------------------
Date: 4/20/95 Date: 4/19/95
------------------------------ ------------------------------
-17-
<PAGE> 18
APPENDIX A
SUMMARY ROYALTY REPORT
THERMAL CYCLER SUPPLIER AUTHORIZATION AGREEMENT
FOR THE PERIOD __/__/95 TO __/__/95
THERMAL CYCLER(TC) SUPPLIER: STRATAGENE FOR SALES IN THE COUNTRY OF_________
LICENSE NUMBER: __________ EFFECTIVE DATE: __/__/__
[ ] Check here if there were no sales for this period
<TABLE>
<CAPTION>
- --------------------------------------------------------------------------------------------------------------------------
ROYALTY (IN$) PER TC:
TC MODEL NO. NO. OF TCS SAMPLE CAPACITY *** + *** X (MAX. SAMPLE CAPACITY - ***)/*** * ROYALTY DUE
- --------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
1.
------------------ --------- --------------- ------------------------------------------ ----------
2.
------------------ --------- --------------- ------------------------------------------ ----------
3.
------------------ --------- --------------- ------------------------------------------ ----------
4.
------------------ --------- --------------- ------------------------------------------ ----------
5.
------------------ --------- --------------- ------------------------------------------ ----------
6.
------------------ --------- --------------- ------------------------------------------ ----------
TOTAL ROYALTY EARNED
----------
APPLICABLE CREDIT**
----------
ROYALTY PAYMENT DUE
----------
</TABLE>
* The fraction (max. sample capacity - ***)/*** is rounded to the next higher
whole number
** Please attach supporting or supplemental data to this sheet
I HEREBY CERTIFY THE INFORMATION SET FORTH ABOVE IS CORRECT AND COMPLETE WITH
RESPECT TO THE AMOUNTS DUE UNDER THE APPLICABLE LICENSE AGREEMENT.
By: Title: Date:
--------------------- ----------------------- -------------------
Name (please print):
------------------------------
================================================================================
THE PERKIN-ELMER CORPORATION
SEND REPORT TO:
Director of Licensing, Applied Biosystems Division, The Perkin-Elmer Corp., 850
Lincoln Centre Dr., Foster City, CA 94404
*** PORTIONS OF THIS EXHIBIT HAVE BEEN OMITTED
PURSUANT TO A REQUEST FOR CONFIDENTIAL TREATMENT
TC Supplier Authorization Agreement -18- Stratagene -4-14-95
<PAGE> 19
APPENDIX A - page 2
SUMMARY ROYALTY REPORT
THERMAL CYCLER SUPPLIER AUTHORIZATION AGREEMENT
FOR THE PERIOD __/__/9_ TO __/__/9_
THERMAL CYCLER(TC) SUPPLIER: STRATAGENE FOR SALES IN THE COUNTRY OF_________
LICENSE NUMBER: __________ EFFECTIVE DATE: __/__/__
[ ] Check here if there were no sales for this period
<TABLE>
<CAPTION>
- --------------------------------------------------------------------------------------------------------------------------
ROYALTY (IN$) PER TC:
TC MODEL NO. NO. OF TCS SAMPLE CAPACITY *** + *** X (MAX. SAMPLE CAPACITY - ***)/*** * ROYALTY DUE
- --------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
1.
------------------ --------- --------------- ------------------------------------------ ----------
2.
------------------ --------- --------------- ------------------------------------------ ----------
3.
------------------ --------- --------------- ------------------------------------------ ----------
4.
------------------ --------- --------------- ------------------------------------------ ----------
5.
------------------ --------- --------------- ------------------------------------------ ----------
6.
------------------ --------- --------------- ------------------------------------------ ----------
TOTAL ROYALTY EARNED
----------
APPLICABLE CREDIT**
----------
ROYALTY PAYMENT DUE
----------
</TABLE>
* The fraction (max. sample capacity - ***)/*** is rounded to the next higher
whole number
** Please attach supporting or supplemental data to this sheet
I HEREBY CERTIFY THE INFORMATION SET FORTH ABOVE IS CORRECT AND COMPLETE WITH
RESPECT TO THE AMOUNTS DUE UNDER THE APPLICABLE LICENSE AGREEMENT.
By: Title: Date:
--------------------- ----------------------- -------------------
Name (please print):
------------------------------
================================================================================
THE PERKIN-ELMER CORPORATION
SEND REPORT TO:
Director of Licensing, Applied Biosystems Division, The Perkin-Elmer Corp., 850
Lincoln Centre Dr., Foster City, CA 94404
*** PORTIONS OF THIS EXHIBIT HAVE BEEN OMITTED
PURSUANT TO A REQUEST FOR CONFIDENTIAL TREATMENT
TC Supplier Authorization Agreement -19- Stratagene -4-14-95
<PAGE> 1
EXHIBIT 10.11
PATENT LICENSE AGREEMENT
PORTIONS OF THIS EXHIBIT HAVE BEEN OMITTED PURSUANT TO A REQUEST FOR
CONFIDENTIAL TREATMENT
<PAGE> 2
PATENT LICENSE AGREEMENT
This is a patent license agreement ("Agreement") made by and among Roche
Molecular Systems, Inc. ("RMS"), a Delaware corporation having an office at
Branchburg Township, 1080 U.S. Highway 202 Somerville, New Jersey 08876-3771,
and F. Hoffmann La Roche Ltd, a Switzerland limited liability company, with
offices at Grenzacherstrasse 124, CH-4002 Basel, Switzerland (both of which are
referred to herein as "ROCHE"), and Stratagene, a California corporation having
offices at 11099 N. Torrey Pines Road., La Jolla, California (referred to herein
as "SCS").
BACKGROUND
A. ROCHE and its Affiliates own United States Patents Nos. 4,683,195, 4,683,202
and 4,965,188 and the corresponding foreign counterpart patents and patent
applications, describing and claiming gene amplification processes including,
inter alia, a process known as the polymerase chain reaction ("PCR") process.
B. ROCHE and its Affiliates also own United States Patent No. 4,889,818 and the
corresponding foreign counterpart patents and patent applications relating to
purified natural, as well as recombinant, themostable DNA polymerase isolated
from Thermus aquaticus ("nTaq" and "rTaq", respectively) as well as U.S. Patent
No. 5,079,352 and the corresponding foreign counterpart patents and patent
applications relating to rTaq and fragments thereof.
C. ROCHE and its Affiliates also own United States Patent No. 5,075,216 and the
corresponding foreign counterpart patents and patent applications relating to
sequencing with Taq DNA polymerase.
1
<PAGE> 3
D. Roche and its Affiliates also own USSN 07/387,003 and the corresponding
foreign counterpart patent applications relating to stabilized enzyme
compositions.
E. The patent rights referred to above were previously owned by Cetus
Corporation ("Cetus"), a Delaware corporation having an office in Emeryville,
California.
F. The Perkin-Elmer Corporation ("P-E") has exclusive rights under the patent
rights referred to above in certain fields, including the field of research,
pursuant to an agreement dated December 11, 1991 with ROCHE and has certain
rights to grant sublicenses in said fields. Under separate agreements between
ROCHE and P-E and in consideration of a share of royalties due hereunder, P-E
has released ROCHE from such of P-E's rights in the aforementioned fields as is
necessary for ROCHE to convey to SCS the rights and licenses specified in this
Agreement.
G. On July 1, 1990, Cetus entered into a "Patent License Agreement"
(hereinafter, "the 1990 Agreement") with SCS granting SCS rights to manufacture,
use and sell purified natural DNA polymerase reagents isolated from Thermus
aquaticus, ("nTaq"), for non-PCR uses, on the condition that SCS "refrain from
promoting the use of" such reagents in "PCR Applications" (which is defined on
page 3 of the 1990 Agreement).
H. SCS has manufactured and sold Taq DNA polymerase under the license under the
1990 Agreement above, and wishes to expand its rights to include the right to
make, use and sell to the research and to other markets Taq DNA polymerase and
other products covered by AMPLIFICATION PATENT RIGHTS and/or SEQUENCING PATENT
RIGHTS, as hereinafter defined. To this end, Stratagene is willing to terminate
the 1990 Agreement and to enter into this Agreement.
2
<PAGE> 4
I. In structuring the present Agreement, the parties have considered the
possibility that novel polymerases may be developed by SCS (and others) that
are useful in AMPLIFICATION PATENT RIGHTS and that, without a license from
ROCHE, SCS may not pass on to its customers the right to use said polymerases in
AMPLIFICATION PATENT RIGHTS. It is SCS' desire to promote and sell such
internally developed, or licensed or purchased polymerases and/or kits
incorporating such polymerases for use in AMPLIFICATION PATENT RIGHTS and to
pass on to the purchaser such a license and ROCHE is willing to permit SCS to do
so.
J. In addition, the parties take note that SCS may, in its discretion, market
the products licensed hereunder in conjunction with other products, components
or materials, both separately or together, and in various package arrangements,
which may be useful in ROCHE's AMPLIFICATION PATENT RIGHTS. Taking this into
consideration, for the mutual convenience of the parties, the products on which
SCS will pay a royalty, that is the royalty base, will include those products as
specifically described below that are adapted for, promoted or supported for use
with the patent rights licensed herein. Furthermore, in an effort to minimize
customer confusion as to which SCS products in fact permit the customer to
practice AMPLIFICATION PATENT RIGHTS without additional licenses, SCS agrees, as
is further described below, to give special consideration to the manner in which
it promotes and sells its other products which may be useful in AMPLIFICATION
PATENT RIGHTS but which are not specifically licensed by ROCHE for that purpose.
NOW, THEREFORE, for and in consideration of the mutual covenants
contained herein, ROCHE and SCS hereby agree as follows:
3
<PAGE> 5
1. DEFINITIONS
For the purpose of this Agreement, and solely for that purpose, the
terms set forth hereinafter shall be defined as follows:
1.1 The term "AFFILIATE" of a designated party to this Agreement shall
mean:
a) an organization of which fifty percent (50%) or more of
the voting stock is controlled or owned directly or
indirectly by either party to this Agreement;
b) an organization which directly or indirectly owns or
controls fifty percent (50%) or more of the voting stock
of either party to this Agreement;
c) an organization, the majority ownership of which is
directly or indirectly common to the majority ownership
of either party to this Agreement; and
d) an organization under (a), (b), or (c) above in which
the amount of said ownership is less than fifty percent
(50%) and that amount is the maximum amount permitted
pursuant to the law governing the ownership of said
organization.
4
<PAGE> 6
It is understood and agreed, however, that the term "Affiliate" shall not
include Genentech Inc., a company located at 460 Point San Bruno Boulevard,
South San Francisco, California, U.S.A. ("Genentech").
1.2 "AMPLIFICATION PATENT RIGHTS" shall mean the nucleic acid
amplification processes covered by United States Patent Nos. 4,683,195,
4,683,202 and 4,965,188, and those claims in foreign patents and patent
applications which correspond to issued claims in the above patents and which
foreign patents and patent applications claim priority from the patent
applications on which the above patents are based, and access to which patents
and patent applications are necessary for SCS to manufacture, use and sell Taq
Reagents and SCS Enzymes in accordance with the rights granted in sections
2.2-2.5 hereto.
1.3 "APPLICATION FIELDS" shall mean those fields listed in Appendix A
which SCS has elected to include in this Agreement as specified in Section 5.
1.4 "APPLICATION KIT" shall mean a Licensed Product in combination with
such other reagents, enzymes or other materials as are necessary to perform a
PCR-based assay or nucleic: acid sequencing in the APPLICATION FIELD for which
it is sold.
1.5 "AUTHORIZED THERMAL CYCLER" shall mean a thermal cycler or
temperature cycling instrument suitable for the automated practice of the PCR
Process for which a fee has been paid to P-E for authorization in the LICENSED
FIELDS under AMPLIFICATION PATENT RIGHTS. All P-E Thermal Cyclers are AUTHORIZED
THERMAL CYCLERS.
5
<PAGE> 7
1.6 "SCS ENZYME" shall mean any thermostable polymerase that is not
derived from Thermus aquaricus and that is not within TAQ PATENT RIGHTS,
developed, purchased, or licensed by SCS from a third party, which enzyme may be
used in or with the PCR PROCESS. An enzyme shall not be included in this
definition if SCS demonstrates to ROCHE's satisfaction that said enzyme is in
fact used predominantly for other than AMPLIFICATION PATENT RIGHTS. For example,
an enzyme that is marketed in a formulation that renders the enzyme unsuitable
for, or is otherwise chemically or structurally rendered unsuitable for, use in
PCR will reasonably be considered not to be an SCS Enzyme unless ROCHE or SCS
becomes aware that said enzyme is in fact used predominantly in PCR. Unless
excluded as provided herein, all sales of said SCS ENZYMES are assumed to be for
use in AMPLIFICATION PATENT RIGHTS.
1.7 "EFFECTIVE DATE" shall mean July 1, 1994.
1.8 "LICENSED APPLICATION PRODUCT" shall mean (a) an APPLICATION KIT or
(b) reagents, components or other materials which are sold in connection with
the sale of an APPLICATION KIT by SCS and which are adapted for or promoted or
supported for use by customers in PCR TESTING or nucleic acid sequencing in
APPLICATION FIELDS. As used herein, "PCR TESTING" shall include all steps in the
analysis of a sample for the presence or absence of amplifiable nucleic acid
from preparation of the sample to detection and/or analysis of any amplified
product
1.9 "LICENSED FIELDS" shall mean the RESEARCH FIELD and the APPLICATION
FIELDS.
6
<PAGE> 8
1.10 "LICENSED PRODUCT" shall mean:
a) a TAQ REAGENT or SCS ENZYME used or sold in a country
where the use or sale of such TAQ REAGENT or SCS ENZYME
would infringe at least one VALID CLAIM within
AMPLIFICATION PATENT RIGHTS or SEQUENCING PATENT
RIGHTS; and/or
b) a TAQ REAGENT or SCS ENZYME made, used or sold in a
country where the manufacture, use or sale thereof would
infringe a VALID CLAIM within TAQ PATENT RIGHTS.
1.11 "LICENSED RESEARCH PRODUCTS" shall mean any product including but
not limited to kits, which products consist of or contain a LICENSED PRODUCT and
may include all or some of the following components: buffers, nucleotides,
enzymes, or other reagents or materials. Notwithstanding the foregoing, it is
understood and agreed that such LICENSED RESEARCH PRODUCT shall not contain,
without ROCHE's specific approval, which approval shall be strictly
discretionary with ROCHE, nucleic acid sequences homologous to the nucleic acid
sequences of any human infectious agent or pathogen.
1.12 "NET SALES" shall mean the gross invoice amount less
(i) credits, freight and insurance and other discounts
allowed and taken, in amounts customary in the trade,
and
(ii) sales and/or use taxes and/or duties for particular
sales.
7
<PAGE> 9
No allowance or deduction shall be made for commissions or collections,
by whatever name known.
NET SALES shall be calculated on the basis of sales or transfers to end
users by SCS or its Affiliate or distributor. In the event SCS is unable to
account for sales to third party end users by its distributors, the NET SALES
shall be calculated as the sales price to such distributors multiplied by ***,
which factor represents a ***% margin allowed to the distributor. Sales to a
third party controlling, controlled by, or under common control with SCS, or
enjoying a special course of dealing, shall be determined by reference to the
listed or published price for the product sold or transferred which would be
applicable in an arm's length transaction with an unrelated third party.
1.13 "PCR PROCESS" shall mean the polymerase chain reaction (PCR)
process, which is one of the amplification processes identified in AMPLIFICATION
PATENT RIGHTS.
1.14 "RESEARCH FIELD" shall mean the internal use by an end user of a
product solely in applications of the end user (or in applications of the end
user's customer, if the end user is performing contract research) in scientific
research and development which, by way of example but not by way of limitation,
expressly excludes:
a) reportable results generated from clinical applications
in humans or animals such as the detection or
measurement, treatment, prevention or mitigation of
disease or other health-related condition; the detection
of pathogens, detection of
*** PORTIONS OF THIS EXHIBIT HAVE BEEN OMITTED
PURSUANT TO A REQUEST FOR CONFIDENTIAL TREATMENT
8
<PAGE> 10
genetic disease or genetic pre-disposition to disease;
tissue transplantation typing; and parentage testing;
b) the use of PCR to manufacture any products for sale;
c) the commercial application of Taggants, which shall be
defined herein to be the application of PCR PROCESS or
AMPLIFICATION PATENT RIGHTS to identify any synthetic
nucleotide sequence which has been inserted, dispersed
or applied into a product, substance or organism in
order to identify such product, substance or organism or
to convey other specific information.
d) Forensic Applications (as defined in Appendix A);
e) human identification testing, and parentage
determination;
f) Plant Diagnostics (as defined in Appendix A);
g) Animal Diagnostics, Animal Identity Testing and Positive
Trait Breeding (as defined in Appendix A);
h) quality assurance and quality control, including without
limitation, conformance with specifications, purity, and
batch-to-batch consistency if performed for third
parties on a commercial basis; and
9
<PAGE> 11
i) Environmental Testing (as defined in Appendix A);
1.15 "SEQUENCING PATENT RIGHTS" shall mean the claims of United States
Patent No. 5,075,216 and those claims in foreign patents and parent applications
which correspond to issued claims in the above patent and which foreign patents
and patent applications claim priority from the patent application(s) on which
the '216 patent is based, and access to which patents and patent applications
are necessary for SCS to manufacture, use and sell TAQ REAGENTS pursuant to
Section 2.5 hereto.
1.16 "TAQ PATENT RIGHTS" shall mean those claims of United States Patent
Nos. 4,889,818 and 5,079,352 and U.S.S.N. 07/387,003, and any reissues and
continuations thereof, and those claims in foreign patents and patent
applications claiming priority from a patent application which is a basis for
any of the above US patents or patent applications and which foreign claims
include within their scope a TAQ REAGENT but only to the extent that such claims
are necessary for SCS to manufacture, use and sell TAQ REAGENTS pursuant to
sections 2.2-2.5 hereto, except that dim rights specifically exclude the
"Stoffel Fragment" (Perkin-Elmer catalogue #N808-0038) and the "Abramson Mutant"
(an amino acid replacement of glycine corresponding to position 46 of the Taq
polymerase amino acid sequence provided in Lawyer et. al. 1989 (JBC 264:
6247-6437).
1.17 "TAQ REAGENT" shall mean an enzyme the manufacture, use or sale of
which would be covered by at least one VALID CLAIM within TAQ PATENT RIGHTS.
1.18 "TERRITORY" shall mean worldwide.
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<PAGE> 12
1.19 "UNITS" of thermostable polymerase shall be defined by equivalence
to units of AmpliTaq DNA polymerase as described in Appendix B.
1.20 "VALID CLAIM" shall mean the claim of a patent or pending patent
application which has not otherwise been held invalid or unenforceable by a
court from which no appeal has or can be taken, or has not otherwise finally
been held unpatentable by the appropriate administrative agency.
2. GRANT TO SCS
2.1 Termination of the Cetus/SCS 1900 Agreement. In consideration of
the rights granted herein to SCS by ROCHE and SCS' obligation to pay royalties,
SCS and ROCHE hereby agree that their respective rights in and obligations under
the 1990 Agreement between Cetus and SCS are terminated, and the terms thereof
superseded by the present Agreement as of the EFFECTIVE DATE hereof, except that
all royalties due under the 1990 Agreement as of the EFFECTIVE DATE of the
present Agreement, shall be paid to ROCHE in accordance with the terms and
schedule of the 1990 Agreement.
2.2 Licenses Under TAQ PATENT RIGHTS. Upon the terms and subject to the
conditions of this Agreement, ROCHE hereby grants to SCS and its AFFILIATES and
SCS hereby accepts from ROCHE, for itself and its AFFILIATES, a non-exclusive,
royalty bearing license in the TERRITORY, without the right to sublicense, under
TAQ PATENT RIGHTS, to: (i) manufacture (but not to have manufactured) in the
TERRITORY (but excluding Japan); (ii) to use TAQ REAGENTS in the TERRITORY; and
(iii) to sell in the TERRITORY as follows and for no other purpose:
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<PAGE> 13
a) to customers in the RESEARCH FIELD for such customers' own internal
use in the RESEARCH FIELD only;
b) to customers in the APPLICATION FIELDS, which customers are those
licensed by other than a product label license under AMPLIFICATION
PATENT RIGHTS in such APPLICATION FIELDS for such customer's own
internal use in performing the PCR PROCESS in such APPLICATION
FIELDS;
c) for incorporation in APPLICATION KITS pursuant to Section 2.4.
2.3 License to Promote and Sell for PCR in the RESEARCH FIELD. In
consideration of SCS' payment of royalties on sales of LICENSED RESEARCH
PRODUCTS, ROCHE hereby grants to SCS and its AFFILIATES and SCS accepts from
ROCHE for itself and its AFFILIATES, a limited, non-exclusive license in the
TERRITORY under the AMPLIFICATION PATENT RIGHTS to promote and sell LICENSED
RESEARCH PRODUCTS in the RESEARCH FIELD and to pass on with such sales of
Licensed Research Products to end user purchasers only so much of those
AMPLIFICATION PATENT RIGHTS as are necessary to be consistent with the label
licenses accompanying those products, and as are necessary for such purchasers
to use such LICENSED RESEARCH PRODUCTS in or with the PCR PROCESS either in an
AUTHORIZED THERMAL CYCLER, strictly for such purchasers' own use in the RESEARCH
FIELD.
2.4 License to Promote and Sell for PCR in APPLICATION FIELDS. In
further consideration of SCS' payment of royalties on sales of LICENSED
APPLICATION PRODUCTS, ROCHE hereby grants to SCS and its AFFILIATES and SCS
accepts from ROCHE for itself and its AFFILIATES, a limited, non-exclusive
license in the TERRITORY under the AMPLIFICATION
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<PAGE> 14
PATENT RIGHTS to promote and sell APPLICATION KITS in the APPLICATION FIELDS and
to pass on with such sales of APPLICATION KITS to end user purchasers only so
much of those AMPLIFICATION PATENT RIGHTS as are necessary to be consistent with
the label licenses accompanying those APPLICATION KITS, and as are necessary for
such purchasers' own internal use of such APPLICATION KITS in the APPLICATION
FIELDS for which the APPLICATION KITS are sold, said use being restricted to be
in conjunction with an AUTHORIZED THERMAL CYCLER.
2.5 License to Promote and Sell for Sequencing in the RESEARCH FIELD and
APPLICATION FIELDS. In further consideration of SCS' payment of royalties on
sales of LICENSED RESEARCH PRODUCTS and LICENSED APPLICATION PRODUCTS, ROCHE
hereby grants to SCS and its AFFILIATES and SCS accepts from ROCHE for itself
and its AFFILIATES, a limited, non-exclusive license in the TERRITORY under the
SEQUENCING PATENT RIGHTS to sell LICENSED RESEARCH PRODUCTS in the RESEARCH
FIELD and APPLICATION KITS in the APPLICATION FIELDS and to pass with such sales
to end user purchasers only so much of those SEQUENCING PATENT RIGHTS as are
necessary for such purchaser's own internal use of such LICENSED RESEARCH
PRODUCTS or APPLICATION KITS in sequencing in the RESEARCH FIELD and the
APPLICATION FIELDS.
2.6 SCS expressly acknowledges and agrees that the licenses granted
pursuant to this Agreement are personal to SCS and its AFFILIATES alone, and SCS
and its AFFILIATES shall have no right to sublicense, assign or otherwise
transfer or share its rights under the foregoing licenses, except that SCS and
its Affiliates may sell or distribute LICENSED RESEARCH PRODUCTS and LICENSED
APPLICATION PRODUCTS through distributors.
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<PAGE> 15
2.7 Except as is specifically provided herein, this Agreement shall not
limit the rights of ROCHE in any way. It is specifically understood that as
between the parties to this Agreement, ROCHE reserves the right itself or
through its AFFILIATES to practice under TAQ PATENT RIGHTS, SEQUENCING PATENT
RIGHTS and AMPLIFICATION PATENT RIGHTS, including the PCR PROCESS itself, and,
subject to the provisions of Section 12 herein, to sublicense, assign or
otherwise transfer the TAQ PATENT RIGHTS and AMPLIFICATION PATENT RIGHTS and
SEQUENCING PATENT RIGHTS to others for any purpose whatsoever.
2.8 SCS and its AFFILIATES shall affix to each particular LICENSED
RESEARCH PRODUCT or LICENSED APPLICATION PRODUCT licensed hereunder, either on a
product insert accompanying the product or on the product itself, one of the
labels set forth in Appendix C, as ROCHE shall direct, or such other label as
ROCHE may direct from time to time. Such changes in labelling shall be subject
to the approval of SCS, which shall not be unreasonably withheld. As to the
labels set forth in Appendix C, SCS understands and agrees that the notices
numbered 1 through 5 reflect ROCHE's present label licensing policy and shall be
used on the labels for SCS products as appropriate. In regard to these or any
other changes in labels directed by RMS, SCS shall have a reasonable time period
over which to change its labels.
2.9 SCS hereby covenants that it and its AFFILIATES shall sell, market
and otherwise promote products licensed hereunder only for use in accordance
with the terms of this Agreement and they shall use their best efforts, as
described herein, and shall contractually require all of its distributors to
also use their best efforts, as described herein, to ensure that these products
are used in compliance with the letter and intent of this Agreement. To that
end, SCS, its AFFILIATES and distributors shall prominently display in
catalogues and brochures describing LICENSED RESEARCH PRODUCTS and/or LICENSED
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<PAGE> 16
APPLICATION PRODUCTS, the label license statements as referred to in Section 2.8
and set forth in Appendix C. Furthermore, in advertisements or any other
materials intended for distribution to third parties and referring in any way to
products licensed hereunder and the use of said products in the PCR PROCESS, but
in which it is not practical to include the complete label license statements,
SCS will include a comparable restriction on use as follows:
Purchase of this product (or product name] is accompanied by a license
to use it in the Polymerase Chain Reaction (PCR) process in conjunction
with an Authorized Thermal Cycler.
or other statement approved in writing by ROCHE.
2.10 a) SCS acknowledges that sales to third parties not in compliance
with the field and use restrictions pursuant to Sections 2.2 - 2.5 constitute an
activity outside the scope of the licenses granted under this Agreement which is
detrimental to ROCHE, its AFFILIATES and distributors. SCS therefore agrees that
once it is notified by ROCHE or once it independently has actual knowledge of
that a particular purchaser is using or intends to use any product licensed
herein other than as is specifically provided in this Agreement, SCS shall
promptly notify said purchaser in writing that such use is unlicensed and that a
license for said use must be obtained from ROCHE or P-E. SCS shall also require
its AFFILIATES and distributors to report to SCS any unlicensed activities of
which they become aware. SCS further agrees that continued or resumed sales by
SCS, its AFFILIATES; or a distributor, to a particular purchaser of which SCS
was previously notified or is otherwise aware is using any licensed product in a
manner other than as expressly provided in this Agreement, shall constitute a
breach under Section 6.5 of the Agreement A written certification by a
distributor or purchaser which is executed by an officer of said distributor
15
<PAGE> 17
or purchaser which officer may legally bind the company, that it has ceased the
unlicensed activity, or a written certification by SCS which is executed by an
officer of SCS which officer may legally bind SCS that it has ceased sales to
such distributor or purchaser, shall be a cure under Section 6.5.
b) Pursuant to the foregoing general requirements, SCS shall, when it
receives an order for a LICENSED PRODUCT from any customer, which SCS
recognizes as significantly exceeding that customer's typical usage
requirements, contact the customer and specifically inform the
customer that the sale of such LICENSED PRODUCT is limited for use by
the customer for internal testing only. Said customers shall be
required to furnish a written certification that customer intends to
use said LICENSED PRODUCT in accordance with the licenses enumerated
in Sections 2.2 - 2.5 hereto.
c) Further pursuant to the general provisions of Section (a) above, SCS
and its AFFILIATES understand and agree that the only customers to
whom they may sell TAQ REAGENTS and SCS ENZYMES pursuant to Section
2.2 (b) are those licensed under AMPLIFICATION PATENT RIGHTS by ROCHE
or P-E by other than a product label license.
d) SCS agrees that it shall provide to ROCHE a copy of each of its
notices to purchasers/distributors pursuant to this section, as well
as a copy of each certification of compliance by
purchasers/distributor's in the event such certification is required
under the provisions of this Agreement.
e) The parties understand and hereby agree that SCS shall have no
obligation to monitor or police the use of AUTHORIZED THERMAL CYCLERS
or by SCS' customers, and that SCS' obligations hereinunder in regard
to AUTHORIZED THERMAL CYCLERS
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<PAGE> 18
shall be limited to providing the label license referred to in Section 2.8 and
set forth in Appendix C. However, SCS agrees not to knowingly promote the use of
thermal cyclers that are not authorized for use in PCR or under AMPLIFICATION
PATENT RIGHTS and further agrees not to provide sales, marketing, or technical
literature regarding the use of SCS ENZYMES or TAQ REAGENTS under PATENT RIGHTS
specifically with thermal cyclers that are not authorized.
ROCHE hereby agrees that ROCHE will enforce its rights and will use its
best efforts to cause P-E to enforce its rights with regard to customers of SCS
not using AUTHORIZED THERMAL CYCLERS in the same manner and to the same extent
ROCHE and P-E treat their own customers in the same circumstances.
2.11 Roche hereby grants to SCS and its Affiliates the right and SCS
accepts for itself and its Affiliates and agrees to credit ROCHE as the source
of patent rights in SCS' promotional materials, including for example
advertisements, product inserts and data sheets, intended for distribution to
third parties as follows:
This product is sold under licensing arrangements with Roche Molecular
Systems, Inc., F. Hoffmann-La Roche Ltd, and The Perkin-Elmer
Corporation."
Such reference will be reasonably prominent and in materials (for example,
catalogues) containing multiple product descriptions, will be directly
associated with information on each specific product covered by this Agreement.
3. GRANT TO ROCHE
***
*** PORTIONS OF THIS EXHIBIT HAVE BEEN OMITTED
PURSUANT TO A REQUEST FOR CONFIDENTIAL TREATMENT
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4. ROYALTIES, RECORDS AND REPORTS
4.1 Royalties. For the rights and privileges granted under this
Agreement, SCS shall pay royalties on products licensed hereunder which are used
by SCS or its AFFILIATES or sold, distributed, or otherwise transferred by SCS
or its AFFILIATES (with or without payment), as follows below, except as
otherwise specifically modified by Section 5.2 and Appendix A.
a) *** per Unit for TAQ REAGENTS;
b) for LICENSED RESEARCH PRODUCTS AND LICENSED APPLICATION PRODUCTS that
include TAQ REAGENTS, ***% of the Net Sales of each LICENSED RESEARCH
PRODUCT and LICENSED APPLICATION PRODUCT or *** per unit of TAQ
REAGENTS in such LICENSED
*** PORTIONS OF THIS EXHIBIT HAVE BEEN OMITTED
PURSUANT TO A REQUEST FOR CONFIDENTIAL TREATMENT
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<PAGE> 20
RESEARCH PRODUCT or LICENSED APPLICATION PRODUCT, whichever is
higher;
c) for SCS ENZYMES, the dollars per unit calculated by multiplying ***
by the PCR Effectiveness Ratio of the SCS ENZYME to AmpliTaq
DNA Polymerase in the assay described in Appendix B;
d) for LICENSED RESEARCH PRODUCTS and LICENSED APPLICATION PRODUCTS that
include SCS ENZYMES, ***% of the Net Sales of the LICENSED RESEARCH
PRODUCT or LICENSED APPLICATION PRODUCT or the dollar amount for the
SCS ENZYME in the LICENSED RESEARCH PRODUCT or LICENSED APPLICATION
PRODUCT calculated pursuant to c) above, whichever is larger;
e) for LICENSED APPLICATION PRODUCTS which contain neither TAQ REAGENTS
nor SCS ENZYMES, ***% of the NET SALES of the LICENSED APPLICATION
PRODUCT; and
f) for combinations of TAQ REAGENTS and SCS ENZYMES, and for LICENSED
RESEARCH PRODUCTS and LICENSED APPLICATION PRODUCTS containing a
combination of TAQ REAGENTS and SCS ENZYMES, an amount calculated by
a combination of a) and c) or b) and d), as the case may be.
*** PORTIONS OF THIS EXHIBIT HAVE BEEN OMITTED
PURSUANT TO A REQUEST FOR CONFIDENTIAL TREATMENT
19
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4.2 SCS and its AFFILIATES shall keep full, true and accurate books of
account containing all particulars which may be necessary for the purpose of
showing the amount payable by way of royalty or by way of any other provision
under this Agreement. Such books and the supporting data shall be available for
inspection during reasonable business hours, and upon reasonable written notice
to SCS, for three (3) years following the end of the calendar year to which they
pertain by an independent certified public accountant retained by ROCHE for the
purpose of verifying the accuracy of SCS' royalty statements or SCS' compliance
in other respects with this Agreement. If in dispute, such records shall be kept
until the dispute is settled. The inspection of records shall be at ROCHE's sole
cost unless the inspector concludes that royalties reported by SCS for the
period being audited are understated by five percent (5%) or more from actual
royalties, in which case the costs and expenses of such inspection shall be paid
by SCS.
4.3 SCS shall within thirty (30) days after the first day of January,
April, July and October of each year deliver to the addresses provided below a
true and accurate royalty report. This report shall be in accordance with the
royalty report form attached hereto as Appendix D. This report shall be on a
country-by-country basis and shall give such particulars of the business
conducted by SCS in each country during the preceding three (3) calendar months
as are pertinent to an accounting for royalty under this Agreement and shall
include at least the following:
(i) separately itemized quantities of products licensed
hereunder that are used, sold or otherwise transferred by
SCS during those three (3) months;
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(ii) THE UNITS of TAQ REAGENTS or SCS ENZYMES each product
licensed hereunder as determined by the assay
described in Appendix B;
(iii) the NET SALES of each LICENSED RESEARCH PRODUCT and
LICENSED APPLICATION PRODUCT;
(iv) the calculation of net royalties based on a royalty
rate of *** per unit;
(v) the credit applicable to net royalties pursuant to
Section 4.5;
(vi) the net royalties due. If no royalties are due, it
shall be so reported.
The correctness and completeness of each such report shall be
attested to in writing by the responsible financial officer of SCS' organization
or by SCS' external auditor or by the chairman or other head of SCS' internal
audit committee.
Simultaneously with the delivery of each such royalty report,
SCS shall pay to P-E the royalty and any other payments due under this Agreement
for the period covered by such report. All amounts payable hereunder by SCS
shall be payable in United
*** PORTIONS OF THIS EXHIBIT HAVE BEEN OMITTED
PURSUANT TO A REQUEST FOR CONFIDENTIAL TREATMENT
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States currency and sent by the due date, together with the royalty report, to
the following address:
Applied Biosystems Division
The Perkin-Elmer Corporation
850 Lincoln Centre Drive
Foster City, CA. 94404
Attn: Licensing Manager
or to such other address as P-E may designate. A copy of the royalty report
shall also be sent to:
Roche Molecular Systems, Inc.
1145 Atlantic Avenue, Suite 100
Alameda, California 94501
Attn: Licensing Manager
or to such other address as ROCHE may designate.
4.4 If SCS shall fail to pay any amount specified under this Agreement
after the due date thereof, the amount owed shall bear interest at the Citibank,
NA base, lending rate ("Prime Rate") plus 3% from the due date until paid,
provided, however, that if this interest rate is held to be unenforceable for
any reason, the interest rate shall be the maximum rate allowed by law at the
time the payment is due.
4.5 a) The parties agree that the royalty rates and unit fees set forth
in Section 4.1 are reasonable in view of the proprietary rights associated with
the products licensed hereunder and the consequent relative importance of these
products in the marketplace. The parties also recognize, however, that a
substantive change might occur in the marketplace, including, for example, a
change in ROCHE's proprietary position, or in the status of technological
alternatives that are non-proprietary to ROCHE, which change
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<PAGE> 24
in the marketplace might significantly detract from the value added of the
products licensed hereunder and thereby, in light of the royalty schedule of
Section 4.1 potentially makes SCS' marketing position correspondingly less
competitive. In the event of any such change in the marketplace, the parties
agree to discuss whether adjustments to the financial terms herein would be
appropriate and otherwise acceptable to ROCHE.
(b) In an effort to assist SCS in remaining competitive in light of such changes
in the marketplace, the parties have specifically agreed that the following
mechanism shall be available to provide SCS royalty relief: if ROCHE ascertains
that P-E's worldwide combined "Average Transaction Price" ("ATP") *** in a ***
period (as is provided below) is less than *** per unit, then SCS' unit royalty
for *** for that same *** period shall be *** per unit multiplied by the
fraction ***, but in no event shall SCS' unit royalty be reduced below *** per
unit for *** nor raised above *** per unit. Such ATP calculations shall be made
by ROCHE *** for the *** period *** each *** and SCS shall be notified before
the next scheduled royalty payment if it is entitled to a credit for the
previously reported *** period. By way of example as to how said royalty
adjustments will operate, on the *** after the effective date of this agreement
and every *** thereafter, ROCHE shall ascertain *** for the preceding *** (or in
the case of the first such calculation, whichever time period falls between the
Effective Date and the next ***) and shall calculate the per-unit royalty as
above described. If that unit royalty is other than *** per unit, ROCHE shall so
notify SCS before SCS' next scheduled royalty payment, so that SCS may take the
appropriate credit against the royalties next owed.
*** PORTIONS OF THIS EXHIBIT HAVE BEEN OMITTED
PURSUANT TO A REQUEST FOR CONFIDENTIAL TREATMENT
23
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As used herein. "Average Transaction Price" shall mean the
average transfer price par unit for all *** transferred by P-E or its Affiliates
to end users (which, in P-E's case shall mean to other than Roche or Roche's
Affiliates). "Average Transaction Price" shall be calculated by dividing the
worldwide aggregate NET SALES of all products transferred by P-E that contain
only *** by the worldwide aggregate UNITS of *** contained in those products.
Except as is specifically provided by the mechanism to provide royalty
relief described in this Section 4.5 (b) above, ROCHE shall be under no
obligation to change or renegotiate any sections, provisions or terms of this
Agreement.
5. LICENSE IN ADDITIONAL FIELDS
5.1 SCS may elect at the time of execution of this agreement,
or shall maintain an option, exercisable for five years from the EFFECTIVE DATE
of this Agreement, to obtain additional license rights in the LICENSED FIELDS.
5.2 Appendix A specifies for each field to which this option
applies a license issuance fee, where applicable, and the applicable royalty
rate if such rate is different from that specified in Section 4.1, for each such
field. Roche shall have the right to change said license issuance fees and
royalty rate after *** from the EFFECTIVE DATE of this Agreement for any field
which has not become a LICENSED FIELD pursuant to Section 5.4.
*** PORTIONS OF THIS EXHIBIT HAVE BEEN OMITTED
PURSUANT TO A REQUEST FOR CONFIDENTIAL TREATMENT
24
<PAGE> 26
5.3 if not elected at the time of execution of this Agreement,
SCS may exercise its option to obtain a license for each such additional field
by giving ROCHE 60 days' written notice at any time during the option period.
5.4 Each individual field in addition to RESEARCH FIELD will
become a LICENSED FIELD when the specified license issuance fee has been paid.
6. TERM; TERMINATION
6.1 The license granted to SCS herein and SCS' obligations to
pay royalties hereunder, shall commence on the EFFECTIVE DATE and terminate on
the expiration of the last to expire of the patents within AMPLIFICATION PATENT
RIGHTS, SEQUENCING PATENT RIGHTS and TAQ PATENT RIGHTS to the extent a license
of right under any of the foregoing surviving Patent Rights is being exercised
pursuant to sections 2.2-2.5 hereto.
6.2 Notwithstanding any other Section of this Agreement, SCS
may terminate this agreement for any reason on ninety (90) days' written notice
to ROCHE. If SCS elects to terminate this Agreement pursuant to this section, it
shall within thirty (30) days of said termination, notify each of its customers
that SCS is no longer licensed under AMPLIFICATION PATENT RIGHTS, TAQ PATENT
RIGHTS, or SEQUENCING PATENT RIGHTS.
6.3 Notwithstanding any other section of this Agreement, ROCHE
may terminate this Agreement, effective immediately upon notice of termination
to SCS, in the event that a third party which is licensed by ROCHE to
manufacture products for use in PCR-based human diagnostic testing acquires
directly or indirectly 50% or more of the voting stock of SCS.
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<PAGE> 27
6.4 The license granted hereunder to SCS shall automatically
terminate upon (i) an adjudication of SCS as bankrupt or insolvent, or SCS'
admission in writing of its inability to pay its obligations as they mature; or
(ii) an assignment by SCS for the benefit of creditors; or (iii) SCS' applying
for or consenting to the appointment of a receiver, trustee or similar officer
for any substantial part of its property or such receiver, trustee or similar
officers appointment without the application or consent of SCS, if such
appointment shall continue undischarged for a period of ninety (90) days; or
(iv) SCS' instituting (by petition, application, answer, consent or otherwise)
any bankruptcy, insolvency arrangement, or similar proceeding relating to SCS
under the laws of any jurisdiction; or (v) the institution of any such
proceeding (by petition, application or otherwise) against SCS, if such
proceeding shall remain undismissed for a period of ninety (90) days or the
issuance or levy of any judgment, writ, warrant of attachment or execution or
similar process against a substantial part of the property of SCS, if such
judgment, writ, or similar process shall not be released, vacated or fully
bonded within ninety (90) days after its issue or levy.
6.5 Breach. Upon any breach or default of a material term
under this Agreement by SCS, this Agreement may be terminated upon ninety (90)
days' written notice to SCS. Said notice shall become effective at the end of
the ninety-day period, unless during said period SCS fully cures such breach or
default of a material term and notifies ROCHE of such cure. Such 90-day cure
period shall not apply to any uncontested royalty payments due, which
uncontested payments must be made in accordance with the terms of this
Agreement
6.6 Upon termination of this Agreement as provided herein, all
rights and licenses granted to SCS by ROCHE hereunder shall automatically revert
to or be retained by ROCHE.
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6.7 SCS' obligations to report to ROCHE and to pay royalties
as to the sale of products licensed hereunder pursuant to the Agreement prior to
termination or expiration of the Agreement shall survive such termination or
expiration.
7. ENFORCEMENT OF PATENTS
7.1 SCS shall advise ROCHE promptly, and shall furnish
documentary proof which is reasonably acceptable to ROCHE, upon its becoming
aware of substantial infringement by a third party or parties of an enforceable
patent right within (1) TAQ PATENT RIGHTS by the sale of "Significant
Quantities" of unlicensed stand-alone enzymes in any country in the TERRITORY,
or (2) AMPLIFICATION PATENT RIGHTS by the sale of "Significant Quantities" of an
enzyme not within TAQ PATENT RIGHTS but which enzyme is actively promoted or
supported by said third party or parties or their affiliates or distributors for
use in AMPLIFICATION PATENT RIGHTS in any country in the TERRITORY. Upon receipt
of said written information, ROCHE agrees it shall, within its reasonable
business judgment, take such action as is required to restrain such
infringement. ROCHE shall be in full compliance with its obligations under this
Section 7.1 if, within six (6) months of ROCHE having received said written
information from SCS about any one infringing party in a particular country, (1)
ROCHE notifies each third party identified by such acceptable documentary proof
of ROCHE's enforceable proprietary position in the country where infringement
is occurring and receives from such third parties written assurance, which shall
be executed by an officer of each said third party capable of legally binding
that party, that it is not infringing ROCHE's rights, or (2) said infringement
has stopped, or (3) ROCHE has entered into good faith license negotiations with
such third parties, or (4) ROCHE has instituted or is prosecuting an action for
patent infringement against at least one infringing third party
27
<PAGE> 29
sells in said country. The above six-month period may be extended with the
written consent of SCS.
It is agreed and understood that, in accordance with the foregoing,
nothing in this Agreement shall require ROCHE to sue more than one party at a
time or to sue in more than one country at any one time.
For the purposes of the foregoing clause, "Significant Quantities"
shall mean (1) in the case of a single third-party infringer in a particular
country, at least ***, or (2) in the case of more than one third-party seller in
a particular country, at least ***, of total unit turnover, respectively, of
stand-alone enzyme(s) within TAQ PATENT RIGHTS or thermostable enzymes actively
promoted for use in AMPLIFICATION PATENT RIGHTS, in each country, the accuracy
of said *** or *** figures being acceptable to both parties. "Actively promoted"
shall mean advertised or technically supported for use in AMPLIFICATION PATENT
RIGHTS.
If ROCHE is provided with the documentary proof of continued infringing
sales as above described and ROCHE does not within the six-month period pursue
one of the above options, SCS shall have the right at the expiration of the
six-month period, or such other period as the parties have agreed, to reduce its
royalty rate for royalties owed on stand-alone TAQ REAGENTS or stand-alone SCS
ENZYMES in said country by ***. SCS' right to reduce its royalties shall
terminate and SCS shall resume paying full royalties in each country, as of the
time: (1) all such infringing third parties in such country have either
delivered the written assurances described above or engaged in good faith
license negotiations with ROCHE, provided that if said negotiations do not
conclude within one year, SCS may again abate its royalty by ***, as the case
may be, in the manner described above until the conclusion of a license with
said third party; or (2) the filing or prosecution of an
*** PORTIONS OF THIS EXHIBIT HAVE BEEN OMITTED
PURSUANT TO A REQUEST FOR CONFIDENTIAL TREATMENT
28
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infringement suit against at least one such party in said country; or (3) as a
result of the written assurances received in accordance with the foregoing or
the conclusion of any licenses or litigations or otherwise, infringement in fact
ceases or is reduced to below "Significant Quantities". Notwithstanding the
provisions of this clause, ROCHE and SCS understand and specifically agree that
nothing in this Agreement shall reduce SCS' royalty below *** per unit of Taq
DNA Polymerase.
8. Confidentiality-Publicity
8.1 To the extent that, in literature for distribution to
third parties, SCS or its AFFILIATES refer to ROCHE, P-E or the terms of this
Agreement, solely by specific inclusion of the clause provided in Section 2.11,
ROCHE hereby approves of such usage and no further ROCHE review or approval
shall be required for distribution of said literature. If SCS varies from the
agreed-to clause in section 2.11, then SCS agrees to obtain ROCHE's written
approval prior to distributing any written information including said modified
reference to ROCHE, P-E or the terms of this Agreement. ROCHE's approval shall
not be unreasonably withheld or delayed and, in any event, its decision shall be
rendered within three (3) weeks of receipt of the written information. Once
approved, such materials, or abstracts of such materials, which do not
materially alter the content of the material originally approved may be
reprinted during the term of the Agreement without further approval by ROCHE
unless ROCHE has notified SCS in writing of its decision to withdraw permission
for such use.
8.2 Each party agrees that any financial, legal or business
information or any technical information disclosed to it (the "Receiving Party")
by the other (the "Disclosing Party") in connection with this Agreement and
identified in writing as
*** PORTIONS OF THIS EXHIBIT HAVE BEEN OMITTED
PURSUANT TO A REQUEST FOR CONFIDENTIAL TREATMENT
29
<PAGE> 31
confidential in connection with this Agreement shall be considered confidential
and proprietary and the Receiving Parry shall not disclose same to any third
party and shall hold it in confidence for a period of five (5) years and will
not use it other than as permitted under this Agreement provided, however, that
any information, know-how or data which is orally disclosed to the Receiving
Party shall not be considered confidential and proprietary unless such oral
disclosure is reduced to writing and marked confidential and given to the
Receiving Party in written form within thirty (30) days after oral disclosure
thereof. Such confidential and proprietary information shall include, without
limitation, marketing and sales information, commercialization plans and
strategies, research and development work plans, and technical information such
as patent applications, inventions, trade secrets, systems, methods, apparatus,
designs, tangible material, organisms and products and derivatives thereof.
Notwithstanding the above, Roche shall have the right to share royalty reports
with P-E.
The above obligations of confidentiality shall not be
applicable to the extent that:
a) such information is general public knowledge or,
after disclosure hereunder, becomes general or
public knowledge through no fault of the Receiving
Party; or
b) such information can be shown by the Receiving Party
by its written records to have been in its possession
prior to receipt thereof hereunder, or
30
<PAGE> 32
c) such information is received by the Receiving Party
from any third party for use or disclosure by the
Receiving Party without any obligation to the
Disclosing Party provided, however, that information
received by the Receiving Party from any third party
funded by the Disclosing Party (e.g., consultants,
subcontractors, etc.) shall not be released from
confidentiality under this exception; or
d) the disclosure of such information is required or
desirable to comply with or fulfill, governmental
requirements, submissions to governmental bodies, or the
securing of regulatory approvals.
8.4 Each party shall, to the extent reasonably practicable, maintain
the confidentiality of the provisions of this Agreement and shall refrain from
making any public announcement or disclosure of this Agreement or its terms
without the prior consent of the other party, which consent shall not be
unreasonably withheld, except to the extent a party concludes in good faith that
such disclosure is required under applicable law or regulations, in which case
the other party shall be notified in advance.
9. ASSIGNMENT
9.1 This Agreement shall not be assigned by SCS (including without
limitation any purported assignment or transfer that would arise from a sale or
transfer of SCS' business). Except as is provided in Section 6.3, this license
shall remain in force if Stratagene is acquired in its entirety or in its
entirety except for its mutagenesis business by
31
<PAGE> 33
a third party so long as Stratagene remains a discrete business unit, operates
under the name of Stratagene, and manufactures and sells licensed products under
the name Stratagene.
9.2 ROCHE may assign all or any part of its rights and obligations
under this Agreement at any time without the consent of SCS. SCS agrees to
execute such further acknowledgments or other instruments as ROCHE may
reasonably request in connection with such assignment.
10. NEGATION OF WARRANTIES AND INDEMNITY
10.1 Nothing in this Agreement shall be construed as:
a) a warranty or representation by ROCHE as to the validity
or scope of any patent included within TAQ PATENT
RIGHTS, AMPLIFICATION PATENT RIGHTS or SEQUENCING PATENT
RIGHTS;
b) a warranty or representation that the practice of TAQ
PATENT RIGHTS, AMPLIFICATION PATENT RIGHTS or SEQUENCING
PATENT RIGHTS is or will be free from infringement of
patents of third parties;
c) an obligation to bring or prosecute actions or suits
against third parties for infringement, provided
however, that this clause shall not alter SCS' rights
and ROCHE's obligations under Section 7.1;
32
<PAGE> 34
d) except as expressly set forth herein, conferring the
right to use in advertising, publicity or otherwise any
trademark, trade name, or names, or any contraction,
abbreviation, simulation or adaptation thereof, of ROCHE
or P-E;
e) conferring by implication, estoppel or otherwise any
licenses, immunities or rights under any patents or
patent applications of ROCHE other than those specified
in TAQ PATENT RIGHTS and AMPLIFICATION PATENT RIGHTS and
SEQUENCING PATENT RIGHTS, regardless of whether such
other patents or patent applications are dominant or
subordinate to those in TAQ PATENT RIGHTS,
AMPLIFICATION PATENT RIGHTS or SEQUENCING PATENT RIGHTS,
or under any thermal cycler or other instrument patent,
or to perform PCR in a thermal cycler that is not an
AUTHORIZED THERMAL CYCLER or a LICENSED THERMAL CYCLER,
or to make or sell any thermal cycler or other
instrument for the automated performance of the PCR
Process;
f) an obligation to furnish any know-how not provided in
TAQ PATENT RIGHTS, AMPLIFICATION PATENT RIGHTS, and
SEQUENCING PATENT RIGHTS; or
g) creating any agency, partnership, joint venture or
similar relationship between ROCHE and/or P-E on the one
hand, and SCS on the other hand.
33
<PAGE> 35
10.2 ROCHE MAKES NO EXPRESS OR IMLIED WARRANTIES OF
MERCHANTABILTY OR FITNESS FOR A PARTICULAR PURPOSE.
10.3 Notwithstanding the foregoing, ROCHE warrants and represents
that it has the right and authority to enter into this Agreement and to grant
the licenses provided in Sections 2 and 5.
11. INDEMNITY.
11.1 SCS shall assume full responsibility for its use of TAG PATENT
RIGHTS and for its sale of Taq and LICENSED PRODUCTS and shall defend, indemnify
and hold ROCHE and P-E and their respective officers, directors, agents,
employees, and stockholders, harmless from and against all liability, demands,
damages, expenses (including attorneys' and expert witness fees and expenses)
and losses for death, personal injury, illness or property damage, or any other
injury or damage arising out of the use by SCS of the TAQ PATENT RIGHTS or the
preparation, use or sale of LICENSED PRODUCTS, including but not limited to, use
or reliance upon such LICENSED PRODUCTS by customers of SCS or its Affiliates.
12. ***
*** PORTIONS OF THIS EXHIBIT HAVE BEEN OMITTED
PURSUANT TO A REQUEST FOR CONFIDENTIAL TREATMENT
34
<PAGE> 36
13. GENERAL
13.1 This Agreement constitutes the entire agreement between SCS and
ROCHE as to the subject matter hereof, and all prior negotiations,
representations, agreements and understandings are merged into, extinguished by
and completely expressed by it. This Agreement may be modified or amended only
by a writing executed by authorized officers of each of The Parties.
Any notice required or permitted to be given by this Agreement shall
be given by postpaid, first class, registered or certified mail, or by courier
or facsimile, properly addressed to the other party or parties at the respective
address as shown below:
If to ROCHE:
Roche Molecular Systems, Inc.
340 Kingsland Street
Nutley, New Jersey 07110
Attn: Corporate Secretary
with a copy to:
Roche Molecular Systems, Inc.
1145 Atlantic Avenue, Suite 100
Alameda, California 94501
Attn: Licensing Manager
36
<PAGE> 37
If to SCS:
Stratagene
11099 North Torrey Pines Road
La Jolla, California 92037
Attn: Dr. Joseph A. Sorge
Chief Executive Officer
with a copy to:
Stratagene
11099 North Torrey Pines Road
La Jolla, California 92037
Attn: Ronni L. Sherman
V. P. and General Counsel
Either party may change its address by providing notice to the other party.
Unless otherwise specified herein, any notice given in accordance with the
foregoing shall be deemed given within four (4) full business days after the day
of mailing, or one full day after the date of delivery to the courier, or the
date of facsimile transmission, as the case will be.
13.2 Governing Law and Venue. This Agreement and its effect are
subject to and shall be construed and enforced in accordance with the law of the
State of New Jersey, U.S.A., except as to any issue which by the law of New
Jersey depends upon the validity, scope or enforceability of any patent within
AMPLIFICATION PATENT RIGHTS, TAQ PATENT RIGHTS, or SEQUENCING PATENT RIGHTS
which issue shall be determined in accordance with the applicable patent laws of
the United States or the relevant foreign jurisdiction. The parties agree that
the exclusive jurisdiction and venue for any dispute or controversy arising from
this Agreement shall be in the United States District Court for the District of
New Jersey if federal jurisdiction exists, and if no federal jurisdiction
exists, then in the Superior Court of New Jersey.
37
<PAGE> 38
13.3 Arbitration. Notwithstanding the provisions of Section 13.2
above, any dispute concerning solely the determination of facts such as, but not
limited to, (1) what constitutes a quantity significantly exceeding a SCS
customer's typical usage requirements pursuant to Section 2.10 (b); (2) a
determination of royalty rate payments owed pursuant to Section 4.1; (3) the
circumstances triggering royalty reduction pursuant to Section 4.5; (4) the
determination of the unlicensed competition and concomitant royalty abatement
pursuant to Section 7, Patent Enforcement clause; and which dispute does not
involve a question of law, shall be settled by final and binding arbitration at
a mutually convenient location in the State of New Jersey pursuant to the
commercial arbitration rules of the American Arbitration Association in
accordance with the following procedural process:
(a) The arbitration tribunal shall consist of three
arbitrators. Each party shall nominate in the request
for arbitration and the answer thereto one arbitrator
and the two arbitrators so named will then jointly
appoint the third arbitrator within sixty (60) days of
the filing of the answer, said third arbitrator being
the chairman of the arbitration tribunal.
(b) The decision of the arbitration tribunal shall be final
and judgement upon such decision may be entered in any
competent court for juridical acceptance of such an
award and order of enforcement.
Each party hereby submits itself to the jurisdiction of the courts of the
place of arbitration, but only for the entry of judgment with respect to the
decision of the arbitrator's hereunder.
38
<PAGE> 39
13.4 Nothing in this Agreement shall be construed so as to require
the commission of any act contrary to law, and wherever there is any conflict
between any provision of this Agreement or concerning the legal right of the
parties to enter into this Agreement and any statute, law, ordinance or treaty,
the latter shall prevail, but in such event the affected provisions of the
Agreement shall be curtailed and limited only to the extent, necessary to bring
it within the applicable legal requirements.
13.5 If any provision of this Agreement is held to be unenforceable
for any reason, it shall be adjusted rather than voided, if possible, in order
to achieve the intent of the party to the extent possible. In any event, all
other provisions of this Agreement shall be deemed valid and enforceable to the
full extent possible.
39
<PAGE> 40
IN WITNESS WHEREOF, The Parties hereto have set their hands and seals and
duly executed this Agreement on the date(s) indicated below.
ROCHE MOLECULAR SYSTEMS, INC. STRATAGENE
By: /s/ KATHY ORDONEZ By: /s/ JOSEPH SORGE
---------------------------- --------------------------------------
Name: Kathy Ordonez Name: Joseph Sorge
------------------------------------
Title: President Title: Chairman & CEO
-----------------------------------
Date: July 26, 1994 Date: 7/7/94
-------------------------- ------------------------------------
APPRV'D As To Form
LAW DEPT.
By PJR
F. HOFFMANN-LA ROCHE LTD F. HOFFMANN-LA ROCHE LTD
By: [SIGNATURE ILLEGIBLE] By: [SIGNATURE ILLEGIBLE]
---------------------------- --------------------------------------
Name: [ILLEGIBLE] Name: [ILLEGIBLE]
--------------------------- ------------------------------------
Title: Authorized Signatory Title: PLR Licensing Manager
------------------------- -----------------------------------
Date: July 19, 1994 Date: July 20, 1994
-------------------------- ------------------------------------
40
<PAGE> 41
APPENDIX A
STRATAGENE
Forensics and Human Identity
1. Field of Use: "Forensic and Human Identity Applications" shall mean the
forensic analysis of human genetic material for use in, or in preparation for,
legal proceedings, but shall exclude paternity determination except in case of
death investigation. This field specifically excludes tissue typing.
2. ***
ENVIRONMENTAL TESTING
1. Field of Use: "Environmental Testing Applications" shall mean testing and
monitoring environmental samples, including, without limitation, for the purpose
of detecting the presence or absence or amount of any organism or microorganism
(including, without limitation, viruses and bacteria), whether living, dead or
extinct, or their remains.
2. ***
PLANT DIAGNOSTICS
1. Field of Use: "Plant Diagnostics Applications" shall mean diagnostic
applications in plants, including, without limitation, the diagnosis of a
disease or condition, the diagnosis of susceptibility or resistance to a disease
or condition, or a choice of treatment of a disease or condition, the
determination of genetic traits for breeding purposes, or the identification of
a particular plant species.
2. ***
*** PORTIONS OF THIS EXHIBIT HAVE BEEN OMITTED
PURSUANT TO A REQUEST FOR CONFIDENTIAL TREATMENT
41
<PAGE> 42
ANIMAL DIAGNOSTICS
1. Field of Use: "Animal Diagnostics" shall mean detection of genetic disease,
genetic pre-disposition to disease, or other medical condition in animals for
any purpose except establishment of identity, and infectious disease testing in
animals. This field shall include sex determination but shall specifically
exclude parentage determination.
2. ***
3. Royalties on these products shall be as follows:
(i) For products directed at detection of nucleic acids
associated with genetic disease, genetic traits, or infectious disease in
animals, ***% of the NET SALES PRICE of the kits, or *** per unit of TAQ REAGENT
or SCS ENZYME in the kit, whichever is higher.
(ii) For products directed at sex determination in embryos, ***%
of the NET SALES PRICE of the kits, or *** per unit of TAQ REAGENT or SCS ENZYME
in the kit, whichever is higher.
ANIMAL IDENTITY TESTING AND POSITIVE TRAIT BREEDING
1. Fields of Use: "Animal Identity Testing Applications" shall mean identity
testing for animals (other than humans), whether living, dead or extinct, or
their remains, including, without limitation, parentage testing. "Positive Trait
Breeding" shall mean the determination of genetic traits other than
disease-related traits for breeding purposes.
2. ***
*** PORTIONS OF THIS EXHIBIT HAVE BEEN OMITTED
PURSUANT TO A REQUEST FOR CONFIDENTIAL TREATMENT
42
<PAGE> 43
FOOD TESTING
1. Field of Use: "Food Testing Applications" shall mean the detection and/or
analysis Of microorganisms in food or food/samples for quality assurance and
quality control Purposes.
2. ***
*** PORTIONS OF THIS EXHIBIT HAVE BEEN OMITTED
PURSUANT TO A REQUEST FOR CONFIDENTIAL TREATMENT
43
<PAGE> 44
APPENDIX B
ASSAY TO DETERMINE UNITS OF ENZYME
I. Taq DNA polymerase
Taq DNA polymerase manufactured by SCS ("SCS-Taq") shall be assayed
under the following conditions, in parallel with an assay of Roche
Molecular Systems' AmpliTaq(R) DNA polymerase (P-E catalogue numbers
N-801-0060, N-801-1012). The activity of SCS-Taq and AmpliTaq thus
measured by SCS shall be normalized to the concentration stated by RMS
for the AmpliTaq.
Unit Definition: One unit of enzyme is defined as the amount that
will incorporate l0nmoles of dNTPs into acid
insoluble material per 30 minutes at 74
(degrees) C under the analysis conditions below.
Analysis conditions: 25mM TAPS (tris-(hydroxymethyl)-methyl-amino-
propanesulfonic acid, sodium salt), pH 9.3 (at
25 (degrees) C); 50mM KCl; 2 mM MgCl(2); 1mM
(beta)-mercaptoethanol; 200 (micrometer)M each
dATP, dGTP, dTTP; 100 (micrometer)M [is
proportional to-(32)P]-dCTP (0.05 to 0.1
Ci/mmole); activated salmon sperm DNA, mixed in
a final volume of 50 (micrometer)l and
incubated at 74 (degrees) C for 10 minutes. The
salmon sperm DNA is activated by a modification
of the methods in reference 1.
The array mixture (without enzyme) is prepared fresh daily and 45
(micrometer)l aliquots (0 (degrees) C) are mixed with 5 (micrometer)l
of Taq DNA polymerase diluted in 25mM Tris-HCl pH8, 50mM KCl, 100
(micrometer)g/ml autoclaved gelatin, lmM (beta)-mercaptoethanol, 0.5%
w/v) NP40 and 0.5% (w/v) Tween20.
Reactions are initiated with addition of enzyme and placed at 74
(degrees) C. Reactions are quenched after 10 minutes with the addition
of 10 (micrometer)l of 60mM EDTA and placed at 0 (degrees) C. Aliquots
(50 (micrometer)l) are diluted with lml of 2mM EDTA containing
50 (micrometer)g/ml sheared salmon sperm DNA, and precipitated by the
addition of 1 ml 20% (w/v) acid and 2% (w/v) sodium pyrophosphate, and
incubated at 0 (degrees) C for
44
<PAGE> 45
15 min. Precipitated DNA is collected on GF/C filter discs (2.4 cm) and
washed extensively with 5% trichloroacetic acid and 2% sodium
pyrophosphate (7 x 5 ml), then 95% ethanol (5ml), dried and counted.
Activity concentration is determined from replicate assays (at least 3)
of replicate parallel, serial dilutions (at least 3) that yield 20-90
pMoles dCMP incorporation in the assay.
Activated salmon sperm DNA is used at a concentration that provides
linear incorporation values with 20-100 mU of enzyme. This DNA
concentration usually represents 12.5-20(micron)g/assay.
II. SCS Enzymes
SCS enzymes shall be assayed in reference to AmpliTaq DNA polymerase (or
another enzyme manufactured by ROCHE which is more comparable to the
particular SCS enzyme) in a manner similar to that described above. The
analysis conditions shall be adapted to reflect the optimal activity
conditions for each such SCS enzymes. Further, the effectiveness of such
enzyme in producing amplified DNA in the PCR Process shall be determined
in comparison with AmpliTaq DNA polymerase under the optimal conditions
for each enzyme. From this comparison a "PCR Effectiveness Ratio" will
be derived to be used in determining the per unit royalty specified in
section 4.1 c. The Parties agree that calculation of such a ratio is
complex and can only be determined on a case-by-case basis. Such assays
shall be agreed upon by ROCHE and SCS.
III. For purposes of calculating royalties owed on products, the
concentration of enzyme (units per volume) reported must be within
+/-*** of the actual activity measured by the above assays. The volume
of enzyme reported to be in a product must be within +/-*** of the
actual measurable volume.
Ref. I Richardson. C.C. 1966. DNA Polymerase from Escherichia coli. in
Procedures in Nucleic Acid Research eds.Cantoni G.L. and Davies, D.R. Harper &
Row, New York, p. 264.
*** PORTIONS OF THIS EXHIBIT HAVE BEEN OMITTED
PURSUANT TO A REQUEST FOR CONFIDENTIAL TREATMENT
45
<PAGE> 46
APPENDIX C
NOTICES TO PURCHASER
1. License statement for use on TAQ REAGENTS and SCS ENZYMES designed and sold
for use in AMPLIFICATION PATENT RIGHTS and/or SEQUENCING PATENT RIGHTS.
NOTICE TO PURCHASER: LIMITED LICENSE
The purchase price of this product includes a limited, non-transferable license
under U.S. Patents 4,683,202, 4,683,195, 4,965,188, and 5,075,216 or their
foreign counterparts, owned by Hoffmann-La Roche Inc. and F.Hoffmann-La Roche
Ltd. ("Roche"), to use only this amount of the product to practice the
Polyrnerase Chain Reaction ("PCR") and related processes described in said
patents solely for the research and development activities of the purchaser when
this product is used in conjunction with an authorized thermal cycler. No right
to perform or offer commercial services of any kind using PCR, including without
limitation reporting the results of purchaser's activities for a fee or other
commercial consideration, is hereby granted by implication or estoppel. Further
information on purchasing licenses to practice the PCR process may be obtained
by contacting the Director of licensing at The Perkin-Elmer Corporation. 850
Lincoln Centre Drive, Foster City, California 94404 or at Roche Molecular
Systems, Inc., 1145 Atlantic Avenue, Alameda, California 94501.
2. For use on LICENSED RESEARCH PRODUCTS designed and sold for use in
AMPLIFICATION PATENT RIGHTS but not suitable for use in SEQUENCING PATENT
RIGHTS.
NOTICE TO PURCHASER: LIMITED LICENSE
The purchase price of this product includes a limited, non-transferable license
under U.S. Patents 4,683,202, 4,683,195 and 4,965,188 or their foreign
counterparts, owned by Hoffmann-La Roche Inc. and F.Hoffmann-La Roche Ltd.
("Roche"), to use only this amount of the product to practice the Polymerase
Chain Reaction ("PCR") and related processes described in said patents solely
for the research and development activities of the purchaser when this product
is used in conjunction with an authorized thermal cycler. No light to perform or
offer commercial services of any kind using PCR, including without limitation
reporting the results of purchaser's activities for a fee or other commercial
consideration, is
46
<PAGE> 47
hereby granted by implication or estoppel. Further information on purchasing
licenses to practice the PCR process may be obtained by contacting the Director
of Licensing at The Perkin-Elmer Corporation, 850 Lincoln Centre Drive, Foster
City, California 94404 or at Roche Molecular Systems, Inc., 1145 Atlantic
Avenue, Alameda, California 94501.
3. For use on LICENSED RESEARCH PRODUCTS designed and sold for use in SEQUENCING
PATENT RIGHTS
NOTICE TO PURCHASER: LIMITED LICENSE
The purchase price of this product includes a limited, non-transferable license
under U.S. Patent 5,075,216 or its foreign counterparts, owned by Hoffmann-La
Roche Inc. and F.Hoffmann-La Roche Ltd. ("Roche"), to use only this amount of
the product for DNA Sequencing and related processes described in said patent
solely for the research and development activities of the purchaser. No license
under these patents to use the PCR process is conveyed expressly or by
implication to the purchaser by the purchase of this product. A license to use
the PCR process for certain research and development activities accompanies the
purchase of certain reagents from licensed suppliers such as Stratagene when
used in conjunction with an authorized thermal cycler, or is available from the
Perkin-Elmer Corporation. Further information on purchasing licenses to practice
the PCR process may be obtained by contacting the Director of Licensing at the
Perkin-Elmer Corporation, 850 Lincoln Centre Drive, Foster City, California
94404 or at Roche Molecular Systems, Inc., 1145 Atlantic Avenue, Alameda,
California 94501.
4. For use on research products which are not LICENSED RESEARCH PRODUCTS but
which are supported for use in PCR and/or with LICENSED RESEARCH PRODUCTS
NOTICE TO PURCHASER
This product is optimized for use in the Polymerase Chain Reaction ("PCR")
covered by patents owned by Hoffmann-La Roche Inc. and F.Hoffmann-La Roche Ltd.
("Roche"). No license under these patents to use the PCR process is conveyed
expressly or by implication to the purchaser by the purchase of this product. A
license to use the PCR process for certain research and development activities
accompanies the purchase of certain reagents from licensed suppliers such as
Stratagene when used in conjunction with an authorized
47
<PAGE> 48
thermal cycle, or is available from the Perkin-Elmer Corporation. Further
information on purchasing licenses to practice the PCR process may be obtained
by contacting the Director of Licensing at the Perkin-Elmer Corporation, 850
Lincoln Centre Drive, Foster City, California 94404 or at Roche Molecular
Systems, Inc., 1145 Atlantic Avenue, Alameda, California, 94501.
5. Similar notices for use on LICENSED APPLICATIONS PRODUCTS will be provided as
are selected.
48
<PAGE> 49
APPENDIX D
SUMMARY ROYALTY REPORT
FOR THE PERIOD ______ TO ______
COUNTRY: ________________
<TABLE>
<S> <C> <C>
LICENSE: STRATAGENE FIELD OF USE: PCR RESEARCH PRODUCTS
LICENSEE NUMBER: __________ EFFECTIVE DATE: ____________ ROYALTY RATE: __________
_________________________________________________________________________________________________________________________________
UNITS OF ENZYME GROSS INVOICE DISCOUNTS NUMBER OF ROYALTY DETERMINED
IN PRICE OF ALLOWED NET SALES PRODUCT UNITS ON ENZYME OR NET
LICENSED PRODUCT PRODUCT PRODUCT (EXPLAIN) OF PRODUCT SOLD SALES ROYALTY DUE
_________________________________________________________________________________________________________________________________
_________________________________________________________________________________________________________________________________
_________________________________________________________________________________________________________________________________
_________________________________________________________________________________________________________________________________
_________________________________________________________________________________________________________________________________
_________________________________________________________________________________________________________________________________
_________________________________________________________________________________________________________________________________
TOTAL ROYALTY EARNED
CHECK HERE IF THERE WERE NO SALES FOR THIS PERIOD ______ _________________________________________________
APPLICABLE CREDIT
_________________________________________________
ROYALTY PAYMENT DUE
_________________________________________________
</TABLE>
I hereby certify the information set forth above is correct and complete with
respect to the amounts due under the applicable license agreement.
By: ___________________________ Title: ___________________ Date: ____________
(authorized signature)
Name (Please print): ________________________
================================================================================
* Please attach supporting or supplemental data to this sheet
<PAGE> 1
EXHIBIT 23.1
INDEPENDENT AUDITORS' REPORT ON SCHEDULE AND CONSENT
The Board of Directors
Stratagene Holding Corporation:
The audits referred to in our report dated March 3, 2000, included the
related financial statement schedule as of December 31, 1998 and 1999, and for
each of the years in the three-year period ended December 31, 1999, included in
the registration statement. This financial statement schedule is the
responsibility of the Company's management. Our responsibility is to express an
opinion on this financial statement schedule based on our audits. In our
opinion, such financial statement schedule, when considered in relation to the
basic combined financial statements taken as a whole, presents fairly in all
material respects the information set forth therein.
We consent to the use of our reports included herein and to the references
to our firm under the headings "Selected Combined Financial Data" and "Experts"
in the prospectus.
KPMG LLP
San Diego, California
March 10, 2000
<TABLE> <S> <C>
<ARTICLE> 5
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> DEC-31-1999
<PERIOD-START> JAN-01-1999
<PERIOD-END> DEC-31-1999
<CASH> 4,199,908
<SECURITIES> 0
<RECEIVABLES> 5,812,177
<ALLOWANCES> 200,000
<INVENTORY> 6,195,980
<CURRENT-ASSETS> 17,677,971
<PP&E> 16,398,511
<DEPRECIATION> 3,072,209
<TOTAL-ASSETS> 36,147,266
<CURRENT-LIABILITIES> 12,678,216
<BONDS> 0
0
0
<COMMON> 3,118
<OTHER-SE> (7,105,565)
<TOTAL-LIABILITY-AND-EQUITY> 36,147,266
<SALES> 50,852,184
<TOTAL-REVENUES> 51,317,600
<CGS> 14,767,105
<TOTAL-COSTS> 27,727,732
<OTHER-EXPENSES> 26,237,255
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 3,232,305
<INCOME-PRETAX> (4,269,046)
<INCOME-TAX> 1,794,000
<INCOME-CONTINUING> (2,475,046)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (2,475,046)
<EPS-BASIC> (.08)
<EPS-DILUTED> (.08)
</TABLE>
